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Where To File 2012 Taxes

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Where To File 2012 Taxes

Where to file 2012 taxes 7. Where to file 2012 taxes   Costs You Can Deduct or Capitalize Table of Contents What's New Introduction Topics - This chapter discusses: Useful Items - You may want to see: Carrying Charges Research and Experimental CostsProduct. Where to file 2012 taxes Costs not included. Where to file 2012 taxes Intangible Drilling Costs Exploration CostsPartnerships and S corporations. Where to file 2012 taxes Development Costs Circulation Costs Business Start-Up and Organizational Costs Reforestation Costs Retired Asset Removal Costs Barrier Removal CostsOther barrier removals. Where to file 2012 taxes Film and Television Production Costs What's New Film and television productions costs. Where to file 2012 taxes  The election to expense film and television production costs does not apply to productions that begin after December 31, 2013. Where to file 2012 taxes See Film and Television Production Costs , later. Where to file 2012 taxes Introduction This chapter discusses costs you can elect to deduct or capitalize. Where to file 2012 taxes You generally deduct a cost as a current business expense by subtracting it from your income in either the year you incur it or the year you pay it. Where to file 2012 taxes If you capitalize a cost, you may be able to recover it over a period of years through periodic deductions for amortization, depletion, or depreciation. Where to file 2012 taxes When you capitalize a cost, you add it to the basis of property to which it relates. Where to file 2012 taxes A partnership, corporation, estate, or trust makes the election to deduct or capitalize the costs discussed in this chapter except for exploration costs for mineral deposits. Where to file 2012 taxes Each individual partner, shareholder, or beneficiary elects whether to deduct or capitalize exploration costs. Where to file 2012 taxes You may be subject to the alternative minimum tax (AMT) if you deduct research and experimental, intangible drilling, exploration, development, circulation, or business organizational costs. Where to file 2012 taxes For more information on the alternative minimum tax, see the instructions for the following forms. Where to file 2012 taxes Form 6251, Alternative Minimum Tax—Individuals. Where to file 2012 taxes Form 4626, Alternative Minimum Tax—Corporations. Where to file 2012 taxes Topics - This chapter discusses: Carrying charges Research and experimental costs Intangible drilling costs Exploration costs Development costs Circulation costs Qualified disaster expenses Business start-up and organizational costs Reforestation costs Retired asset removal costs Barrier removal costs Film and television production costs Useful Items - You may want to see: Publication 544 Sales and Other Dispositions of Assets Form (and Instructions) 3468 Investment Credit 8826 Disabled Access Credit See chapter 12 for information about getting publications and forms. Where to file 2012 taxes Carrying Charges Carrying charges include the taxes and interest you pay to carry or develop real property or to carry, transport, or install personal property. Where to file 2012 taxes Certain carrying charges must be capitalized under the uniform capitalization rules. Where to file 2012 taxes (For information on capitalization of interest, see chapter 4 . Where to file 2012 taxes ) You can elect to capitalize carrying charges not subject to the uniform capitalization rules, but only if they are otherwise deductible. Where to file 2012 taxes You can elect to capitalize carrying charges separately for each project you have and for each type of carrying charge. Where to file 2012 taxes For unimproved and unproductive real property, your election is good for only 1 year. Where to file 2012 taxes You must decide whether to capitalize carrying charges each year the property remains unimproved and unproductive. Where to file 2012 taxes For other real property, your election to capitalize carrying charges remains in effect until construction or development is completed. Where to file 2012 taxes For personal property, your election is effective until the date you install or first use it, whichever is later. Where to file 2012 taxes How to make the election. Where to file 2012 taxes   To make the election to capitalize a carrying charge, attach a statement to your original tax return for the year the election is to be effective indicating which charges you are electing to capitalize. Where to file 2012 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). Where to file 2012 taxes Attach the statement to the amended return and write “Filed pursuant to section 301. Where to file 2012 taxes 9100-2” on the statement. Where to file 2012 taxes File the amended return at the same address you filed the original return. Where to file 2012 taxes Research and Experimental Costs The costs of research and experimentation are generally capital expenses. Where to file 2012 taxes However, you can elect to deduct these costs as a current business expense. Where to file 2012 taxes Your election to deduct these costs is binding for the year it is made and for all later years unless you get IRS approval to make a change. Where to file 2012 taxes If you meet certain requirements, you may elect to defer and amortize research and experimental costs. Where to file 2012 taxes For information on electing to defer and amortize these costs, see Research and Experimental Costs in chapter 8. Where to file 2012 taxes Research and experimental costs defined. Where to file 2012 taxes   Research and experimental costs are reasonable costs you incur in your trade or business for activities intended to provide information that would eliminate uncertainty about the development or improvement of a product. Where to file 2012 taxes Uncertainty exists if the information available to you does not establish how to develop or improve a product or the appropriate design of a product. Where to file 2012 taxes Whether costs qualify as research and experimental costs depends on the nature of the activity to which the costs relate rather than on the nature of the product or improvement being developed or the level of technological advancement. Where to file 2012 taxes      The costs of obtaining a patent, including attorneys' fees paid or incurred in making and perfecting a patent application, are research and experimental costs. Where to file 2012 taxes However, costs paid or incurred to obtain another's patent are not research and experimental costs. Where to file 2012 taxes Product. Where to file 2012 taxes   The term “product” includes any of the following items. Where to file 2012 taxes Formula. Where to file 2012 taxes Invention. Where to file 2012 taxes Patent. Where to file 2012 taxes Pilot model. Where to file 2012 taxes Process. Where to file 2012 taxes Technique. Where to file 2012 taxes Property similar to the items listed above. Where to file 2012 taxes It also includes products used by you in your trade or business or held for sale, lease, or license. Where to file 2012 taxes Costs not included. Where to file 2012 taxes   Research and experimental costs do not include expenses for any of the following activities. Where to file 2012 taxes Advertising or promotions. Where to file 2012 taxes Consumer surveys. Where to file 2012 taxes Efficiency surveys. Where to file 2012 taxes Management studies. Where to file 2012 taxes Quality control testing. Where to file 2012 taxes Research in connection with literary, historical, or similar projects. Where to file 2012 taxes The acquisition of another's patent, model, production, or process. Where to file 2012 taxes When and how to elect. Where to file 2012 taxes   You make the election to deduct research and experimental costs by deducting them on your tax return for the year in which you first pay or incur research and experimental costs. Where to file 2012 taxes If you do not make the election to deduct research and experimental costs in the first year in which you pay or incur the costs, you can deduct the costs in a later year only with approval from the IRS. Where to file 2012 taxes Deducting or Amortizing Research and Experimentation Costs IF you . Where to file 2012 taxes . Where to file 2012 taxes . Where to file 2012 taxes THEN . Where to file 2012 taxes . Where to file 2012 taxes . Where to file 2012 taxes Elect to deduct research and experimental costs as a current business expense Deduct all research and experimental costs in the first year you pay or incur the costs and all later years. Where to file 2012 taxes Do not deduct research and experimental costs as a current business expense If you meet the requirements, amortize them over at least 60 months, starting with the month you first receive an economic benefit from the research. Where to file 2012 taxes See Research and Experimental Costs in chapter 8. Where to file 2012 taxes Research credit. Where to file 2012 taxes   If you pay or incur qualified research expenses, you may be able to take the research credit. Where to file 2012 taxes For more information see Form 6765, Credit for Increasing Research Activities and its instructions. Where to file 2012 taxes Intangible Drilling Costs The costs of developing oil, gas, or geothermal wells are ordinarily capital expenditures. Where to file 2012 taxes You can usually recover them through depreciation or depletion. Where to file 2012 taxes However, you can elect to deduct intangible drilling costs (IDCs) as a current business expense. Where to file 2012 taxes These are certain drilling and development costs for wells in the United States in which you hold an operating or working interest. Where to file 2012 taxes You can deduct only costs for drilling or preparing a well for the production of oil, gas, or geothermal steam or hot water. Where to file 2012 taxes You can elect to deduct only the costs of items with no salvage value. Where to file 2012 taxes These include wages, fuel, repairs, hauling, and supplies related to drilling wells and preparing them for production. Where to file 2012 taxes Your cost for any drilling or development work done by contractors under any form of contract is also an IDC. Where to file 2012 taxes However, see Amounts paid to contractor that must be capitalized , later. Where to file 2012 taxes You can also elect to deduct the cost of drilling exploratory bore holes to determine the location and delineation of offshore hydrocarbon deposits if the shaft is capable of conducting hydrocarbons to the surface on completion. Where to file 2012 taxes It does not matter whether there is any intent to produce hydrocarbons. Where to file 2012 taxes If you do not elect to deduct your IDCs as a current business expense, you can elect to deduct them over the 60-month period beginning with the month they were paid or incurred. Where to file 2012 taxes Amounts paid to contractor that must be capitalized. Where to file 2012 taxes   Amounts paid to a contractor must be capitalized if they are either: Amounts properly allocable to the cost of depreciable property, or Amounts paid only out of production or proceeds from production if these amounts are depletable income to the recipient. Where to file 2012 taxes How to make the election. Where to file 2012 taxes   You elect to deduct IDCs as a current business expense by taking the deduction on your income tax return for the first tax year you have eligible costs. Where to file 2012 taxes No formal statement is required. Where to file 2012 taxes If you file Schedule C (Form 1040), enter these costs under “Other expenses. Where to file 2012 taxes ”   For oil and gas wells, your election is binding for the year it is made and for all later years. Where to file 2012 taxes For geothermal wells, your election can be revoked by the filing of an amended return on which you do not take the deduction. Where to file 2012 taxes You can file the amended return for the year up to the normal time of expiration for filing a claim for credit or refund, generally, within 3 years after the date you filed the original return or within 2 years after the date you paid the tax, whichever is later. Where to file 2012 taxes Energy credit for costs of geothermal wells. Where to file 2012 taxes   If you capitalize the drilling and development costs of geothermal wells that you place in service during the tax year, you may be able to claim a business energy credit. Where to file 2012 taxes See the Instructions for Form 3468 for more information. Where to file 2012 taxes Nonproductive well. Where to file 2012 taxes   If you capitalize your IDCs, you have another option if the well is nonproductive. Where to file 2012 taxes You can deduct the IDCs of the nonproductive well as an ordinary loss. Where to file 2012 taxes You must indicate and clearly state your election on your tax return for the year the well is completed. Where to file 2012 taxes Once made, the election for oil and gas wells is binding for all later years. Where to file 2012 taxes You can revoke your election for a geothermal well by filing an amended return that does not claim the loss. Where to file 2012 taxes Costs incurred outside the United States. Where to file 2012 taxes   You cannot deduct as a current business expense all the IDCs paid or incurred for an oil, gas, or geothermal well located outside the United States. Where to file 2012 taxes However, you can elect to include the costs in the adjusted basis of the well to figure depletion or depreciation. Where to file 2012 taxes If you do not make this election, you can deduct the costs over the 10-year period beginning with the tax year in which you paid or incurred them. Where to file 2012 taxes These rules do not apply to a nonproductive well. Where to file 2012 taxes Exploration Costs The costs of determining the existence, location, extent, or quality of any mineral deposit are ordinarily capital expenditures if the costs lead to the development of a mine. Where to file 2012 taxes You recover these costs through depletion as the mineral is removed from the ground. Where to file 2012 taxes However, you can elect to deduct domestic exploration costs paid or incurred before the beginning of the development stage of the mine (except those for oil and gas wells). Where to file 2012 taxes How to make the election. Where to file 2012 taxes   You elect to deduct exploration costs by taking the deduction on your income tax return, or on an amended income tax return, for the first tax year for which you wish to deduct the costs paid or incurred during the tax year. Where to file 2012 taxes Your return must adequately describe and identify each property or mine, and clearly state how much is being deducted for each one. Where to file 2012 taxes The election applies to the tax year you make this election and all later tax years. Where to file 2012 taxes Partnerships and S corporations. Where to file 2012 taxes   Each partner, not the partnership, elects whether to capitalize or to deduct that partner's share of exploration costs. Where to file 2012 taxes Each shareholder, not the S corporation, elects whether to capitalize or to deduct that shareholder's share of exploration costs. Where to file 2012 taxes Reduced corporate deductions for exploration costs. Where to file 2012 taxes   A corporation (other than an S corporation) can deduct only 70% of its domestic exploration costs. Where to file 2012 taxes It must capitalize the remaining 30% of costs and amortize them over the 60-month period starting with the month the exploration costs are paid or incurred. Where to file 2012 taxes A corporation may also elect to capitalize and amortize mining exploration costs over a 10-year period. Where to file 2012 taxes For more information on this method of amortization, see Internal Revenue Code section 59(e). Where to file 2012 taxes   The 30% the corporation capitalizes cannot be added to its basis in the property to figure cost depletion. Where to file 2012 taxes However, the amount amortized is treated as additional depreciation and is subject to recapture as ordinary income on a disposition of the property. Where to file 2012 taxes See Section 1250 Property under Depreciation Recapture in chapter 3 of Publication 544. Where to file 2012 taxes   These rules also apply to the deduction of development costs by corporations. Where to file 2012 taxes See Development Costs , later. Where to file 2012 taxes Recapture of exploration expenses. Where to file 2012 taxes   When your mine reaches the producing stage, you must recapture any exploration costs you elected to deduct. Where to file 2012 taxes Use either of the following methods. Where to file 2012 taxes Method 1—Include the deducted costs in gross income for the tax year the mine reaches the producing stage. Where to file 2012 taxes Your election must be clearly indicated on the return. Where to file 2012 taxes Increase your adjusted basis in the mine by the amount included in income. Where to file 2012 taxes Generally, you must elect this recapture method by the due date (including extensions) of your return. Where to file 2012 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). Where to file 2012 taxes Make the election on your amended return and write “Filed pursuant to section 301. Where to file 2012 taxes 9100-2” on the form where you are including the income. Where to file 2012 taxes File the amended return at the same address you filed the original return. Where to file 2012 taxes Method 2—Do not claim any depletion deduction for the tax year the mine reaches the producing stage and any later tax years until the depletion you would have deducted equals the exploration costs you deducted. Where to file 2012 taxes   You also must recapture deducted exploration costs if you receive a bonus or royalty from mine property before it reaches the producing stage. Where to file 2012 taxes Do not claim any depletion deduction for the tax year you receive the bonus or royalty and any later tax years until the depletion you would have deducted equals the exploration costs you deducted. Where to file 2012 taxes   Generally, if you dispose of the mine before you have fully recaptured the exploration costs you deducted, recapture the balance by treating all or part of your gain as ordinary income. Where to file 2012 taxes Under these circumstances, you generally treat as ordinary income all of your gain if it is less than your adjusted exploration costs with respect to the mine. Where to file 2012 taxes If your gain is more than your adjusted exploration costs, treat as ordinary income only a part of your gain, up to the amount of your adjusted exploration costs. Where to file 2012 taxes Foreign exploration costs. Where to file 2012 taxes   If you pay or incur exploration costs for a mine or other natural deposit located outside the United States, you cannot deduct all the costs in the current year. Where to file 2012 taxes You can elect to include the costs (other than for an oil, gas, or geothermal well) in the adjusted basis of the mineral property to figure cost depletion. Where to file 2012 taxes (Cost depletion is discussed in chapter 9 . Where to file 2012 taxes ) If you do not make this election, you must deduct the costs over the 10-year period beginning with the tax year in which you pay or incur them. Where to file 2012 taxes These rules also apply to foreign development costs. Where to file 2012 taxes Development Costs You can deduct costs paid or incurred during the tax year for developing a mine or any other natural deposit (other than an oil or gas well) located in the United States. Where to file 2012 taxes These costs must be paid or incurred after the discovery of ores or minerals in commercially marketable quantities. Where to file 2012 taxes Development costs also include depreciation on improvements used in the development of ores or minerals and costs incurred for you by a contractor. Where to file 2012 taxes Development costs do not include the costs for the acquisition or improvement of depreciable property. Where to file 2012 taxes Instead of deducting development costs in the year paid or incurred, you can elect to treat the cost as deferred expenses and deduct them ratably as the units of produced ores or minerals benefited by the expenses are sold. Where to file 2012 taxes This election applies each tax year to expenses paid or incurred in that year. Where to file 2012 taxes Once made, the election is binding for the year and cannot be revoked for any reason. Where to file 2012 taxes How to make the election. Where to file 2012 taxes   The election to deduct development costs ratably as the ores or minerals are sold must be made for each mine or other natural deposit by a clear indication on your return or by a statement filed with the IRS office where you file your return. Where to file 2012 taxes Generally, you must make the election by the due date of the return (including extensions). Where to file 2012 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). Where to file 2012 taxes Clearly indicate the election on your amended return and write “Filed pursuant to section 301. Where to file 2012 taxes 9100-2. Where to file 2012 taxes ” File the amended return at the same address you filed the original return. Where to file 2012 taxes Foreign development costs. Where to file 2012 taxes   The rules discussed earlier for foreign exploration costs apply to foreign development costs. Where to file 2012 taxes Reduced corporate deductions for development costs. Where to file 2012 taxes   The rules discussed earlier for reduced corporate deductions for exploration costs also apply to corporate deductions for development costs. Where to file 2012 taxes Circulation Costs A publisher can deduct as a current business expense the costs of establishing, maintaining, or increasing the circulation of a newspaper, magazine, or other periodical. Where to file 2012 taxes For example, a publisher can deduct the cost of hiring extra employees for a limited time to get new subscriptions through telephone calls. Where to file 2012 taxes Circulation costs are deductible even if they normally would be capitalized. Where to file 2012 taxes This rule does not apply to the following costs that must be capitalized. Where to file 2012 taxes The purchase of land or depreciable property. Where to file 2012 taxes The acquisition of circulation through the purchase of any part of the business of another publisher of a newspaper, magazine, or other periodical, including the purchase of another publisher's list of subscribers. Where to file 2012 taxes Other treatment of circulation costs. Where to file 2012 taxes   If you do not want to deduct circulation costs as a current business expense, you can elect one of the following ways to recover these costs. Where to file 2012 taxes Capitalize all circulation costs that are properly chargeable to a capital account (see chapter 1 ). Where to file 2012 taxes Amortize circulation costs over the 3-year period beginning with the tax year they were paid or incurred. Where to file 2012 taxes How to make the election. Where to file 2012 taxes   You elect to capitalize circulation costs by attaching a statement to your return for the first tax year the election applies. Where to file 2012 taxes Your election is binding for the year it is made and for all later years, unless you get IRS approval to revoke it. Where to file 2012 taxes Business Start-Up and Organizational Costs Business start-up and organizational costs are generally capital expenditures. Where to file 2012 taxes However, you can elect to deduct up to $5,000 of business start-up and $5,000 of organizational costs paid or incurred after October 22, 2004. Where to file 2012 taxes The $5,000 deduction is reduced by the amount your total start-up or organizational costs exceed $50,000. Where to file 2012 taxes Any remaining costs must be amortized. Where to file 2012 taxes For information about amortizing start-up and organizational costs, see chapter 8 . Where to file 2012 taxes Start-up costs include any amounts paid or incurred in connection with creating an active trade or business or investigating the creation or acquisition of an active trade or business. Where to file 2012 taxes Organizational costs include the costs of creating a corporation. Where to file 2012 taxes For more information on start-up and organizational costs, see chapter 8 . Where to file 2012 taxes How to make the election. Where to file 2012 taxes   You elect to deduct the start-up or organizational costs by claiming the deduction on your income tax return (filed by the due date including extensions) for the tax year in which the active trade or business begins. Where to file 2012 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). Where to file 2012 taxes Clearly indicate the election on your amended return and write “Filed pursuant to section 301. Where to file 2012 taxes 9100-2. Where to file 2012 taxes ” File the amended return at the same address you filed the original return. Where to file 2012 taxes The election applies when computing taxable income for the current tax year and all subsequent years. Where to file 2012 taxes Reforestation Costs Reforestation costs are generally capital expenditures. Where to file 2012 taxes However, you can elect to deduct up to $10,000 ($5,000 if married filing separately; $0 for a trust) of qualifying reforestation costs paid or incurred after October 22, 2004, for each qualified timber property. Where to file 2012 taxes The remaining costs can be amortized over an 84-month period. Where to file 2012 taxes For information about amortizing reforestation costs, see chapter 8 . Where to file 2012 taxes Qualifying reforestation costs are the direct costs of planting or seeding for forestation or reforestation. Where to file 2012 taxes Qualified timber property is property that contains trees in significant commercial quantities. Where to file 2012 taxes See chapter 8 for more information on qualifying reforestation costs and qualified timber property. Where to file 2012 taxes If you elect to deduct qualified reforestation costs, create and maintain separate timber accounts for each qualified timber property and include all reforestation costs and the dates each was applied. Where to file 2012 taxes Do not include this qualified timber property in any account (for example, depletion block) for which depletion is allowed. Where to file 2012 taxes How to make the election. Where to file 2012 taxes   You elect to deduct qualifying reforestation costs by claiming the deduction on your timely filed income tax return (including extensions) for the tax year the expenses were paid or incurred. Where to file 2012 taxes If Form T (Timber), Forest Activities Schedule, is required, complete Part IV of Form T. Where to file 2012 taxes If Form T is not required, attach a statement containing the following information for each qualified timber property for which an election is being made. Where to file 2012 taxes The unique stand identification numbers. Where to file 2012 taxes The total number of acres reforested during the tax year. Where to file 2012 taxes The nature of the reforestation treatments. Where to file 2012 taxes The total amounts of qualified reforestation expenditures eligible to be amortized or deducted. Where to file 2012 taxes   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). Where to file 2012 taxes Clearly indicate the election on your amended return and write “Filed pursuant to section 301. Where to file 2012 taxes 9100-2. Where to file 2012 taxes ” File the amended return at the same address you filed the original return. Where to file 2012 taxes The election applies when computing taxable income for the current tax year and all subsequent years. Where to file 2012 taxes   For additional information on reforestation costs, see chapter 8 . Where to file 2012 taxes Recapture. Where to file 2012 taxes   This deduction may have to be recaptured as ordinary income under section 1245 when you sell or otherwise dispose of the property that would have received an addition to basis if you had not elected to deduct the expenditure. Where to file 2012 taxes For more information on recapturing the deduction, see Depreciation Recapture in Publication 544. Where to file 2012 taxes Retired Asset Removal Costs If you retire and remove a depreciable asset in connection with the installation or production of a replacement asset, you can deduct the costs of removing the retired asset. Where to file 2012 taxes However, if you replace a component (part) of a depreciable asset, capitalize the removal costs if the replacement is an improvement and deduct the costs if the replacement is a repair. Where to file 2012 taxes Barrier Removal Costs The cost of an improvement to a business asset is normally a capital expense. Where to file 2012 taxes However, you can elect to deduct the costs of making a facility or public transportation vehicle more accessible to and usable by those who are disabled or elderly. Where to file 2012 taxes You must own or lease the facility or vehicle for use in connection with your trade or business. Where to file 2012 taxes A facility is all or any part of buildings, structures, equipment, roads, walks, parking lots, or similar real or personal property. Where to file 2012 taxes A public transportation vehicle is a vehicle, such as a bus or railroad car, that provides transportation service to the public (including service for your customers, even if you are not in the business of providing transportation services). Where to file 2012 taxes You cannot deduct any costs that you paid or incurred to completely renovate or build a facility or public transportation vehicle or to replace depreciable property in the normal course of business. Where to file 2012 taxes Deduction limit. Where to file 2012 taxes   The most you can deduct as a cost of removing barriers to the disabled and the elderly for any tax year is $15,000. Where to file 2012 taxes However, you can add any costs over this limit to the basis of the property and depreciate these excess costs. Where to file 2012 taxes Partners and partnerships. Where to file 2012 taxes   The $15,000 limit applies to a partnership and also to each partner in the partnership. Where to file 2012 taxes A partner can allocate the $15,000 limit in any manner among the partner's individually incurred costs and the partner's distributive share of partnership costs. Where to file 2012 taxes If the partner cannot deduct the entire share of partnership costs, the partnership can add any costs not deducted to the basis of the improved property. Where to file 2012 taxes   A partnership must be able to show that any amount added to basis was not deducted by the partner and that it was over a partner's $15,000 limit (as determined by the partner). Where to file 2012 taxes If the partnership cannot show this, it is presumed that the partner was able to deduct the distributive share of the partnership's costs in full. Where to file 2012 taxes Example. Where to file 2012 taxes Emilio Azul's distributive share of ABC partnership's deductible expenses for the removal of architectural barriers was $14,000. Where to file 2012 taxes Emilio had $12,000 of similar expenses in his sole proprietorship. Where to file 2012 taxes He elected to deduct $7,000 of them. Where to file 2012 taxes Emilio allocated the remaining $8,000 of the $15,000 limit to his share of ABC's expenses. Where to file 2012 taxes Emilio can add the excess $5,000 of his own expenses to the basis of the property used in his business. Where to file 2012 taxes Also, if ABC can show that Emilio could not deduct $6,000 ($14,000 – $8,000) of his share of the partnership's expenses because of how Emilio applied the limit, ABC can add $6,000 to the basis of its property. Where to file 2012 taxes Qualification standards. Where to file 2012 taxes   You can deduct your costs as a current expense only if the barrier removal meets the guidelines and requirements issued by the Architectural and Transportation Barriers Compliance Board under the Americans with Disabilities Act (ADA) of 1990. Where to file 2012 taxes You can view the Americans with Disabilities Act at www. Where to file 2012 taxes ada. Where to file 2012 taxes gov/pubs/ada. Where to file 2012 taxes htm. Where to file 2012 taxes   The following is a list of some architectural barrier removal costs that can be deducted. Where to file 2012 taxes Ground and floor surfaces. Where to file 2012 taxes Walks. Where to file 2012 taxes Parking lots. Where to file 2012 taxes Ramps. Where to file 2012 taxes Entrances. Where to file 2012 taxes Doors and doorways. Where to file 2012 taxes Stairs. Where to file 2012 taxes Floors. Where to file 2012 taxes Toilet rooms. Where to file 2012 taxes Water fountains. Where to file 2012 taxes Public telephones. Where to file 2012 taxes Elevators. Where to file 2012 taxes Controls. Where to file 2012 taxes Signage. Where to file 2012 taxes Alarms. Where to file 2012 taxes Protruding objects. Where to file 2012 taxes Symbols of accessibility. Where to file 2012 taxes You can find the ADA guidelines and requirements for architectural barrier removal at www. Where to file 2012 taxes usdoj. Where to file 2012 taxes gov/crt/ada/reg3a. Where to file 2012 taxes html. Where to file 2012 taxes   The costs for removal of transportation barriers from rail facilities, buses, and rapid and light rail vehicles are deductible. Where to file 2012 taxes You can find the guidelines and requirements for transportation barrier removal at www. Where to file 2012 taxes fta. Where to file 2012 taxes dot. Where to file 2012 taxes gov. Where to file 2012 taxes   Also, you can access the ADA website at www. Where to file 2012 taxes ada. Where to file 2012 taxes gov for additional information. Where to file 2012 taxes Other barrier removals. Where to file 2012 taxes   To be deductible, expenses of removing any barrier not covered by the above standards must meet all three of the following tests. Where to file 2012 taxes The removed barrier must be a substantial barrier to access or use of a facility or public transportation vehicle by persons who have a disability or are elderly. Where to file 2012 taxes The removed barrier must have been a barrier for at least one major group of persons who have a disability or are elderly (such as people who are blind, deaf, or wheelchair users). Where to file 2012 taxes The barrier must be removed without creating any new barrier that significantly impairs access to or use of the facility or vehicle by a major group of persons who have a disability or are elderly. Where to file 2012 taxes How to make the election. Where to file 2012 taxes   If you elect to deduct your costs for removing barriers to the disabled or the elderly, claim the deduction on your income tax return (partnership return for partnerships) for the tax year the expenses were paid or incurred. Where to file 2012 taxes Identify the deduction as a separate item. Where to file 2012 taxes The election applies to all the qualifying costs you have during the year, up to the $15,000 limit. Where to file 2012 taxes If you make this election, you must maintain adequate records to support your deduction. Where to file 2012 taxes   For your election to be valid, you generally must file your return by its due date, including extensions. Where to file 2012 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). Where to file 2012 taxes Clearly indicate the election on your amended return and write “Filed pursuant to section 301. Where to file 2012 taxes 9100-2. Where to file 2012 taxes ” File the amended return at the same address you filed the original return. Where to file 2012 taxes Your election is irrevocable after the due date, including extensions, of your return. Where to file 2012 taxes Disabled access credit. Where to file 2012 taxes   If you make your business accessible to persons with disabilities and your business is an eligible small business, you may be able to claim the disabled access credit. Where to file 2012 taxes If you choose to claim the credit, you must reduce the amount you deduct or capitalize by the amount of the credit. Where to file 2012 taxes   For more information, see Form 8826, Disabled Access Credit. Where to file 2012 taxes Film and Television Production Costs Film and television production costs are generally capital expenses. Where to file 2012 taxes However, you can elect to deduct costs paid or incurred for certain productions commencing before January 1, 2014. Where to file 2012 taxes For more information, see section 181 of the Internal Revenue Code and the related Treasury Regulations. Where to file 2012 taxes Prev  Up  Next   Home   More Online Publications
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The Where To File 2012 Taxes

Where to file 2012 taxes 10. Where to file 2012 taxes   Installment Sales Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Installment Sale of a Farm Installment MethodWhen to elect out. Where to file 2012 taxes Revoking the election. Where to file 2012 taxes More information. Where to file 2012 taxes Figuring Installment Sale Income Payments Received or Considered Received ExampleSection 1231 gains. Where to file 2012 taxes Summary. Where to file 2012 taxes Introduction An installment sale is a sale of property where you receive at least one payment after the tax year of the sale. Where to file 2012 taxes If you realize a gain on an installment sale, you may be able to report part of your gain when you receive each payment. Where to file 2012 taxes This method of reporting gain is called the installment method. Where to file 2012 taxes You cannot use the installment method to report a loss. Where to file 2012 taxes You can choose to report all of your gain in the year of sale. Where to file 2012 taxes Installment obligation. Where to file 2012 taxes   The buyer's obligation to make future payments to you can be in the form of a deed of trust, note, land contract, mortgage, or other evidence of the buyer's debt to you. Where to file 2012 taxes Topics - This chapter discusses: The general rules that apply to using the installment method Installment sale of a farm Useful Items - You may want to see: Publication 523 Selling Your Home 535 Business Expenses 537 Installment Sales 538 Accounting Periods and Methods 544 Sales and Other Dispositions of Assets Form (and Instructions) 4797 Sales of Business Property 6252 Installment Sale Income See chapter 16 for information about getting publications and forms. Where to file 2012 taxes Installment Sale of a Farm The installment sale of a farm for one overall price under a single contract is not the sale of a single asset. Where to file 2012 taxes It generally includes the sale of real property and personal property reportable on the installment method. Where to file 2012 taxes It may also include the sale of property for which you must maintain an inventory, which cannot be reported on the installment method. Where to file 2012 taxes See Inventory , later. Where to file 2012 taxes The selling price must be allocated to determine the amount received for each class of asset. Where to file 2012 taxes The tax treatment of the gain or loss on the sale of each class of assets is determined by its classification as a capital asset, as property used in the business, or as property held for sale and by the length of time the asset was held. Where to file 2012 taxes (See chapter 8 for a discussion of capital assets and chapter 9 for a discussion of property used in the business. Where to file 2012 taxes ) Separate computations must be made to figure the gain or loss for each class of asset sold. Where to file 2012 taxes See Sale of a Farm in chapter 8. Where to file 2012 taxes If you report the sale of property on the installment method, any depreciation recapture under section 1245 or 1250 of the Internal Revenue Code is generally taxable as ordinary income in the year of sale. Where to file 2012 taxes See Depreciation recapture , later. Where to file 2012 taxes This applies even if no payments are received in that year. Where to file 2012 taxes Installment Method An installment sale is a sale of property where you receive at least one payment after the tax year of the sale. Where to file 2012 taxes A farmer who is not required to maintain an inventory can use the installment method to report gain from the sale of property used or produced in farming. Where to file 2012 taxes See Inventory , later, for information on the sale of farm property where inventory items are included in the assets sold. Where to file 2012 taxes If a sale qualifies as an installment sale, the gain must be reported under the installment method unless you elect out of using the installment method. Where to file 2012 taxes Electing out of the installment method. Where to file 2012 taxes   If you elect not to use the installment method, you generally report the entire gain in the year of sale, even though you do not receive all the sale proceeds in that year. Where to file 2012 taxes   To make this election, do not report your sale on Form 6252. Where to file 2012 taxes Instead, report it on Schedule D (Form 1040), Form 4797, or both. Where to file 2012 taxes When to elect out. Where to file 2012 taxes   Make this election by the due date, including extensions, for filing your tax return for the year the sale takes place. Where to file 2012 taxes   However, if you timely file your tax return for the year the sale takes place without making the election, you still can make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). Where to file 2012 taxes Write “Filed pursuant to section 301. Where to file 2012 taxes 9100-2” at the top of the amended return and file it where the original return was filed. Where to file 2012 taxes Revoking the election. Where to file 2012 taxes   Once made, the election can be revoked only with IRS approval. Where to file 2012 taxes A revocation is retroactive. Where to file 2012 taxes More information. Where to file 2012 taxes   See Electing Out of the Installment Method in Publication 537 for more information. Where to file 2012 taxes Inventory. Where to file 2012 taxes   The sale of farm inventory items cannot be reported on the installment method. Where to file 2012 taxes All gain or loss on their sale must be reported in the year of sale, even if you receive payment in later years. Where to file 2012 taxes   If inventory items are included in an installment sale, you may have an agreement stating which payments are for inventory and which are for the other assets being sold. Where to file 2012 taxes If you do not, each payment must be allocated between the inventory and the other assets sold. Where to file 2012 taxes Sale at a loss. Where to file 2012 taxes   If your sale results in a loss, you cannot use the installment method. Where to file 2012 taxes If the loss is on an installment sale of business assets, you can deduct it only in the tax year of sale. Where to file 2012 taxes Figuring Installment Sale Income Each payment on an installment sale usually consists of the following three parts. Where to file 2012 taxes Interest income. Where to file 2012 taxes Return of your adjusted basis in the property. Where to file 2012 taxes Gain on the sale. Where to file 2012 taxes In each year you receive a payment, you must include in income both the interest part and the part that is your gain on the sale. Where to file 2012 taxes You do not include in income the part that is the return of your basis in the property. Where to file 2012 taxes Basis is the amount of your investment in the property for installment sale purposes. Where to file 2012 taxes Interest income. Where to file 2012 taxes   You must report interest as ordinary income. Where to file 2012 taxes Interest is generally not included in a down payment. Where to file 2012 taxes However, you may have to treat part of each later payment as interest, even if it is not called interest in your agreement with the buyer. Where to file 2012 taxes Interest provided in the agreement is called stated interest. Where to file 2012 taxes If the agreement does not provide for enough stated interest, there may be unstated interest or original issue discount. Where to file 2012 taxes See Unstated interest , later. Where to file 2012 taxes    You must continue to report the interest income on payments you receive in subsequent years as interest income. Where to file 2012 taxes Adjusted basis and installment sale income (gain on sale). Where to file 2012 taxes   After you have determined how much of each payment to treat as interest, you treat the rest of each payment as if it were made up of two parts. Where to file 2012 taxes A tax-free return of your adjusted basis in the property, and Your gain (referred to as “installment sale income” on Form 6252). Where to file 2012 taxes Figuring adjusted basis for installment sale purposes. Where to file 2012 taxes   You can use Worksheet 10-1 to figure your adjusted basis in the property for installment sale purposes. Where to file 2012 taxes When you have completed the worksheet, you will also have determined the gross profit percentage necessary to figure your installment sale income (gain) for this year. Where to file 2012 taxes    Worksheet 10-1. Where to file 2012 taxes Figuring Adjusted Basis and Gross Profit Percentage 1. Where to file 2012 taxes Enter the selling price for the property   2. Where to file 2012 taxes Enter your adjusted basis for the property     3. Where to file 2012 taxes Enter your selling expenses     4. Where to file 2012 taxes Enter any depreciation recapture     5. Where to file 2012 taxes Add lines 2, 3, and 4. Where to file 2012 taxes  This is your adjusted basis  for installment sale purposes   6. Where to file 2012 taxes Subtract line 5 from line 1. Where to file 2012 taxes If zero or less, enter -0-. Where to file 2012 taxes  This is your gross profit     If the amount entered on line 6 is zero, Stop here. Where to file 2012 taxes You cannot use the installment method. Where to file 2012 taxes   7. Where to file 2012 taxes Enter the contract price for the property   8. Where to file 2012 taxes Divide line 6 by line 7. Where to file 2012 taxes This is your gross profit percentage   Selling price. Where to file 2012 taxes   The selling price is the total cost of the property to the buyer and includes the following. Where to file 2012 taxes Any money you are to receive. Where to file 2012 taxes The fair market value (FMV) of any property you are to receive (FMV is discussed at Property used as a payment under Payments Received or Considered Received ). Where to file 2012 taxes Any existing mortgage or other debt the buyer pays, assumes, or takes (a note, mortgage, or any other liability, such as a lien, accrued interest, or taxes you owe on the property). Where to file 2012 taxes Any of your selling expenses the buyer pays. Where to file 2012 taxes Do not include stated interest, unstated interest, any amount recomputed or recharacterized as interest, or original issue discount. Where to file 2012 taxes Adjusted basis for installment sale purposes. Where to file 2012 taxes   Your adjusted basis is the total of the following three items. Where to file 2012 taxes Adjusted basis. Where to file 2012 taxes Selling expenses. Where to file 2012 taxes Depreciation recapture. Where to file 2012 taxes Adjusted basis. Where to file 2012 taxes   Basis is your investment in the property for installment sale purposes. Where to file 2012 taxes The way you figure basis depends on how you acquire the property. Where to file 2012 taxes The basis of property you buy is generally its cost. Where to file 2012 taxes The basis of property you inherit, receive as a gift, build yourself, or receive in a tax-free exchange is figured differently. Where to file 2012 taxes   While you own property, various events may change your original basis. Where to file 2012 taxes Some events, such as adding rooms or making permanent improvements, increase basis. Where to file 2012 taxes Others, such as deductible casualty losses or depreciation previously allowed or allowable, decrease basis. Where to file 2012 taxes The result is adjusted basis. Where to file 2012 taxes See chapter 6 and Publication 551, Basis of Assets, for more information. Where to file 2012 taxes Selling expenses. Where to file 2012 taxes   Selling expenses relate to the sale of the property. Where to file 2012 taxes They include commissions, attorney fees, and any other expenses paid on the sale. Where to file 2012 taxes Selling expenses are added to the basis of the sold property. Where to file 2012 taxes Depreciation recapture. Where to file 2012 taxes   If the property you sold was depreciable property, you may need to recapture part of the gain on the sale as ordinary income. Where to file 2012 taxes See Depreciation Recapture in chapter 9 and Depreciation Recapture Income in Publication 537. Where to file 2012 taxes Gross profit. Where to file 2012 taxes   Gross profit is the total gain you report on the installment method. Where to file 2012 taxes   To figure your gross profit, subtract your adjusted basis for installment sale purposes from the selling price. Where to file 2012 taxes If the property you sold was your home, subtract from the gross profit any gain you can exclude. Where to file 2012 taxes Contract price. Where to file 2012 taxes   Contract price equals: The selling price, minus The mortgages, debts, and other liabilities assumed or taken by the buyer, plus The amount by which the mortgages, debts, and other liabilities assumed or taken by the buyer exceed your adjusted basis for installment sale purposes. Where to file 2012 taxes Gross profit percentage. Where to file 2012 taxes   A certain percentage of each payment (after subtracting interest) is reported as installment sale income. Where to file 2012 taxes This percentage is called the gross profit percentage and is figured by dividing your gross profit from the sale by the contract price. Where to file 2012 taxes   The gross profit percentage generally remains the same for each payment you receive. Where to file 2012 taxes However, see the example under Selling price reduced , later, for a situation where the gross profit percentage changes. Where to file 2012 taxes Amount to report as installment sale income. Where to file 2012 taxes   Multiply the payments you receive each year (less interest) by the gross profit percentage. Where to file 2012 taxes The result is your installment sales income for the tax year. Where to file 2012 taxes In certain circumstances, you may be treated as having received a payment, even though you received nothing directly. Where to file 2012 taxes A receipt of property or the assumption of a mortgage on the property sold may be treated as a payment. Where to file 2012 taxes For a detailed discussion, see Payments Received or Considered Received , later. Where to file 2012 taxes Selling price reduced. Where to file 2012 taxes   If the selling price is reduced at a later date, the gross profit on the sale also will change. Where to file 2012 taxes You then must refigure the gross profit percentage for the remaining payments. Where to file 2012 taxes Refigure your gross profit using Worksheet 10-2. Where to file 2012 taxes New Gross Profit Percentage — Selling Price Reduced. Where to file 2012 taxes You will spread any remaining gain over future installments. Where to file 2012 taxes    Worksheet 10-2. Where to file 2012 taxes New Gross Profit Percentage — Selling Price Reduced 1. Where to file 2012 taxes Enter the reduced selling  price for the property   2. Where to file 2012 taxes Enter your adjusted  basis for the  property     3. Where to file 2012 taxes Enter your selling  expenses     4. Where to file 2012 taxes Enter any depreciation  recapture     5. Where to file 2012 taxes Add lines 2, 3, and 4. Where to file 2012 taxes   6. Where to file 2012 taxes Subtract line 5 from line 1. Where to file 2012 taxes  This is your adjusted  gross profit   7. Where to file 2012 taxes Enter any installment sale  income reported in  prior year(s)   8. Where to file 2012 taxes Subtract line 7 from line 6   9. Where to file 2012 taxes Future installments     10. Where to file 2012 taxes Divide line 8 by line 9. Where to file 2012 taxes  This is your new  gross profit percentage*. Where to file 2012 taxes   * Apply this percentage to all future payments to determine how much of each of those payments is installment sale income. Where to file 2012 taxes Example. Where to file 2012 taxes In 2011, you sold land with a basis of $40,000 for $100,000. Where to file 2012 taxes Your gross profit was $60,000. Where to file 2012 taxes You received a $20,000 down payment and the buyer's note for $80,000. Where to file 2012 taxes The note provides for monthly payments of $1,953 each, figured at 8% interest, amortized over four years, beginning in January 2012. Where to file 2012 taxes Your gross profit percentage was 60%. Where to file 2012 taxes You received the down payment of $20,000 in 2011 and total payments of $23,436 in 2012, of which $17,675 was principal and $5,761 was interest according to the amortization schedule. Where to file 2012 taxes You reported a gain of $12,000 on the down payment received in 2011 and $10,605 ($17,675 X 60% (. Where to file 2012 taxes 60)) in 2012. Where to file 2012 taxes In January 2013, you and the buyer agreed to reduce the purchase price to $85,000 and payments during 2013, 2014, and 2015 are reduced to $1,483 a month amortized over the remaining three years. Where to file 2012 taxes The new gross profit percentage, 47. Where to file 2012 taxes 32%, is figured in Example — Worksheet 10-2. Where to file 2012 taxes Example — Worksheet 10-2. Where to file 2012 taxes New Gross Profit Percentage — Selling Price Reduced 1. Where to file 2012 taxes Enter the reduced selling  price for the property 85,000 2. Where to file 2012 taxes Enter your adjusted  basis for the  property 40,000   3. Where to file 2012 taxes Enter your selling  expenses -0-   4. Where to file 2012 taxes Enter any depreciation  recapture -0-   5. Where to file 2012 taxes Add lines 2, 3, and 4. Where to file 2012 taxes 40,000 6. Where to file 2012 taxes Subtract line 5 from line 1. Where to file 2012 taxes  This is your adjusted  gross profit 45,000 7. Where to file 2012 taxes Enter any installment sale  income reported in  prior year(s) 22,605 8. Where to file 2012 taxes Subtract line 7 from line 6 22,395 9. Where to file 2012 taxes Future installments   47,325 10. Where to file 2012 taxes Divide line 8 by line 9. Where to file 2012 taxes  This is your new  gross profit percentage*. Where to file 2012 taxes 47. Where to file 2012 taxes 32% * Apply this percentage to all future payments to determine how much of each of those payments is installment sale income. Where to file 2012 taxes You will report installment sale income of $6,878 (47. Where to file 2012 taxes 32% of $14,535) in 2013, $7,449 (47. Where to file 2012 taxes 32% of $15,742) in 2014, and $8,067 (47. Where to file 2012 taxes 32% of $17,048) in 2015. Where to file 2012 taxes Form 6252. Where to file 2012 taxes   Use Form 6252 to report an installment sale in the year it takes place and to report payments received, or considered received because of related party resales, in later years. Where to file 2012 taxes Attach it to your tax return for each year. Where to file 2012 taxes Disposition of Installment Obligation If you are using the installment method and you dispose of the installment obligation, generally you will have a gain or loss to report. Where to file 2012 taxes It is considered gain or loss on the sale of the property for which you received the installment obligation. Where to file 2012 taxes Cancellation. Where to file 2012 taxes   If an installment obligation is canceled or otherwise becomes unenforceable, it is treated as a disposition other than a sale or exchange. Where to file 2012 taxes Your gain or loss is the difference between your basis in the obligation and its fair market value (FMV) at the time you cancel it. Where to file 2012 taxes If the parties are related, the FMV of the obligation is considered to be no less than its full face value. Where to file 2012 taxes Transfer due to death. Where to file 2012 taxes   The transfer of an installment obligation (other than to a buyer) as a result of the death of the seller is not a disposition. Where to file 2012 taxes Any unreported gain from the installment obligation is not treated as gross income to the decedent. Where to file 2012 taxes No income is reported on the decedent's return due to the transfer. Where to file 2012 taxes Whoever receives the installment obligation as a result of the seller's death is taxed on the installment payments the same as the seller would have been had the seller lived to receive the payments. Where to file 2012 taxes   However, if the installment obligation is canceled, becomes unenforceable, or is transferred to the buyer because of the death of the holder of the obligation, it is a disposition. Where to file 2012 taxes The estate must figure its gain or loss on the disposition. Where to file 2012 taxes If the holder and the buyer were related, the FMV of the installment obligation is considered to be no less than its full face value. Where to file 2012 taxes More information. Where to file 2012 taxes   For more information on the disposition of an installment obligation, see Publication 537. Where to file 2012 taxes Sale of depreciable property. Where to file 2012 taxes   You generally cannot report gain from the sale of depreciable property to a related person on the installment method. Where to file 2012 taxes See Sale to a Related Person in Publication 537. Where to file 2012 taxes   You cannot use the installment method to report any depreciation recapture income up to the gain on the sale. Where to file 2012 taxes However, report any gain greater than the recapture income on the installment method. Where to file 2012 taxes   The recapture income reported in the year of sale is included in your installment sale basis to determine your gross profit on the installment sale. Where to file 2012 taxes   Figure your depreciation recapture income (including the section 179 deduction and the section 179A deduction recapture) in Part III of Form 4797. Where to file 2012 taxes Report the depreciation recapture income in Part II of Form 4797 as ordinary income in the year of sale. Where to file 2012 taxes    If you sell depreciable business property, prepare Form 4797 first in order to figure the amount to enter on line 12 of Part I, Form 6252. Where to file 2012 taxes See the Form 6252 instructions for details. Where to file 2012 taxes   For more information on the section 179 deduction, see Section 179 Expense Deduction in chapter 7. Where to file 2012 taxes For more information on depreciation recapture, see Depreciation Recapture in  chapter 9. Where to file 2012 taxes Payments Received or Considered Received You must figure your gain each year on the payments you receive, or are treated as receiving, from an installment sale. Where to file 2012 taxes In certain situations, you are considered to have received a payment, even though the buyer does not pay you directly. Where to file 2012 taxes These situations occur when the buyer assumes or pays any of your debts, such as a loan, or pays any of your expenses, such as a sales commission. Where to file 2012 taxes However, as discussed later, the buyer's assumption of your debt is treated as a recovery of basis, rather than as a payment, in many cases. Where to file 2012 taxes Buyer pays seller's expenses. Where to file 2012 taxes   If the buyer pays any of your expenses related to the sale of your property, it is considered a payment to you in the year of sale. Where to file 2012 taxes Include these expenses in the selling and contract prices when figuring the gross profit percentage. Where to file 2012 taxes Buyer assumes mortgage. Where to file 2012 taxes   If the buyer assumes or pays off your mortgage, or otherwise takes the property subject to the mortgage, the following rules apply. Where to file 2012 taxes Mortgage less than basis. Where to file 2012 taxes   If the buyer assumes a mortgage that is not more than your installment sale basis in the property, it is not considered a payment to you. Where to file 2012 taxes It is considered a recovery of your basis. Where to file 2012 taxes The contract price is the selling price minus the mortgage. Where to file 2012 taxes Example. Where to file 2012 taxes You sell property with an adjusted basis of $19,000. Where to file 2012 taxes You have selling expenses of $1,000. Where to file 2012 taxes The buyer assumes your existing mortgage of $15,000 and agrees to pay you $10,000 (a cash down payment of $2,000 and $2,000 (plus 8% interest) in each of the next 4 years). Where to file 2012 taxes The selling price is $25,000 ($15,000 + $10,000). Where to file 2012 taxes Your gross profit is $5,000 ($25,000 − $20,000 installment sale basis). Where to file 2012 taxes The contract price is $10,000 ($25,000 − $15,000 mortgage). Where to file 2012 taxes Your gross profit percentage is 50% ($5,000 ÷ $10,000). Where to file 2012 taxes You report half of each $2,000 payment received as gain from the sale. Where to file 2012 taxes You also report all interest you receive as ordinary income. Where to file 2012 taxes Mortgage more than basis. Where to file 2012 taxes   If the buyer assumes a mortgage that is more than your installment sale basis in the property, you recover your entire basis. Where to file 2012 taxes The part of the mortgage greater than your basis is treated as a payment received in the year of sale. Where to file 2012 taxes   To figure the contract price, subtract the mortgage from the selling price. Where to file 2012 taxes This is the total amount (other than interest) you will receive directly from the buyer. Where to file 2012 taxes Add to this amount the payment you are considered to have received (the difference between the mortgage and your installment sale basis). Where to file 2012 taxes The contract price is then the same as your gross profit from the sale. Where to file 2012 taxes    If the mortgage the buyer assumes is equal to or more than your installment sale basis, the gross profit percentage always will be 100%. Where to file 2012 taxes Example. Where to file 2012 taxes The selling price for your property is $9,000. Where to file 2012 taxes The buyer will pay you $1,000 annually (plus 8% interest) over the next 3 years and assume an existing mortgage of $6,000. Where to file 2012 taxes Your adjusted basis in the property is $4,400. Where to file 2012 taxes You have selling expenses of $600, for a total installment sale basis of $5,000. Where to file 2012 taxes The part of the mortgage that is more than your installment sale basis is $1,000 ($6,000 − $5,000). Where to file 2012 taxes This amount is included in the contract price and treated as a payment received in the year of sale. Where to file 2012 taxes The contract price is $4,000: Selling price $9,000 Minus: Mortgage (6,000) Amount actually received $3,000 Add difference:   Mortgage $6,000   Minus: Installment sale basis 5,000 1,000 Contract price $4,000   Your gross profit on the sale is also $4,000: Selling price $9,000 Minus: Installment sale basis (5,000) Gross profit $4,000   Your gross profit percentage is 100%. Where to file 2012 taxes Report 100% of each payment (less interest) as gain from the sale. Where to file 2012 taxes Treat the $1,000 difference between the mortgage and your installment sale basis as a payment and report 100% of it as gain in the year of sale. Where to file 2012 taxes Buyer assumes other debts. Where to file 2012 taxes   If the buyer assumes any other debts, such as a loan or back taxes, it may be considered a payment to you in the year of sale. Where to file 2012 taxes   If the buyer assumes the debt instead of paying it off, only part of it may have to be treated as a payment. Where to file 2012 taxes Compare the debt to your installment sale basis in the property being sold. Where to file 2012 taxes If the debt is less than your installment sale basis, none of it is treated as a payment. Where to file 2012 taxes If it is more, only the difference is treated as a payment. Where to file 2012 taxes If the buyer assumes more than one debt, any part of the total that is more than your installment sale basis is considered a payment. Where to file 2012 taxes These rules are the same as the rules discussed earlier under Buyer assumes mortgage . Where to file 2012 taxes However, they apply only to the following types of debt the buyer assumes. Where to file 2012 taxes Those acquired from ownership of the property you are selling, such as a mortgage, lien, overdue interest, or back taxes. Where to file 2012 taxes Those acquired in the ordinary course of your business, such as a balance due for inventory you purchased. Where to file 2012 taxes   If the buyer assumes any other type of debt, such as a personal loan or your legal fees relating to the sale, it is treated as if the buyer had paid off the debt at the time of the sale. Where to file 2012 taxes The value of the assumed debt is then considered a payment to you in the year of sale. Where to file 2012 taxes Property used as a payment. Where to file 2012 taxes   If you receive property rather than money from the buyer, it is still considered a payment in the year received. Where to file 2012 taxes However, see Trading property for like-kind property , later. Where to file 2012 taxes Generally, the amount of the payment is the property's FMV on the date you receive it. Where to file 2012 taxes Exception. Where to file 2012 taxes   If the property the buyer gives you is payable on demand or readily tradable (see examples later), the amount you should consider as payment in the year received is: The FMV of the property on the date you receive it if you use the cash method of accounting, The face amount of the obligation on the date you receive it if you use an accrual method of accounting, or The stated redemption price at maturity less any original issue discount (OID) or, if there is no OID, the stated redemption price at maturity appropriately discounted to reflect total unstated interest. Where to file 2012 taxes See Unstated interest , later. Where to file 2012 taxes Examples. Where to file 2012 taxes If you receive a note from the buyer as payment, and the note stipulates that you can demand payment from the buyer at any time, the note is payable on demand. Where to file 2012 taxes If you receive marketable securities from the buyer as payment, and you can sell the securities on an established securities market (such as the New York Stock Exchange) at any time, the securities are readily tradable. Where to file 2012 taxes In these examples, use the above rules to determine the amount you should consider as payment in the year received. Where to file 2012 taxes Debt not payable on demand. Where to file 2012 taxes   Any evidence of debt you receive from the buyer that is not payable on demand is not considered a payment. Where to file 2012 taxes This is true even if the debt is guaranteed by a third party, including a government agency. Where to file 2012 taxes Fair market value (FMV). Where to file 2012 taxes   This is the price at which property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having a reasonable knowledge of all the necessary facts. Where to file 2012 taxes Third-party note. Where to file 2012 taxes   If the property the buyer gives you is a third-party note (or other obligation of a third party), you are considered to have received a payment equal to the note's FMV. Where to file 2012 taxes Because the FMV of the note is itself a payment on your installment sale, any payments you later receive from the third party are not considered payments on the sale. Where to file 2012 taxes The excess of the note's face value over its FMV is interest. Where to file 2012 taxes Exclude this interest in determining the selling price of the property. Where to file 2012 taxes However, see Exception under Property used as a payment , earlier. Where to file 2012 taxes Example. Where to file 2012 taxes You sold real estate in an installment sale. Where to file 2012 taxes As part of the down payment, the buyer assigned to you a $50,000, 8% third-party note. Where to file 2012 taxes The FMV of the third-party note at the time of the sale was $30,000. Where to file 2012 taxes This amount, not $50,000, is a payment to you in the year of sale. Where to file 2012 taxes The third-party note had an FMV equal to 60% of its face value ($30,000 ÷ $50,000), so 60% of each principal payment you receive on this note is a nontaxable return of capital. Where to file 2012 taxes The remaining 40% is interest taxed as ordinary income. Where to file 2012 taxes Bond. Where to file 2012 taxes   A bond or other evidence of debt you receive from the buyer that is payable on demand or readily tradable in an established securities market is treated as a payment in the year you receive it. Where to file 2012 taxes For more information on the amount you should treat as a payment, see Exception under Property used as a payment , earlier. Where to file 2012 taxes   If you receive a government or corporate bond for a sale before October 22, 2004, and the bond has interest coupons attached or can be readily traded in an established securities market, you are considered to have received payment equal to the bond's FMV. Where to file 2012 taxes However, see Exception under Property used as a payment , earlier. Where to file 2012 taxes Buyer's note. Where to file 2012 taxes   The buyer's note (unless payable on demand) is not considered payment on the sale. Where to file 2012 taxes However, its full face value is included when figuring the selling price and the contract price. Where to file 2012 taxes Payments you receive on the note are used to figure your gain in the year received. Where to file 2012 taxes Sale to a related person. Where to file 2012 taxes   If you sell depreciable property to a related person and the sale is an installment sale, you may not be able to report the sale using the installment method. Where to file 2012 taxes For information on these rules, see the Instructions for Form 6252 and Sale to a Related Person in Publication 537. Where to file 2012 taxes Trading property for like-kind property. Where to file 2012 taxes   If you trade business or investment property solely for the same kind of property to be held as business or investment property, you can postpone reporting the gain. Where to file 2012 taxes See Like-Kind Exchanges in chapter 8 for a discussion of like-kind property. Where to file 2012 taxes   If, in addition to like-kind property, you receive an installment obligation in the exchange, the following rules apply to determine installment sale income each year. Where to file 2012 taxes The contract price is reduced by the FMV of the like-kind property received in the trade. Where to file 2012 taxes The gross profit is reduced by any gain on the trade that can be postponed. Where to file 2012 taxes Like-kind property received in the trade is not considered payment on the installment obligation. Where to file 2012 taxes Unstated interest. Where to file 2012 taxes   An installment sale contract may provide that each deferred payment on the sale will include interest or that there will be an interest payment in addition to the principal payment. Where to file 2012 taxes Interest provided in the contract is called stated interest. Where to file 2012 taxes   If an installment sale contract does not provide for adequate stated interest, part of the stated principal amount of the contract may be recharacterized as interest. Where to file 2012 taxes If Internal Revenue Code section 483 applies to the contract, this interest is called unstated interest. Where to file 2012 taxes   If Internal Revenue Code section 1274 applies to the contract, this interest is called original issue discount (OID). Where to file 2012 taxes   Generally, if a buyer gives a debt in consideration for personal use property, the unstated interest rules do not apply. Where to file 2012 taxes Therefore, the buyer cannot deduct the unstated interest. Where to file 2012 taxes The seller must report the unstated interest as income. Where to file 2012 taxes Personal-use property is any property in which substantially all of its use by the buyer is not in connection with a trade or business or an investment activity. Where to file 2012 taxes   If the debt is subject to the Internal Revenue Code section 483 rules and is also subject to the below-market loan rules, such as a gift loan, compensation-related loan or corporation-shareholder loan, then both parties are subject to the below-market loan rules rather than the unstated interest rules. Where to file 2012 taxes   Unstated interest reduces the stated selling price of the property and the buyer's basis in the property. Where to file 2012 taxes It increases the seller's interest income and the buyer's interest expense. Where to file 2012 taxes   In general, an installment sale contract provides for adequate stated interest if the stated interest rate (based on an appropriate compounding period) is at least equal to the applicable federal rate (AFR). Where to file 2012 taxes    The AFRs are published monthly in the Internal Revenue Bulletin (IRB). Where to file 2012 taxes You can get this information by contacting an IRS office. Where to file 2012 taxes IRBs are also available at IRS. Where to file 2012 taxes gov. Where to file 2012 taxes More information. Where to file 2012 taxes   For more information, see Unstated Interest and Original Issue Discount (OID) in Publication 537. Where to file 2012 taxes Example. Where to file 2012 taxes You sell property at a contract price of $6,000 and your gross profit is $1,500. Where to file 2012 taxes Your gross profit percentage is 25% ($1,500 ÷ $6,000). Where to file 2012 taxes After subtracting interest, you report 25% of each payment, including the down payment, as installment sale income from the sale for the tax year you receive the payment. Where to file 2012 taxes The remainder (balance) of each payment is the tax-free return of your adjusted basis. Where to file 2012 taxes Example On January 3, 2013, you sold your farm, including the home, farm land and buildings. Where to file 2012 taxes You received $50,000 down and the buyer's note for $200,000. Where to file 2012 taxes In addition, the buyer assumed an outstanding $50,000 mortgage on the farm land. Where to file 2012 taxes The total selling price was $300,000. Where to file 2012 taxes The note payments of $25,000 each, plus adequate interest, are due every July 1 and January 1, beginning in July 2013. Where to file 2012 taxes Your selling expenses were $15,000. Where to file 2012 taxes Adjusted basis and depreciation. Where to file 2012 taxes   The adjusted basis and depreciation claimed on each asset sold are as follows:   Depreciation Adjusted Asset Claimed Basis Home* -0- $33,743 Farm land -0- 73,610 Buildings $31,500 35,130 * Owned and used as main home for at least 2 of the 5 years prior to the sale Gain on each asset. Where to file 2012 taxes   The following schedule shows the assets included in the sale, each asset's selling price based on its respective value, the selling expense allocated to each asset, the adjusted basis of each asset, and the gain on each asset. Where to file 2012 taxes The selling expense for each asset is 5% of the selling price ($15,000 selling expense ÷ $300,000 selling price). Where to file 2012 taxes   Selling Selling Adjusted     Price Expense Basis Gain Home* $60,000 $3,000 $33,743 $23,257 Farm land  165,000  8,250  73,610  83,140 Buildings 75,000 3,750 35,130 36,120   $300,000 $15,000 $142,483 $142,517 * Owned and used as main home for at least 2 of the 5 years prior to the sale Depreciation recapture. Where to file 2012 taxes   The buildings are section 1250 property. Where to file 2012 taxes There is no depreciation recapture income for them because they were depreciated using the straight line method. Where to file 2012 taxes See chapter 9 for more information on depreciation recapture. Where to file 2012 taxes   Special rules may apply when you sell section 1250 assets depreciated under the straight line method. Where to file 2012 taxes See the Unrecaptured Section 1250 Gain Worksheet in the Instructions for Schedule D (Form 1040). Where to file 2012 taxes See chapter 3 of Publication 544, Sales and Other Dispositions of Assets, for more information on section 1250 assets. Where to file 2012 taxes Installment sale basis and gross profit. Where to file 2012 taxes   The following table shows each asset reported on the installment method, its selling price, installment sale basis, and gross profit. Where to file 2012 taxes     Installment     Selling Sale Gross   Price Basis Profit Farm land $165,000 $73,610 $83,140 Buildings 75,000 35,130 36,120   $240,000 $108,740 $119,260 Section 1231 gains. Where to file 2012 taxes   The gain on the farm land and buildings is reported as section 1231 gains. Where to file 2012 taxes See Section 1231 Gains and Losses in chapter 9. Where to file 2012 taxes Contract price and gross profit percentage. Where to file 2012 taxes   The contract price is $250,000 for the part of the sale reported on the installment method. Where to file 2012 taxes This is the selling price ($300,000) minus the mortgage assumed ($50,000). Where to file 2012 taxes   Gross profit percentage for the sale is 47. Where to file 2012 taxes 70% ($119,260 gross profit ÷ $250,000 contract price). Where to file 2012 taxes The gross profit percentage for each asset is figured as follows:   Percent Farm land ($83,140 ÷ $250,000) 33. Where to file 2012 taxes 256 Buildings ($36,120 ÷ $250,000) 14. Where to file 2012 taxes 448 Total 47. Where to file 2012 taxes 70 Figuring the gain to report on the installment method. Where to file 2012 taxes   One hundred percent (100%) of each payment is reported on the installment method. Where to file 2012 taxes The total amount received on the sale in 2013 is $75,000 ($50,000 down payment + $25,000 payment on July 1). Where to file 2012 taxes The installment sale part of the total payments received in 2013 is also $75,000. Where to file 2012 taxes Figure the gain to report for each asset by multiplying its gross profit percentage times $75,000. Where to file 2012 taxes   Income Farm land—33. Where to file 2012 taxes 256% × $75,000 $24,942 Buildings—14. Where to file 2012 taxes 448% × $75,000 10,836 Total installment income for 2013 $35,778 Reporting the sale. Where to file 2012 taxes   Report the installment sale on Form 6252. Where to file 2012 taxes Then report the amounts from Form 6252 on Form 4797 and Schedule D (Form 1040). Where to file 2012 taxes Attach a separate page to Form 6252 that shows the computations in the example. Where to file 2012 taxes If you sell depreciable business property, prepare Form 4797 first in order to figure the amount to enter on line 12 of Part I, Form 6252. Where to file 2012 taxes Section 1231 gains. Where to file 2012 taxes   The gains on the farm land and buildings are section 1231 gains. Where to file 2012 taxes They may be reported as either capital or ordinary gain depending on the net balance when combined with other section 1231 losses. Where to file 2012 taxes A net 1231 gain is capital gain and a net 1231 loss is an ordinary loss. Where to file 2012 taxes Installment income for years after 2013. Where to file 2012 taxes   You figure installment income for the years after 2013 by applying the same gross profit percentages to the payments you receive each year. Where to file 2012 taxes If you receive $50,000 during the year, the entire $50,000 is considered received on the installment sale (100% × $50,000). Where to file 2012 taxes You realize income as follows:   Income Farm land—33. Where to file 2012 taxes 256% × $50,000 $16,628 Buildings—14. Where to file 2012 taxes 448% × $50,000 7,224 Total installment income $23,852   In this example, no gain ever is recognized from the sale of your home. Where to file 2012 taxes You will combine your section 1231 gains from this sale with section 1231 gains and losses from other sales in each of the later years to determine whether to report them as ordinary or capital gains. Where to file 2012 taxes The interest received with each payment will be included in full as ordinary income. Where to file 2012 taxes Summary. Where to file 2012 taxes   The installment income (rounded to the nearest dollar) from the sale of the farm is reported as follows: Selling price $190,000 Minus: Installment basis (108,740) Gross profit $81,260     Gain reported in 2012 (year of sale) $35,778 Gain reported in 2013:   $50,000 × 47. Where to file 2012 taxes 70% 23,850 Gain reported in 2014:   $50,000 × 47. Where to file 2012 taxes 70% 23,850 Gain reported in 2015:   $50,000 × 47. Where to file 2012 taxes 70% 23,850 Gain reported in 2016:   $25,000 × 47. Where to file 2012 taxes 70% 11,925 Total gain reported $119,253 Prev  Up  Next   Home   More Online Publications