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Tax Forms 1040x

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Tax Forms 1040x

Tax forms 1040x 4. Tax forms 1040x   Farm Business Expenses Table of Contents What's New for 2013 Introduction Topics - This chapter discusses: Useful Items - You may want to see: Deductible ExpensesReasonable allocation. Tax forms 1040x Prepaid Farm Supplies Prepaid Livestock Feed Labor Hired Repairs and Maintenance Interest Breeding Fees Fertilizer and Lime Taxes Insurance Rent and Leasing Depreciation Business Use of Your Home Truck and Car Expenses Travel Expenses Marketing Quota Penalties Tenant House Expenses Items Purchased for Resale Other Expenses Domestic Production Activities Deduction Capital ExpensesForestation and reforestation costs. Tax forms 1040x Nondeductible ExpensesPersonal, Living, and Family Expenses Other Nondeductible Items Losses From Operating a FarmAt-Risk Limits Passive Activity Limits Excess Farm Loss Limit Not-for-Profit FarmingUsing the presumption later. Tax forms 1040x Category 1. Tax forms 1040x Category 2. Tax forms 1040x Category 3. Tax forms 1040x What's New for 2013 Standard mileage rate. Tax forms 1040x  For 2013, the standard mileage rate for the cost of operating your car, van, pickup, or panel truck for each mile of business use is 56. Tax forms 1040x 5 cents. Tax forms 1040x See Truck and Car Expenses , later. Tax forms 1040x Simplified method for business use of home deduction. Tax forms 1040x  The IRS now provides a simplified method to determine your expenses for business use of your home. Tax forms 1040x For more information, see Schedule C (Form 1040), Part II, and its instructions. Tax forms 1040x Introduction You can generally deduct the current costs of operating your farm. Tax forms 1040x Current costs are expenses you do not have to capitalize or include in inventory costs. Tax forms 1040x However, your deduction for the cost of livestock feed and certain other supplies may be limited. Tax forms 1040x If you have an operating loss, you may not be able to deduct all of it. Tax forms 1040x Topics - This chapter discusses: Deductible expenses Domestic production activities deduction Capital expenses Nondeductible expenses Losses from operating a farm Not-for-profit farming Useful Items - You may want to see: Publication 463 Travel, Entertainment, Gift, and Car Expenses 535 Business Expenses 587 Business Use of Your Home 925 Passive Activity and At-Risk Rules 936 Home Mortgage Interest Deduction Form (and Instructions) Sch A (Form 1040) Itemized Deductions Sch F (Form 1040) Profit or Loss From Farming 1045 Application for Tentative Refund 5213 Election To Postpone Determination as To Whether the Presumption Applies That an Activity Is Engaged in for Profit 8903 Domestic Production Activities Deduction See chapter 16 for information about getting publications and forms. Tax forms 1040x Deductible Expenses The ordinary and necessary costs of operating a farm for profit are deductible business expenses. Tax forms 1040x “Ordinary” means what most farmers do and “necessary” means what is useful and helpful in farming. Tax forms 1040x Schedule F, Part II, lists some common farm expenses that are typically deductible. Tax forms 1040x This chapter discusses many of these expenses, as well as others not listed on Schedule F. Tax forms 1040x Reimbursed expenses. Tax forms 1040x   If the reimbursement is received in the same year that the expense is claimed, reduce the expense by the amount of the reimbursement. Tax forms 1040x If the reimbursement is received in a year after the expense is claimed, include the reimbursement amount in income. Tax forms 1040x See Refund or reimbursement under Income From Other Sources in chapter 3. Tax forms 1040x Personal and business expenses. Tax forms 1040x   Some expenses you pay during the tax year may be part personal and part business. Tax forms 1040x These may include expenses for gasoline, oil, fuel, water, rent, electricity, telephone, automobile upkeep, repairs, insurance, interest, and taxes. Tax forms 1040x   You must allocate these mixed expenses between their business and personal parts. Tax forms 1040x Generally, the personal part of these expenses is not deductible. Tax forms 1040x The business portion of the expenses is deductible on Schedule F. Tax forms 1040x Example. Tax forms 1040x You paid $1,500 for electricity during the tax year. Tax forms 1040x You used 1/3 of the electricity for personal purposes and 2/3 for farming. Tax forms 1040x Under these circumstances, you can deduct $1,000 (2/3 of $1,500) of your electricity expense as a farm business expense. Tax forms 1040x Reasonable allocation. Tax forms 1040x   It is not always easy to determine the business and nonbusiness parts of an expense. Tax forms 1040x There is no method of allocation that applies to all mixed expenses. Tax forms 1040x Any reasonable allocation is acceptable. Tax forms 1040x What is reasonable depends on the circumstances in each case. Tax forms 1040x Prepaid Farm Supplies Prepaid farm supplies include the following items if paid for during the year. Tax forms 1040x Feed, seed, fertilizer, and similar farm supplies not used or consumed during the year, but not including farm supplies that you would have consumed during the year if not for a fire, storm, flood, other casualty, disease, or drought. Tax forms 1040x Poultry (including egg-laying hens and baby chicks) bought for use (or for both use and resale) in your farm business. Tax forms 1040x However, include only the amount that would be deductible in the following year if you had capitalized the cost and deducted it ratably over the lesser of 12 months or the useful life of the poultry. Tax forms 1040x Poultry bought for resale and not resold during the year. Tax forms 1040x Deduction limit. Tax forms 1040x   If you use the cash method of accounting to report your income and expenses, your deduction for prepaid farm supplies in the year you pay for them may be limited to 50% of your other deductible farm expenses for the year (all Schedule F deductions except prepaid farm supplies). Tax forms 1040x This limit does not apply if you meet one of the exceptions described later. Tax forms 1040x See Chapter 2 for a discussion of the cash method of accounting. Tax forms 1040x   If the limit applies, you can deduct the excess cost of farm supplies other than poultry in the year you use or consume the supplies. Tax forms 1040x The excess cost of poultry bought for use (or for both use and resale) in your farm business is deductible in the year following the year you pay for it. Tax forms 1040x The excess cost of poultry bought for resale is deductible in the year you sell or otherwise dispose of that poultry. Tax forms 1040x Example. Tax forms 1040x You may not qualify for the exception described next. Tax forms 1040x During 2013, you bought fertilizer ($4,000), feed ($1,000), and seed ($500) for use on your farm in the following year. Tax forms 1040x Your total prepaid farm supplies expense for 2013 is $5,500. Tax forms 1040x Your other deductible farm expenses totaled $10,000 for 2013. Tax forms 1040x Therefore, your deduction for prepaid farm supplies cannot be more than $5,000 (50% of $10,000) for 2013. Tax forms 1040x The excess prepaid farm supplies expense of $500 ($5,500 − $5,000) is deductible in a later tax year when you use or consume the supplies. Tax forms 1040x Exceptions. Tax forms 1040x   This limit on the deduction for prepaid farm supplies expense does not apply if you are a farm-related taxpayer and either of the following apply. Tax forms 1040x Your prepaid farm supplies expense is more than 50% of your other deductible farm expenses because of a change in business operations caused by unusual circumstances. Tax forms 1040x Your total prepaid farm supplies expense for the preceding 3 tax years is less than 50% of your total other deductible farm expenses for those 3 tax years. Tax forms 1040x   You are a farm-related taxpayer if any of the following tests apply. Tax forms 1040x Your main home is on a farm. Tax forms 1040x Your principal business is farming. Tax forms 1040x A member of your family meets (1) or (2). Tax forms 1040x For this purpose, your family includes your brothers and sisters, half-brothers and half-sisters, spouse, parents, grandparents, children, grandchildren, and aunts and uncles and their children. Tax forms 1040x    Whether or not the deduction limit for prepaid farm supplies applies, your expenses for prepaid livestock feed may be subject to the rules for advance payment of livestock feed, discussed next. Tax forms 1040x Prepaid Livestock Feed If you report your income and expenses under the cash method of accounting, you cannot deduct in the year paid the cost of feed your livestock will consume in a later year unless you meet all the following tests. Tax forms 1040x The payment is for the purchase of feed rather than a deposit. Tax forms 1040x The prepayment has a business purpose and is not merely for tax avoidance. Tax forms 1040x Deducting the prepayment does not result in a material distortion of your income. Tax forms 1040x If you meet all three tests, you can deduct the prepaid feed, subject to the limit on prepaid farm supplies discussed earlier. Tax forms 1040x If you fail any of these tests, you can deduct the prepaid feed only in the year it is consumed. Tax forms 1040x This rule does not apply to the purchase of commodity futures contracts. Tax forms 1040x Payment for the purchase of feed. Tax forms 1040x   Whether a payment is for the purchase of feed or a deposit depends on the facts and circumstances in each case. Tax forms 1040x It is for the purchase of feed if you can show you made it under a binding commitment to accept delivery of a specific quantity of feed at a fixed price and you are not entitled, by contract or business custom, to a refund or repurchase. Tax forms 1040x   The following are some factors that show a payment is a deposit rather than for the purchase of feed. Tax forms 1040x The absence of specific quantity terms. Tax forms 1040x The right to a refund of any unapplied payment credit at the end of the contract. Tax forms 1040x The seller's treatment of the payment as a deposit. Tax forms 1040x The right to substitute other goods or products for those specified in the contract. Tax forms 1040x   A provision permitting substitution of ingredients to vary the particular feed mix to meet your livestock's current diet requirements will not suggest a deposit. Tax forms 1040x Further, a price adjustment to reflect market value at the date of delivery is not, by itself, proof of a deposit. Tax forms 1040x Business purpose. Tax forms 1040x   The prepayment has a business purpose only if you have a reasonable expectation of receiving some business benefit from prepaying the cost of livestock feed. Tax forms 1040x The following are some examples of business benefits. Tax forms 1040x Fixing maximum prices and securing an assured feed supply. Tax forms 1040x Securing preferential treatment in anticipation of a feed shortage. Tax forms 1040x   Other factors considered in determining the existence of a business purpose are whether the prepayment was a condition imposed by the seller and whether that condition was meaningful. Tax forms 1040x No material distortion of income. Tax forms 1040x   The following are some factors considered in determining whether deducting prepaid livestock feed materially distorts income. Tax forms 1040x Your customary business practice in conducting your livestock operations. Tax forms 1040x The expense in relation to past purchases. Tax forms 1040x The time of year you made the purchase. Tax forms 1040x The expense in relation to your income for the year. Tax forms 1040x Labor Hired You can deduct reasonable wages paid for regular farm labor, piecework, contract labor, and other forms of labor hired to perform your farming operations. Tax forms 1040x You can pay wages in cash or in noncash items such as inventory, capital assets, or assets used in your business. Tax forms 1040x The cost of boarding farm labor is a deductible labor cost. Tax forms 1040x Other deductible costs you incur for farm labor include health insurance, workers' compensation insurance, and other benefits. Tax forms 1040x If you must withhold social security, Medicare, and income taxes from your employees' cash wages, you can still deduct the full amount of wages before withholding. Tax forms 1040x See chapter 13 for more information on employment taxes. Tax forms 1040x Also, deduct the employer's share of the social security and Medicare taxes you must pay on your employees' wages as a farm business expense on Schedule F, line 29. Tax forms 1040x See Taxes , later. Tax forms 1040x Property for services. Tax forms 1040x   If you transfer property to an employee in payment for services, you can deduct as wages paid the fair market value of the property on the date of transfer. Tax forms 1040x If the employee pays you anything for the property, deduct as wages the fair market value of the property minus the payment by the employee for the property. Tax forms 1040x   Treat the wages deducted as an amount received for the property. Tax forms 1040x You may have a gain or loss to report if the property's adjusted basis on the date of transfer is different from its fair market value. Tax forms 1040x Any gain or loss has the same character the exchanged property had in your hands. Tax forms 1040x For more information, see chapter 8. Tax forms 1040x Child as an employee. Tax forms 1040x   You can deduct reasonable wages or other compensation you pay to your child for doing farmwork if a true employer-employee relationship exists between you and your child. Tax forms 1040x Include these wages in the child's income. Tax forms 1040x The child may have to file an income tax return. Tax forms 1040x These wages may also be subject to social security and Medicare taxes if your child is age 18 or older. Tax forms 1040x For more information, see Family Employees in chapter 13. Tax forms 1040x    A Form W-2, Wage and Tax Statement, should be issued to the child employee. Tax forms 1040x   The fact that your child spends the wages to buy clothes or other necessities you normally furnish does not prevent you from deducting your child's wages as a farm expense. Tax forms 1040x The amount of wages paid to the child could cause a loss of the dependency exemption depending on how the child uses the money. Tax forms 1040x Spouse as an employee. Tax forms 1040x   You can deduct reasonable wages or other compensation you pay to your spouse if a true employer-employee relationship exists between you and your spouse. Tax forms 1040x Wages you pay to your spouse are subject to social security and Medicare taxes. Tax forms 1040x For more information, see Family Employees in chapter 13. Tax forms 1040x Nondeductible Pay You cannot deduct wages paid for certain household work, construction work, and maintenance of your home. Tax forms 1040x However, those wages may be subject to the employment taxes discussed in chapter 13. Tax forms 1040x Household workers. Tax forms 1040x   Do not deduct amounts paid to persons engaged in household work, except to the extent their services are used in boarding or otherwise caring for farm laborers. Tax forms 1040x Construction labor. Tax forms 1040x   Do not deduct wages paid to hired help for the construction of new buildings or other improvements. Tax forms 1040x These wages are part of the cost of the building or other improvement. Tax forms 1040x You must capitalize them. Tax forms 1040x Maintaining your home. Tax forms 1040x   If your farm employee spends time maintaining or repairing your home, the wages and employment taxes you pay for that work are nondeductible personal expenses. Tax forms 1040x For example, assume you have a farm employee for the entire tax year and the employee spends 5% of the time maintaining your home. Tax forms 1040x The employee devotes the remaining time to work on your farm. Tax forms 1040x You cannot deduct 5% of the wages and employment taxes you pay for that employee. Tax forms 1040x Employment Credits Reduce your deduction for wages by the amount of any employment credits you claim such as the work opportunity credit for qualified tax-exempt organizations hiring qualified veterans (Form 5884-C). Tax forms 1040x Repairs and Maintenance You can deduct most expenses for the repair and maintenance of your farm property. Tax forms 1040x Common items of repair and maintenance are repainting, replacing shingles and supports on farm buildings, and periodic or routine maintenance of trucks, tractors, and other farm machinery. Tax forms 1040x However, repairs to, or overhauls of, depreciable property that substantially prolong the life of the property, increase its value, or adapt it to a different use are capital expenses. Tax forms 1040x For example, if you repair the barn roof, the cost is deductible. Tax forms 1040x But if you replace the roof, it is a capital expense. Tax forms 1040x For more information, see Capital Expenses , later. Tax forms 1040x Interest You can deduct as a farm business expense interest paid on farm mortgages and other obligations you incur in your farm business. Tax forms 1040x Cash method. Tax forms 1040x   If you use the cash method of accounting, you can generally deduct interest paid during the tax year. Tax forms 1040x You cannot deduct interest paid with funds received from the original lender through another loan, advance, or other arrangement similar to a loan. Tax forms 1040x You can, however, deduct the interest when you start making payments on the new loan. Tax forms 1040x For more information, see Cash Method in chapter 2. Tax forms 1040x Prepaid interest. Tax forms 1040x   Under the cash method, you generally cannot deduct any interest paid before the year it is due. Tax forms 1040x Interest paid in advance may be deducted only in the tax year in which it is due. Tax forms 1040x Accrual method. Tax forms 1040x   If you use an accrual method of accounting, you can deduct only interest that has accrued during the tax year. Tax forms 1040x However, you cannot deduct interest owed to a related person who uses the cash method until payment is made and the interest is includible in the gross income of that person. Tax forms 1040x For more information, see Accrual Method in chapter 2. Tax forms 1040x Allocation of interest. Tax forms 1040x   If you use the proceeds of a loan for more than one purpose, you must allocate the interest on that loan to each use. Tax forms 1040x Allocate the interest to the following categories. Tax forms 1040x Trade or business interest. Tax forms 1040x Passive activity interest. Tax forms 1040x Investment interest. Tax forms 1040x Portfolio interest. Tax forms 1040x Personal interest. Tax forms 1040x   You generally allocate interest on a loan the same way you allocate the loan proceeds. Tax forms 1040x You allocate loan proceeds by tracing disbursements to specific uses. Tax forms 1040x The easiest way to trace disbursements to specific uses is to keep the proceeds of a particular loan separate from any other funds. Tax forms 1040x Secured loan. Tax forms 1040x   The allocation of loan proceeds and the related interest is generally not affected by the use of property that secures the loan. Tax forms 1040x Example. Tax forms 1040x You secure a loan with property used in your farming business. Tax forms 1040x You use the loan proceeds to buy a car for personal use. Tax forms 1040x You must allocate interest expense on the loan to personal use (purchase of the car) even though the loan is secured by farm business property. Tax forms 1040x If the property that secures the loan is your home, you generally do not allocate the loan proceeds or the related interest. Tax forms 1040x The interest is usually deductible as qualified home mortgage interest, regardless of how the loan proceeds are used. Tax forms 1040x However, you can choose to treat the loan as not secured by your home. Tax forms 1040x For more information, see Publication 936. Tax forms 1040x Allocation period. Tax forms 1040x   The period for which a loan is allocated to a particular use begins on the date the proceeds are used and ends on the earlier of the following dates. Tax forms 1040x The date the loan is repaid. Tax forms 1040x The date the loan is reallocated to another use. Tax forms 1040x More information. Tax forms 1040x   For more information on interest, see chapter 4 in Publication 535. Tax forms 1040x Breeding Fees You can deduct breeding fees as a farm business expense. Tax forms 1040x However, if you use an accrual method of accounting, you must capitalize breeding fees and allocate them to the cost basis of the calf, foal, etc. Tax forms 1040x For more information on who must use an accrual method of accounting, see Accrual Method Required under Accounting Methods in chapter 2. Tax forms 1040x Fertilizer and Lime You can deduct in the year paid or incurred the cost of fertilizer, lime, and other materials applied to farmland to enrich, neutralize, or condition it if the benefits last a year or less. Tax forms 1040x You can also deduct the cost of applying these materials in the year you pay or incur it. Tax forms 1040x However, see Prepaid Farm Supplies , earlier, for a rule that may limit your deduction for these materials. Tax forms 1040x If the benefits of the fertilizer, lime, or other materials last substantially more than one year, you generally capitalize their cost and deduct a part each year the benefits last. Tax forms 1040x However, you can choose to deduct these expenses in the year paid or incurred. Tax forms 1040x If you make this choice, you will need IRS approval if you later decide to capitalize the cost of previously deducted items. Tax forms 1040x If you sell farmland on which fertilizer or lime has been applied and if the selling price of the land includes part or all of the cost of the fertilizer or lime, you report the sale amount attributable to the fertilizer or lime as ordinary income. Tax forms 1040x Farmland, for these purposes, is land used for producing crops, fruits, or other agricultural products or for sustaining livestock. Tax forms 1040x It does not include land you have never used previously for producing crops or sustaining livestock. Tax forms 1040x You cannot deduct initial land preparation costs. Tax forms 1040x (See Capital Expenses , later. Tax forms 1040x ) Include government payments you receive for lime or fertilizer in income. Tax forms 1040x See Fertilizer and Lime under Agricultural Program Payments in chapter 3. Tax forms 1040x Taxes You can deduct as a farm business expense the real estate and personal property taxes on farm business assets, such as farm equipment, animals, farmland, and farm buildings. Tax forms 1040x You also can deduct the social security and Medicare taxes you pay to match the amount withheld from the wages of farm employees and any federal unemployment tax you pay. Tax forms 1040x For information on employment taxes, see chapter 13. Tax forms 1040x Allocation of taxes. Tax forms 1040x   The taxes on the part of your farm you use as your home (including the furnishings and surrounding land not used for farming) are nonbusiness taxes. Tax forms 1040x You may be able to deduct these nonbusiness taxes as itemized deductions on Schedule A (Form 1040). Tax forms 1040x To determine the nonbusiness part, allocate the taxes between the farm assets and nonbusiness assets. Tax forms 1040x The allocation can be done from the assessed valuations. Tax forms 1040x If your tax statement does not show the assessed valuations, you can usually get them from the tax assessor. Tax forms 1040x State and local general sales taxes. Tax forms 1040x   State and local general sales taxes on nondepreciable farm business expense items are deductible as part of the cost of those items. Tax forms 1040x Include state and local general sales taxes imposed on the purchase of assets for use in your farm business as part of the cost you depreciate. Tax forms 1040x Also treat the taxes as part of your cost if they are imposed on the seller and passed on to you. Tax forms 1040x State and federal income taxes. Tax forms 1040x   Individuals cannot deduct state and federal income taxes as farm business expenses. Tax forms 1040x Individuals can deduct state and local income taxes only as an itemized deduction on Schedule A (Form 1040). Tax forms 1040x However, you cannot deduct federal income tax. Tax forms 1040x Highway use tax. Tax forms 1040x   You can deduct the federal use tax on highway motor vehicles paid on a truck or truck tractor used in your farm business. Tax forms 1040x For information on the tax itself, including information on vehicles subject to the tax, see the Instructions for Form 2290, Heavy Highway Vehicle Use Tax Return. Tax forms 1040x Self-employment tax deduction. Tax forms 1040x   You can deduct as an adjustment to income on Form 1040 one-half of your self-employment tax in figuring your adjusted gross income. Tax forms 1040x For more information, see chapter 12. Tax forms 1040x Insurance You generally can deduct the ordinary and necessary cost of insurance for your farm business as a business expense. Tax forms 1040x This includes premiums you pay for the following types of insurance. Tax forms 1040x Fire, storm, crop, theft, liability, and other insurance on farm business assets. Tax forms 1040x Health and accident insurance on your farm employees. Tax forms 1040x Workers' compensation insurance set by state law that covers any claims for job-related bodily injuries or diseases suffered by employees on your farm, regardless of fault. Tax forms 1040x Business interruption insurance. Tax forms 1040x State unemployment insurance on your farm employees (deductible as taxes if they are considered taxes under state law). Tax forms 1040x Insurance to secure a loan. Tax forms 1040x   If you take out a policy on your life or on the life of another person with a financial interest in your farm business to get or protect a business loan, you cannot deduct the premiums as a business expense. Tax forms 1040x In the event of death, the proceeds of the policy are not taxed as income even if they are used to liquidate the debt. Tax forms 1040x Advance premiums. Tax forms 1040x   Deduct advance payments of insurance premiums only in the year to which they apply, regardless of your accounting method. Tax forms 1040x Example. Tax forms 1040x On June 28, 2013, you paid a premium of $3,000 for fire insurance on your barn. Tax forms 1040x The policy will cover a period of 3 years beginning on July 1, 2013. Tax forms 1040x Only the cost for the 6 months in 2013 is deductible as an insurance expense on your 2013 calendar year tax return. Tax forms 1040x Deduct $500, which is the premium for 6 months of the 36-month premium period, or 6/36 of $3,000. Tax forms 1040x In both 2014 and 2015, deduct $1,000 (12/36 of $3,000). Tax forms 1040x Deduct the remaining $500 in 2016. Tax forms 1040x Had the policy been effective on January 1, 2013, the deductible expense would have been $1,000 for each of the years 2013, 2014, and 2015, based on one-third of the premium used each year. Tax forms 1040x Business interruption insurance. Tax forms 1040x   Use and occupancy and business interruption insurance premiums are deductible as a business expense. Tax forms 1040x This insurance pays for lost profits if your business is shut down due to a fire or other cause. Tax forms 1040x Report any proceeds in full on Schedule F, Part I. Tax forms 1040x Self-employed health insurance deduction. Tax forms 1040x   If you are self-employed, you can deduct as an adjustment to income on Form 1040 your payments for medical, dental, and qualified long-term care insurance coverage for yourself, your spouse, and your dependents when figuring your adjusted gross income on your Form 1040. Tax forms 1040x Effective March 30, 2010, the insurance can also cover any child of yours under age 27 at the end of 2013, even if the child was not your dependent. Tax forms 1040x Generally, this deduction cannot be more than the net profit from the business under which the plan was established. Tax forms 1040x   If you or your spouse is also an employee of another person, you cannot take the deduction for any month in which you are eligible to participate in a subsidized health plan maintained by your employer or your spouse's employer. Tax forms 1040x   Generally, use the Self-Employed Health Insurance Deduction Worksheet in the Instructions for Form 1040 to figure your deduction. Tax forms 1040x Include the remaining part of the insurance payment in your medical expenses on Schedule A (Form 1040) if you itemize your deductions. Tax forms 1040x   For more information, see Deductible Premiums in Publication 535, chapter 6. Tax forms 1040x Rent and Leasing If you lease property for use in your farm business, you can generally deduct the rent you pay on Schedule F. Tax forms 1040x However, you cannot deduct rent you pay in crop shares if you deduct the cost of raising the crops as farm expenses. Tax forms 1040x Advance payments. Tax forms 1040x   Deduct advance payments of rent only in the year to which they apply, regardless of your accounting method. Tax forms 1040x Farm home. Tax forms 1040x   If you rent a farm, do not deduct the part of the rental expense that represents the fair rental value of the farm home in which you live. Tax forms 1040x Lease or Purchase If you lease a farm building or equipment, you must determine whether or not the agreement must be treated as a conditional sales contract rather than a lease. Tax forms 1040x If the agreement is treated as a conditional sales contract, the payments under the agreement (so far as they do not represent interest or other charges) are payments for the purchase of the property. Tax forms 1040x Do not deduct these payments as rent, but capitalize the cost of the property and recover this cost through depreciation. Tax forms 1040x Conditional sales contract. Tax forms 1040x   Whether an agreement is a conditional sales contract depends on the intent of the parties. Tax forms 1040x Determine intent based on the provisions of the agreement and the facts and circumstances that exist when you make the agreement. Tax forms 1040x No single test, or special combination of tests, always applies. Tax forms 1040x However, in general, an agreement may be considered a conditional sales contract rather than a lease if any of the following is true. Tax forms 1040x The agreement applies part of each payment toward an equity interest you will receive. Tax forms 1040x You get title to the property after you make a stated amount of required payments. Tax forms 1040x The amount you must pay to use the property for a short time is a large part of the amount you would pay to get title to the property. Tax forms 1040x You pay much more than the current fair rental value of the property. Tax forms 1040x You have an option to buy the property at a nominal price compared to the value of the property when you may exercise the option. Tax forms 1040x Determine this value when you make the agreement. Tax forms 1040x You have an option to buy the property at a nominal price compared to the total amount you have to pay under the agreement. Tax forms 1040x The agreement designates part of the payments as interest, or part of the payments can be easily recognized as interest. Tax forms 1040x Example. Tax forms 1040x You lease new farm equipment from a dealer who both sells and leases. Tax forms 1040x The agreement includes an option to purchase the equipment for a specified price. Tax forms 1040x The lease payments and the specified option price equal the sales price of the equipment plus interest. Tax forms 1040x Under the agreement, you are responsible for maintenance, repairs, and the risk of loss. Tax forms 1040x For federal income tax purposes, the agreement is a conditional sales contract. Tax forms 1040x You cannot deduct any of the lease payments as rent. Tax forms 1040x You can deduct interest, repairs, insurance, depreciation, and other expenses related to the equipment. Tax forms 1040x Motor vehicle leases. Tax forms 1040x   Special rules apply to lease agreements that have a terminal rental adjustment clause. Tax forms 1040x In general, this is a clause that provides for a rental price adjustment based on the amount the lessor is able to sell the vehicle for at the end of the lease. Tax forms 1040x If your rental agreement contains a terminal rental adjustment clause, treat the agreement as a lease if the agreement otherwise qualifies as a lease. Tax forms 1040x For more information, see Internal Revenue Code (IRC) section 7701(h). Tax forms 1040x Leveraged leases. Tax forms 1040x   Special rules apply to leveraged leases of equipment (arrangements in which the equipment is financed by a nonrecourse loan from a third party). Tax forms 1040x For more information, see Publication 535, chapter 3, and Revenue Procedure 2001-28, which begins on page 1156 of Internal Revenue Bulletin 2001-19 at www. Tax forms 1040x irs. Tax forms 1040x gov/pub/irs-irbs/irb01-19. Tax forms 1040x pdf. Tax forms 1040x Depreciation If property you acquire to use in your farm business is expected to last more than one year, you generally cannot deduct the entire cost in the year you acquire it. Tax forms 1040x You must recover the cost over more than one year and deduct part of it each year on Schedule F as depreciation or amortization. Tax forms 1040x However, you can choose to deduct part or all of the cost of certain qualifying property, up to a limit, as a section 179 deduction in the year you place it in service. Tax forms 1040x Depreciation, amortization, and the section 179 deduction are discussed in chapter 7. Tax forms 1040x Business Use of Your Home You can deduct expenses for the business use of your home if you use part of your home exclusively and regularly: As the principal place of business for any trade or business in which you engage, As a place to meet or deal with patients, clients, or customers in the normal course of your trade or business, or In connection with your trade or business, if you are using a separate structure that is not attached to your home. Tax forms 1040x Your home office will qualify as your principal place of business for deducting expenses for its use if you meet both of the following requirements. Tax forms 1040x You use it exclusively and regularly for the administrative or management activities of your trade or business. Tax forms 1040x You have no other fixed location where you conduct substantial administrative or management activities of your trade or business. Tax forms 1040x If you use part of your home for business, you must divide the expenses of operating your home between personal and business use. Tax forms 1040x The IRS now provides a simplified method to determine your expenses for business use of your home. Tax forms 1040x For more information, see Schedule C (Form 1040), Part II, and its instructions. Tax forms 1040x Deduction limit. Tax forms 1040x   If your gross income from farming equals or exceeds your total farm expenses (including expenses for the business use of your home), you can deduct all your farm expenses. Tax forms 1040x But if your gross income from farming is less than your total farm expenses, your deduction for certain expenses for the use of your home in your farming business is limited. Tax forms 1040x   Your deduction for otherwise nondeductible expenses, such as utilities, insurance, and depreciation (with depreciation taken last), cannot be more than the gross income from farming minus the following expenses. Tax forms 1040x The business part of expenses you could deduct even if you did not use your home for business (such as deductible mortgage interest, real estate taxes, and casualty and theft losses). Tax forms 1040x Farm expenses other than expenses that relate to the use of your home. Tax forms 1040x If you are self-employed, do not include your deduction for half of your self-employment tax. Tax forms 1040x   Deductions over the current year's limit can be carried over to your next tax year. Tax forms 1040x They are subject to the deduction limit for the next tax year. Tax forms 1040x More information. Tax forms 1040x   See Publication 587 for more information on deducting expenses for the business use of your home. Tax forms 1040x Telephone expense. Tax forms 1040x   You cannot deduct the cost of basic local telephone service (including any taxes) for the first telephone line you have in your home, even if you have an office in your home. Tax forms 1040x However, charges for business long-distance phone calls on that line, as well as the cost of a second line into your home used exclusively for your farm business, are deductible business expenses. Tax forms 1040x Cell phone charges for calls relating to your farm business are deductible. Tax forms 1040x If the cell phone you use for your farm business is part of a family cell phone plan, you must allocate and deduct only the portion of the charges attributable to farm business calls. Tax forms 1040x Truck and Car Expenses You can deduct the actual cost of operating a truck or car in your farm business. Tax forms 1040x Only expenses for business use are deductible. Tax forms 1040x These include such items as gasoline, oil, repairs, license tags, insurance, and depreciation (subject to certain limits). Tax forms 1040x Standard mileage rate. Tax forms 1040x   Instead of using actual costs, under certain conditions you can use the standard mileage rate. Tax forms 1040x The standard mileage rate for each mile of business use is 56. Tax forms 1040x 5 cents in 2013. Tax forms 1040x You can use the standard mileage rate for a car or a light truck, such as a van, pickup, or panel truck, you own or lease. Tax forms 1040x   You cannot use the standard mileage rate if you operate five or more cars or light trucks at the same time. Tax forms 1040x You are not using five or more vehicles at the same time if you alternate using the vehicles (you use them at different times) for business. Tax forms 1040x Example. Tax forms 1040x Maureen owns a car and four pickup trucks that are used in her farm business. Tax forms 1040x Her farm employees use the trucks and she uses the car for business. Tax forms 1040x Maureen cannot use the standard mileage rate for the car or the trucks. Tax forms 1040x This is because all five vehicles are used in Maureen's farm business at the same time. Tax forms 1040x She must use actual expenses for all vehicles. Tax forms 1040x Business use percentage. Tax forms 1040x   You can claim 75% of the use of a car or light truck as business use without any records if you used the vehicle during most of the normal business day directly in connection with the business of farming. Tax forms 1040x You choose this method of substantiating business use the first year the vehicle is placed in service. Tax forms 1040x Once you make this choice, you may not change to another method later. Tax forms 1040x The following are uses directly connected with the business of farming. Tax forms 1040x Cultivating land. Tax forms 1040x Raising or harvesting any agricultural or horticultural commodity. Tax forms 1040x Raising, shearing, feeding, caring for, training, and managing animals. Tax forms 1040x Driving to the feed or supply store. Tax forms 1040x   If you keep records and they show that your business use was more than 75%, you may be able to claim more. Tax forms 1040x See Recordkeeping requirements under Travel Expenses , below. Tax forms 1040x More information. Tax forms 1040x   For more information on deductible truck and car expenses, see Publication 463, chapter 4. Tax forms 1040x If you pay your employees for the use of their truck or car in your farm business, see Reimbursements to employees under Travel Expenses next. Tax forms 1040x Travel Expenses You can deduct ordinary and necessary expenses you incur while traveling away from home for your farm business. Tax forms 1040x You cannot deduct lavish or extravagant expenses. Tax forms 1040x Usually, the location of your farm business is considered your home for tax purposes. Tax forms 1040x You are traveling away from home if: Your duties require you to be absent from your farm substantially longer than an ordinary work day, and You need to get sleep or rest to meet the demands of your work while away from home. Tax forms 1040x If you meet these requirements and can prove the time, place, and business purpose of your travel, you can deduct your ordinary and necessary travel expenses. Tax forms 1040x The following are some types of deductible travel expenses. Tax forms 1040x Air, rail, bus, and car transportation; Meals and lodging; Dry cleaning and laundry; Telephone and fax; Transportation between your hotel and your temporary work or business meeting location; and Tips for any of the above expenses. Tax forms 1040x Meals. Tax forms 1040x   You ordinarily can deduct only 50% of your business-related meals expenses. Tax forms 1040x You can deduct the cost of your meals while traveling on business only if your business trip is overnight or long enough to require you to stop for sleep or rest to properly perform your duties. Tax forms 1040x You cannot deduct any of the cost of meals if it is not necessary for you to rest, unless you meet the rules for business entertainment. Tax forms 1040x For information on entertainment expenses, see Publication 463, chapter 2. Tax forms 1040x   The expense of a meal includes amounts you spend for your food, beverages, taxes, and tips relating to the meal. Tax forms 1040x You can deduct either 50% of the actual cost or 50% of a standard meal allowance that covers your daily meal and incidental expenses. Tax forms 1040x    Recordkeeping requirements. Tax forms 1040x You must be able to prove your deductions for travel by adequate records or other evidence that will support your own statement. Tax forms 1040x Estimates or approximations do not qualify as proof of an expense. Tax forms 1040x   You should keep an account book or similar record, supported by adequate documentary evidence, such as receipts, that together support each element of an expense. Tax forms 1040x Generally, it is best to record the expense and get documentation of it at the time you pay it. Tax forms 1040x   If you choose to deduct a standard meal allowance rather than the actual expense, you do not have to keep records to prove amounts spent for meals and incidental items. Tax forms 1040x However, you must still keep records to prove the actual amount of other travel expenses, and the time, place, and business purpose of your travel. Tax forms 1040x More information. Tax forms 1040x   For detailed information on travel, recordkeeping, and the standard meal allowance, see Publication 463. Tax forms 1040x Reimbursements to employees. Tax forms 1040x   You generally can deduct reimbursements you pay to your employees for travel and transportation expenses they incur in the conduct of your business. Tax forms 1040x Employees may be reimbursed under an accountable or nonaccountable plan. Tax forms 1040x Under an accountable plan, the employee must provide evidence of expenses. Tax forms 1040x Under a nonaccountable plan, no evidence of expenses is required. Tax forms 1040x If you reimburse expenses under an accountable plan, deduct them as travel and transportation expenses. Tax forms 1040x If you reimburse expenses under a nonaccountable plan, you must report the reimbursements as wages on Form W-2 and deduct them as wages. Tax forms 1040x For more information, see Publication 535, chapter 11. Tax forms 1040x Marketing Quota Penalties You can deduct as Other expenses on Schedule F penalties you pay for marketing crops in excess of farm marketing quotas. Tax forms 1040x However, if you do not pay the penalty, but instead the purchaser of your crop deducts it from the payment to you, include in gross income only the amount you received. Tax forms 1040x Do not take a separate deduction for the penalty. Tax forms 1040x Tenant House Expenses You can deduct the costs of maintaining houses and their furnishings for tenants or hired help as farm business expenses. Tax forms 1040x These costs include repairs, utilities, insurance, and depreciation. Tax forms 1040x The value of a dwelling you furnish to a tenant under the usual tenant-farmer arrangement is not taxable income to the tenant. Tax forms 1040x Items Purchased for Resale If you use the cash method of accounting, you ordinarily deduct the cost of livestock and other items purchased for resale only in the year of sale. Tax forms 1040x You deduct this cost, including freight charges for transporting the livestock to the farm, on Schedule F, Part I. Tax forms 1040x However, see Chickens, seeds, and young plants , below. Tax forms 1040x Example. Tax forms 1040x You use the cash method of accounting. Tax forms 1040x In 2013, you buy 50 steers you will sell in 2014. Tax forms 1040x You cannot deduct the cost of the steers on your 2013 tax return. Tax forms 1040x You deduct their cost on your 2014 Schedule F, Part I. Tax forms 1040x Chickens, seeds, and young plants. Tax forms 1040x   If you are a cash method farmer, you can deduct the cost of hens and baby chicks bought for commercial egg production, or for raising and resale, as an expense on Schedule F, Part I, in the year paid if you do it consistently and it does not distort income. Tax forms 1040x You also can deduct the cost of seeds and young plants bought for further development and cultivation before sale as an expense on Schedule F, Part I, when paid if you do this consistently and you do not figure your income on the crop method. Tax forms 1040x However, see Prepaid Farm Supplies , earlier, for a rule that may limit your deduction for these items. Tax forms 1040x   If you deduct the cost of chickens, seeds, and young plants as an expense, report their entire selling price as income. Tax forms 1040x You cannot also deduct the cost from the selling price. Tax forms 1040x   You cannot deduct the cost of seeds and young plants for Christmas trees and timber as an expense. Tax forms 1040x Deduct the cost of these seeds and plants through depletion allowances. Tax forms 1040x For more information, see Depletion in chapter 7. Tax forms 1040x   The cost of chickens and plants used as food for your family is never deductible. Tax forms 1040x   Capitalize the cost of plants with a preproductive period of more than 2 years, unless you can elect out of the uniform capitalization rules. Tax forms 1040x These rules are discussed in chapter 6. Tax forms 1040x Example. Tax forms 1040x You use the cash method of accounting. Tax forms 1040x In 2013, you buy 500 baby chicks to raise for resale in 2014. Tax forms 1040x You also buy 50 bushels of winter wheat seed in 2013 that you sow in the fall. Tax forms 1040x Unless you previously adopted the method of deducting these costs in the year you sell the chickens or the harvested crops, you can deduct the cost of both the baby chicks and the seed wheat in 2013. Tax forms 1040x Election to use crop method. Tax forms 1040x   If you use the crop method, you can delay deducting the cost of seeds and young plants until you sell them. Tax forms 1040x You must get IRS approval to use the crop method. Tax forms 1040x If you follow this method, deduct the cost from the selling price to determine your profit on Schedule F, Part I. Tax forms 1040x For more information, see Crop method under Special Methods of Accounting in chapter 2. Tax forms 1040x Choosing a method. Tax forms 1040x   You can adopt either the crop method or the cash method for deducting the cost in the first year you buy egg-laying hens, pullets, chicks, or seeds and young plants. Tax forms 1040x   Although you must use the same method for egg-laying hens, pullets, and chicks, you can use a different method for seeds and young plants. Tax forms 1040x Once you use a particular method for any of these items, use it for those items until you get IRS approval to change your method. Tax forms 1040x For more information, see Change in Accounting Method in chapter 2. Tax forms 1040x Other Expenses The following list, while not all-inclusive, shows some expenses you can deduct as other farm expenses on Schedule F, Part II. Tax forms 1040x These expenses must be for business purposes and  (1) paid, if you use the cash method of accounting, or (2) incurred, if you use an accrual method of accounting. Tax forms 1040x Accounting fees. Tax forms 1040x Advertising. Tax forms 1040x Business travel and meals. Tax forms 1040x Commissions. Tax forms 1040x Consultant fees. Tax forms 1040x Crop scouting expenses. Tax forms 1040x Dues to cooperatives. Tax forms 1040x Educational expenses (to maintain and improve farming skills). Tax forms 1040x Farm-related attorney fees. Tax forms 1040x Farm magazines. Tax forms 1040x Ginning. Tax forms 1040x Insect sprays and dusts. Tax forms 1040x Litter and bedding. Tax forms 1040x Livestock fees. Tax forms 1040x Marketing fees. Tax forms 1040x Milk assessment. Tax forms 1040x Recordkeeping expenses. Tax forms 1040x Service charges. Tax forms 1040x Small tools expected to last one year or less. Tax forms 1040x Stamps and stationery. Tax forms 1040x Subscriptions to professional, technical, and trade journals that deal with farming. Tax forms 1040x Tying material and containers. Tax forms 1040x Loan expenses. Tax forms 1040x   You prorate and deduct loan expenses, such as legal fees and commissions, you pay to get a farm loan over the term of the loan. Tax forms 1040x Tax preparation fees. Tax forms 1040x   You can deduct as a farm business expense on Schedule F the cost of preparing that part of your tax return relating to your farm business. Tax forms 1040x You may be able to deduct the remaining cost on Schedule A (Form 1040) if you itemize your deductions. Tax forms 1040x   You also can deduct on Schedule F the amount you pay or incur in resolving tax issues relating to your farm business. Tax forms 1040x Domestic Production Activities Deduction Generally, you are allowed a deduction for income attributable to domestic production activities. Tax forms 1040x You can deduct 9% of the lesser of your qualified production activities income or your taxable income (adjusted gross income for individuals) for the tax year. Tax forms 1040x Your deduction is limited to 50% of the Form W-2 wages you paid for the tax year that are properly allocable to domestic production gross receipts. Tax forms 1040x For this purpose, Form W-2 wages do not include noncash wages paid for agricultural labor, such as compensation paid as commodities. Tax forms 1040x Also, excluded from Form W-2 wages are wages paid to your children under age 18 and nontaxable fringe benefits. Tax forms 1040x Income from cooperatives. Tax forms 1040x   If you receive a patronage dividend or qualified per-unit retain allocation from a cooperative which is engaged in the manufacturing, production, growth, or extraction in whole or in significant part of any agricultural or horticultural product or in the marketing of agricultural or horticultural products, your income from the cooperative can give rise to a domestic production activities deduction. Tax forms 1040x This deduction amount is reported on Form 1099-PATR, box 6. Tax forms 1040x In order for you to qualify for the deduction, the cooperative is required to send you a written notice designating your portion of the domestic production activities deduction. Tax forms 1040x More information. Tax forms 1040x   For more information on the domestic production activities deduction, see the Instructions for Form 8903. Tax forms 1040x Capital Expenses A capital expense is a payment, or a debt incurred, for the acquisition, improvement, or restoration of an asset that is expected to last more than one year. Tax forms 1040x You include the expense in the basis of the asset. Tax forms 1040x Uniform capitalization rules also require you to capitalize or include in inventory certain other expenses. Tax forms 1040x See chapters 2  and 6. Tax forms 1040x Capital expenses are generally not deductible, but they may be depreciable. Tax forms 1040x However, you can elect to deduct certain capital expenses, such as the following. Tax forms 1040x The cost of fertilizer, lime, etc. Tax forms 1040x (See Fertilizer and Lime under Deductible Expenses , earlier. Tax forms 1040x ) Soil and water conservation expenses. Tax forms 1040x (See chapter 5. Tax forms 1040x ) The cost of property that qualifies for a deduction under section 179. Tax forms 1040x (See chapter 7. Tax forms 1040x ) Business start-up costs. Tax forms 1040x (See Business start-up and organizational costs , later. Tax forms 1040x ) Forestation and reforestation costs. Tax forms 1040x (See Forestation and reforestation costs , later. Tax forms 1040x ) Generally, the costs of the following items, including the costs of material, hired labor, and installation, are capital expenses. Tax forms 1040x Land and buildings. Tax forms 1040x Additions, alterations, and improvements to buildings, etc. Tax forms 1040x Cars and trucks. Tax forms 1040x Equipment and machinery. Tax forms 1040x Fences. Tax forms 1040x Draft, breeding, sport, and dairy livestock. Tax forms 1040x Repairs to machinery, equipment, trucks, and cars that prolong their useful life, increase their value, or adapt them to different use. Tax forms 1040x Water wells, including drilling and equipping costs. Tax forms 1040x Land preparation costs, such as: Clearing land for farming, Leveling and conditioning land, Purchasing and planting trees, Building irrigation canals and ditches, Laying irrigation pipes, Installing drain tile, Modifying channels or streams, Constructing earthen, masonry, or concrete tanks, reservoirs, or dams, and Building roads. Tax forms 1040x Business start-up and organizational costs. Tax forms 1040x   You can elect to deduct up to $5,000 of business start-up costs and $5,000 of organizational costs paid or incurred after October 22, 2004. Tax forms 1040x The $5,000 deduction is reduced by the amount your total start-up or organizational costs exceed $50,000. Tax forms 1040x Any remaining costs must be amortized. Tax forms 1040x See chapter 7. Tax forms 1040x   You elect to deduct start-up or organizational costs by claiming the deduction on the income tax return filed by the due date (including extensions) for the tax year in which the active trade or business begins. Tax forms 1040x However, if you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). Tax forms 1040x Clearly indicate the election on your amended return and write “Filed pursuant to section 301. Tax forms 1040x 9100-2” at the top of the amended return. Tax forms 1040x File the amended return at the same address you filed the original return. Tax forms 1040x The election applies when figuring taxable income for the current tax year and all subsequent years. Tax forms 1040x   You can choose to forgo the election by clearly electing to capitalize your start-up or organizational costs on an income tax return filed by the due date (including extensions) for the tax year in which the active trade or business begins. Tax forms 1040x For more information about start-up and organizational costs, see chapter 7. Tax forms 1040x Crop production expenses. Tax forms 1040x   The uniform capitalization rules generally require you to capitalize expenses incurred in producing plants. Tax forms 1040x However, except for certain taxpayers required to use an accrual method of accounting, the capitalization rules do not apply to plants with a preproductive period of 2 years or less. Tax forms 1040x For more information, see Uniform Capitalization Rules in chapter 6. Tax forms 1040x Timber. Tax forms 1040x   Capitalize the cost of acquiring timber. Tax forms 1040x Do not include the cost of land in the cost of the timber. Tax forms 1040x You must generally capitalize direct costs incurred in reforestation. Tax forms 1040x However, you can elect to deduct some forestation and reforestation costs. Tax forms 1040x See Forestation and reforestation costs next. Tax forms 1040x Reforestation costs include the following. Tax forms 1040x Site preparation costs, such as: Girdling, Applying herbicide, Baiting rodents, and Clearing and controlling brush. Tax forms 1040x The cost of seed or seedlings. Tax forms 1040x Labor and tool expenses. Tax forms 1040x Depreciation on equipment used in planting or seeding. Tax forms 1040x Costs incurred in replanting to replace lost seedlings. Tax forms 1040x You can choose to capitalize certain indirect reforestation costs. Tax forms 1040x   These capitalized amounts are your basis for the timber. Tax forms 1040x Recover your basis when you sell the timber or take depletion allowances when you cut the timber. Tax forms 1040x See Depletion in chapter 7. Tax forms 1040x Forestation and reforestation costs. Tax forms 1040x   You can elect to deduct up to $10,000 ($5,000 if married filing separately; $0 for a trust) of qualifying reforestation costs paid or incurred after October 22, 2004, for each qualified timber property. Tax forms 1040x Any remaining costs can be amortized over an 84-month period. Tax forms 1040x See chapter 7. Tax forms 1040x If you make an election to deduct or amortize qualifying reforestation costs, you should create and maintain separate timber accounts for each qualified timber property. Tax forms 1040x The accounts should include all reforestation treatments and the dates they were applied. Tax forms 1040x Any qualified timber property that is subject to the deduction or amortization election cannot be included in any other timber account for which depletion is allowed. Tax forms 1040x The timber account should be maintained until the timber is disposed of. Tax forms 1040x For more information, see Notice 2006-47, 2006-20 I. Tax forms 1040x R. Tax forms 1040x B. Tax forms 1040x 892, available at  www. Tax forms 1040x irs. Tax forms 1040x gov/irb/2006-20_IRB/ar11. Tax forms 1040x html. Tax forms 1040x   You elect to deduct forestation and reforestation costs by claiming the deduction on the income tax return filed by the due date (including extensions) for the tax year in which the expenses were paid or incurred. Tax forms 1040x If you are filing Form T (Timber), Forest Activities Schedule, also complete Form T (Timber), Part IV. Tax forms 1040x If you are not filing Form T (Timber), attach a statement to your return with the following information. Tax forms 1040x The unique stand identification numbers. Tax forms 1040x The total number of acres reforested during the tax year. Tax forms 1040x The nature of the reforestation treatments. Tax forms 1040x The total amounts of the qualified reforestation expenditures eligible to be amortized or deducted. Tax forms 1040x   However, if you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). Tax forms 1040x Clearly indicate the election on your amended return and write “Filed pursuant to section 301. Tax forms 1040x 9100-2” at the top of the amended return. Tax forms 1040x File the amended return at the same address you filed the original return. Tax forms 1040x    For more information about forestation and reforestation costs, see chapter 7. Tax forms 1040x    For more information about timber, see Agriculture Handbook Number 731, Forest Landowners' Guide to the Federal Income Tax. Tax forms 1040x You can view this publication on the Internet at  www. Tax forms 1040x fs. Tax forms 1040x fed. Tax forms 1040x us/publications. Tax forms 1040x Christmas tree cultivation. Tax forms 1040x   If you are in the business of planting and cultivating Christmas trees to sell when they are more than 6 years old, capitalize expenses incurred for planting and stump culture and add them to the basis of the standing trees. Tax forms 1040x Recover these expenses as part of your adjusted basis when you sell the standing trees or as depletion allowances when you cut the trees. Tax forms 1040x For more information, see Timber Depletion under Depletion in chapter 7. Tax forms 1040x   You can deduct as business expenses the costs incurred for shearing and basal pruning of these trees. Tax forms 1040x Expenses incurred for silvicultural practices, such as weeding or cleaning, and noncommercial thinning are also deductible as business expenses. Tax forms 1040x   Capitalize the cost of land improvements, such as road grading, ditching, and fire breaks, that have a useful life beyond the tax year. Tax forms 1040x If the improvements do not have a determinable useful life, add their cost to the basis of the land. Tax forms 1040x The cost is recovered when you sell or otherwise dispose of it. Tax forms 1040x If the improvements have a determinable useful life, recover their cost through depreciation. Tax forms 1040x Capitalize the cost of equipment and other depreciable assets, such as culverts and fences, to the extent you do not use them in planting Christmas trees. Tax forms 1040x Recover these costs through depreciation. Tax forms 1040x Nondeductible Expenses You cannot deduct personal expenses and certain other items on your tax return even if they relate to your farm. Tax forms 1040x Personal, Living, and Family Expenses You cannot deduct certain personal, living, and family expenses as business expenses. Tax forms 1040x These include rent and insurance premiums paid on property used as your home, life insurance premiums on yourself or your family, the cost of maintaining cars, trucks, or horses for personal use, allowances to minor children, attorneys' fees and legal expenses incurred in personal matters, and household expenses. Tax forms 1040x Likewise, the cost of purchasing or raising produce or livestock consumed by you or your family is not deductible. Tax forms 1040x Other Nondeductible Items You cannot deduct the following items on your tax return. Tax forms 1040x Loss of growing plants, produce, and crops. Tax forms 1040x   Losses of plants, produce, and crops raised for sale are generally not deductible. Tax forms 1040x However, you may have a deductible loss on plants with a preproductive period of more than 2 years. Tax forms 1040x See chapter 11 for more information. Tax forms 1040x Repayment of loans. Tax forms 1040x   You cannot deduct the repayment of a loan. Tax forms 1040x However, if you use the proceeds of a loan for farm business expenses, you can deduct the interest on the loan. Tax forms 1040x See Interest , earlier. Tax forms 1040x Estate, inheritance, legacy, succession, and gift taxes. Tax forms 1040x   You cannot deduct estate, inheritance, legacy, succession, and gift taxes. Tax forms 1040x Loss of livestock. Tax forms 1040x   You cannot deduct as a loss the value of raised livestock that die if you deducted the cost of raising them as an expense. Tax forms 1040x Losses from sales or exchanges between related persons. Tax forms 1040x   You cannot deduct losses from sales or exchanges of property between you and certain related persons, including your spouse, brother, sister, ancestor, or lineal descendant. Tax forms 1040x For more information, see chapter 2 of Publication 544, Sales and Other Dispositions of Assets. Tax forms 1040x Cost of raising unharvested crops. Tax forms 1040x   You cannot deduct the cost of raising unharvested crops sold with land owned more than one year if you sell both at the same time and to the same person. Tax forms 1040x Add these costs to the basis of the land to determine the gain or loss on the sale. Tax forms 1040x For more information, see Section 1231 Gains and Losses in chapter 9. Tax forms 1040x Cost of unharvested crops bought with land. Tax forms 1040x   Capitalize the purchase price of land, including the cost allocable to unharvested crops. Tax forms 1040x You cannot deduct the cost of the crops at the time of purchase. Tax forms 1040x However, you can deduct this cost in figuring net profit or loss in the tax year you sell the crops. Tax forms 1040x Cost related to gifts. Tax forms 1040x   You cannot deduct costs related to your gifts of agricultural products or property held for sale in the ordinary course of your business. Tax forms 1040x The costs are not deductible in the year of the gift or any later year. Tax forms 1040x For example, you cannot deduct the cost of raising cattle or the cost of planting and raising unharvested wheat on parcels of land given as a gift to your children. Tax forms 1040x Club dues and membership fees. Tax forms 1040x   Generally, you cannot deduct amounts you pay or incur for membership in any club organized for business, pleasure, recreation, or any other social purpose. Tax forms 1040x This includes country clubs, golf and athletic clubs, hotel clubs, sporting clubs, airline clubs, and clubs operated to provide meals under circumstances generally considered to be conducive to business discussions. Tax forms 1040x Exception. Tax forms 1040x   The following organizations will not be treated as a club organized for business, pleasure, recreation, or other social purposes, unless one of its main purposes is to conduct entertainment activities for members or their guests or to provide members or their guests with access to entertainment facilities. Tax forms 1040x Boards of trade. Tax forms 1040x Business leagues. Tax forms 1040x Chambers of commerce. Tax forms 1040x Civic or public service organizations. Tax forms 1040x Professional associations. Tax forms 1040x Trade associations. Tax forms 1040x Real estate boards. Tax forms 1040x Fines and penalties. Tax forms 1040x   You cannot deduct fines and penalties, except penalties for exceeding marketing quotas, discussed earlier. Tax forms 1040x Losses From Operating a Farm If your deductible farm expenses are more than your farm income, you have a loss from the operation of your farm. Tax forms 1040x The amount of the loss you can deduct when figuring your taxable income may be limited. Tax forms 1040x To figure your deductible loss, you must apply the following limits. Tax forms 1040x The at-risk limits. Tax forms 1040x The passive activity limits. Tax forms 1040x The following discussions explain these limits. Tax forms 1040x If your deductible loss after applying these limits is more than your other income for the year, you may have a net operating loss. Tax forms 1040x See Publication 536, Net Operating Losses (NOLs) for Individuals, Estates, and Trusts. Tax forms 1040x If you do not carry on your farming activity to make a profit, your loss deduction may be limited by the not-for-profit rules. Tax forms 1040x See Not-for-Profit Farming, later. Tax forms 1040x At-Risk Limits The at-risk rules limit your deduction for losses from most business or income-producing activities, including farming. Tax forms 1040x These rules limit the losses you can deduct when figuring your taxable income. Tax forms 1040x The deductible loss from an activity is limited to the amount you have at risk in the activity. Tax forms 1040x You are at risk in any activity for: The money and adjusted basis of property you contribute to the activity, and Amounts you borrow for use in the activity if: You are personally liable for repayment, or You pledge property (other than property used in the activity) as security for the loan. Tax forms 1040x You are not at risk, however, for amounts you borrow for use in a farming activity from a person who has an interest in the activity (other than as a creditor) or a person related to someone (other than you) having such an interest. Tax forms 1040x For more information, see Publication 925. Tax forms 1040x Passive Activity Limits A passive activity is generally any activity involving the conduct of any trade or business in which you do not materially participate. Tax forms 1040x Generally, a rental activity is a passive activity. Tax forms 1040x If you have a passive activity, special rules limit the loss you can deduct in the tax year. Tax forms 1040x You generally can deduct losses from passive activities only up to income from passive activities. Tax forms 1040x Credits are similarly limited. Tax forms 1040x For more information, see Publication 925. Tax forms 1040x Excess Farm Loss Limit For tax years beginning after 2009, excess farm losses (defined below) are not deductible if you received certain applicable subsidies. Tax forms 1040x This limit applies to any farming businesses, other than a C corporation, that received a direct or counter-cyclical payment (or any payment in lieu of such payments) under title I of the Food, Conservation, and Energy Act of 2008, or from a Commodity Credit Corporation loan. Tax forms 1040x Your farming losses are limited to the greater of: $300,000 ($150,000 for a married person filing a separate return), or The total net farm income for the prior five tax years. Tax forms 1040x Farming losses from casualty losses or losses by reason of disease or drought are disregarded for purposes of figuring this limitation. Tax forms 1040x Also, the limitation on farm losses should be applied before the passive activity loss rules are applied. Tax forms 1040x For more details, see IRC section 461(j). Tax forms 1040x Excess farm loss. Tax forms 1040x   Generally, an excess farm loss is the amount of your farming loss that exceeds the amount of the limitation (as described above). Tax forms 1040x This loss can be determined by taking the excess of: The total deductions for the tax year from your farming businesses, over The total gross income or gain for the tax year from your farming businesses, plus the greater of: $300,000 ($150,000 for a married person filing a separate return), or The excess (if any) of the total gross income or gain from your farming businesses for the prior five tax years over the total deductions from your farming businesses for the prior five tax years. Tax forms 1040x   Excess farm losses that are disallowed can be carried forward to the next tax year and treated as a deduction from that year. Tax forms 1040x Not-for-Profit Farming If you operate a farm for profit, you can deduct all the ordinary and necessary expenses of carrying on the business of farming on Schedule F. Tax forms 1040x However, if you do not carry on your farming activity, or other activity you engage or invest in, to make a profit, you report the income from the activity on Form 1040, line 21, and you can deduct expenses of carrying on the activity only if you itemize your deductions on Schedule A (Form 1040). Tax forms 1040x Also, there is a limit on the deductions you can take. Tax forms 1040x You cannot use a loss from that activity to offset income from other activities. Tax forms 1040x Activities you do as a hobby, or mainly for sport or recreation, come under this limit. Tax forms 1040x An investment activity intended only to produce tax losses for the investors also comes under this limit. Tax forms 1040x The limit on not-for-profit losses applies to individuals, partnerships, estates, trusts, and S corporations. Tax forms 1040x It does not apply to corporations other than S corporations. Tax forms 1040x In determining whether you are carrying on your farming activity for profit, all the facts are taken into account. Tax forms 1040x No one factor alone is decisive. Tax forms 1040x Among the factors to consider are whether: You operate your farm in a businesslike manner; The time and effort you spend on farming indicate you intend to make it profitable; You depend on income from farming for your livelihood; Your losses are due to circumstances beyond your control or are normal in the start-up phase of farming; You change your methods of operation in an attempt to improve profitability; You, or your advisors, have the knowledge needed to carry on the farming activity as a successful business; You were successful in making a profit in similar activities in the past; You make a profit from farming in some years and the amount of profit you make; and You can expect to make a future profit from the appreciation of the assets used in the farming activity. Tax forms 1040x Presumption of profit. Tax forms 1040x   Your farming or other activity is presumed carried on for profit if it produced a profit in at least 3 of the last 5 tax years, including the current year. Tax forms 1040x Activities that consist primarily of breeding, training, showing, or racing horses are presumed carried on for profit if they produced a profit in at least 2 of the last 7 tax years, including the current year. Tax forms 1040x The activity must be substantially the same for each year within this period. Tax forms 1040x You have a profit when the gross income from an activity is more than the deductions for it. Tax forms 1040x   If a taxpayer dies before the end of the 5-year (or 7-year) period, the period ends on the date of the taxpayer's death. Tax forms 1040x   If your business or investment activity passes this 3- (or 2-) years-of-profit test, presume it is carried on for profit. Tax forms 1040x This means the limits discussed here do not apply. Tax forms 1040x You can take all your business deductions from the activity on Schedule F, even for the years that you have a loss. Tax forms 1040x You can rely on this presumption in every case, unless the IRS shows it is not valid. Tax forms 1040x   If you fail the 3- (or 2-) years-of-profit test, you still may be considered to operate your farm for profit by considering the factors listed earlier. Tax forms 1040x Using the presumption later. Tax forms 1040x   If you are starting out in farming and do not have 3 (or 2) years showing a profit, you may want to take advantage of this presumption later, after you have had the 5 (or 7) years of experience allowed by the test. Tax forms 1040x   You can choose to do this by filing Form 5213. Tax forms 1040x Filing this form postpones any determination that your farming activity is not carried on for profit until 5 (or 7) years have passed since you first started farming. Tax forms 1040x You must file Form 5213 within 3 years after the due date of your return for the year in which you first carried on the activity, or, if earlier, within 60 days after receiving a written notice from the IRS proposing to disallow deductions attributable to the activity. Tax forms 1040x   The benefit gained by making this choice is that the IRS will not immediately question whether your farming activity is engaged in for profit. Tax forms 1040x Accordingly, it will not limit your deductions. Tax forms 1040x Rather, you will gain time to earn a profit in 3 (or 2) out of the first 5 (or 7) years you carry on the farming activity. Tax forms 1040x If you show 3 (or 2) years of profit at the end of this period, your deductions are not limited under these rules. Tax forms 1040x If you do not have 3 (or 2) years of profit (and cannot otherwise show that you operated your farm for profit), the limit applies retroactively to any year in the 5-year (or 7-year) period with a loss. Tax forms 1040x   Filing Form 5213 automatically extends the period of limitations on any year
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Agricultural Marketing Service

The Agricultural Marketing Service supports the fair marketing of U.S. agricultural products.

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The Tax Forms 1040x

Tax forms 1040x Publication 514 - Main Content Table of Contents Choosing To Take Credit or DeductionChoice Applies to All Qualified Foreign Taxes Making or Changing Your Choice Why Choose the Credit?Credit for Taxes Paid or Accrued Foreign Currency and Exchange Rates Foreign Tax Redetermination Who Can Take the Credit?U. Tax forms 1040x S. Tax forms 1040x Citizens Resident Aliens Nonresident Aliens What Foreign Taxes Qualify for the Credit?Tax Must Be Imposed on You You Must Have Paid or Accrued the Tax Tax Must Be the Legal and Actual Foreign Tax Liability Tax Must Be an Income Tax (or Tax in Lieu of Income Tax) Foreign Taxes for Which You Cannot Take a CreditTaxes on Excluded Income Taxes for Which You Can Only Take an Itemized Deduction Taxes on Foreign Mineral Income Taxes From International Boycott Operations Taxes on Combined Foreign Oil and Gas Income Taxes of U. Tax forms 1040x S. Tax forms 1040x Persons Controlling Foreign Corporations and Partnerships Taxes Related to a Foreign Tax Credit Splitting Event How To Figure the CreditLimit on the Credit Separate Limit Income Allocation of Foreign Taxes Foreign Taxes From a Partnership or an S Corporation Figuring the Limit Qualified Dividends Capital Gains and Losses Allocation of Foreign and U. Tax forms 1040x S. Tax forms 1040x Losses Tax Treaties Carryback and CarryoverTime Limit on Tax Assessment Claim for Refund Taxes All Credited or All Deducted Married Couples How To Claim the CreditForm 1116 Records To Keep Simple Example — Filled-In Form 1116Part I—Taxable Income or Loss From Sources Outside the United States (for Category Checked Above) Part II—Foreign Taxes Paid or Accrued Part III—Figuring the Credit Part IV—Summary of Credits From Separate Parts III Comprehensive Example — Filled-In Form 1116Foreign earned income. Tax forms 1040x Employee business expenses. Tax forms 1040x Forms 1116 Computation of Taxable Income Part I—Taxable Income or Loss From Sources Outside the United States (for Category Checked Above) Part II—Foreign Taxes Paid or Accrued Part III—Figuring the Credit Part IV—Summary of Credits From Separate Parts III Unused Foreign Taxes How To Get Tax HelpLow Income Taxpayer Clinics Choosing To Take Credit or Deduction You can choose whether to take the amount of any qualified foreign taxes paid or accrued during the year as a foreign tax credit or as an itemized deduction. Tax forms 1040x You can change your choice for each year's taxes. Tax forms 1040x To choose the foreign tax credit, in most cases you must complete Form 1116 and attach it to your U. Tax forms 1040x S. Tax forms 1040x tax return. Tax forms 1040x However, you may qualify for the exception that allows you to claim the foreign tax credit without using Form 1116. Tax forms 1040x See How To Figure the Credit , later. Tax forms 1040x To choose to claim the taxes as an itemized deduction, use Schedule A (Form 1040), Itemized Deductions. Tax forms 1040x Figure your tax both ways—claiming the credit and claiming the deduction. Tax forms 1040x Then fill out your return the way that benefits you more. Tax forms 1040x See Why Choose the Credit, later. Tax forms 1040x Choice Applies to All Qualified Foreign Taxes As a general rule, you must choose to take either a credit or a deduction for all qualified foreign taxes. Tax forms 1040x If you choose to take a credit for qualified foreign taxes, you must take the credit for all of them. Tax forms 1040x You cannot deduct any of them. Tax forms 1040x Conversely, if you choose to deduct qualified foreign taxes, you must deduct all of them. Tax forms 1040x You cannot take a credit for any of them. Tax forms 1040x See What Foreign Taxes Qualify for the Credit , later, for the meaning of qualified foreign taxes. Tax forms 1040x There are exceptions to this general rule, which are described next. Tax forms 1040x Exceptions for foreign taxes not allowed as a credit. Tax forms 1040x   Even if you claim a credit for other foreign taxes, you can deduct any foreign tax that is not allowed as a credit if: You paid the tax to a country for which a credit is not allowed because it provides support for acts of international terrorism, or because the United States does not have or does not conduct diplomatic relations with it or recognize its government and that government is not otherwise eligible to purchase defense articles or services under the Arms Export Control Act, You paid withholding tax on dividends from foreign corporations whose stock you did not hold for the required period of time, You paid withholding tax on income or gain (other than dividends) from property you did not hold for the required period of time, You paid withholding tax on income or gain to the extent you had to make related payments on positions in substantially similar or related property, You participated in or cooperated with an international boycott, You paid taxes in connection with the purchase or sale of oil or gas, or You paid or accrued taxes on income or gain in connection with a covered asset acquisition. Tax forms 1040x Covered asset acquisitions include certain acquisitions that result in a stepped-up basis for U. Tax forms 1040x S. Tax forms 1040x tax purposes. Tax forms 1040x For more information, see Internal Revenue Code section 901(m). Tax forms 1040x The IRS intends to issue guidance that will explain this provision in greater detail. Tax forms 1040x   For more information on these items, see Taxes for Which You Can Only Take an Itemized Deduction , later, under Foreign Taxes for Which You Cannot Take a Credit. Tax forms 1040x Foreign taxes that are not income taxes. Tax forms 1040x   In most cases, only foreign income taxes qualify for the foreign tax credit. Tax forms 1040x Other taxes, such as foreign real and personal property taxes, do not qualify. Tax forms 1040x But you may be able to deduct these other taxes even if you claim the foreign tax credit for foreign income taxes. Tax forms 1040x   In most cases, you can deduct these other taxes only if they are expenses incurred in a trade or business or in the production of income. Tax forms 1040x However, you can deduct foreign real property taxes that are not trade or business expenses as an itemized deduction on Schedule A (Form 1040). Tax forms 1040x Carrybacks and carryovers. Tax forms 1040x   There is a limit on the credit you can claim in a tax year. Tax forms 1040x If your qualified foreign taxes exceed the credit limit, you may be able to carry over or carry back the excess to another tax year. Tax forms 1040x If you deduct qualified foreign taxes in a tax year, you cannot use a carryback or carryover in that year. Tax forms 1040x That is because you cannot take both a deduction and a credit for qualified foreign taxes in the same tax year. Tax forms 1040x   For more information on the limit, see How To Figure the Credit , later. Tax forms 1040x For more information on carrybacks and carryovers, see Carryback and Carryover , later. Tax forms 1040x Making or Changing Your Choice You can make or change your choice to claim a deduction or credit at any time during the period within 10 years from the regular due date for filing the return (without regard to any extension of time to file) for the tax year in which the taxes were actually paid or accrued. Tax forms 1040x You make or change your choice on your tax return (or on an amended return) for the year your choice is to be effective. Tax forms 1040x Example. Tax forms 1040x You paid foreign taxes for the last 13 years and chose to deduct them on your U. Tax forms 1040x S. Tax forms 1040x income tax returns. Tax forms 1040x You were timely in both filing your returns and paying your U. Tax forms 1040x S. Tax forms 1040x tax liability. Tax forms 1040x In February 2013, you file an amended return for tax year 2002 choosing to take a credit for your 2002 foreign taxes because you now realize that the credit is more advantageous than the deduction for that year. Tax forms 1040x Because the regular due date of your 2002 return was April 15, 2003, this choice is timely (within 10 years). Tax forms 1040x Because there is a limit on the credit for your 2002 foreign tax, you have unused 2002 foreign taxes. Tax forms 1040x Ordinarily, you first carry back unused foreign taxes arising in 2002 to, and claim them as a credit in, the 2 preceding tax years. Tax forms 1040x If you are unable to claim all of them in those 2 years, you carry them forward to the 10 years following the year in which they arose. Tax forms 1040x Because you originally chose to deduct your foreign taxes and the 10-year period for changing the choice for 2000 and 2001 has passed, you cannot change your choice and carry the unused 2002 foreign taxes back to tax years 2000 and 2001. Tax forms 1040x Because the 10-year periods for changing the choice have not passed for your 2003 through 2012 income tax returns, you can still choose to claim the credit for those years and carry forward any unused 2002 foreign taxes. Tax forms 1040x However, you must reduce the unused 2002 foreign taxes that you carry forward by the amount that would have been allowed as a carryback if you had timely carried back the foreign tax to tax years 2000 and 2001. Tax forms 1040x You cannot take a credit or a deduction for foreign taxes paid on income you exclude under the foreign earned income exclusion or the foreign housing exclusion. Tax forms 1040x See Foreign Earned Income and Housing Exclusions under Foreign Taxes for Which You Cannot Take a Credit, later. Tax forms 1040x Why Choose the Credit? The foreign tax credit is intended to relieve you of a double tax burden when your foreign source income is taxed by both the United States and the foreign country. Tax forms 1040x In most cases, if the foreign tax rate is higher than the U. Tax forms 1040x S. Tax forms 1040x rate, there will be no U. Tax forms 1040x S. Tax forms 1040x tax on the foreign income. Tax forms 1040x If the foreign tax rate is lower than the U. Tax forms 1040x S. Tax forms 1040x rate, U. Tax forms 1040x S. Tax forms 1040x tax on the foreign income will be limited to the difference between the rates. Tax forms 1040x The foreign tax credit can only reduce U. Tax forms 1040x S. Tax forms 1040x taxes on foreign source income; it cannot reduce U. Tax forms 1040x S. Tax forms 1040x taxes on U. Tax forms 1040x S. Tax forms 1040x source income. Tax forms 1040x Although no one rule covers all situations, in most cases it is better to take a credit for qualified foreign taxes than to deduct them as an itemized deduction. Tax forms 1040x This is because: A credit reduces your actual U. Tax forms 1040x S. Tax forms 1040x income tax on a dollar-for-dollar basis, while a deduction reduces only your income subject to tax, You can choose to take the foreign tax credit even if you do not itemize your deductions. Tax forms 1040x You then are allowed the standard deduction in addition to the credit, and If you choose to take the foreign tax credit, and the taxes paid or accrued exceed the credit limit for the tax year, you may be able to carry over or carry back the excess to another tax year. Tax forms 1040x (See Limit on credit under How To Figure the Credit, later. Tax forms 1040x ) Example 1. Tax forms 1040x For 2013, you and your spouse have adjusted gross income of $80,300, including $20,000 of dividend income from foreign sources. Tax forms 1040x None of the dividends are qualified dividends. Tax forms 1040x You file a joint return and can claim two $3,900 exemptions. Tax forms 1040x You had to pay $2,000 in foreign income taxes on the dividend income. Tax forms 1040x If you take the foreign taxes as an itemized deduction, your total itemized deductions are $15,000. Tax forms 1040x Your taxable income then is $57,500 and your tax is $7,736. Tax forms 1040x If you take the credit instead, your itemized deductions are only $13,000. Tax forms 1040x Your taxable income then is $59,500 and your tax before the credit is $8,036. Tax forms 1040x After the credit, however, your tax is only $6,036. Tax forms 1040x Therefore, your tax is $1,700 lower ($7,736 − $6,036) by taking the credit. Tax forms 1040x Example 2. Tax forms 1040x In 2013, you receive investment income of $5,000 from a foreign country, which imposes a tax of $1,500 on that income. Tax forms 1040x You report on your U. Tax forms 1040x S. Tax forms 1040x return this income as well as $56,000 of U. Tax forms 1040x S. Tax forms 1040x source wages and an allowable $49,000 partnership loss from a U. Tax forms 1040x S. Tax forms 1040x partnership. Tax forms 1040x Your share of the partnership's gross income is $25,000 and your share of its expenses is $74,000. Tax forms 1040x You are single, entitled to one $3,900 exemption, and have other itemized deductions of $6,850. Tax forms 1040x If you deduct the foreign tax on your U. Tax forms 1040x S. Tax forms 1040x return, your taxable income is a negative $250 ($5,000 + $56,000 − $49,000 − $1,500 − $6,850 − $3,900) and your tax is $0. Tax forms 1040x If you take the credit instead, your taxable income is $1,250 ($5,000 + $56,000 − $49,000 − $3,900 − $6,850) and your tax before the credit is $126. Tax forms 1040x You can take a credit of only $113 because of limits discussed later. Tax forms 1040x Your tax after the credit is $13 ($126 − $113), which is $13 more than if you deduct the foreign tax. Tax forms 1040x If you choose the credit, you will have unused foreign taxes of $1,387 ($1,500 − $113). Tax forms 1040x When deciding whether to take the credit or the deduction this year, you will need to consider whether you can benefit from a carryback or carryover of that unused foreign tax. Tax forms 1040x Credit for Taxes Paid or Accrued You can claim the credit for a qualified foreign tax in the tax year in which you pay it or accrue it, depending on your method of accounting. Tax forms 1040x “Tax year” refers to the tax year for which your U. Tax forms 1040x S. Tax forms 1040x return is filed, not the tax year for which your foreign return is filed. Tax forms 1040x Accrual method of accounting. Tax forms 1040x   If you use an accrual method of accounting, you can claim the credit only in the year in which you accrue the tax. Tax forms 1040x You are using an accrual method of accounting if you report income when you earn it, rather than when you receive it, and you deduct your expenses when you incur them, rather than when you pay them. Tax forms 1040x   In most cases, foreign taxes accrue when all the events have taken place that fix the amount of the tax and your liability to pay it. Tax forms 1040x Generally, this occurs on the last day of the tax year for which your foreign return is filed. Tax forms 1040x Contesting your foreign tax liability. Tax forms 1040x   If you are contesting your foreign tax liability, you cannot accrue it and take a credit until the amount of foreign tax due is finally determined. Tax forms 1040x However, if you choose to pay the tax liability you are contesting, you can take a credit for the amount you pay before a final determination of foreign tax liability is made. Tax forms 1040x Once your liability is determined, the foreign tax credit is allowable for the year to which the foreign tax relates. Tax forms 1040x If the amount of foreign taxes taken as a credit differs from the final foreign tax liability, you may have to adjust the credit, as discussed later under Foreign Tax Redetermination . Tax forms 1040x You may have to post a bond. Tax forms 1040x   If you claim a credit for taxes accrued but not paid, you may have to post an income tax bond to guarantee your payment of any tax due in the event the amount of foreign tax paid differs from the amount claimed. Tax forms 1040x   The IRS can request this bond at any time without regard to the Time Limit on Tax Assessment discussed later under Carryback and Carryover. Tax forms 1040x Cash method of accounting. Tax forms 1040x   If you use the cash method of accounting, you can choose to take the credit either in the year you pay the tax or in the year you accrue it. Tax forms 1040x You are using the cash method of accounting if you report income in the year you actually or constructively receive it, and deduct expenses in the year you pay them. Tax forms 1040x Choosing to take credit in the year taxes accrue. Tax forms 1040x   Even if you use the cash method of accounting, you can choose to take a credit for foreign taxes in the year they accrue. Tax forms 1040x You make the choice by checking the box in Part II of Form 1116. Tax forms 1040x Once you make that choice, you must follow it in all later years and take a credit for foreign taxes in the year they accrue. Tax forms 1040x   In addition, the choice to take the credit when foreign taxes accrue applies to all foreign taxes qualifying for the credit. Tax forms 1040x You cannot take a credit for some foreign taxes when paid and take a credit for others when accrued. Tax forms 1040x   If you make the choice to take the credit when foreign taxes accrue and pay them in a later year, you cannot claim a deduction for any part of the previously accrued taxes. Tax forms 1040x Credit based on taxes paid in earlier year. Tax forms 1040x   If, in earlier years, you took the credit based on taxes paid, and this year you choose to take the credit based on taxes accrued, you may be able to take the credit this year for taxes from more than one year. Tax forms 1040x Example. Tax forms 1040x Last year you took the credit based on taxes paid. Tax forms 1040x This year you chose to take the credit based on taxes accrued. Tax forms 1040x During the year you paid foreign income taxes owed for last year. Tax forms 1040x You also accrued foreign income taxes for this year that you did not pay by the end of the year. Tax forms 1040x You can base the credit on your return for this year on both last year's taxes that you paid and this year's taxes that you accrued. Tax forms 1040x Foreign Currency and Exchange Rates U. Tax forms 1040x S. Tax forms 1040x income tax is imposed on income expressed in U. Tax forms 1040x S. Tax forms 1040x dollars, while in most cases the foreign tax is imposed on income expressed in foreign currency. Tax forms 1040x Therefore, fluctuations in the value of the foreign currency relative to the U. Tax forms 1040x S. Tax forms 1040x dollar may affect the foreign tax credit. Tax forms 1040x Translating foreign currency into U. Tax forms 1040x S. Tax forms 1040x dollars. Tax forms 1040x   If you receive all or part of your income or pay some or all of your expenses in foreign currency, you must translate the foreign currency into U. Tax forms 1040x S. Tax forms 1040x dollars. Tax forms 1040x How and when you do this depends on your functional currency. Tax forms 1040x In most cases, your functional currency is the U. Tax forms 1040x S. Tax forms 1040x dollar unless you are required to use the currency of a foreign country. Tax forms 1040x   You must make all federal income tax determinations in your functional currency. Tax forms 1040x The U. Tax forms 1040x S. Tax forms 1040x dollar is the functional currency for all taxpayers except some qualified business units. Tax forms 1040x A qualified business unit is a separate and clearly identified unit of a trade or business that maintains separate books and records. Tax forms 1040x Unless you are self-employed, your functional currency is the U. Tax forms 1040x S. Tax forms 1040x dollar. Tax forms 1040x   Even if you are self-employed and have a qualified business unit, your functional currency is the U. Tax forms 1040x S. Tax forms 1040x dollar if any of the following apply. Tax forms 1040x You conduct the business primarily in dollars. Tax forms 1040x The principal place of business is located in the United States. Tax forms 1040x You choose to or are required to use the dollar as your functional currency. Tax forms 1040x The business books and records are not kept in the currency of the economic environment in which a significant part of the business activities is conducted. Tax forms 1040x   If your functional currency is the U. Tax forms 1040x S. Tax forms 1040x dollar, you must immediately translate into dollars all items of income, expense, etc. Tax forms 1040x , that you receive, pay, or accrue in a foreign currency and that will affect computation of your income tax. Tax forms 1040x If there is more than one exchange rate, use the one that most properly reflects your income. Tax forms 1040x In most cases, you can get exchange rates from banks and U. Tax forms 1040x S. Tax forms 1040x Embassies. Tax forms 1040x   If your functional currency is not the U. Tax forms 1040x S. Tax forms 1040x dollar, make all income tax determinations in your functional currency. Tax forms 1040x At the end of the year, translate the results, such as income or loss, into U. Tax forms 1040x S. Tax forms 1040x dollars to report on your income tax return. Tax forms 1040x    For more information, write to: Internal Revenue Service International Section Philadelphia, PA 19255-0725 Rate of exchange for foreign taxes paid. Tax forms 1040x   Use the rate of exchange in effect on the date you paid the foreign taxes to the foreign country unless you meet the exception discussed next. Tax forms 1040x If your tax was withheld in foreign currency, use the rate of exchange in effect for the date on which the tax was withheld. Tax forms 1040x If you make foreign estimated tax payments, you use the rate of exchange in effect for the date on which you made the estimated tax payment. Tax forms 1040x   The exchange rate rules discussed here apply even if the foreign taxes are paid or accrued with respect to a foreign tax credit splitting event (discussed later). Tax forms 1040x Exception. Tax forms 1040x   If you claim the credit for foreign taxes on an accrual basis, in most cases you must use the average exchange rate for the tax year to which the taxes relate. Tax forms 1040x This rule applies to accrued taxes relating to tax years beginning after 1997 and only under the following conditions. Tax forms 1040x The foreign taxes are paid on or after the first day of the tax year to which they relate. Tax forms 1040x The foreign taxes are paid not later than 2 years after the close of the tax year to which they relate. Tax forms 1040x The foreign tax liability is not denominated in an inflationary currency (defined in the Form 1116 instructions). Tax forms 1040x (This condition applies to taxes paid or accrued in tax years beginning after November 6, 2007. Tax forms 1040x )   For all other foreign taxes, you should use the exchange rate in effect on the date you paid them. Tax forms 1040x Election to use exchange rate on date paid. Tax forms 1040x   If you have accrued foreign taxes that you are otherwise required to convert using the average exchange rate, you may elect to use the exchange rate in effect on the date the foreign taxes are paid if the taxes are denominated in a nonfunctional foreign currency. Tax forms 1040x If any of the accrued taxes are unpaid, you must translate them into U. Tax forms 1040x S. Tax forms 1040x dollars using the exchange rate on the last day of the U. Tax forms 1040x S. Tax forms 1040x tax year to which those taxes relate. Tax forms 1040x You may make the election for all nonfunctional currency foreign income taxes or only those nonfunctional currency foreign income taxes that are attributable to qualified business units with a U. Tax forms 1040x S. Tax forms 1040x dollar functional currency. Tax forms 1040x Once made, the election applies to the tax year for which made and all subsequent tax years unless revoked with the consent of the IRS. Tax forms 1040x The election is available for tax years beginning after 2004. Tax forms 1040x It must be made by the due date (including extensions) for filing the tax return for the first tax year to which the election applies. Tax forms 1040x Make the election by attaching a statement to the applicable tax return. Tax forms 1040x The statement must identify whether the election is made for all foreign taxes or only for foreign taxes attributable to qualified business units with a U. Tax forms 1040x S. Tax forms 1040x dollar functional currency. Tax forms 1040x Foreign Tax Redetermination A foreign tax redetermination is any change in your foreign tax liability that may affect your U. Tax forms 1040x S. Tax forms 1040x foreign tax credit claimed. Tax forms 1040x The year in which to claim the credit remains the year to which the foreign taxes paid or accrued relate, even if the change in foreign tax liability occurs in a later year. Tax forms 1040x If a foreign tax redetermination occurs, a redetermination of your U. Tax forms 1040x S. Tax forms 1040x tax liability is required if any of the following conditions apply. Tax forms 1040x The accrued taxes when paid differ from the amounts claimed as a credit. Tax forms 1040x The accrued taxes you claimed as a credit in one tax year are not paid within 2 years after the end of that tax year. Tax forms 1040x If this applies to you, you must reduce the credit previously claimed by the amount of the unpaid taxes. Tax forms 1040x You will not be allowed a credit for the unpaid taxes until you pay them. Tax forms 1040x When you pay the accrued taxes, a new foreign tax redetermination occurs and you must translate the taxes into U. Tax forms 1040x S. Tax forms 1040x dollars using the exchange rate as of the date they were paid. Tax forms 1040x The foreign tax credit is allowed for the year to which the foreign tax relates. Tax forms 1040x See Rate of exchange for foreign taxes paid , earlier, under Foreign Currency and Exchange Rates. Tax forms 1040x The foreign taxes you paid are refunded in whole or in part. Tax forms 1040x For taxes taken into account when accrued but translated into dollars on the date of payment, the dollar value of the accrued tax differs from the dollar value of the tax paid because of fluctuations in the exchange rate between the date of accrual and the date of payment. Tax forms 1040x However, no redetermination is required if the change in foreign tax liability for each foreign country is solely attributable to exchange rate fluctuations and is less than the smaller of: $10,000, or 2% of the total dollar amount of the foreign tax initially accrued for that foreign country for the U. Tax forms 1040x S. Tax forms 1040x tax year. Tax forms 1040x In this case, you must adjust your U. Tax forms 1040x S. Tax forms 1040x tax in the tax year in which the accrued foreign taxes are paid. Tax forms 1040x Notice to the Internal Revenue Service (IRS) of Redetermination You are required to notify the IRS about a foreign tax credit redetermination that affects your U. Tax forms 1040x S. Tax forms 1040x tax liability for each tax year affected by the redetermination. Tax forms 1040x In most cases, you must file Form 1040X, Amended U. Tax forms 1040x S. Tax forms 1040x Individual Income Tax Return, with a revised Form 1116 and a statement that contains information sufficient for the IRS to redetermine your U. Tax forms 1040x S. Tax forms 1040x tax liability for the year or years affected. Tax forms 1040x See Contents of statement , later. Tax forms 1040x You are not required to attach Form 1116 for a tax year affected by a redetermination if: The amount of your creditable taxes paid or accrued during the tax year is not more than $300 ($600 if married filing a joint return) as a result of the foreign tax redetermination, and You meet the requirements listed under Exemption from foreign tax credit limit under How To Figure the Credit, later. Tax forms 1040x There are other exceptions to this requirement. Tax forms 1040x They are discussed later under Due date of notification to IRS . Tax forms 1040x Contents of statement. Tax forms 1040x   The statement must include all of the following. Tax forms 1040x Your name, address, and taxpayer identification number. Tax forms 1040x The tax year or years that are affected by the foreign tax redetermination. Tax forms 1040x The date or dates the foreign taxes were accrued, if applicable. Tax forms 1040x The date or dates the foreign taxes were paid. Tax forms 1040x The amount of foreign taxes paid or accrued on each date (in foreign currency) and the exchange rate used to translate each amount. Tax forms 1040x Information sufficient to determine any interest due from or owing to you, including the amount of any interest paid to you by the foreign government and the dates received. Tax forms 1040x   In the case of any foreign taxes that were not paid before the date two years after the close of the tax year to which those taxes relate, you must provide the amount of those taxes in foreign currency and the exchange rate that was used to translate that amount when originally claimed as a credit. Tax forms 1040x   If any foreign tax was refunded in whole or in part, you must provide the date and amount (in foreign currency) of each refund, the exchange rate that was used to translate each amount when originally claimed as a credit, and the exchange rate for the date the refund was received (for purposes of computing foreign currency gain or loss under Internal Revenue Code section 988). Tax forms 1040x Due date of notification to IRS. Tax forms 1040x   If you pay less foreign tax than you originally claimed a credit for, in most cases you must file a notification by the due date (with extensions) of your original return for your tax year in which the foreign tax redetermination occurred. Tax forms 1040x There is no limit on the time the IRS has to redetermine and assess the correct U. Tax forms 1040x S. Tax forms 1040x tax due. Tax forms 1040x If you pay more foreign tax than you originally claimed a credit for, you have 10 years to file a claim for refund of U. Tax forms 1040x S. Tax forms 1040x taxes. Tax forms 1040x See Time Limit on Refund Claims , later. Tax forms 1040x   Exceptions to this due date are explained in the next two paragraphs. Tax forms 1040x Multiple redeterminations of U. Tax forms 1040x S. Tax forms 1040x tax liability for same tax year. Tax forms 1040x   Where more than one foreign tax redetermination requires a redetermination of U. Tax forms 1040x S. Tax forms 1040x tax liability for the same tax year and those redeterminations occur in the same tax year or within two consecutive tax years, you can file for that tax year one notification (Form 1040X with a Form 1116 and the required statement) that reflects all those tax redeterminations. Tax forms 1040x If you choose to file one notification, the due date for that notification is the due date of the original return (with extensions) for the year in which the first foreign tax redetermination that reduced your foreign tax liability occurred. Tax forms 1040x However, foreign tax redeterminations with respect to the tax year for which a redetermination of U. Tax forms 1040x S. Tax forms 1040x tax liability is required may occur after the due date for providing that notification. Tax forms 1040x In this situation, you may have to file more than one Form 1040X for that tax year. Tax forms 1040x Additional U. Tax forms 1040x S. Tax forms 1040x tax due eliminated by foreign tax credit carryback or carryover. Tax forms 1040x   If a foreign tax redetermination requires a redetermination of U. Tax forms 1040x S. Tax forms 1040x tax liability that would otherwise result in an additional amount of U. Tax forms 1040x S. Tax forms 1040x tax due, but the additional tax is eliminated by a carryback or carryover of an unused foreign tax, you do not have to amend your tax return for the year affected by the redetermination. Tax forms 1040x Instead, you can notify the IRS by attaching a statement to the original return for the tax year in which the foreign tax redetermination occurred. Tax forms 1040x You must file the statement by the due date (with extensions) of that return. Tax forms 1040x The statement must show the amount of the unused foreign taxes paid or accrued and a detailed schedule showing the computation of the carryback or carryover (including the amounts carried back or over to the year for which a redetermination on U. Tax forms 1040x S. Tax forms 1040x tax liability is required). Tax forms 1040x Failure-to-notify penalty. Tax forms 1040x   If you fail to notify the IRS of a foreign tax redetermination and cannot show reasonable cause for the failure, you may have to pay a penalty. Tax forms 1040x   For each month, or part of a month, that the failure continues, you pay a penalty of 5% of the tax due resulting from a redetermination of your U. Tax forms 1040x S. Tax forms 1040x tax. Tax forms 1040x This penalty cannot be more than 25% of the tax due. Tax forms 1040x Foreign tax refund. Tax forms 1040x   If you receive a foreign tax refund without interest from the foreign government, you will not have to pay interest on the amount of tax due resulting from the adjustment to your U. Tax forms 1040x S. Tax forms 1040x tax for the time before the date of the refund. Tax forms 1040x   However, if you receive a foreign tax refund with interest, you must pay interest to the IRS up to the amount of the interest paid to you by the foreign government. Tax forms 1040x The interest you must pay cannot be more than the interest you would have had to pay on taxes that were unpaid for any other reason for the same period. Tax forms 1040x Interest also is owed from the time you receive a refund until you pay the additional tax due. Tax forms 1040x Foreign tax imposed on foreign refund. Tax forms 1040x   If your foreign tax refund is taxed by the foreign country, you cannot take a separate credit or deduction for this additional foreign tax. Tax forms 1040x However, when you refigure the foreign tax credit taken for the original foreign tax, reduce the amount of the refund by the foreign tax paid on the refund. Tax forms 1040x Example. Tax forms 1040x You paid a foreign income tax of $3,000 in 2011, and received a foreign tax refund of $500 in 2013 on which a foreign tax of $100 was imposed. Tax forms 1040x When you refigure your credit for 2011, you must reduce the $3,000 you paid by $400. Tax forms 1040x Time Limit on Refund Claims You have 10 years to file a claim for refund of U. Tax forms 1040x S. Tax forms 1040x tax if you find that you paid or accrued a larger foreign tax than you claimed a credit for. Tax forms 1040x The 10-year period begins the day after the regular due date for filing the return (without extensions) for the year in which the taxes were actually paid or accrued. Tax forms 1040x You have 10 years to file your claim regardless of whether you claim the credit for taxes paid or taxes accrued. Tax forms 1040x The 10-year period applies to claims for refund or credit based on: Fixing math errors in figuring qualified foreign taxes, Reporting qualified foreign taxes not originally reported on the return, or Any other change in the size of the credit (including one caused by correcting the foreign tax credit limit). Tax forms 1040x The special 10-year period also applies to making or changing your choice to claim a deduction or credit for foreign taxes. Tax forms 1040x See Making or Changing Your Choice discussed earlier under Choosing To Take Credit or Deduction. Tax forms 1040x Who Can Take the Credit? U. Tax forms 1040x S. Tax forms 1040x citizens, resident aliens, and nonresident aliens who paid foreign income tax and are subject to U. Tax forms 1040x S. Tax forms 1040x tax on foreign source income may be able to take a foreign tax credit. Tax forms 1040x U. Tax forms 1040x S. Tax forms 1040x Citizens If you are a U. Tax forms 1040x S. Tax forms 1040x citizen, you are taxed by the United States on your worldwide income wherever you live. Tax forms 1040x You are normally entitled to take a credit for foreign taxes you pay or accrue. Tax forms 1040x Resident Aliens If you are a resident alien of the United States, you can take a credit for foreign taxes subject to the same general rules as U. Tax forms 1040x S. Tax forms 1040x citizens. Tax forms 1040x If you are a bona fide resident of Puerto Rico for the entire tax year, you also come under the same rules. Tax forms 1040x Usually, you can take a credit only for those foreign taxes imposed on income you actually or constructively received while you had resident alien status. Tax forms 1040x For information on alien status, see Publication 519. Tax forms 1040x Nonresident Aliens If you are a nonresident alien, you cannot take the credit in most cases. Tax forms 1040x However, you may be able to take the credit if: You were a bona fide resident of Puerto Rico during your entire tax year, or You pay or accrue tax to a foreign country or U. Tax forms 1040x S. Tax forms 1040x possession on income from foreign sources that is effectively connected with a trade or business in the United States. Tax forms 1040x But if you must pay tax to a foreign country or U. Tax forms 1040x S. Tax forms 1040x possession on income from U. Tax forms 1040x S. Tax forms 1040x sources only because you are a citizen or a resident of that country or U. Tax forms 1040x S. Tax forms 1040x possession, do not use that tax in figuring the amount of your credit. Tax forms 1040x For information on alien status and effectively connected income, see Publication 519. Tax forms 1040x What Foreign Taxes Qualify for the Credit? In most cases, the following four tests must be met for any foreign tax to qualify for the credit. Tax forms 1040x The tax must be imposed on you. Tax forms 1040x You must have paid or accrued the tax. Tax forms 1040x The tax must be the legal and actual foreign tax liability. Tax forms 1040x The tax must be an income tax (or a tax in lieu of an income tax). Tax forms 1040x Certain foreign taxes do not qualify for the credit even if the four tests are met. Tax forms 1040x See Foreign Taxes for Which You Cannot Take a Credit, later. Tax forms 1040x Tax Must Be Imposed on You You can claim a credit only for foreign taxes that are imposed on you by a foreign country or U. Tax forms 1040x S. Tax forms 1040x possession. Tax forms 1040x For example, a tax that is deducted from your wages is considered to be imposed on you. Tax forms 1040x You cannot shift the right to claim the credit by contract or other means. Tax forms 1040x Foreign country. Tax forms 1040x   A foreign country includes any foreign state and its political subdivisions. Tax forms 1040x Income, war profits, and excess profits taxes paid or accrued to a foreign city or province qualify for the foreign tax credit. Tax forms 1040x U. Tax forms 1040x S. Tax forms 1040x possessions. Tax forms 1040x   For foreign tax credit purposes, all qualified taxes paid to U. Tax forms 1040x S. Tax forms 1040x possessions are considered foreign taxes. Tax forms 1040x For this purpose, U. Tax forms 1040x S. Tax forms 1040x possessions include Puerto Rico and American Samoa. Tax forms 1040x   When the term “foreign country” is used in this publication, it includes U. Tax forms 1040x S. Tax forms 1040x possessions unless otherwise stated. Tax forms 1040x You Must Have Paid or Accrued the Tax In most cases, you can claim the credit only if you paid or accrued the foreign tax to a foreign country or U. Tax forms 1040x S. Tax forms 1040x possession. Tax forms 1040x However, the paragraphs that follow describe some instances in which you can claim the credit even if you did not directly pay or accrue the tax yourself. Tax forms 1040x Joint return. Tax forms 1040x   If you file a joint return, you can claim the credit based on the total foreign income taxes paid or accrued by you and your spouse. Tax forms 1040x Combined income. Tax forms 1040x   If foreign tax is imposed on the combined income of two or more persons (for example, spouses), the tax is allocated among, and considered paid by, these persons on a pro rata basis in proportion to each person's portion of the combined income, as determined under foreign law and Regulations section 1. Tax forms 1040x 901-2(f)(3)(iii). Tax forms 1040x Combined income with respect to each foreign tax that is imposed on a combined basis (and combined income subject to tax exemption or preferential tax rates) is computed separately, and the tax on that combined income is allocated separately. Tax forms 1040x   These rules apply to foreign taxes paid or accrued in tax years beginning after February 14, 2012. Tax forms 1040x However, you can choose to apply the new rules to foreign taxes paid or accrued in tax years beginning after December 31, 2010, and before February 15, 2012. Tax forms 1040x For more details, see paragraphs (f) and (h) of Regulations section 1. Tax forms 1040x 901-2. Tax forms 1040x For similar rules applicable to prior tax years, see Regulations section 1. Tax forms 1040x 901-2 (revised as of April 1, 2011). Tax forms 1040x Example. Tax forms 1040x You and your spouse reside in Country X, which imposes income tax on your combined incomes. Tax forms 1040x Both of you use the “u” as your functional currency. Tax forms 1040x Country X apportions tax based on income. Tax forms 1040x You had income of 30,000u and your spouse had income of 20,000u. Tax forms 1040x Your filing status on your U. Tax forms 1040x S. Tax forms 1040x income tax return is married filing separately. Tax forms 1040x You can claim only 60% (30,000u/50,000u) of the foreign taxes imposed on your income on your U. Tax forms 1040x S income tax return. Tax forms 1040x Your spouse can claim only 40% (20,000u/50,000u). Tax forms 1040x Partner or S corporation shareholder. Tax forms 1040x   If you are a member of a partnership, or a shareholder in an S corporation, you can claim the credit based on your proportionate share of the foreign income taxes paid or accrued by the partnership or the S corporation. Tax forms 1040x These amounts will be shown on the Schedule K-1 you receive from the partnership or S corporation. Tax forms 1040x However, if you are a shareholder in an S corporation that in turn owns stock in a foreign corporation, you cannot claim a credit for your share of foreign taxes paid by the foreign corporation. Tax forms 1040x Beneficiary. Tax forms 1040x   If you are a beneficiary of an estate or trust, you may be able to claim the credit based on your proportionate share of foreign income taxes paid or accrued by the estate or trust. Tax forms 1040x This amount will be shown on the Schedule K-1 you receive from the estate or trust. Tax forms 1040x However, you must show that the tax was imposed on income of the estate and not on income received by the decedent. Tax forms 1040x Mutual fund shareholder. Tax forms 1040x   If you are a shareholder of a mutual fund or other regulated investment company (RIC), you may be able to claim the credit based on your share of foreign income taxes paid by the fund if it chooses to pass the credit on to its shareholders. Tax forms 1040x You should receive from the mutual fund or other RIC a Form 1099-DIV, or similar statement, showing your share of the foreign income, and your share of the foreign taxes paid. Tax forms 1040x If you do not receive this information, you will need to contact the fund. Tax forms 1040x Controlled foreign corporation shareholder. Tax forms 1040x   If you are a shareholder of a controlled foreign corporation and choose to be taxed at corporate rates on the amount you must include in gross income from that corporation, you can claim the credit based on your share of foreign taxes paid or accrued by the controlled foreign corporation. Tax forms 1040x If you make this election, you must claim the credit by filing Form 1118, Foreign Tax Credit—Corporations. Tax forms 1040x Controlled foreign corporation. Tax forms 1040x   A controlled foreign corporation is a foreign corporation in which U. Tax forms 1040x S. Tax forms 1040x shareholders own more than 50% of the voting power or value of the stock. Tax forms 1040x You are considered a U. Tax forms 1040x S. Tax forms 1040x shareholder if you own, directly or indirectly, 10% or more of the total voting power of all classes of the foreign corporation's stock. Tax forms 1040x See Internal Revenue Code sections 951(b) and 958(b) for more information. Tax forms 1040x Tax Must Be the Legal and Actual Foreign Tax Liability The amount of foreign tax that qualifies is not necessarily the amount of tax withheld by the foreign country. Tax forms 1040x Only the legal and actual foreign tax liability that you paid or accrued during the year qualifies for the credit. Tax forms 1040x Foreign tax refund. Tax forms 1040x   You cannot take a foreign tax credit for income taxes paid to a foreign country if it is reasonably certain the amount would be refunded, credited, rebated, abated, or forgiven if you made a claim. Tax forms 1040x   For example, the United States has tax treaties with many countries allowing U. Tax forms 1040x S. Tax forms 1040x citizens and residents reductions in the rates of tax of those foreign countries. Tax forms 1040x However, some treaty countries require U. Tax forms 1040x S. Tax forms 1040x citizens and residents to pay the tax figured without regard to the lower treaty rates and then claim a refund for the amount by which the tax actually paid is more than the amount of tax figured using the lower treaty rate. Tax forms 1040x The qualified foreign tax is the amount figured using the lower treaty rate and not the amount actually paid, because the excess tax is refundable. Tax forms 1040x Subsidy received. Tax forms 1040x   Tax payments a foreign country returns to you in the form of a subsidy do not qualify for the foreign tax credit. Tax forms 1040x This rule applies even if the subsidy is given to a person related to you, or persons who participated with you in a transaction or a related transaction. Tax forms 1040x A subsidy can be provided by any means but must be determined, directly or indirectly, in relation to the amount of tax, or to the base used to figure the tax. Tax forms 1040x   The term “subsidy” includes any type of benefit. Tax forms 1040x Some ways of providing a subsidy are refunds, credits, deductions, payments, or discharges of obligations. Tax forms 1040x Shareholder receiving refund for corporate tax in integrated system. Tax forms 1040x   Under some foreign tax laws and treaties, a shareholder is considered to have paid part of the tax that is imposed on the corporation. Tax forms 1040x You may be able to claim a refund of these taxes from the foreign government. Tax forms 1040x You must include the refund (including any amount withheld) in your income in the year received. Tax forms 1040x Any tax withheld from the refund is a qualified foreign tax. Tax forms 1040x Example. Tax forms 1040x You are a shareholder of a French corporation. Tax forms 1040x You receive a $100 refund of the tax paid to France by the corporation on the earnings distributed to you as a dividend. Tax forms 1040x The French government imposes a 15% withholding tax ($15) on the refund you received. Tax forms 1040x You receive a check for $85. Tax forms 1040x You include $100 in your income. Tax forms 1040x The $15 of tax withheld is a qualified foreign tax. Tax forms 1040x Tax Must Be an Income Tax (or Tax in Lieu of Income Tax) In most cases, only income, war profits, and excess profits taxes (income taxes) qualify for the foreign tax credit. Tax forms 1040x Foreign taxes on wages, dividends, interest, and royalties qualify for the credit in most cases. Tax forms 1040x Furthermore, foreign taxes on income can qualify even though they are not imposed under an income tax law if the tax is in lieu of an income, war profits, or excess profits tax. Tax forms 1040x See Taxes in Lieu of Income Taxes , later. Tax forms 1040x Income Tax Simply because the levy is called an income tax by the foreign taxing authority does not make it an income tax for this purpose. Tax forms 1040x A foreign levy is an income tax only if it meets both of the following requirements. Tax forms 1040x It is a tax; that is, you have to pay it and you get no specific economic benefit (discussed below) from paying it. Tax forms 1040x The predominant character of the tax is that of an income tax in the U. Tax forms 1040x S. Tax forms 1040x sense. Tax forms 1040x A foreign levy may meet these requirements even if the foreign tax law differs from U. Tax forms 1040x S. Tax forms 1040x tax law. Tax forms 1040x The foreign law may include in income items that U. Tax forms 1040x S. Tax forms 1040x law does not include, or it may allow certain exclusions or deductions that U. Tax forms 1040x S. Tax forms 1040x law does not allow. Tax forms 1040x Specific economic benefit. Tax forms 1040x   In most cases, you get a specific economic benefit if you receive, or are considered to receive, an economic benefit from the foreign country imposing the levy, and: If there is a generally imposed income tax, the economic benefit is not available on substantially the same terms to all persons subject to the income tax, or If there is no generally imposed income tax, the economic benefit is not available on substantially the same terms to the population of the foreign country in general. Tax forms 1040x   You are considered to receive a specific economic benefit if you have a business transaction with a person who receives a specific economic benefit from the foreign country and, under the terms and conditions of the transaction, you receive directly or indirectly all or part of the benefit. Tax forms 1040x   However, see the exception discussed later under Pension, unemployment, and disability fund payments . Tax forms 1040x Economic benefits. Tax forms 1040x   Economic benefits include the following. Tax forms 1040x Goods. Tax forms 1040x Services. Tax forms 1040x Fees or other payments. Tax forms 1040x Rights to use, acquire, or extract resources, patents, or other property the foreign country owns or controls. Tax forms 1040x Discharges of contractual obligations. Tax forms 1040x   In most cases, the right or privilege merely to engage in business is not an economic benefit. Tax forms 1040x Dual-capacity taxpayers. Tax forms 1040x   If you are subject to a foreign country's levy and you also receive a specific economic benefit from that foreign country, you are a “dual-capacity taxpayer. Tax forms 1040x ” As a dual-capacity taxpayer, you cannot claim a credit for any part of the foreign levy, unless you establish that the amount paid under a distinct element of the foreign levy is a tax, rather than a compulsory payment for a direct or indirect specific economic benefit. Tax forms 1040x    For more information on how to establish amounts paid under separate elements of a levy, write to: Internal Revenue Service International Section Philadelphia, PA 19255-0725 Pension, unemployment, and disability fund payments. Tax forms 1040x   A foreign tax imposed on an individual to pay for retirement, old-age, death, survivor, unemployment, illness, or disability benefits, or for substantially similar purposes, is not payment for a specific economic benefit if the amount of the tax does not depend on the age, life expectancy, or similar characteristics of that individual. Tax forms 1040x    No deduction or credit is allowed, however, for social security taxes paid or accrued to a foreign country with which the United States has a social security agreement. Tax forms 1040x For more information about these agreements, see Publication 54. Tax forms 1040x Soak-up taxes. Tax forms 1040x   A foreign tax is not predominantly an income tax and does not qualify for credit to the extent it is a soak-up tax. Tax forms 1040x A tax is a soak-up tax to the extent that liability for it depends on the availability of a credit for it against income tax imposed by another country. Tax forms 1040x This rule applies only if and to the extent that the foreign tax would not be imposed if the credit were not available. Tax forms 1040x Penalties and interest. Tax forms 1040x   Amounts paid to a foreign government to satisfy a liability for interest, fines, penalties, or any similar obligation are not taxes and do not qualify for the credit. Tax forms 1040x Taxes not based on income. Tax forms 1040x   Foreign taxes based on gross receipts or the number of units produced, rather than on realized net income, do not qualify unless they are imposed in lieu of an income tax, as discussed next. Tax forms 1040x Taxes based on assets, such as property taxes, do not qualify for the credit. Tax forms 1040x Taxes in Lieu of Income Taxes A tax paid or accrued to a foreign country qualifies for the credit if it is imposed in lieu of an income tax otherwise generally imposed. Tax forms 1040x A foreign levy is a tax in lieu of an income tax only if: It is not payment for a specific economic benefit as discussed earlier, and The tax is imposed in place of, and not in addition to, an income tax otherwise generally imposed. Tax forms 1040x A tax in lieu of an income tax does not have to be based on realized net income. Tax forms 1040x A foreign tax imposed on gross income, gross receipts or sales, or the number of units produced or exported can qualify for the credit. Tax forms 1040x In most cases, a soak-up tax (discussed earlier) does not qualify as a tax in lieu of an income tax. Tax forms 1040x However, if the foreign country imposes a soak-up tax in lieu of an income tax, the amount that does not qualify for foreign tax credit is the lesser of the following amounts. Tax forms 1040x The soak-up tax. Tax forms 1040x The foreign tax you paid that is more than the amount you would have paid if you had been subject to the generally imposed income tax. Tax forms 1040x Foreign Taxes for Which You Cannot Take a Credit This part discusses the foreign taxes for which you cannot take a credit. Tax forms 1040x These are: Taxes on excluded income, Taxes for which you can only take an itemized deduction, Taxes on foreign mineral income, Taxes from international boycott operations, A portion of taxes on combined foreign oil and gas income, Taxes of U. Tax forms 1040x S. Tax forms 1040x persons controlling foreign corporations and partnerships who fail to file required information returns, and Taxes related to a foreign tax splitting event. Tax forms 1040x Taxes on Excluded Income You cannot take a credit for foreign taxes paid or accrued on certain income that is excluded from U. Tax forms 1040x S. Tax forms 1040x gross income. Tax forms 1040x Foreign Earned Income and Housing Exclusions You must reduce your foreign taxes available for the credit by the amount of those taxes paid or accrued on income that is excluded from U. Tax forms 1040x S. Tax forms 1040x income under the foreign earned income exclusion or the foreign housing exclusion. Tax forms 1040x See Publication 54 for more information on the foreign earned income and housing exclusions. Tax forms 1040x Wages completely excluded. Tax forms 1040x   If your wages are completely excluded, you cannot take a credit for any of the foreign taxes paid or accrued on these wages. Tax forms 1040x Wages partly excluded. Tax forms 1040x   If only part of your wages is excluded, you cannot take a credit for the foreign income taxes allocable to the excluded part. Tax forms 1040x You find the amount allocable to your excluded wages by multiplying the foreign tax paid or accrued on foreign earned income received or accrued during the tax year by a fraction. Tax forms 1040x   The numerator of the fraction is your foreign earned income and housing amounts excluded under the foreign earned income and housing exclusions for the tax year minus otherwise deductible expenses definitely related and properly apportioned to that income. Tax forms 1040x Deductible expenses do not include the foreign housing deduction. Tax forms 1040x   The denominator is your total foreign earned income received or accrued during the tax year minus all deductible expenses allocable to that income (including the foreign housing deduction). Tax forms 1040x If the foreign law taxes foreign earned income and some other income (for example, earned income from U. Tax forms 1040x S. Tax forms 1040x sources or a type of income not subject to U. Tax forms 1040x S. Tax forms 1040x tax), and the taxes on the other income cannot be segregated, the denominator of the fraction is the total amount of income subject to the foreign tax minus deductible expenses allocable to that income. Tax forms 1040x Example. Tax forms 1040x You are a U. Tax forms 1040x S. Tax forms 1040x citizen and a cash basis taxpayer, employed by Company X and living in Country A. Tax forms 1040x Your records show the following: Foreign earned income received $125,000 Unreimbursed business travel expenses 20,000 Income tax paid to Country A 30,000 Exclusion of foreign earned  income and housing allowance 97,600     Because you can exclude part of your wages, you cannot claim a credit for part of the foreign taxes. Tax forms 1040x To find that part, do the following. Tax forms 1040x First, find the amount of business expenses allocable to excluded wages and therefore not deductible. Tax forms 1040x To do this, multiply the otherwise deductible expenses by a fraction. Tax forms 1040x That fraction is the excluded wages over your foreign earned income. Tax forms 1040x   $20,000 × $97,600 $125,000 = $15,616             Next, find the numerator of the fraction by which you will multiply the foreign taxes paid. Tax forms 1040x To do this, subtract business expenses allocable to excluded wages ($15,616) from excluded wages ($97,600). Tax forms 1040x The result is $81,984. Tax forms 1040x Then, find the denominator of the fraction by subtracting all your deductible expenses from all your foreign earned income ($125,000 − $20,000 = $105,000). Tax forms 1040x Finally, multiply the foreign tax you paid by the resulting fraction. Tax forms 1040x   $30,000 × $81,984  $105,000 = $23,424 The amount of Country A tax you cannot take a credit for is $23,424. Tax forms 1040x Taxes on Income From Puerto Rico Exempt From U. Tax forms 1040x S. Tax forms 1040x Tax If you have income from Puerto Rican sources that is not taxable, you must reduce your foreign taxes paid or accrued by the taxes allocable to the exempt income. Tax forms 1040x For information on figuring the reduction, see Publication 570. Tax forms 1040x Possession Exclusion If you are a bona fide resident of American Samoa and exclude income from sources in American Samoa, you cannot take a credit for the taxes you pay or accrue on the excluded income. Tax forms 1040x For more information on this exclusion, see Publication 570. Tax forms 1040x Extraterritorial Income Exclusion You cannot take a credit for taxes you pay on qualifying foreign trade income excluded on Form 8873, Extraterritorial Income Exclusion. Tax forms 1040x However, see Internal Revenue Code section 943(d) for an exception for certain withholding taxes. Tax forms 1040x Taxes for Which You Can Only Take an Itemized Deduction You cannot claim a foreign tax credit for foreign income taxes paid or accrued under the following circumstances. Tax forms 1040x However, you can claim an itemized deduction for these taxes. Tax forms 1040x See Choosing To Take Credit or Deduction , earlier. Tax forms 1040x Taxes Imposed By Sanctioned Countries (Section 901(j) Income) You cannot claim a foreign tax credit for income taxes paid or accrued to any country if the income giving rise to the tax is for a period (the sanction period) during which: The Secretary of State has designated the country as one that repeatedly provides support for acts of international terrorism, The United States has severed or does not conduct diplomatic relations with the country, or The United States does not recognize the country's government, and that government is not otherwise eligible to purchase defense articles or services under the Arms Export Control Act. Tax forms 1040x The following countries meet this description for 2013. Tax forms 1040x Income taxes paid or accrued to these countries in 2013 do not qualify for the credit. Tax forms 1040x Cuba. Tax forms 1040x Iran. Tax forms 1040x Libya (but see Note later). Tax forms 1040x North Korea. Tax forms 1040x Sudan. Tax forms 1040x Syria. Tax forms 1040x Waiver of denial of the credit. Tax forms 1040x   A waiver can be granted to a sanctioned country if the President of the United States determines that granting the waiver is in the national interest of the United States and will expand trade and investment opportunities for U. Tax forms 1040x S. Tax forms 1040x companies in the sanctioned country. Tax forms 1040x The President must report to Congress his intentions to grant the waiver and his reasons for granting the waiver not less than 30 days before the date on which the waiver is granted. Tax forms 1040x Note. Tax forms 1040x Effective December 10, 2004, the President granted a waiver to Libya. Tax forms 1040x Income taxes arising on or after this date qualify for the credit if they meet the other requirements in this publication. Tax forms 1040x Limit on credit. Tax forms 1040x   In figuring the foreign tax credit limit, discussed later, income from a sanctioned country is a separate category of foreign income unless a Presidential waiver is granted. Tax forms 1040x You must fill out a separate Form 1116 for this income. Tax forms 1040x This will prevent you from claiming a credit for foreign taxes paid or accrued to the sanctioned country. Tax forms 1040x Example. Tax forms 1040x You lived and worked in Iran until August, when you were transferred to Italy. Tax forms 1040x You paid taxes to each country on the income earned in that country. Tax forms 1040x You cannot claim a foreign tax credit for the foreign taxes paid on the income earned in Iran. Tax forms 1040x Because the income earned in Iran is a separate category of foreign income, you must fill out a separate Form 1116 for that income. Tax forms 1040x You cannot take a credit for taxes paid on the income earned in Iran, but that income is taxable by the United States. Tax forms 1040x Figuring the credit when a sanction ends. Tax forms 1040x    Table 1 lists the countries for which sanctions have ended or for which a Presidential waiver has been granted. Tax forms 1040x For any of these countries, you can claim a foreign tax credit for the taxes paid or accrued to that country on the income for the period that begins after the end of the sanction period or the date the Presidential waiver was granted. Tax forms 1040x Example. Tax forms 1040x The sanctions against Country X ended on July 31. Tax forms 1040x On August 19, you receive a distribution from a mutual fund of Country X income. Tax forms 1040x The fund paid Country X income tax for you on the distribution. Tax forms 1040x Because the distribution was made after the sanction ended, you may include the foreign tax paid on the distribution to compute your foreign tax credit. Tax forms 1040x Amounts for the nonsanctioned period. Tax forms 1040x   If a sanction period ends (or a Presidential waiver is granted) during your tax year and you are not able to determine the actual income and taxes for that period, you can allocate amounts to that period based on the number of days in the period that fall in your tax year. Tax forms 1040x Multiply the income or taxes for the year by the following fraction to determine the amounts allocable to that period. Tax forms 1040x   Number of nonsanctioned days in year  Number of days in year Example. Tax forms 1040x You are a calendar year filer and received $20,000 of income from Country X in 2013 on which you paid tax of $4,500. Tax forms 1040x Sanctions against Country X ended on July 11, 2013. Tax forms 1040x You are unable to determine how much of the income or tax is for the nonsanctioned period. Tax forms 1040x Because your tax year starts on January 1, and the Country X sanction ended on July 11, 2013, 173 days of your tax year are in the nonsanctioned period. Tax forms 1040x You would compute the income for the nonsanctioned period as follows. Tax forms 1040x 173 365 × $20,000 = $9,479             You would figure the tax for the nonsanctioned period as follows. Tax forms 1040x 173 365 × $4,500 = $2,133 To figure your foreign tax credit, you would use $9,479 as the income from Country X and $2,133 as the tax. Tax forms 1040x Further information. Tax forms 1040x   The rules for figuring the foreign tax credit after a country's sanction period ends are more fully explained in Revenue Ruling 92-62, Cumulative Bulletin 1992-2, page 193. Tax forms 1040x This Cumulative Bulletin can be found in many libraries and IRS offices. Tax forms 1040x Table 1. Tax forms 1040x Countries Removed From the Sanction List or Granted Presidential Waiver   Sanction Period Country Starting Date Ending Date Iraq February 1, 1991 June 27, 2004 Libya January 1, 1987 December 9, 2004* *Presidential waiver granted for qualified income taxes arising after December 9, 2004. Tax forms 1040x Taxes Imposed on Certain Dividends You cannot claim a foreign tax credit for withholding tax (defined later ) on dividends paid or accrued if either of the following applies to the dividends. Tax forms 1040x The dividends are on stock you held for less than 16 days during the 31-day period that begins 15 days before the ex-dividend date (defined later). Tax forms 1040x The dividends are for a period or periods totaling more than 366 days on preferred stock you held for less than 46 days during the 91-day period that begins 45 days before the ex-dividend date. Tax forms 1040x If the dividend is not for more than 366 days, rule (1) applies to the preferred stock. Tax forms 1040x When figuring how long you held the stock, count the day you sold it, but do not count the day you acquired it or any days on which you were protected from risk of loss. Tax forms 1040x Regardless of how long you held the stock, you cannot claim the credit to the extent you have an obligation under a short sale or otherwise to make payments related to the dividend for positions in substantially similar or related property. Tax forms 1040x Withholding tax. Tax forms 1040x   For this purpose, withholding tax includes any tax determined on a gross basis. Tax forms 1040x It does not include any tax which is in the nature of a prepayment of a tax imposed on a net basis. Tax forms 1040x Ex-dividend date. Tax forms 1040x   The ex-dividend date is the first date following the declaration of a dividend on which the purchaser of a stock is not entitled to receive the next dividend payment. Tax forms 1040x Example 1. Tax forms 1040x You bought common stock from a foreign corporation on November 3. Tax forms 1040x You sold the stock on November 19. Tax forms 1040x You received a dividend on this stock because you owned it on the ex-dividend date of November 5. Tax forms 1040x To claim the credit, you must have held the stock for at least 16 days within the 31-day period that began on October 21 (15 days before the ex-dividend date). Tax forms 1040x Because you held the stock for 16 days, from November 4 until November 19, you are entitled to the credit. Tax forms 1040x Example 2. Tax forms 1040x The facts are the same as in Example 1 except that you sold the stock on November 14. Tax forms 1040x You held the stock for only 11 days. Tax forms 1040x You are not entitled to the credit. Tax forms 1040x Exception. Tax forms 1040x   If you are a securities dealer who actively conducts business in a foreign country, you may be able to claim a foreign tax credit for qualified taxes paid on dividends regardless of how long you held the stock or whether you were obligated to make payments for positions in substantially similar or related property. Tax forms 1040x See section 901(k)(4) of the Internal Revenue Code for more information. Tax forms 1040x Taxes Withheld on Income or Gain (Other Than Dividends) For income or gain (other than dividends) paid or accrued on property, you cannot claim a foreign tax credit for withholding tax (defined later): If you have not held the property for at least 16 days during the 31-day period that begins 15 days before the date on which the right to receive the payment arises, or To the extent you have to make related payments on positions in substantially similar or related property. Tax forms 1040x When figuring how long you held the property, count the day you sold it, but do not count the day you acquired it or any days on which you were protected from risk of loss. Tax forms 1040x Withholding tax. Tax forms 1040x   For this purpose, withholding tax includes any tax determined on a gross basis. Tax forms 1040x It does not include any tax which is in the nature of a prepayment of a tax imposed on a net basis. Tax forms 1040x Exception for dealers. Tax forms 1040x   If you are a dealer in property who actively conducts business in a foreign country, you may be able to claim a foreign tax credit for qualified taxes withheld on income or gain from that property regardless of how long you held it or whether you have to make related payments on positions in substantially similar or related property. Tax forms 1040x See section 901(I)(2) of the Internal Revenue Code for more information. Tax forms 1040x Covered Asset Acquisition ???You cannot take a credit for the disqualified portion of any foreign tax paid or accrued in connection with a covered asset acquisition. Tax forms 1040x A covered asset acquisition includes certain acquisitions that result in a stepped-up basis for U. Tax forms 1040x S. Tax forms 1040x tax purposes but not for foreign tax purposes. Tax forms 1040x For more information, see Internal Revenue Code section 901(m). Tax forms 1040x The IRS intends to issue guidance that will explain this provision in greater detail. Tax forms 1040x Taxes in Connection With the Purchase or Sale of Oil or Gas You cannot claim a foreign tax credit for taxes paid or accrued to a foreign country in connection with the purchase or sale of oil or gas extracted in that country if you do not have an economic interest in the oil or gas, and the purchase price or sales price is different from the fair market value of the oil or gas at the time of purchase or sale. Tax forms 1040x Taxes on Foreign Mineral Income You must reduce any taxes paid or accrued to a foreign country or possession on mineral income from that country or possession if you were allowed a deduction for percentage depletion for any part of the mineral income. Tax forms 1040x For details, see Regulations section 1. Tax forms 1040x 901-3. Tax forms 1040x Taxes From International Boycott Operations If you participate in or cooperate with an international boycott during the tax year, your foreign taxes resulting from boycott activities will reduce the total taxes available for credit. Tax forms 1040x See the instructions for line 12 in the Form 1116 instructions to figure this reduction. Tax forms 1040x In most cases, this rule does not apply to employees with wages who are working and living in boycotting countries, or to retirees with pensions who are living in these countries. Tax forms 1040x List of boycotting countries. Tax forms 1040x   A list of the countries which may require participation in or cooperation with an international boycott is published by the Department of the Treasury. Tax forms 1040x As of November 2013, the following countries are listed. Tax forms 1040x Iraq. Tax forms 1040x Kuwait. Tax forms 1040x Lebanon. Tax forms 1040x Libya. Tax forms 1040x Qatar. Tax forms 1040x Saudi Arabia. Tax forms 1040x Syria. Tax forms 1040x United Arab Emirates. Tax forms 1040x Yemen. Tax forms 1040x    For information concerning changes to the list, write to: Internal Revenue Service International Section Philadelphia, PA 19255-0725 Determinations of whether the boycott rule applies. Tax forms 1040x   You may request a determination from the Internal Revenue Service as to whether a particular operation constitutes participation in or cooperation with an international boycott. Tax forms 1040x The procedures for obtaining a determination from the Service are outlined in Revenue Procedure 77-9 in Cumulative Bulletin 1977-1. Tax forms 1040x Cumulative Bulletins are available in most IRS offices and you are welcome to read them there. Tax forms 1040x Public inspection. Tax forms 1040x   A determination and any related background file is open to public inspection. Tax forms 1040x However, your identity and certain other information will remain confidential. Tax forms 1040x Reporting requirements. Tax forms 1040x   You must file a report with the IRS if you or any of the following persons have operations in or related to a boycotting country or with the government, a company, or a national of a boycotting country. Tax forms 1040x A foreign corporation in which you own 10% or more of the voting power of all voting stock but only if you own the stock of the foreign corporation directly or through foreign entities. Tax forms 1040x A partnership in which you are a partner. Tax forms 1040x A trust you are treated as owning. Tax forms 1040x Form 5713 required. Tax forms 1040x   If you have to file a report, you must use Form 5713, International Boycott Report, and attach all supporting schedules. Tax forms 1040x See the Instructions for Form 5713 for information on when and where to file the form. Tax forms 1040x Penalty for failure to file. Tax forms 1040x   If you willfully fail to make a report, in addition to other penalties, you may be fined $25,000 or imprisoned for no more than one year, or both. Tax forms 1040x Taxes on Combined Foreign Oil and Gas Income You must reduce your foreign taxes by a portion of any foreign taxes imposed on combined foreign oil and gas income. Tax forms 1040x The amount of the reduction is the amount by which your foreign oil and gas taxes exceed the amount of your combined foreign oil and gas income multiplied by a fraction equal to your pre-credit U. Tax forms 1040x S. Tax forms 1040x tax liability (Form 1040, line 44) divided by your worldwide taxable income. Tax forms 1040x You may be entitled to carry over to other years taxes reduced under this rule. Tax forms 1040x See Internal Revenue Code section 907(f). Tax forms 1040x Combined foreign oil and gas income means the sum of foreign oil related income and foreign oil and gas extraction income. Tax forms 1040x Foreign oil and gas taxes are the sum of foreign oil and gas extraction taxes and foreign oil related taxes. Tax forms 1040x Taxes of U. Tax forms 1040x S. Tax forms 1040x Persons Controlling Foreign Corporations and Partnerships If you had control of a foreign corporation or a foreign partnership for the annual accounting period of that corporation or partnership that ended with or within your tax year, you may have to file an annual information return. Tax forms 1040x If you do not file the required information return, you may have to reduce the foreign taxes that may be used for the foreign tax credit. Tax forms 1040x See Penalty for not filing Form 5471 or Form 8865 , later. Tax forms 1040x U. Tax forms 1040x S. Tax forms 1040x persons controlling foreign corporations. Tax forms 1040x   If you are a U. Tax forms 1040x S. Tax forms 1040x citizen or resident who had control of a foreign corporation for an uninterrupted period of at least 30 days during the annual accounting period of that corporation, you may have to file an annual information return on Form 5471, Information Return of U. Tax forms 1040x S. Tax forms 1040x Persons With Respect To Certain Foreign Corporations. Tax forms 1040x Under this rule, you generally had control of a foreign corporation if at any time during your tax year you owned: Stock possessing more than 50% of the total combined voting power of all classes of stock entitled to vote, or More than 50% of the total value of shares of all classes of stock of the foreign corporation. Tax forms 1040x U. Tax forms 1040x S. Tax forms 1040x persons controlling foreign partnerships. Tax forms 1040x   If you are a U. Tax forms 1040x S. Tax forms 1040x citizen or resident who had control of a foreign partnership at any time during the partnership's tax year, you may have to file