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Www irs gov eitc 4. Www irs gov eitc   Sales and Trades of Investment Property Table of Contents IntroductionNominees. Www irs gov eitc Topics - This chapter discusses: Useful Items - You may want to see: What Is a Sale or Trade?Dividend versus sale or trade. Www irs gov eitc Worthless Securities Constructive Sales of Appreciated Financial Positions Section 1256 Contracts Marked to Market Basis of Investment PropertyCost Basis Basis Other Than Cost Adjusted Basis Stocks and Bonds How To Figure Gain or LossFair market value. Www irs gov eitc Debt paid off. Www irs gov eitc Payment of cash. Www irs gov eitc Special Rules for Mutual Funds Nontaxable TradesLike-Kind Exchanges Corporate Stocks Exchange of Shares In One Mutual Fund For Shares In Another Mutual Fund Insurance Policies and Annuities U. Www irs gov eitc S. Www irs gov eitc Treasury Notes or Bonds Transfers Between Spouses Related Party TransactionsGain on Sale or Trade of Depreciable Property Capital Gains and LossesCapital or Ordinary Gain or Loss Holding Period Nonbusiness Bad Debts Short Sales Wash Sales Options Straddles Sales of Stock to ESOPs or Certain Cooperatives Rollover of Gain From Publicly Traded Securities Gains on Qualified Small Business Stock Exclusion of Gain From DC Zone Assets Reporting Capital Gains and LossesException 1. Www irs gov eitc Exception 2. Www irs gov eitc Section 1256 contracts and straddles. Www irs gov eitc Market discount bonds. Www irs gov eitc File Form 1099-B or Form 1099-S with the IRS. Www irs gov eitc Capital Losses Capital Gain Tax Rates Special Rules for Traders in SecuritiesHow To Report Introduction This chapter explains the tax treatment of sales and trades of investment property. Www irs gov eitc Investment property. Www irs gov eitc   This is property that produces investment income. Www irs gov eitc Examples include stocks, bonds, and Treasury bills and notes. Www irs gov eitc Property used in a trade or business is not investment property. Www irs gov eitc Form 1099-B. Www irs gov eitc   If you sold property such as stocks, bonds, mutual funds, or certain commodities through a broker during the year, you should receive, for each sale, a Form 1099-B, Proceeds From Broker and Barter Exchange Transactions, or substitute statement, from the broker. Www irs gov eitc You should receive the statement by February 15 of the next year. Www irs gov eitc It will show the gross proceeds from the sale. Www irs gov eitc The IRS will also get a copy of Form 1099-B from the broker. Www irs gov eitc   Use Form 1099-B (or substitute statement received from your broker) to complete Form 8949. Www irs gov eitc If you sold a covered security in 2013, your broker will send you a Form 1099-B (or substitute statement) that shows your basis. Www irs gov eitc This will help you complete Form 8949. Www irs gov eitc Generally, a covered security is a security you acquired after 2010, with certain exceptions explained in the Instructions for Form 8949. Www irs gov eitc    For more information on Form 8949 and Schedule D (Form 1040), see Reporting Capital Gains and Losses in this chapter. Www irs gov eitc Also see the Instructions for Form 8949 and the Instructions for Schedule D (Form 1040). Www irs gov eitc Nominees. Www irs gov eitc   If someone receives gross proceeds as a nominee for you, that person will give you a Form 1099-B, which will show gross proceeds received on your behalf. Www irs gov eitc   If you receive a Form 1099-B that includes gross proceeds belonging to another person, see Nominees , later under Reporting Capital Gains and Losses for more information. Www irs gov eitc Other property transactions. Www irs gov eitc   Certain transfers of property are discussed in other IRS publications. Www irs gov eitc These include: Sale of your main home, discussed in Publication 523, Selling Your Home; Installment sales, covered in Publication 537; Various types of transactions involving business property, discussed in Publication 544, Sales and Other Dispositions of Assets; Transfers of property at death, covered in Publication 559; and Disposition of an interest in a passive activity, discussed in Publication 925. Www irs gov eitc Topics - This chapter discusses: What Is a Sale or Trade? , Basis of Investment Property , Adjusted Basis , How To Figure Gain or Loss , Nontaxable trades , Transfers Between Spouses , Related Party Transactions , Capital Gains and Losses , Reporting Capital Gains and Losses , and Special Rules for Traders in Securities . Www irs gov eitc Useful Items - You may want to see: Publication 551 Basis of Assets Form (and Instructions) Schedule D (Form 1040) Capital Gains and Losses 6781 Gains and Losses From Section 1256 Contracts and Straddles 8582 Passive Activity Loss Limitations 8824 Like-Kind Exchanges 8949 Sales and Other Dispositions of Capital Assets See chapter 5, How To Get Tax Help , for information about getting these publications and forms. Www irs gov eitc What Is a Sale or Trade? This section explains what is a sale or trade. Www irs gov eitc It also explains certain transactions and events that are treated as sales or trades. Www irs gov eitc A sale is generally a transfer of property for money or a mortgage, note, or other promise to pay money. Www irs gov eitc A trade is a transfer of property for other property or services, and may be taxed in the same way as a sale. Www irs gov eitc Sale and purchase. Www irs gov eitc   Ordinarily, a transaction is not a trade when you voluntarily sell property for cash and immediately buy similar property to replace it. Www irs gov eitc The sale and purchase are two separate transactions. Www irs gov eitc But see Like-Kind Exchanges under Nontaxable Trades, later. Www irs gov eitc Redemption of stock. Www irs gov eitc   A redemption of stock is treated as a sale or trade and is subject to the capital gain or loss provisions unless the redemption is a dividend or other distribution on stock. Www irs gov eitc Dividend versus sale or trade. Www irs gov eitc   Whether a redemption is treated as a sale, trade, dividend, or other distribution depends on the circumstances in each case. Www irs gov eitc Both direct and indirect ownership of stock will be considered. Www irs gov eitc The redemption is treated as a sale or trade of stock if: The redemption is not essentially equivalent to a dividend — see Dividends and Other Distributions in chapter 1, There is a substantially disproportionate redemption of stock, There is a complete redemption of all the stock of the corporation owned by the shareholder, or The redemption is a distribution in partial liquidation of a corporation. Www irs gov eitc Redemption or retirement of bonds. Www irs gov eitc   A redemption or retirement of bonds or notes at their maturity generally is treated as a sale or trade. Www irs gov eitc See Stocks, stock rights, and bonds and Discounted Debt Instruments under Capital or Ordinary Gain or Loss, later. Www irs gov eitc   In addition, a significant modification of a bond is treated as a trade of the original bond for a new bond. Www irs gov eitc For details, see Regulations section 1. Www irs gov eitc 1001-3. Www irs gov eitc Surrender of stock. Www irs gov eitc   A surrender of stock by a dominant shareholder who retains ownership of more than half of the corporation's voting shares is treated as a contribution to capital rather than as an immediate loss deductible from taxable income. Www irs gov eitc The surrendering shareholder must reallocate his or her basis in the surrendered shares to the shares he or she retains. Www irs gov eitc Trade of investment property for an annuity. Www irs gov eitc   The transfer of investment property to a corporation, trust, fund, foundation, or other organization, in exchange for a fixed annuity contract that will make guaranteed annual payments to you for life, is a taxable trade. Www irs gov eitc If the present value of the annuity is more than your basis in the property traded, you have a taxable gain in the year of the trade. Www irs gov eitc Figure the present value of the annuity according to factors used by commercial insurance companies issuing annuities. Www irs gov eitc Transfer by inheritance. Www irs gov eitc   The transfer of property of a decedent to the executor or administrator of the estate, or to the heirs or beneficiaries, is not a sale or other disposition. Www irs gov eitc No taxable gain or deductible loss results from the transfer. Www irs gov eitc Termination of certain rights and obligations. Www irs gov eitc   The cancellation, lapse, expiration, or other termination of a right or obligation (other than a securities futures contract) with respect to property that is a capital asset (or that would be a capital asset if you acquired it) is treated as a sale. Www irs gov eitc Any gain or loss is treated as a capital gain or loss. Www irs gov eitc   This rule does not apply to the retirement of a debt instrument. Www irs gov eitc See Redemption or retirement of bonds , earlier. Www irs gov eitc Worthless Securities Stocks, stock rights, and bonds (other than those held for sale by a securities dealer) that became completely worthless during the tax year are treated as though they were sold on the last day of the tax year. Www irs gov eitc This affects whether your capital loss is long term or short term. Www irs gov eitc See Holding Period , later. Www irs gov eitc Worthless securities also include securities that you abandon after March 12, 2008. Www irs gov eitc To abandon a security, you must permanently surrender and relinquish all rights in the security and receive no consideration in exchange for it. Www irs gov eitc All the facts and circumstances determine whether the transaction is properly characterized as an abandonment or other type of transaction, such as an actual sale or exchange, contribution to capital, dividend, or gift. Www irs gov eitc If you are a cash basis taxpayer and make payments on a negotiable promissory note that you issued for stock that became worthless, you can deduct these payments as losses in the years you actually make the payments. Www irs gov eitc Do not deduct them in the year the stock became worthless. Www irs gov eitc How to report loss. Www irs gov eitc   Report worthless securities in Form 8949, Part I or Part II, whichever applies. Www irs gov eitc    Report your worthless securities transactions on Form 8949 with the correct box checked for these transactions. Www irs gov eitc See Form 8949 and the Instructions for Form 8949. Www irs gov eitc Filing a claim for refund. Www irs gov eitc   If you do not claim a loss for a worthless security on your original return for the year it becomes worthless, you can file a claim for a credit or refund due to the loss. Www irs gov eitc You must use Form 1040X, Amended U. Www irs gov eitc S. Www irs gov eitc Individual Income Tax Return, to amend your return for the year the security became worthless. Www irs gov eitc You must file it within 7 years from the date your original return for that year had to be filed, or 2 years from the date you paid the tax, whichever is later. Www irs gov eitc (Claims not due to worthless securities or bad debts generally must be filed within 3 years from the date a return is filed, or 2 years from the date the tax is paid, whichever is later. Www irs gov eitc ) For more information about filing a claim, see Publication 556. Www irs gov eitc Constructive Sales of Appreciated Financial Positions You are treated as having made a constructive sale when you enter into certain transactions involving an appreciated financial position (defined later) in stock, a partnership interest, or certain debt instruments. Www irs gov eitc You must recognize gain as if the position were disposed of at its fair market value on the date of the constructive sale. Www irs gov eitc This gives you a new holding period for the position that begins on the date of the constructive sale. Www irs gov eitc Then, when you close the transaction, you reduce your gain (or increase your loss) by the gain recognized on the constructive sale. Www irs gov eitc Constructive sale. Www irs gov eitc   You are treated as having made a constructive sale of an appreciated financial position if you: Enter into a short sale of the same or substantially identical property, Enter into an offsetting notional principal contract relating to the same or substantially identical property, Enter into a futures or forward contract to deliver the same or substantially identical property (including a forward contract that provides for cash settlement), or Acquire the same or substantially identical property (if the appreciated financial position is a short sale, an offsetting notional principal contract, or a futures or forward contract). Www irs gov eitc   You are also treated as having made a constructive sale of an appreciated financial position if a person related to you enters into a transaction described above with a view toward avoiding the constructive sale treatment. Www irs gov eitc For this purpose, a related person is any related party described under Related Party Transactions , later in this chapter. Www irs gov eitc Exception for nonmarketable securities. Www irs gov eitc   You are not treated as having made a constructive sale solely because you entered into a contract for sale of any stock, debt instrument, or partnership interest that is not a marketable security if it settles within 1 year of the date you enter into it. Www irs gov eitc Exception for certain closed transactions. Www irs gov eitc   Do not treat a transaction as a constructive sale if all of the following are true. Www irs gov eitc You closed the transaction on or before the 30th day after the end of your tax year. Www irs gov eitc You held the appreciated financial position throughout the 60-day period beginning on the date you closed the transaction. Www irs gov eitc Your risk of loss was not reduced at any time during that 60-day period by holding certain other positions. Www irs gov eitc   If a closed transaction is reestablished in a substantially similar position during the 60-day period beginning on the date the first transaction was closed, this exception still applies if the reestablished position is closed before the 30th day after the end of your tax year in which the first transaction was closed and, after that closing, (2) and (3) above are true. Www irs gov eitc   This exception also applies to successive short sales of an entire appreciated financial position. Www irs gov eitc For more information, see Revenue Ruling 2003-1 in Internal Revenue Bulletin 2003-3. Www irs gov eitc This bulletin is available at www. Www irs gov eitc irs. Www irs gov eitc gov/pub/irs-irbs/irb03-03. Www irs gov eitc pdf. Www irs gov eitc Appreciated financial position. Www irs gov eitc   This is any interest in stock, a partnership interest, or a debt instrument (including a futures or forward contract, a short sale, or an option) if disposing of the interest would result in a gain. Www irs gov eitc Exceptions. Www irs gov eitc   An appreciated financial position does not include the following. Www irs gov eitc Any position from which all of the appreciation is accounted for under marked-to-market rules, including section 1256 contracts (described later under Section 1256 Contracts Marked to Market ). Www irs gov eitc Any position in a debt instrument if: The position unconditionally entitles the holder to receive a specified principal amount, The interest payments (or other similar amounts) with respect to the position are payable at a fixed rate or a variable rate described in Regulations section 1. Www irs gov eitc 860G-1(a)(3), and The position is not convertible, either directly or indirectly, into stock of the issuer (or any related person). Www irs gov eitc Any hedge with respect to a position described in (2). Www irs gov eitc Certain trust instruments treated as stock. Www irs gov eitc   For the constructive sale rules, an interest in an actively traded trust is treated as stock unless substantially all of the value of the property held by the trust is debt that qualifies for the exception to the definition of an appreciated financial position (explained in (2) above). Www irs gov eitc Sale of appreciated financial position. Www irs gov eitc   A transaction treated as a constructive sale of an appreciated financial position is not treated as a constructive sale of any other appreciated financial position, as long as you continue to hold the original position. Www irs gov eitc However, if you hold another appreciated financial position and dispose of the original position before closing the transaction that resulted in the constructive sale, you are treated as if, at the same time, you constructively sold the other appreciated financial position. Www irs gov eitc Section 1256 Contracts Marked to Market If you hold a section 1256 contract at the end of the tax year, you generally must treat it as sold at its fair market value on the last business day of the tax year. Www irs gov eitc Section 1256 Contract A section 1256 contract is any: Regulated futures contract, Foreign currency contract, Nonequity option, Dealer equity option, or Dealer securities futures contract. Www irs gov eitc Exceptions. Www irs gov eitc   A section 1256 contract does not include: Interest rate swaps, Currency swaps, Basis swaps, Interest rate caps, Interest rate floors, Commodity swaps, Equity swaps, Equity index swaps, Credit default swaps, or Similar agreements. Www irs gov eitc For more details, including definitions of these terms, see section 1256. Www irs gov eitc Regulated futures contract. Www irs gov eitc   This is a contract that: Provides that amounts which must be deposited to, or can be withdrawn from, your margin account depend on daily market conditions (a system of marking to market), and Is traded on, or subject to the rules of, a qualified board of exchange. Www irs gov eitc A qualified board of exchange is a domestic board of trade designated as a contract market by the Commodity Futures Trading Commission, any board of trade or exchange approved by the Secretary of the Treasury, or a national securities exchange registered with the Securities and Exchange Commission. Www irs gov eitc Foreign currency contract. Www irs gov eitc   This is a contract that: Requires delivery of a foreign currency that has positions traded through regulated futures contracts (or settlement of which depends on the value of that type of foreign currency), Is traded in the interbank market, and Is entered into at arm's length at a price determined by reference to the price in the interbank market. Www irs gov eitc   Bank forward contracts with maturity dates longer than the maturities ordinarily available for regulated futures contracts are considered to meet the definition of a foreign currency contract if the above three conditions are satisfied. Www irs gov eitc   Special rules apply to certain foreign currency transactions. Www irs gov eitc These transactions may result in ordinary gain or loss treatment. Www irs gov eitc For details, see Internal Revenue Code section 988 and Regulations sections 1. Www irs gov eitc 988-1(a)(7) and 1. Www irs gov eitc 988-3. Www irs gov eitc Nonequity option. Www irs gov eitc   This is any listed option (defined later) that is not an equity option. Www irs gov eitc Nonequity options include debt options, commodity futures options, currency options, and broad-based stock index options. Www irs gov eitc A broad-based stock index is based on the value of a group of diversified stocks or securities (such as the Standard and Poor's 500 index). Www irs gov eitc Warrants based on a stock index that are economically, substantially identical in all material respects to options based on a stock index are treated as options based on a stock index. Www irs gov eitc Cash-settled options. Www irs gov eitc   Cash-settled options based on a stock index and either traded on or subject to the rules of a qualified board of exchange are nonequity options if the Securities and Exchange Commission (SEC) determines that the stock index is broad based. Www irs gov eitc   This rule does not apply to options established before the SEC determines that the stock index is broad based. Www irs gov eitc Listed option. Www irs gov eitc   This is any option traded on, or subject to the rules of, a qualified board or exchange (as discussed earlier under Regulated futures contract). Www irs gov eitc A listed option, however, does not include an option that is a right to acquire stock from the issuer. Www irs gov eitc Dealer equity option. Www irs gov eitc   This is any listed option that, for an options dealer: Is an equity option, Is bought or granted by that dealer in the normal course of the dealer's business activity of dealing in options, and Is listed on the qualified board of exchange where that dealer is registered. Www irs gov eitc   An “options dealer” is any person registered with an appropriate national securities exchange as a market maker or specialist in listed options. Www irs gov eitc Equity option. Www irs gov eitc   This is any option: To buy or sell stock, or That is valued directly or indirectly by reference to any stock or narrow-based security index. Www irs gov eitc  Equity options include options on a group of stocks only if the group is a narrow-based stock index. Www irs gov eitc Dealer securities futures contract. Www irs gov eitc   For any dealer in securities futures contracts or options on those contracts, this is a securities futures contract (or option on such a contract) that: Is entered into by the dealer (or, in the case of an option, is purchased or granted by the dealer) in the normal course of the dealer's activity of dealing in this type of contract (or option), and Is traded on a qualified board or exchange (as defined under Regulated futures contract , earlier). Www irs gov eitc A securities futures contract that is not a dealer securities futures contract is treated as described later under Securities Futures Contracts . Www irs gov eitc Marked-to-Market Rules A section 1256 contract that you hold at the end of the tax year will generally be treated as sold at its fair market value on the last business day of the tax year, and you must recognize any gain or loss that results. Www irs gov eitc That gain or loss is taken into account in figuring your gain or loss when you later dispose of the contract, as shown in the example under 60/40 rule, below. Www irs gov eitc Hedging exception. Www irs gov eitc   The marked-to-market rules do not apply to hedging transactions. Www irs gov eitc See Hedging Transactions , later. Www irs gov eitc 60/40 rule. Www irs gov eitc   Under the marked-to-market system, 60% of your capital gain or loss will be treated as a long-term capital gain or loss, and 40% will be treated as a short-term capital gain or loss. Www irs gov eitc This is true regardless of how long you actually held the property. Www irs gov eitc Example. Www irs gov eitc On June 22, 2012, you bought a regulated futures contract for $50,000. Www irs gov eitc On December 31, 2012 (the last business day of your tax year), the fair market value of the contract was $57,000. Www irs gov eitc You recognized a $7,000 gain on your 2012 tax return, treated as 60% long-term and 40% short-term capital gain. Www irs gov eitc On February 1, 2013, you sold the contract for $56,000. Www irs gov eitc Because you recognized a $7,000 gain on your 2012 return, you recognize a $1,000 loss ($57,000 − $56,000) on your 2013 tax return, treated as 60% long-term and 40% short-term capital loss. Www irs gov eitc Limited partners or entrepreneurs. Www irs gov eitc   The 60/40 rule does not apply to dealer equity options or dealer securities futures contracts that result in capital gain or loss allocable to limited partners or limited entrepreneurs (defined later under Hedging Transactions ). Www irs gov eitc Instead, these gains or losses are treated as short term. Www irs gov eitc Terminations and transfers. Www irs gov eitc   The marked-to-market rules also apply if your obligation or rights under section 1256 contracts are terminated or transferred during the tax year. Www irs gov eitc In this case, use the fair market value of each section 1256 contract at the time of termination or transfer to determine the gain or loss. Www irs gov eitc Terminations or transfers may result from any offsetting, delivery, exercise, assignment, or lapse of your obligation or rights under section 1256 contracts. Www irs gov eitc Loss carryback election. Www irs gov eitc   An individual having a net section 1256 contracts loss (defined later), generally can elect to carry this loss back 3 years instead of carrying it over to the next year. Www irs gov eitc See How To Report , later, for information about reporting this election on your return. Www irs gov eitc   The loss carried back to any year under this election cannot be more than the net section 1256 contracts gain in that year. Www irs gov eitc In addition, the amount of loss carried back to an earlier tax year cannot increase or produce a net operating loss for that year. Www irs gov eitc   The loss is carried to the earliest carryback year first, and any unabsorbed loss amount can then be carried to each of the next 2 tax years. Www irs gov eitc In each carryback year, treat 60% of the carryback amount as a long-term capital loss and 40% as a short-term capital loss from section 1256 contracts. Www irs gov eitc   If only a portion of the net section 1256 contracts loss is absorbed by carrying the loss back, the unabsorbed portion can be carried forward, under the capital loss carryover rules, to the year following the loss. Www irs gov eitc (See Capital Losses under Reporting Capital Gains and Losses, later. Www irs gov eitc ) Figure your capital loss carryover as if, for the loss year, you had an additional short-term capital gain of 40% of the amount of net section 1256 contracts loss absorbed in the carryback years and an additional long-term capital gain of 60% of the absorbed loss. Www irs gov eitc In the carryover year, treat any capital loss carryover from losses on section 1256 contracts as if it were a loss from section 1256 contracts for that year. Www irs gov eitc Net section 1256 contracts loss. Www irs gov eitc   This loss is the lesser of: The net capital loss for your tax year determined by taking into account only the gains and losses from section 1256 contracts, or The capital loss carryover to the next tax year determined without this election. Www irs gov eitc Net section 1256 contracts gain. Www irs gov eitc   This gain is the lesser of: The capital gain net income for the carryback year determined by taking into account only gains and losses from section 1256 contracts, or The capital gain net income for that year. Www irs gov eitc  Figure your net section 1256 contracts gain for any carryback year without regard to the net section 1256 contracts loss for the loss year or any later tax year. Www irs gov eitc Traders in section 1256 contracts. Www irs gov eitc   Gain or loss from the trading of section 1256 contracts is capital gain or loss subject to the marked-to-market rules. Www irs gov eitc However, this does not apply to contracts held for purposes of hedging property if any loss from the property would be an ordinary loss. Www irs gov eitc Treatment of underlying property. Www irs gov eitc   The determination of whether an individual's gain or loss from any property is ordinary or capital gain or loss is made without regard to the fact that the individual is actively engaged in dealing in or trading section 1256 contracts related to that property. Www irs gov eitc How To Report If you disposed of regulated futures or foreign currency contracts in 2013 (or had unrealized profit or loss on these contracts that were open at the end of 2012 or 2013), you should receive Form 1099-B, or substitute statement, from your broker. Www irs gov eitc Form 6781. Www irs gov eitc   Use Part I of Form 6781 to report your gains and losses from all section 1256 contracts that are open at the end of the year or that were closed out during the year. Www irs gov eitc This includes the amount shown in box 10 of Form 1099-B. Www irs gov eitc Then enter the net amount of these gains and losses on Schedule D (Form 1040), line 4 or line 11, as appropriate. Www irs gov eitc Include a copy of Form 6781 with your income tax return. Www irs gov eitc   If the Form 1099-B you receive includes a straddle or hedging transaction, defined later, it may be necessary to show certain adjustments on Form 6781. Www irs gov eitc Follow the Form 6781 instructions for completing Part I. Www irs gov eitc Loss carryback election. Www irs gov eitc   To carry back your loss under the election procedures described earlier, file Form 1040X or Form 1045, Application for Tentative Refund, for the year to which you are carrying the loss with an amended Form 6781 and an amended Schedule D (Form 1040) attached. Www irs gov eitc Follow the instructions for completing Form 6781 for the loss year to make this election. Www irs gov eitc Hedging Transactions The marked-to-market rules, described earlier, do not apply to hedging transactions. Www irs gov eitc A transaction is a hedging transaction if both of the following conditions are met. Www irs gov eitc You entered into the transaction in the normal course of your trade or business primarily to manage the risk of: Price changes or currency fluctuations on ordinary property you hold (or will hold), or Interest rate or price changes, or currency fluctuations, on your current or future borrowings or ordinary obligations. Www irs gov eitc You clearly identified the transaction as being a hedging transaction before the close of the day on which you entered into it. Www irs gov eitc This hedging transaction exception does not apply to transactions entered into by or for any syndicate. Www irs gov eitc A syndicate is a partnership, S corporation, or other entity (other than a regular corporation) that allocates more than 35% of its losses to limited partners or limited entrepreneurs. Www irs gov eitc A limited entrepreneur is a person who has an interest in an enterprise (but not as a limited partner) and who does not actively participate in its management. Www irs gov eitc However, an interest is not considered held by a limited partner or entrepreneur if the interest holder actively participates (or did so for at least 5 full years) in the management of the entity, or is the spouse, child (including a legally adopted child), grandchild, or parent of an individual who actively participates in the management of the entity. Www irs gov eitc Hedging loss limit. Www irs gov eitc   If you are a limited partner or entrepreneur in a syndicate, the amount of a hedging loss you can claim is limited. Www irs gov eitc A “hedging loss” is the amount by which the allowable deductions in a tax year that resulted from a hedging transaction (determined without regard to the limit) are more than the income received or accrued during the tax year from this transaction. Www irs gov eitc   Any hedging loss allocated to you for the tax year is limited to your taxable income for that year from the trade or business in which the hedging transaction occurred. Www irs gov eitc Ignore any hedging transaction items in determining this taxable income. Www irs gov eitc If you have a hedging loss that is disallowed because of this limit, you can carry it over to the next tax year as a deduction resulting from a hedging transaction. Www irs gov eitc   If the hedging transaction relates to property other than stock or securities, the limit on hedging losses applies if the limited partner or entrepreneur is an individual. Www irs gov eitc   The limit on hedging losses does not apply to any hedging loss to the extent that it is more than all your unrecognized gains from hedging transactions at the end of the tax year that are from the trade or business in which the hedging transaction occurred. Www irs gov eitc The term “unrecognized gain” has the same meaning as defined under Loss Deferral Rules in Straddles, later. Www irs gov eitc Sale of property used in a hedge. Www irs gov eitc   Once you identify personal property as being part of a hedging transaction, you must treat gain from its sale or exchange as ordinary income, not capital gain. Www irs gov eitc Self-Employment Income Gains and losses derived in the ordinary course of a commodity or option dealer's trading in section 1256 contracts and property related to these contracts are included in net earnings from self-employment. Www irs gov eitc See the Instructions for Schedule SE (Form 1040). Www irs gov eitc In addition, the rules relating to contributions to self-employment retirement plans apply. Www irs gov eitc For information on retirement plan contributions, see Publication 560 and Publication 590. Www irs gov eitc Basis of Investment Property Basis is a way of measuring your investment in property for tax purposes. Www irs gov eitc You must know the basis of your property to determine whether you have a gain or loss on its sale or other disposition. Www irs gov eitc Investment property you buy normally has an original basis equal to its cost. Www irs gov eitc If you get property in some way other than buying it, such as by gift or inheritance, its fair market value may be important in figuring the basis. Www irs gov eitc Cost Basis The basis of property you buy is usually its cost. Www irs gov eitc The cost is the amount you pay in cash, debt obligations, or other property or services. Www irs gov eitc Unstated interest. Www irs gov eitc   If you buy property on a time-payment plan that charges little or no interest, the basis of your property is your stated purchase price, minus the amount considered to be unstated interest. Www irs gov eitc You generally have unstated interest if your interest rate is less than the applicable federal rate. Www irs gov eitc For more information, see Unstated Interest and Original Issue Discount (OID) in Publication 537. Www irs gov eitc Basis Other Than Cost There are times when you must use a basis other than cost. Www irs gov eitc In these cases, you may need to know the property's fair market value or the adjusted basis of the previous owner. Www irs gov eitc Fair market value. Www irs gov eitc   This is the price at which the property would change hands between a buyer and a seller, neither being forced to buy or sell and both having reasonable knowledge of all the relevant facts. Www irs gov eitc Sales of similar property, around the same date, may be helpful in figuring fair market value. Www irs gov eitc Property Received for Services If you receive investment property for services, you must include the property's fair market value in income. Www irs gov eitc The amount you include in income then becomes your basis in the property. Www irs gov eitc If the services were performed for a price that was agreed to beforehand, this price will be accepted as the fair market value of the property if there is no evidence to the contrary. Www irs gov eitc Restricted property. Www irs gov eitc   If you receive, as payment for services, property that is subject to certain restrictions, your basis in the property generally is its fair market value when it becomes substantially vested. Www irs gov eitc Property becomes substantially vested when it is transferable or is no longer subject to substantial risk of forfeiture, whichever happens first. Www irs gov eitc See Restricted Property in Publication 525 for more information. Www irs gov eitc Bargain purchases. Www irs gov eitc   If you buy investment property at less than fair market value, as payment for services, you must include the difference in income. Www irs gov eitc Your basis in the property is the price you pay plus the amount you include in income. Www irs gov eitc Property Received in Taxable Trades If you received investment property in trade for other property, the basis of the new property is its fair market value at the time of the trade unless you received the property in a nontaxable trade. Www irs gov eitc Example. Www irs gov eitc You trade A Company stock for B Company stock having a fair market value of $1,200. Www irs gov eitc If the adjusted basis of the A Company stock is less than $1,200, you have a taxable gain on the trade. Www irs gov eitc If the adjusted basis of the A Company stock is more than $1,200, you have a deductible loss on the trade. Www irs gov eitc The basis of your B Company stock is $1,200. Www irs gov eitc If you later sell the B Company stock for $1,300, you will have a gain of $100. Www irs gov eitc Property Received in Nontaxable Trades If you have a nontaxable trade, you do not recognize gain or loss until you dispose of the property you received in the trade. Www irs gov eitc See Nontaxable Trades , later. Www irs gov eitc The basis of property you received in a nontaxable or partly nontaxable trade is generally the same as the adjusted basis of the property you gave up. Www irs gov eitc Increase this amount by any cash you paid, additional costs you had, and any gain recognized. Www irs gov eitc Reduce this amount by any cash or unlike property you received, any loss recognized, and any liability of yours that was assumed or treated as assumed. Www irs gov eitc Property Received From Your Spouse If property is transferred to you from your spouse (or former spouse, if the transfer is incident to your divorce), your basis is the same as your spouse's or former spouse's adjusted basis just before the transfer. Www irs gov eitc See Transfers Between Spouses , later. Www irs gov eitc Recordkeeping. Www irs gov eitc The transferor must give you the records necessary to determine the adjusted basis and holding period of the property as of the date of the transfer. Www irs gov eitc Property Received as a Gift To figure your basis in property that you received as a gift, you must know its adjusted basis to the donor just before it was given to you, its fair market value at the time it was given to you, the amount of any gift tax paid on it, and the date it was given to you. Www irs gov eitc Fair market value less than donor's adjusted basis. Www irs gov eitc   If the fair market value of the property at the time of the gift was less than the donor's adjusted basis just before the gift, your basis for gain on its sale or other disposition is the same as the donor's adjusted basis plus or minus any required adjustments to basis during the period you hold the property. Www irs gov eitc Your basis for loss is its fair market value at the time of the gift plus or minus any required adjustments to basis during the period you hold the property. Www irs gov eitc No gain or loss. Www irs gov eitc   If you use the basis for figuring a gain and the result is a loss, and then use the basis for figuring a loss and the result is a gain, you will have neither a gain nor a loss. Www irs gov eitc Example. Www irs gov eitc You receive a gift of investment property having an adjusted basis of $10,000 at the time of the gift. Www irs gov eitc The fair market value at the time of the gift is $9,000. Www irs gov eitc You later sell the property for $9,500. Www irs gov eitc You have neither gain nor loss. Www irs gov eitc Your basis for figuring gain is $10,000, and $9,500 minus $10,000 results in a $500 loss. Www irs gov eitc Your basis for figuring loss is $9,000, and $9,500 minus $9,000 results in a $500 gain. Www irs gov eitc Fair market value equal to or more than donor's adjusted basis. Www irs gov eitc   If the fair market value of the property at the time of the gift was equal to or more than the donor's adjusted basis just before the gift, your basis for gain or loss on its sale or other disposition is the donor's adjusted basis plus or minus any required adjustments to basis during the period you hold the property. Www irs gov eitc Also, you may be allowed to add to the donor's adjusted basis all or part of any gift tax paid, depending on the date of the gift. Www irs gov eitc Gift received before 1977. Www irs gov eitc   If you received property as a gift before 1977, your basis in the property is the donor's adjusted basis increased by the total gift tax paid on the gift. Www irs gov eitc However, your basis cannot be more than the fair market value of the gift at the time it was given to you. Www irs gov eitc Example 1. Www irs gov eitc You were given XYZ Company stock in 1976. Www irs gov eitc At the time of the gift, the stock had a fair market value of $21,000. Www irs gov eitc The donor's adjusted basis was $20,000. Www irs gov eitc The donor paid a gift tax of $500 on the gift. Www irs gov eitc Your basis for gain or loss is $20,500, the donor's adjusted basis plus the amount of gift tax paid. Www irs gov eitc Example 2. Www irs gov eitc The facts are the same as in Example 1 except that the gift tax paid was $1,500. Www irs gov eitc Your basis is $21,000, the donor's adjusted basis plus the gift tax paid, but limited to the fair market value of the stock at the time of the gift. Www irs gov eitc Gift received after 1976. Www irs gov eitc   If you received property as a gift after 1976, your basis is the donor's adjusted basis increased by the part of the gift tax paid that was for the net increase in value of the gift. Www irs gov eitc You figure this part by multiplying the gift tax paid on the gift by a fraction. Www irs gov eitc The numerator (top part) is the net increase in value of the gift and the denominator (bottom part) is the amount of the gift. Www irs gov eitc   The net increase in value of the gift is the fair market value of the gift minus the donor's adjusted basis. Www irs gov eitc The amount of the gift is its value for gift tax purposes after reduction by any annual exclusion and marital or charitable deduction that applies to the gift. Www irs gov eitc Example. Www irs gov eitc In 2013, you received a gift of property from your mother. Www irs gov eitc At the time of the gift, the property had a fair market value of $101,000 and an adjusted basis to her of $40,000. Www irs gov eitc The amount of the gift for gift tax purposes was $87,000 ($101,000 minus the $14,000 annual exclusion), and your mother paid a gift tax of $21,000. Www irs gov eitc You figure your basis in the following way: Fair market value $101,000 Minus: Adjusted basis 40,000 Net increase in value of gift $61,000 Gift tax paid $21,000 Multiplied by . Www irs gov eitc 701 ($61,000 ÷ $87,000) . Www irs gov eitc 701 Gift tax due to net increase in value $14,721 Plus: Adjusted basis of property to  your mother 40,000 Your basis in the property $54,721 Part sale, part gift. Www irs gov eitc   If you get property in a transfer that is partly a sale and partly a gift, your basis is the larger of the amount you paid for the property or the transferor's adjusted basis in the property at the time of the transfer. Www irs gov eitc Add to that amount the amount of any gift tax paid on the gift, as described in the preceding discussion. Www irs gov eitc For figuring loss, your basis is limited to the property's fair market value at the time of the transfer. Www irs gov eitc Gift tax information. Www irs gov eitc   For information on gift tax, see Publication 950, Introduction to Estate and Gift Taxes. Www irs gov eitc For information on figuring the amount of gift tax to add to your basis, see Property Received as a Gift in Publication 551. Www irs gov eitc Property Received as Inheritance Before or after 2010. Www irs gov eitc   If you inherited property from a decedent who died before or after 2010, or who died in 2010 and the executor of the decedent's estate elected not to file Form 8939, Allocation of Increase in Basis for Property Acquired From a Decedent, your basis in that property generally is its fair market value (its appraised value on Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return) on: The date of the decedent's death, or The later alternate valuation date if the estate qualifies for, and elects to use, alternate valuation. Www irs gov eitc If no Form 706 was filed, use the appraised value on the date of death for state inheritance or transmission taxes. Www irs gov eitc For stocks and bonds, if no Form 706 was filed and there are no state inheritance or transmission taxes, see the Form 706 instructions for figuring the fair market value of the stocks and bonds on the date of the decedent's death. Www irs gov eitc Appreciated property you gave the decedent. Www irs gov eitc   Your basis in certain appreciated property that you inherited is the decedent's adjusted basis in the property immediately before death rather than its fair market value. Www irs gov eitc This applies to appreciated property that you or your spouse gave the decedent as a gift during the 1-year period ending on the date of death. Www irs gov eitc Appreciated property is any property whose fair market value on the day you gave it to the decedent was more than its adjusted basis. Www irs gov eitc More information. Www irs gov eitc   See Publication 551 for more information on the basis of inherited property, including community property, property held by a surviving tenant in a joint tenancy or tenancy by the entirety, a qualified joint interest, and a farm or closely held business. Www irs gov eitc Inherited in 2010 and executor elected to file Form 8939. Www irs gov eitc   If you inherited property from a decedent who died in 2010 and the executor made the election to file Form 8939, see Publication 4895, Tax Treatment of Property Acquired From a Decedent Dying in 2010, to figure your basis. Www irs gov eitc Adjusted Basis Before you can figure any gain or loss on a sale, exchange, or other disposition of property or figure allowable depreciation, depletion, or amortization, you usually must make certain adjustments (increases and decreases) to the basis of the property. Www irs gov eitc The result of these adjustments to the basis is the adjusted basis. Www irs gov eitc Adjustments to the basis of stocks and bonds are explained in the following discussion. Www irs gov eitc For information about other adjustments to basis, see Publication 551. Www irs gov eitc Stocks and Bonds The basis of stocks or bonds you own generally is the purchase price plus the costs of purchase, such as commissions and recording or transfer fees. Www irs gov eitc If you acquired stock or bonds other than by purchase, your basis is usually determined by fair market value or the previous owner's adjusted basis as discussed earlier under Basis Other Than Cost . Www irs gov eitc The basis of stock must be adjusted for certain events that occur after purchase. Www irs gov eitc For example, if you receive more stock from nontaxable stock dividends or stock splits, you must reduce the basis of your original stock. Www irs gov eitc You must also reduce your basis when you receive nondividend distributions (discussed in chapter 1). Www irs gov eitc These distributions, up to the amount of your basis, are a nontaxable return of capital. Www irs gov eitc The IRS partners with companies that offer Form 8949 and Schedule D (Form 1040) software that can import trades from many brokerage firms and accounting software to help you keep track of your adjusted basis in securities. Www irs gov eitc To find out more, go to www. Www irs gov eitc irs. Www irs gov eitc gov/Filing/Filing-Options. Www irs gov eitc Identifying stock or bonds sold. Www irs gov eitc   If you can adequately identify the shares of stock or the bonds you sold, their basis is the cost or other basis of the particular shares of stock or bonds. Www irs gov eitc Adequate identification. Www irs gov eitc   You will make an adequate identification if you show that certificates representing shares of stock from a lot that you bought on a certain date or for a certain price were delivered to your broker or other agent. Www irs gov eitc Broker holds stock. Www irs gov eitc   If you have left the stock certificates with your broker or other agent, you will make an adequate identification if you: Tell your broker or other agent the particular stock to be sold or transferred at the time of the sale or transfer, and Receive a written confirmation of this from your broker or other agent within a reasonable time. Www irs gov eitc  Stock identified this way is the stock sold or transferred even if stock certificates from a different lot are delivered to the broker or other agent. Www irs gov eitc Single stock certificate. Www irs gov eitc   If you bought stock in different lots at different times and you hold a single stock certificate for this stock, you will make an adequate identification if you: Tell your broker or other agent the particular stock to be sold or transferred when you deliver the certificate to your broker or other agent, and Receive a written confirmation of this from your broker or other agent within a reasonable time. Www irs gov eitc   If you sell part of the stock represented by a single certificate directly to the buyer instead of through a broker, you will make an adequate identification if you keep a written record of the particular stock that you intend to sell. Www irs gov eitc Bonds. Www irs gov eitc   These methods of identification also apply to bonds sold or transferred. Www irs gov eitc Identification not possible. Www irs gov eitc   If you buy and sell securities at various times in varying quantities and you cannot adequately identify the shares you sell, the basis of the securities you sell is the basis of the securities you acquired first. Www irs gov eitc Except for certain mutual fund shares, discussed later, you cannot use the average price per share to figure gain or loss on the sale of the shares. Www irs gov eitc Example. Www irs gov eitc You bought 100 shares of stock of XYZ Corporation in 1998 for $10 a share. Www irs gov eitc In January 1999 you bought another 200 shares for $11 a share. Www irs gov eitc In July 1999 you gave your son 50 shares. Www irs gov eitc In December 2001 you bought 100 shares for $9 a share. Www irs gov eitc In April 2013 you sold 130 shares. Www irs gov eitc You cannot identify the shares you disposed of, so you must use the stock you acquired first to figure the basis. Www irs gov eitc The shares of stock you gave your son had a basis of $500 (50 × $10). Www irs gov eitc You figure the basis of the 130 shares of stock you sold in 2013 as follows: 50 shares (50 × $10) balance of stock bought in 1998 $ 500 80 shares (80 × $11) stock bought in January 1999 880 Total basis of stock sold in 2013 $1,380 Shares in a mutual fund or REIT. Www irs gov eitc    The basis of shares in a mutual fund (or other regulated investment company) or a real estate investment trust (REIT) is generally figured in the same way as the basis of other stock and usually includes any commissions or load charges paid for the purchase. Www irs gov eitc Example. Www irs gov eitc You bought 100 shares of Fund A for $10 a share. Www irs gov eitc You paid a $50 commission to the broker for the purchase. Www irs gov eitc Your cost basis for each share is $10. Www irs gov eitc 50 ($1,050 ÷ 100). Www irs gov eitc Commissions and load charges. Www irs gov eitc   The fees and charges you pay to acquire or redeem shares of a mutual fund are not deductible. Www irs gov eitc You can usually add acquisition fees and charges to your cost of the shares and thereby increase your basis. Www irs gov eitc A fee paid to redeem the shares is usually a reduction in the redemption price (sales price). Www irs gov eitc   You cannot add your entire acquisition fee or load charge to the cost of the mutual fund shares acquired if all of the following conditions apply. Www irs gov eitc You get a reinvestment right because of the purchase of the shares or the payment of the fee or charge. Www irs gov eitc You dispose of the shares within 90 days of the purchase date. Www irs gov eitc You acquire new shares in the same mutual fund or another mutual fund, for which the fee or charge is reduced or waived because of the reinvestment right you got when you acquired the original shares. Www irs gov eitc   The amount of the original fee or charge in excess of the reduction in (3) is added to the cost of the original shares. Www irs gov eitc The rest of the original fee or charge is added to the cost basis of the new shares (unless all three conditions above also apply to the purchase of the new shares). Www irs gov eitc Choosing average basis for mutual fund shares. Www irs gov eitc   You can choose to use the average basis of mutual fund shares if you acquired the identical shares at various times and prices, or you acquired the shares after 2010 in connection with a dividend reinvestment plan, and left them on deposit in an account kept by a custodian or agent. Www irs gov eitc The methods you can use to figure average basis are explained later. Www irs gov eitc Undistributed capital gains. Www irs gov eitc   If you had to include in your income any undistributed capital gains of the mutual fund or REIT, increase your basis in the stock by the difference between the amount you included and the amount of tax paid for you by the fund or REIT. Www irs gov eitc See Undistributed capital gains of mutual funds and REITs under Capital Gain Distributions in chapter 1. Www irs gov eitc Reinvestment right. Www irs gov eitc   This is the right to acquire mutual fund shares in the same or another mutual fund without paying a fee or load charge, or by paying a reduced fee or load charge. Www irs gov eitc      The original cost basis of mutual fund shares you acquire by reinvesting your distributions is the amount of the distributions used to purchase each full or fractional share. Www irs gov eitc This rule applies even if the distribution is an exempt-interest dividend that you do not report as income. Www irs gov eitc Table 4-1. Www irs gov eitc This is a worksheet you can use to keep track of the adjusted basis of your mutual fund shares. Www irs gov eitc Enter the cost per share when you acquire new shares and any adjustments to their basis when the adjustment occurs. Www irs gov eitc This worksheet will help you figure the adjusted basis when you sell or redeem shares. Www irs gov eitc Table 4-1. Www irs gov eitc Mutual Fund Record Mutual Fund Acquired1 Adjustment to Basis Per Share Adjusted2 Basis Per Share Sold or redeemed Date Number of Shares Cost Per Share Date Number of Shares                                                                                                                                                                                                                                                                         1 Include share received from reinvestment of distributions. Www irs gov eitc 2 Cost plus or minus adjustments. Www irs gov eitc Automatic investment service. Www irs gov eitc   If you participate in an automatic investment service, your basis for each share of stock, including fractional shares, bought by the bank or other agent is the purchase price plus a share of the broker's commission. Www irs gov eitc Dividend reinvestment plans. Www irs gov eitc   If you participate in a dividend reinvestment plan and receive stock from the corporation at a discount, your basis is the full fair market value of the stock on the dividend payment date. Www irs gov eitc You must include the amount of the discount in your income. Www irs gov eitc Public utilities. Www irs gov eitc   If, before 1986, you excluded from income the value of stock you had received under a qualified public utility reinvestment plan, your basis in that stock is zero. Www irs gov eitc Stock dividends. Www irs gov eitc   Stock dividends are distributions made by a corporation of its own stock. Www irs gov eitc Generally, stock dividends are not taxable to you. Www irs gov eitc However, see Distributions of Stock and Stock Rights under Dividends and Other Distributions in chapter 1 for some exceptions. Www irs gov eitc If the stock dividends are not taxable, you must divide your basis for the old stock between the old and new stock. Www irs gov eitc New and old stock identical. Www irs gov eitc   If the new stock you received as a nontaxable dividend is identical to the old stock on which the dividend was declared, divide the adjusted basis of the old stock by the number of shares of old and new stock. Www irs gov eitc The result is your basis for each share of stock. Www irs gov eitc Example 1. Www irs gov eitc You owned one share of common stock that you bought for $45. Www irs gov eitc The corporation distributed two new shares of common stock for each share held. Www irs gov eitc You then had three shares of common stock. Www irs gov eitc Your basis in each share is $15 ($45 ÷ 3). Www irs gov eitc Example 2. Www irs gov eitc You owned two shares of common stock. Www irs gov eitc You bought one for $30 and the other for $45. Www irs gov eitc The corporation distributed two new shares of common stock for each share held. Www irs gov eitc You had six shares after the distribution—three with a basis of $10 each ($30 ÷ 3) and three with a basis of $15 each ($45 ÷ 3). Www irs gov eitc New and old stock not identical. Www irs gov eitc   If the new stock you received as a nontaxable dividend is not identical to the old stock on which it was declared, the basis of the new stock is calculated differently. Www irs gov eitc Divide the adjusted basis of the old stock between the old and the new stock in the ratio of the fair market value of each lot of stock to the total fair market value of both lots on the date of distribution of the new stock. Www irs gov eitc Example. Www irs gov eitc You bought a share of common stock for $100. Www irs gov eitc Later, the corporation distributed a share of preferred stock for each share of common stock held. Www irs gov eitc At the date of distribution, your common stock had a fair market value of $150 and the preferred stock had a fair market value of $50. Www irs gov eitc You figure the basis of the old and new stock by dividing your $100 basis between them. Www irs gov eitc The basis of your common stock is $75 (($150 ÷ $200) × $100), and the basis of the new preferred stock is $25 (($50 ÷ $200) × $100). Www irs gov eitc Stock bought at various times. Www irs gov eitc   Figure the basis of stock dividends received on stock you bought at various times and at different prices by allocating to each lot of stock the share of the stock dividends due to it. Www irs gov eitc Taxable stock dividends. Www irs gov eitc   If your stock dividend is taxable when you receive it, the basis of your new stock is its fair market value on the date of distribution. Www irs gov eitc The basis of your old stock does not change. Www irs gov eitc Stock splits. Www irs gov eitc   Figure the basis of stock splits in the same way as stock dividends if identical stock is distributed on the stock held. Www irs gov eitc Stock rights. Www irs gov eitc   A stock right is a right to acquire a corporation's stock. Www irs gov eitc It may be exercised, it may be sold if it has a market value, or it may expire. Www irs gov eitc Stock rights are rarely taxable when you receive them. Www irs gov eitc See Distributions of Stock and Stock Rights under Dividends and Other Distributions in chapter 1. Www irs gov eitc Taxable stock rights. Www irs gov eitc   If you receive stock rights that are taxable, the basis of the rights is their fair market value at the time of distribution. Www irs gov eitc The basis of the old stock does not change. Www irs gov eitc Nontaxable stock rights. Www irs gov eitc   If you receive nontaxable stock rights and allow them to expire, they have no basis. Www irs gov eitc   If you exercise or sell the nontaxable stock rights and if, at the time of distribution, the stock rights had a fair market value of 15% or more of the fair market value of the old stock, you must divide the adjusted basis of the old stock between the old stock and the stock rights. Www irs gov eitc Use a ratio of the fair market value of each to the total fair market value of both at the time of distribution. Www irs gov eitc   If the fair market value of the stock rights was less than 15%, their basis is zero. Www irs gov eitc However, you can choose to divide the basis of the old stock between the old stock and the stock rights. Www irs gov eitc To make the choice, attach a statement to your return for the year in which you received the rights, stating that you choose to divide the basis of the stock. Www irs gov eitc Basis of new stock. Www irs gov eitc   If you exercise the stock rights, the basis of the new stock is its cost plus the basis of the stock rights exercised. Www irs gov eitc Example. Www irs gov eitc You own 100 shares of ABC Company stock, which cost you $22 per share. Www irs gov eitc The ABC Company gave you 10 nontaxable stock rights that would allow you to buy 10 more shares at $26 per share. Www irs gov eitc At the time the stock rights were distributed, the stock had a market value of $30, not including the stock rights. Www irs gov eitc Each stock right had a market value of $3. Www irs gov eitc The market value of the stock rights was less than 15% of the market value of the stock, but you chose to divide the basis of your stock between the stock and the rights. Www irs gov eitc You figure the basis of the rights and the basis of the old stock as follows: 100 shares × $22 = $2,200, basis of old stock   100 shares × $30 = $3,000, market value of old stock   10 rights × $3 = $30, market value of rights   ($3,000 ÷ $3,030) × $2,200 = $2,178. Www irs gov eitc 22, new basis of old stock   ($30 ÷ $3,030) × $2,200 = $21. Www irs gov eitc 78, basis of rights   If you sell the rights, the basis for figuring gain or loss is $2. Www irs gov eitc 18 ($21. Www irs gov eitc 78 ÷ 10) per right. Www irs gov eitc If you exercise the rights, the basis of the stock you acquire is the price you pay ($26) plus the basis of the right exercised ($2. Www irs gov eitc 18), or $28. Www irs gov eitc 18 per share. Www irs gov eitc The remaining basis of the old stock is $21. Www irs gov eitc 78 per share. Www irs gov eitc Investment property received in liquidation. Www irs gov eitc   In general, if you receive investment property as a distribution in partial or complete liquidation of a corporation and if you recognize gain or loss when you acquire the property, your basis in the property is its fair market value at the time of the distribution. Www irs gov eitc S corporation stock. Www irs gov eitc   You must increase your basis in stock of an S corporation by your pro rata share of the following items. Www irs gov eitc All income items of the S corporation, including tax-exempt income, that are separately stated and passed through to you as a shareholder. Www irs gov eitc The nonseparately stated income of the S corporation. Www irs gov eitc The amount of the deduction for depletion (other than oil and gas depletion) that is more than the basis of the property being depleted. Www irs gov eitc   You must decrease your basis in stock of an S corporation by your pro rata share of the following items. Www irs gov eitc Distributions by the S corporation that were not included in your income. Www irs gov eitc All loss and deduction items of the S corporation that are separately stated and passed through to you. Www irs gov eitc Any nonseparately stated loss of the S corporation. Www irs gov eitc Any expense of the S corporation that is not deductible in figuring its taxable income and not properly chargeable to a capital account. Www irs gov eitc The amount of your deduction for depletion of oil and gas wells to the extent the deduction is not more than your share of the adjusted basis of the wells. Www irs gov eitc However, your basis in the stock cannot be reduced below zero. Www irs gov eitc Specialized small business investment company stock or partnership interest. Www irs gov eitc   If you bought this stock or interest as replacement property for publicly traded securities you sold at a gain, you must reduce the basis of the stock or interest by the amount of any postponed gain on that sale. Www irs gov eitc See Rollover of Gain From Publicly Traded Securities , later. Www irs gov eitc Qualified small business stock. Www irs gov eitc   If you bought this stock as replacement property for other qualified small business stock you sold at a gain, you must reduce the basis of this replacement stock by the amount of any postponed gain on the earlier sale. Www irs gov eitc See Gains on Qualified Small Business Stock , later. Www irs gov eitc Short sales. Www irs gov eitc   If you cannot deduct payments you make to a lender in lieu of dividends on stock used in a short sale, the amount you pay to the lender is a capital expense, and you must add it to the basis of the stock used to close the short sale. Www irs gov eitc   See Payments in lieu of dividends , later, for information about deducting payments in lieu of dividends. Www irs gov eitc Premiums on bonds. Www irs gov eitc   If you buy a bond at a premium, the premium is treated as part of your basis in the bond. Www irs gov eitc If you choose to amortize the premium paid on a taxable bond, you must reduce the basis of the bond by the amortized part of the premium each year over the life of the bond. Www irs gov eitc   Although you cannot deduct the premium on a tax-exempt bond, you must amortize it to determine your adjusted basis in the bond. Www irs gov eitc You must reduce the basis of the bond by the premium you amortized for the period you held the bond. Www irs gov eitc   See Bond Premium Amortization in chapter 3 for more information. Www irs gov eitc Market discount on bonds. Www irs gov eitc   If you include market discount on a bond in income currently, increase the basis of your bond by the amount of market discount you include in your income. Www irs gov eitc See Market Discount Bonds in chapter 1 for more information. Www irs gov eitc Bonds purchased at par value. Www irs gov eitc   A bond purchased at par value (face amount) has no premium or discount. Www irs gov eitc When you sell or otherwise dispose of the bond, you figure the gain or loss by comparing the bond proceeds to the purchase price of the bond. Www irs gov eitc Example. Www irs gov eitc You purchased a bond several years ago for its par value of $10,000. Www irs gov eitc You sold the bond this year for $10,100. Www irs gov eitc You have a gain of $100. Www irs gov eitc However, if you had sold the bond for $9,900, you would have a loss of $100. Www irs gov eitc Acquisition discount on short-term obligations. Www irs gov eitc   If you include acquisition discount on a short-term obligation in your income currently, increase the basis of the obligation by the amount of acquisition discount you include in your income. Www irs gov eitc See Discount on Short-Term Obligations in chapter 1 for more information. Www irs gov eitc Original issue discount (OID) on debt instruments. Www irs gov eitc   Increase the basis of a debt instrument by the OID you include in your income. Www irs gov eitc See Original Issue Discount (OID) in chapter 1. Www irs gov eitc Discounted tax-exempt obligations. Www irs gov eitc   OID on tax-exempt obligations is generally not taxable. Www irs gov eitc However, when you dispose of a tax-exempt obligation issued after September 3, 1982, that you acquired after March 1, 1984, you must accrue OID on the obligation to determine its adjusted basis. Www irs gov eitc The accrued OID is added to the basis of the obligation to determine your gain or loss. Www irs gov eitc   For information on determining OID on a long-term obligation, see Debt Instruments Issued After July 1, 1982, and Before 1985 or Debt Instruments Issued After 1984, whichever applies, in Publication 1212 under Figuring OID on Long-Term Debt Instruments. Www irs gov eitc   If the tax-exempt obligation has a maturity of 1 year or less, accrue OID under the rules for acquisition discount on short-term obligations. Www irs gov eitc See Discount on Short-Term Obligations in chapter 1. Www irs gov eitc Stripped tax-exempt obligation. Www irs gov eitc   If you acquired a stripped tax-exempt bond or coupon after October 22, 1986, you must accrue OID on it to determine its adjusted basis when you dispose of it. Www irs gov eitc For stripped tax-exempt bonds or coupons acquired after June 10, 1987, part of this OID may be taxable. Www irs gov eitc You accrue the OID on these obligations in the manner described in chapter 1 under Stripped Bonds and Coupons . Www irs gov eitc   Increase your basis in the stripped tax-exempt bond or coupon by the taxable and nontaxable accrued OID. Www irs gov eitc Also increase your basis by the interest that accrued (but was not paid and was not previously reflected in your basis) before the date you sold the bond or coupon. Www irs gov eitc In addition, for bonds acquired after June 10, 1987, add to your basis any accrued market discount not previously reflected in basis. Www irs gov eitc How To Figure Gain or Loss You figure gain or loss on a sale or trade of property by comparing the amount you realize with the adjusted basis of the property. Www irs gov eitc Gain. Www irs gov eitc   If the amount you realize from a sale or trade is more than the adjusted basis of the property you transfer, the difference is a gain. Www irs gov eitc Loss. Www irs gov eitc   If the adjusted basis of the property you transfer is more than the amount you realize, the difference is a loss. Www irs gov eitc Amount realized. Www irs gov eitc   The amount you realize from a sale or trade of property is everything you receive for the property minus your expenses of sale (such as redemption fees, sales commissions, sales charges, or exit fees). Www irs gov eitc Amount realized includes the money you receive plus the fair market value of any property or services you receive. Www irs gov eitc   If you finance the buyer's purchase of your property and the debt instrument does not provide for adequate stated interest, the unstated interest that you must report as ordinary income will reduce the amount realized from the sale. Www irs gov eitc For more information, see Publication 537. Www irs gov eitc   If a buyer of property issues a debt instrument to the seller of the property, the amount realized is determined by reference to the issue price of the debt instrument, which may or may not be the fair market value of the debt instrument. Www irs gov eitc See Regulations section 1. Www irs gov eitc 1001-1(g). Www irs gov eitc However, if the debt instrument was previously issued by a third party (one not part of the sale transaction), the fair market value of the debt instrument is used to determine the amount realized. Www irs gov eitc Fair market value. Www irs gov eitc   Fair market value is the price at which property would change hands between a buyer and a seller, neither being forced to buy or sell and both having reasonable knowledge of all the relevant facts. Www irs gov eitc Example. Www irs gov eitc You trade A Company stock with an adjusted basis of $7,000 for B Company stock with a fair market value of $10,000, which is your amount realized. Www irs gov eitc Your gain is $3,000 ($10,000 – $7,000). Www irs gov eitc If you also receive a note for $6,000 that has an issue price of $6,000, your gain is $9,000 ($10,000 + $6,000 – $7,000). Www irs gov eitc Debt paid off. Www irs gov eitc   A debt against the property, or against you, that is paid off as a part of the transaction or that is assumed by the buyer must be included in the amount realized. Www irs gov eitc This is true even if neither you nor the buyer is personally liable for the debt. Www irs gov eitc For example, if you sell or trade property that is subject to a nonrecourse loan, the amount you realize generally includes the full amount of the note assumed by the buyer even if the amount of the note is more than the fair market value of the property. Www irs gov eitc Example. Www irs gov eitc You sell stock that you had pledged as security for a bank loan of $8,000. Www irs gov eitc Your basis in the stock is $6,000. Www irs gov eitc The buyer pays off your bank loan and pays you $20,000 in cash. Www irs gov eitc The amount realized is $28,000 ($20,000 + $8,000). Www irs gov eitc Your gain is $22,000 ($28,000 – $6,000). Www irs gov eitc Payment of cash. Www irs gov eitc   If you trade property and cash for other property, the amount you realize is the fair market value of the property you receive. Www irs gov eitc Determine your gain or loss by subtracting the cash you pay and the adjusted basis of the property you trade in from the amount you realize. Www irs gov eitc If the result is a positive number, it is a gain. Www irs gov eitc If the result is a negative number, it is a loss. Www irs gov eitc No gain or loss. Www irs gov eitc   You may have to use a basis for figuring gain that is different from the basis used for figuring loss. Www irs gov eitc In this case, you may have neither a gain nor a loss. Www irs gov eitc See No gain or loss in the discussion on the basis of property you received as a gift under Basis Other Than Cost, earlier. Www irs gov eitc Special Rules for Mutual Funds To figure your gain or loss when you dispose of mutual fund shares, you need to determine which shares were sold and the basis of those shares. Www irs gov eitc If your shares in a mutual fund were acquired all on the same day and for the same price, figuring their basis is not difficu
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The Www Irs Gov Eitc

Www irs gov eitc Depreciation Table of Contents Introduction Special Depreciation AllowanceQualified Property Election Not To Claim the Allowance Rules for Returns Filed Before June 1, 2002 Passenger Automobiles New York Liberty Zone BenefitsSpecial Liberty Zone Depreciation Allowance Increased Section 179 Deduction Liberty Zone Leasehold Improvement Property If you depreciate business property that you acquired and placed in service after September 10, 2001, new law contains provisions that may affect your depreciation deduction for that property. Www irs gov eitc Publication 946, How To Depreciate Property, contains information on depreciation. Www irs gov eitc However, Publication 946 does not contain the new provisions because it was printed before the law was enacted. Www irs gov eitc The new provisions are in the Supplement to Publication 946, which is reprinted below. Www irs gov eitc Supplement to Publication 946 How To Depreciate Property   Introduction After Publication 946 was printed, the Job Creation and Worker Assistance Act of 2002 was signed into law by the President. Www irs gov eitc The new law made several changes in the tax rules explained in the publication. Www irs gov eitc Some of the changes apply to property placed in service during 2001. Www irs gov eitc This supplemental publication describes those changes and explains what you should do if you are affected by them. Www irs gov eitc The situations and examples in Publication 946 do not reflect any of the changes made by the Job Creation and Worker Assistance Act of 2002. Www irs gov eitc The new law contains the following provisions. Www irs gov eitc 30% depreciation deductions (special depreciation allowance and special New York Liberty Zone (Liberty Zone) depreciation allowance) for the year qualified property is placed in service after September 10, 2001. Www irs gov eitc An increased dollar limit on the section 179 deduction for qualified Liberty Zone property purchased after September 10, 2001. Www irs gov eitc A shorter recovery period for qualified Liberty Zone leasehold improvement property placed in service after September 10, 2001. Www irs gov eitc An increase in the maximum depreciation deduction for 2001 for a qualified passenger automobile placed in service after September 10, 2001. Www irs gov eitc If you believe you qualify for an increased deduction under any of these new rules, you must file the revised 2001 Form 4562 (dated March 2002) for 2001 calendar or fiscal years and 2000 fiscal years ending after September 10, 2001. Www irs gov eitc If you have already filed a tax return, this supplemental publication explains how to claim these benefits and how to elect not to claim the special depreciation allowance or special Liberty Zone depreciation allowance. Www irs gov eitc See Table 2 at the end of the supplement for an overview of the rules that apply if you filed your return before June 1, 2002. Www irs gov eitc Special Depreciation Allowance You can take a special depreciation allowance for qualified property you place in service after September 10, 2001. Www irs gov eitc The allowance is an additional deduction of 30% of the property's depreciable basis. Www irs gov eitc To figure the depreciable basis, you must first multiply the property's cost or other basis by the percentage of business/investment use and then reduce that amount by any section 179 deduction and certain other deductions and credits for the property. Www irs gov eitc See What Is the Basis for Depreciation? on page 23 in Publication 946 for more information on figuring depreciable basis. Www irs gov eitc The allowance is deductible for both regular tax and alternative minimum tax (AMT) purposes. Www irs gov eitc There is no AMT adjustment required for any depreciation figured on the remaining basis of the property. Www irs gov eitc In the year you claim the allowance (generally the year you place the property in service), you must reduce the depreciable basis of the property by the allowance before figuring your regular depreciation deduction. Www irs gov eitc Example 1. Www irs gov eitc On November 1, 2001, you bought and placed in service in your business qualified property that cost $100,000. Www irs gov eitc You did not elect to claim a section 179 deduction. Www irs gov eitc You can deduct 30% of the cost ($30,000) as a special depreciation allowance for 2001. Www irs gov eitc You use the remaining $70,000 of cost to figure your regular depreciation deduction for 2001 and later years. Www irs gov eitc Example 2. Www irs gov eitc The facts are the same as in Example 1, except that you choose to deduct $24,000 of the property's cost as a section 179 deduction. Www irs gov eitc You use the remaining $76,000 of cost to figure your special depreciation allowance of $22,800 ($76,000 × 30%). Www irs gov eitc You use the remaining $53,200 of cost to figure your regular depreciation deduction for 2001 and later years. Www irs gov eitc Qualified Property To qualify for the special depreciation allowance, your property must meet the following requirements. Www irs gov eitc It is new property of one of the following types. Www irs gov eitc Property depreciated under the modified accelerated cost recovery system (MACRS) with a recovery period of 20 years or less. Www irs gov eitc See Can You Use MACRS To Depreciate Your Property and Which Recovery Period Applies? on pages 7 and 23, respectively, in Publication 946. Www irs gov eitc Water utility property. Www irs gov eitc See 25-year property on page 22 in Publication 946. Www irs gov eitc Computer software that is not a section 197 intangible as described in Computer software on page 5 in Publication 946. Www irs gov eitc (The cost of some computer software is treated as part of the cost of hardware and is depreciated under MACRS. Www irs gov eitc ) Qualified leasehold improvement property (defined later). Www irs gov eitc It meets the following tests (explained later under Tests To Be Met). Www irs gov eitc Acquisition date test. Www irs gov eitc Placed in service date test. Www irs gov eitc Original use test. Www irs gov eitc It is not excepted property (explained later under Excepted Property). Www irs gov eitc Qualified leasehold improvement property. Www irs gov eitc    Generally, this is any improvement to an interior part of a building that is nonresidential real property, provided all of the following requirements are met. Www irs gov eitc The improvement is made under or pursuant to a lease by the lessee (or any sublessee) or the lessor of that part of the building. Www irs gov eitc That part of the building is to be occupied exclusively by the lessee (or any sublessee) of that part. Www irs gov eitc The improvement is placed in service more than 3 years after the date the building was first placed in service. Www irs gov eitc   However, a qualified leasehold improvement does not include any improvement for which the expenditure is attributable to any of the following. Www irs gov eitc The enlargement of the building. Www irs gov eitc Any elevator or escalator. Www irs gov eitc Any structural component benefiting a common area. Www irs gov eitc The internal structural framework of the building. Www irs gov eitc   Generally, a binding commitment to enter into a lease is treated as a lease and the parties to the commitment are treated as the lessor and lessee. Www irs gov eitc However, a binding commitment between related persons is not treated as a lease. Www irs gov eitc Related persons. Www irs gov eitc   For this purpose, the following are related persons. Www irs gov eitc Members of an affiliated group. Www irs gov eitc The persons listed in items (1) through (9) under Related persons on page 8 of Publication 946 (except that “80% or more” should be substituted for “more than 10%” each place it appears). Www irs gov eitc An executor and a beneficiary of the same estate. Www irs gov eitc Tests To Be Met To qualify for the special depreciation allowance, the property must meet all of the following tests. Www irs gov eitc Acquisition date test. Www irs gov eitc    Generally, you must have acquired the property either: After September 10, 2001, and before September 11, 2004, but only if no written binding contract for the acquisition was in effect before September 11, 2001, or Pursuant to a written binding contract entered into after September 10, 2001, and before September 11, 2004. Www irs gov eitc   Property you manufacture, construct, or produce for your own use meets this test if you began the manufacture, construction, or production of the property after September 10, 2001, and before September 11, 2004. Www irs gov eitc Placed in service date test. Www irs gov eitc   Generally, the property must be placed in service for use in your trade or business or for the production of income after September 10, 2001, and before January 1, 2005. Www irs gov eitc   If you sold property you placed in service after September 10, 2001, and you leased it back within 3 months after the property was originally placed in service, the property is treated as placed in service no earlier than the date it is used under the leaseback. Www irs gov eitc Original use test. Www irs gov eitc   The original use of the property must have begun with you after September 10, 2001. Www irs gov eitc “Original use” means the first use to which the property is put, whether or not by you. Www irs gov eitc Additional capital expenditures you incurred after September 10, 2001, to recondition or rebuild your property meet the original use test. Www irs gov eitc Excepted Property The following property does not qualify for the special depreciation allowance. Www irs gov eitc Property used by any person before September 11, 2001. Www irs gov eitc Property required to be depreciated using ADS. Www irs gov eitc This includes listed property used 50% or less in a qualified business use. Www irs gov eitc Qualified New York Liberty Zone leasehold improvement property (defined next). Www irs gov eitc Qualified New York Liberty Zone leasehold improvement property. Www irs gov eitc   This is any qualified leasehold improvement property (as defined earlier) if all of the following requirements are met. Www irs gov eitc The improvement is to a building located in the New York Liberty Zone (defined later under New York Liberty Zone Benefits). Www irs gov eitc The improvement is placed in service after September 10, 2001, and before January 1, 2007. Www irs gov eitc No written binding contract for the improvement was in effect before September 11, 2001. Www irs gov eitc Election Not To Claim the Allowance You can elect not to claim the special depreciation allowance for qualified property. Www irs gov eitc If you make this election for any property, it applies to all property in the same property class placed in service during the year. Www irs gov eitc To make this election, attach a statement to your return indicating you elect not to claim the allowance and the class of property for which you are making the election. Www irs gov eitc When to make election. Www irs gov eitc   Generally, you must make the election on a timely filed tax return (including extensions) for the year in which you place the property in service. Www irs gov eitc   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 original return (not including extensions). Www irs gov eitc Attach the election statement to the amended return. Www irs gov eitc At the top of the election statement, write “Filed pursuant to section 301. Www irs gov eitc 9100–2. Www irs gov eitc ” Revoking an election. Www irs gov eitc   Once you elect not to deduct the special depreciation allowance for a class of property, you cannot revoke the election without IRS consent. Www irs gov eitc A request to revoke the election is subject to a user fee. Www irs gov eitc Rules for Returns Filed Before June 1, 2002 The following rules apply if you placed qualified property in service after September 10, 2001, and filed your return before June 1, 2002. Www irs gov eitc The rules apply to returns for the following years. Www irs gov eitc 2000 fiscal years that end after September 10, 2001. Www irs gov eitc 2001 calendar and fiscal years. Www irs gov eitc Claiming the allowance. Www irs gov eitc   If you did not claim the allowance on your return and did not make the election not to claim the allowance, you can do either of the following to claim the allowance. Www irs gov eitc File an amended return by the due date (not including extensions) of your return for the year following the year the property was placed in service. Www irs gov eitc Write “Filed Pursuant to Rev. Www irs gov eitc Proc. Www irs gov eitc 2002–33” at the top of the amended return. Www irs gov eitc File Form 3115, Application for Change in Accounting Method, with your return for the year following the year the property was placed in service. Www irs gov eitc Your return must be filed by the due date (including extensions). Www irs gov eitc Write “Automatic Change Filed Under Rev. Www irs gov eitc Proc. Www irs gov eitc 2002–33” on the appropriate line of Form 3115. Www irs gov eitc You must also file a copy (with signature) of the completed Form 3115 with the IRS National Office no later than when you file the original with your return. Www irs gov eitc For more information about filing Form 3115, including the address to send it to, see Revenue Procedure 2002–9, Revenue Procedure 2002–19, and Revenue Procedure 2002–33. Www irs gov eitc Example 1. Www irs gov eitc You are an individual and you use the calendar year. Www irs gov eitc You placed qualified property in service for your business in December 2001. Www irs gov eitc You filed your 2001 income tax return before April 15, 2002. Www irs gov eitc You did not claim the special depreciation allowance for the property and did not make the election not to claim the allowance. Www irs gov eitc You can claim the special allowance by filing an amended 2001 return by April 15, 2003, with “Filed Pursuant to Rev. Www irs gov eitc Proc. Www irs gov eitc 2002–33” at the top of the amended return. Www irs gov eitc You must file an amended return by April 15, 2003, even if you get an extension of time to file your 2002 tax return. Www irs gov eitc Example 2. Www irs gov eitc The facts concerning your 2001 return are the same as in Example 1. Www irs gov eitc In addition, you got an automatic 4-month extension of time (to August 15, 2003) to file your 2002 return. Www irs gov eitc You can claim the special allowance by filing a Form 3115 (with “Filed Pursuant to Rev. Www irs gov eitc Proc. Www irs gov eitc 2002–33” on the appropriate line) with your 2002 return by August 15, 2003. Www irs gov eitc You must also file a copy of this Form 3115 with the IRS National Office no later than when you file your 2002 return. Www irs gov eitc Electing not to claim the allowance. Www irs gov eitc   Generally, you have elected not to claim the special depreciation allowance for a class of property if you: Filed your return timely (including extensions) for the year you placed qualified property in service and indicated on a statement with the return that you are not claiming the allowance, or Filed your return timely and filed an amended return within 6 months of the due date of the original return (not including extensions) and indicated on a statement with the amended return that you are not claiming the allowance. Www irs gov eitc The statement must indicate that you are not deducting the special depreciation allowance and the class of property to which the election applies. Www irs gov eitc The statement can be either attached to or written on the return. Www irs gov eitc You can, for example, write “not deducting 30%” on Form 4562. Www irs gov eitc Deemed election. Www irs gov eitc   If you have not followed either of the procedures described above to elect not to claim the allowance, you may still be treated as making the election. Www irs gov eitc You will be treated as making the election if you meet both of the following conditions. Www irs gov eitc You filed your return for the year you placed the property in service and claimed depreciation, but not the special allowance, for any class of property. Www irs gov eitc You do not file an amended return or a Form 3115 within the time prescribed for claiming the special allowance. Www irs gov eitc See Claiming the allowance, earlier. Www irs gov eitc Passenger Automobiles The limit on your depreciation deduction (including any section 179 deduction) for any passenger automobile that is qualified property (defined earlier) placed in service after September 10, 2001, and for which you claim the special depreciation allowance is increased. Www irs gov eitc Generally, the limit is increased from $3,060 to $7,660. Www irs gov eitc However, if the automobile is a qualified electric car, the limit is increased from $9,280 to $23,080 ($22,980 if placed in service in 2002). Www irs gov eitc Table 1 shows the maximum deduction amounts for 2001. Www irs gov eitc Table 1. Www irs gov eitc Maximum Deduction for 2001 Qualified Vehicle Placed in Service Before Sept. Www irs gov eitc 11 Placed in Service After Sept. Www irs gov eitc 10 Passenger automobile $3,060 $7,660 Electric car 9,280 23,080 1 1$22,980 if you place an electric car in service in 2002. Www irs gov eitc Election not to claim the allowance. Www irs gov eitc   The increased maximum depreciation deduction does not apply if you elected not to claim the special depreciation allowance as explained earlier under Election Not To Claim the Allowance and Rules for Returns Filed Before June 1, 2002. Www irs gov eitc New York Liberty Zone Benefits Several benefits are available for property you place in service in the New York Liberty Zone (Liberty Zone). Www irs gov eitc They include a special depreciation allowance for the year you place the property in service, an increased section 179 deduction, and the classification of certain leasehold improvement property as 5-year property. Www irs gov eitc Area defined. Www irs gov eitc   The New York Liberty Zone is the area located on or south of Canal Street, East Broadway (east of its intersection with Canal Street), or Grand Street (east of its intersection with East Broadway) in the Borough of Manhattan in the City of New York, New York. Www irs gov eitc Special Liberty Zone Depreciation Allowance You can take a special depreciation allowance for qualified Liberty Zone property you place in service after September 10, 2001. Www irs gov eitc The allowance is an additional deduction of 30% of the property's depreciable basis. Www irs gov eitc To figure the depreciable basis, you must first multiply the property's cost or other basis by the percentage of business/investment use and then reduce that amount by any section 179 deduction and certain other deductions and credits for the property. Www irs gov eitc See What Is the Basis for Depreciation? on page 23 in Publication 946 for more information on figuring depreciable basis. Www irs gov eitc The allowance is deductible for both regular tax and alternative minimum tax (AMT) purposes. Www irs gov eitc There is no AMT adjustment required for any depreciation figured on the remaining basis of the property. Www irs gov eitc In the year you claim the allowance (generally the year you place the property in service), you must reduce the depreciable basis of the property by the allowance before figuring your regular depreciation deduction. Www irs gov eitc You cannot claim the special Liberty Zone depreciation allowance for property eligible for the special depreciation allowance explained earlier in Qualified Property under Special Depreciation Allowance. Www irs gov eitc Qualified property is eligible for only one special depreciation allowance. Www irs gov eitc Example 1. Www irs gov eitc On November 1, 2001, you bought and placed in service in your business, which is in the Liberty Zone, qualified Liberty Zone property that cost $200,000. Www irs gov eitc You did not elect to claim a section 179 deduction. Www irs gov eitc You can deduct 30% of the cost ($60,000) as a special Liberty Zone depreciation allowance for 2001. Www irs gov eitc You use the remaining $140,000 of cost to figure your regular depreciation deduction for 2001 and later years. Www irs gov eitc Example 2. Www irs gov eitc The facts are the same as in Example 1, except that you choose to deduct $59,000 of the property's cost as a section 179 deduction. Www irs gov eitc (See Increased Section 179 Deduction, later, for information concerning how this section 179 deduction amount is figured). Www irs gov eitc You use the remaining $141,000 of cost to figure your special Liberty Zone depreciation allowance of $42,300 ($141,000 × 30%). Www irs gov eitc You use the remaining $98,700 of cost to figure your regular depreciation deduction for 2001 and later years. Www irs gov eitc Qualified Liberty Zone Property For a 2001 calendar or fiscal year and a 2000 fiscal year that ends after September 10, 2001, property qualifies for the special Liberty Zone depreciation allowance if it meets the following requirements. Www irs gov eitc It is one of the following types of property. Www irs gov eitc Used property depreciated under MACRS with a recovery period of 20 years or less. Www irs gov eitc See Can You Use MACRS To Depreciate Your Property and Which Recovery Period Applies? on pages 7 and 23, respectively, in Publication 946. Www irs gov eitc Used water utility property. Www irs gov eitc See 25-year property on page 22 in Publication 946. Www irs gov eitc Used computer software that is not a section 197 intangible as described in Computer software on page 5 in Publication 946. Www irs gov eitc (The cost of some computer software is treated as part of the cost of hardware and is depreciated under MACRS. Www irs gov eitc ) Certain nonresidential real property and residential rental property (defined later). Www irs gov eitc It meets the following tests (explained later under Tests to be met). Www irs gov eitc Acquisition date test. Www irs gov eitc Placed in service date test. Www irs gov eitc Substantial use test. Www irs gov eitc Original use test. Www irs gov eitc It is not excepted property (explained later under Excepted property). Www irs gov eitc Nonresidential real property and residential rental property. Www irs gov eitc   This property is qualifying property only to the extent it rehabilitates real property damaged, or replaces real property destroyed or condemned, as a result of the terrorist attack of September 11, 2001. Www irs gov eitc Property is treated as replacing destroyed or condemned property if, as part of an integrated plan, such property replaces real property included in a continuous area that includes real property destroyed or condemned. Www irs gov eitc   For these purposes, real property is considered destroyed (or condemned) only if an entire building or structure was destroyed (or condemned) as a result of the terrorist attack. Www irs gov eitc Otherwise, the property is considered damaged real property. Www irs gov eitc For example, if certain structural components of a building (such as walls, floors, or plumbing fixtures) are damaged or destroyed as a result of the terrorist attack, but the building is not destroyed (or condemned), then only costs related to replacing the damaged or destroyed structural components qualify for the special Liberty Zone depreciation allowance. Www irs gov eitc Tests to be met. Www irs gov eitc   To qualify for the special Liberty Zone depreciation allowance, your property must meet all of the following tests. Www irs gov eitc Acquisition date test. Www irs gov eitc   You must have acquired the property by purchase after September 10, 2001, and there must not have been a binding written contract for the acquisition in effect before September 11, 2001. Www irs gov eitc   For information on the acquisition of property by purchase, see Property Acquired by Purchase on page 15 of Publication 946. Www irs gov eitc   Property you manufacture, construct, or produce for your own use meets this test if you began the manufacture, construction, or production of the property after September 10, 2001. Www irs gov eitc Placed in service date test. Www irs gov eitc   Generally, the property must be placed in service for use in your trade or business or for the production of income before January 1, 2007 (January 1, 2010, in the case of qualifying nonresidential real property and residential rental property). Www irs gov eitc   If you sold property you placed in service after September 10, 2001, and you leased it back within 3 months after the property was originally placed in service, the property is treated as placed in service no earlier than the date it is used under the leaseback. Www irs gov eitc Substantial use test. Www irs gov eitc   Substantially all use of the property must be in the Liberty Zone and in the active conduct of your trade or business in the Liberty Zone. Www irs gov eitc Original use test. Www irs gov eitc   The original use of the property in the Liberty Zone must have begun with you after September 10, 2001. Www irs gov eitc   Used property can be qualified Liberty Zone property if it has not previously been used within the Liberty Zone. Www irs gov eitc Also, additional capital expenditures you incurred after September 10, 2001, to recondition or rebuild your property meet the original use test if the original use of the property in the Liberty Zone began with you. Www irs gov eitc Excepted property. Www irs gov eitc   The following property does not qualify for the special Liberty Zone depreciation allowance. Www irs gov eitc Property eligible for the special depreciation allowance explained earlier in Qualified Property under Special Depreciation Allowance. Www irs gov eitc Property required to be depreciated using ADS. Www irs gov eitc This includes listed property used 50% or less in a qualified business use. Www irs gov eitc Qualified New York Liberty Zone leasehold improvement property (defined earlier in Excepted Property under Special Depreciation Allowance). Www irs gov eitc Example. Www irs gov eitc In December 2001, you bought and placed in service in your business in the Liberty Zone the following property. Www irs gov eitc New office furniture with a MACRS recovery period of 7 years. Www irs gov eitc A used computer with a MACRS recovery period of 5 years. Www irs gov eitc The computer had not previously been used within the Liberty Zone. Www irs gov eitc Because the office furniture is new property, it qualifies for the special depreciation allowance, but not the special Liberty Zone depreciation allowance. Www irs gov eitc Because the computer is used property that had not previously been used in the Liberty Zone, it qualifies for the special Liberty Zone depreciation allowance, but not the special depreciation allowance. Www irs gov eitc Election Not To Claim the Liberty Zone Allowance You can elect not to claim the special Liberty Zone depreciation allowance for qualified property. Www irs gov eitc If you make this election for any property, it applies to all property in the same property class placed in service during the year. Www irs gov eitc To make this election, attach a statement to your return indicating you elect not to claim the allowance and the class of property for which you are making the election. Www irs gov eitc When to make the election. Www irs gov eitc   Generally, you must make the election on a timely filed tax return (including extensions) for the year in which you place the property in service. Www irs gov eitc   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 original return (not including extensions). Www irs gov eitc Attach the election statement to the amended return. Www irs gov eitc At the top of the election statement, write “Filed pursuant to section 301. Www irs gov eitc 9100–2. Www irs gov eitc ” Revoking an election. Www irs gov eitc   Once you elect not to deduct the special Liberty Zone depreciation allowance for a class of property, you cannot revoke the election without IRS consent. Www irs gov eitc A request to revoke the election is subject to a user fee. Www irs gov eitc Returns filed before June 1, 2002. Www irs gov eitc   The rules that apply to the special depreciation allowance discussed earlier in Rules for Returns Filed Before June 1, 2002 under Special Depreciation Allowance also apply to the special Liberty Zone depreciation allowance. Www irs gov eitc Increased Section 179 Deduction Under section 179 of the Internal Revenue Code, you can choose to recover all or part of the cost of certain qualifying property, up to a limit, by deducting it in the year you place the property in service. Www irs gov eitc For tax years beginning in 2000, that limit was $20,000. Www irs gov eitc For tax years beginning in 2001 and 2002, that limit is generally $24,000. Www irs gov eitc If the cost of qualifying section 179 property placed in service in a year is over $200,000, you must reduce the dollar limit (but not below zero) by the amount of the cost over $200,000. Www irs gov eitc Increased Dollar Limit The dollar limit on the section 179 deduction is increased for certain property placed in service in the Liberty Zone. Www irs gov eitc The increase is the smaller of the following amounts. Www irs gov eitc $35,000. Www irs gov eitc The cost of section 179 property that is qualified Liberty Zone property placed in service during the year. Www irs gov eitc If you use the revised 2001 Form 4562 (dated March 2002) for a tax year beginning in 2000, you must reduce the section 179 dollar limit to $20,000 before adding the additional amount for qualified property. Www irs gov eitc Qualified property. Www irs gov eitc   To qualify for the increased section 179 deduction, your property must be section 179 property that is either: Qualified Liberty Zone property, or Property that would be qualified Liberty Zone property except that it is eligible for the special depreciation allowance. Www irs gov eitc Qualified Liberty Zone property is explained earlier in Qualified Liberty Zone Property under Special Liberty Zone Depreciation Allowance. Www irs gov eitc Property eligible for the special depreciation allowance is explained earlier in Qualified Property under Special Depreciation Allowance. Www irs gov eitc For information on the requirements that must be met for property to qualify for the section 179 deduction, see What Property Qualifies? on page 14 of Publication 946. Www irs gov eitc Example 1. Www irs gov eitc In 2002, you place in service in your business, which is in the Liberty Zone, qualified property (defined earlier) costing $25,000. Www irs gov eitc Because this cost is less than $35,000, the dollar limit on the section 179 deduction is increased by $25,000 to $49,000 ($24,000 + $25,000). Www irs gov eitc Example 2. Www irs gov eitc In 2002, you place in service in your business, which is in the Liberty Zone, qualified property (defined earlier) costing $75,000. Www irs gov eitc Because $35,000 is less than the cost of the property you place in service, the dollar limit on the section 179 deduction you can claim is increased by $35,000 to $59,000 ($24,000 + $35,000). Www irs gov eitc Reduced Dollar Limit Generally, you must reduce the dollar limit for a year by the cost of qualifying section 179 property placed in service in the year that is more than $200,000. Www irs gov eitc However, if the cost of your Liberty Zone property exceeds $200,000, you take into account only 50% (instead of 100%) of the cost of qualified property placed in service in a year. Www irs gov eitc Example. Www irs gov eitc In 2002, you place in service in your business, which is in the Liberty Zone, qualified property costing $460,000. Www irs gov eitc Your increased dollar limit is $59,000 ($35,000 + $24,000). Www irs gov eitc Because 50% of the cost of the property you place in service ($230,000) is $30,000 more than $200,000, you must reduce your $59,000 dollar limit to $29,000 ($59,000 - $30,000). Www irs gov eitc Recapture Rules Rules similar to those explained on page 20 of Publication 946 under When Must You Recapture the Deduction? apply with respect to any qualified property you stop using in the Liberty Zone. Www irs gov eitc Returns Filed Before June 1, 2002 If you filed a return before June 1, 2002, and did not deduct the increased section 179 amount for qualified property placed in service after September 10, 2001, you can deduct the increased amount by filing an amended return by the due date (not including extensions) of the return for the year after the year the property was placed in service. Www irs gov eitc This rule applies to returns for the following years. Www irs gov eitc 2000 fiscal years that end after September 10, 2001. Www irs gov eitc 2001 calendar and fiscal years. Www irs gov eitc On the amended return, write “Filed Pursuant to Rev. Www irs gov eitc Proc. Www irs gov eitc 2002–33. Www irs gov eitc ” Liberty Zone Leasehold Improvement Property Qualified Liberty Zone leasehold improvement property (described earlier in Qualified Property under Special Depreciation Allowance) is 5-year property. Www irs gov eitc This means that it is depreciated over a recovery period of 5 years. Www irs gov eitc For information about recovery periods, see Which Recovery Period Applies? on page 23 of Publication 946. Www irs gov eitc The straight-line method must be used with respect to qualified Liberty Zone leasehold improvement property. Www irs gov eitc Under ADS, the recovery period for qualified Liberty Zone leasehold improvement property is 9 years. Www irs gov eitc Returns Filed Before June 1, 2002 If you filed either of the following returns before June 1, 2002, and did not depreciate qualified Liberty Zone leasehold improvement property placed in service during the tax year as 5-year property using the straight line method, you should file an amended return before you file your return for the year after the year the property was placed in service. Www irs gov eitc Your 2000 fiscal year return (for a 2000 fiscal year that ends after September 10, 2001). Www irs gov eitc Your 2001 calendar or fiscal year return. Www irs gov eitc On the amended return, write “Filed Pursuant to Rev. Www irs gov eitc Proc. Www irs gov eitc 2002–33. Www irs gov eitc ” Table 2. Www irs gov eitc Rules for Returns Filed Before June 1, 2002 Note:This chart highlights the rules for returns affected by the Job Creation and Worker Assistance Act of 2002 that were filed before June 1, 2002, without accounting for any of the new benefits under the law. Www irs gov eitc See the text for definitions and examples. Www irs gov eitc Do not rely on this chart alone. Www irs gov eitc IF you want to. Www irs gov eitc . Www irs gov eitc . Www irs gov eitc THEN you. Www irs gov eitc . Www irs gov eitc . Www irs gov eitc BY. Www irs gov eitc . Www irs gov eitc . Www irs gov eitc claim the special depreciation allowance or special Liberty Zone depreciation allowance • must file an amended return • the due date (not including extensions) of your return for the year after the year the property was placed in service, or • must file Form 3115, Application for Change in Accounting Method, with your return for the year after the year the property was placed in service • the due date (including extensions) of your return for the year after the year the property was placed in service, and • must file a copy of your completed Form 3115 with the IRS National Office • the date you file the original Form 3115 with your return for the year after the year the property was placed in service. Www irs gov eitc elect not to claim the special depreciation allowance or the special Liberty Zone depreciation allowance 1 • must have filed your return timely for the year the property was placed in service, and   • must file an amended return stating you are not claiming the allowance • the date that is 6 months after the due date of the original return (not including extensions). Www irs gov eitc deduct the increased section 179 amount • must file an amended return • the due date (not including extensions) of your return for the year after the year the property was placed in service. Www irs gov eitc use a 5-year recovery period for depreciating qualified Liberty Zone leasehold improvement property • should file an amended return • the date you file your return for the year after the year the property was placed in service. Www irs gov eitc 1See also Deemed election under Rules for Returns Filed Before June 1, 2002, earlier. 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