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Www. Www.taxact.com taxact. Www.taxact.com com 4. Www.taxact.com   Student Loan Interest Deduction Table of Contents Introduction Student Loan Interest DefinedQualified Student Loan Qualified Education Expenses Include As Interest Do Not Include As Interest When Must Interest Be Paid Can You Claim the DeductionNo Double Benefit Allowed Figuring the DeductionEffect of the Amount of Your Income on the Amount of Your Deduction Which Worksheet To Use Claiming the Deduction Introduction Generally, personal interest you pay, other than certain mortgage interest, is not deductible on your tax return. Www.taxact.com However, if your modified adjusted gross income (MAGI) is less than $75,000 ($155,000 if filing a joint return) there is a special deduction allowed for paying interest on a student loan (also known as an education loan) used for higher education. Www.taxact.com For most taxpayers, MAGI is the adjusted gross income as figured on their federal income tax return before subtracting any deduction for student loan interest. Www.taxact.com This deduction can reduce the amount of your income subject to tax by up to $2,500 in 2013. Www.taxact.com The student loan interest deduction is taken as an adjustment to income. Www.taxact.com This means you can claim this deduction even if you do not itemize deductions on Schedule A (Form 1040). Www.taxact.com This chapter explains: What type of loan interest you can deduct, Whether you can claim the deduction, What expenses you must have paid with the student loan, Who is an eligible student, How to figure the deduction, and How to claim the deduction. Www.taxact.com Table 4-1. Www.taxact.com Student Loan Interest Deduction at a Glance This table summarizes the features of the student loan interest deduction. Www.taxact.com Do not rely on this table alone. Www.taxact.com Refer to the text for complete details. Www.taxact.com Feature   Description Maximum benefit   You can reduce your income subject to tax by up to $2,500. Www.taxact.com Loan qualifications   Your student loan: •must have been taken out solely to pay qualified education expenses, and •cannot be from a related person or made under a qualified employer plan. Www.taxact.com Student qualifications   The student must be: •you, your spouse, or your dependent, and  •enrolled at least half-time in a degree program. Www.taxact.com Time limit on deduction   You can deduct interest paid during the remaining period of your student loan. Www.taxact.com Limit on modified adjusted gross income (MAGI)   $155,000 if married filing a joint return; $75,000 if single, head of household, or qualifying widow(er). Www.taxact.com Student Loan Interest Defined Student loan interest is interest you paid during the year on a qualified student loan. Www.taxact.com It includes both required and voluntary interest payments. Www.taxact.com Qualified Student Loan This is a loan you took out solely to pay qualified education expenses (defined later) that were: For you, your spouse, or a person who was your dependent when you took out the loan, Paid or incurred within a reasonable period of time before or after you took out the loan, and For education provided during an academic period for an eligible student. Www.taxact.com Loans from the following sources are not qualified student loans. Www.taxact.com A related person. Www.taxact.com A qualified employer plan. Www.taxact.com Your dependent. Www.taxact.com   Generally, your dependent is someone who is either a: Qualifying child, or Qualifying relative. Www.taxact.com You can find more information about dependents in Publication 501. Www.taxact.com Exceptions. Www.taxact.com   For purposes of the student loan interest deduction, there are the following exceptions to the general rules for dependents. Www.taxact.com An individual can be your dependent even if you are the dependent of another taxpayer. Www.taxact.com An individual can be your dependent even if the individual files a joint return with a spouse. Www.taxact.com An individual can be your dependent even if the individual had gross income for the year that was equal to or more than the exemption amount for the year ($3,900 for 2013). Www.taxact.com Reasonable period of time. Www.taxact.com   Qualified education expenses are treated as paid or incurred within a reasonable period of time before or after you take out the loan if they are paid with the proceeds of student loans that are part of a federal postsecondary education loan program. Www.taxact.com   Even if not paid with the proceeds of that type of loan, the expenses are treated as paid or incurred within a reasonable period of time if both of the following requirements are met. Www.taxact.com The expenses relate to a specific academic period, and The loan proceeds are disbursed within a period that begins 90 days before the start of that academic period and ends 90 days after the end of that academic period. Www.taxact.com   If neither of the above situations applies, the reasonable period of time usually is determined based on all the relevant facts and circumstances. Www.taxact.com Academic period. Www.taxact.com   An academic period includes a semester, trimester, quarter, or other period of study (such as a summer school session) as reasonably determined by an educational institution. Www.taxact.com In the case of an educational institution that uses credit hours or clock hours and does not have academic terms, each payment period can be treated as an academic period. Www.taxact.com Eligible student. Www.taxact.com   This is a student who was enrolled at least half-time in a program leading to a degree, certificate, or other recognized educational credential. Www.taxact.com Enrolled at least half-time. Www.taxact.com   A student was enrolled at least half-time if the student was taking at least half the normal full-time work load for his or her course of study. Www.taxact.com   The standard for what is half of the normal full-time work load is determined by each eligible educational institution. Www.taxact.com However, the standard may not be lower than any of those established by the U. Www.taxact.com S. Www.taxact.com Department of Education under the Higher Education Act of 1965. Www.taxact.com Related person. Www.taxact.com   You cannot deduct interest on a loan you get from a related person. Www.taxact.com Related persons include: Your spouse, Your brothers and sisters, Your half brothers and half sisters, Your ancestors (parents, grandparents, etc. Www.taxact.com ), Your lineal descendants (children, grandchildren, etc. Www.taxact.com ), and Certain corporations, partnerships, trusts, and exempt organizations. Www.taxact.com Qualified employer plan. Www.taxact.com   You cannot deduct interest on a loan made under a qualified employer plan or under a contract purchased under such a plan. Www.taxact.com Qualified Education Expenses For purposes of the student loan interest deduction, these expenses are the total costs of attending an eligible educational institution, including graduate school. Www.taxact.com They include amounts paid for the following items. Www.taxact.com Tuition and fees. Www.taxact.com Room and board. Www.taxact.com Books, supplies, and equipment. Www.taxact.com Other necessary expenses (such as transportation). Www.taxact.com The cost of room and board qualifies only to the extent that it is not more than the greater of: The allowance for room and board, as determined by the eligible educational institution, that was included in the cost of attendance (for federal financial aid purposes) for a particular academic period and living arrangement of the student, or The actual amount charged if the student is residing in housing owned or operated by the eligible educational institution. Www.taxact.com Eligible educational institution. Www.taxact.com   An eligible educational institution is any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the U. Www.taxact.com S. Www.taxact.com Department of Education. Www.taxact.com It includes virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions. Www.taxact.com   Certain educational institutions located outside the United States also participate in the U. Www.taxact.com S. Www.taxact.com Department of Education's Federal Student Aid (FSA) programs. Www.taxact.com   For purposes of the student loan interest deduction, an eligible educational institution also includes an institution conducting an internship or residency program leading to a degree or certificate from an institution of higher education, a hospital, or a health care facility that offers postgraduate training. Www.taxact.com   An educational institution must meet the above criteria only during the academic period(s) for which the student loan was incurred. Www.taxact.com The deductibility of interest on the loan is not affected by the institution's subsequent loss of eligibility. Www.taxact.com    The educational institution should be able to tell you if it is an eligible educational institution. Www.taxact.com Adjustments to Qualified Education Expenses You must reduce your qualified education expenses by the total amount paid for them with the following tax-free items. Www.taxact.com Employer-provided educational assistance. Www.taxact.com See chapter 11, Employer-Provided Educational Assistance . Www.taxact.com Tax-free distribution of earnings from a Coverdell education savings account (ESA). Www.taxact.com See Tax-Free Distributions in chapter 7, Coverdell Education Savings Account. Www.taxact.com Tax-free distribution of earnings from a qualified tuition program (QTP). Www.taxact.com See Figuring the Taxable Portion of a Distribution in chapter 8, Qualified Tuition Program. Www.taxact.com U. Www.taxact.com S. Www.taxact.com savings bond interest that you exclude from income because it is used to pay qualified education expenses. Www.taxact.com See chapter 10, Education Savings Bond Program . Www.taxact.com The tax-free part of scholarships and fellowships. Www.taxact.com See Tax-Free Scholarships and Fellowships in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions. Www.taxact.com Veterans' educational assistance. Www.taxact.com See Veterans' Benefits in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions. Www.taxact.com Any other nontaxable (tax-free) payments (other than gifts or inheritances) received as educational assistance. Www.taxact.com Include As Interest In addition to simple interest on the loan, if all other requirements are met, the items discussed below can be student loan interest. Www.taxact.com Loan origination fee. Www.taxact.com   In general, this is a one-time fee charged by the lender when a loan is made. Www.taxact.com To be deductible as interest, a loan origination fee must be for the use of money rather than for property or services (such as commitment fees or processing costs) provided by the lender. Www.taxact.com A loan origination fee treated as interest accrues over the term of the loan. Www.taxact.com   Loan origination fees were not required to be reported on Form 1098-E, Student Loan Interest Statement, for loans made before September 1, 2004. Www.taxact.com If loan origination fees are not included in the amount reported on your Form 1098-E, you can use any reasonable method to allocate the loan origination fees over the term of the loan. Www.taxact.com The method shown in the example below allocates equal portions of the loan origination fee to each payment required under the terms of the loan. Www.taxact.com A method that results in the double deduction of the same portion of a loan origination fee would not be reasonable. Www.taxact.com Example. Www.taxact.com In August 2004, Bill took out a student loan for $16,000 to pay the tuition for his senior year of college. Www.taxact.com The lender charged a 3% loan origination fee ($480) that was withheld from the funds Bill received. Www.taxact.com Bill began making payments on his student loan in 2013. Www.taxact.com Because the loan origination fee was not included in his 2013 Form 1098-E, Bill can use any reasonable method to allocate that fee over the term of the loan. Www.taxact.com Bill's loan is payable in 120 equal monthly payments. Www.taxact.com He allocates the $480 fee equally over the total number of payments ($480 ÷ 120 months = $4 per month). Www.taxact.com Bill made 7 payments in 2013, so he paid $28 ($4 × 7) of interest attributable to the loan origination fee. Www.taxact.com To determine his student loan interest deduction, he will add the $28 to the amount of other interest reported to him on Form 1098-E. Www.taxact.com Capitalized interest. Www.taxact.com   This is unpaid interest on a student loan that is added by the lender to the outstanding principal balance of the loan. Www.taxact.com Capitalized interest is treated as interest for tax purposes and is deductible as payments of principal are made on the loan. Www.taxact.com No deduction for capitalized interest is allowed in a year in which no loan payments were made. Www.taxact.com Interest on revolving lines of credit. Www.taxact.com   This interest, which includes interest on credit card debt, is student loan interest if the borrower uses the line of credit (credit card) only to pay qualified education expenses. Www.taxact.com See Qualified Education Expenses , earlier. Www.taxact.com Interest on refinanced student loans. Www.taxact.com   This includes interest on both: Consolidated loans—loans used to refinance more than one student loan of the same borrower, and Collapsed loans—two or more loans of the same borrower that are treated by both the lender and the borrower as one loan. Www.taxact.com    If you refinance a qualified student loan for more than your original loan and you use the additional amount for any purpose other than qualified education expenses, you cannot deduct any interest paid on the refinanced loan. Www.taxact.com Voluntary interest payments. Www.taxact.com   These are payments made on a qualified student loan during a period when interest payments are not required, such as when the borrower has been granted a deferment or the loan has not yet entered repayment status. Www.taxact.com Example. Www.taxact.com The payments on Roger's student loan were scheduled to begin in June 2012, 6 months after he graduated from college. Www.taxact.com He began making payments as required. Www.taxact.com In September 2013, Roger enrolled in graduate school on a full-time basis. Www.taxact.com He applied for and was granted deferment of his loan payments while in graduate school. Www.taxact.com Wanting to pay down his student loan as much as possible, he made loan payments in October and November 2013. Www.taxact.com Even though these were voluntary (not required) payments, Roger can deduct the interest paid in October and November. Www.taxact.com Allocating Payments Between Interest and Principal The allocation of payments between interest and principal for tax purposes might not be the same as the allocation shown on the Form 1098-E or other statement you receive from the lender or loan servicer. Www.taxact.com To make the allocation for tax purposes, a payment generally applies first to stated interest that remains unpaid as of the date the payment is due, second to any loan origination fees allocable to the payment, third to any capitalized interest that remains unpaid as of the date the payment is due, and fourth to the outstanding principal. Www.taxact.com Example. Www.taxact.com In August 2012, Peg took out a $10,000 student loan to pay the tuition for her senior year of college. Www.taxact.com The lender charged a 3% loan origination fee ($300) that was withheld from the funds Peg received. Www.taxact.com The interest (5% simple) on this loan accrued while she completed her senior year and for 6 months after she graduated. Www.taxact.com At the end of that period, the lender determined the amount to be repaid by capitalizing all accrued but unpaid interest ($625 interest accrued from August 2012 through October 2013) and adding it to the outstanding principal balance of the loan. Www.taxact.com The loan is payable over 60 months, with a payment of $200. Www.taxact.com 51 due on the first of each month, beginning November 2013. Www.taxact.com Peg did not receive a Form 1098-E for 2013 from her lender because the amount of interest she paid did not require the lender to issue an information return. Www.taxact.com However, she did receive an account statement from the lender that showed the following 2013 payments on her outstanding loan of $10,625 ($10,000 principal + $625 accrued but unpaid interest). Www.taxact.com Payment Date   Payment   Stated Interest   Principal November 2013   $200. Www.taxact.com 51   $44. Www.taxact.com 27   $156. Www.taxact.com 24 December 2013   $200. Www.taxact.com 51   $43. Www.taxact.com 62   $156. Www.taxact.com 89 Totals   $401. Www.taxact.com 02   $87. Www.taxact.com 89   $313. Www.taxact.com 13 To determine the amount of interest that could be deducted on the loan for 2013, Peg starts with the total amount of stated interest she paid, $87. Www.taxact.com 89. Www.taxact.com Next, she allocates the loan origination fee over the term of the loan ($300 ÷ 60 months = $5 per month). Www.taxact.com A total of $10 ($5 of each of the two principal payments) should be treated as interest for tax purposes. Www.taxact.com Peg then applies the unpaid capitalized interest ($625) to the two principal payments in the order in which they were made, and determines that the remaining amount of principal of both payments is treated as interest for tax purposes. Www.taxact.com Assuming that Peg qualifies to take the student loan interest deduction, she can deduct $401. Www.taxact.com 02 ($87. Www.taxact.com 89 + $10 + $303. Www.taxact.com 13). Www.taxact.com For 2014, Peg will continue to allocate $5 of the loan origination fee to the principal portion of each monthly payment she makes and treat that amount as interest for tax purposes. Www.taxact.com She also will apply the remaining amount of capitalized interest ($625 − $303. Www.taxact.com 13 = $321. Www.taxact.com 87) to the principal payments in the order in which they are made until the balance is zero, and treat those amounts as interest for tax purposes. Www.taxact.com Do Not Include As Interest You cannot claim a student loan interest deduction for any of the following items. Www.taxact.com Interest you paid on a loan if, under the terms of the loan, you are not legally obligated to make interest payments. Www.taxact.com Loan origination fees that are payments for property or services provided by the lender, such as commitment fees or processing costs. Www.taxact.com Interest you paid on a loan to the extent payments were made through your participation in the National Health Service Corps Loan Repayment Program (the “NHSC Loan Repayment Program”) or certain other loan repayment assistance programs. Www.taxact.com For more information, see Student Loan Repayment Assistance in chapter 5, Student Loan Cancellations and Repayment Assistance. Www.taxact.com When Must Interest Be Paid You can deduct all interest you paid during the year on your student loan, including voluntary payments, until the loan is paid off. Www.taxact.com Can You Claim the Deduction Generally, you can claim the deduction if all of the following requirements are met. Www.taxact.com Your filing status is any filing status except married filing separately. Www.taxact.com No one else is claiming an exemption for you on his or her tax return. Www.taxact.com You are legally obligated to pay interest on a qualified student loan. Www.taxact.com You paid interest on a qualified student loan. Www.taxact.com Claiming an exemption for you. Www.taxact.com   Another taxpayer is claiming an exemption for you if he or she lists your name and other required information on his or her Form 1040 (or Form 1040A), line 6c, or Form 1040NR, line 7c. Www.taxact.com Example 1. Www.taxact.com During 2013, Josh paid $600 interest on his qualified student loan. Www.taxact.com Only he is legally obligated to make the payments. Www.taxact.com No one claimed an exemption for Josh for 2013. Www.taxact.com Assuming all other requirements are met, Josh can deduct the $600 of interest he paid on his 2013 Form 1040 or 1040A. Www.taxact.com Example 2. Www.taxact.com During 2013, Jo paid $1,100 interest on her qualified student loan. Www.taxact.com Only she is legally obligated to make the payments. Www.taxact.com Jo's parents claimed an exemption for her on their 2013 tax return. Www.taxact.com In this case, neither Jo nor her parents may deduct the student loan interest Jo paid in 2013. Www.taxact.com Interest paid by others. Www.taxact.com   If you are the person legally obligated to make interest payments and someone else makes a payment of interest on your behalf, you are treated as receiving the payments from the other person and, in turn, paying the interest. Www.taxact.com Example 1. Www.taxact.com Darla obtained a qualified student loan to attend college. Www.taxact.com After Darla's graduation from college, she worked as an intern for a nonprofit organization. Www.taxact.com As part of the internship program, the nonprofit organization made an interest payment on behalf of Darla. Www.taxact.com This payment was treated as additional compensation and reported in box 1 of her Form W-2. Www.taxact.com Assuming all other qualifications are met, Darla can deduct this payment of interest on her tax return. Www.taxact.com Example 2. Www.taxact.com Ethan obtained a qualified student loan to attend college. Www.taxact.com After graduating from college, the first monthly payment on his loan was due in December. Www.taxact.com As a gift, Ethan's mother made this payment for him. Www.taxact.com No one is claiming a dependency exemption for Ethan on his or her tax return. Www.taxact.com Assuming all other qualifications are met, Ethan can deduct this payment of interest on his tax return. Www.taxact.com No Double Benefit Allowed You cannot deduct as interest on a student loan any amount that is an allowable deduction under any other provision of the tax law (for example, as home mortgage interest). Www.taxact.com Figuring the Deduction Your student loan interest deduction for 2013 is generally the smaller of: $2,500, or The interest you paid in 2013. Www.taxact.com However, the amount determined above may be gradually reduced (phased out) or eliminated based on your filing status and MAGI as explained below. Www.taxact.com You can use Worksheet 4-1. Www.taxact.com Student Loan Interest Deduction Worksheet (at the end of this chapter) to figure both your MAGI and your deduction. Www.taxact.com Form 1098-E. Www.taxact.com   To help you figure your student loan interest deduction, you should receive Form 1098-E. Www.taxact.com Generally, an institution (such as a bank or governmental agency) that received interest payments of $600 or more during 2013 on one or more qualified student loans must send Form 1098-E (or acceptable substitute) to each borrower by January 31, 2014. Www.taxact.com   For qualified student loans taken out before September 1, 2004, the institution is required to include on Form 1098-E only payments of stated interest. Www.taxact.com Other interest payments, such as certain loan origination fees and capitalized interest, may not appear on the form you receive. Www.taxact.com However, if you pay qualifying interest that is not included on Form 1098-E, you can also deduct those amounts. Www.taxact.com See Allocating Payments Between Interest and Principal , earlier. Www.taxact.com    The lender may ask for a completed Form W-9S, or similar statement to obtain the borrower's name, address, and taxpayer identification number. Www.taxact.com The form may also be used by the borrower to certify that the student loan was incurred solely to pay for qualified education expenses. Www.taxact.com Effect of the Amount of Your Income on the Amount of Your Deduction The amount of your student loan interest deduction is phased out (gradually reduced) if your MAGI is between $60,000 and $75,000 ($125,000 and $155,000 if you file a joint return). Www.taxact.com You cannot take a student loan interest deduction if your MAGI is $75,000 or more ($155,000 or more if you file a joint return). Www.taxact.com Modified adjusted gross income (MAGI). Www.taxact.com   For most taxpayers, MAGI is adjusted gross income (AGI) as figured on their federal income tax return before subtracting any deduction for student loan interest. Www.taxact.com However, as discussed below, there may be other modifications. Www.taxact.com Table 4-2 shows how the amount of your MAGI can affect your student loan interest deduction. Www.taxact.com Table 4-2. Www.taxact.com Effect of MAGI on Student Loan Interest Deduction IF your filing status is. Www.taxact.com . Www.taxact.com . Www.taxact.com AND your MAGI is. Www.taxact.com . Www.taxact.com . Www.taxact.com THEN your student loan interest deduction is. Www.taxact.com . Www.taxact.com . Www.taxact.com single,  head of household, or qualifying widow(er) not more than $60,000 not affected by the phaseout. Www.taxact.com more than $60,000  but less than $75,000 reduced because of the phaseout. Www.taxact.com $75,000 or more eliminated by the phaseout. Www.taxact.com married filing joint return not more than $125,000 not affected by the phaseout. Www.taxact.com more than $125,000 but less than $155,000 reduced because of the phaseout. Www.taxact.com $155,000 or more eliminated by the phaseout. Www.taxact.com MAGI when using Form 1040A. Www.taxact.com   If you file Form 1040A, your MAGI is the AGI on line 22 of that form figured without taking into account any amount on line 18 (student loan interest deduction) and line 19 (tuition and fees deduction). Www.taxact.com MAGI when using Form 1040. Www.taxact.com   If you file Form 1040, your MAGI is the AGI on line 38 of that form figured without taking into account any amount on line 33 (student loan interest deduction), line 34 (tuition and fees deduction), or line 35 (domestic production activities deduction), and modified by adding back any: Foreign earned income exclusion, Foreign housing exclusion, Foreign housing deduction, Exclusion of income by bona fide residents of American Samoa, and Exclusion of income by bona fide residents of Puerto Rico. Www.taxact.com MAGI when using Form 1040NR. Www.taxact.com   If you file Form 1040NR, your MAGI is the AGI on line 36 of that form figured without taking into account any amount on line 33 (student loan interest deduction) and line 34 (domestic production activities deduction). Www.taxact.com MAGI when using Form 1040NR-EZ. Www.taxact.com   If you file Form 1040NR-EZ, your MAGI is the AGI on line 10 of that form figured without taking into account any amount on line 9 (student loan interest deduction). Www.taxact.com Phaseout. Www.taxact.com   If your MAGI is within the range of incomes where the credit must be reduced, you must figure your reduced deduction. Www.taxact.com To figure the phaseout, multiply your interest deduction (before the phaseout) by a fraction. Www.taxact.com The numerator is your MAGI minus $60,000 ($125,000 in the case of a joint return). Www.taxact.com The denominator is $15,000 ($30,000 in the case of a joint return). Www.taxact.com Subtract the result from your deduction (before the phaseout) to give you the amount you can deduct. Www.taxact.com Example 1. Www.taxact.com During 2013 you paid $800 interest on a qualified student loan. Www.taxact.com Your 2013 MAGI is $145,000 and you are filing a joint return. Www.taxact.com You must reduce your deduction by $533, figured as follows. Www.taxact.com   $800 × $145,000 − $125,000  $30,000 = $533   Your reduced student loan interest deduction is $267 ($800 − $533). Www.taxact.com Example 2. Www.taxact.com The facts are the same as in Example 1 except that you paid $2,750 interest. Www.taxact.com Your maximum deduction for 2013 is $2,500. Www.taxact.com You must reduce your maximum deduction by $1,667, figured as follows. Www.taxact.com   $2,500 × $145,000 − $125,000  $30,000 = $1,667   In this example, your reduced student loan interest deduction is $833 ($2,500 − $1,667). Www.taxact.com Which Worksheet To Use Generally, you figure the deduction using the Student Loan Interest Deduction Worksheet in the instructions for Form 1040, Form 1040A, or Form 1040NR. Www.taxact.com However, if you are filing Form 2555, Foreign Earned Income, Form 2555-EZ, Foreign Earned Income Exclusion, or Form 4563, Exclusion of Income for Bona Fide Residents of American Samoa, or you are excluding income from sources within Puerto Rico, you must complete Worksheet 4-1. Www.taxact.com Student Loan Interest Deduction Worksheet at the end of this chapter. Www.taxact.com Claiming the Deduction The student loan interest deduction is an adjustment to income. Www.taxact.com To claim the deduction, enter the allowable amount on line 33 (Form 1040), line 18 (Form 1040A), line 33 (Form 1040NR), or line 9 (Form 1040NR-EZ). Www.taxact.com Worksheet 4-1. Www.taxact.com Student Loan Interest Deduction Worksheet Use this worksheet instead of the worksheet in the Form 1040 instructions if you are filing Form 2555, 2555-EZ, or 4563, or you are excluding income from sources within Puerto Rico. Www.taxact.com Before using this worksheet, you must complete Form 1040, lines 7 through 32, plus any amount to be entered on the dotted line next to line 36. Www.taxact.com 1. Www.taxact.com Enter the total interest you paid in 2013 on qualified student loans. Www.taxact.com Do not enter  more than $2,500 1. Www.taxact.com   2. Www.taxact.com Enter the amount from Form 1040, line 22 2. Www.taxact.com       3. Www.taxact.com Enter the total of the amounts from Form 1040,  lines 23 through 32 3. Www.taxact.com           4. Www.taxact.com Enter the total of any amounts entered on the dotted line next to Form 1040, line 36 4. Www.taxact.com           5. Www.taxact.com Add lines 3 and 4 5. Www.taxact.com       6. Www.taxact.com Subtract line 5 from line 2 6. Www.taxact.com       7. Www.taxact.com Enter any foreign earned income exclusion and/or housing  exclusion (Form 2555, line 45, or Form 2555-EZ, line 18) 7. Www.taxact.com       8. Www.taxact.com Enter any foreign housing deduction (Form 2555, line 50) 8. Www.taxact.com       9. Www.taxact.com Enter the amount of income from Puerto Rico you are excluding 9. Www.taxact.com       10. Www.taxact.com Enter the amount of income from American Samoa  you are excluding (Form 4563, line 15) 10. Www.taxact.com       11. Www.taxact.com Add lines 6 through 10. Www.taxact.com This is your modified adjusted gross income 11. Www.taxact.com   12. Www.taxact.com Enter the amount shown below for your filing status 12. Www.taxact.com     •Single, head of household, or qualifying widow(er)—$60,000       •Married filing jointly—$125,000     13. Www.taxact.com Is the amount on line 11 more than the amount on line 12?       □ No. Www.taxact.com Skip lines 13 and 14, enter -0- on line 15, and go to line 16. Www.taxact.com       □ Yes. Www.taxact.com Subtract line 12 from line 11 13. Www.taxact.com   14. Www.taxact.com Divide line 13 by $15,000 ($30,000 if married filing jointly). Www.taxact.com Enter the result as a decimal  (rounded to at least three places). Www.taxact.com If the result is 1. Www.taxact.com 000 or more, enter 1. Www.taxact.com 000 14. Www.taxact.com . Www.taxact.com 15. Www.taxact.com Multiply line 1 by line 14 15. Www.taxact.com   16. Www.taxact.com Student loan interest deduction. Www.taxact.com Subtract line 15 from line 1. Www.taxact.com Enter the result here  and on Form 1040, line 33. Www.taxact.com Do not include this amount in figuring any other  deduction on your return (such as on Schedule A, C, E, etc. Www.taxact.com ) 16. Www.taxact.com   Prev  Up  Next   Home   More Online Publications
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Joint Congressional Committee on Inaugural Ceremonies

Made up of members of the House and Senate, the Joint Congressional Committee on Inaugural Ceremonies is responsible for planning and carrying out the President's swearing-in ceremony at the U.S. Capitol.

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