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Need To File 2006 Tax Return

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Need To File 2006 Tax Return

Need to file 2006 tax return Publication 542 - Main Content Table of Contents Businesses Taxed as CorporationsPersonal services. Need to file 2006 tax return Employee-owners. Need to file 2006 tax return Other rules. Need to file 2006 tax return Other rules. Need to file 2006 tax return Property Exchanged for StockNonqualified preferred stock. Need to file 2006 tax return Liabilities. Need to file 2006 tax return Election to reduce basis. Need to file 2006 tax return Capital Contributions Filing and Paying Income TaxesIncome Tax Return Penalties Estimated Tax U. Need to file 2006 tax return S. Need to file 2006 tax return Real Property Interest Accounting MethodsSection 481(a) adjustment. Need to file 2006 tax return Accounting Periods Recordkeeping Income, Deductions, and Special ProvisionsCosts of Going Into Business Related Persons Income From Qualifying Shipping Activities Election to Expense Qualified Refinery Property Deduction to Comply With EPA Sulfur Regulations Energy-Efficient Commercial Building Property Deduction Corporate Preference Items Dividends-Received Deduction Extraordinary Dividends Below-Market Loans Charitable Contributions Capital Losses Net Operating Losses At-Risk Limits Passive Activity Limits Figuring TaxTax Rate Schedule Alternative Minimum Tax (AMT) Credits Recapture Taxes Accumulated Earnings Tax Distributions to ShareholdersMoney or Property Distributions Distributions of Stock or Stock Rights Constructive Distributions Reporting Dividends and Other Distributions How To Get Tax Help Businesses Taxed as Corporations The rules you must use to determine whether a business is taxed as a corporation changed for businesses formed after 1996. Need to file 2006 tax return Business formed before 1997. Need to file 2006 tax return   A business formed before 1997 and taxed as a corporation under the old rules will generally continue to be taxed as a corporation. Need to file 2006 tax return Business formed after 1996. Need to file 2006 tax return   The following businesses formed after 1996 are taxed as corporations. Need to file 2006 tax return A business formed under a federal or state law that refers to it as a corporation, body corporate, or body politic. Need to file 2006 tax return A business formed under a state law that refers to it as a joint-stock company or joint-stock association. Need to file 2006 tax return An insurance company. Need to file 2006 tax return Certain banks. Need to file 2006 tax return A business wholly owned by a state or local government. Need to file 2006 tax return A business specifically required to be taxed as a corporation by the Internal Revenue Code (for example, certain publicly traded partnerships). Need to file 2006 tax return Certain foreign businesses. Need to file 2006 tax return Any other business that elects to be taxed as a corporation. Need to file 2006 tax return For example, a limited liability company (LLC) can elect to be treated as an association taxable as a corporation by filing Form 8832, Entity Classification Election. Need to file 2006 tax return For more information about LLCs, see Publication 3402, Taxation of Limited Liability Companies. Need to file 2006 tax return S corporations. Need to file 2006 tax return   Some corporations may meet the qualifications for electing to be S corporations. Need to file 2006 tax return For information on S corporations, see the instructions for Form 1120S, U. Need to file 2006 tax return S. Need to file 2006 tax return Income Tax Return for an S Corporation. Need to file 2006 tax return Personal service corporations. Need to file 2006 tax return   A corporation is a personal service corporation if it meets all of the following requirements. Need to file 2006 tax return Its principal activity during the “testing period” is performing personal services (defined later). Need to file 2006 tax return Generally, the testing period for any tax year is the prior tax year. Need to file 2006 tax return If the corporation has just been formed, the testing period begins on the first day of its tax year and ends on the earlier of: The last day of its tax year, or The last day of the calendar year in which its tax year begins. Need to file 2006 tax return Its employee-owners substantially perform the services in (1), above. Need to file 2006 tax return This requirement is met if more than 20% of the corporation's compensation cost for its activities of performing personal services during the testing period is for personal services performed by employee-owners. Need to file 2006 tax return Its employee-owners own more than 10% of the fair market value of its outstanding stock on the last day of the testing period. Need to file 2006 tax return Personal services. Need to file 2006 tax return   Personal services include any activity performed in the fields of accounting, actuarial science, architecture, consulting, engineering, health (including veterinary services), law, and the performing arts. Need to file 2006 tax return Employee-owners. Need to file 2006 tax return   A person is an employee-owner of a personal service corporation if both of the following apply. Need to file 2006 tax return He or she is an employee of the corporation or performs personal services for, or on behalf of, the corporation (even if he or she is an independent contractor for other purposes) on any day of the testing period. Need to file 2006 tax return He or she owns any stock in the corporation at any time during the testing period. Need to file 2006 tax return Other rules. Need to file 2006 tax return   For other rules that apply to personal service corporations see Accounting Periods, later. Need to file 2006 tax return Closely held corporations. Need to file 2006 tax return   A corporation is closely held if all of the following apply. Need to file 2006 tax return It is not a personal service corporation. Need to file 2006 tax return At any time during the last half of the tax year, more than 50% of the value of its outstanding stock is, directly or indirectly, owned by or for five or fewer individuals. Need to file 2006 tax return “Individual” includes certain trusts and private foundations. Need to file 2006 tax return Other rules. Need to file 2006 tax return   For the at-risk rules that apply to closely held corporations, seeAt-Risk Limits, later. Need to file 2006 tax return Property Exchanged for Stock If you transfer property (or money and property) to a corporation in exchange for stock in that corporation (other than nonqualified preferred stock, described later), and immediately afterward you are in control of the corporation, the exchange is usually not taxable. Need to file 2006 tax return This rule applies both to individuals and to groups who transfer property to a corporation. Need to file 2006 tax return It also applies whether the corporation is being formed or is already operating. Need to file 2006 tax return It does not apply in the following situations. Need to file 2006 tax return The corporation is an investment company. Need to file 2006 tax return You transfer the property in a bankruptcy or similar proceeding in exchange for stock used to pay creditors. Need to file 2006 tax return The stock is received in exchange for the corporation's debt (other than a security) or for interest on the corporation's debt (including a security) that accrued while you held the debt. Need to file 2006 tax return Both the corporation and any person involved in a nontaxable exchange of property for stock must attach to their income tax returns a complete statement of all facts pertinent to the exchange. Need to file 2006 tax return For more information, see section 1. Need to file 2006 tax return 351-3 of the Regulations. Need to file 2006 tax return Control of a corporation. Need to file 2006 tax return   To be in control of a corporation, you or your group of transferors must own, immediately after the exchange, at least 80% of the total combined voting power of all classes of stock entitled to vote and at least 80% of the outstanding shares of each class of nonvoting stock. Need to file 2006 tax return Example 1. Need to file 2006 tax return You and Bill Jones buy property for $100,000. Need to file 2006 tax return You both organize a corporation when the property has a fair market value of $300,000. Need to file 2006 tax return You transfer the property to the corporation for all its authorized capital stock, which has a par value of $300,000. Need to file 2006 tax return No gain is recognized by you, Bill, or the corporation. Need to file 2006 tax return Example 2. Need to file 2006 tax return You and Bill transfer the property with a basis of $100,000 to a corporation in exchange for stock with a fair market value of $300,000. Need to file 2006 tax return This represents only 75% of each class of stock of the corporation. Need to file 2006 tax return The other 25% was already issued to someone else. Need to file 2006 tax return You and Bill recognize a taxable gain of $200,000 on the transaction. Need to file 2006 tax return Services rendered. Need to file 2006 tax return   The term property does not include services rendered or to be rendered to the issuing corporation. Need to file 2006 tax return The value of stock received for services is income to the recipient. Need to file 2006 tax return Example. Need to file 2006 tax return You transfer property worth $35,000 and render services valued at $3,000 to a corporation in exchange for stock valued at $38,000. Need to file 2006 tax return Right after the exchange, you own 85% of the outstanding stock. Need to file 2006 tax return No gain is recognized on the exchange of property. Need to file 2006 tax return However, you recognize ordinary income of $3,000 as payment for services you rendered to the corporation. Need to file 2006 tax return Property of relatively small value. Need to file 2006 tax return   The term property does not include property of a relatively small value when it is compared to the value of stock and securities already owned or to be received for services by the transferor if the main purpose of the transfer is to qualify for the nonrecognition of gain or loss by other transferors. Need to file 2006 tax return   Property transferred will not be considered to be of relatively small value if its fair market value is at least 10% of the fair market value of the stock and securities already owned or to be received for services by the transferor. Need to file 2006 tax return Stock received in disproportion to property transferred. Need to file 2006 tax return   If a group of transferors exchange property for corporate stock, each transferor does not have to receive stock in proportion to his or her interest in the property transferred. Need to file 2006 tax return If a disproportionate transfer takes place, it will be treated for tax purposes in accordance with its true nature. Need to file 2006 tax return It may be treated as if the stock were first received in proportion and then some of it used to make gifts, pay compensation for services, or satisfy the transferor's obligations. Need to file 2006 tax return Money or other property received. Need to file 2006 tax return   If, in an otherwise nontaxable exchange of property for corporate stock, you also receive money or property other than stock, you may have to recognize gain. Need to file 2006 tax return You must recognize gain only up to the amount of money plus the fair market value of the other property you receive. Need to file 2006 tax return The rules for figuring the recognized gain in this situation generally follow those for a partially nontaxable exchange discussed in Publication 544 under Like-Kind Exchanges. Need to file 2006 tax return If the property you give up includes depreciable property, the recognized gain may have to be reported as ordinary income from depreciation. Need to file 2006 tax return See chapter 3 of Publication 544. Need to file 2006 tax return No loss is recognized. Need to file 2006 tax return Nonqualified preferred stock. Need to file 2006 tax return   Nonqualified preferred stock is treated as property other than stock. Need to file 2006 tax return Generally, it is preferred stock with any of the following features. Need to file 2006 tax return The holder has the right to require the issuer or a related person to redeem or buy the stock. Need to file 2006 tax return The issuer or a related person is required to redeem or buy the stock. Need to file 2006 tax return The issuer or a related person has the right to redeem or buy the stock and, on the issue date, it is more likely than not that the right will be exercised. Need to file 2006 tax return The dividend rate on the stock varies with reference to interest rates, commodity prices, or similar indices. Need to file 2006 tax return For a detailed definition of nonqualified preferred stock, see section 351(g)(2) of the Internal Revenue Code. Need to file 2006 tax return Liabilities. Need to file 2006 tax return   If the corporation assumes your liabilities, the exchange generally is not treated as if you received money or other property. Need to file 2006 tax return There are two exceptions to this treatment. Need to file 2006 tax return If the liabilities the corporation assumes are more than your adjusted basis in the property you transfer, gain is recognized up to the difference. Need to file 2006 tax return However, if the liabilities assumed give rise to a deduction when paid, such as a trade account payable or interest, no gain is recognized. Need to file 2006 tax return If there is no good business reason for the corporation to assume your liabilities, or if your main purpose in the exchange is to avoid federal income tax, the assumption is treated as if you received money in the amount of the liabilities. Need to file 2006 tax return For more information on the assumption of liabilities, see section 357(d) of the Internal Revenue Code. Need to file 2006 tax return Example. Need to file 2006 tax return You transfer property to a corporation for stock. Need to file 2006 tax return Immediately after the transfer, you control the corporation. Need to file 2006 tax return You also receive $10,000 in the exchange. Need to file 2006 tax return Your adjusted basis in the transferred property is $20,000. Need to file 2006 tax return The stock you receive has a fair market value (FMV) of $16,000. Need to file 2006 tax return The corporation also assumes a $5,000 mortgage on the property for which you are personally liable. Need to file 2006 tax return Gain is realized as follows. Need to file 2006 tax return FMV of stock received $16,000 Cash received 10,000 Liability assumed by corporation 5,000 Total received $31,000 Minus: Adjusted basis of property transferred 20,000 Realized gain $11,000   The liability assumed is not treated as money or other property. Need to file 2006 tax return The recognized gain is limited to $10,000, the cash received. Need to file 2006 tax return Loss on exchange. Need to file 2006 tax return   If you have a loss from an exchange and own, directly or indirectly, more than 50% of the corporation's stock, you cannot deduct the loss. Need to file 2006 tax return For more information, see Nondeductible Loss under Sales and Exchanges Between Related Persons in chapter 2 of Publication 544. Need to file 2006 tax return Basis of stock or other property received. Need to file 2006 tax return   The basis of the stock you receive is generally the adjusted basis of the property you transfer. Need to file 2006 tax return Increase this amount by any amount treated as a dividend, plus any gain recognized on the exchange. Need to file 2006 tax return Decrease this amount by any cash you received, the fair market value of any other property you received, and any loss recognized on the exchange. Need to file 2006 tax return Also decrease this amount by the amount of any liability the corporation or another party to the exchange assumed from you, unless payment of the liability gives rise to a deduction when paid. Need to file 2006 tax return    Further decreases may be required when the corporation or another party to the exchange assumes from you a liability that gives rise to a deduction when paid, if the basis of the stock would otherwise be higher than its fair market value on the date of the exchange. Need to file 2006 tax return This rule does not apply if the entity assuming the liability acquired either substantially all of the assets or the trade or business with which the liability is associated. Need to file 2006 tax return The basis of any other property you receive is its fair market value on the date of the trade. Need to file 2006 tax return Basis of property transferred. Need to file 2006 tax return   A corporation that receives property from you in exchange for its stock generally has the same basis you had in the property, increased by any gain you recognized on the exchange. Need to file 2006 tax return However, the increase for the gain recognized may be limited. Need to file 2006 tax return For more information, see section 362 of the Internal Revenue Code. Need to file 2006 tax return Election to reduce basis. Need to file 2006 tax return   In a section 351 transaction, if the adjusted basis of the property transferred exceeds the property's fair market value, the transferor and transferee may make an irrevocable election to treat the basis of the stock received by the transferor as having a basis equal to the fair market value of the property transferred. Need to file 2006 tax return The transferor and transferee make this election by attaching a statement to their tax returns filed by the due date (including extensions) for the tax year in which the transaction occurred. Need to file 2006 tax return However, if the transferor makes the election by including the certification provided in Notice 2005-70, 2005-41, I. Need to file 2006 tax return R. Need to file 2006 tax return B. Need to file 2006 tax return 694, on or with its tax return filed by the due date (including extensions), then no election need be made by the transferee. Need to file 2006 tax return    For more information on making this election, see section 362(e)(2)(C) of the Internal Revenue Code, and Notice 2005-70. Need to file 2006 tax return Capital Contributions This section explains the tax treatment of contributions from shareholders and nonshareholders. Need to file 2006 tax return Paid-in capital. Need to file 2006 tax return   Contributions to the capital of a corporation, whether or not by shareholders, are paid-in capital. Need to file 2006 tax return These contributions are not taxable to the corporation. Need to file 2006 tax return Basis. Need to file 2006 tax return   The corporation's basis of property contributed to capital by a shareholder is the same as the basis the shareholder had in the property, increased by any gain the shareholder recognized on the exchange. Need to file 2006 tax return However, the increase for the gain recognized may be limited. Need to file 2006 tax return For more information, see Basis of property transferred, above, and section 362 of the Internal Revenue Code. Need to file 2006 tax return   The basis of property contributed to capital by a person other than a shareholder is zero. Need to file 2006 tax return   If a corporation receives a cash contribution from a person other than a shareholder, the corporation must reduce the basis of any property acquired with the contribution during the 12-month period beginning on the day it received the contribution by the amount of the contribution. Need to file 2006 tax return If the amount contributed is more than the cost of the property acquired, then reduce, but not below zero, the basis of the other properties held by the corporation on the last day of the 12-month period in the following order. Need to file 2006 tax return Depreciable property. Need to file 2006 tax return Amortizable property. Need to file 2006 tax return Property subject to cost depletion but not to percentage depletion. Need to file 2006 tax return All other remaining properties. Need to file 2006 tax return   Reduce the basis of property in each category to zero before going on to the next category. Need to file 2006 tax return   There may be more than one piece of property in each category. Need to file 2006 tax return Base the reduction of the basis of each property on the following ratio:   Basis of each piece of property   Bases of all properties (within that category) If the corporation wishes to make this adjustment in some other way, it must get IRS approval. Need to file 2006 tax return The corporation files a request for approval with its income tax return for the tax year in which it receives the contribution. Need to file 2006 tax return Filing and Paying Income Taxes The federal income tax is a pay-as-you-go tax. Need to file 2006 tax return A corporation generally must make estimated tax payments as it earns or receives income during its tax year. Need to file 2006 tax return After the end of the year, the corporation must file an income tax return. Need to file 2006 tax return This section will help you determine when and how to pay and file corporate income taxes. Need to file 2006 tax return For certain corporations affected by Presidentially declared disasters such as hurricanes, the due dates for filing returns, paying taxes, and performing other time-sensitive acts may be extended. Need to file 2006 tax return The IRS may also forgive the interest and penalties on any underpaid tax for the length of any extension. Need to file 2006 tax return For more information, visit www. Need to file 2006 tax return irs. Need to file 2006 tax return gov/newsroom/article/0,,id=108362. Need to file 2006 tax return 00. Need to file 2006 tax return Income Tax Return This section will help you determine when and how to report a corporation's income tax. Need to file 2006 tax return Who must file. Need to file 2006 tax return   Unless exempt under section 501 of the Internal Revenue Code, all domestic corporations in existence for any part of a tax year (including corporations in bankruptcy) must file an income tax return whether or not they have taxable income. Need to file 2006 tax return Which form to file. Need to file 2006 tax return   A corporation generally must file Form 1120, U. Need to file 2006 tax return S. Need to file 2006 tax return Corporation Income Tax Return, to report its income, gains, losses, deductions, credits, and to figure its income tax liability. Need to file 2006 tax return Certain organizations and entities must file special returns. Need to file 2006 tax return For more information, see Special Returns for Certain Organizations, in the Instructions for Form 1120. Need to file 2006 tax return Electronic filing. Need to file 2006 tax return   Corporations can generally electronically file (e-file) Form 1120 and certain related forms, schedules, and attachments. Need to file 2006 tax return Certain corporations with total assets of $10 million or more, that file at least 250 returns a year must e-file Form 1120. Need to file 2006 tax return However, in certain instances, these corporations can request a waiver. Need to file 2006 tax return For more information regarding electronic filing, visit www. Need to file 2006 tax return irs. Need to file 2006 tax return gov/efile. Need to file 2006 tax return When to file. Need to file 2006 tax return   Generally, a corporation must file its income tax return by the 15th day of the 3rd month after the end of its tax year. Need to file 2006 tax return A new corporation filing a short-period return must generally file by the 15th day of the 3rd month after the short period ends. Need to file 2006 tax return A corporation that has dissolved must generally file by the 15th day of the 3rd month after the date it dissolved. Need to file 2006 tax return Example 1. Need to file 2006 tax return A corporation's tax year ends December 31. Need to file 2006 tax return It must file its income tax return by March 15th. Need to file 2006 tax return Example 2. Need to file 2006 tax return A corporation's tax year ends June 30. Need to file 2006 tax return It must file its income tax return by September 15th. Need to file 2006 tax return   If the due date falls on a Saturday, Sunday, or legal holiday, the due date is extended to the next business day. Need to file 2006 tax return Extension of time to file. Need to file 2006 tax return   File Form 7004, Application for Automatic Extension of Time To File Certain Business Income Tax, Information and Other Returns, to request an extension of time to file a corporation income tax return. Need to file 2006 tax return The IRS will grant the extension if you complete the form properly, file it, and pay any tax due by the original due date for the return. Need to file 2006 tax return   Form 7004 does not extend the time for paying the tax due on the return. Need to file 2006 tax return Interest, and possibly penalties, will be charged on any part of the final tax due not shown as a balance due on Form 7004. Need to file 2006 tax return The interest is figured from the original due date of the return to the date of payment. Need to file 2006 tax return   For more information, see the instructions for Form 7004. Need to file 2006 tax return How to pay your taxes. Need to file 2006 tax return   A corporation must pay its tax due in full no later than the 15th day of the 3rd month after the end of its tax year. Need to file 2006 tax return Electronic Federal Tax Payment System (EFTPS). Need to file 2006 tax return   Corporations generally must use EFTPS to make deposits of all tax liabilities (including social security, Medicare, withheld income, excise, and corporate income taxes). Need to file 2006 tax return For more information on EFTPS and enrollment, visit www. Need to file 2006 tax return eftps. Need to file 2006 tax return gov or call 1-800-555-4477. Need to file 2006 tax return Also see Publication 966, The Secure Way to Pay Your Federal Taxes. Need to file 2006 tax return Note. Need to file 2006 tax return Forms 8109 and 8109-B, Federal Tax Deposit Coupon, can no longer be used to make federal tax deposits. Need to file 2006 tax return Penalties Generally, if the corporation receives a notice about interest and penalties after it files its return, send the IRS an explanation and we will determine if the corporation meets reasonable-cause criteria. Need to file 2006 tax return Do not attach an explanation when the corporation's return is filed. Need to file 2006 tax return See the instructions for your income tax return. Need to file 2006 tax return Late filing of return. Need to file 2006 tax return    A corporation that does not file its tax return by the due date, including extensions, may be penalized 5% of the unpaid tax for each month or part of a month the return is late, up to a maximum of 25% of the unpaid tax. Need to file 2006 tax return If the corporation is charged a penalty for late payment of tax (discussed next) for the same period of time, the penalty for late filing is reduced by the amount of the penalty for late payment. Need to file 2006 tax return The minimum penalty for a return that is over 60 days late is the smaller of the tax due or $100. Need to file 2006 tax return The penalty will not be imposed if the corporation can show the failure to file on time was due to a reasonable cause. Need to file 2006 tax return Late payment of tax. Need to file 2006 tax return    A corporation that does not pay the tax when due may be penalized ½ of 1% of the unpaid tax for each month or part of a month the tax is not paid, up to a maximum of 25% of the unpaid tax. Need to file 2006 tax return The penalty will not be imposed if the corporation can show that the failure to pay on time was due to a reasonable cause. Need to file 2006 tax return Trust fund recovery penalty. Need to file 2006 tax return   If income, social security, and Medicare taxes that a corporation must withhold from employee wages are not withheld or are not deposited or paid to the United States Treasury, the trust fund recovery penalty may apply. Need to file 2006 tax return The penalty is the full amount of the unpaid trust fund tax. Need to file 2006 tax return This penalty may apply to you if these unpaid taxes cannot be immediately collected from the business. Need to file 2006 tax return   The trust fund recovery penalty may be imposed on all persons who are determined by the IRS to be responsible for collecting, accounting for, and paying these taxes, and who acted willfully in not doing so. Need to file 2006 tax return   A responsible person can be an officer or employee of a corporation, an accountant, or a volunteer director/trustee. Need to file 2006 tax return A responsible person also may include one who signs checks for the corporation or otherwise has authority to cause the spending of business funds. Need to file 2006 tax return   Willfully means voluntarily, consciously, and intentionally. Need to file 2006 tax return A responsible person acts willfully if the person knows the required actions are not taking place. Need to file 2006 tax return   For more information on withholding and paying these taxes, see Publication 15 (Circular E), Employer's Tax Guide, and Publication 51, (Circular A), Agricultural Employer's Tax Guide. Need to file 2006 tax return Other penalties. Need to file 2006 tax return   Other penalties can be imposed for negligence, substantial understatement of tax, reportable transaction understatements, and fraud. Need to file 2006 tax return See sections 6662, 6662A, and 6663 of the Internal Revenue Code. Need to file 2006 tax return Estimated Tax Generally, a corporation must make installment payments if it expects its estimated tax for the year to be $500 or more. Need to file 2006 tax return If the corporation does not pay the installments when they are due, it could be subject to an underpayment penalty. Need to file 2006 tax return This section will explain how to avoid this penalty. Need to file 2006 tax return When to pay estimated tax. Need to file 2006 tax return   Installment payments are due by the 15th day of the 4th, 6th, 9th, and 12th months of the corporation's tax year. Need to file 2006 tax return Example 1. Need to file 2006 tax return Your corporation's tax year ends December 31. Need to file 2006 tax return Installment payments are due on April 15, June 15, September 15, and December 15. Need to file 2006 tax return Example 2. Need to file 2006 tax return Your corporation's tax year ends June 30. Need to file 2006 tax return Installment payments are due on October 15, December 15, March 15, and June 15. Need to file 2006 tax return   If any due date falls on a Saturday, Sunday, or legal holiday, the installment is due on the next business day. Need to file 2006 tax return How to figure each required installment. Need to file 2006 tax return   Use Form 1120-W, Estimated Tax for Corporations, as a worksheet to figure each required installment of estimated tax. Need to file 2006 tax return You will generally use one of the following two methods to figure each required installment. Need to file 2006 tax return You should use the method that yields the smallest installment payments. Need to file 2006 tax return Note. Need to file 2006 tax return In these discussions, “return” generally refers to the corporation's original return. Need to file 2006 tax return However, an amended return is considered the original return if it is filed by the due date (including extensions) of the original return. Need to file 2006 tax return Method 1. Need to file 2006 tax return   Each required installment is 25% of the income tax the corporation will show on its return for the current year. Need to file 2006 tax return Method 2. Need to file 2006 tax return   Each required installment is 25% of the income tax shown on the corporation's return for the previous year. Need to file 2006 tax return   To use Method 2: The corporation must have filed a return for the previous year, The return must have been for a full 12 months, and The return must have shown a positive tax liability (not zero). Need to file 2006 tax return Also, if the corporation is a large corporation, it can use Method 2 to figure the first installment only. Need to file 2006 tax return   See the Instructions for Form 1120-W, for the definition of a large corporation and other special rules for large corporations. Need to file 2006 tax return Other methods. Need to file 2006 tax return   If a corporation's income is expected to vary during the year because, for example, its business is seasonal, it may be able to lower the amount of one or more required installments by using one or both of the following methods. Need to file 2006 tax return The annualized income installment method. Need to file 2006 tax return The adjusted seasonal installment method. Need to file 2006 tax return Use Schedule A of Form 1120-W to determine if using one or both of these methods will lower the amount of any required installments. Need to file 2006 tax return Refiguring required installments. Need to file 2006 tax return   If after the corporation figures and deposits its estimated tax it finds that its tax liability for the year will be more or less than originally estimated, it may have to refigure its required installments to see if an underpayment penalty may apply. Need to file 2006 tax return An immediate catchup payment should be made to reduce any penalty resulting from the underpayment of any earlier installments. Need to file 2006 tax return Underpayment penalty. Need to file 2006 tax return   If the corporation does not pay a required installment of estimated tax by its due date, it may be subject to a penalty. Need to file 2006 tax return The penalty is figured separately for each installment due date. Need to file 2006 tax return The corporation may owe a penalty for an earlier due date, even if it paid enough tax later to make up the underpayment. Need to file 2006 tax return This is true even if the corporation is due a refund when its return is filed. Need to file 2006 tax return Form 2220. Need to file 2006 tax return   Use Form 2220, Underpayment of Estimated Tax by Corporations, to determine if a corporation is subject to the penalty for underpayment of estimated tax and to figure the amount of the penalty. Need to file 2006 tax return   If the corporation is charged a penalty, the amount of the penalty depends on the following three factors. Need to file 2006 tax return The amount of the underpayment. Need to file 2006 tax return The period during which the underpayment was due and unpaid. Need to file 2006 tax return The interest rate for underpayments published quarterly by the IRS in the Internal Revenue Bulletin. Need to file 2006 tax return   A corporation generally does not have to file Form 2220 with its income tax return because the IRS will figure any penalty and bill the corporation. Need to file 2006 tax return However, even if the corporation does not owe a penalty, complete and attach the form to the corporation's tax return if any of the following apply. Need to file 2006 tax return The annualized income installment method was used to figure any required installment. Need to file 2006 tax return The adjusted seasonal installment method was used to figure any required installment. Need to file 2006 tax return The corporation is a large corporation figuring its first required installment based on the prior year's tax. Need to file 2006 tax return How to pay estimated tax. Need to file 2006 tax return   A corporation is generally required to use EFTPS to pay its taxes. Need to file 2006 tax return See Electronic Federal Tax Payment System (EFTPS), earlier. Need to file 2006 tax return Also see the Instructions for Form 1120-W. Need to file 2006 tax return Quick refund of overpayments. Need to file 2006 tax return   A corporation that has overpaid its estimated tax for the tax year may be able to apply for a quick refund. Need to file 2006 tax return Use Form 4466, Corporation Application for Quick Refund of Overpayment of Estimated Tax, to apply for a quick refund of an overpayment of estimated tax. Need to file 2006 tax return A corporation can apply for a quick refund if the overpayment is: At least 10% of its expected tax liability, and At least $500. Need to file 2006 tax return Use Form 4466 to figure the corporation's expected tax liability and the overpayment of estimated tax. Need to file 2006 tax return File Form 4466 before the 16th day of the 3rd month after the end of the tax year, but before the corporation files its income tax return. Need to file 2006 tax return Do not file Form 4466 before the end of the corporation's tax year. Need to file 2006 tax return An extension of time to file the corporation's income tax return will not extend the time for filing Form 4466. Need to file 2006 tax return The IRS will act on the form within 45 days from the date you file it. Need to file 2006 tax return U. Need to file 2006 tax return S. Need to file 2006 tax return Real Property Interest If a domestic corporation acquires a U. Need to file 2006 tax return S. Need to file 2006 tax return real property interest from a foreign person or firm, the corporation may have to withhold tax on the amount it pays for the property. Need to file 2006 tax return The amount paid includes cash, the fair market value of other property, and any assumed liability. Need to file 2006 tax return If a domestic corporation distributes a U. Need to file 2006 tax return S. Need to file 2006 tax return real property interest to a foreign person or firm, it may have to withhold tax on the fair market value of the property. Need to file 2006 tax return A corporation that fails to withhold may be liable for the tax, and any penalties and interest that apply. Need to file 2006 tax return For more information, see section 1445 of the Internal Revenue Code; Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities; Form 8288, U. Need to file 2006 tax return S. Need to file 2006 tax return Withholding Tax Return for Dispositions by Foreign Persons of U. Need to file 2006 tax return S. Need to file 2006 tax return Real Property Interests; and Form 8288-A, Statement of Withholding on Dispositions by Foreign Persons of U. Need to file 2006 tax return S. Need to file 2006 tax return Real Property Interests. Need to file 2006 tax return Accounting Methods An accounting method is a set of rules used to determine when and how income and expenses are reported. Need to file 2006 tax return Taxable income should be determined using the method of accounting regularly used in keeping the corporation's books and records. Need to file 2006 tax return In all cases, the method used must clearly show taxable income. Need to file 2006 tax return Generally, permissible methods include: Cash, Accrual, or Any other method authorized by the Internal Revenue Code. Need to file 2006 tax return Accrual method. Need to file 2006 tax return   Generally, a corporation (other than a qualified personal service corporation) must use the accrual method of accounting if its average annual gross receipts exceed $5 million. Need to file 2006 tax return A corporation engaged in farming operations also must use the accrual method. Need to file 2006 tax return   If inventories are required, the accrual method generally must be used for sales and purchases of merchandise. Need to file 2006 tax return However, qualifying taxpayers and eligible businesses of qualifying small business taxpayers are excepted from using the accrual method for eligible trades or businesses and may account for inventoriable items as materials and supplies that are not incidental. Need to file 2006 tax return   Under the accrual method, an amount is includable in income when: All the events have occurred that fix the right to receive the income, which is the earliest of the date: The required performance takes place, Payment is due, or Payment is received; and The amount can be determined with reasonable accuracy. Need to file 2006 tax return   Generally, an accrual basis taxpayer can deduct accrued expenses in the tax year when: All events that determine the liability have occurred, The amount of the liability can be figured with reasonable accuracy, and Economic performance takes place with respect to the expense. Need to file 2006 tax return   There are exceptions to the economic performance rule for certain items, including recurring expenses. Need to file 2006 tax return See section 461(h) of the Internal Revenue Code and the related regulations for the rules for determining when economic performance takes place. Need to file 2006 tax return Nonaccrual experience method. Need to file 2006 tax return   Accrual method corporations are not required to maintain accruals for certain amounts from the performance of services that, on the basis of their experience, will not be collected, if: The services are in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, or consulting; or The corporation's average annual gross receipts for the 3 prior tax years does not exceed $5 million. Need to file 2006 tax return   This provision does not apply if interest is required to be paid on the amount or if there is any penalty for failure to pay the amount timely. Need to file 2006 tax return Percentage of completion method. Need to file 2006 tax return   Long-term contracts (except for certain real property construction contracts) must generally be accounted for using the percentage of completion method described in section 460 of the Internal Revenue Code. Need to file 2006 tax return Mark-to-market accounting method. Need to file 2006 tax return   Generally, dealers in securities must use the mark-to-market accounting method described in section 475 of the Internal Revenue Code. Need to file 2006 tax return Under this method any security held by a dealer as inventory must be included in inventory at its FMV. Need to file 2006 tax return Any security not held as inventory at the close of the tax year is treated as sold at its FMV on the last business day of the tax year. Need to file 2006 tax return Any gain or loss must be taken into account in determining gross income. Need to file 2006 tax return The gain or loss taken into account is treated as ordinary gain or loss. Need to file 2006 tax return   Dealers in commodities and traders in securities and commodities can elect to use the mark-to-market accounting method. Need to file 2006 tax return Change in accounting method. Need to file 2006 tax return   A corporation can change its method of accounting used to report taxable income (for income as a whole or for the treatment of any material item). Need to file 2006 tax return The corporation must file Form 3115, Application for Change in Accounting Method. Need to file 2006 tax return For more information, see Form 3115 and Publication 538. Need to file 2006 tax return Section 481(a) adjustment. Need to file 2006 tax return   The corporation may have to make an adjustment under section 481(a) of the Internal Revenue Code to prevent amounts of income or expense from being duplicated or omitted. Need to file 2006 tax return The section 481(a) adjustment period is generally 1 year for a net negative adjustment and 4 years for a net positive adjustment. Need to file 2006 tax return However, a corporation can elect to use a 1-year adjustment period if the net section 481(a) adjustment for the change is less than $25,000. Need to file 2006 tax return The corporation must complete the appropriate lines of Form 3115 to make the election. Need to file 2006 tax return See the Instructions for Form 3115. Need to file 2006 tax return Accounting Periods A corporation must figure its taxable income on the basis of a tax year. Need to file 2006 tax return A tax year is the annual accounting period a corporation uses to keep its records and report its income and expenses. Need to file 2006 tax return Generally, corporations can use either a calendar year or a fiscal year as its tax year. Need to file 2006 tax return Unless special rules apply, a corporation generally adopts a tax year by filing its first federal income tax return using that tax year. Need to file 2006 tax return For more information, see Publication 538. Need to file 2006 tax return Personal service corporation. Need to file 2006 tax return   A personal service corporation must use a calendar year as its tax year unless: It elects to use a 52–53 week tax year that ends with reference to the calendar year; It can establish a business purpose for a different tax year and obtains approval of the IRS. Need to file 2006 tax return See Form 1128, Application To Adopt, Change, or Retain a Tax Year, and Publication 538; or It elects under section 444 of the Internal Revenue Code to have a tax year other than a calendar year. Need to file 2006 tax return Use Form 8716, Election to Have a Tax Year Other Than a Required Tax Year, to make the election. Need to file 2006 tax return   If a personal service corporation makes a section 444 election, its deduction for certain amounts paid to employee-owners may be limited. Need to file 2006 tax return See Schedule H (Form 1120), Section 280H Limitations for a Personal Service Corporation (PSC), to figure the maximum deduction. Need to file 2006 tax return Change of tax year. Need to file 2006 tax return   Generally, a corporation must get the consent of the IRS before changing its tax year by filing Form 1128. Need to file 2006 tax return However, under certain conditions, a corporation can change its tax year without getting the consent. Need to file 2006 tax return For more information, see Form 1128 and Publication 538. Need to file 2006 tax return Recordkeeping A corporation should keep its records for as long as they may be needed for the administration of any provision of the Internal Revenue Code. Need to file 2006 tax return Usually records that support items of income, deductions, or credits on the return must be kept for 3 years from the date the return is due or filed, whichever is later. Need to file 2006 tax return Keep records that verify the corporation's basis in property for as long as they are needed to figure the basis of the original or replacement property. Need to file 2006 tax return The corporation should keep copies of all filed returns. Need to file 2006 tax return They help in preparing future and amended returns and in the calculation of earnings and profits. Need to file 2006 tax return Income, Deductions, and Special Provisions Rules on income and deductions that apply to individuals also apply, for the most part, to corporations. Need to file 2006 tax return However, the following special provisions apply only to corporations. Need to file 2006 tax return Costs of Going Into Business When you go into business, treat all costs you incur to get your business started as capital expenses. Need to file 2006 tax return However, a corporation can elect to deduct a limited amount of start-up or organizational costs. Need to file 2006 tax return Any costs not deducted can be amortized. Need to file 2006 tax return Start-up costs are costs for creating an active trade or business or investigating the creation or acquisition of an active trade or business. Need to file 2006 tax return Organizational costs are the direct costs of creating the corporation. Need to file 2006 tax return For more information on deducting or amortizing start-up and organizational costs, see the instructions for your income tax return. Need to file 2006 tax return Also see, Publication 535, chapter 7, Costs You Can Deduct or Capitalize, and chapter 8, Amortization. Need to file 2006 tax return Related Persons A corporation that uses an accrual method of accounting cannot deduct business expenses and interest owed to a related person who uses the cash method of accounting until the corporation makes the payment and the corresponding amount is includible in the related person's gross income. Need to file 2006 tax return Determine the relationship, for this rule, as of the end of the tax year for which the expense or interest would otherwise be deductible. Need to file 2006 tax return If a deduction is denied, the rule will continue to apply even if the corporation's relationship with the person ends before the expense or interest is includible in the gross income of that person. Need to file 2006 tax return These rules also deny the deduction of losses on the sale or exchange of property between related persons. Need to file 2006 tax return Related persons. Need to file 2006 tax return   For purposes of this rule, the following persons are related to a corporation. Need to file 2006 tax return Another corporation, that is a member of the same controlled group (as defined in section 267(f) of the Internal Revenue Code). Need to file 2006 tax return An individual who owns, directly or indirectly, more than 50% of the value of the outstanding stock of the corporation. Need to file 2006 tax return A trust fiduciary, when the trust or the grantor of the trust owns, directly or indirectly, more than 50% in value of the outstanding stock of the corporation. Need to file 2006 tax return An S corporation, if the same persons own more than 50% in value of the outstanding stock of each corporation. Need to file 2006 tax return A partnership, if the same persons own more than 50% in value of the outstanding stock of the corporation and more than 50% of the capital or profits interest in the partnership. Need to file 2006 tax return Any employee-owner, if the corporation is a personal service corporation (see Personal service corporation, earlier), regardless of the amount of stock owned by the employee-owner. Need to file 2006 tax return Ownership of stock. Need to file 2006 tax return   To determine whether an individual directly or indirectly owns any of the outstanding stock of a corporation, the following apply. Need to file 2006 tax return Stock owned, directly or indirectly, by or for a corporation, partnership, estate, or trust, is treated as being owned proportionately by or for its shareholders, partners, or beneficiaries. Need to file 2006 tax return An individual is treated as owning the stock owned, directly or indirectly, by or for the individual's family. Need to file 2006 tax return Family includes only brothers and sisters (including half brothers and half sisters), a spouse, ancestors, and lineal descendants. Need to file 2006 tax return Any individual owning (other than by applying (2), above) stock in a corporation, is treated as also owning the stock owned directly or indirectly by that individual's partner. Need to file 2006 tax return To apply (1), (2), or (3), above, stock constructively owned by a person under (1) is treated as actually owned by that person. Need to file 2006 tax return But stock constructively owned by an individual under (2) or (3) is not treated as actually owned by the individual for applying either (2) or (3) to make another person the constructive owner of that stock. Need to file 2006 tax return Reallocation of income and deductions. Need to file 2006 tax return   Where it is necessary to clearly show income or prevent tax evasion, the IRS can reallocate gross income, deductions, credits, or allowances between two or more organizations, trades, or businesses owned or controlled directly, or indirectly, by the same interests. Need to file 2006 tax return Complete liquidations. Need to file 2006 tax return   The disallowance of losses from the sale or exchange of property between related persons does not apply to liquidating distributions. Need to file 2006 tax return More information. Need to file 2006 tax return   For more information about the related person rules, see Publication 544. Need to file 2006 tax return Income From Qualifying Shipping Activities A corporation may make an election to be taxed on its notional shipping income at the highest corporate tax rate. Need to file 2006 tax return If a corporation makes this election it may exclude income from qualifying shipping activities from gross income. Need to file 2006 tax return Also if the election is made, the corporation generally may not claim any loss, deduction, or credit with respect to qualifying shipping activities. Need to file 2006 tax return A corporation making this election may also elect to defer gain on the disposition of a qualifying vessel. Need to file 2006 tax return A corporation uses Form 8902, Alternative Tax on Qualifying Shipping Activities, to make the election and figure the alternative tax. Need to file 2006 tax return For more information regarding the election, see Form 8902. Need to file 2006 tax return Election to Expense Qualified Refinery Property A corporation can make an irrevocable election on its tax return filed by the due date (including extensions) to deduct 50% of the cost of qualified refinery property (defined in section 179C(c) of the Internal Revenue Code), placed in service before January 1, 2014. Need to file 2006 tax return The deduction is allowed for the year in which the property is placed in service. Need to file 2006 tax return A subchapter T cooperative can make an irrevocable election on its return by the due date (including extensions) to allocate this deduction to its owners based on their ownership interest. Need to file 2006 tax return For more information, see section 179C of the Internal Revenue Code and the related Regulations. Need to file 2006 tax return Deduction to Comply With EPA Sulfur Regulations A small business refiner can make an irrevocable election on its tax return filed by the due date (including extensions) to deduct up to 75% of qualified costs paid or incurred to comply with the Highway Diesel Fuel Sulfur Control Requirements of the Environmental Protection Agency (EPA). Need to file 2006 tax return A subchapter T cooperative can make an irrevocable election on its return filed by the due date (including extensions) to allocate the deduction to its owners based on their ownership interest. Need to file 2006 tax return For more information, see sections 45H and 179B of the Internal Revenue Code and the related Regulations. Need to file 2006 tax return Energy-Efficient Commercial Building Property Deduction A corporation can claim a deduction for costs associated with energy-efficient commercial building property, placed in service before January 1, 2014. Need to file 2006 tax return In order to qualify for the deduction: The costs must be associated with depreciable or amortizable property in a Standard 90. Need to file 2006 tax return 1-2001 domestic building; The property must be either a part of the interior lighting system, the heating, cooling, ventilation and hot water system, or the building envelope (defined in section 179D(c)(1)(C) of the Internal Revenue Code); and The property must be installed as part of a plan to reduce the total annual energy and power costs of the building by 50% or more. Need to file 2006 tax return The deduction is limited to $1. Need to file 2006 tax return 80 per square foot of the building less the total amount of deductions taken for this property in prior tax years. Need to file 2006 tax return Other rules and limitations apply. Need to file 2006 tax return The corporation must reduce the basis of any property by any deduction taken. Need to file 2006 tax return The deduction is subject to recapture if the corporation fails to fully implement an energy savings plan. Need to file 2006 tax return For more information, see section 179D of the Internal Revenue Code. Need to file 2006 tax return Also see Notice 2006-52, 2006-26 I. Need to file 2006 tax return R. Need to file 2006 tax return B. Need to file 2006 tax return 1175, clarified and amplified by Notice 2008-40, 2008-14 I. Need to file 2006 tax return R. Need to file 2006 tax return B. Need to file 2006 tax return 725, and any successor. Need to file 2006 tax return Corporate Preference Items A corporation must make special adjustments to certain items before it takes them into account in determining its taxable income. Need to file 2006 tax return These items are known as corporate preference items and they include the following. Need to file 2006 tax return Gain on the disposition of section 1250 property. Need to file 2006 tax return For more information, see section 1250 Property under Depreciation Recapture in chapter 3 of Publication 544. Need to file 2006 tax return Percentage depletion for iron ore and coal (including lignite). Need to file 2006 tax return For more information, see Mines and Geothermal Deposits under Mineral Property in chapter 9 of Publication 535. Need to file 2006 tax return Amortization of pollution control facilities. Need to file 2006 tax return For more information, see Pollution Control Facilities in chapter 8 of Publication 535 and section 291(a)(5) of the Internal Revenue Code. Need to file 2006 tax return Mineral exploration and development costs. Need to file 2006 tax return For more information, see Exploration Costs and Development Costs in chapter 7 of Publication 535. Need to file 2006 tax return For more information on corporate preference items, see section 291 of the Internal Revenue Code. Need to file 2006 tax return Dividends-Received Deduction A corporation can deduct a percentage of certain dividends received during its tax year. Need to file 2006 tax return This section discusses the general rules that apply. Need to file 2006 tax return The deduction is figured on Form 1120, Schedule C, or the applicable schedule of your income tax return. Need to file 2006 tax return For more information, see the Instructions for Form 1120, or the instructions for your applicable income tax return. Need to file 2006 tax return Dividends from domestic corporations. Need to file 2006 tax return   A corporation can deduct, within certain limits, 70% of the dividends received if the corporation receiving the dividend owns less than 20% of the corporation distributing the dividend. Need to file 2006 tax return If the corporation owns 20% or more of the distributing corporation's stock, it can, subject to certain limits, deduct 80% of the dividends received. Need to file 2006 tax return Ownership. Need to file 2006 tax return   Determine ownership, for these rules, by the amount of voting power and value of the paying corporation's stock (other than certain preferred stock) the receiving corporation owns. Need to file 2006 tax return Small business investment companies. Need to file 2006 tax return   Small business investment companies can deduct 100% of the dividends received from taxable domestic corporations. Need to file 2006 tax return Dividends from regulated investment companies. Need to file 2006 tax return   Regulated investment company dividends received are subject to certain limits. Need to file 2006 tax return Capital gain dividends received from a regulated investment company do not qualify for the deduction. Need to file 2006 tax return For more information, see section 854 of the Internal Revenue Code. Need to file 2006 tax return No deduction allowed for certain dividends. Need to file 2006 tax return   Corporations cannot take a deduction for dividends received from the following entities. Need to file 2006 tax return A real estate investment trust (REIT). Need to file 2006 tax return A corporation exempt from tax under section 501 or 521 of the Internal Revenue Code either for the tax year of the distribution or the preceding tax year. Need to file 2006 tax return A corporation whose stock was held less than 46 days during the 91-day period beginning 45 days before the stock became ex-dividend with respect to the dividend. Need to file 2006 tax return Ex-dividend means the holder has no rights to the dividend. Need to file 2006 tax return A corporation whose preferred stock was held less than 91 days during the 181-day period beginning 90 days before the stock became ex-dividend with respect to the dividend if the dividends received are for a period or periods totaling more than 366 days. Need to file 2006 tax return Any corporation, if your corporation is under an obligation (pursuant to a short sale or otherwise) to make related payments with respect to positions in substantially similar or related property. Need to file 2006 tax return Dividends on deposits. Need to file 2006 tax return   Dividends on deposits or withdrawable accounts in domestic building and loan associations, mutual savings banks, cooperative banks, and similar organizations are interest, not dividends. Need to file 2006 tax return They do not qualify for this deduction. Need to file 2006 tax return Limit on deduction for dividends. Need to file 2006 tax return   The total deduction for dividends received or accrued is generally limited (in the following order) to: 80% of the difference between taxable income and the 100% deduction allowed for dividends received from affiliated corporations, or by a small business investment company, for dividends received or accrued from 20%-owned corporations, then 70% of the difference between taxable income and the 100% deduction allowed for dividends received from affiliated corporations, or by a small business investment company, for dividends received or accrued from less-than-20%-owned corporations (reducing taxable income by the total dividends received from 20%-owned corporations). Need to file 2006 tax return Figuring the limit. Need to file 2006 tax return   In figuring the limit, determine taxable income without the following items. Need to file 2006 tax return The net operating loss deduction. Need to file 2006 tax return The domestic production activities deduction. Need to file 2006 tax return The deduction for dividends received. Need to file 2006 tax return Any adjustment due to the nontaxable part of an extraordinary dividend (see Extraordinary Dividends, below). Need to file 2006 tax return Any capital loss carryback to the tax year. Need to file 2006 tax return Effect of net operating loss. Need to file 2006 tax return   If a corporation has a net operating loss (NOL) for a tax year, the limit of 80% (or 70%) of taxable income does not apply. Need to file 2006 tax return To determine whether a corporation has an NOL, figure the dividends-received deduction without the 80% (or 70%) of taxable income limit. Need to file 2006 tax return Example 1. Need to file 2006 tax return A corporation loses $25,000 from operations. Need to file 2006 tax return It receives $100,000 in dividends from a 20%-owned corporation. Need to file 2006 tax return Its taxable income is $75,000 ($100,000 – $25,000) before the deduction for dividends received. Need to file 2006 tax return If it claims the full dividends-received deduction of $80,000 ($100,000 × 80%) and combines it with an operations loss of $25,000, it will have an NOL of ($5,000). Need to file 2006 tax return Therefore, the 80% of taxable income limit does not apply. Need to file 2006 tax return The corporation can deduct the full $80,000. Need to file 2006 tax return Example 2. Need to file 2006 tax return Assume the same facts as in Example 1, except that the corporation only loses $15,000 from operations. Need to file 2006 tax return Its taxable income is $85,000 before the deduction for dividends received. Need to file 2006 tax return After claiming the dividends-received deduction of $80,000 ($100,000 × 80%), its taxable income is $5,000. Need to file 2006 tax return Because the corporation will not have an NOL after applying a full dividends-received deduction, its allowable dividends-received deduction is limited to 80% of its taxable income, or $68,000 ($85,000 × 80%). Need to file 2006 tax return Extraordinary Dividends If a corporation receives an extraordinary dividend on stock held 2 years or less before the dividend announcement date, it generally must reduce its basis in the stock by the nontaxed part of the dividend. Need to file 2006 tax return The nontaxed part is any dividends-received deduction allowable for the dividends. Need to file 2006 tax return Extraordinary dividend. Need to file 2006 tax return   An extraordinary dividend is any dividend on stock that equals or exceeds a certain percentage of the corporation's adjusted basis in the stock. Need to file 2006 tax return The percentages are: 5% for stock preferred as to dividends, or 10% for other stock. Need to file 2006 tax return Treat all dividends received that have ex-dividend dates within an 85-consecutive-day period as one dividend. Need to file 2006 tax return Treat all dividends received that have ex-dividend dates within a 365-consecutive-day period as extraordinary dividends if the total of the dividends exceeds 20% of the corporation's adjusted basis in the stock. Need to file 2006 tax return Disqualified preferred stock. Need to file 2006 tax return   Any dividend on disqualified preferred stock is treated as an extraordinary dividend regardless of the period of time the corporation held the stock. Need to file 2006 tax return   Disqualified preferred stock is any stock preferred as to dividends if any of the following apply. Need to file 2006 tax return The stock when issued has a dividend rate that declines (or can reasonably be expected to decline) in the future. Need to file 2006 tax return The issue price of the stock exceeds its liquidation rights or stated redemption price. Need to file 2006 tax return The stock is otherwise structured to avoid the rules for extraordinary dividends and to enable corporate shareholders to reduce tax through a combination of dividends-received deductions and loss on the disposition of the stock. Need to file 2006 tax return   These rules apply to stock issued after July 10, 1989, unless it was issued under a written binding contract in effect on that date, and thereafter, before the issuance of the stock. Need to file 2006 tax return More information. Need to file 2006 tax return   For more information on extraordinary dividends, see section 1059 of the Internal Revenue Code. Need to file 2006 tax return Below-Market Loans If a corporation receives a below-market loan and uses the proceeds for its trade or business, it may be able to deduct the forgone interest. Need to file 2006 tax return A below-market loan is a loan on which no interest is charged or on which interest is charged at a rate below the applicable federal rate. Need to file 2006 tax return A below-market loan generally is treated as an arm's-length transaction in which the borrower is considered as having received both the following: A loan in exchange for a note that requires payment of interest at the applicable federal rate, and An additional payment in an amount equal to the forgone interest. Need to file 2006 tax return Treat the additional payment as a gift, dividend, contribution to capital, payment of compensation, or other payment, depending on the substance of the transaction. Need to file 2006 tax return Foregone interest. Need to file 2006 tax return   For any period, forgone interest is equal to: The interest that would be payable for that period if interest accrued on the loan at the applicable federal rate and was payable annually on December 31, minus Any interest actually payable on the loan for the period. Need to file 2006 tax return See Below-market loans, in chapter 4 of Publication 535 for more information. Need to file 2006 tax return Charitable Contributions A corporation can claim a limited deduction for charitable contributions made in cash or other property. Need to file 2006 tax return The contribution is deductible if made to, or for the use of, a qualified organization. Need to file 2006 tax return For more information on qualified organizations, see Publication 526, Charitable Contributions. Need to file 2006 tax return Also see, Exempt Organizations Select Check (EO Select Check) at www. Need to file 2006 tax return irs. Need to file 2006 tax return gov/charities, the on-line search tool for finding information on organizations eligible to receive tax-deductible contributions. Need to file 2006 tax return Note. Need to file 2006 tax return You cannot take a deduction if any of the net earnings of an organization receiving contributions benefit any private shareholder or individual. Need to file 2006 tax return Cash method corporation. Need to file 2006 tax return   A corporation using the cash method of accounting deducts contributions in the tax year paid. Need to file 2006 tax return Accrual method corporation. Need to file 2006 tax return   A corporation using an accrual method of accounting can choose to deduct unpaid contributions for the tax year the board of directors authorizes them if it pays them by the 15th day of the 3rd month after the close of that tax year. Need to file 2006 tax return Make the choice by reporting the contribution on the corporation's return for the tax year. Need to file 2006 tax return A declaration stating that the board of directors adopted the resolution during the tax year must accompany the return. Need to file 2006 tax return The declaration must include the date the resolution was adopted. Need to file 2006 tax return Limitations on deduction. Need to file 2006 tax return   A corporation cannot deduct charitable contributions that exceed 10% of its taxable income for the tax year. Need to file 2006 tax return Figure taxable income for this purpose without the following. Need to file 2006 tax return The deduction for charitable contributions. Need to file 2006 tax return The dividends-received deduction. Need to file 2006 tax return The deduction allowed under section 249 of the Internal Revenue Code. Need to file 2006 tax return The domestic production activities deduction. Need to file 2006 tax return Any net operating loss carryback to the tax year. Need to file 2006 tax return Any capital loss carryback to the tax year. Need to file 2006 tax return Farmers and ranchers. Need to file 2006 tax return    Corporations that are farmers and ranchers should see section 170(b)(2) of the Internal Revenue Code for special rules that may affect the deduction limit. Need to file 2006 tax return Carryover of excess contributions. Need to file 2006 tax return   You can carry over, within certain limits, to each of the subsequent 5 years any charitable contributions made during the current year that exceed the 10% limit. Need to file 2006 tax return You lose any excess not used within that period. Need to file 2006 tax return For example, if a corporation has a carryover of excess contributions paid in 2010 and it does not use all the excess on its return for 2011, it can carry any excess over to 2012, 2013, 2014, and 2015, if applicable. Need to file 2006 tax return Any excess not used in 2015 is lost. Need to file 2006 tax return Do not deduct a carryover of excess contributions in the carryover year until after you deduct contributions made in that year (subject to the 10% limit). Need to file 2006 tax return You cannot deduct a carryover of excess contributions to the extent it increases a net operating loss carryover. Need to file 2006 tax return Cash contributions. Need to file 2006 tax return   A corporation must maintain a record of any contribution of cash, check, or other monetary contribution, regardless of the amount. Need to file 2006 tax return The record can be a bank record, receipt, letter, or other written communication from the donee indicating the name of the organization, the date of the contribution, and the amount of the contribution. Need to file 2006 tax return Keep the record of the contribution with the other corporate records. Need to file 2006 tax return Do not attach the records to the corporation's return. Need to file 2006 tax return For more information on cash contributions, see Publication 526. Need to file 2006 tax return Gifts of $250 or more. Need to file 2006 tax return   Generally, no deduction is allowed for any contribution of $250 or more unless the corporation gets a written acknowledgement from the donee organization. Need to file 2006 tax return The acknowledgement should show the amount of cash contributed, a description of the property contributed, and either gives a description and a good faith estimate of the value of any goods or services provided in return for the contribution or states that no goods or services were provided in return for the contribution. Need to file 2006 tax return The acknowledgement should be received by the due date (including extensions) of the return, or, if earlier, the date the return was filed. Need to file 2006 tax return Keep the acknowledgement with other corporate records. Need to file 2006 tax return Do not attach the acknowledgement to the return. Need to file 2006 tax return Contributions of property other than cash. Need to file 2006 tax return   If a corporation (other than a closely-held or a personal service corporation) claims a deduction of more than $500 for contributions of property other than cash, a schedule describing the property and the method used to determine its fair market value must be attached to the corporation's return. Need to file 2006 tax return In addition the corporation should keep a record of: The approximate date and manner of acquisition of the donated property and The cost or other basis of the donated property held by the donor for less than 12 months prior to contribution. Need to file 2006 tax return   Closely held and personal service corporations must complete and attach Form 8283, Noncash Charitable Contributions, to their returns if they claim a deduction of more than $500 for non-cash contributions. Need to file 2006 tax return For all other corporations, if the deduction claimed for donated property exceeds $5,000, complete Form 8283 and attach it to the corporation's return. Need to file 2006 tax return   A corporation must obtain a qualified appraisal for all deductions of property claimed in excess of $5,000. Need to file 2006 tax return A qualified appraisal is not required for the donation of cash, publicly traded securities, inventory, and any qualified vehicles sold by a donee organization without any significant intervening use or material improvement. Need to file 2006 tax return The appraisal should be maintained with other corporate records and only attached to the corporation's return when the deduction claimed exceeds $500,000; $20,000 for donated art work. Need to file 2006 tax return   See Form 8283 for more information. Need to file 2006 tax return Qualified conservation contributions. Need to file 2006 tax return   If a corporation makes a qualified conservation contribution, the corporation must provide information regarding the legal interest being donated, the fair market value of the underlying property before and after the donation, and a description of the conservation purpose for which the property will be used. Need to file 2006 tax return For more information, see section 170(h) of the Internal Revenue Code. Need to file 2006 tax return Contributions of used vehicles. Need to file 2006 tax return   A corporation is allowed a deduction for the contribution of used motor vehicles, boats, and airplanes. Need to file 2006 tax return The deduction is limited, and other special rules apply. Need to file 2006 tax return For more information, see Publication 526. Need to file 2006 tax return Reduction for contributions of certain property. Need to file 2006 tax return   For a charitable contribution of property, the corporation must reduce the contribution by the sum of: The ordinary income and short-term capital gain that would have resulted if the property were sold at its FMV and For certain contributions, the long-term capital gain that would have resulted if the property were sold at its FMV. Need to file 2006 tax return   The reduction for the long-term capital gain applies to: Contributions of tangible personal property for use by an exempt organization for a purpose or function unrelated to the basis for its exemption; Contributions of any property to or for the use of certain private foundations except for stock for which market quotations are readily available; and Contributions of any patent, certain copyrights, trademark, trade name, trade secret, know-how, software (that is a section 197 intangible), or similar property, or applications or registrations of such property. Need to file 2006 tax return Larger deduction. Need to file 2006 tax return   A corporation (other than an S corporation) may be able to claim a deduction equal to the lesser of (a) the basis of the donated inventory or property plus one-half of the inventory or property's appreciation (gain if the donated inventory or property was sold at fair market value on the date of the donation), or (b) two times basis of the donated inventory or property. Need to file 2006 tax return This deduction may be allowed for certain contributions of: Certain inventory and other property made to a donee organization and used solely for the care of the ill, the needy, and infants. Need to file 2006 tax return Scientific property constructed by the corporation (other than an S corporation, personal holding company, or personal service corporation) and donated no later than 2 years after substantial completion of the construction. Need to file 2006 tax return The property must be donated to a qualified organization and its original use must be by the donee for research, experimentation, or research training within the United States in the area of physical or biological science. Need to file 2006 tax return Computer technology and equipment acquired or constructed and donated no later than 3 years after either acquisition or substantial completion of construction to an educational organization for educational purposes within the United States. Need to file 2006 tax return Contributions to organizations conducting lobbying activities. Need to file 2006 tax return   Contributions made to an organization that conducts lobbying activities are not deductible if: The lobbying activities relate to matters of direct financial interest to the donor's trade or business and The principal purpose of the contribution was to avoid federal income tax by obtaining a deduction for activities that would have been nondeductible under the lobbying expense rules if conducted directly by the donor. Need to file 2006 tax return More information. Need to file 2006 tax return   For more information on charitable contributions, including substantiation and recordkeeping requirements, see section 170 of the Internal Revenue Code, the related regulations, and Publication 526. Need to file 2006 tax return Capital Losses A corporation can deduct capital losses only up to the amount of its capital gains. Need to file 2006 tax return In other words, if a corporation has an excess capital loss, it cannot deduct the loss in the current tax year. Need to file 2006 tax return Instead, it carries the loss to other tax years and deducts it from any net capital gains that occur in those years. Need to file 2006 tax return A capital loss is carried to other years in the following order. Need to file 2006 tax return 3 years prior to the loss year. Need to file 2006 tax return 2 years prior to the loss year. Need to file 2006 tax return 1 year prior to the loss year. Need to file 2006 tax return Any loss remaining is carried forward for 5 years. Need to file 2006 tax return When you carry a net capital loss to another tax year, treat it as a short-term loss. Need to file 2006 tax return It does not retain its original identity as long term or short term. Need to file 2006 tax return Example. Need to file 2006 tax return A calendar year corporation has a net short-term capital gain of $3,000 and a net long-term capital loss of $9,000. Need to file 2006 tax return The short-term gain offsets some of the long-term loss, leaving a net capital loss of $6,000. Need to file 2006 tax return The corporation treats this $6,000 as a short-term loss when carried back or forward. Need to file 2006 tax return The corporation carries the $6,000 short-term loss back 3 years. Need to file 2006 tax return In year 1, the corporation had a net short-term capital gain of $8,000 and a net long-term capital gain of $5,000. Need to file 2006 tax return It subtracts the $6,000 short-term loss first from the net short-term gain. Need to file 2006 tax return This results in a net capital gain for year 1 of $7,000. Need to file 2006 tax return This consists of a net short-term capital gain of $2,000 ($8,000 − $6,000) and a net long-term capital gain of $5,000. Need to file 2006 tax return S corporation status. Need to file 2006 tax return   A corporation may not carry a capital loss from, or to, a year for which it is an S corporation. Need to file 2006 tax return Rules for carryover and carryback. Need to file 2006 tax return   When carrying a capital loss from one year to another, the following rules apply. Need to file 2006 tax return When figuring the current year's net capital loss, you cannot combine it with a capital loss carried from another year. Need to file 2006 tax return In other words, you can carry capital losses only to years that would otherwise have a total net capital gain. Need to file 2006 tax return If you carry capital losses from 2 or more years to the same year, deduct the loss from the earliest year first. Need to file 2006 tax return You cannot use a capital loss carried from another year to produce or increase a net operating loss in the year to which you carry it back. Need to file 2006 tax return Refunds. Need to file 2006 tax return   When you carry back a capital loss to an earlier tax year, refigure your tax for that year. Need to file 2006 tax return If your corrected tax is less than the tax you originally owed, use either Form 1139, Corporate Application for Tentative Refund, or Form 1120X, Amended U. Need to file 2006 tax return S. Need to file 2006 tax return Corporation Income Tax Return, to apply for a refund. Need to file 2006 tax return Form 1139. Need to file 2006 tax return    A corporation can get a refund faster by using Form 1139. Need to file 2006 tax return It cannot file Form 1139 before filing the return for the corporation's capital loss year, but it must file Form 1139 no later than 1 year after the year it sustains the capital loss. Need to file 2006 tax return Form 1120X. Need to file 2006 tax return   If the corporation does not file Form 1139, it must file Form 1120X to apply for a refund. Need to file 2006 tax return The corporation must file the Form 1120X within 3 years of the due date, includin
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The Need To File 2006 Tax Return

Need to file 2006 tax return 3. Need to file 2006 tax return   Investment Expenses Table of Contents Topics - This chapter discusses: Useful Items - You may want to see: Limits on DeductionsPassive activity. Need to file 2006 tax return Other income (nonpassive income). Need to file 2006 tax return Expenses. Need to file 2006 tax return Additional information. Need to file 2006 tax return Interest ExpensesInvestment Interest Limit on Deduction Bond Premium AmortizationSpecial rules to determine amounts payable on a bond. Need to file 2006 tax return Basis. Need to file 2006 tax return How To Figure Amortization Choosing To Amortize How To Report Amortization Expenses of Producing IncomeFees to buy or sell. Need to file 2006 tax return Including mutual fund or REMIC expenses in income. Need to file 2006 tax return Nondeductible ExpensesUsed as collateral. Need to file 2006 tax return Short-sale expenses. Need to file 2006 tax return Expenses for both tax-exempt and taxable income. Need to file 2006 tax return State income taxes. Need to file 2006 tax return Nondeductible amount. Need to file 2006 tax return Basis adjustment. Need to file 2006 tax return How To Report Investment Expenses When To Report Investment Expenses Topics - This chapter discusses: Limits on Deductions , Interest Expenses , Bond Premium Amortization , Expenses of Producing Income , Nondeductible Expenses , How To Report Investment Expenses , and When To Report Investment Expenses . Need to file 2006 tax return Useful Items - You may want to see: Publication 535 Business Expenses 925 Passive Activity and At-Risk Rules 929 Tax Rules for Children and Dependents Form (and Instructions) Schedule A (Form 1040) Itemized Deductions 4952 Investment Interest Expense Deduction See chapter 5, How To Get Tax Help , for information about getting these publications and forms. Need to file 2006 tax return Limits on Deductions Your deductions for investment expenses may be limited by: The at-risk rules, The passive activity loss limits, The limit on investment interest, or The 2% limit on certain miscellaneous itemized deductions. Need to file 2006 tax return The at-risk rules and passive activity rules are explained briefly in this section. Need to file 2006 tax return The limit on investment interest is explained later in this chapter under Interest Expenses . Need to file 2006 tax return The 2% limit is explained later in this chapter under Expenses of Producing Income . Need to file 2006 tax return At-risk rules. Need to file 2006 tax return   Special at-risk rules apply to most income-producing activities. Need to file 2006 tax return These rules limit the amount of loss you can deduct to the amount you risk losing in the activity. Need to file 2006 tax return Generally, this is the cash and the adjusted basis of property you contribute to the activity. Need to file 2006 tax return It also includes money you borrow for use in the activity if you are personally liable for repayment or if you use property not used in the activity as security for the loan. Need to file 2006 tax return For more information, see Publication 925. Need to file 2006 tax return Passive activity losses and credits. Need to file 2006 tax return   The amount of losses and tax credits you can claim from passive activities is limited. Need to file 2006 tax return Generally, you are allowed to deduct passive activity losses only up to the amount of your passive activity income. Need to file 2006 tax return Also, you can use credits from passive activities only against tax on the income from passive activities. Need to file 2006 tax return There are exceptions for certain activities, such as rental real estate activities. Need to file 2006 tax return Passive activity. Need to file 2006 tax return   A passive activity generally is any activity involving the conduct of any trade or business in which you do not materially participate and any rental activity. Need to file 2006 tax return However, if you are involved in renting real estate, the activity is not a passive activity if both of the following are true. Need to file 2006 tax return More than one-half of the personal services you perform during the year in all trades or businesses are performed in real property trades or businesses in which you materially participate. Need to file 2006 tax return You perform more than 750 hours of services during the year in real property trades or businesses in which you materially participate. Need to file 2006 tax return  The term “trade or business” generally means any activity that involves the conduct of a trade or business, is conducted in anticipation of starting a trade or business, or involves certain research or experimental expenditures. Need to file 2006 tax return However, it does not include rental activities or certain activities treated as incidental to holding property for investment. Need to file 2006 tax return   You are considered to materially participate in an activity if you are involved on a regular, continuous, and substantial basis in the operations of the activity. Need to file 2006 tax return Other income (nonpassive income). Need to file 2006 tax return    Generally, you can use losses from passive activities only to offset income from passive activities. Need to file 2006 tax return You cannot use passive activity losses to offset your other income, such as your wages or your portfolio income. Need to file 2006 tax return Portfolio income includes gross income from interest, dividends, annuities, or royalties that is not derived in the ordinary course of a trade or business. Need to file 2006 tax return It also includes gains or losses (not derived in the ordinary course of a trade or business) from the sale or trade of property (other than an interest in a passive activity) producing portfolio income or held for investment. Need to file 2006 tax return This includes capital gain distributions from mutual funds (and other regulated investment companies) and real estate investment trusts. Need to file 2006 tax return   You cannot use passive activity losses to offset Alaska Permanent Fund dividends. Need to file 2006 tax return Expenses. Need to file 2006 tax return   Do not include in the computation of your passive activity income or loss: Expenses (other than interest) that are clearly and directly allocable to your portfolio income, or Interest expense properly allocable to portfolio income. Need to file 2006 tax return However, this interest and other expenses may be subject to other limits. Need to file 2006 tax return These limits are explained in the rest of this chapter. Need to file 2006 tax return Additional information. Need to file 2006 tax return   For more information about determining and reporting income and losses from passive activities, see Publication 925. Need to file 2006 tax return Interest Expenses This section discusses interest expenses you may be able to deduct as an investor. Need to file 2006 tax return For information on business interest, see chapter 4 of Publication 535. Need to file 2006 tax return You cannot deduct personal interest expenses other than qualified home mortgage interest, as explained in Publication 936, Home Mortgage Interest Deduction, and interest on certain student loans, as explained in Publication 970. Need to file 2006 tax return Investment Interest If you borrow money to buy property you hold for investment, the interest you pay is investment interest. Need to file 2006 tax return You can deduct investment interest subject to the limit discussed later. Need to file 2006 tax return However, you cannot deduct interest you incurred to produce tax-exempt income. Need to file 2006 tax return See Tax-exempt income under Nondeductible Expenses, later. Need to file 2006 tax return You also cannot deduct interest expenses on straddles discussed under Interest expense and carrying charges on straddles , later. Need to file 2006 tax return Investment interest does not include any qualified home mortgage interest or any interest taken into account in computing income or loss from a passive activity. Need to file 2006 tax return Investment property. Need to file 2006 tax return   Property held for investment includes property that produces interest, dividends, annuities, or royalties not derived in the ordinary course of a trade or business. Need to file 2006 tax return It also includes property that produces gain or loss (not derived in the ordinary course of a trade or business) from the sale or trade of property producing these types of income or held for investment (other than an interest in a passive activity). Need to file 2006 tax return Investment property also includes an interest in a trade or business activity in which you did not materially participate (other than a passive activity). Need to file 2006 tax return Partners, shareholders, and beneficiaries. Need to file 2006 tax return   To determine your investment interest, combine your share of investment interest from a partnership, S corporation, estate, or trust with your other investment interest. Need to file 2006 tax return Allocation of Interest Expense If you borrow money for business or personal purposes as well as for investment, you must allocate the debt among those purposes. Need to file 2006 tax return Only the interest expense on the part of the debt used for investment purposes is treated as investment interest. Need to file 2006 tax return The allocation is not affected by the use of property that secures the debt. Need to file 2006 tax return Example 1. Need to file 2006 tax return You borrow $10,000 and use $8,000 to buy stock. Need to file 2006 tax return You use the other $2,000 to buy items for your home. Need to file 2006 tax return Since 80% of the debt is used for, and allocated to, investment purposes, 80% of the interest on that debt is investment interest. Need to file 2006 tax return The other 20% is nondeductible personal interest. Need to file 2006 tax return Debt proceeds received in cash. Need to file 2006 tax return   If you receive debt proceeds in cash, the proceeds are generally not treated as investment property. Need to file 2006 tax return Debt proceeds deposited in account. Need to file 2006 tax return   If you deposit debt proceeds in an account, that deposit is treated as investment property, regardless of whether the account bears interest. Need to file 2006 tax return But, if you withdraw the funds and use them for another purpose, you must reallocate the debt to determine the amount considered to be for investment purposes. Need to file 2006 tax return Example 2. Need to file 2006 tax return Assume in Example 1 that you borrowed the money on March 1 and immediately bought the stock for $8,000. Need to file 2006 tax return You did not buy the household items until June 1. Need to file 2006 tax return You had deposited the $2,000 in the bank. Need to file 2006 tax return You had no other transactions on the bank account until June. Need to file 2006 tax return You did not sell the stock, and you made no principal payments on the debt. Need to file 2006 tax return You paid interest from another account. Need to file 2006 tax return The $8,000 is treated as being used for an investment purpose. Need to file 2006 tax return The $2,000 is treated as being used for an investment purpose for the 3-month period. Need to file 2006 tax return Your total interest expense for 3 months on this debt is investment interest. Need to file 2006 tax return In June, when you spend the $2,000 for household items, you must begin to allocate 80% of the debt and the interest expense to investment purposes and 20% to personal purposes. Need to file 2006 tax return Amounts paid within 30 days. Need to file 2006 tax return   If you receive loan proceeds in cash or if the loan proceeds are deposited in an account, you can treat any payment (up to the amount of the proceeds) made from any account you own, or from cash, as made from those proceeds. Need to file 2006 tax return This applies to any payment made within 30 days before or after the proceeds are received in cash or deposited in your account. Need to file 2006 tax return   If you received the loan proceeds in cash, you can treat the payment as made on the date you received the cash instead of the date you actually made the payment. Need to file 2006 tax return Payments on debt may require new allocation. Need to file 2006 tax return   As you repay a debt used for more than one purpose, you must reallocate the balance. Need to file 2006 tax return You must first reduce the amount allocated to personal purposes by the repayment. Need to file 2006 tax return You then reallocate the rest of the debt to find what part is for investment purposes. Need to file 2006 tax return Example 3. Need to file 2006 tax return If, in Example 2 , you repay $500 on November 1, the entire repayment is applied against the amount allocated to personal purposes. Need to file 2006 tax return The debt balance is now allocated as $8,000 for investment purposes and $1,500 for personal purposes. Need to file 2006 tax return Until the next reallocation is necessary, 84% ($8,000 ÷ $9,500) of the debt and the interest expense is allocated to investment. Need to file 2006 tax return Pass-through entities. Need to file 2006 tax return   If you use borrowed funds to buy an interest in a partnership or S corporation, then the interest on those funds must be allocated based on the assets of the entity. Need to file 2006 tax return If you contribute to the capital of the entity, you can make the allocation using any reasonable method. Need to file 2006 tax return Additional allocation rules. Need to file 2006 tax return   For more information about allocating interest expense, see chapter 4 of Publication 535. Need to file 2006 tax return When To Deduct Investment Interest If you use the cash method of accounting, you must pay the interest before you can deduct it. Need to file 2006 tax return If you use an accrual method of accounting, you can deduct interest over the period it accrues, regardless of when you pay it. Need to file 2006 tax return For an exception, see Unpaid expenses owed to related party under When To Report Investment Expenses, later in this chapter. Need to file 2006 tax return Example. Need to file 2006 tax return You borrowed $1,000 on August 26, 2013, payable in 90 days at 12% interest. Need to file 2006 tax return On November 26, 2013, you paid this with a new note for $1,030, due on February 26, 2014. Need to file 2006 tax return If you use the cash method of accounting, you cannot deduct any part of the $30 interest on your return for 2013 because you did not actually pay it. Need to file 2006 tax return If you use an accrual method, you may be able to deduct a portion of the interest on the loans through December 31, 2013, on your return for 2013. Need to file 2006 tax return Interest paid in advance. Need to file 2006 tax return   Generally, if you pay interest in advance for a period that goes beyond the end of the tax year, you must spread the interest over the tax years to which it belongs under the OID rules discussed in chapter 1. Need to file 2006 tax return You can deduct in each year only the interest for that year. Need to file 2006 tax return Interest on margin accounts. Need to file 2006 tax return   If you are a cash method taxpayer, you can deduct interest on margin accounts to buy taxable securities as investment interest in the year you paid it. Need to file 2006 tax return You are considered to have paid interest on these accounts only when you actually pay the broker or when payment becomes available to the broker through your account. Need to file 2006 tax return Payment may become available to the broker through your account when the broker collects dividends or interest for your account, or sells securities held for you or received from you. Need to file 2006 tax return   You cannot deduct any interest on money borrowed for personal reasons. Need to file 2006 tax return Limit on interest deduction for market discount bonds. Need to file 2006 tax return   The amount you can deduct for interest expense you paid or accrued during the year to buy or carry a market discount bond may be limited. Need to file 2006 tax return This limit does not apply if you accrue the market discount and include it in your income currently. Need to file 2006 tax return   Under this limit, the interest is deductible only to the extent it is more than: The total interest and OID includible in gross income for the bond for the year, plus The market discount for the number of days you held the bond during the year. Need to file 2006 tax return Figure the amount in (2) above using the rules for figuring accrued market discount in chapter 1 under Market Discount Bonds . Need to file 2006 tax return Interest not deducted due to limit. Need to file 2006 tax return   In the year you dispose of the bond, you can deduct any interest expense you were not allowed to deduct in earlier years because of the limit. Need to file 2006 tax return Choosing to deduct disallowed interest expense before the year of disposition. Need to file 2006 tax return   You can choose to deduct disallowed interest expense in any year before the year you dispose of the bond, up to your net interest income from the bond during the year. Need to file 2006 tax return The rest of the disallowed interest expense remains deductible in the year you dispose of the bond. Need to file 2006 tax return Net interest income. Need to file 2006 tax return   This is the interest income (including OID) from the bond that you include in income for the year, minus the interest expense paid or accrued during the year to purchase or carry the bond. Need to file 2006 tax return Limit on interest deduction for short-term obligations. Need to file 2006 tax return   If the current income inclusion rules discussed in chapter 1 under Discount on Short-Term Obligations do not apply to you, the amount you can deduct for interest expense you paid or accrued during the year to buy or carry a short-term obligation is limited. Need to file 2006 tax return   The interest is deductible only to the extent it is more than: The amount of acquisition discount or OID on the obligation for the tax year, plus The amount of any interest payable on the obligation for the year that is not included in income because of your accounting method (other than interest taken into account in determining the amount of acquisition discount or OID). Need to file 2006 tax return The method of determining acquisition discount and OID for short-term obligations is discussed in chapter 1 under Discount on Short-Term Obligations . Need to file 2006 tax return Interest not deducted due to limit. Need to file 2006 tax return   In the year you dispose of the obligation, or, if you choose, in another year in which you have net interest income from the obligation, you can deduct any interest expense you were not allowed to deduct for an earlier year because of the limit. Need to file 2006 tax return Follow the same rules provided in the earlier discussion under Limit on interest deduction for market discount bonds , earlier. Need to file 2006 tax return Limit on Deduction Generally, your deduction for investment interest expense is limited to your net investment income. Need to file 2006 tax return You can carry over the amount of investment interest you could not deduct because of this limit to the next tax year. Need to file 2006 tax return The interest carried over is treated as investment interest paid or accrued in that next year. Need to file 2006 tax return You can carry over disallowed investment interest to the next tax year even if it is more than your taxable income in the year the interest was paid or accrued. Need to file 2006 tax return Net Investment Income Determine the amount of your net investment income by subtracting your investment expenses (other than interest expense) from your investment income. Need to file 2006 tax return Investment income. Need to file 2006 tax return   This generally includes your gross income from property held for investment (such as interest, dividends, annuities, and royalties). Need to file 2006 tax return Investment income does not include Alaska Permanent Fund dividends. Need to file 2006 tax return It also does not include qualified dividends or net capital gain unless you choose to include them. Need to file 2006 tax return Choosing to include qualified dividends. Need to file 2006 tax return   Investment income generally does not include qualified dividends, discussed in chapter 1. Need to file 2006 tax return However, you can choose to include all or part of your qualified dividends in investment income. Need to file 2006 tax return   You make this choice by completing Form 4952, line 4g, according to its instructions. Need to file 2006 tax return   If you choose to include any of your qualified dividends in investment income, you must reduce your qualified dividends that are eligible for the lower capital gains tax rates by the same amount. Need to file 2006 tax return Choosing to include net capital gain. Need to file 2006 tax return    Investment income generally does not include net capital gain from disposing of investment property (including capital gain distributions from mutual funds). Need to file 2006 tax return However, you can choose to include all or part of your net capital gain in investment income. Need to file 2006 tax return   You make this choice by completing Form 4952, line 4g, according to its instructions. Need to file 2006 tax return   If you choose to include any of your net capital gain in investment income, you must reduce your net capital gain that is eligible for the lower capital gains tax rates by the same amount. Need to file 2006 tax return   For more information about the capital gains rates, see Capital Gain Tax Rates in chapter 4. Need to file 2006 tax return    Before making either choice, consider the overall effect on your tax liability. Need to file 2006 tax return Compare your tax if you make one or both of these choices with your tax if you do not. Need to file 2006 tax return Investment income of child reported on parent's return. Need to file 2006 tax return   Investment income includes the part of your child's interest and dividend income you choose to report on your return. Need to file 2006 tax return If the child does not have qualified dividends, Alaska Permanent Fund dividends, or capital gain distributions, this is the amount on line 6 of Form 8814. Need to file 2006 tax return Include it on line 4a of Form 4952. Need to file 2006 tax return Example. Need to file 2006 tax return Your 8-year-old son has interest income of $2,200, which you choose to report on your own return. Need to file 2006 tax return You enter $2,200 on Form 8814, lines 1a and 4, and $200 on lines 6 and 12 and complete Part II. Need to file 2006 tax return Also enter $200 on Form 1040, line 21. Need to file 2006 tax return Your investment income includes this $200. Need to file 2006 tax return Child's qualified dividends. Need to file 2006 tax return   If part of the amount you report is your child's qualified dividends, that part (which is reported on Form 1040, line 9b) generally does not count as investment income. Need to file 2006 tax return However, you can choose to include all or part of it in investment income, as explained under Choosing to include qualified dividends , earlier. Need to file 2006 tax return   Your investment income also includes the amount on Form 8814, line 12 (or, if applicable, the reduced amount figured next under Child's Alaska Permanent Fund dividends). Need to file 2006 tax return Child's Alaska Permanent Fund dividends. Need to file 2006 tax return   If part of the amount you report is your child's Alaska Permanent Fund dividends, that part does not count as investment income. Need to file 2006 tax return To figure the amount of your child's income that you can consider your investment income, start with the amount on Form 8814, line 6. Need to file 2006 tax return Multiply that amount by a percentage that is equal to the Alaska Permanent Fund dividends divided by the total amount on Form 8814, line 4. Need to file 2006 tax return Subtract the result from the amount on Form 8814, line 12. Need to file 2006 tax return Example. Need to file 2006 tax return Your 10-year-old child has taxable interest income of $4,000 and Alaska Permanent Fund dividends of $2,000. Need to file 2006 tax return You choose to report this on your return. Need to file 2006 tax return You enter $4,000 on Form 8814, line 1a, $2,000 on line 2a, and $6,000 on line 4. Need to file 2006 tax return You then enter $4,000 on Form 8814, lines 6 and 12, and Form 1040, line 21. Need to file 2006 tax return You figure the amount of your child's income that you can consider your investment income as follows: $4,000 − ($4,000 × ($2,000 ÷ $6,000)) = $2,667 You include the result, $2,667, on Form 4952, line 4a. Need to file 2006 tax return Child's capital gain distributions. Need to file 2006 tax return   If part of the amount you report is your child's capital gain distributions, that part (which is reported on Schedule D (Form 1040), line 13, or Form 1040, line 13) generally does not count as investment income. Need to file 2006 tax return However, you can choose to include all or part of it in investment income, as explained in Choosing to include net capital gain , earlier. Need to file 2006 tax return   Your investment income also includes the amount on Form 8814, line 12 (or, if applicable, the reduced amount figured under Child's Alaska Permanent Fund dividends , earlier). Need to file 2006 tax return Investment expenses. Need to file 2006 tax return   Investment expenses are your allowed deductions (other than interest expense) directly connected with the production of investment income. Need to file 2006 tax return Investment expenses that are included as a miscellaneous itemized deduction on Schedule A (Form 1040) are allowable deductions after applying the 2% limit that applies to miscellaneous itemized deductions. Need to file 2006 tax return Use the smaller of: The investment expenses included on Schedule A (Form 1040), line 23, or The amount on Schedule A (Form 1040), line 27. Need to file 2006 tax return See Expenses of Producing Income , later, for a discussion of the 2% limit. Need to file 2006 tax return Losses from passive activities. Need to file 2006 tax return   Income or expenses that you used in computing income or loss from a passive activity are not included in determining your investment income or investment expenses (including investment interest expense). Need to file 2006 tax return See Publication 925 for information about passive activities. Need to file 2006 tax return Example. Need to file 2006 tax return Ted is a partner in a partnership that operates a business. Need to file 2006 tax return However, he does not materially participate in the partnership's business. Need to file 2006 tax return Ted's interest in the partnership is considered a passive activity. Need to file 2006 tax return Ted's investment income from interest and dividends (other than qualified dividends) is $10,000. Need to file 2006 tax return His investment expenses (other than interest) are $3,200 after taking into account the 2% limit on miscellaneous itemized deductions. Need to file 2006 tax return His investment interest expense is $8,000. Need to file 2006 tax return Ted also has income from the partnership of $2,000. Need to file 2006 tax return Ted figures his net investment income and the limit on his investment interest expense deduction in the following way: Total investment income $10,000 Minus: Investment expenses (other than interest) 3,200 Net investment income $6,800 Deductible investment interest expense for the year $6,800 The $2,000 of income from the passive activity is not used in determining Ted's net investment income. Need to file 2006 tax return His investment interest deduction for the year is limited to $6,800, the amount of his net investment income. Need to file 2006 tax return Form 4952 Use Form 4952 to figure your deduction for investment interest. Need to file 2006 tax return See Form 4952 for more information. Need to file 2006 tax return Exception to use of Form 4952. Need to file 2006 tax return   You do not have to complete Form 4952 or attach it to your return if you meet all of the following tests. Need to file 2006 tax return Your investment interest expense is not more than your investment income from interest and ordinary dividends minus any qualified dividends. Need to file 2006 tax return You do not have any other deductible investment expenses. Need to file 2006 tax return You have no carryover of investment interest expense from 2012. Need to file 2006 tax return   If you meet all of these tests, you can deduct all of your investment interest. Need to file 2006 tax return    Bond Premium Amortization If you pay a premium to buy a bond, the premium is part of your basis in the bond. Need to file 2006 tax return If the bond yields taxable interest, you can choose to amortize the premium. Need to file 2006 tax return This generally means that each year, over the life of the bond, you use a part of the premium to reduce the amount of interest includible in your income. Need to file 2006 tax return If you make this choice, you must reduce your basis in the bond by the amortization for the year. Need to file 2006 tax return If the bond yields tax-exempt interest, you must amortize the premium. Need to file 2006 tax return This amortized amount is not deductible in determining taxable income. Need to file 2006 tax return However, each year you must reduce your basis in the bond (and tax-exempt interest otherwise reportable on Form 1040, line 8b) by the amortization for the year. Need to file 2006 tax return Bond premium. Need to file 2006 tax return   Bond premium is the amount by which your basis in the bond right after you get it is more than the total of all amounts payable on the bond after you get it (other than payments of qualified stated interest). Need to file 2006 tax return For example, a bond with a maturity value of $1,000 generally would have a $50 premium if you buy it for $1,050. Need to file 2006 tax return Special rules to determine amounts payable on a bond. Need to file 2006 tax return   For special rules that apply to determine the amounts payable on a variable rate bond, an inflation-indexed debt instrument, a bond that provides for certain alternative payment schedules (for example, a bond callable prior to the stated maturity date of the bond), or a bond that provides for remote or incidental contingencies, see Regulations section 1. Need to file 2006 tax return 171-3. Need to file 2006 tax return Basis. Need to file 2006 tax return   In general, your basis for figuring bond premium amortization is the same as your basis for figuring any loss on the sale of the bond. Need to file 2006 tax return However, you may need to use a different basis for: Convertible bonds, Bonds you got in a trade, and Bonds whose basis has to be determined using the basis of the person who transferred the bond to you. Need to file 2006 tax return See Regulations section 1. Need to file 2006 tax return 171-1(e). Need to file 2006 tax return Dealers. Need to file 2006 tax return   A dealer in taxable bonds (or anyone who holds them mainly for sale to customers in the ordinary course of a trade or business or who would properly include bonds in inventory at the close of the tax year) cannot claim a deduction for amortizable bond premium. Need to file 2006 tax return   See section 75 of the Internal Revenue Code for the treatment of bond premium by a dealer in tax-exempt bonds. Need to file 2006 tax return How To Figure Amortization For bonds issued after September 27, 1985, you must amortize bond premium using a constant yield method on the basis of the bond's yield to maturity, determined by using the bond's basis and compounding at the close of each accrual period. Need to file 2006 tax return Constant yield method. Need to file 2006 tax return   Figure the bond premium amortization for each accrual period as follows. Need to file 2006 tax return Step 1: Determine your yield. Need to file 2006 tax return   Your yield is the discount rate that, when used in figuring the present value of all remaining payments to be made on the bond (including payments of qualified stated interest), produces an amount equal to your basis in the bond. Need to file 2006 tax return Figure the yield as of the date you got the bond. Need to file 2006 tax return It must be constant over the term of the bond and must be figured to at least two decimal places when expressed as a percentage. Need to file 2006 tax return   If you do not know the yield, consult your broker or tax advisor. Need to file 2006 tax return Databases available to them are likely to show the yield at the date of purchase. Need to file 2006 tax return Step 2: Determine the accrual periods. Need to file 2006 tax return   You can choose the accrual periods to use. Need to file 2006 tax return They may be of any length and may vary in length over the term of the bond, but each accrual period can be no longer than 1 year and each scheduled payment of principal or interest must occur either on the first or the final day of an accrual period. Need to file 2006 tax return The computation is simplest if accrual periods are the same as the intervals between interest payment dates. Need to file 2006 tax return Step 3: Determine the bond premium for the accrual period. Need to file 2006 tax return   To do this, multiply your adjusted acquisition price at the beginning of the accrual period by your yield. Need to file 2006 tax return Then subtract the result from the qualified stated interest for the period. Need to file 2006 tax return   Your adjusted acquisition price at the beginning of the first accrual period is the same as your basis. Need to file 2006 tax return After that, it is your basis decreased by the amount of bond premium amortized for earlier periods and the amount of any payment previously made on the bond other than a payment of qualified stated interest. Need to file 2006 tax return Example. Need to file 2006 tax return On February 1, 2012, you bought a taxable bond for $110,000. Need to file 2006 tax return The bond has a stated principal amount of $100,000, payable at maturity on February 1, 2019, making your premium $10,000 ($110,000 − $100,000). Need to file 2006 tax return The bond pays qualified stated interest of $10,000 on February 1 of each year. Need to file 2006 tax return Your yield is 8. Need to file 2006 tax return 07439% compounded annually. Need to file 2006 tax return You choose to use annual accrual periods ending on February 1 of each year. Need to file 2006 tax return To find your bond premium amortization for the accrual period ending on February 1, 2013, you multiply the adjusted acquisition price at the beginning of the period ($110,000) by your yield. Need to file 2006 tax return When you subtract the result ($8,881. Need to file 2006 tax return 83) from the qualified stated interest for the period ($10,000), you find that your bond premium amortization for the period is $1,118. Need to file 2006 tax return 17. Need to file 2006 tax return Special rules to figure amortization. Need to file 2006 tax return   For special rules to figure the bond premium amortization on a variable rate bond, an inflation-indexed debt instrument, a bond that provides for certain alternative payment schedules (for example, a bond callable prior to the stated maturity date of the bond), or a bond that provides for remote or incidental contingencies, see Regulations section 1. Need to file 2006 tax return 171-3. Need to file 2006 tax return Bonds Issued Before September 28, 1985 For these bonds, you can amortize bond premium using any reasonable method. Need to file 2006 tax return Reasonable methods include: The straight-line method, and The Revenue Ruling 82-10 method. Need to file 2006 tax return Straight-line method. Need to file 2006 tax return   Under this method, the amount of your bond premium amortization is the same each month. Need to file 2006 tax return Divide the number of months you held the bond during the year by the number of months from the beginning of the tax year (or, if later, the date of acquisition) to the date of maturity or earlier call date. Need to file 2006 tax return Then multiply the result by the bond premium (reduced by any bond premium amortization claimed in earlier years). Need to file 2006 tax return This gives you your bond premium amortization for the year. Need to file 2006 tax return Revenue Ruling 82-10 method. Need to file 2006 tax return   Under this method, the amount of your bond premium amortization increases each month over the life of the bond. Need to file 2006 tax return This method is explained in Revenue Ruling 82-10, 1982-1 C. Need to file 2006 tax return B. Need to file 2006 tax return 46. Need to file 2006 tax return Choosing To Amortize You choose to amortize the premium on taxable bonds by reporting the amortization for the year on your income tax return for the first tax year you want the choice to apply. Need to file 2006 tax return You should attach a statement to your return that you are making this choice under section 171. Need to file 2006 tax return See How To Report Amortization, next. Need to file 2006 tax return This choice is binding for the year you make it and for later tax years. Need to file 2006 tax return It applies to all taxable bonds you own in the year you make the choice and also to those you acquire in later years. Need to file 2006 tax return You can change your decision to amortize bond premium only with the written approval of the IRS. Need to file 2006 tax return To request approval, use Form 3115. Need to file 2006 tax return For more information on requesting approval, see section 5 of the Appendix to Revenue Procedure 2011-14 in Internal Revenue Bulletin 2011-4. Need to file 2006 tax return You can find Revenue Procedure 2011-14 at www. Need to file 2006 tax return irs. Need to file 2006 tax return gov/irb/2011-04_IRB/ar08. Need to file 2006 tax return html. Need to file 2006 tax return How To Report Amortization Subtract the bond premium amortization from your interest income from these bonds. Need to file 2006 tax return Report the bond's interest on Schedule B (Form 1040A or 1040), line 1. Need to file 2006 tax return Under your last entry on line 1, put a subtotal of all interest listed on line 1. Need to file 2006 tax return Below this subtotal, print “ABP Adjustment,” and the total interest you received. Need to file 2006 tax return Subtract this amount from the subtotal, and enter the result on line 2. Need to file 2006 tax return Bond premium amortization more than interest. Need to file 2006 tax return   If the amount of your bond premium amortization for an accrual period is more than the qualified stated interest for the period, you can deduct the difference as a miscellaneous itemized deduction on Schedule A (Form 1040), line 28. Need to file 2006 tax return    But your deduction is limited to the amount by which your total interest inclusions on the bond in prior accrual periods is more than your total bond premium deductions on the bond in prior periods. Need to file 2006 tax return Any amount you cannot deduct because of this limit can be carried forward to the next accrual period. Need to file 2006 tax return Pre-1998 election to amortize bond premium. Need to file 2006 tax return   Generally, if you first elected to amortize bond premium before 1998, the above treatment of the premium does not apply to bonds you acquired before 1988. Need to file 2006 tax return Bonds acquired before October 23, 1986. Need to file 2006 tax return   The amortization of the premium on these bonds is a miscellaneous itemized deduction not subject to the 2%-of-adjusted-gross-income limit. Need to file 2006 tax return Bonds acquired after October 22, 1986, but before 1988. Need to file 2006 tax return    The amortization of the premium on these bonds is investment interest expense subject to the investment interest limit, unless you choose to treat it as an offset to interest income on the bond. Need to file 2006 tax return Expenses of Producing Income You deduct investment expenses (other than interest expenses) as miscellaneous itemized deductions on Schedule A (Form 1040). Need to file 2006 tax return To be deductible, these expenses must be ordinary and necessary expenses paid or incurred: To produce or collect income, or To manage property held for producing income. Need to file 2006 tax return The expenses must be directly related to the income or income-producing property, and the income must be taxable to you. Need to file 2006 tax return The deduction for most income-producing expenses is subject to a 2% limit that also applies to certain other miscellaneous itemized deductions. Need to file 2006 tax return The amount deductible is limited to the total of these miscellaneous deductions that is more than 2% of your adjusted gross income. Need to file 2006 tax return For information on how to report expenses of producing income, see How To Report Investment Expenses , later. Need to file 2006 tax return Attorney or accounting fees. Need to file 2006 tax return   You can deduct attorney or accounting fees that are necessary to produce or collect taxable income. Need to file 2006 tax return However, in some cases, attorney or accounting fees are part of the basis of property. Need to file 2006 tax return See Basis of Investment Property in chapter 4. Need to file 2006 tax return Automatic investment service and dividend reinvestment plans. Need to file 2006 tax return   A bank may offer its checking account customers an automatic investment service so that, for a charge, each customer can choose to invest a part of the checking account each month in common stock. Need to file 2006 tax return Or a bank that is a dividend disbursing agent for a number of publicly-owned corporations may set up an automatic dividend reinvestment service. Need to file 2006 tax return Through that service, cash dividends are reinvested in more shares of stock after the bank deducts a service charge. Need to file 2006 tax return   A corporation in which you own stock also may have a dividend reinvestment plan. Need to file 2006 tax return This plan lets you choose to use your dividends to buy more shares of stock in the corporation instead of receiving the dividends in cash. Need to file 2006 tax return   You can deduct the monthly service charge you pay to a bank to participate in an automatic investment service. Need to file 2006 tax return If you participate in a dividend reinvestment plan, you can deduct any service charge subtracted from your cash dividends before the dividends are used to buy more shares of stock. Need to file 2006 tax return Deduct the charges in the year you pay them. Need to file 2006 tax return Clerical help and office rent. Need to file 2006 tax return   You can deduct office expenses, such as rent and clerical help, you incurred in connection with your investments and collecting the taxable income on your investments. Need to file 2006 tax return Cost of replacing missing securities. Need to file 2006 tax return   To replace your taxable securities that are mislaid, lost, stolen, or destroyed, you may have to post an indemnity bond. Need to file 2006 tax return You can deduct the premium you pay to buy the indemnity bond and the related incidental expenses. Need to file 2006 tax return   You may, however, get a refund of part of the bond premium if the missing securities are recovered within a specified time. Need to file 2006 tax return Under certain types of insurance policies, you can recover some of the expenses. Need to file 2006 tax return   If you receive the refund in the tax year you pay the amounts, you can deduct only the difference between the expenses paid and the amount refunded. Need to file 2006 tax return If the refund is made in a later tax year, you must include the refund in income in the year you received it, but only to the extent that the expenses decreased your tax in the year you deducted them. Need to file 2006 tax return Fees to collect income. Need to file 2006 tax return   You can deduct fees you pay to a broker, bank, trustee, or similar agent to collect investment income, such as your taxable bond or mortgage interest, or your dividends on shares of stock. Need to file 2006 tax return Fees to buy or sell. Need to file 2006 tax return   You cannot deduct a fee you pay to a broker to acquire investment property, such as stocks or bonds. Need to file 2006 tax return You must add the fee to the cost of the property. Need to file 2006 tax return See Basis of Investment Property in chapter 4. Need to file 2006 tax return    You cannot deduct any broker's fees, commissions, or option premiums you pay (or that were netted out) in connection with the sale of investment property. Need to file 2006 tax return They can be used only to figure gain or loss from the sale. Need to file 2006 tax return See Reporting Capital Gains and Losses , in chapter 4, for more information about the treatment of these sale expenses. Need to file 2006 tax return Investment counsel and advice. Need to file 2006 tax return   You can deduct fees you pay for counsel and advice about investments that produce taxable income. Need to file 2006 tax return This includes amounts you pay for investment advisory services. Need to file 2006 tax return Safe deposit box rent. Need to file 2006 tax return   You can deduct rent you pay for a safe deposit box if you use the box to store taxable income-producing stocks, bonds, or other investment-related papers and documents. Need to file 2006 tax return If you also use the box to store tax-exempt securities or personal items, you can deduct only part of the rent. Need to file 2006 tax return See Tax-exempt income under Nondeductible Expenses, later, to figure what part you can deduct. Need to file 2006 tax return State and local transfer taxes. Need to file 2006 tax return   You cannot deduct the state and local transfer taxes you pay when you buy or sell securities. Need to file 2006 tax return If you pay these transfer taxes when you buy securities, you must treat them as part of the cost of the property. Need to file 2006 tax return If you pay these transfer taxes when you sell securities, you must treat them as a reduction in the amount realized. Need to file 2006 tax return Trustee's commissions for revocable trust. Need to file 2006 tax return   If you set up a revocable trust and have its income distributed to you, you can deduct the commission you pay the trustee for managing the trust to the extent it is to produce or collect taxable income or to manage property. Need to file 2006 tax return However, you cannot deduct any part of the commission used for producing or collecting tax-exempt income or for managing property that produces tax-exempt income. Need to file 2006 tax return   If you are a cash-basis taxpayer and pay the commissions for several years in advance, you must deduct a part of the commission each year. Need to file 2006 tax return You cannot deduct the entire amount in the year you pay it. Need to file 2006 tax return Investment expenses from pass-through entities. Need to file 2006 tax return   If you hold an interest in a partnership, S corporation, real estate mortgage investment conduit (REMIC), or a nonpublicly offered mutual fund, you can deduct your share of that entity's investment expenses. Need to file 2006 tax return A partnership or S corporation will show your share of these expenses on your Schedule K-1 (Form 1065) or Schedule K-1 (Form 1120S). Need to file 2006 tax return A nonpublicly offered mutual fund will indicate your share of these expenses in box 5 of Form 1099-DIV (or substitute statement). Need to file 2006 tax return Publicly-offered mutual funds are discussed later. Need to file 2006 tax return   If you hold an interest in a REMIC, any expenses relating to your residual interest investment will be shown on Schedule Q (Form 1066), line 3b. Need to file 2006 tax return Any expenses relating to your regular interest investment will appear in box 5 of Form 1099-INT (or substitute statement) or box 9 of Form 1099-OID (or substitute statement). Need to file 2006 tax return   Report your share of these investment expenses on Schedule A (Form 1040), subject to the 2% limit, in the same manner as your other investment expenses. Need to file 2006 tax return Including mutual fund or REMIC expenses in income. Need to file 2006 tax return   Your share of the investment expenses of a REMIC or a nonpublicly offered mutual fund, as described above, are considered to be indirect deductions through that pass-through entity. Need to file 2006 tax return You must include in your gross income an amount equal to the expenses allocated to you, whether or not you are able to claim a deduction for those expenses. Need to file 2006 tax return If you are a shareholder in a nonpublicly offered mutual fund, you must include on your return the full amount of ordinary dividends or other distributions of stock, as shown in box 1a of Form 1099-DIV (or substitute statement). Need to file 2006 tax return If you are a residual interest holder in a REMIC, you must report as ordinary income on Schedule E (Form 1040) the total amounts shown on Schedule Q (Form 1066), lines 1b and 3b. Need to file 2006 tax return If you are a REMIC regular interest holder, you must include the amount of any expense allocation you received on Form 1040, line 8a. Need to file 2006 tax return Publicly-offered mutual funds. Need to file 2006 tax return   Most mutual funds are publicly offered. Need to file 2006 tax return These mutual funds, generally, are traded on an established securities exchange. Need to file 2006 tax return These funds do not pass investment expenses through to you. Need to file 2006 tax return Instead, the dividend income they report to you in box 1a of Form 1099-DIV (or substitute statement) is already reduced by your share of investment expenses. Need to file 2006 tax return As a result, you cannot deduct the expenses on your return. Need to file 2006 tax return   Include the amount from box 1a of Form 1099-DIV (or substitute statement) in your income. Need to file 2006 tax return    A publicly offered mutual fund is one that: Is continuously offered pursuant to a public offering, Is regularly traded on an established securities market, and Is held by or for no fewer than 500 persons at any time during the year. Need to file 2006 tax return Contact your mutual fund if you are not sure whether it is publicly offered. Need to file 2006 tax return Nondeductible Expenses Some expenses that you incur as an investor are not deductible. Need to file 2006 tax return Stockholders' meetings. Need to file 2006 tax return   You cannot deduct transportation and other expenses you pay to attend stockholders' meetings of companies in which you have no interest other than owning stock. Need to file 2006 tax return This is true even if your purpose in attending is to get information that would be useful in making further investments. Need to file 2006 tax return Investment-related seminar. Need to file 2006 tax return   You cannot deduct expenses for attending a convention, seminar, or similar meeting for investment purposes. Need to file 2006 tax return Single-premium life insurance, endowment, and annuity contracts. Need to file 2006 tax return   You cannot deduct interest on money you borrow to buy or carry a single-premium life insurance, endowment, or annuity contract. Need to file 2006 tax return Used as collateral. Need to file 2006 tax return   If you use a single premium annuity contract as collateral to obtain or continue a mortgage loan, you cannot deduct any interest on the loan that is collateralized by the annuity contract. Need to file 2006 tax return Figure the amount of interest expense disallowed by multiplying the current interest rate on the mortgage loan by the lesser of the amount of the annuity contract used as collateral or the amount of the loan. Need to file 2006 tax return Borrowing on insurance. Need to file 2006 tax return   Generally, you cannot deduct interest on money you borrow to buy or carry a life insurance, endowment, or annuity contract if you plan to systematically borrow part or all of the increases in the cash value of the contract. Need to file 2006 tax return This rule applies to the interest on the total amount borrowed to buy or carry the contract, not just the interest on the borrowed increases in the cash value. Need to file 2006 tax return Tax-exempt income. Need to file 2006 tax return   You cannot deduct expenses you incur to produce tax-exempt income. Need to file 2006 tax return Nor can you deduct interest on money you borrow to buy tax-exempt securities or shares in a mutual fund or other regulated investment company that distributes only exempt-interest dividends. Need to file 2006 tax return Short-sale expenses. Need to file 2006 tax return   The rule disallowing a deduction for interest expenses on tax-exempt securities applies to amounts you pay in connection with personal property used in a short sale or amounts paid by others for the use of any collateral in connection with the short sale. Need to file 2006 tax return However, it does not apply to the expenses you incur if you deposit cash as collateral for the property used in the short sale and the cash does not earn a material return during the period of the sale. Need to file 2006 tax return Short sales are discussed in Short Sales in chapter 4. Need to file 2006 tax return Expenses for both tax-exempt and taxable income. Need to file 2006 tax return   You may have expenses that are for both tax-exempt and taxable income. Need to file 2006 tax return If you cannot specifically identify what part of the expenses is for each type of income, you can divide the expenses, using reasonable proportions based on facts and circumstances. Need to file 2006 tax return You must attach a statement to your return showing how you divided the expenses and stating that each deduction claimed is not based on tax-exempt income. Need to file 2006 tax return   One accepted method for dividing expenses is to do it in the same proportion that each type of income is to the total income. Need to file 2006 tax return If the expenses relate in part to capital gains and losses, include the gains, but not the losses, in figuring this proportion. Need to file 2006 tax return To find the part of the expenses that is for the tax-exempt income, divide your tax-exempt income by the total income and multiply your expenses by the result. Need to file 2006 tax return Example. Need to file 2006 tax return You received $6,000 interest; $4,800 was tax-exempt and $1,200 was taxable. Need to file 2006 tax return In earning this income, you had $500 of expenses. Need to file 2006 tax return You cannot specifically identify the amount of each expense item that is for each income item, so you must divide your expenses. Need to file 2006 tax return 80% ($4,800 tax-exempt interest divided by $6,000 total interest) of your expenses is for the tax-exempt income. Need to file 2006 tax return You cannot deduct $400 (80% of $500) of the expenses. Need to file 2006 tax return You can deduct $100 (the rest of the expenses) because they are for the taxable interest. Need to file 2006 tax return State income taxes. Need to file 2006 tax return   If you itemize your deductions, you can deduct, as taxes, state income taxes on interest income that is exempt from federal income tax. Need to file 2006 tax return But you cannot deduct, as either taxes or investment expenses, state income taxes on other exempt income. Need to file 2006 tax return Interest expense and carrying charges on straddles. Need to file 2006 tax return   You cannot deduct interest and carrying charges allocable to personal property that is part of a straddle. Need to file 2006 tax return The nondeductible interest and carrying charges are added to the basis of the straddle property. Need to file 2006 tax return However, this treatment does not apply if: All the offsetting positions making up the straddle either consist of one or more qualified covered call options and the optioned stock, or consist of section 1256 contracts (and the straddle is not part of a larger straddle); or The straddle is a hedging transaction. Need to file 2006 tax return  For information about straddles, including definitions of the terms used in this discussion, see Straddles in chapter 4. Need to file 2006 tax return   Interest includes any amount you pay or incur in connection with personal property used in a short sale. Need to file 2006 tax return However, you must first apply the rules discussed in Payments in lieu of dividends under Short Sales in chapter 4. Need to file 2006 tax return   To determine the interest on market discount bonds and short-term obligations that are part of a straddle, you must first apply the rules discussed under Limit on interest deduction for market discount bonds and Limit on interest deduction for short-term obligations (both under Interest Expenses, earlier). Need to file 2006 tax return Nondeductible amount. Need to file 2006 tax return   Figure the nondeductible interest and carrying charges on straddle property as follows. Need to file 2006 tax return Add: Interest on indebtedness incurred or continued to buy or carry the personal property, and All other amounts (including charges to insure, store, or transport the personal property) paid or incurred to carry the personal property. Need to file 2006 tax return Subtract from the amount in (1): Interest (including OID) includible in gross income for the year on the personal property, Any income from the personal property treated as ordinary income on the disposition of short-term government obligations or as ordinary income under the market discount and short-term bond provisions — see Discount on Debt Instruments in chapter 1, The dividends includible in gross income for the year from the personal property, and Any payment on a loan of the personal property for use in a short sale that is includible in gross income. Need to file 2006 tax return Basis adjustment. Need to file 2006 tax return   Add the nondeductible amount to the basis of your straddle property. Need to file 2006 tax return How To Report Investment Expenses To deduct your investment expenses, you must itemize deductions on Schedule A (Form 1040). Need to file 2006 tax return Enter your deductible investment interest expense on Schedule A (Form1040), line 14. Need to file 2006 tax return Include any deductible short sale expenses. Need to file 2006 tax return (See Short Sales in chapter 4 for information on these expenses. Need to file 2006 tax return ) Also attach a completed Form 4952 if you used that form to figure your investment interest expense. Need to file 2006 tax return Enter the total amount of your other investment expenses (other than interest expenses) on Schedule A (Form 1040), line 23. Need to file 2006 tax return List the type and amount of each expense on the dotted lines next to line 23. Need to file 2006 tax return (If necessary, you can show the required information on an attached statement. Need to file 2006 tax return ) For information on how to report amortizable bond premium, see Bond Premium Amortization , earlier in this chapter. Need to file 2006 tax return When To Report Investment Expenses If you use the cash method to report income and expenses, you generally deduct your expenses, except for certain prepaid interest, in the year you pay them. Need to file 2006 tax return If you use an accrual method, you generally deduct your expenses when you incur a liability for them, rather than when you pay them. Need to file 2006 tax return Also see When To Deduct Investment Interest , earlier in this chapter. Need to file 2006 tax return Unpaid expenses owed to related party. Need to file 2006 tax return   If you use an accrual method, you cannot deduct interest and other expenses owed to a related cash-basis person until payment is made and the amount is includible in the gross income of that person. Need to file 2006 tax return The relationship, for purposes of this rule, is determined as of the end of the tax year for which the interest or expense would otherwise be deductible. Need to file 2006 tax return If a deduction is denied under this rule, this rule will continue to apply even if your relationship with the person ceases to exist before the amount is includible in the gross income of that person. Need to file 2006 tax return   This rule generally applies to those relationships listed in chapter 4 under Related Party Transactions . Need to file 2006 tax return It also applies to accruals by partnerships to partners, partners to partnerships, shareholders to S corporations, and S corporations to shareholders. Need to file 2006 tax return   The postponement of deductions for unpaid expenses and interest under the related party rule does not apply to OID, regardless of when payment is made. Need to file 2006 tax return This rule also does not apply to loans with below-market interest rates or to certain payments for the use of property and services when the lender or recipient has to include payments periodically in income, even if a payment has not been made. Need to file 2006 tax return Prev  Up  Next   Home   More Online Publications