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Tax Return Form 1040ez

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Tax Return Form 1040ez

Tax return form 1040ez 1. Tax return form 1040ez   Scholarships, Fellowships, Grants, and Tuition Reductions Table of Contents Reminder Introduction Scholarships and FellowshipsTax-Free Scholarships and Fellowships Taxable Scholarships and Fellowships Reporting Scholarships and Fellowships Other Types of Educational AssistanceFulbright Grants Pell Grants and Other Title IV Need-Based Education Grants Payment to Service Academy Cadets Veterans' Benefits Qualified Tuition Reduction Reminder Individual retirement arrangements (IRAs). Tax return form 1040ez  You can set up and make contributions to an IRA if you receive taxable compensation. Tax return form 1040ez Under this rule, a taxable scholarship or fellowship is compensation only if it is shown in box 1 of your Form W-2, Wage and Tax Statement. Tax return form 1040ez For more information about IRAs, see Publication 590. Tax return form 1040ez Introduction This chapter discusses the income tax treatment of various types of educational assistance you may receive if you are studying, teaching, or researching in the United States. Tax return form 1040ez The educational assistance can be for a primary or secondary school, a college or university, or a vocational school. Tax return form 1040ez Included are discussions of: Scholarships, Fellowships, Need-based education grants, such as a Pell Grant, and Qualified tuition reductions. Tax return form 1040ez Many types of educational assistance are tax free if they meet the requirements discussed here. Tax return form 1040ez Special rules apply to U. Tax return form 1040ez S. Tax return form 1040ez citizens and resident aliens who have received scholarships or fellowships for studying, teaching, or researching abroad. Tax return form 1040ez For information about these rules, see Publication 54, Tax Guide for U. Tax return form 1040ez S. Tax return form 1040ez Citizens and Resident Aliens Abroad. Tax return form 1040ez Scholarships and Fellowships A scholarship is generally an amount paid or allowed to, or for the benefit of, a student (whether an undergraduate or a graduate) at an educational institution to aid in the pursuit of his or her studies. Tax return form 1040ez A fellowship is generally an amount paid for the benefit of an individual to aid in the pursuit of study or research. Tax return form 1040ez Amount of scholarship or fellowship. Tax return form 1040ez   The amount of a scholarship or fellowship includes the following: The value of contributed services and accommodations. Tax return form 1040ez This includes such services and accommodations as room (lodging), board (meals), laundry service, and similar services or accommodations that are received by an individual as a part of a scholarship or fellowship. Tax return form 1040ez The amount of tuition, matriculation, and other fees that are paid or remitted to the student to aid the student in pursuing study or research. Tax return form 1040ez Any amount received in the nature of a family allowance as a part of a scholarship or fellowship. Tax return form 1040ez Tax-Free Scholarships and Fellowships A scholarship or fellowship is tax free (excludable from gross income) only if you are a candidate for a degree at an eligible educational institution. Tax return form 1040ez A scholarship or fellowship is tax free only to the extent: It does not exceed your expenses; It is not designated or earmarked for other purposes (such as room and board), and does not require (by its terms) that it cannot be used for qualified education expenses; and It does not represent payment for teaching, research, or other services required as a condition for receiving the scholarship. Tax return form 1040ez (But for exceptions, see Payment for services,later. Tax return form 1040ez Use Worksheet 1–1 to figure the amount of a scholarship or fellowship you can exclude from gross income. Tax return form 1040ez Candidate for a degree. Tax return form 1040ez   You are a candidate for a degree if you: Attend a primary or secondary school or are pursuing a degree at a college or university, or Attend an educational institution that: Provides a program that is acceptable for full credit toward a bachelor's or higher degree, or offers a program of training to prepare students for gainful employment in a recognized occupation; and Is authorized under federal or state law to provide such a program and is accredited by a nationally recognized accreditation agency. Tax return form 1040ez Eligible educational institution. Tax return form 1040ez   An eligible educational institution is one whose primary function is the presentation of formal instruction and that normally maintains a regular faculty and curriculum and normally has a regularly enrolled body of students in attendance at the place where it carries on its educational activities. Tax return form 1040ez Qualified education expenses. Tax return form 1040ez   For purposes of tax-free scholarships and fellowships, these are expenses for: Tuition and fees required to enroll at or attend an eligible educational institution, and Course-related expenses, such as fees, books, supplies, and equipment that are required for the courses at the eligible educational institution. Tax return form 1040ez These items must be required of all students in your course of instruction. Tax return form 1040ez Expenses that do not qualify. Tax return form 1040ez   Qualified education expenses do not include the cost of: Room and board, Travel, Research, Clerical help, or Equipment and other expenses that are not required for enrollment in or attendance at an eligible educational institution. Tax return form 1040ez Payment for services. Tax return form 1040ez   Generally, you cannot exclude from your gross income the part of any scholarship or fellowship that represents payment for teaching, research, or other services required as a condition for receiving the scholarship. Tax return form 1040ez This applies even if all candidates for a degree must perform the services to receive the degree. Tax return form 1040ez (See exceptions next. Tax return form 1040ez ) Exceptions. Tax return form 1040ez   You do not have to treat as payment for services the part of any scholarship or fellowship that represents payment for teaching, research, or other services if you receive the amount under: The National Health Service Corps Scholarship Program, or The Armed Forces Health Professions Scholarship and Financial Assistance Program. Tax return form 1040ez Example 1. Tax return form 1040ez You received a scholarship of $2,500. Tax return form 1040ez The scholarship was not received under either of the exceptions mentioned above. Tax return form 1040ez As a condition for receiving the scholarship, you must serve as a part-time teaching assistant. Tax return form 1040ez Of the $2,500 scholarship, $1,000 represents payment for teaching. Tax return form 1040ez The provider of your scholarship gives you a Form W-2 showing $1,000 as income. Tax return form 1040ez Your qualified education expenses were at least $1,500. Tax return form 1040ez Assuming that all other conditions are met, $1,500 of your scholarship is tax free. Tax return form 1040ez The $1,000 you received for teaching is taxable. Tax return form 1040ez Example 2. Tax return form 1040ez You are a candidate for a degree at a medical school. Tax return form 1040ez You receive a scholarship (not under either of the exceptions mentioned above) for your medical education and training. Tax return form 1040ez The terms of your scholarship require you to perform future services. Tax return form 1040ez A substantial penalty applies if you do not comply. Tax return form 1040ez The entire amount of your grant is taxable as payment for services in the year it is received. Tax return form 1040ez Athletic Scholarships An athletic scholarship is tax free only if and to the extent it meets the requirements discussed later. Tax return form 1040ez Worksheet 1-1. Tax return form 1040ez    You can use Worksheet 1-1, Taxable Scholarship and Fellowship Income , later, to figure the tax-free and taxable parts of your athletic scholarship. Tax return form 1040ez    Worksheet 1-1. Tax return form 1040ez Taxable Scholarship and Fellowship Income 1. Tax return form 1040ez Enter the total amount of any scholarship or fellowship for 2013. Tax return form 1040ez See Amount of scholarship or fellowship, earlier. Tax return form 1040ez 1. Tax return form 1040ez       If you are a degree candidate at an eligible educational institution, go to line 2. Tax return form 1040ez If you are not a degree candidate at an eligible educational institution, stop here. Tax return form 1040ez The entire amount is taxable. Tax return form 1040ez For information on how to report this amount on your tax return, see Reporting Scholarships and Fellowships , earlier, in this chapter. Tax return form 1040ez       2. Tax return form 1040ez Enter the amount from line 1 that was for teaching, research, or any other services required as a condition for receiving the scholarship. Tax return form 1040ez (Do not include amounts received for these items under the National Health Service Corps Scholarship Program or the Armed Forces Health Professions Scholarship and Financial Assistance Program. Tax return form 1040ez ) 2. Tax return form 1040ez     3. Tax return form 1040ez Subtract line 2 from line 1 3. Tax return form 1040ez     4. Tax return form 1040ez Enter the amount from line 3 that your scholarship or fellowship required you to use for other than qualified education expenses 4. Tax return form 1040ez     5. Tax return form 1040ez Subtract line 4 from line 3 5. Tax return form 1040ez     6. Tax return form 1040ez Enter the amount of your qualified education expenses 6. Tax return form 1040ez     7. Tax return form 1040ez Enter the smaller of line 5 or line 6. Tax return form 1040ez This amount is the most you can exclude from your gross income (the tax-free part of the scholarship or fellowship) 7. Tax return form 1040ez     8. Tax return form 1040ez Subtract line 7 from line 5 8. Tax return form 1040ez     9. Tax return form 1040ez Taxable part. Tax return form 1040ez Add lines 2, 4, and 8. Tax return form 1040ez See Reporting Scholarships and Fellowships , earlier, for how to report this amount on your tax return 9. Tax return form 1040ez     Taxable Scholarships and Fellowships If and to the extent your scholarship or fellowship does not meet the requirements described earlier, it is taxable and must be included in gross income. Tax return form 1040ez You can use Worksheet 1–1, Taxable Scholarship and Fellowship Income, later, to figure the tax-free and taxable parts of your scholarship or fellowship. Tax return form 1040ez Reporting Scholarships and Fellowships Whether you must report your scholarship or fellowship depends on whether you must file a return and whether any part of your scholarship or fellowship is taxable. Tax return form 1040ez If your only income is a completely tax-free scholarship or fellowship, you do not have to file a tax return and no reporting is necessary. Tax return form 1040ez If all or part of your scholarship or fellowship is taxable and you are required to file a tax return, report the taxable amount as explained below. Tax return form 1040ez You must report the taxable amount whether or not you received a Form W-2. Tax return form 1040ez If you receive an incorrect Form W-2, ask the payer for a corrected one. Tax return form 1040ez For information on whether you must file a return, see Publication 501, Exemptions, Standard Deduction, and Filing Information, or your income tax form instructions. Tax return form 1040ez How To Report How you report any taxable scholarship or fellowship income depends on which return you file. Tax return form 1040ez Form 1040EZ. Tax return form 1040ez   If you file Form 1040EZ, include the taxable amount in the total on line 1. Tax return form 1040ez If the taxable amount was not reported on Form W-2, also enter “SCH” and the taxable amount in the space to the left of line 1. Tax return form 1040ez Form 1040A. Tax return form 1040ez   If you file Form 1040A, include the taxable amount in the total on line 7. Tax return form 1040ez If the taxable amount was not reported on Form W-2, also enter “SCH” and the taxable amount in the space to the left of line 7. Tax return form 1040ez Form 1040. Tax return form 1040ez   If you file Form 1040, include the taxable amount in the total on line 7. Tax return form 1040ez If the taxable amount was not reported on Form W-2, also enter “SCH” and the taxable amount on the dotted line next to line 7. Tax return form 1040ez Schedule SE (Form 1040). Tax return form 1040ez   To determine your net earnings from self-employment, include amounts you receive under a scholarship as pay for your services that are reported to you on Form 1099-MISC, Miscellaneous Income. Tax return form 1040ez If your net earnings are $400 or more, you must pay self-employment tax. Tax return form 1040ez Use Schedule SE, Self-Employment Tax, to figure this tax. Tax return form 1040ez Form 1040NR. Tax return form 1040ez   If you file Form 1040NR, report the taxable amount on line 12. Tax return form 1040ez Generally, you must report the amount shown in box 2 of Form(s) 1042-S, Foreign Person's U. Tax return form 1040ez S. Tax return form 1040ez Source Income Subject to Withholding. Tax return form 1040ez See the Instructions for Form 1040NR for more information. Tax return form 1040ez Form 1040NR-EZ. Tax return form 1040ez   If you file Form 1040NR-EZ, report the taxable amount on line 5. Tax return form 1040ez Generally, you must report the amount shown in box 2 of Form(s) 1042-S. Tax return form 1040ez See the Instructions for Form 1040NR-EZ for more information. Tax return form 1040ez Other Types of Educational Assistance The following discussions deal with other common types of educational assistance. Tax return form 1040ez Fulbright Grants A Fulbright grant is generally treated as a scholarship or fellowship in figuring how much of the grant is tax free. Tax return form 1040ez Pell Grants and Other Title IV Need-Based Education Grants These need-based grants are treated as scholarships for purposes of determining their tax treatment. Tax return form 1040ez They are tax free to the extent used for qualified education expenses during the period for which a grant is awarded. Tax return form 1040ez Payment to Service Academy Cadets An appointment to a United States military academy is not a scholarship or fellowship. Tax return form 1040ez Payment you receive as a cadet or midshipman at an armed services academy is pay for personal services and will be reported to you in box 1 of Form W-2. Tax return form 1040ez Include this pay in your income in the year you receive it unless one of the exceptions, discussed earlier under Payment for services , applies. Tax return form 1040ez Veterans' Benefits Payments you receive for education, training, or subsistence under any law administered by the Department of Veterans Affairs (VA) are tax free. Tax return form 1040ez Do not include these payments as income on your federal tax return. Tax return form 1040ez If you qualify for one or more of the education benefits discussed in chapters 2 through 12, you may have to reduce the amount of education expenses qualifying for a specific benefit by part or all of your VA payments. Tax return form 1040ez This applies only to the part of your VA payments that is required to be used for education expenses. Tax return form 1040ez You may want to visit the Veteran's Administration website at www. Tax return form 1040ez gibill. Tax return form 1040ez va. Tax return form 1040ez gov for specific information about the various VA benefits for education. Tax return form 1040ez Example. Tax return form 1040ez You have returned to college and are receiving two education benefits under the latest GI Bill: (1) a $1,534 monthly basic housing allowance (BHA) that is directly deposited to your checking account, and (2) $3,840 paid directly to your college for tuition. Tax return form 1040ez Neither of these benefits is taxable and you do not report them on your tax return. Tax return form 1040ez You also want to claim an American opportunity credit on your return. Tax return form 1040ez You paid $5,000 in qualified education expenses (see chapter 2, American Opportunity Credit , later). Tax return form 1040ez To figure the amount of credit, you must first subtract the $3,840 from your qualified education expenses because this payment under the GI Bill was required to be used for education expenses. Tax return form 1040ez You do not subtract any amount of the BHA because it was paid to you and its use was not restricted. Tax return form 1040ez Qualified Tuition Reduction If you are allowed to study tuition free or for a reduced rate of tuition, you may not have to pay tax on this benefit. Tax return form 1040ez This is called a “tuition reduction. Tax return form 1040ez ” You do not have to include a qualified tuition reduction in your income. Tax return form 1040ez A tuition reduction is qualified only if you receive it from, and use it at, an eligible educational institution. Tax return form 1040ez You do not have to use the tuition reduction at the eligible educational institution from which you received it. Tax return form 1040ez In other words, if you work for an eligible educational institution and the institution arranges for you to take courses at another eligible educational institution without paying any tuition, you may not have to include the value of the free courses in your income. Tax return form 1040ez The rules for determining if a tuition reduction is qualified, and therefore tax free, are different if the education provided is below the graduate level or is graduate education. Tax return form 1040ez You must include in your income any tuition reduction you receive that is payment for your services. Tax return form 1040ez Eligible educational institution. Tax return form 1040ez   An eligible educational institution is one that maintains a regular faculty and curriculum and normally has a regularly enrolled body of students in attendance at the place where it carries on its educational activities. Tax return form 1040ez Officers, owners, and highly compensated employees. Tax return form 1040ez   Qualified tuition reductions apply to officers, owners, or highly compensated employees only if benefits are available to employees on a nondiscriminatory basis. Tax return form 1040ez This means that the tuition reduction benefits must be available on substantially the same basis to each member of a group of employees. Tax return form 1040ez The group must be defined under a reasonable classification set up by the employer. Tax return form 1040ez The classification must not discriminate in favor of owners, officers, or highly compensated employees. Tax return form 1040ez Payment for services. Tax return form 1040ez   Generally, you must include in income the part of any qualified tuition reduction that represents payment for teaching, research, or other services by the student required as a condition of receiving the qualified tuition reduction. Tax return form 1040ez This applies even if all candidates for a degree must perform the services to receive the degree. Tax return form 1040ez (See below for exceptions. Tax return form 1040ez ) Exceptions. Tax return form 1040ez   You do not have to include in income the part of any scholarship or fellowship that represents payment for teaching, research, or other services if you receive the amount under: The National Health Service Corps Scholarship Program, or The Armed Forces Health Professions Scholarship and Financial Assistance Program. Tax return form 1040ez Education Below the Graduate Level If you receive a tuition reduction for education below the graduate level (including primary, secondary, or high school), it is a qualified tuition reduction, and therefore tax free, only if your relationship to the educational institution providing the benefit is described below. Tax return form 1040ez You are an employee of the eligible educational institution. Tax return form 1040ez You were an employee of the eligible educational institution, but you retired or left on disability. Tax return form 1040ez You are a widow or widower of an individual who died while an employee of the eligible educational institution or who retired or left on disability. Tax return form 1040ez You are the dependent child or spouse of an individual described in (1) through (3), above. Tax return form 1040ez Child of deceased parents. Tax return form 1040ez   For purposes of the qualified tuition reduction, a child is a dependent child if the child is under age 25 and both parents have died. Tax return form 1040ez Child of divorced parents. Tax return form 1040ez   For purposes of the qualified tuition reduction, a dependent child of divorced parents is treated as the dependent of both parents. Tax return form 1040ez Graduate Education A tuition reduction you receive for graduate education is qualified, and therefore tax free, if both of the following requirements are met. Tax return form 1040ez It is provided by an eligible educational institution. Tax return form 1040ez You are a graduate student who performs teaching or research activities for the educational institution. Tax return form 1040ez You must include in income any other tuition reductions for graduate education that you receive. Tax return form 1040ez How To Report Any tuition reduction that is taxable should be included as wages in box 1 of your Form W-2. Tax return form 1040ez Report the amount from Form W-2, box 1, on line 7 (Form 1040 or Form 1040A) or line 1 (Form 1040EZ). Tax return form 1040ez Prev  Up  Next   Home   More Online Publications
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The Tax Return Form 1040ez

Tax return form 1040ez 8. Tax return form 1040ez   Amortization Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: How To Deduct Amortization Starting a BusinessBusiness Start-Up Costs Costs of Organizing a Corporation Costs of Organizing a Partnership How To Amortize Getting a Lease Section 197 IntangiblesSection 197 Intangibles Defined Assets That Are Not Section 197 Intangibles Safe Harbor for Creative Property Costs Anti-Churning Rules Incorrect Amount of Amortization Deducted Disposition of Section 197 Intangibles Reforestation Costs Geological and Geophysical Costs Pollution Control FacilitiesNew identifiable treatment facility. Tax return form 1040ez Research and Experimental Costs Optional Write-off of Certain Tax Preferences Introduction Amortization is a method of recovering (deducting) certain capital costs over a fixed period of time. Tax return form 1040ez It is similar to the straight line method of depreciation. Tax return form 1040ez The various amortizable costs covered in this chapter are included in the list below. Tax return form 1040ez However, this chapter does not discuss amortization of bond premium. Tax return form 1040ez For information on that topic, see chapter 3 of Publication 550, Investment Income and Expenses. Tax return form 1040ez Topics - This chapter discusses: Deducting amortization Amortizing costs of starting a business Amortizing costs of getting a lease Amortizing costs of section 197 intangibles Amortizing reforestation costs Amortizing costs of geological and geophysical costs Amortizing costs of pollution control facilities Amortizing costs of research and experimentation Amortizing costs of certain tax preferences Useful Items - You may want to see: Publication 544 Sales and Other Dispositions of Assets 550 Investment Income and Expenses 946 How To Depreciate Property Form (and Instructions) 4562 Depreciation and Amortization 4626 Alternative Minimum Tax—Corporations 6251 Alternative Minimum Tax—Individuals See chapter 12 for information about getting publications and forms. Tax return form 1040ez How To Deduct Amortization To deduct amortization that begins during the current tax year, complete Part VI of Form 4562 and attach it to your income tax return. Tax return form 1040ez To report amortization from previous years, in addition to amortization that begins in the current year, list on Form 4562 each item separately. Tax return form 1040ez For example, in 2012, you began to amortize a lease. Tax return form 1040ez In 2013, you began to amortize a second lease. Tax return form 1040ez Report amortization from the new lease on line 42 of your 2013 Form 4562. Tax return form 1040ez Report amortization from the 2012 lease on line 43 of your 2013 Form 4562. Tax return form 1040ez If you do not have any new amortizable expenses for the current year, you are not required to complete Form 4562 (unless you are claiming depreciation). Tax return form 1040ez Report the current year's deduction for amortization that began in a prior year directly on the “Other deduction” or “Other expense line” of your return. Tax return form 1040ez Starting a Business When you start a business, treat all eligible costs you incur before you begin operating the business as capital expenditures which are part of your basis in the business. Tax return form 1040ez Generally, you recover costs for particular assets through depreciation deductions. Tax return form 1040ez However, you generally cannot recover other costs until you sell the business or otherwise go out of business. Tax return form 1040ez For a discussion on how to treat these costs, see If your attempt to go into business is unsuccessful under Capital Expenses in chapter 1. Tax return form 1040ez For costs paid or incurred after September 8, 2008, you can deduct a limited amount of start-up and organizational costs. Tax return form 1040ez The costs that are not deducted currently can be amortized ratably over a 180-month period. Tax return form 1040ez The amortization period starts with the month you begin operating your active trade or business. Tax return form 1040ez You are not required to attach a statement to make this election. Tax return form 1040ez You can choose to forgo this election by affirmatively electing to capitalize your start-up costs on your income tax return filed by the due date (including extensions) for the tax year in which the active trade or business begins. Tax return form 1040ez Once made, the election to either amortize or capitalize start-up costs is irrevocable and applies to all start-up costs that are related to your trade or business. Tax return form 1040ez See Regulations sections 1. Tax return form 1040ez 195-1, 1. Tax return form 1040ez 248-1, and 1. Tax return form 1040ez 709-1. Tax return form 1040ez For costs paid or incurred after October 22, 2004, and before September 9, 2008, you can elect to deduct a limited amount of business start-up and organizational costs in the year your active trade or business begins. Tax return form 1040ez Any costs not deducted can be amortized ratably over a 180-month period, beginning with the month you begin business. Tax return form 1040ez If the election is made, you must attach any statement required by Regulations sections 1. Tax return form 1040ez 195-1(b), 1. Tax return form 1040ez 248-1(c), and 1. Tax return form 1040ez 709-1(c), as in effect before September 9, 2008. Tax return form 1040ez Note. Tax return form 1040ez You can apply the provisions of Regulations sections 1. Tax return form 1040ez 195-1, 1. Tax return form 1040ez 248-1, and 1. Tax return form 1040ez 709-1 to all business start-up and organizational costs paid or incurred after October 22, 2004, provided the period of limitations on assessment has not expired for the year of the election. Tax return form 1040ez Otherwise, the provisions under Regulations sections 1. Tax return form 1040ez 195-1(b), 1. Tax return form 1040ez 248-1(c), and 1. Tax return form 1040ez 709-1(c), as in effect before September 9, 2008, will apply. Tax return form 1040ez For costs paid or incurred before October 23, 2004, you can elect to amortize business start-up and organization costs over an amortization period of 60 months or more. Tax return form 1040ez See How To Make the Election , later. Tax return form 1040ez The cost must qualify as one of the following. Tax return form 1040ez A business start-up cost. Tax return form 1040ez An organizational cost for a corporation. Tax return form 1040ez An organizational cost for a partnership. Tax return form 1040ez Business Start-Up Costs Start-up costs are amounts paid or incurred for: (a) creating an active trade or business; or (b) investigating the creation or acquisition of an active trade or business. Tax return form 1040ez Start-up costs include amounts paid or incurred in connection with an existing activity engaged in for profit; and for the production of income in anticipation of the activity becoming an active trade or business. Tax return form 1040ez Qualifying costs. Tax return form 1040ez   A start-up cost is amortizable if it meets both of the following tests. Tax return form 1040ez It is a cost you could deduct if you paid or incurred it to operate an existing active trade or business (in the same field as the one you entered into). Tax return form 1040ez It is a cost you pay or incur before the day your active trade or business begins. Tax return form 1040ez   Start-up costs include amounts paid for the following: An analysis or survey of potential markets, products, labor supply, transportation facilities, etc. Tax return form 1040ez Advertisements for the opening of the business. Tax return form 1040ez Salaries and wages for employees who are being trained and their instructors. Tax return form 1040ez Travel and other necessary costs for securing prospective distributors, suppliers, or customers. Tax return form 1040ez Salaries and fees for executives and consultants, or for similar professional services. Tax return form 1040ez Nonqualifying costs. Tax return form 1040ez   Start-up costs do not include deductible interest, taxes, or research and experimental costs. Tax return form 1040ez See Research and Experimental Costs , later. Tax return form 1040ez Purchasing an active trade or business. Tax return form 1040ez   Amortizable start-up costs for purchasing an active trade or business include only investigative costs incurred in the course of a general search for or preliminary investigation of the business. Tax return form 1040ez These are costs that help you decide whether to purchase a business. Tax return form 1040ez Costs you incur in an attempt to purchase a specific business are capital expenses that you cannot amortize. Tax return form 1040ez Example. Tax return form 1040ez On June 1st, you hired an accounting firm and a law firm to assist you in the potential purchase of XYZ, Inc. Tax return form 1040ez They researched XYZ's industry and analyzed the financial projections of XYZ, Inc. Tax return form 1040ez In September, the law firm prepared and submitted a letter of intent to XYZ, Inc. Tax return form 1040ez The letter stated that a binding commitment would result only after a purchase agreement was signed. Tax return form 1040ez The law firm and accounting firm continued to provide services including a review of XYZ's books and records and the preparation of a purchase agreement. Tax return form 1040ez On October 22nd, you signed a purchase agreement with XYZ, Inc. Tax return form 1040ez All amounts paid or incurred to investigate the business before October 22nd are amortizable investigative costs. Tax return form 1040ez Amounts paid on or after that date relate to the attempt to purchase the business and therefore must be capitalized. Tax return form 1040ez Disposition of business. Tax return form 1040ez   If you completely dispose of your business before the end of the amortization period, you can deduct any remaining deferred start-up costs. Tax return form 1040ez However, you can deduct these deferred start-up costs only to the extent they qualify as a loss from a business. Tax return form 1040ez Costs of Organizing a Corporation Amounts paid to organize a corporation are the direct costs of creating the corporation. Tax return form 1040ez Qualifying costs. Tax return form 1040ez   To qualify as an organizational cost, it must be: For the creation of the corporation, Chargeable to a capital account (see chapter 1), Amortized over the life of the corporation if the corporation had a fixed life, and Incurred before the end of the first tax year in which the corporation is in business. Tax return form 1040ez   A corporation using the cash method of accounting can amortize organizational costs incurred within the first tax year, even if it does not pay them in that year. Tax return form 1040ez   Examples of organizational costs include: The cost of temporary directors. Tax return form 1040ez The cost of organizational meetings. Tax return form 1040ez State incorporation fees. Tax return form 1040ez The cost of legal services. Tax return form 1040ez Nonqualifying costs. Tax return form 1040ez   The following items are capital expenses that cannot be amortized: Costs for issuing and selling stock or securities, such as commissions, professional fees, and printing costs. Tax return form 1040ez Costs associated with the transfer of assets to the corporation. Tax return form 1040ez Costs of Organizing a Partnership The costs to organize a partnership are the direct costs of creating the partnership. Tax return form 1040ez Qualifying costs. Tax return form 1040ez   A partnership can amortize an organizational cost only if it meets all the following tests. Tax return form 1040ez It is for the creation of the partnership and not for starting or operating the partnership trade or business. Tax return form 1040ez It is chargeable to a capital account (see chapter 1). Tax return form 1040ez It could be amortized over the life of the partnership if the partnership had a fixed life. Tax return form 1040ez It is incurred by the due date of the partnership return (excluding extensions) for the first tax year in which the partnership is in business. Tax return form 1040ez However, if the partnership uses the cash method of accounting and pays the cost after the end of its first tax year, see Cash method partnership under How To Amortize, later. Tax return form 1040ez It is for a type of item normally expected to benefit the partnership throughout its entire life. Tax return form 1040ez   Organizational costs include the following fees. Tax return form 1040ez Legal fees for services incident to the organization of the partnership, such as negotiation and preparation of the partnership agreement. Tax return form 1040ez Accounting fees for services incident to the organization of the partnership. Tax return form 1040ez Filing fees. Tax return form 1040ez Nonqualifying costs. Tax return form 1040ez   The following costs cannot be amortized. Tax return form 1040ez The cost of acquiring assets for the partnership or transferring assets to the partnership. Tax return form 1040ez The cost of admitting or removing partners, other than at the time the partnership is first organized. Tax return form 1040ez The cost of making a contract concerning the operation of the partnership trade or business including a contract between a partner and the partnership. Tax return form 1040ez The costs for issuing and marketing interests in the partnership such as brokerage, registration, and legal fees and printing costs. Tax return form 1040ez These “syndication fees” are capital expenses that cannot be depreciated or amortized. Tax return form 1040ez Liquidation of partnership. Tax return form 1040ez   If a partnership is liquidated before the end of the amortization period, the unamortized amount of qualifying organizational costs can be deducted in the partnership's final tax year. Tax return form 1040ez However, these costs can be deducted only to the extent they qualify as a loss from a business. Tax return form 1040ez How To Amortize Deduct start-up and organizational costs in equal amounts over the applicable amortization period (discussed earlier). Tax return form 1040ez You can choose an amortization period for start-up costs that is different from the period you choose for organizational costs, as long as both are not less than the applicable amortization period. Tax return form 1040ez Once you choose an amortization period, you cannot change it. Tax return form 1040ez To figure your deduction, divide your total start-up or organizational costs by the months in the amortization period. Tax return form 1040ez The result is the amount you can deduct for each month. Tax return form 1040ez Cash method partnership. Tax return form 1040ez   A partnership using the cash method of accounting can deduct an organizational cost only if it has been paid by the end of the tax year. Tax return form 1040ez However, any cost the partnership could have deducted as an organizational cost in an earlier tax year (if it had been paid that year) can be deducted in the tax year of payment. Tax return form 1040ez How To Make the Election To elect to amortize start-up or organizational costs, you must complete and attach Form 4562 to your return for the first tax year you are in business. Tax return form 1040ez You may also be required to attach an accompanying statement (described later) to your return. Tax return form 1040ez For start-up or organizational costs paid or incurred after September 8, 2008, an accompanying statement is not required. Tax return form 1040ez Generally, for start-up or organizational costs paid or incurred before September 9, 2008, and after October 22, 2004, unless you choose to apply Regulations sections 1. Tax return form 1040ez 195-1, 1. Tax return form 1040ez 248-1, and 1. Tax return form 1040ez 709-1, you must also attach an accompanying statement to elect to amortize the costs. Tax return form 1040ez If you have both start-up and organizational costs, attach a separate statement (if required) to your return for each type of cost. Tax return form 1040ez See Starting a Business , earlier, for more information. Tax return form 1040ez Generally, you must file the return by the due date (including any extensions). Tax return form 1040ez 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 return form 1040ez For more information, see the instructions for Part VI of Form 4562. Tax return form 1040ez You can choose to forgo the election to amortize by affirmatively electing to capitalize your start-up or organizational costs on your income tax return filed by the due date (including extensions) for the tax year in which the active trade or business begins. Tax return form 1040ez Note. Tax return form 1040ez The election to either amortize or capitalize start-up or organizational costs is irrevocable and applies to all start-up and organizational costs that are related to the trade or business. Tax return form 1040ez If your business is organized as a corporation or partnership, only the corporation or partnership can elect to amortize its start-up or organizational costs. Tax return form 1040ez A shareholder or partner cannot make this election. Tax return form 1040ez You, as a shareholder or partner, cannot amortize any costs you incur in setting up your corporation or partnership. Tax return form 1040ez Only the corporation or partnership can amortize these costs. Tax return form 1040ez However, you, as an individual, can elect to amortize costs you incur to investigate an interest in an existing partnership. Tax return form 1040ez These costs qualify as business start-up costs if you acquire the partnership interest. Tax return form 1040ez Start-up costs election statement. Tax return form 1040ez   If you elect to amortize your start-up costs, attach a separate statement (if required) that contains the following information. Tax return form 1040ez A description of the business to which the start-up costs relate. Tax return form 1040ez A description of each start-up cost incurred. Tax return form 1040ez The month your active business began (or was acquired). Tax return form 1040ez The number of months in your amortization period (which is generally 180 months). Tax return form 1040ez Filing the statement early. Tax return form 1040ez   You can elect to amortize your start-up costs by filing the statement with a return for any tax year before the year your active business begins. Tax return form 1040ez If you file the statement early, the election becomes effective in the month of the tax year your active business begins. Tax return form 1040ez Revised statement. Tax return form 1040ez   You can file a revised statement to include any start-up costs not included in your original statement. Tax return form 1040ez However, you cannot include on the revised statement any cost you previously treated on your return as a cost other than a start-up cost. Tax return form 1040ez You can file the revised statement with a return filed after the return on which you elected to amortize your start-up costs. Tax return form 1040ez Organizational costs election statement. Tax return form 1040ez   If you elect to amortize your corporation's or partnership's organizational costs, attach a separate statement (if required) that contains the following information. Tax return form 1040ez A description of each cost. Tax return form 1040ez The amount of each cost. Tax return form 1040ez The date each cost was incurred. Tax return form 1040ez The month your corporation or partnership began active business (or acquired the business). Tax return form 1040ez The number of months in your amortization period (which is generally 180 months). Tax return form 1040ez Partnerships. Tax return form 1040ez   The statement prepared for a cash basis partnership must also indicate the amount paid before the end of the year for each cost. Tax return form 1040ez   You do not need to separately list any partnership organizational cost that is less than $10. Tax return form 1040ez Instead, you can list the total amount of these costs with the dates the first and last costs were incurred. Tax return form 1040ez   After a partnership makes the election to amortize organizational costs, it can later file an amended return to include additional organizational costs not included in the partnership's original return and statement. Tax return form 1040ez Getting a Lease If you get a lease for business property, you may recover the cost of acquiring the lease by amortizing it over the term of the lease. Tax return form 1040ez The term of the lease for amortization purposes generally includes all renewal options (and any other period for which you and the lessor reasonably expect the lease to be renewed). Tax return form 1040ez However, renewal periods are not included if 75% or more of the cost of acquiring the lease is for the term of the lease remaining on the acquisition date (not including any period for which you may choose to renew, extend, or continue the lease). Tax return form 1040ez For more information on the costs of getting a lease, see Cost of Getting a Lease in  chapter 3. Tax return form 1040ez How to amortize. Tax return form 1040ez   Enter your deduction in Part VI of Form 4562 if you are deducting amortization that begins during the current year, or on the appropriate line of your tax return if you are not otherwise required to file Form 4562. Tax return form 1040ez Section 197 Intangibles Generally, you may amortize the capitalized costs of “section 197 intangibles” (defined later) ratably over a 15-year period. Tax return form 1040ez You must amortize these costs if you hold the section 197 intangibles in connection with your trade or business or in an activity engaged in for the production of income. Tax return form 1040ez You may not be able to amortize section 197 intangibles acquired in a transaction that did not result in a significant change in ownership or use. Tax return form 1040ez See Anti-Churning Rules, later. Tax return form 1040ez Your amortization deduction each year is the applicable part of the intangible's adjusted basis (for purposes of determining gain), figured by amortizing it ratably over 15 years (180 months). Tax return form 1040ez The 15-year period begins with the later of: The month the intangible is acquired, or The month the trade or business or activity engaged in for the production of income begins. Tax return form 1040ez You cannot deduct amortization for the month you dispose of the intangible. Tax return form 1040ez If you pay or incur an amount that increases the basis of an amortizable section 197 intangible after the 15-year period begins, amortize it over the remainder of the 15-year period beginning with the month the basis increase occurs. Tax return form 1040ez You are not allowed any other depreciation or amortization deduction for an amortizable section 197 intangible. Tax return form 1040ez Tax-exempt use property subject to a lease. Tax return form 1040ez   The amortization period for any section 197 intangible leased under a lease agreement entered into after March 12, 2004, to a tax-exempt organization, governmental unit, or foreign person or entity (other than a partnership), shall not be less than 125 percent of the lease term. Tax return form 1040ez Cost attributable to other property. Tax return form 1040ez   The rules for section 197 intangibles do not apply to any amount that is included in determining the cost of property that is not a section 197 intangible. Tax return form 1040ez For example, if the cost of computer software is not separately stated from the cost of hardware or other tangible property and you consistently treat it as part of the cost of the hardware or other tangible property, these rules do not apply. Tax return form 1040ez Similarly, none of the cost of acquiring real property held for the production of rental income is considered the cost of goodwill, going concern value, or any other section 197 intangible. Tax return form 1040ez Section 197 Intangibles Defined The following assets are section 197 intangibles and must be amortized over 180 months: Goodwill; Going concern value; Workforce in place; Business books and records, operating systems, or any other information base, including lists or other information concerning current or prospective customers; A patent, copyright, formula, process, design, pattern, know-how, format, or similar item; A customer-based intangible; A supplier-based intangible; Any item similar to items (3) through (7); A license, permit, or other right granted by a governmental unit or agency (including issuances and renewals); A covenant not to compete entered into in connection with the acquisition of an interest in a trade or business; Any franchise, trademark, or trade name; and A contract for the use of, or a term interest in, any item in this list. Tax return form 1040ez You cannot amortize any of the intangibles listed in items (1) through (8) that you created rather than acquired unless you created them in acquiring assets that make up a trade or business or a substantial part of a trade or business. Tax return form 1040ez Goodwill. Tax return form 1040ez   This is the value of a trade or business based on expected continued customer patronage due to its name, reputation, or any other factor. Tax return form 1040ez Going concern value. Tax return form 1040ez   This is the additional value of a trade or business that attaches to property because the property is an integral part of an ongoing business activity. Tax return form 1040ez It includes value based on the ability of a business to continue to function and generate income even though there is a change in ownership (but does not include any other section 197 intangible). Tax return form 1040ez It also includes value based on the immediate use or availability of an acquired trade or business, such as the use of earnings during any period in which the business would not otherwise be available or operational. Tax return form 1040ez Workforce in place, etc. Tax return form 1040ez   This includes the composition of a workforce (for example, its experience, education, or training). Tax return form 1040ez It also includes the terms and conditions of employment, whether contractual or otherwise, and any other value placed on employees or any of their attributes. Tax return form 1040ez   For example, you must amortize the part of the purchase price of a business that is for the existence of a highly skilled workforce. Tax return form 1040ez Also, you must amortize the cost of acquiring an existing employment contract or relationship with employees or consultants. Tax return form 1040ez Business books and records, etc. Tax return form 1040ez   This includes the intangible value of technical manuals, training manuals or programs, data files, and accounting or inventory control systems. Tax return form 1040ez It also includes the cost of customer lists, subscription lists, insurance expirations, patient or client files, and lists of newspaper, magazine, radio, and television advertisers. Tax return form 1040ez Patents, copyrights, etc. Tax return form 1040ez   This includes package design, computer software, and any interest in a film, sound recording, videotape, book, or other similar property, except as discussed later under Assets That Are Not Section 197 Intangibles . Tax return form 1040ez Customer-based intangible. Tax return form 1040ez   This is the composition of market, market share, and any other value resulting from the future provision of goods or services because of relationships with customers in the ordinary course of business. Tax return form 1040ez For example, you must amortize the part of the purchase price of a business that is for the existence of the following intangibles. Tax return form 1040ez A customer base. Tax return form 1040ez A circulation base. Tax return form 1040ez An undeveloped market or market growth. Tax return form 1040ez Insurance in force. Tax return form 1040ez A mortgage servicing contract. Tax return form 1040ez An investment management contract. Tax return form 1040ez Any other relationship with customers involving the future provision of goods or services. Tax return form 1040ez   Accounts receivable or other similar rights to income for goods or services provided to customers before the acquisition of a trade or business are not section 197 intangibles. Tax return form 1040ez Supplier-based intangible. Tax return form 1040ez   A supplier-based intangible is the value resulting from the future acquisitions, (through contract or other relationships with suppliers in the ordinary course of business) of goods or services that you will sell or use. Tax return form 1040ez The amount you pay or incur for supplier-based intangibles includes, for example, any portion of the purchase price of an acquired trade or business that is attributable to the existence of a favorable relationship with persons providing distribution services (such as a favorable shelf or display space or a retail outlet), or the existence of favorable supply contracts. Tax return form 1040ez Do not include any amount required to be paid for the goods or services to honor the terms of the agreement or other relationship. Tax return form 1040ez Also, see Assets That Are Not Section 197 Intangibles below. Tax return form 1040ez Government-granted license, permit, etc. Tax return form 1040ez   This is any right granted by a governmental unit or an agency or instrumentality of a governmental unit. Tax return form 1040ez For example, you must amortize the capitalized costs of acquiring (including issuing or renewing) a liquor license, a taxicab medallion or license, or a television or radio broadcasting license. Tax return form 1040ez Covenant not to compete. Tax return form 1040ez   Section 197 intangibles include a covenant not to compete (or similar arrangement) entered into in connection with the acquisition of an interest in a trade or business, or a substantial portion of a trade or business. Tax return form 1040ez An interest in a trade or business includes an interest in a partnership or a corporation engaged in a trade or business. Tax return form 1040ez   An arrangement that requires the former owner to perform services (or to provide property or the use of property) is not similar to a covenant not to compete to the extent the amount paid under the arrangement represents reasonable compensation for those services or for that property or its use. Tax return form 1040ez Franchise, trademark, or trade name. Tax return form 1040ez   A franchise, trademark, or trade name is a section 197 intangible. Tax return form 1040ez You must amortize its purchase or renewal costs, other than certain contingent payments that you can deduct currently. Tax return form 1040ez For information on currently deductible contingent payments, see chapter 11. Tax return form 1040ez Professional sports franchise. Tax return form 1040ez   A franchise engaged in professional sports and any intangible assets acquired in connection with acquiring the franchise (including player contracts) is a section 197 intangible amortizable over a 15-year period. Tax return form 1040ez Contract for the use of, or a term interest in, a section 197 intangible. Tax return form 1040ez   Section 197 intangibles include any right under a license, contract, or other arrangement providing for the use of any section 197 intangible. Tax return form 1040ez It also includes any term interest in any section 197 intangible, whether the interest is outright or in trust. Tax return form 1040ez Assets That Are Not Section 197 Intangibles The following assets are not section 197 intangibles. Tax return form 1040ez Any interest in a corporation, partnership, trust, or estate. Tax return form 1040ez Any interest under an existing futures contract, foreign currency contract, notional principal contract, interest rate swap, or similar financial contract. Tax return form 1040ez Any interest in land. Tax return form 1040ez Most computer software. Tax return form 1040ez (See Computer software , later. Tax return form 1040ez ) Any of the following assets not acquired in connection with the acquisition of a trade or business or a substantial part of a trade or business. Tax return form 1040ez An interest in a film, sound recording, video tape, book, or similar property. Tax return form 1040ez A right to receive tangible property or services under a contract or from a governmental agency. Tax return form 1040ez An interest in a patent or copyright. Tax return form 1040ez Certain rights that have a fixed duration or amount. Tax return form 1040ez (See Rights of fixed duration or amount , later. Tax return form 1040ez ) An interest under either of the following. Tax return form 1040ez An existing lease or sublease of tangible property. Tax return form 1040ez A debt that was in existence when the interest was acquired. Tax return form 1040ez A right to service residential mortgages unless the right is acquired in connection with the acquisition of a trade or business or a substantial part of a trade or business. Tax return form 1040ez Certain transaction costs incurred by parties to a corporate organization or reorganization in which any part of a gain or loss is not recognized. Tax return form 1040ez Intangible property that is not amortizable under the rules for section 197 intangibles can be depreciated if it meets certain requirements. Tax return form 1040ez You generally must use the straight line method over its useful life. Tax return form 1040ez For certain intangibles, the depreciation period is specified in the law and regulations. Tax return form 1040ez For example, the depreciation period for computer software that is not a section 197 intangible is generally 36 months. Tax return form 1040ez For more information on depreciating intangible property, see Intangible Property under What Method Can You Use To Depreciate Your Property? in chapter 1 of Publication 946. Tax return form 1040ez Computer software. Tax return form 1040ez   Section 197 intangibles do not include the following types of computer software. Tax return form 1040ez Software that meets all the following requirements. Tax return form 1040ez It is, or has been, readily available for purchase by the general public. Tax return form 1040ez It is subject to a nonexclusive license. Tax return form 1040ez It has not been substantially modified. Tax return form 1040ez This requirement is considered met if the cost of all modifications is not more than the greater of 25% of the price of the publicly available unmodified software or $2,000. Tax return form 1040ez Software that is not acquired in connection with the acquisition of a trade or business or a substantial part of a trade or business. Tax return form 1040ez Computer software defined. Tax return form 1040ez   Computer software includes all programs designed to cause a computer to perform a desired function. Tax return form 1040ez It also includes any database or similar item that is in the public domain and is incidental to the operation of qualifying software. Tax return form 1040ez Rights of fixed duration or amount. Tax return form 1040ez   Section 197 intangibles do not include any right under a contract or from a governmental agency if the right is acquired in the ordinary course of a trade or business (or in an activity engaged in for the production of income) but not as part of a purchase of a trade or business and either: Has a fixed life of less than 15 years, or Is of a fixed amount that, except for the rules for section 197 intangibles, would be recovered under a method similar to the unit-of-production method of cost recovery. Tax return form 1040ez However, this does not apply to the following intangibles. Tax return form 1040ez Goodwill. Tax return form 1040ez Going concern value. Tax return form 1040ez A covenant not to compete. Tax return form 1040ez A franchise, trademark, or trade name. Tax return form 1040ez A customer-related information base, customer-based intangible, or similar item. Tax return form 1040ez Safe Harbor for Creative Property Costs If you are engaged in the trade or business of film production, you may be able to amortize the creative property costs for properties not set for production within 3 years of the first capitalized transaction. Tax return form 1040ez You may amortize these costs ratably over a 15-year period beginning on the first day of the second half of the tax year in which you properly write off the costs for financial accounting purposes. Tax return form 1040ez If, during the 15-year period, you dispose of the creative property rights, you must continue to amortize the costs over the remainder of the 15-year period. Tax return form 1040ez Creative property costs include costs paid or incurred to acquire and develop screenplays, scripts, story outlines, motion picture production rights to books and plays, and other similar properties for purposes of potential future film development, production, and exploitation. Tax return form 1040ez Amortize these costs using the rules of Revenue Procedure 2004-36. Tax return form 1040ez For more information, see Revenue Procedure 2004-36, 2004-24 I. Tax return form 1040ez R. Tax return form 1040ez B. Tax return form 1040ez 1063, available at  www. Tax return form 1040ez irs. Tax return form 1040ez gov/irb/2004-24_IRB/ar16. Tax return form 1040ez html. Tax return form 1040ez A change in the treatment of creative property costs is a change in method of accounting. Tax return form 1040ez Anti-Churning Rules Anti-churning rules prevent you from amortizing most section 197 intangibles if the transaction in which you acquired them did not result in a significant change in ownership or use. Tax return form 1040ez These rules apply to goodwill and going concern value, and to any other section 197 intangible that is not otherwise depreciable or amortizable. Tax return form 1040ez Under the anti-churning rules, you cannot use 15-year amortization for the intangible if any of the following conditions apply. Tax return form 1040ez You or a related person (defined later) held or used the intangible at any time from July 25, 1991, through August 10, 1993. Tax return form 1040ez You acquired the intangible from a person who held it at any time during the period in (1) and, as part of the transaction, the user did not change. Tax return form 1040ez You granted the right to use the intangible to a person (or a person related to that person) who held or used it at any time during the period in (1). Tax return form 1040ez This applies only if the transaction in which you granted the right and the transaction in which you acquired the intangible are part of a series of related transactions. Tax return form 1040ez See Related person , later, for more information. Tax return form 1040ez Exceptions. Tax return form 1040ez   The anti-churning rules do not apply in the following situations. Tax return form 1040ez You acquired the intangible from a decedent and its basis was stepped up to its fair market value. Tax return form 1040ez The intangible was amortizable as a section 197 intangible by the seller or transferor you acquired it from. Tax return form 1040ez This exception does not apply if the transaction in which you acquired the intangible and the transaction in which the seller or transferor acquired it are part of a series of related transactions. Tax return form 1040ez The gain-recognition exception, discussed later, applies. Tax return form 1040ez Related person. Tax return form 1040ez   For purposes of the anti-churning rules, the following are related persons. Tax return form 1040ez An individual and his or her brothers, sisters, half-brothers, half-sisters, spouse, ancestors (parents, grandparents, etc. Tax return form 1040ez ), and lineal descendants (children, grandchildren, etc. Tax return form 1040ez ). Tax return form 1040ez A corporation and an individual who owns, directly or indirectly, more than 20% of the value of the corporation's outstanding stock. Tax return form 1040ez Two corporations that are members of the same controlled group as defined in section 1563(a) of the Internal Revenue Code, except that “more than 20%” is substituted for “at least 80%” in that definition and the determination is made without regard to subsections (a)(4) and (e)(3)(C) of section 1563. Tax return form 1040ez (For an exception, see section 1. Tax return form 1040ez 197-2(h)(6)(iv) of the regulations. Tax return form 1040ez ) A trust fiduciary and a corporation if more than 20% of the value of the corporation's outstanding stock is owned, directly or indirectly, by or for the trust or grantor of the trust. Tax return form 1040ez The grantor and fiduciary, and the fiduciary and beneficiary, of any trust. Tax return form 1040ez The fiduciaries of two different trusts, and the fiduciaries and beneficiaries of two different trusts, if the same person is the grantor of both trusts. Tax return form 1040ez The executor and beneficiary of an estate. Tax return form 1040ez A tax-exempt educational or charitable organization and a person who directly or indirectly controls the organization (or whose family members control it). Tax return form 1040ez A corporation and a partnership if the same persons own more than 20% of the value of the outstanding stock of the corporation and more than 20% of the capital or profits interest in the partnership. Tax return form 1040ez Two S corporations, and an S corporation and a regular corporation, if the same persons own more than 20% of the value of the outstanding stock of each corporation. Tax return form 1040ez Two partnerships if the same persons own, directly or indirectly, more than 20% of the capital or profits interests in both partnerships. Tax return form 1040ez A partnership and a person who owns, directly or indirectly, more than 20% of the capital or profits interests in the partnership. Tax return form 1040ez Two persons who are engaged in trades or businesses under common control (as described in section 41(f)(1) of the Internal Revenue Code). Tax return form 1040ez When to determine relationship. Tax return form 1040ez   Persons are treated as related if the relationship existed at the following time. Tax return form 1040ez In the case of a single transaction, immediately before or immediately after the transaction in which the intangible was acquired. Tax return form 1040ez In the case of a series of related transactions (or a series of transactions that comprise a qualified stock purchase under section 338(d)(3) of the Internal Revenue Code), immediately before the earliest transaction or immediately after the last transaction. Tax return form 1040ez Ownership of stock. Tax return form 1040ez   In determining whether an individual directly or indirectly owns any of the outstanding stock of a corporation, the following rules apply. Tax return form 1040ez Rule 1. Tax return form 1040ez   Stock directly or indirectly owned by or for a corporation, partnership, estate, or trust is considered owned proportionately by or for its shareholders, partners, or beneficiaries. Tax return form 1040ez Rule 2. Tax return form 1040ez   An individual is considered to own the stock directly or indirectly owned by or for his or her family. Tax return form 1040ez Family includes only brothers and sisters, half-brothers and half-sisters, spouse, ancestors, and lineal descendants. Tax return form 1040ez Rule 3. Tax return form 1040ez   An individual owning (other than by applying Rule 2) any stock in a corporation is considered to own the stock directly or indirectly owned by or for his or her partner. Tax return form 1040ez Rule 4. Tax return form 1040ez   For purposes of applying Rule 1, 2, or 3, treat stock constructively owned by a person under Rule 1 as actually owned by that person. Tax return form 1040ez Do not treat stock constructively owned by an individual under Rule 2 or 3 as owned by the individual for reapplying Rule 2 or 3 to make another person the constructive owner of the stock. Tax return form 1040ez Gain-recognition exception. Tax return form 1040ez   This exception to the anti-churning rules applies if the person you acquired the intangible from (the transferor) meets both of the following requirements. Tax return form 1040ez That person would not be related to you (as described under Related person , earlier) if the 20% test for ownership of stock and partnership interests were replaced by a 50% test. Tax return form 1040ez That person chose to recognize gain on the disposition of the intangible and pay income tax on the gain at the highest tax rate. Tax return form 1040ez See chapter 2 in Publication 544 for information on making this choice. Tax return form 1040ez   If this exception applies, the anti-churning rules apply only to the amount of your adjusted basis in the intangible that is more than the gain recognized by the transferor. Tax return form 1040ez Notification. Tax return form 1040ez   If the person you acquired the intangible from chooses to recognize gain under the rules for this exception, that person must notify you in writing by the due date of the return on which the choice is made. Tax return form 1040ez Anti-abuse rule. Tax return form 1040ez   You cannot amortize any section 197 intangible acquired in a transaction for which the principal purpose was either of the following. Tax return form 1040ez To avoid the requirement that the intangible be acquired after August 10, 1993. Tax return form 1040ez To avoid any of the anti-churning rules. Tax return form 1040ez More information. Tax return form 1040ez   For more information about the anti-churning rules, including additional rules for partnerships, see Regulations section 1. Tax return form 1040ez 197-2(h). Tax return form 1040ez Incorrect Amount of Amortization Deducted If you later discover that you deducted an incorrect amount for amortization for a section 197 intangible in any year, you may be able to make a correction for that year by filing an amended return. Tax return form 1040ez See Amended Return , next. Tax return form 1040ez If you are not allowed to make the correction on an amended return, you can change your accounting method to claim the correct amortization. Tax return form 1040ez See Changing Your Accounting Method , later. Tax return form 1040ez Amended Return If you deducted an incorrect amount for amortization, you can file an amended return to correct the following. Tax return form 1040ez A mathematical error made in any year. Tax return form 1040ez A posting error made in any year. Tax return form 1040ez An amortization deduction for a section 197 intangible for which you have not adopted a method of accounting. Tax return form 1040ez When to file. Tax return form 1040ez   If an amended return is allowed, you must file it by the later of the following dates. Tax return form 1040ez 3 years from the date you filed your original return for the year in which you did not deduct the correct amount. Tax return form 1040ez (A return filed early is considered filed on the due date. Tax return form 1040ez ) 2 years from the time you paid your tax for that year. Tax return form 1040ez Changing Your Accounting Method Generally, you must get IRS approval to change your method of accounting. Tax return form 1040ez File Form 3115, Application for Change in Accounting Method, to request a change to a permissible method of accounting for amortization. Tax return form 1040ez The following are examples of a change in method of accounting for amortization. Tax return form 1040ez A change in the amortization method, period of recovery, or convention of an amortizable asset. Tax return form 1040ez A change in the accounting for amortizable assets from a single asset account to a multiple asset account (pooling), or vice versa. Tax return form 1040ez A change in the accounting for amortizable assets from one type of multiple asset account to a different type of multiple asset account. Tax return form 1040ez Changes in amortization that are not a change in method of accounting include the following: A change in computing amortization in the tax year in which your use of the asset changes. Tax return form 1040ez An adjustment in the useful life of an amortizable asset. Tax return form 1040ez Generally, the making of a late amortization election or the revocation of a timely valid amortization election. Tax return form 1040ez Any change in the placed-in-service date of an amortizable asset. Tax return form 1040ez See Regulations section 1. Tax return form 1040ez 446-1(e)(2)(ii)(a) for more information and examples. Tax return form 1040ez Automatic approval. Tax return form 1040ez   In some instances, you may be able to get automatic approval from the IRS to change your method of accounting for amortization. Tax return form 1040ez For a list of automatic accounting method changes, see the Instructions for Form 3115. Tax return form 1040ez Also see the Instructions for Form 3115 for more information on getting approval, automatic approval procedures, and a list of exceptions to the automatic approval process. Tax return form 1040ez For more information, see Revenue Procedure 2006-12, as modified by Revenue Procedure 2006-37, and Revenue Procedure 2008-52, as amplified, clarified, and modified by Revenue Procedure 2009-39, as clarified and modified by Revenue Procedure 2011-14, as modified and amplified by Revenue Procedure 2011-22, as modified by Revenue Procedure 2012-39, or any successor. Tax return form 1040ez See Revenue Procedure 2006-12, 2006-3 I. Tax return form 1040ez R. Tax return form 1040ez B. Tax return form 1040ez 310, available at  www. Tax return form 1040ez irs. Tax return form 1040ez gov/irb/2006-03_IRB/ar14. Tax return form 1040ez html. Tax return form 1040ez  See Revenue Procedure 2006-37, 2006-38 I. Tax return form 1040ez R. Tax return form 1040ez B. Tax return form 1040ez 499, available at  www. Tax return form 1040ez irs. Tax return form 1040ez gov/irb/2006-38_IRB/ar10. Tax return form 1040ez html. Tax return form 1040ez  See Revenue Procedure 2008-52, 2008-36 I. Tax return form 1040ez R. Tax return form 1040ez B. Tax return form 1040ez 587, available at www. Tax return form 1040ez irs. Tax return form 1040ez gov/irb/2008-36_IRB/ar09. Tax return form 1040ez html. Tax return form 1040ez  See Revenue Procedure 2009-39, 2009-38 I. Tax return form 1040ez R. Tax return form 1040ez B. Tax return form 1040ez 371, available at  www. Tax return form 1040ez irs. Tax return form 1040ez gov/irb/2009-38_IRB/ar08. Tax return form 1040ez html. Tax return form 1040ez  See Revenue Procedure 2011-14, 2011-4 I. Tax return form 1040ez R. Tax return form 1040ez B. Tax return form 1040ez 330, available at  www. Tax return form 1040ez irs. Tax return form 1040ez gov/irb/2011-04_IRB/ar08. Tax return form 1040ez html. Tax return form 1040ez  See Revenue Procedure 2011-22, 2011-18 I. Tax return form 1040ez R. Tax return form 1040ez B. Tax return form 1040ez 737, available at  www. Tax return form 1040ez irs. Tax return form 1040ez gov/irb/2011-18_IRB/ar08. Tax return form 1040ez html. Tax return form 1040ez Also, see Revenue Procedure 2012-39, 2012-41 I. Tax return form 1040ez R. Tax return form 1040ez B. Tax return form 1040ez 470 available at www. Tax return form 1040ez irs. Tax return form 1040ez gov/irb/2012-41_IRB/index. Tax return form 1040ez html. Tax return form 1040ez Disposition of Section 197 Intangibles A section 197 intangible is treated as depreciable property used in your trade or business. Tax return form 1040ez If you held the intangible for more than 1 year, any gain on its disposition, up to the amount of allowable amortization, is ordinary income (section 1245 gain). Tax return form 1040ez If multiple section 197 intangibles are disposed of in a single transaction or a series of related transactions, treat all of the section 197 intangibles as if they were a single asset for purposes of determining the amount of gain that is ordinary income. Tax return form 1040ez Any remaining gain, or any loss, is a section 1231 gain or loss. Tax return form 1040ez If you held the intangible 1 year or less, any gain or loss on its disposition is an ordinary gain or loss. Tax return form 1040ez For more information on ordinary or capital gain or loss on business property, see chapter 3 in Publication 544. Tax return form 1040ez Nondeductible loss. Tax return form 1040ez   You cannot deduct any loss on the disposition or worthlessness of a section 197 intangible that you acquired in the same transaction (or series of related transactions) as other section 197 intangibles you still have. Tax return form 1040ez Instead, increase the adjusted basis of each remaining amortizable section 197 intangible by a proportionate part of the nondeductible loss. Tax return form 1040ez Figure the increase by multiplying the nondeductible loss on the disposition of the intangible by the following fraction. Tax return form 1040ez The numerator is the adjusted basis of each remaining intangible on the date of the disposition. Tax return form 1040ez The denominator is the total adjusted bases of all remaining amortizable section 197 intangibles on the date of the disposition. Tax return form 1040ez Covenant not to compete. Tax return form 1040ez   A covenant not to compete, or similar arrangement, is not considered disposed of or worthless before you dispose of your entire interest in the trade or business for which you entered into the covenant. Tax return form 1040ez Nonrecognition transfers. Tax return form 1040ez   If you acquire a section 197 intangible in a nonrecognition transfer, you are treated as the transferor with respect to the part of your adjusted basis in the intangible that is not more than the transferor's adjusted basis. Tax return form 1040ez You amortize this part of the adjusted basis over the intangible's remaining amortization period in the hands of the transferor. Tax return form 1040ez Nonrecognition transfers include transfers to a corporation, partnership contributions and distributions, like-kind exchanges, and involuntary conversions. Tax return form 1040ez   In a like-kind exchange or involuntary conversion of a section 197 intangible, you must continue to amortize the part of your adjusted basis in the acquired intangible that is not more than your adjusted basis in the exchanged or converted intangible over the remaining amortization period of the exchanged or converted intangible. Tax return form 1040ez Amortize over a new 15-year period the part of your adjusted basis in the acquired intangible that is more than your adjusted basis in the exchanged or converted intangible. Tax return form 1040ez Example. Tax return form 1040ez You own a section 197 intangible you have amortized for 4 full years. Tax return form 1040ez It has a remaining unamortized basis of $30,000. Tax return form 1040ez You exchange the asset plus $10,000 for a like-kind section 197 intangible. Tax return form 1040ez The nonrecognition provisions of like-kind exchanges apply. Tax return form 1040ez You amortize $30,000 of the $40,000 adjusted basis of the acquired intangible over the 11 years remaining in the original 15-year amortization period for the transferred asset. Tax return form 1040ez You amortize the other $10,000 of adjusted basis over a new 15-year period. Tax return form 1040ez For more information, see Regulations section 1. Tax return form 1040ez 197-2(g). Tax return form 1040ez Reforestation Costs You can elect to deduct a limited amount of reforestation costs paid or incurred during the tax year. Tax return form 1040ez See Reforestation Costs in chapter 7. Tax return form 1040ez You can elect to amortize the qualifying costs that are not deducted currently over an 84-month period. Tax return form 1040ez There is no limit on the amount of your amortization deduction for reforestation costs paid or incurred during the tax year. Tax return form 1040ez The election to amortize reforestation costs incurred by a partnership, S corporation, or estate must be made by the partnership, corporation, or estate. Tax return form 1040ez A partner, shareholder, or beneficiary cannot make that election. Tax return form 1040ez A partner's or shareholder's share of amortizable costs is figured under the general rules for allocating items of income, loss, deduction, etc. Tax return form 1040ez , of a partnership or S corporation. Tax return form 1040ez The amortizable costs of an estate are divided between the estate and the income beneficiary based on the income of the estate allocable to each. Tax return form 1040ez Qualifying costs. Tax return form 1040ez   Reforestation costs are the direct costs of planting or seeding for forestation or reforestation. Tax return form 1040ez Qualifying costs include only those costs you must capitalize and include in the adjusted basis of the property. Tax return form 1040ez They include costs for the following items. Tax return form 1040ez Site preparation. Tax return form 1040ez Seeds or seedlings. Tax return form 1040ez Labor. Tax return form 1040ez Tools. Tax return form 1040ez Depreciation on equipment used in planting and seeding. Tax return form 1040ez Qualifying costs do not include costs for which the government reimburses you under a cost-sharing program, unless you include the reimbursement in your income. Tax return form 1040ez Qualified timber property. Tax return form 1040ez   Qualified timber property is property that contains trees in significant commercial quantities. Tax return form 1040ez It can be a woodlot or other site that you own or lease. Tax return form 1040ez The property qualifies only if it meets all of the following requirements. Tax return form 1040ez It is located in the United States. Tax return form 1040ez It is held for the growing and cutting of timber you will either use in, or sell for use in, the commercial production of timber products. Tax return form 1040ez It consists of at least one acre planted with tree seedlings in the manner normally used in forestation or reforestation. Tax return form 1040ez Qualified timber property does not include property on which you have planted shelter belts or ornamental trees, such as Christmas trees. Tax return form 1040ez Amortization period. Tax return form 1040ez   The 84-month amortization period starts on the first day of the first month of the second half of the tax year you incur the costs (July 1 for a calendar year taxpayer), regardless of the month you actually incur the costs. Tax return form 1040ez You can claim amortization deductions for no more than 6 months of the first and last (eighth) tax years of the period. Tax return form 1040ez Life tenant and remainderman. Tax return form 1040ez   If one person holds the property for life with the remainder going to another person, the life tenant is entitled to the full amortization for qualifying reforestation costs incurred by the life tenant. Tax return form 1040ez Any remainder interest in the property is ignored for amortization purposes. Tax return form 1040ez Recapture. Tax return form 1040ez   If you dispose of qualified timber property within 10 years after the tax year you incur qualifying reforestation expenses, report any gain as ordinary income up to the amortization you took. Tax return form 1040ez See chapter 3 of Publication 544 for more information. Tax return form 1040ez How to make the election. Tax return form 1040ez   To elect to amortize qualifying reforestation costs, complete Part VI of Form 4562 and attach a statement that contains the following information. Tax return form 1040ez A description of the costs and the dates you incurred them. Tax return form 1040ez A description of the type of timber being grown and the purpose for which it is grown. Tax return form 1040ez Attach a separate statement for each property for which you amortize reforestation costs. Tax return form 1040ez   Generally, you must make the election on a timely filed return (including extensions) for the tax year in which you incurred the costs. Tax return form 1040ez 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 return form 1040ez Attach Form 4562 and the statement to the amended return and write “Filed pursuant to section 301. Tax return form 1040ez 9100-2” on Form 4562. Tax return form 1040ez File the amended return at the same address you filed the original return. Tax return form 1040ez Revoking the election. Tax return form 1040ez   You must get IRS approval to revoke your election to amortize qualifying reforestation costs. Tax return form 1040ez Your application to revoke the election must include your name, address, the years for which your election was in effect, and your reason for revoking it. Tax return form 1040ez Please provide your daytime telephone number (optional), in case we need to contact you. Tax return form 1040ez You, or your duly authorized representative, must sign the application and file it at least 90 days before the due date (without extensions) for filing your income tax return for the first tax year for which your election is to end. Tax return form 1040ez    Send the application to: Internal Revenue Service Associate Chief Counsel Passthroughs and Special Industries CC:PSI:6 1111 Constitution Ave. Tax return form 1040ez NW, IR-5300 Washington, DC 20224 Geological and Geophysical Costs You can amortize the cost of geological and geophysical expenses paid or incurred in connection with oil and gas exploration or development within the United States. Tax return form 1040ez These costs can be amortized ratably over a 24-month period beginning on the mid-point of the tax year in which the expenses were paid or incurred. Tax return form 1040ez For major integrated oil companies (as defined in section 167(h)(5)), these costs must be amortized ratably over a 5-year period for costs paid or incurred after May 17, 2006 (a 7-year period for costs paid or incurred after December 19, 2007). Tax return form 1040ez If you retire or abandon the property during the amortization period, no amortization deduction is allowed in the year of retirement or abandonment. Tax return form 1040ez Pollution Control Facilities You can elect to amortize the cost of a certified pollution control facility over 60 months. Tax return form 1040ez However, see Atmospheric pollution control facilities for an exception. Tax return form 1040ez The cost of a pollution control facility that is not eligible for amortization can be depreciated under the regular rules for depreciation. Tax return form 1040ez Also, you can claim a special depreciation allowance on a certified pollution control facility that is qualified property even if you elect to amortize its cost. Tax return form 1040ez You must reduce its cost (amortizable basis) by the amount of any special allowance you claim. Tax return form 1040ez See chapter 3 of Publication 946. Tax return form 1040ez A certified pollution control facility is a new identifiable treatment facility used in connection with a plant or other property in operation before 1976, to reduce or control water or atmospheric pollution or contamination. Tax return form 1040ez The facility must do so by removing, changing, disposing, storing, or preventing the creation or emission of pollutants, contaminants, wastes, or heat. Tax return form 1040ez The facility must be certified by state and federal certifying authorities. Tax return form 1040ez The facility must not significantly increase the output or capacity, extend the useful life, or reduce the total operating costs of the plant or other property. Tax return form 1040ez Also, it must not significantly change the nature of the manufacturing or production process or facility. Tax return form 1040ez The federal certifying authority will not certify your property to the extent it appears you will recover (over the property's useful life) all or part of its cost from the profit based on its operation (such as through sales of recovered wastes). Tax return form 1040ez The federal certifying authority will describe the nature of the potential cost recovery. Tax return form 1040ez You must then reduce the amortizable basis of the facility by this potential recovery. Tax return form 1040ez New identifiable treatment facility. Tax return form 1040ez   A new identifiable treatment facility is tangible depreciable property that is identifiable as a treatment facility. Tax return form 1040ez It does not include a building and its structural components unless the building is exclusively a treatment facility. Tax return form 1040ez Atmospheric pollution control facilities. Tax return form 1040ez   Certain atmospheric pollution control facilities can be amortized over 84 months. Tax return form 1040ez To qualify, the following must apply. Tax return form 1040ez The facility must be acquired and placed in service after April 11, 2005. Tax return form 1040ez If acquired, the original use must begin with you after April 11, 2005. Tax return form 1040ez The facility must be used in connection with an electric generation plant or other property placed in operation after December 31, 1975, that is primarily coal fired. Tax return form 1040ez If you construct, reconstruct, or erect the facility, only the basis attributable to the construction, reconstruction, or erection completed after April 11, 2005, qualifies. Tax return form 1040ez Basis reduction for corporations. Tax return form 1040ez   A corporation must reduce the amortizable basis of a pollution control facility by 20% before figuring the amortization deduction. Tax return form 1040ez More information. Tax return form 1040ez   For more information on the amortization of pollution control facilities, see Code sections 169 and 291(c) and the related regulations. Tax return form 1040ez Research and Experimental Costs You can elect to amortize your research and experimental costs, deduct them as current business expenses, or write them off over a 10-year period (see Optional write-off method below). Tax return form 1040ez If you elect to amortize these costs, deduct them in equal amounts over 60 months or more. Tax return form 1040ez The amortization period begins the month you first receive an economic benefit from the costs. Tax return form 1040ez For a definition of “research and experimental costs” and information on deducting them as current business expenses, see chapter 7. Tax return form 1040ez Optional write-off method. Tax return form 1040ez   Rather than amortize these costs or deduct them as a current expense, you have the option of deducting (writing off) research and experimental costs ratably over a 10-year period beginning with the tax year in which you incurred the costs. Tax return form 1040ez For more information, see Optional Write-off of Certain Tax Preferences , later, and section 59(e) of the Internal Revenue Code. Tax return form 1040ez Costs you can amortize. Tax return form 1040ez   You can amortize costs chargeable to a capital account (see chapter 1) if you meet both of the following requirements. Tax return form 1040ez You paid or incurred the costs in your trade or business. Tax return form 1040ez You are not deducting the costs currently. Tax return form 1040ez How to make the election. Tax return form 1040ez   To elect to amortize research and experimental costs, complete Part VI of Form 4562 and attach it to your income tax return. Tax return form 1040ez Generally, you must file the return by the due date (including extensions). Tax return form 1040ez 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 return form 1040ez Attach Form 4562 to the amended return and write “Filed pursuant to section 301. Tax return form 1040ez 9100-2” on Form 4562. Tax return form 1040ez File the amended return at the same address you filed the original return. Tax return form 1040ez   Your election is binding for the year it is made and for all later years unless you obtain approval from the IRS to change to a different method. Tax return form 1040ez Optional Write-off of Certain Tax Preferences You can elect to amortize certain tax preference items over an optional period beginning in the tax year in which you incurred the costs. Tax return form 1040ez If you make this election, there is no AMT adjustment. Tax return form 1040ez The applicable costs and the optional recovery periods are as follows: Circulation costs — 3 years, Intangible drilling and development costs — 60 months, Mining exploration and development costs — 10 years, and Research and experimental costs — 10 years. Tax return form 1040ez How to make the election. Tax return form 1040ez   To elect to amortize qualifying costs over the optional recovery period, complete Part VI of Form 4562 and attach a statement containing the following information to your return for the tax year in which the election begins: Your name, address, and taxpayer identification number; and The type of cost and the specific amount of the cost for which you are making the election. Tax return form 1040ez   Generally, the election must be made on a timely filed return (including extensions) for the tax year in which you incurred the costs. Tax return form 1040ez 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 return form 1040ez Attach Form 4562 to the amended return and write “Filed pursuant to section 301. Tax return form 1040ez 9100-2” on Form 4562. Tax return form 1040ez File the amended return at the same address you filed the original return. Tax return form 1040ez Revoking the election. Tax return form 1040ez   You must obtain consent from the IRS to revoke your election. Tax return form 1040ez Your request to revoke the election must be submitted to the IRS in the form of a letter ruling before the end of the tax year in which the optional recovery period ends. Tax return form 1040ez The request must contain all of the information necessary to demonstrate the rare and unusual circumstances that would justify granting revocation. Tax return form 1040ez If the request for revocation is approved, any unamortized costs are deductible in the year the revocation is effective. Tax return form 1040ez Prev  Up  Next   Home   More Online Publications