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Taxes 8. Taxes   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. Taxes 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. Taxes It is similar to the straight line method of depreciation. Taxes The various amortizable costs covered in this chapter are included in the list below. Taxes However, this chapter does not discuss amortization of bond premium. Taxes For information on that topic, see chapter 3 of Publication 550, Investment Income and Expenses. Taxes 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. Taxes 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. Taxes To report amortization from previous years, in addition to amortization that begins in the current year, list on Form 4562 each item separately. Taxes For example, in 2012, you began to amortize a lease. Taxes In 2013, you began to amortize a second lease. Taxes Report amortization from the new lease on line 42 of your 2013 Form 4562. Taxes Report amortization from the 2012 lease on line 43 of your 2013 Form 4562. Taxes 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). Taxes 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. Taxes 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. Taxes Generally, you recover costs for particular assets through depreciation deductions. Taxes However, you generally cannot recover other costs until you sell the business or otherwise go out of business. Taxes 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. Taxes For costs paid or incurred after September 8, 2008, you can deduct a limited amount of start-up and organizational costs. Taxes The costs that are not deducted currently can be amortized ratably over a 180-month period. Taxes The amortization period starts with the month you begin operating your active trade or business. Taxes You are not required to attach a statement to make this election. Taxes 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. Taxes 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. Taxes See Regulations sections 1. Taxes 195-1, 1. Taxes 248-1, and 1. Taxes 709-1. Taxes 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. Taxes Any costs not deducted can be amortized ratably over a 180-month period, beginning with the month you begin business. Taxes If the election is made, you must attach any statement required by Regulations sections 1. Taxes 195-1(b), 1. Taxes 248-1(c), and 1. Taxes 709-1(c), as in effect before September 9, 2008. Taxes Note. Taxes You can apply the provisions of Regulations sections 1. Taxes 195-1, 1. Taxes 248-1, and 1. Taxes 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. Taxes Otherwise, the provisions under Regulations sections 1. Taxes 195-1(b), 1. Taxes 248-1(c), and 1. Taxes 709-1(c), as in effect before September 9, 2008, will apply. Taxes 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. Taxes See How To Make the Election , later. Taxes The cost must qualify as one of the following. Taxes A business start-up cost. Taxes An organizational cost for a corporation. Taxes An organizational cost for a partnership. Taxes 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. Taxes 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. Taxes Qualifying costs. Taxes   A start-up cost is amortizable if it meets both of the following tests. Taxes 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). Taxes It is a cost you pay or incur before the day your active trade or business begins. Taxes   Start-up costs include amounts paid for the following: An analysis or survey of potential markets, products, labor supply, transportation facilities, etc. Taxes Advertisements for the opening of the business. Taxes Salaries and wages for employees who are being trained and their instructors. Taxes Travel and other necessary costs for securing prospective distributors, suppliers, or customers. Taxes Salaries and fees for executives and consultants, or for similar professional services. Taxes Nonqualifying costs. Taxes   Start-up costs do not include deductible interest, taxes, or research and experimental costs. Taxes See Research and Experimental Costs , later. Taxes Purchasing an active trade or business. Taxes   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. Taxes These are costs that help you decide whether to purchase a business. Taxes Costs you incur in an attempt to purchase a specific business are capital expenses that you cannot amortize. Taxes Example. Taxes On June 1st, you hired an accounting firm and a law firm to assist you in the potential purchase of XYZ, Inc. Taxes They researched XYZ's industry and analyzed the financial projections of XYZ, Inc. Taxes In September, the law firm prepared and submitted a letter of intent to XYZ, Inc. Taxes The letter stated that a binding commitment would result only after a purchase agreement was signed. Taxes 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. Taxes On October 22nd, you signed a purchase agreement with XYZ, Inc. Taxes All amounts paid or incurred to investigate the business before October 22nd are amortizable investigative costs. Taxes Amounts paid on or after that date relate to the attempt to purchase the business and therefore must be capitalized. Taxes Disposition of business. Taxes   If you completely dispose of your business before the end of the amortization period, you can deduct any remaining deferred start-up costs. Taxes However, you can deduct these deferred start-up costs only to the extent they qualify as a loss from a business. Taxes Costs of Organizing a Corporation Amounts paid to organize a corporation are the direct costs of creating the corporation. Taxes Qualifying costs. Taxes   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. Taxes   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. Taxes   Examples of organizational costs include: The cost of temporary directors. Taxes The cost of organizational meetings. Taxes State incorporation fees. Taxes The cost of legal services. Taxes Nonqualifying costs. Taxes   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. Taxes Costs associated with the transfer of assets to the corporation. Taxes Costs of Organizing a Partnership The costs to organize a partnership are the direct costs of creating the partnership. Taxes Qualifying costs. Taxes   A partnership can amortize an organizational cost only if it meets all the following tests. Taxes It is for the creation of the partnership and not for starting or operating the partnership trade or business. Taxes It is chargeable to a capital account (see chapter 1). Taxes It could be amortized over the life of the partnership if the partnership had a fixed life. Taxes 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. Taxes 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. Taxes It is for a type of item normally expected to benefit the partnership throughout its entire life. Taxes   Organizational costs include the following fees. Taxes Legal fees for services incident to the organization of the partnership, such as negotiation and preparation of the partnership agreement. Taxes Accounting fees for services incident to the organization of the partnership. Taxes Filing fees. Taxes Nonqualifying costs. Taxes   The following costs cannot be amortized. Taxes The cost of acquiring assets for the partnership or transferring assets to the partnership. Taxes The cost of admitting or removing partners, other than at the time the partnership is first organized. Taxes The cost of making a contract concerning the operation of the partnership trade or business including a contract between a partner and the partnership. Taxes The costs for issuing and marketing interests in the partnership such as brokerage, registration, and legal fees and printing costs. Taxes These “syndication fees” are capital expenses that cannot be depreciated or amortized. Taxes Liquidation of partnership. Taxes   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. Taxes However, these costs can be deducted only to the extent they qualify as a loss from a business. Taxes How To Amortize Deduct start-up and organizational costs in equal amounts over the applicable amortization period (discussed earlier). Taxes 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. Taxes Once you choose an amortization period, you cannot change it. Taxes To figure your deduction, divide your total start-up or organizational costs by the months in the amortization period. Taxes The result is the amount you can deduct for each month. Taxes Cash method partnership. Taxes   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. Taxes 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. Taxes 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. Taxes You may also be required to attach an accompanying statement (described later) to your return. Taxes For start-up or organizational costs paid or incurred after September 8, 2008, an accompanying statement is not required. Taxes 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. Taxes 195-1, 1. Taxes 248-1, and 1. Taxes 709-1, you must also attach an accompanying statement to elect to amortize the costs. Taxes If you have both start-up and organizational costs, attach a separate statement (if required) to your return for each type of cost. Taxes See Starting a Business , earlier, for more information. Taxes Generally, you must file the return by the due date (including any extensions). Taxes 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). Taxes For more information, see the instructions for Part VI of Form 4562. Taxes 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. Taxes Note. Taxes 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. Taxes 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. Taxes A shareholder or partner cannot make this election. Taxes You, as a shareholder or partner, cannot amortize any costs you incur in setting up your corporation or partnership. Taxes Only the corporation or partnership can amortize these costs. Taxes However, you, as an individual, can elect to amortize costs you incur to investigate an interest in an existing partnership. Taxes These costs qualify as business start-up costs if you acquire the partnership interest. Taxes Start-up costs election statement. Taxes   If you elect to amortize your start-up costs, attach a separate statement (if required) that contains the following information. Taxes A description of the business to which the start-up costs relate. Taxes A description of each start-up cost incurred. Taxes The month your active business began (or was acquired). Taxes The number of months in your amortization period (which is generally 180 months). Taxes Filing the statement early. Taxes   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. Taxes If you file the statement early, the election becomes effective in the month of the tax year your active business begins. Taxes Revised statement. Taxes   You can file a revised statement to include any start-up costs not included in your original statement. Taxes 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. Taxes You can file the revised statement with a return filed after the return on which you elected to amortize your start-up costs. Taxes Organizational costs election statement. Taxes   If you elect to amortize your corporation's or partnership's organizational costs, attach a separate statement (if required) that contains the following information. Taxes A description of each cost. Taxes The amount of each cost. Taxes The date each cost was incurred. Taxes The month your corporation or partnership began active business (or acquired the business). Taxes The number of months in your amortization period (which is generally 180 months). Taxes Partnerships. Taxes   The statement prepared for a cash basis partnership must also indicate the amount paid before the end of the year for each cost. Taxes   You do not need to separately list any partnership organizational cost that is less than $10. Taxes Instead, you can list the total amount of these costs with the dates the first and last costs were incurred. Taxes   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. Taxes 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. Taxes 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). Taxes 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). Taxes For more information on the costs of getting a lease, see Cost of Getting a Lease in  chapter 3. Taxes How to amortize. Taxes   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. Taxes Section 197 Intangibles Generally, you may amortize the capitalized costs of “section 197 intangibles” (defined later) ratably over a 15-year period. Taxes 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. Taxes 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. Taxes See Anti-Churning Rules, later. Taxes 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). Taxes 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. Taxes You cannot deduct amortization for the month you dispose of the intangible. Taxes 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. Taxes You are not allowed any other depreciation or amortization deduction for an amortizable section 197 intangible. Taxes Tax-exempt use property subject to a lease. Taxes   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. Taxes Cost attributable to other property. Taxes   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. Taxes 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. Taxes 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. Taxes 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. Taxes 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. Taxes Goodwill. Taxes   This is the value of a trade or business based on expected continued customer patronage due to its name, reputation, or any other factor. Taxes Going concern value. Taxes   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. Taxes 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). Taxes 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. Taxes Workforce in place, etc. Taxes   This includes the composition of a workforce (for example, its experience, education, or training). Taxes 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. Taxes   For example, you must amortize the part of the purchase price of a business that is for the existence of a highly skilled workforce. Taxes Also, you must amortize the cost of acquiring an existing employment contract or relationship with employees or consultants. Taxes Business books and records, etc. Taxes   This includes the intangible value of technical manuals, training manuals or programs, data files, and accounting or inventory control systems. Taxes 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. Taxes Patents, copyrights, etc. Taxes   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 . Taxes Customer-based intangible. Taxes   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. Taxes For example, you must amortize the part of the purchase price of a business that is for the existence of the following intangibles. Taxes A customer base. Taxes A circulation base. Taxes An undeveloped market or market growth. Taxes Insurance in force. Taxes A mortgage servicing contract. Taxes An investment management contract. Taxes Any other relationship with customers involving the future provision of goods or services. Taxes   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. Taxes Supplier-based intangible. Taxes   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. Taxes 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. Taxes Do not include any amount required to be paid for the goods or services to honor the terms of the agreement or other relationship. Taxes Also, see Assets That Are Not Section 197 Intangibles below. Taxes Government-granted license, permit, etc. Taxes   This is any right granted by a governmental unit or an agency or instrumentality of a governmental unit. Taxes 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. Taxes Covenant not to compete. Taxes   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. Taxes An interest in a trade or business includes an interest in a partnership or a corporation engaged in a trade or business. Taxes   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. Taxes Franchise, trademark, or trade name. Taxes   A franchise, trademark, or trade name is a section 197 intangible. Taxes You must amortize its purchase or renewal costs, other than certain contingent payments that you can deduct currently. Taxes For information on currently deductible contingent payments, see chapter 11. Taxes Professional sports franchise. Taxes   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. Taxes Contract for the use of, or a term interest in, a section 197 intangible. Taxes   Section 197 intangibles include any right under a license, contract, or other arrangement providing for the use of any section 197 intangible. Taxes It also includes any term interest in any section 197 intangible, whether the interest is outright or in trust. Taxes Assets That Are Not Section 197 Intangibles The following assets are not section 197 intangibles. Taxes Any interest in a corporation, partnership, trust, or estate. Taxes Any interest under an existing futures contract, foreign currency contract, notional principal contract, interest rate swap, or similar financial contract. Taxes Any interest in land. Taxes Most computer software. Taxes (See Computer software , later. Taxes ) 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. Taxes An interest in a film, sound recording, video tape, book, or similar property. Taxes A right to receive tangible property or services under a contract or from a governmental agency. Taxes An interest in a patent or copyright. Taxes Certain rights that have a fixed duration or amount. Taxes (See Rights of fixed duration or amount , later. Taxes ) An interest under either of the following. Taxes An existing lease or sublease of tangible property. Taxes A debt that was in existence when the interest was acquired. Taxes 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. Taxes Certain transaction costs incurred by parties to a corporate organization or reorganization in which any part of a gain or loss is not recognized. Taxes Intangible property that is not amortizable under the rules for section 197 intangibles can be depreciated if it meets certain requirements. Taxes You generally must use the straight line method over its useful life. Taxes For certain intangibles, the depreciation period is specified in the law and regulations. Taxes For example, the depreciation period for computer software that is not a section 197 intangible is generally 36 months. Taxes 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. Taxes Computer software. Taxes   Section 197 intangibles do not include the following types of computer software. Taxes Software that meets all the following requirements. Taxes It is, or has been, readily available for purchase by the general public. Taxes It is subject to a nonexclusive license. Taxes It has not been substantially modified. Taxes 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. Taxes Software that is not acquired in connection with the acquisition of a trade or business or a substantial part of a trade or business. Taxes Computer software defined. Taxes   Computer software includes all programs designed to cause a computer to perform a desired function. Taxes It also includes any database or similar item that is in the public domain and is incidental to the operation of qualifying software. Taxes Rights of fixed duration or amount. Taxes   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. Taxes However, this does not apply to the following intangibles. Taxes Goodwill. Taxes Going concern value. Taxes A covenant not to compete. Taxes A franchise, trademark, or trade name. Taxes A customer-related information base, customer-based intangible, or similar item. Taxes 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. Taxes 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. Taxes 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. Taxes 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. Taxes Amortize these costs using the rules of Revenue Procedure 2004-36. Taxes For more information, see Revenue Procedure 2004-36, 2004-24 I. Taxes R. Taxes B. Taxes 1063, available at  www. Taxes irs. Taxes gov/irb/2004-24_IRB/ar16. Taxes html. Taxes A change in the treatment of creative property costs is a change in method of accounting. Taxes 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. Taxes These rules apply to goodwill and going concern value, and to any other section 197 intangible that is not otherwise depreciable or amortizable. Taxes Under the anti-churning rules, you cannot use 15-year amortization for the intangible if any of the following conditions apply. Taxes You or a related person (defined later) held or used the intangible at any time from July 25, 1991, through August 10, 1993. Taxes 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. Taxes 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). Taxes 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. Taxes See Related person , later, for more information. Taxes Exceptions. Taxes   The anti-churning rules do not apply in the following situations. Taxes You acquired the intangible from a decedent and its basis was stepped up to its fair market value. Taxes The intangible was amortizable as a section 197 intangible by the seller or transferor you acquired it from. Taxes 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. Taxes The gain-recognition exception, discussed later, applies. Taxes Related person. Taxes   For purposes of the anti-churning rules, the following are related persons. Taxes An individual and his or her brothers, sisters, half-brothers, half-sisters, spouse, ancestors (parents, grandparents, etc. Taxes ), and lineal descendants (children, grandchildren, etc. Taxes ). Taxes A corporation and an individual who owns, directly or indirectly, more than 20% of the value of the corporation's outstanding stock. Taxes 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. Taxes (For an exception, see section 1. Taxes 197-2(h)(6)(iv) of the regulations. Taxes ) 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. Taxes The grantor and fiduciary, and the fiduciary and beneficiary, of any trust. Taxes 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. Taxes The executor and beneficiary of an estate. Taxes A tax-exempt educational or charitable organization and a person who directly or indirectly controls the organization (or whose family members control it). Taxes 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. Taxes 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. Taxes Two partnerships if the same persons own, directly or indirectly, more than 20% of the capital or profits interests in both partnerships. Taxes A partnership and a person who owns, directly or indirectly, more than 20% of the capital or profits interests in the partnership. Taxes Two persons who are engaged in trades or businesses under common control (as described in section 41(f)(1) of the Internal Revenue Code). Taxes When to determine relationship. Taxes   Persons are treated as related if the relationship existed at the following time. Taxes In the case of a single transaction, immediately before or immediately after the transaction in which the intangible was acquired. Taxes 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. Taxes Ownership of stock. Taxes   In determining whether an individual directly or indirectly owns any of the outstanding stock of a corporation, the following rules apply. Taxes Rule 1. Taxes   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. Taxes Rule 2. Taxes   An individual is considered to own the stock directly or indirectly owned by or for his or her family. Taxes Family includes only brothers and sisters, half-brothers and half-sisters, spouse, ancestors, and lineal descendants. Taxes Rule 3. Taxes   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. Taxes Rule 4. Taxes   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. Taxes 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. Taxes Gain-recognition exception. Taxes   This exception to the anti-churning rules applies if the person you acquired the intangible from (the transferor) meets both of the following requirements. Taxes 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. Taxes That person chose to recognize gain on the disposition of the intangible and pay income tax on the gain at the highest tax rate. Taxes See chapter 2 in Publication 544 for information on making this choice. Taxes   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. Taxes Notification. Taxes   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. Taxes Anti-abuse rule. Taxes   You cannot amortize any section 197 intangible acquired in a transaction for which the principal purpose was either of the following. Taxes To avoid the requirement that the intangible be acquired after August 10, 1993. Taxes To avoid any of the anti-churning rules. Taxes More information. Taxes   For more information about the anti-churning rules, including additional rules for partnerships, see Regulations section 1. Taxes 197-2(h). Taxes 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. Taxes See Amended Return , next. Taxes If you are not allowed to make the correction on an amended return, you can change your accounting method to claim the correct amortization. Taxes See Changing Your Accounting Method , later. Taxes Amended Return If you deducted an incorrect amount for amortization, you can file an amended return to correct the following. Taxes A mathematical error made in any year. Taxes A posting error made in any year. Taxes An amortization deduction for a section 197 intangible for which you have not adopted a method of accounting. Taxes When to file. Taxes   If an amended return is allowed, you must file it by the later of the following dates. Taxes 3 years from the date you filed your original return for the year in which you did not deduct the correct amount. Taxes (A return filed early is considered filed on the due date. Taxes ) 2 years from the time you paid your tax for that year. Taxes Changing Your Accounting Method Generally, you must get IRS approval to change your method of accounting. Taxes File Form 3115, Application for Change in Accounting Method, to request a change to a permissible method of accounting for amortization. Taxes The following are examples of a change in method of accounting for amortization. Taxes A change in the amortization method, period of recovery, or convention of an amortizable asset. Taxes A change in the accounting for amortizable assets from a single asset account to a multiple asset account (pooling), or vice versa. Taxes A change in the accounting for amortizable assets from one type of multiple asset account to a different type of multiple asset account. Taxes 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. Taxes An adjustment in the useful life of an amortizable asset. Taxes Generally, the making of a late amortization election or the revocation of a timely valid amortization election. Taxes Any change in the placed-in-service date of an amortizable asset. Taxes See Regulations section 1. Taxes 446-1(e)(2)(ii)(a) for more information and examples. Taxes Automatic approval. Taxes   In some instances, you may be able to get automatic approval from the IRS to change your method of accounting for amortization. Taxes For a list of automatic accounting method changes, see the Instructions for Form 3115. Taxes 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. Taxes 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. Taxes See Revenue Procedure 2006-12, 2006-3 I. Taxes R. Taxes B. Taxes 310, available at  www. Taxes irs. Taxes gov/irb/2006-03_IRB/ar14. Taxes html. Taxes  See Revenue Procedure 2006-37, 2006-38 I. Taxes R. Taxes B. Taxes 499, available at  www. Taxes irs. Taxes gov/irb/2006-38_IRB/ar10. Taxes html. Taxes  See Revenue Procedure 2008-52, 2008-36 I. Taxes R. Taxes B. Taxes 587, available at www. Taxes irs. Taxes gov/irb/2008-36_IRB/ar09. Taxes html. Taxes  See Revenue Procedure 2009-39, 2009-38 I. Taxes R. Taxes B. Taxes 371, available at  www. Taxes irs. Taxes gov/irb/2009-38_IRB/ar08. Taxes html. Taxes  See Revenue Procedure 2011-14, 2011-4 I. Taxes R. Taxes B. Taxes 330, available at  www. Taxes irs. Taxes gov/irb/2011-04_IRB/ar08. Taxes html. Taxes  See Revenue Procedure 2011-22, 2011-18 I. Taxes R. Taxes B. Taxes 737, available at  www. Taxes irs. Taxes gov/irb/2011-18_IRB/ar08. Taxes html. Taxes Also, see Revenue Procedure 2012-39, 2012-41 I. Taxes R. Taxes B. Taxes 470 available at www. Taxes irs. Taxes gov/irb/2012-41_IRB/index. Taxes html. Taxes Disposition of Section 197 Intangibles A section 197 intangible is treated as depreciable property used in your trade or business. Taxes 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). Taxes 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. Taxes Any remaining gain, or any loss, is a section 1231 gain or loss. Taxes If you held the intangible 1 year or less, any gain or loss on its disposition is an ordinary gain or loss. Taxes For more information on ordinary or capital gain or loss on business property, see chapter 3 in Publication 544. Taxes Nondeductible loss. Taxes   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. Taxes Instead, increase the adjusted basis of each remaining amortizable section 197 intangible by a proportionate part of the nondeductible loss. Taxes Figure the increase by multiplying the nondeductible loss on the disposition of the intangible by the following fraction. Taxes The numerator is the adjusted basis of each remaining intangible on the date of the disposition. Taxes The denominator is the total adjusted bases of all remaining amortizable section 197 intangibles on the date of the disposition. Taxes Covenant not to compete. Taxes   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. Taxes Nonrecognition transfers. Taxes   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. Taxes You amortize this part of the adjusted basis over the intangible's remaining amortization period in the hands of the transferor. Taxes Nonrecognition transfers include transfers to a corporation, partnership contributions and distributions, like-kind exchanges, and involuntary conversions. Taxes   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. Taxes 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. Taxes Example. Taxes You own a section 197 intangible you have amortized for 4 full years. Taxes It has a remaining unamortized basis of $30,000. Taxes You exchange the asset plus $10,000 for a like-kind section 197 intangible. Taxes The nonrecognition provisions of like-kind exchanges apply. Taxes 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. Taxes You amortize the other $10,000 of adjusted basis over a new 15-year period. Taxes For more information, see Regulations section 1. Taxes 197-2(g). Taxes Reforestation Costs You can elect to deduct a limited amount of reforestation costs paid or incurred during the tax year. Taxes See Reforestation Costs in chapter 7. Taxes You can elect to amortize the qualifying costs that are not deducted currently over an 84-month period. Taxes There is no limit on the amount of your amortization deduction for reforestation costs paid or incurred during the tax year. Taxes The election to amortize reforestation costs incurred by a partnership, S corporation, or estate must be made by the partnership, corporation, or estate. Taxes A partner, shareholder, or beneficiary cannot make that election. Taxes A partner's or shareholder's share of amortizable costs is figured under the general rules for allocating items of income, loss, deduction, etc. Taxes , of a partnership or S corporation. Taxes 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. Taxes Qualifying costs. Taxes   Reforestation costs are the direct costs of planting or seeding for forestation or reforestation. Taxes Qualifying costs include only those costs you must capitalize and include in the adjusted basis of the property. Taxes They include costs for the following items. Taxes Site preparation. Taxes Seeds or seedlings. Taxes Labor. Taxes Tools. Taxes Depreciation on equipment used in planting and seeding. Taxes 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. Taxes Qualified timber property. Taxes   Qualified timber property is property that contains trees in significant commercial quantities. Taxes It can be a woodlot or other site that you own or lease. Taxes The property qualifies only if it meets all of the following requirements. Taxes It is located in the United States. Taxes 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. Taxes It consists of at least one acre planted with tree seedlings in the manner normally used in forestation or reforestation. Taxes Qualified timber property does not include property on which you have planted shelter belts or ornamental trees, such as Christmas trees. Taxes Amortization period. Taxes   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. Taxes You can claim amortization deductions for no more than 6 months of the first and last (eighth) tax years of the period. Taxes Life tenant and remainderman. Taxes   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. Taxes Any remainder interest in the property is ignored for amortization purposes. Taxes Recapture. Taxes   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. Taxes See chapter 3 of Publication 544 for more information. Taxes How to make the election. Taxes   To elect to amortize qualifying reforestation costs, complete Part VI of Form 4562 and attach a statement that contains the following information. Taxes A description of the costs and the dates you incurred them. Taxes A description of the type of timber being grown and the purpose for which it is grown. Taxes Attach a separate statement for each property for which you amortize reforestation costs. Taxes   Generally, you must make the election on a timely filed return (including extensions) for the tax year in which you incurred the costs. Taxes 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). Taxes Attach Form 4562 and the statement to the amended return and write “Filed pursuant to section 301. Taxes 9100-2” on Form 4562. Taxes File the amended return at the same address you filed the original return. Taxes Revoking the election. Taxes   You must get IRS approval to revoke your election to amortize qualifying reforestation costs. Taxes 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. Taxes Please provide your daytime telephone number (optional), in case we need to contact you. Taxes 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. Taxes    Send the application to: Internal Revenue Service Associate Chief Counsel Passthroughs and Special Industries CC:PSI:6 1111 Constitution Ave. Taxes 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. Taxes 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. Taxes 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). Taxes If you retire or abandon the property during the amortization period, no amortization deduction is allowed in the year of retirement or abandonment. Taxes Pollution Control Facilities You can elect to amortize the cost of a certified pollution control facility over 60 months. Taxes However, see Atmospheric pollution control facilities for an exception. Taxes The cost of a pollution control facility that is not eligible for amortization can be depreciated under the regular rules for depreciation. Taxes 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. Taxes You must reduce its cost (amortizable basis) by the amount of any special allowance you claim. Taxes See chapter 3 of Publication 946. Taxes 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. Taxes The facility must do so by removing, changing, disposing, storing, or preventing the creation or emission of pollutants, contaminants, wastes, or heat. Taxes The facility must be certified by state and federal certifying authorities. Taxes 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. Taxes Also, it must not significantly change the nature of the manufacturing or production process or facility. Taxes 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). Taxes The federal certifying authority will describe the nature of the potential cost recovery. Taxes You must then reduce the amortizable basis of the facility by this potential recovery. Taxes New identifiable treatment facility. Taxes   A new identifiable treatment facility is tangible depreciable property that is identifiable as a treatment facility. Taxes It does not include a building and its structural components unless the building is exclusively a treatment facility. Taxes Atmospheric pollution control facilities. Taxes   Certain atmospheric pollution control facilities can be amortized over 84 months. Taxes To qualify, the following must apply. Taxes The facility must be acquired and placed in service after April 11, 2005. Taxes If acquired, the original use must begin with you after April 11, 2005. Taxes 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. Taxes If you construct, reconstruct, or erect the facility, only the basis attributable to the construction, reconstruction, or erection completed after April 11, 2005, qualifies. Taxes Basis reduction for corporations. Taxes   A corporation must reduce the amortizable basis of a pollution control facility by 20% before figuring the amortization deduction. Taxes More information. Taxes   For more information on the amortization of pollution control facilities, see Code sections 169 and 291(c) and the related regulations. Taxes 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). Taxes If you elect to amortize these costs, deduct them in equal amounts over 60 months or more. Taxes The amortization period begins the month you first receive an economic benefit from the costs. Taxes For a definition of “research and experimental costs” and information on deducting them as current business expenses, see chapter 7. Taxes Optional write-off method. Taxes   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. Taxes For more information, see Optional Write-off of Certain Tax Preferences , later, and section 59(e) of the Internal Revenue Code. Taxes Costs you can amortize. Taxes   You can amortize costs chargeable to a capital account (see chapter 1) if you meet both of the following requirements. Taxes You paid or incurred the costs in your trade or business. Taxes You are not deducting the costs currently. Taxes How to make the election. Taxes   To elect to amortize research and experimental costs, complete Part VI of Form 4562 and attach it to your income tax return. Taxes Generally, you must file the return by the due date (including extensions). Taxes 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). Taxes Attach Form 4562 to the amended return and write “Filed pursuant to section 301. Taxes 9100-2” on Form 4562. Taxes File the amended return at the same address you filed the original return. Taxes   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. Taxes 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. Taxes If you make this election, there is no AMT adjustment. Taxes 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. Taxes How to make the election. Taxes   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. Taxes   Generally, the election must be made on a timely filed return (including extensions) for the tax year in which you incurred the costs. Taxes 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). Taxes Attach Form 4562 to the amended return and write “Filed pursuant to section 301. Taxes 9100-2” on Form 4562. Taxes File the amended return at the same address you filed the original return. Taxes Revoking the election. Taxes   You must obtain consent from the IRS to revoke your election. Taxes 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. Taxes The request must contain all of the information necessary to demonstrate the rare and unusual circumstances that would justify granting revocation. Taxes If the request for revocation is approved, any unamortized costs are deductible in the year the revocation is effective. Taxes Prev  Up  Next   Home   More Online Publications
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The Taxes

Taxes 35. Taxes   Education Credits Table of Contents Introduction Useful Items - You may want to see: Who Can Claim an Education Credit Qualified Education ExpensesNo Double Benefit Allowed Adjustments to Qualified Education Expenses Introduction For 2013, there are two tax credits available to persons who pay expenses for higher (postsecondary) education. Taxes They are: The American opportunity credit, and The lifetime learning credit. Taxes The chapter will present an overview of these education credits. Taxes To get the detailed information you will need to claim either of the credits, and for examples illustrating that information, see chapters 2 and 3 of Publication 970. Taxes Can you claim more than one education credit this year?   For each student, you can choose for any year only one of the credits. Taxes For example, if you choose to take the American opportunity credit for a child on your 2013 tax return, you cannot, for that same child, also claim the lifetime learning credit for 2013. Taxes   If you are eligible to claim the American opportunity credit and you are also eligible to claim the lifetime learning credit for the same student in the same year, you can choose to claim either credit, but not both. Taxes   If you pay qualified education expenses for more than one student in the same year, you can choose to take the American opportunity and the lifetime learning credits on a per-student, per-year basis. Taxes This means that, for example, you can claim the American opportunity credit for one student and the lifetime learning credit for another student in the same year. Taxes Table 35-1. Taxes Comparison of Education Credits Caution. Taxes You can claim both the American opportunity credit and the lifetime learning credit on the same return—but not for the same student. Taxes   American Opportunity Credit Lifetime Learning Credit Maximum credit Up to $2,500 credit per eligible student Up to $2,000 credit per return Limit on modified adjusted gross income (MAGI) $180,000 if married filing jointly;  $90,000 if single, head of household, or qualifying widow(er) $127,000 if married filing jointly;  $63,000 if single, head of household, or qualifying widow(er) Refundable or nonrefundable 40% of credit may be refundable Credit limited to the amount of tax you must pay on your taxable income Number of years of postsecondary education Available ONLY if the student had not completed the first 4 years of postsecondary education before 2013 Available for all years of postsecondary education and for courses to acquire or improve job skills Number of tax years credit available Available ONLY for 4 tax years per eligible student (including any year(s) the Hope credit was claimed) Available for an unlimited number of years Type of program required Student must be pursuing a program leading to a degree or other recognized education credential Student does not need to be pursuing a program leading to a degree or other recognized education credential Number of courses Student must be enrolled at least half time for at least one academic period beginning during the tax year Available for one or more courses Felony drug conviction At the end of 2013, the student had not been convicted of a felony for possessing or distributing a controlled substance Felony drug convictions do not make the student ineligible Qualified expenses Tuition, required enrollment fees, and course materials that the student needs for a course of study whether or not the materials are bought at the educational institution as a condition of enrollment or attendance Tuition and fees required for enrollment or attendance (including amounts required to be paid to the institution for course-related books, supplies, and equipment) Payments for academic periods Payments made in 2013 for academic periods beginning in 2013 or beginning in the first 3 months of 2014 Differences between the American opportunity and lifetime learning credits. Taxes   There are several differences between these two credits. Taxes These differences are summarized in Table 35-1, later. Taxes Useful Items - You may want to see: Publication 970 Tax Benefits for Education Form (and Instructions) 8863 Education Credits (American Opportunity and Lifetime Learning Credits) Who Can Claim an Education Credit You may be able to claim an education credit if you, your spouse, or a dependent you claim on your tax return was a student enrolled at or attending an eligible educational institution. Taxes The credits are based on the amount of qualified education expenses paid for the student in 2013 for academic periods beginning in 2013 and in the first 3 months of 2014. Taxes For example, if you paid $1,500 in December 2013 for qualified tuition for the spring 2014 semester beginning in January 2014, you may be able to use that $1,500 in figuring your 2013 education credit(s). Taxes Academic period. Taxes   An academic period includes a semester, trimester, quarter, or other period of study (such as a summer school session) as reasonably determined by an educational institution. Taxes In the case of an educational institution that uses credit hours or clock hours and does not have academic terms, each payment period can be treated as an academic period. Taxes Eligible educational institution. Taxes   An eligible educational institution is any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the U. Taxes S. Taxes Department of Education. Taxes It includes virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions. Taxes The educational institution should be able to tell you if it is an eligible educational institution. Taxes   Certain educational institutions located outside the United States also participate in the U. Taxes S. Taxes Department of Education's Federal Student Aid (FSA) programs. Taxes Who can claim a dependent's expenses. Taxes   If an exemption is allowed as a deduction for any person who claims the student as a dependent, all qualified education expenses of the student are treated as having been paid by that person. Taxes Therefore, only that person can claim an education credit for the student. Taxes If a student is not claimed as a dependent on another person's tax return, only the student can claim a credit. Taxes Expenses paid by a third party. Taxes   Qualified education expenses paid on behalf of the student by someone other than the student (such as a relative) are treated as paid by the student. Taxes However, qualified education expenses paid (or treated as paid) by a student who is claimed as a dependent on your tax return are treated as paid by you. Taxes Therefore, you are treated as having paid expenses that were paid by the third party. Taxes For more information and an example see Who Can Claim a Dependent's Expenses in Pub. Taxes 970, chapter 2 or 3. Taxes Who cannot claim a credit. Taxes   You cannot take an education credit if any of the following apply. Taxes You are claimed as a dependent on another person's tax return, such as your parent's return. Taxes Your filing status is married filing separately. Taxes You (or your spouse) were a nonresident alien for any part of 2013 and did not elect to be treated as a resident alien for tax purposes. Taxes Your MAGI is one of the following. Taxes American opportunity credit: $180,000 or more if married filing jointly, or $90,000 or more if single, head of household, or qualifying widow(er). Taxes Lifetime learning credit: $127,000 or more if married filing jointly, or $63,000 or more if single, head of household, or qualifying widow(er) . Taxes   Generally, your MAGI is the amount on your Form 1040, line 38, or Form 1040A, line 22. Taxes However, if you are filing Form 2555, Form 2555–EZ, or Form 4563, or are excluding income from Puerto RIco, add to the amount on your Form 1040, line 38, or Form 1040A, line 22, the amount of income you excluded. Taxes For details, see Pub. Taxes 970. Taxes    Figure 35-A may be helpful in determining if you can claim an education credit on your tax return. Taxes The American opportunity credit will always be greater than or equal to the lifetime learning credit for any student who is eligible for both credits. Taxes However, if any of the conditions for the American opportunity credit, listed in Table 35-1 earlier, are not met for any student, you cannot take the American opportunity credit for that student. Taxes You may be able to take the lifetime learning credit for part or all of that student's qualified education expenses instead. Taxes See Pub. Taxes 970 for information on other education benefits. Taxes Qualified Education Expenses Generally, qualified education expenses are amounts paid in 2013 for tuition and fees required for the student's enrollment or attendance at an eligible educational institution. Taxes It does not matter whether the expenses were paid in cash, by check, by credit or debit card, or with borrowed funds. Taxes For course-related books, supplies, and equipment, only certain expenses qualify. Taxes American opportunity credit: Qualified education expenses include amounts spent on books, supplies, and equipment needed for a course of study, whether or not the materials are purchased from the educational institution as a condition of enrollment or attendance. Taxes Lifetime learning credit: Qualified education expenses include amounts for books, supplies, and equipment only if required to be paid to the institution as a condition of enrollment or attendance. Taxes Qualified education expenses include nonacademic fees, such as student activity fees, athletic fees, or other expenses unrelated to the academic course of instruction, only if the fee must be paid to the institution as a condition of enrollment or attendance. Taxes However, fees for personal expenses (described below) are never qualified education expenses. Taxes Qualified education expenses for either credit do not include amounts paid for: Personal expenses. Taxes This means room and board, insurance, medical expenses (including student health fees), transportation, and other similar personal, living, or family expenses. Taxes Any course or other education involving sports, games, or hobbies, or any noncredit course, unless such course or other education is part of the student's degree program or (for the lifetime learning credit only) helps the student acquire or improve job skills. Taxes You should receive Form 1098–T, Tuition Statement, from the institution reporting either payments received in 2013 (box 1) or amounts billed in 2013 (box 2). Taxes However, the amount in box 1 or 2 of Form 1098–T may be different from the amount you paid (or are treated as having paid). Taxes In completing Form 8863, use only the amounts you actually paid (plus any amounts you are treated as having paid) in 2013, reduced as necessary, as described in Adjustments to Qualified Education Expenses , later. Taxes Qualified education expenses paid on behalf of the student by someone other than the student (such as a relative) are treated as paid by the student. Taxes Qualified education expenses paid (or treated as paid) by a student who is claimed as a dependent on your tax return are treated as paid by you. Taxes If you or the student takes a deduction for higher education expenses, such as on Schedule A or C (Form 1040), you cannot use those expenses in your qualified education expenses when figuring your education credits. Taxes Qualified education expenses for any academic period must be reduced by any tax-free educational assistance allocable to that academic period. Taxes See Adjustments to Qualified Education Expenses, later. Taxes Prepaid Expenses. Taxes   Qualified education expenses paid in 2013 for an academic period that begins in the first 3 months of 2014 can be used in figuring an education credit for 2013 only. Taxes See Academic period , earlier. Taxes For example, if you pay $2,000 in December 2013 for qualified tuition for the 2014 winter quarter that begins in January 2014, you can use that $2,000 in figuring an education credit for 2013 only (if you meet all the other requirements). Taxes    You cannot use any amount you paid in 2012 or 2014 to figure the qualified education expenses you use to figure your 2013 education credit(s). Taxes Paid with borrowed funds. Taxes   You can claim an education credit for qualified education expenses paid with the proceeds of a loan. Taxes Use the expenses to figure the credit for the year in which the expenses are paid, not the year in which the loan is repaid. Taxes Treat loan payments sent directly to the educational institution as paid on the date the institution credits the student's account. Taxes Student withdraws from class(es). Taxes   You can claim an education credit for qualified education expenses not refunded when a student withdraws. Taxes No Double Benefit Allowed You cannot do any of the following. Taxes Deduct higher education expenses on your income tax return (as, for example, a business expense) and also claim an education credit based on those same expenses. Taxes Claim more than one education credit based on the same qualified education expenses. Taxes Claim an education credit based on the same expenses used to figure the tax-free portion of a distribution from a Coverdell education savings account (ESA) or qualified tuition program (QTP). Taxes Claim an education credit based on qualified education expenses paid with educational assistance, such as a tax-free scholarship, grant, or employer-provided educational assistance. Taxes See Adjustments to Qualified Education Expenses, next. Taxes Adjustments to Qualified Education Expenses For each student, reduce the qualified education expenses paid in 2013 by or on behalf of that student under the following rules. Taxes The result is the amount of adjusted qualified education expenses for each student. Taxes Tax-free educational assistance. Taxes   For tax-free educational assistance received in 2013, reduce the qualified educational expenses for each academic period by the amount of tax-free educational assistance allocable to that academic period. Taxes See Academic period , earlier. Taxes      Tax-free educational assistance includes:    Tax-free parts of scholarships and fellowships (see chapter 12 of this publication and chapter 1 of Pub. Taxes 970), The tax-free part of Pell grants (see chapter 1 of Pub. Taxes 970), The tax-free part of employer-provided educational assistance (see Pub. Taxes 970), Veterans' educational assistance (see chapter 1 of Pub. Taxes 970), and Any other nontaxable (tax-free) payments (other than gifts or inheritances) received as educational assistance. Taxes Generally, any scholarship or fellowship is treated as tax-free educational assistance. Taxes However, a scholarship or fellowship is not treated as tax-free educational assistance to the extent the student includes it in gross income (if the student is required to file a tax return) for the year the scholarship or fellowship is received and either: The scholarship or fellowship (or any part of it) must be applied (by its terms) to expenses (such as room and board) other than qualified education expenses as defined in Qualified education expenses in Pub. Taxes 970, chapter 1; or The scholarship or fellowship (or any part of it) may be applied (by its terms) to expenses (such as room and board) other than qualified education expenses as defined in Qualified education expenses in Pub. Taxes 970, chapter 1. Taxes You may be able to increase the combined value of an education credit and certain educational assistance if the student includes some or all of the educational assistance in income in the year received. Taxes For details, see Adjustments of Qualified Education Expenses, in chapters 2 and 3 of Pub. Taxes 970. Taxes Some tax-free educational assistance received after 2013 may be treated as a refund of qualified education expenses paid in 2013. Taxes This tax-free educational assistance is any tax-free educational assistance received by you or anyone else after 2013 for qualified education expenses paid on behalf of a student in 2013 (or attributable to enrollment at an eligible educational institution during 2013). Taxes If this tax-free educational assistance is received after 2013 but before you file your 2013 income tax return, see Refunds received after 2013 but before your income tax return is filed, later. Taxes If this tax-free educational assistance is received after 2013 and after you file your 2013 income tax return, see Refunds received after 2013 and after your income tax return is filed, later. Taxes Refunds. Taxes   A refund of qualified education expenses may reduce qualified education expenses for the tax year or may require you to repay (recapture) the credit that you claimed in an earlier year. Taxes Some tax-free educational assistance received after 2013 may be treated as a refund. Taxes See Tax-free educational assistance, earlier. Taxes Refunds received in 2013. Taxes   For each student, figure the adjusted qualified education expenses for 2013 by adding all the qualified education expenses paid in 2013 and subtracting any refunds of those expenses received from the eligible educational institution during 2013. Taxes Refunds received after 2013 but before your income tax return is filed. Taxes   If anyone receives a refund after 2013 of qualified education expenses paid on behalf of a student in 2013 and the refund is received before you file your 2013 income tax return, reduce the amount of qualified education expenses for 2013 by the amount of the refund. Taxes Refunds received after 2013 and after your income tax return is filed. Taxes   If anyone receives a refund after 2013 of qualified education expenses paid on behalf of a student in 2013 and the refund is received after you file your 2013 income tax return, you may need to repay some or all of the credit that you claimed. Taxes See Credit recapture, next. Taxes Credit recapture. Taxes    If any tax-free educational assistance for the qualified education expenses paid in 2013, or any refund of your qualified education expenses paid in 2013, is received after you file your 2013 income tax return, you must recapture (repay) any excess credit. Taxes You do this by refiguring the amount of your adjusted qualified education expenses for 2013 by reducing the expenses by the amount of the refund or tax-free educational assistance. Taxes You then refigure your education credit(s) for 2013 and figure the amount by which your 2013 tax liability would have increased if you had claimed the refigured credit(s). Taxes Include that amount as an additional tax for the year the refund or tax-free assistance was received. Taxes Example. Taxes    You paid $8,000 tuition and fees in December 2013 for your child's Spring semester beginning in January 2014. Taxes You filed your 2013 tax return on February 3, 2014, and claimed a lifetime learning credit of $1,600 ($8,000 qualified education expense paid x . Taxes 20). Taxes You claimed no other tax credits. Taxes After you filed your return, your child withdrew from two courses and you received a refund of $1,400. Taxes You must refigure your 2013 lifetime learning credit using $6,600 ($8,000 qualified education expenses − $1,400 refund). Taxes The refigured credit is $1,320 and your tax liability increased by $280. Taxes You must include the difference of $280 ($1,600 credit originally claimed − $1,320 refigured credit) as additional tax on your 2014 income tax return. Taxes See the instructions for your 2014 income tax return to determine where to include this tax. Taxes If you also pay qualified education expenses in 2014 for an academic period that begins in the first 3 months of 2014 and you receive tax-free educational assistance, or a refund, as described above, you may choose to reduce your qualified education expenses for 2014 instead of reducing your expenses for 2013. Taxes Amounts that do not reduce qualified education expenses. Taxes   Do not reduce qualified education expenses by amounts paid with funds the student receives as: Payment for services, such as wages, A loan, A gift, An inheritance, or A withdrawal from the student's personal savings. Taxes   Do not reduce the qualified education expenses by any scholarship or fellowship reported as income on the student's tax return in the following situations. Taxes The use of the money is restricted, by the terms of the scholarship or fellowship, to costs of attendance (such as room and board) other than qualified education expenses, as defined in Chapter 1 of Pub. Taxes 970. Taxes The use of the money is not restricted. Taxes   For examples, see chapter 2 in Pub. Taxes 970. Taxes Figure 35-A. Taxes Can You Claim an Education Credit for 2013? This image is too large to be displayed in the current screen. Taxes Please click the link to view the image. Taxes Figure 35-A. Taxes Can You Claim an Education Credit for 2013? Prev  Up  Next   Home   More Online Publications