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1040a Instructions

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1040a Instructions

1040a instructions 16. 1040a instructions   Reporting Gains and Losses Table of Contents What's New Introduction Useful Items - You may want to see: Reporting Capital Gains and Losses Exception 1. 1040a instructions Exception 2. 1040a instructions File Form 1099-B or Form 1099-S with the IRS. 1040a instructions Capital Losses Capital Gain Tax Rates What's New Maximum capital gain rates. 1040a instructions . 1040a instructions  For 2013, the maximum capital gain rates are 0%, 15%, 20%, 25%, and 28%. 1040a instructions Introduction This chapter discusses how to report capital gains and losses from sales, exchanges, and other dispositions of investment property on Form 8949 and Schedule D (Form 1040). 1040a instructions The discussion includes the following topics. 1040a instructions How to report short-term gains and losses. 1040a instructions How to report long-term gains and losses. 1040a instructions How to figure capital loss carryovers. 1040a instructions How to figure your tax on a net capital gain. 1040a instructions If you sell or otherwise dispose of property used in a trade or business or for the production of income, see Publication 544, Sales and Other Dispositions of Assets, before completing Schedule D (Form 1040). 1040a instructions Useful Items - You may want to see: Publication 537 Installment Sales 544 Sales and Other Dispositions of Assets 550 Investment Income and Expenses Form (and Instructions) 4797 Sales of Business Property 6252 Installment Sale Income 8582 Passive Activity Loss Limitations 8949 Sales and Other Dispositions of Capital Assets Schedule D (Form 1040) Capital Gains and Losses Reporting Capital Gains and Losses Generally, report capital gains and losses on Form 8949. 1040a instructions Complete Form 8949 before you complete line 1b, 2, 3, 8b, 9, or 10 of Schedule D (Form 1040). 1040a instructions Use Form 8949 to report: The sale or exchange of a capital asset not reported on another form or schedule; Gains from involuntary conversions (other than from casualty or theft) of capital assets not held for business or profit; and Nonbusiness bad debts. 1040a instructions Use Schedule D (Form 1040): To figure the overall gain or loss from transactions reported on Form 8949; To report a gain from Form 6252 or Part I of Form 4797; To report a gain or loss from Form 4684, 6781, or 8824; To report capital gain distributions not reported directly on Form 1040 or Form 1040A; To report a capital loss carryover from the previous tax year to the current tax year; To report your share of a gain or (loss) from a partnership, S corporation, estate, or trust; To report transactions reported to you on a Form 1099-B (or substitute statement) showing basis was reported to the IRS and to which none of the Form 8949 adjustments or codes apply; and To report undistributed long-term capital gains from Form 2439. 1040a instructions On Form 8949, enter all sales and exchanges of capital assets, including stocks, bonds, etc. 1040a instructions , and real estate (if not reported on Form 4684, 4797, 6252, 6781, 8824, or line 1a or 8a of Schedule D). 1040a instructions Include these transactions even if you did not receive a Form 1099-B or 1099-S (or substitute statement) for the transaction. 1040a instructions Report short-term gains or losses in Part I. 1040a instructions Report long-term gains or losses in Part II. 1040a instructions Use as many Forms 8949 as you need. 1040a instructions Exceptions to filing Form 8949 and Schedule D (Form 1040). 1040a instructions   There are certain situations where you may not have to file Form 8949 and/or Schedule D (Form 1040). 1040a instructions Exception 1. 1040a instructions   You do not have to file Form 8949 or Schedule D (Form 1040) if you have no capital losses and your only capital gains are capital gain distributions from Form(s) 1099-DIV, box 2a (or substitute statements). 1040a instructions (If any Form(s) 1099-DIV (or substitute statements) you receive have an amount in box 2b (unrecaptured section 1250 gain), box 2c (section 1202 gain), or box 2d (collectibles (28%) gain), you do not qualify for this exception. 1040a instructions ) If you qualify for this exception, report your capital gain distributions directly on line 13 of Form 1040 (and check the box on line 13). 1040a instructions Also use the Qualified Dividends and Capital Gain Tax Worksheet in the Form 1040 instructions to figure your tax. 1040a instructions You can report your capital gain distributions on line 10 of Form 1040A, instead of on Form 1040, if none of the Forms 1099-DIV (or substitute statements) you received have an amount in box 2b, 2c, or 2d, and you do not have to file Form 1040. 1040a instructions Exception 2. 1040a instructions   You must file Schedule D (Form 1040), but generally do not have to file Form 8949, if Exception 1 does not apply and your only capital gains and losses are: Capital gain distributions; A capital loss carryover; A gain from Form 2439 or 6252 or Part I of Form 4797; A gain or loss from Form 4684, 6781, or 8824; A gain or loss from a partnership, S corporation, estate, or trust; or Gains and losses from transactions for which you received a Form 1099-B (or substitute statement) that shows the basis was reported to the IRS and for which you do not need to make any adjustments in column (g) of Form 8949 or enter any codes in column (f) of Form 8949. 1040a instructions Installment sales. 1040a instructions   You cannot use the installment method to report a gain from the sale of stock or securities traded on an established securities market. 1040a instructions You must report the entire gain in the year of sale (the year in which the trade date occurs). 1040a instructions Passive activity gains and losses. 1040a instructions    If you have gains or losses from a passive activity, you may also have to report them on Form 8582. 1040a instructions In some cases, the loss may be limited under the passive activity rules. 1040a instructions Refer to Form 8582 and its instructions for more information about reporting capital gains and losses from a passive activity. 1040a instructions Form 1099-B transactions. 1040a instructions   If you sold property, such as stocks, bonds, or certain commodities, through a broker, you should receive Form 1099-B or substitute statement from the broker. 1040a instructions Use the Form 1099-B or the substitute statement to complete Form 8949. 1040a instructions If you sold a covered security in 2013, your broker should send you a Form 1099-B (or substitute statement) that shows your basis. 1040a instructions This will help you complete Form 8949. 1040a instructions Generally, a covered security is a security you acquired after 2010. 1040a instructions   Report the gross proceeds shown in box 2a of Form 1099-B as the sales price in column (d) of either Part I or Part II of Form 8949, whichever applies. 1040a instructions However, if the broker advises you, in box 2a of Form 1099-B, that gross proceeds (sales price) less commissions and option premiums were reported to the IRS, enter that net sales price in column (d) of either Part I or Part II of Form 8949, whichever applies. 1040a instructions    Include in column (g) any expense of sale, such as broker's fees, commissions, state and local transfer taxes, and option premiums, unless you reported the net sales price in column (d). 1040a instructions If you include an expense of sale in column (g), enter “E” in column (f). 1040a instructions Form 1099-CAP transactions. 1040a instructions   If a corporation in which you own stock has had a change in control or a substantial change in capital structure, you should receive Form 1099-CAP or a substitute statement from the corporation. 1040a instructions Use the Form 1099-CAP or substitute statement to fill in Form 8949. 1040a instructions If your computations show that you would have a loss because of the change, do not enter any amounts on Form 8949 or Schedule D (Form 1040). 1040a instructions You cannot claim a loss on Schedule D (Form 1040) as a result of this transaction. 1040a instructions   Report the aggregate amount received shown in box 2 of Form 1099-CAP as the sales price in column (d) of either Part I or Part II of Form 8949, whichever applies. 1040a instructions Form 1099-S transactions. 1040a instructions   If you sold or traded reportable real estate, you generally should receive from the real estate reporting person a Form 1099-S showing the gross proceeds. 1040a instructions    “Reportable real estate” is defined as any present or future ownership interest in any of the following: Improved or unimproved land, including air space; Inherently permanent structures, including any residential, commercial, or industrial building; A condominium unit and its accessory fixtures and common elements, including land; and Stock in a cooperative housing corporation (as defined in section 216 of the Internal Revenue Code). 1040a instructions   A “real estate reporting person” could include the buyer's attorney, your attorney, the title or escrow company, a mortgage lender, your broker, the buyer's broker, or the person acquiring the biggest interest in the property. 1040a instructions   Your Form 1099-S will show the gross proceeds from the sale or exchange in box 2. 1040a instructions See the Instructions for Form 8949 and the Instructions for Schedule D (Form 1040) for how to report these transactions and include them in Part I or Part II of Form 8949 as appropriate. 1040a instructions However, report like-kind exchanges on Form 8824 instead. 1040a instructions   It is unlawful for any real estate reporting person to separately charge you for complying with the requirement to file Form 1099-S. 1040a instructions Nominees. 1040a instructions   If you receive gross proceeds as a nominee (that is, the gross proceeds are in your name but actually belong to someone else), see the Instructions for Form 8949 for how to report these amounts on Form 8949. 1040a instructions File Form 1099-B or Form 1099-S with the IRS. 1040a instructions   If you received gross proceeds as a nominee in 2013, you must file a Form 1099-B or Form 1099-S for those proceeds with the IRS. 1040a instructions Send the Form 1099-B or Form 1099-S with a Form 1096, Annual Summary and Transmittal of U. 1040a instructions S. 1040a instructions Information Returns, to your Internal Revenue Service Center by February 28, 2014 (March 31, 2014, if you file Form 1099-B or Form 1099-S electronically). 1040a instructions Give the actual owner of the proceeds Copy B of the Form 1099-B or Form 1099-S by February 18, 2014. 1040a instructions On Form 1099-B, you should be listed as the “Payer. 1040a instructions ” The other owner should be listed as the “Recipient. 1040a instructions ” On Form 1099-S, you should be listed as the “Filer. 1040a instructions ” The other owner should be listed as the “Transferor. 1040a instructions ” You do not have to file a Form 1099-B or Form 1099-S to show proceeds for your spouse. 1040a instructions For more information about the reporting requirements and the penalties for failure to file (or furnish) certain information returns, see the General Instructions for Certain Information Returns. 1040a instructions If you are filing electronically see Publication 1220. 1040a instructions Sale of property bought at various times. 1040a instructions   If you sell a block of stock or other property that you bought at various times, report the short-term gain or loss from the sale on one row in Part I of Form 8949, and the long-term gain or loss on one row in Part II of Form 8949. 1040a instructions Write “Various” in column (b) for the “Date acquired. 1040a instructions ” Sale expenses. 1040a instructions    On Form 8949, include in column (g) any expense of sale, such as broker's fees, commissions, state and local transfer taxes, and option premiums, unless you reported the net sales price in column (d). 1040a instructions If you include an expense of sale in column (g), enter “E” in column (f). 1040a instructions   For more information about adjustments to basis, see chapter 13. 1040a instructions Short-term gains and losses. 1040a instructions   Capital gain or loss on the sale or trade of investment property held 1 year or less is a short-term capital gain or loss. 1040a instructions You report it in Part I of Form 8949. 1040a instructions   You combine your share of short-term capital gain or loss from partnerships, S corporations, estates, and trusts, and any short-term capital loss carryover, with your other short-term capital gains and losses to figure your net short-term capital gain or loss on line 7 of Schedule D (Form 1040). 1040a instructions Long-term gains and losses. 1040a instructions    A capital gain or loss on the sale or trade of investment property held more than 1 year is a long-term capital gain or loss. 1040a instructions You report it in Part II of Form 8949. 1040a instructions   You report the following in Part II of Schedule D (Form 1040): Undistributed long-term capital gains from a mutual fund (or other regulated investment company) or real estate investment trust (REIT); Your share of long-term capital gains or losses from partnerships, S corporations, estates, and trusts; All capital gain distributions from mutual funds and REITs not reported directly on line 10 of Form 1040A or line 13 of Form 1040; and Long-term capital loss carryovers. 1040a instructions    The result after combining these items with your other long-term capital gains and losses is your net long-term capital gain or loss (Schedule D (Form 1040), line 15). 1040a instructions Total net gain or loss. 1040a instructions   To figure your total net gain or loss, combine your net short-term capital gain or loss (Schedule D (Form 1040), line 7) with your net long-term capital gain or loss (Schedule D (Form 1040), line 15). 1040a instructions Enter the result on Schedule D (Form 1040), Part III, line 16. 1040a instructions If your losses are more than your gains, see Capital Losses , next. 1040a instructions If both lines 15 and 16 of your Schedule D (Form 1040) are gains and your taxable income on your Form 1040 is more than zero, see Capital Gain Tax Rates , later. 1040a instructions Capital Losses If your capital losses are more than your capital gains, you can claim a capital loss deduction. 1040a instructions Report the amount of the deduction on line 13 of Form 1040, in parentheses. 1040a instructions Limit on deduction. 1040a instructions   Your allowable capital loss deduction, figured on Schedule D (Form 1040), is the lesser of: $3,000 ($1,500 if you are married and file a separate return); or Your total net loss as shown on line 16 of Schedule D (Form 1040). 1040a instructions   You can use your total net loss to reduce your income dollar for dollar, up to the $3,000 limit. 1040a instructions Capital loss carryover. 1040a instructions   If you have a total net loss on line 16 of Schedule D (Form 1040) that is more than the yearly limit on capital loss deductions, you can carry over the unused part to the next year and treat it as if you had incurred it in that next year. 1040a instructions If part of the loss is still unused, you can carry it over to later years until it is completely used up. 1040a instructions   When you figure the amount of any capital loss carryover to the next year, you must take the current year's allowable deduction into account, whether or not you claimed it and whether or not you filed a return for the current year. 1040a instructions   When you carry over a loss, it remains long term or short term. 1040a instructions A long-term capital loss you carry over to the next tax year will reduce that year's long-term capital gains before it reduces that year's short-term capital gains. 1040a instructions Figuring your carryover. 1040a instructions   The amount of your capital loss carryover is the amount of your total net loss that is more than the lesser of: Your allowable capital loss deduction for the year; or Your taxable income increased by your allowable capital loss deduction for the year and your deduction for personal exemptions. 1040a instructions   If your deductions are more than your gross income for the tax year, use your negative taxable income in computing the amount in item (2). 1040a instructions    Complete the Capital Loss Carryover Worksheet in the Instructions for Schedule D or Publication 550 to determine the part of your capital loss that you can carry over. 1040a instructions Example. 1040a instructions Bob and Gloria sold securities in 2013. 1040a instructions The sales resulted in a capital loss of $7,000. 1040a instructions They had no other capital transactions. 1040a instructions Their taxable income was $26,000. 1040a instructions On their joint 2013 return, they can deduct $3,000. 1040a instructions The unused part of the loss, $4,000 ($7,000 − $3,000), can be carried over to 2014. 1040a instructions If their capital loss had been $2,000, their capital loss deduction would have been $2,000. 1040a instructions They would have no carryover. 1040a instructions Use short-term losses first. 1040a instructions   When you figure your capital loss carryover, use your short-term capital losses first, even if you incurred them after a long-term capital loss. 1040a instructions If you have not reached the limit on the capital loss deduction after using the short-term capital losses, use the long-term capital losses until you reach the limit. 1040a instructions Decedent's capital loss. 1040a instructions    A capital loss sustained by a decedent during his or her last tax year (or carried over to that year from an earlier year) can be deducted only on the final income tax return filed for the decedent. 1040a instructions The capital loss limits discussed earlier still apply in this situation. 1040a instructions The decedent's estate cannot deduct any of the loss or carry it over to following years. 1040a instructions Joint and separate returns. 1040a instructions   If you and your spouse once filed separate returns and are now filing a joint return, combine your separate capital loss carryovers. 1040a instructions However, if you and your spouse once filed a joint return and are now filing separate returns, any capital loss carryover from the joint return can be deducted only on the return of the spouse who actually had the loss. 1040a instructions Capital Gain Tax Rates The tax rates that apply to a net capital gain are generally lower than the tax rates that apply to other income. 1040a instructions These lower rates are called the maximum capital gain rates. 1040a instructions The term “net capital gain” means the amount by which your net long-term capital gain for the year is more than your net short-term capital loss. 1040a instructions For 2013, the maximum capital gain rates are 0%, 15%, 20%, 25%, and 28%. 1040a instructions See Table 16-1 for details. 1040a instructions If you figure your tax using the maximum capital gain rate and the regular tax computation results in a lower tax, the regular tax computation applies. 1040a instructions Example. 1040a instructions All of your net capital gain is from selling collectibles, so the capital gain rate would be 28%. 1040a instructions If you are otherwise subject to a rate lower than 28%, the 28% rate does not apply. 1040a instructions Investment interest deducted. 1040a instructions   If you claim a deduction for investment interest, you may have to reduce the amount of your net capital gain that is eligible for the capital gain tax rates. 1040a instructions Reduce it by the amount of the net capital gain you choose to include in investment income when figuring the limit on your investment interest deduction. 1040a instructions This is done on the Schedule D Tax Worksheet or the Qualified Dividends and Capital Gain Tax Worksheet. 1040a instructions For more information about the limit on investment interest, see Interest Expenses in chapter 3 of Publication 550. 1040a instructions Table 16-1. 1040a instructions What Is Your Maximum Capital Gain Rate? IF your net capital gain is from . 1040a instructions . 1040a instructions . 1040a instructions THEN your  maximum capital gain rate is . 1040a instructions . 1040a instructions . 1040a instructions a collectibles gain 28% an eligible gain on qualified small business stock minus the section 1202 exclusion 28% an unrecaptured section 1250 gain 25% other gain1 and the regular tax rate that would apply is 39. 1040a instructions 6% 20% other gain1 and the regular tax rate that would apply is 25%, 28%, 33%, or 35% 15% other gain1 and the regular tax rate that would apply is 10% or 15% 0% 1 Other gain means any gain that is not collectibles gain, gain on qualified small business stock, or unrecaptured section 1250 gain. 1040a instructions     Collectibles gain or loss. 1040a instructions   This is gain or loss from the sale or trade of a work of art, rug, antique, metal (such as gold, silver, and platinum bullion), gem, stamp, coin, or alcoholic beverage held more than 1 year. 1040a instructions   Collectibles gain includes gain from sale of an interest in a partnership, S corporation, or trust due to unrealized appreciation of collectibles. 1040a instructions Gain on qualified small business stock. 1040a instructions    If you realized a gain from qualified small business stock that you held more than 5 years, you generally can exclude some or all of your gain under section 1202. 1040a instructions The eligible gain minus your section 1202 exclusion is a 28% rate gain. 1040a instructions See Gains on Qualified Small Business Stock in chapter 4 of Publication 550. 1040a instructions Unrecaptured section 1250 gain. 1040a instructions    Generally, this is any part of your capital gain from selling section 1250 property (real property) that is due to depreciation (but not more than your net section 1231 gain), reduced by any net loss in the 28% group. 1040a instructions Use the Unrecaptured Section 1250 Gain Worksheet in the Schedule D (Form 1040) instructions to figure your unrecaptured section 1250 gain. 1040a instructions For more information about section 1250 property and section 1231 gain, see chapter 3 of Publication 544. 1040a instructions Tax computation using maximum capital gain rates. 1040a instructions   Use the Qualified Dividends and Capital Gain Tax Worksheet or the Schedule D Tax Worksheet (whichever applies) to figure your tax if you have qualified dividends or net capital gain. 1040a instructions You have net capital gain if Schedule D (Form 1040), lines 15 and 16, are both gains. 1040a instructions Schedule D Tax Worksheet. 1040a instructions   Use the Schedule D Tax Worksheet in the Schedule D (Form 1040) instructions to figure your tax if: You have to file Schedule D (Form 1040); and Schedule D (Form 1040), line 18 (28% rate gain) or line 19 (unrecaptured section 1250 gain), is more than zero. 1040a instructions Qualified Dividends and Capital Gain Tax Worksheet. 1040a instructions   If you do not have to use the Schedule D Tax Worksheet (as explained above) and any of the following apply, use the Qualified Dividends and Capital Gain Tax Worksheet in the instructions for Form 1040 or Form 1040A (whichever you file) to figure your tax. 1040a instructions You received qualified dividends. 1040a instructions (See Qualified Dividends in chapter 8. 1040a instructions ) You do not have to file Schedule D (Form 1040) and you received capital gain distributions. 1040a instructions (See Exceptions to filing Form 8949 and Schedule D (Form 1040) , earlier. 1040a instructions ) Schedule D (Form 1040), lines 15 and 16, are both more than zero. 1040a instructions Alternative minimum tax. 1040a instructions   These capital gain rates are also used in figuring alternative minimum tax. 1040a instructions Prev  Up  Next   Home   More Online Publications
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Large Business and International Tax Center

The Large Business and International (LB&I) Division serves corporations, subchapter S corporations, and partnerships with assets greater than $10 million.

LB&I Programs and Resources

Abusive Tax Shelters and Transactions
The Internal Revenue Service has a comprehensive strategy in place to combat abusive tax shelters and transactions.

Coordinated Issue Papers - LB&I
Effective January 21, 2014, all LB&I coordinated issue papers are decoordinated.  See 1/21/14 Directive from LB&I Commissioner Maloy for details.

e-file for Large and Mid-Size Corporations
For tax years ending on or after December 31, 2006, corporations that have assets of $10 Million or more are required to electronically file their 1120/1102S income tax returns.  For tax years ending on or after December 31, 2007, foreign corporations with assets of $10 Million or more are required to electronically file their 1120-F income tax returns.

Industry Issue Resolution Program
The Industry Issue Resolution (IIR) Program resolves frequently disputed or burdensome tax issues. IRS solicits suggestions for issues for the program from taxpayers, representatives and associations.

LB&I Industry Director Guidance
LB&I Directives provide industry-related and administrative guidance to LB&I examiners to ensure consistent tax administration. The Directives do not establish Service position on legal issues and are not legal guidance.

Pre-Filing Agreement Program
The Pre-Filing Agreement Program is expected to reduce taxpayer burden and make more effective use of IRS resources by resolving or eliminating tax controversy earlier in the examination process.

Schedule M-3 for Reconciling Book to Tax Income
The Treasury Department and IRS are implementing Schedule M-3, “Net Income (Loss) Reconciliation for Corporations With Total Assets of $10 Million or More”.
 

Page Last Reviewed or Updated: 18-Mar-2014

The 1040a Instructions

1040a instructions 2. 1040a instructions   Simplified Employee Pensions (SEPs) Table of Contents Topics - This chapter discusses: Useful Items - You may want to see: Setting Up a SEPWhen not to use Form 5305-SEP. 1040a instructions How Much Can I Contribute?Contribution Limits Deducting ContributionsDeduction Limit for Contributions for Participants Deduction Limit for Self-Employed Individuals Carryover of Excess SEP Contributions When To Deduct Contributions Where To Deduct Contributions Salary Reduction Simplified Employee Pensions (SARSEPs)SARSEP ADP test. 1040a instructions Deferral percentage. 1040a instructions Employee compensation. 1040a instructions Compensation of self-employed individuals. 1040a instructions Choice not to treat deferrals as compensation. 1040a instructions Limit on Elective Deferrals Tax Treatment of Deferrals Distributions (Withdrawals) Additional TaxesEffects on employee. 1040a instructions Reporting and Disclosure Requirements Topics - This chapter discusses: Setting up a SEP How much can I contribute Deducting contributions Salary reduction simplified employee pensions (SARSEPs) Distributions (withdrawals) Additional taxes Reporting and disclosure requirements Useful Items - You may want to see: Publication 590 Individual Retirement Arrangements (IRAs) 3998 Choosing A Retirement Solution for Your Small Business 4285 SEP Checklist 4286 SARSEP Checklist 4333 SEP Retirement Plans for Small Businesses 4336 SARSEP for Small Businesses 4407 SARSEP—Key Issues and Assistance Forms (and Instructions) W-2 Wage and Tax Statement 1040 U. 1040a instructions S. 1040a instructions Individual Income Tax Return 5305-SEP Simplified Employee Pension—Individual Retirement Accounts Contribution Agreement 5305A-SEP Salary Reduction Simplified Employee Pension—Individual Retirement Accounts Contribution Agreement 8880 Credit for Qualified Retirement Savings Contributions 8881 Credit for Small Employer Pension Plan Startup Costs A SEP is a written plan that allows you to make contributions toward your own retirement and your employees' retirement without getting involved in a more complex qualified plan. 1040a instructions Under a SEP, you make contributions to a traditional individual retirement arrangement (called a SEP-IRA) set up by or for each eligible employee. 1040a instructions A SEP-IRA is owned and controlled by the employee, and you make contributions to the financial institution where the SEP-IRA is maintained. 1040a instructions SEP-IRAs are set up for, at a minimum, each eligible employee (defined below). 1040a instructions A SEP-IRA may have to be set up for a leased employee (defined in chapter 1), but does not need to be set up for excludable employees (defined later). 1040a instructions Eligible employee. 1040a instructions   An eligible employee is an individual who meets all the following requirements. 1040a instructions Has reached age 21. 1040a instructions Has worked for you in at least 3 of the last 5 years. 1040a instructions Has received at least $550 in compensation from you in 2013. 1040a instructions This amount remains the same in 2014. 1040a instructions    You can use less restrictive participation requirements than those listed, but not more restrictive ones. 1040a instructions Excludable employees. 1040a instructions   The following employees can be excluded from coverage under a SEP. 1040a instructions Employees covered by a union agreement and whose retirement benefits were bargained for in good faith by the employees' union and you. 1040a instructions Nonresident alien employees who have received no U. 1040a instructions S. 1040a instructions source wages, salaries, or other personal services compensation from you. 1040a instructions For more information about nonresident aliens, see Publication 519, U. 1040a instructions S. 1040a instructions Tax Guide for Aliens. 1040a instructions Setting Up a SEP There are three basic steps in setting up a SEP. 1040a instructions You must execute a formal written agreement to provide benefits to all eligible employees. 1040a instructions You must give each eligible employee certain information about the SEP. 1040a instructions A SEP-IRA must be set up by or for each eligible employee. 1040a instructions Many financial institutions will help you set up a SEP. 1040a instructions Formal written agreement. 1040a instructions   You must execute a formal written agreement to provide benefits to all eligible employees under a SEP. 1040a instructions You can satisfy the written agreement requirement by adopting an IRS model SEP using Form 5305-SEP. 1040a instructions However, see When not to use Form 5305-SEP, below. 1040a instructions   If you adopt an IRS model SEP using Form 5305-SEP, no prior IRS approval or determination letter is required. 1040a instructions Keep the original form. 1040a instructions Do not file it with the IRS. 1040a instructions Also, using Form 5305-SEP will usually relieve you from filing annual retirement plan information returns with the IRS and the Department of Labor. 1040a instructions See the Form 5305-SEP instructions for details. 1040a instructions If you choose not to use Form 5305-SEP, you should seek professional advice in adopting a SEP. 1040a instructions When not to use Form 5305-SEP. 1040a instructions   You cannot use Form 5305-SEP if any of the following apply. 1040a instructions You currently maintain any other qualified retirement plan other than another SEP. 1040a instructions You have any eligible employees for whom IRAs have not been set up. 1040a instructions You use the services of leased employees, who are not your common-law employees (as described in chapter 1). 1040a instructions You are a member of any of the following unless all eligible employees of all the members of these groups, trades, or businesses participate under the SEP. 1040a instructions An affiliated service group described in section 414(m). 1040a instructions A controlled group of corporations described in section 414(b). 1040a instructions Trades or businesses under common control described in section 414(c). 1040a instructions You do not pay the cost of the SEP contributions. 1040a instructions Information you must give to employees. 1040a instructions   You must give each eligible employee a copy of Form 5305-SEP, its instructions, and the other information listed in the Form 5305-SEP instructions. 1040a instructions An IRS model SEP is not considered adopted until you give each employee this information. 1040a instructions Setting up the employee's SEP-IRA. 1040a instructions   A SEP-IRA must be set up by or for each eligible employee. 1040a instructions SEP-IRAs can be set up with banks, insurance companies, or other qualified financial institutions. 1040a instructions You send SEP contributions to the financial institution where the SEP-IRA is maintained. 1040a instructions Deadline for setting up a SEP. 1040a instructions   You can set up a SEP for any year as late as the due date (including extensions) of your income tax return for that year. 1040a instructions Credit for startup costs. 1040a instructions   You may be able to claim a tax credit for part of the ordinary and necessary costs of starting a SEP that first became effective in 2013. 1040a instructions For more information, see Credit for startup costs under Reminders, earlier. 1040a instructions How Much Can I Contribute? The SEP rules permit you to contribute a limited amount of money each year to each employee's SEP-IRA. 1040a instructions If you are self-employed, you can contribute to your own SEP-IRA. 1040a instructions Contributions must be in the form of money (cash, check, or money order). 1040a instructions You cannot contribute property. 1040a instructions However, participants may be able to transfer or roll over certain property from one retirement plan to another. 1040a instructions See Publication 590 for more information about rollovers. 1040a instructions You do not have to make contributions every year. 1040a instructions But if you make contributions, they must be based on a written allocation formula and must not discriminate in favor of highly compensated employees (defined in chapter 1). 1040a instructions When you contribute, you must contribute to the SEP-IRAs of all participants who actually performed personal services during the year for which the contributions are made, including employees who die or terminate employment before the contributions are made. 1040a instructions Contributions are deductible within limits, as discussed later, and generally are not taxable to the plan participants. 1040a instructions A SEP-IRA cannot be a Roth IRA. 1040a instructions Employer contributions to a SEP-IRA will not affect the amount an individual can contribute to a Roth or traditional IRA. 1040a instructions Unlike regular contributions to a traditional IRA, contributions under a SEP can be made to participants over age 70½. 1040a instructions If you are self-employed, you can also make contributions under the SEP for yourself even if you are over 70½. 1040a instructions Participants age 70½ or over must take required minimum distributions. 1040a instructions Time limit for making contributions. 1040a instructions   To deduct contributions for a year, you must make the contributions by the due date (including extensions) of your tax return for the year. 1040a instructions Contribution Limits Contributions you make for 2013 to a common-law employee's SEP-IRA cannot exceed the lesser of 25% of the employee's compensation or $51,000. 1040a instructions Compensation generally does not include your contributions to the SEP. 1040a instructions The SEP plan document will specify how the employer contribution is determined and how it will be allocated to participants. 1040a instructions Example. 1040a instructions Your employee, Mary Plant, earned $21,000 for 2013. 1040a instructions The maximum contribution you can make to her SEP-IRA is $5,250 (25% x $21,000). 1040a instructions Contributions for yourself. 1040a instructions   The annual limits on your contributions to a common-law employee's SEP-IRA also apply to contributions you make to your own SEP-IRA. 1040a instructions However, special rules apply when figuring your maximum deductible contribution. 1040a instructions See Deduction Limit for Self-Employed Individuals , later. 1040a instructions Annual compensation limit. 1040a instructions   You cannot consider the part of an employee's compensation over $255,000 when figuring your contribution limit for that employee. 1040a instructions However, $51,000 is the maximum contribution for an eligible employee. 1040a instructions These limits are $260,000 and $52,000, respectively, in 2014. 1040a instructions Example. 1040a instructions Your employee, Susan Green, earned $210,000 for 2013. 1040a instructions Because of the maximum contribution limit for 2013, you can only contribute $51,000 to her SEP-IRA. 1040a instructions More than one plan. 1040a instructions   If you contribute to a defined contribution plan (defined in chapter 4), annual additions to an account are limited to the lesser of $51,000 or 100% of the participant's compensation. 1040a instructions When you figure this limit, you must add your contributions to all defined contribution plans maintained by you. 1040a instructions Because a SEP is considered a defined contribution plan for this limit, your contributions to a SEP must be added to your contributions to other defined contribution plans you maintain. 1040a instructions Tax treatment of excess contributions. 1040a instructions   Excess contributions are your contributions to an employee's SEP-IRA (or to your own SEP-IRA) for 2013 that exceed the lesser of the following amounts. 1040a instructions 25% of the employee's compensation (or, for you, 20% of your net earnings from self-employment). 1040a instructions $51,000. 1040a instructions Excess contributions are included in the employee's income for the year and are treated as contributions by the employee to his or her SEP-IRA. 1040a instructions For more information on employee tax treatment of excess contributions, see chapter 1 in Publication 590. 1040a instructions Reporting on Form W-2. 1040a instructions   Do not include SEP contributions on your employee's Form W-2 unless contributions were made under a salary reduction arrangement (discussed later). 1040a instructions Deducting Contributions Generally, you can deduct the contributions you make each year to each employee's SEP-IRA. 1040a instructions If you are self-employed, you can deduct the contributions you make each year to your own SEP-IRA. 1040a instructions Deduction Limit for Contributions for Participants The most you can deduct for your contributions to you or your employee's SEP-IRA is the lesser of the following amounts. 1040a instructions Your contributions (including any excess contributions carryover). 1040a instructions 25% of the compensation (limited to $255,000 per participant) paid to the participants during 2013 from the business that has the plan, not to exceed $51,000 per participant. 1040a instructions In 2014, the amounts in (2) above are $260,000 and $52,000, respectively. 1040a instructions Deduction Limit for Self-Employed Individuals If you contribute to your own SEP-IRA, you must make a special computation to figure your maximum deduction for these contributions. 1040a instructions When figuring the deduction for contributions made to your own SEP-IRA, compensation is your net earnings from self-employment (defined in chapter 1), which takes into account both the following deductions. 1040a instructions The deduction for the deductible part of your self-employment tax. 1040a instructions The deduction for contributions to your own SEP-IRA. 1040a instructions The deduction for contributions to your own SEP-IRA and your net earnings depend on each other. 1040a instructions For this reason, you determine the deduction for contributions to your own SEP-IRA indirectly by reducing the contribution rate called for in your plan. 1040a instructions To do this, use the Rate Table for Self-Employed or the Rate Worksheet for Self-Employed, whichever is appropriate for your plan's contribution rate, in chapter 5. 1040a instructions Then figure your maximum deduction by using the Deduction Worksheet for Self-Employed in chapter 5. 1040a instructions Carryover of Excess SEP Contributions If you made SEP contributions that are more than the deduction limit (nondeductible contributions), you can carry over and deduct the difference in later years. 1040a instructions However, the carryover, when combined with the contribution for the later year, is subject to the deduction limit for that year. 1040a instructions If you also contributed to a defined benefit plan or defined contribution plan, see Carryover of Excess Contributions under Employer Deduction in chapter 4 for the carryover limit. 1040a instructions Excise tax. 1040a instructions   If you made nondeductible (excess) contributions to a SEP, you may be subject to a 10% excise tax. 1040a instructions For information about the excise tax, see Excise Tax for Nondeductible (Excess) Contributions under Employer Deduction in chapter 4. 1040a instructions When To Deduct Contributions When you can deduct contributions made for a year depends on the tax year on which the SEP is maintained. 1040a instructions If the SEP is maintained on a calendar year basis, you deduct the yearly contributions on your tax return for the year within which the calendar year ends. 1040a instructions If you file your tax return and maintain the SEP using a fiscal year or short tax year, you deduct contributions made for a year on your tax return for that year. 1040a instructions Example. 1040a instructions You are a fiscal year taxpayer whose tax year ends June 30. 1040a instructions You maintain a SEP on a calendar year basis. 1040a instructions You deduct SEP contributions made for calendar year 2013 on your tax return for your tax year ending June 30, 2014. 1040a instructions Where To Deduct Contributions Deduct the contributions you make for your common-law employees on your tax return. 1040a instructions For example, sole proprietors deduct them on Schedule C (Form 1040) or Schedule F (Form 1040), Profit or Loss From Farming; partnerships deduct them on Form 1065, U. 1040a instructions S. 1040a instructions Return of Partnership Income; and corporations deduct them on Form 1120, U. 1040a instructions S. 1040a instructions Corporation Income Tax Return, or Form 1120S, U. 1040a instructions S. 1040a instructions Income Tax Return for an S Corporation. 1040a instructions Sole proprietors and partners deduct contributions for themselves on line 28 of Form 1040. 1040a instructions (If you are a partner, contributions for yourself are shown on the Schedule K-1 (Form 1065), Partner's Share of Income, Deductions, Credits, etc. 1040a instructions , you receive from the partnership. 1040a instructions ) Remember that sole proprietors and partners can't deduct as a business expense contributions made to a SEP for themselves, only those made for their common-law employees. 1040a instructions Salary Reduction Simplified Employee Pensions (SARSEPs) A SARSEP is a SEP set up before 1997 that includes a salary reduction arrangement. 1040a instructions (See the Caution, next. 1040a instructions ) Under a SARSEP, your employees can choose to have you contribute part of their pay to their SEP-IRAs rather than receive it in cash. 1040a instructions This contribution is called an “elective deferral” because employees choose (elect) to set aside the money, and they defer the tax on the money until it is distributed to them. 1040a instructions You are not allowed to set up a SARSEP after 1996. 1040a instructions However, participants (including employees hired after 1996) in a SARSEP set up before 1997 can continue to have you contribute part of their pay to the plan. 1040a instructions If you are interested in setting up a retirement plan that includes a salary reduction arrangement, see chapter 3. 1040a instructions Who can have a SARSEP?   A SARSEP set up before 1997 is available to you and your eligible employees only if all the following requirements are met. 1040a instructions At least 50% of your employees eligible to participate choose to make elective deferrals. 1040a instructions You have 25 or fewer employees who were eligible to participate in the SEP at any time during the preceding year. 1040a instructions The elective deferrals of your highly compensated employees meet the SARSEP ADP test. 1040a instructions SARSEP ADP test. 1040a instructions   Under the SARSEP ADP test, the amount deferred each year by each eligible highly compensated employee as a percentage of pay (the deferral percentage) cannot be more than 125% of the average deferral percentage (ADP) of all non-highly compensated employees eligible to participate. 1040a instructions A highly compensated employee is defined in chapter 1. 1040a instructions Deferral percentage. 1040a instructions   The deferral percentage for an employee for a year is figured as follows. 1040a instructions   The elective employer contributions (excluding certain catch-up contributions)  paid to the SEP for the employee for the year     The employee's compensation (limited to $255,000 in 2013)   The instructions for Form 5305A-SEP have a worksheet you can use to determine whether the elective deferrals of your highly compensated employees meet the SARSEP ADP test. 1040a instructions Employee compensation. 1040a instructions   For figuring the deferral percentage, compensation is generally the amount you pay to the employee for the year. 1040a instructions Compensation includes the elective deferral and other amounts deferred in certain employee benefit plans. 1040a instructions See Compensation in chapter 1. 1040a instructions Elective deferrals under the SARSEP are included in figuring your employees' deferral percentage even though they are not included in the income of your employees for income tax purposes. 1040a instructions Compensation of self-employed individuals. 1040a instructions   If you are self-employed, compensation is your net earnings from self-employment as defined in chapter 1. 1040a instructions   Compensation does not include tax-free items (or deductions related to them) other than foreign earned income and housing cost amounts. 1040a instructions Choice not to treat deferrals as compensation. 1040a instructions   You can choose not to treat elective deferrals (and other amounts deferred in certain employee benefit plans) for a year as compensation under your SARSEP. 1040a instructions Limit on Elective Deferrals The most a participant can choose to defer for calendar year 2013 is the lesser of the following amounts. 1040a instructions 25% of the participant's compensation (limited to $255,000 of the participant's compensation). 1040a instructions $17,500. 1040a instructions The $17,500 limit applies to the total elective deferrals the employee makes for the year to a SEP and any of the following. 1040a instructions Cash or deferred arrangement (section 401(k) plan). 1040a instructions Salary reduction arrangement under a tax-sheltered annuity plan (section 403(b) plan). 1040a instructions SIMPLE IRA plan. 1040a instructions In 2014, the $255,000 limit increases to $260,000 and the $17,500 limit remains at $17,500. 1040a instructions Catch-up contributions. 1040a instructions   A SARSEP can permit participants who are age 50 or over at the end of the calendar year to also make catch-up contributions. 1040a instructions The catch-up contribution limit for 2013 is $5,500 and remains at $5,500 for 2014. 1040a instructions Elective deferrals are not treated as catch-up contributions for 2013 until they exceed the elective deferral limit (the lesser of 25% of compensation or $17,500), the SARSEP ADP test limit discussed earlier, or the plan limit (if any). 1040a instructions However, the catch-up contribution a participant can make for a year cannot exceed the lesser of the following amounts. 1040a instructions The catch-up contribution limit. 1040a instructions The excess of the participant's compensation over the elective deferrals that are not catch-up contributions. 1040a instructions   Catch-up contributions are not subject to the elective deferral limit (the lesser of 25% of compensation or $17,500 in 2013 and in 2014). 1040a instructions Overall limit on SEP contributions. 1040a instructions   If you also make nonelective contributions to a SEP-IRA, the total of the nonelective and elective contributions to that SEP-IRA cannot exceed the lesser of 25% of the employee's compensation or $51,000 for 2013 ($52,000 for 2014). 1040a instructions The same rule applies to contributions you make to your own SEP-IRA. 1040a instructions See Contribution Limits , earlier. 1040a instructions Figuring the elective deferral. 1040a instructions   For figuring the 25% limit on elective deferrals, compensation does not include SEP contributions, including elective deferrals or other amounts deferred in certain employee benefit plans. 1040a instructions Tax Treatment of Deferrals Elective deferrals that are not more than the limits discussed earlier under Limit on Elective Deferrals are excluded from your employees' wages subject to federal income tax in the year of deferral. 1040a instructions However, these deferrals are included in wages for social security, Medicare, and federal unemployment (FUTA) tax. 1040a instructions Excess deferrals. 1040a instructions   For 2013, excess deferrals are the elective deferrals for the year that are more than the $17,500 limit discussed earlier. 1040a instructions For a participant who is eligible to make catch-up contributions, excess deferrals are the elective deferrals that are more than $23,000. 1040a instructions The treatment of excess deferrals made under a SARSEP is similar to the treatment of excess deferrals made under a qualified plan. 1040a instructions See Treatment of Excess Deferrals under Elective Deferrals (401(k) Plans) in chapter 4. 1040a instructions Excess SEP contributions. 1040a instructions   Excess SEP contributions are elective deferrals of highly compensated employees that are more than the amount permitted under the SARSEP ADP test. 1040a instructions You must notify your highly compensated employees within 2½ months after the end of the plan year of their excess SEP contributions. 1040a instructions If you do not notify them within this time period, you must pay a 10% tax on the excess. 1040a instructions For an explanation of the notification requirements, see Rev. 1040a instructions Proc. 1040a instructions 91-44, 1991-2 C. 1040a instructions B. 1040a instructions 733. 1040a instructions If you adopted a SARSEP using Form 5305A-SEP, the notification requirements are explained in the instructions for that form. 1040a instructions Reporting on Form W-2. 1040a instructions   Do not include elective deferrals in the “Wages, tips, other compensation” box of Form W-2. 1040a instructions You must, however, include them in the “Social security wages” and “Medicare wages and tips” boxes. 1040a instructions You must also include them in box 12. 1040a instructions Mark the “Retirement plan” checkbox in box 13. 1040a instructions For more information, see the Form W-2 instructions. 1040a instructions Distributions (Withdrawals) As an employer, you cannot prohibit distributions from a SEP-IRA. 1040a instructions Also, you cannot make your contributions on the condition that any part of them must be kept in the account after you have made your contributions to the employee's accounts. 1040a instructions Distributions are subject to IRA rules. 1040a instructions Generally, you or your employee must begin to receive distributions from a SEP-IRA by April 1 of the first year after the calendar year in which you or your employee reaches age 70½. 1040a instructions For more information about IRA rules, including the tax treatment of distributions, rollovers, required distributions, and income tax withholding, see Publication 590. 1040a instructions Additional Taxes The tax advantages of using SEP-IRAs for retirement savings can be offset by additional taxes that may be imposed for all the following actions. 1040a instructions Making excess contributions. 1040a instructions Making early withdrawals. 1040a instructions Not making required withdrawals. 1040a instructions For information about these taxes, see chapter 1 in Publication 590. 1040a instructions Also, a SEP-IRA may be disqualified, or an excise tax may apply, if the account is involved in a prohibited transaction, discussed next. 1040a instructions Prohibited transaction. 1040a instructions   If an employee improperly uses his or her SEP-IRA, such as by borrowing money from it, the employee has engaged in a prohibited transaction. 1040a instructions In that case, the SEP-IRA will no longer qualify as an IRA. 1040a instructions For a list of prohibited transactions, see Prohibited Transactions in chapter 4. 1040a instructions Effects on employee. 1040a instructions   If a SEP-IRA is disqualified because of a prohibited transaction, the assets in the account will be treated as having been distributed to the employee on the first day of the year in which the transaction occurred. 1040a instructions The employee must include in income the fair market value of the assets (on the first day of the year) that is more than any cost basis in the account. 1040a instructions Also, the employee may have to pay the additional tax for making early withdrawals. 1040a instructions Reporting and Disclosure Requirements If you set up a SEP using Form 5305-SEP, you must give your eligible employees certain information about the SEP when you set it up. 1040a instructions See Setting Up a SEP , earlier. 1040a instructions Also, you must give your eligible employees a statement each year showing any contributions to their SEP-IRAs. 1040a instructions You must also give them notice of any excess contributions. 1040a instructions For details about other information you must give them, see the instructions for Form 5305-SEP or Form 5305A-SEP (for a salary reduction SEP). 1040a instructions Even if you did not use Form 5305-SEP or Form 5305A-SEP to set up your SEP, you must give your employees information similar to that described above. 1040a instructions For more information, see the instructions for either Form 5305-SEP or Form 5305A-SEP. 1040a instructions Prev  Up  Next   Home   More Online Publications