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1040x Efile

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1040x Efile

1040x efile 1. 1040x efile   Travel Table of Contents Traveling Away From HomeTax Home Tax Home Different From Family Home Temporary Assignment or Job What Travel Expenses Are Deductible?Employee. 1040x efile Business associate. 1040x efile Bona fide business purpose. 1040x efile Meals Travel in the United States Travel Outside the United States Luxury Water Travel Conventions If you temporarily travel away from your tax home, you can use this chapter to determine if you have deductible travel expenses. 1040x efile This chapter discusses: Traveling away from home, Temporary assignment or job, and What travel expenses are deductible. 1040x efile It also discusses the standard meal allowance, rules for travel inside and outside the United States, luxury water travel, and deductible convention expenses. 1040x efile Travel expenses defined. 1040x efile   For tax purposes, travel expenses are the ordinary and necessary expenses of traveling away from home for your business, profession, or job. 1040x efile   An ordinary expense is one that is common and accepted in your trade or business. 1040x efile A necessary expense is one that is helpful and appropriate for your business. 1040x efile An expense does not have to be required to be considered necessary. 1040x efile   You will find examples of deductible travel expenses in Table 1-1 , later. 1040x efile Traveling Away From Home You are traveling away from home if: Your duties require you to be away from the general area of your tax home (defined later) substantially longer than an ordinary day's work, and You need to sleep or rest to meet the demands of your work while away from home. 1040x efile This rest requirement is not satisfied by merely napping in your car. 1040x efile You do not have to be away from your tax home for a whole day or from dusk to dawn as long as your relief from duty is long enough to get necessary sleep or rest. 1040x efile Example 1. 1040x efile You are a railroad conductor. 1040x efile You leave your home terminal on a regularly scheduled round-trip run between two cities and return home 16 hours later. 1040x efile During the run, you have 6 hours off at your turnaround point where you eat two meals and rent a hotel room to get necessary sleep before starting the return trip. 1040x efile You are considered to be away from home. 1040x efile Example 2. 1040x efile You are a truck driver. 1040x efile You leave your terminal and return to it later the same day. 1040x efile You get an hour off at your turnaround point to eat. 1040x efile Because you are not off to get necessary sleep and the brief time off is not an adequate rest period, you are not traveling away from home. 1040x efile Members of the Armed Forces. 1040x efile   If you are a member of the U. 1040x efile S. 1040x efile Armed Forces on a permanent duty assignment overseas, you are not traveling away from home. 1040x efile You cannot deduct your expenses for meals and lodging. 1040x efile You cannot deduct these expenses even if you have to maintain a home in the United States for your family members who are not allowed to accompany you overseas. 1040x efile If you are transferred from one permanent duty station to another, you may have deductible moving expenses, which are explained in Publication 521, Moving Expenses. 1040x efile   A naval officer assigned to permanent duty aboard a ship that has regular eating and living facilities has a tax home (explained next) aboard the ship for travel expense purposes. 1040x efile Tax Home To determine whether you are traveling away from home, you must first determine the location of your tax home. 1040x efile Generally, your tax home is your regular place of business or post of duty, regardless of where you maintain your family home. 1040x efile It includes the entire city or general area in which your business or work is located. 1040x efile If you have more than one regular place of business, your tax home is your main place of business. 1040x efile See Main place of business or work , later. 1040x efile If you do not have a regular or a main place of business because of the nature of your work, then your tax home may be the place where you regularly live. 1040x efile See No main place of business or work , later. 1040x efile If you do not have a regular or main place of business or post of duty and there is no place where you regularly live, you are considered an itinerant (a transient) and your tax home is wherever you work. 1040x efile As an itinerant, you cannot claim a travel expense deduction because you are never considered to be traveling away from home. 1040x efile Main place of business or work. 1040x efile   If you have more than one place of work, consider the following when determining which one is your main place of business or work. 1040x efile The total time you ordinarily spend in each place. 1040x efile The level of your business activity in each place. 1040x efile Whether your income from each place is significant or insignificant. 1040x efile Example. 1040x efile You live in Cincinnati where you have a seasonal job for 8 months each year and earn $40,000. 1040x efile You work the other 4 months in Miami, also at a seasonal job, and earn $15,000. 1040x efile Cincinnati is your main place of work because you spend most of your time there and earn most of your income there. 1040x efile No main place of business or work. 1040x efile   You may have a tax home even if you do not have a regular or main place of work. 1040x efile Your tax home may be the home where you regularly live. 1040x efile Factors used to determine tax home. 1040x efile   If you do not have a regular or main place of business or work, use the following three factors to determine where your tax home is. 1040x efile You perform part of your business in the area of your main home and use that home for lodging while doing business in the area. 1040x efile You have living expenses at your main home that you duplicate because your business requires you to be away from that home. 1040x efile You have not abandoned the area in which both your historical place of lodging and your claimed main home are located; you have a member or members of your family living at your main home; or you often use that home for lodging. 1040x efile   If you satisfy all three factors, your tax home is the home where you regularly live. 1040x efile If you satisfy only two factors, you may have a tax home depending on all the facts and circumstances. 1040x efile If you satisfy only one factor, you are an itinerant; your tax home is wherever you work and you cannot deduct travel expenses. 1040x efile Example 1. 1040x efile You are single and live in Boston in an apartment you rent. 1040x efile You have worked for your employer in Boston for a number of years. 1040x efile Your employer enrolls you in a 12-month executive training program. 1040x efile You do not expect to return to work in Boston after you complete your training. 1040x efile During your training, you do not do any work in Boston. 1040x efile Instead, you receive classroom and on-the-job training throughout the United States. 1040x efile You keep your apartment in Boston and return to it frequently. 1040x efile You use your apartment to conduct your personal business. 1040x efile You also keep up your community contacts in Boston. 1040x efile When you complete your training, you are transferred to Los Angeles. 1040x efile You do not satisfy factor (1) because you did not work in Boston. 1040x efile You satisfy factor (2) because you had duplicate living expenses. 1040x efile You also satisfy factor (3) because you did not abandon your apartment in Boston as your main home, you kept your community contacts, and you frequently returned to live in your apartment. 1040x efile Therefore, you have a tax home in Boston. 1040x efile Example 2. 1040x efile You are an outside salesperson with a sales territory covering several states. 1040x efile Your employer's main office is in Newark, but you do not conduct any business there. 1040x efile Your work assignments are temporary, and you have no way of knowing where your future assignments will be located. 1040x efile You have a room in your married sister's house in Dayton. 1040x efile You stay there for one or two weekends a year, but you do no work in the area. 1040x efile You do not pay your sister for the use of the room. 1040x efile You do not satisfy any of the three factors listed earlier. 1040x efile You are an itinerant and have no tax home. 1040x efile Tax Home Different From Family Home If you (and your family) do not live at your tax home (defined earlier), you cannot deduct the cost of traveling between your tax home and your family home. 1040x efile You also cannot deduct the cost of meals and lodging while at your tax home. 1040x efile See Example 1 , later. 1040x efile If you are working temporarily in the same city where you and your family live, you may be considered as traveling away from home. 1040x efile See Example 2 , later. 1040x efile Example 1. 1040x efile You are a truck driver and you and your family live in Tucson. 1040x efile You are employed by a trucking firm that has its terminal in Phoenix. 1040x efile At the end of your long runs, you return to your home terminal in Phoenix and spend one night there before returning home. 1040x efile You cannot deduct any expenses you have for meals and lodging in Phoenix or the cost of traveling from Phoenix to Tucson. 1040x efile This is because Phoenix is your tax home. 1040x efile Example 2. 1040x efile Your family home is in Pittsburgh, where you work 12 weeks a year. 1040x efile The rest of the year you work for the same employer in Baltimore. 1040x efile In Baltimore, you eat in restaurants and sleep in a rooming house. 1040x efile Your salary is the same whether you are in Pittsburgh or Baltimore. 1040x efile Because you spend most of your working time and earn most of your salary in Baltimore, that city is your tax home. 1040x efile You cannot deduct any expenses you have for meals and lodging there. 1040x efile However, when you return to work in Pittsburgh, you are away from your tax home even though you stay at your family home. 1040x efile You can deduct the cost of your round trip between Baltimore and Pittsburgh. 1040x efile You can also deduct your part of your family's living expenses for meals and lodging while you are living and working in Pittsburgh. 1040x efile Temporary Assignment or Job You may regularly work at your tax home and also work at another location. 1040x efile It may not be practical to return to your tax home from this other location at the end of each work day. 1040x efile Temporary assignment vs. 1040x efile indefinite assignment. 1040x efile   If your assignment or job away from your main place of work is temporary, your tax home does not change. 1040x efile You are considered to be away from home for the whole period you are away from your main place of work. 1040x efile You can deduct your travel expenses if they otherwise qualify for deduction. 1040x efile Generally, a temporary assignment in a single location is one that is realistically expected to last (and does in fact last) for 1 year or less. 1040x efile    However, if your assignment or job is indefinite, the location of the assignment or job becomes your new tax home and you cannot deduct your travel expenses while there. 1040x efile An assignment or job in a single location is considered indefinite if it is realistically expected to last for more than 1 year, whether or not it actually lasts for more than 1 year. 1040x efile   If your assignment is indefinite, you must include in your income any amounts you receive from your employer for living expenses, even if they are called travel allowances and you account to your employer for them. 1040x efile You may be able to deduct the cost of relocating to your new tax home as a moving expense. 1040x efile See Publication 521 for more information. 1040x efile Exception for federal crime investigations or prosecutions. 1040x efile   If you are a federal employee participating in a federal crime investigation or prosecution, you are not subject to the 1-year rule. 1040x efile This means you may be able to deduct travel expenses even if you are away from your tax home for more than 1 year provided you meet the other requirements for deductibility. 1040x efile   For you to qualify, the Attorney General (or his or her designee) must certify that you are traveling: For the federal government, In a temporary duty status, and To investigate, prosecute, or provide support services for the investigation or prosecution of a federal crime. 1040x efile Determining temporary or indefinite. 1040x efile   You must determine whether your assignment is temporary or indefinite when you start work. 1040x efile If you expect an assignment or job to last for 1 year or less, it is temporary unless there are facts and circumstances that indicate otherwise. 1040x efile An assignment or job that is initially temporary may become indefinite due to changed circumstances. 1040x efile A series of assignments to the same location, all for short periods but that together cover a long period, may be considered an indefinite assignment. 1040x efile   The following examples illustrate whether an assignment or job is temporary or indefinite. 1040x efile Example 1. 1040x efile You are a construction worker. 1040x efile You live and regularly work in Los Angeles. 1040x efile You are a member of a trade union in Los Angeles that helps you get work in the Los Angeles area. 1040x efile Your tax home is Los Angeles. 1040x efile Because of a shortage of work, you took a job on a construction project in Fresno. 1040x efile Your job was scheduled to end in 8 months. 1040x efile The job actually lasted 10 months. 1040x efile You realistically expected the job in Fresno to last 8 months. 1040x efile The job actually did last less than 1 year. 1040x efile The job is temporary and your tax home is still in Los Angeles. 1040x efile Example 2. 1040x efile The facts are the same as in Example 1, except that you realistically expected the work in Fresno to last 18 months. 1040x efile The job actually was completed in 10 months. 1040x efile Your job in Fresno is indefinite because you realistically expected the work to last longer than 1 year, even though it actually lasted less than 1 year. 1040x efile You cannot deduct any travel expenses you had in Fresno because Fresno became your tax home. 1040x efile Example 3. 1040x efile The facts are the same as in Example 1, except that you realistically expected the work in Fresno to last 9 months. 1040x efile After 8 months, however, you were asked to remain for 7 more months (for a total actual stay of 15 months). 1040x efile Initially, you realistically expected the job in Fresno to last for only 9 months. 1040x efile However, due to changed circumstances occurring after 8 months, it was no longer realistic for you to expect that the job in Fresno would last for 1 year or less. 1040x efile You can only deduct your travel expenses for the first 8 months. 1040x efile You cannot deduct any travel expenses you had after that time because Fresno became your tax home when the job became indefinite. 1040x efile Going home on days off. 1040x efile   If you go back to your tax home from a temporary assignment on your days off, you are not considered away from home while you are in your hometown. 1040x efile You cannot deduct the cost of your meals and lodging there. 1040x efile However, you can deduct your travel expenses, including meals and lodging, while traveling between your temporary place of work and your tax home. 1040x efile You can claim these expenses up to the amount it would have cost you to stay at your temporary place of work. 1040x efile   If you keep your hotel room during your visit home, you can deduct the cost of your hotel room. 1040x efile In addition, you can deduct your expenses of returning home up to the amount you would have spent for meals had you stayed at your temporary place of work. 1040x efile Probationary work period. 1040x efile   If you take a job that requires you to move, with the understanding that you will keep the job if your work is satisfactory during a probationary period, the job is indefinite. 1040x efile You cannot deduct any of your expenses for meals and lodging during the probationary period. 1040x efile What Travel Expenses Are Deductible? Once you have determined that you are traveling away from your tax home, you can determine what travel expenses are deductible. 1040x efile You can deduct ordinary and necessary expenses you have when you travel away from home on business. 1040x efile The type of expense you can deduct depends on the facts and your circumstances. 1040x efile Table 1-1 summarizes travel expenses you may be able to deduct. 1040x efile You may have other deductible travel expenses that are not covered there, depending on the facts and your circumstances. 1040x efile When you travel away from home on business, you should keep records of all the expenses you have and any advances you receive from your employer. 1040x efile You can use a log, diary, notebook, or any other written record to keep track of your expenses. 1040x efile The types of expenses you need to record, along with supporting documentation, are described in Table 5-1 (see chapter 5). 1040x efile Separating costs. 1040x efile   If you have one expense that includes the costs of meals, entertainment, and other services (such as lodging or transportation), you must allocate that expense between the cost of meals and entertainment and the cost of other services. 1040x efile You must have a reasonable basis for making this allocation. 1040x efile For example, you must allocate your expenses if a hotel includes one or more meals in its room charge. 1040x efile Travel expenses for another individual. 1040x efile    If a spouse, dependent, or other individual goes with you (or your employee) on a business trip or to a business convention, you generally cannot deduct his or her travel expenses. 1040x efile Employee. 1040x efile   You can deduct the travel expenses of someone who goes with you if that person: Is your employee, Has a bona fide business purpose for the travel, and Would otherwise be allowed to deduct the travel expenses. 1040x efile Business associate. 1040x efile   If a business associate travels with you and meets the conditions in (2) and (3), earlier, you can deduct the travel expenses you have for that person. 1040x efile A business associate is someone with whom you could reasonably expect to actively conduct business. 1040x efile A business associate can be a current or prospective (likely to become) customer, client, supplier, employee, agent, partner, or professional advisor. 1040x efile Bona fide business purpose. 1040x efile   A bona fide business purpose exists if you can prove a real business purpose for the individual's presence. 1040x efile Incidental services, such as typing notes or assisting in entertaining customers, are not enough to make the expenses deductible. 1040x efile Table 1-1. 1040x efile Travel Expenses You Can Deduct   This chart summarizes expenses you can deduct when you travel away from home for business purposes. 1040x efile IF you have expenses for. 1040x efile . 1040x efile . 1040x efile THEN you can deduct the cost of. 1040x efile . 1040x efile . 1040x efile transportation travel by airplane, train, bus, or car between your home and your business destination. 1040x efile If you were provided with a free ticket or you are riding free as a result of a frequent traveler or similar program, your cost is zero. 1040x efile If you travel by ship, see Luxury Water Travel and Cruise Ships (under Conventions) for additional rules and limits. 1040x efile taxi, commuter bus, and airport limousine fares for these and other types of transportation that take you between: The airport or station and your hotel, and The hotel and the work location of your customers or clients, your business meeting place, or your temporary work location. 1040x efile baggage and shipping sending baggage and sample or display material between your regular and temporary work locations. 1040x efile car operating and maintaining your car when traveling away from home on business. 1040x efile You can deduct actual expenses or the standard mileage rate, as well as business-related tolls and parking. 1040x efile If you rent a car while away from home on business, you can deduct only the business-use portion of the expenses. 1040x efile lodging and meals your lodging and meals if your business trip is overnight or long enough that you need to stop for sleep or rest to properly perform your duties. 1040x efile Meals include amounts spent for food, beverages, taxes, and related tips. 1040x efile See Meals for additional rules and limits. 1040x efile cleaning dry cleaning and laundry. 1040x efile telephone business calls while on your business trip. 1040x efile This includes business communication by fax machine or other communication devices. 1040x efile tips tips you pay for any expenses in this chart. 1040x efile other other similar ordinary and necessary expenses related to your business travel. 1040x efile These expenses might include transportation to or from a business meal, public stenographer's fees, computer rental fees, and operating and maintaining a house trailer. 1040x efile Example. 1040x efile Jerry drives to Chicago on business and takes his wife, Linda, with him. 1040x efile Linda is not Jerry's employee. 1040x efile Linda occasionally types notes, performs similar services, and accompanies Jerry to luncheons and dinners. 1040x efile The performance of these services does not establish that her presence on the trip is necessary to the conduct of Jerry's business. 1040x efile Her expenses are not deductible. 1040x efile Jerry pays $199 a day for a double room. 1040x efile A single room costs $149 a day. 1040x efile He can deduct the total cost of driving his car to and from Chicago, but only $149 a day for his hotel room. 1040x efile If he uses public transportation, he can deduct only his fare. 1040x efile Meals You can deduct the cost of meals in either of the following situations. 1040x efile It is necessary for you to stop for substantial sleep or rest to properly perform your duties while traveling away from home on business. 1040x efile The meal is business-related entertainment. 1040x efile Business-related entertainment is discussed in chapter 2 . 1040x efile The following discussion deals only with meals that are not business-related entertainment. 1040x efile Lavish or extravagant. 1040x efile   You cannot deduct expenses for meals that are lavish or extravagant. 1040x efile An expense is not considered lavish or extravagant if it is reasonable based on the facts and circumstances. 1040x efile Expenses will not be disallowed merely because they are more than a fixed dollar amount or take place at deluxe restaurants, hotels, nightclubs, or resorts. 1040x efile 50% limit on meals. 1040x efile   You can figure your meals expense using either of the following methods. 1040x efile Actual cost. 1040x efile The standard meal allowance. 1040x efile Both of these methods are explained below. 1040x efile But, regardless of the method you use, you generally can deduct only 50% of the unreimbursed cost of your meals. 1040x efile   If you are reimbursed for the cost of your meals, how you apply the 50% limit depends on whether your employer's reimbursement plan was accountable or nonaccountable. 1040x efile If you are not reimbursed, the 50% limit applies whether the unreimbursed meal expense is for business travel or business entertainment. 1040x efile Chapter 2 discusses the 50% Limit in more detail, and chapter 6 discusses accountable and nonaccountable plans. 1040x efile Actual Cost You can use the actual cost of your meals to figure the amount of your expense before reimbursement and application of the 50% deduction limit. 1040x efile If you use this method, you must keep records of your actual cost. 1040x efile Standard Meal Allowance Generally, you can use the “standard meal allowance” method as an alternative to the actual cost method. 1040x efile It allows you to use a set amount for your daily meals and incidental expenses (M&IE), instead of keeping records of your actual costs. 1040x efile The set amount varies depending on where and when you travel. 1040x efile In this publication, “standard meal allowance” refers to the federal rate for M&IE, discussed later under Amount of standard meal allowance . 1040x efile If you use the standard meal allowance, you still must keep records to prove the time, place, and business purpose of your travel. 1040x efile See the recordkeeping rules for travel in chapter 5 . 1040x efile Incidental expenses. 1040x efile   The term “incidental expenses” means fees and tips given to porters, baggage carriers, hotel staff, and staff on ships. 1040x efile   Incidental expenses do not include expenses for laundry, cleaning and pressing of clothing, lodging taxes, costs of telegrams or telephone calls, transportation between places of lodging or business and places where meals are taken, or the mailing cost of filing travel vouchers and paying employer-sponsored charge card billings. 1040x efile Incidental-expenses-only method. 1040x efile   You can use an optional method (instead of actual cost) for deducting incidental expenses only. 1040x efile The amount of the deduction is $5 a day. 1040x efile You can use this method only if you did not pay or incur any meal expenses. 1040x efile You cannot use this method on any day that you use the standard meal allowance. 1040x efile This method is subject to the proration rules for partial days. 1040x efile See Travel for days you depart and return , later in this chapter. 1040x efile Note. 1040x efile The incidental-expenses-only method is not subject to the 50% limit discussed below. 1040x efile Federal employees should refer to the Federal Travel Regulations at www. 1040x efile gsa. 1040x efile gov. 1040x efile Find the “Most Requested Links” on the upper left and click on “Regulations: FAR, FMR, FTR” for Federal Travel Regulation (FTR) for changes affecting claims for reimbursement. 1040x efile 50% limit may apply. 1040x efile   If you use the standard meal allowance method for meal expenses and you are not reimbursed or you are reimbursed under a nonaccountable plan, you can generally deduct only 50% of the standard meal allowance. 1040x efile If you are reimbursed under an accountable plan and you are deducting amounts that are more than your reimbursements, you can deduct only 50% of the excess amount. 1040x efile The 50% limit is discussed in more detail in chapter 2, and accountable and nonaccountable plans are discussed in chapter 6. 1040x efile There is no optional standard lodging amount similar to the standard meal allowance. 1040x efile Your allowable lodging expense deduction is your actual cost. 1040x efile Who can use the standard meal allowance. 1040x efile   You can use the standard meal allowance whether you are an employee or self-employed, and whether or not you are reimbursed for your traveling expenses. 1040x efile Use of the standard meal allowance for other travel. 1040x efile   You can use the standard meal allowance to figure your meal expenses when you travel in connection with investment and other income-producing property. 1040x efile You can also use it to figure your meal expenses when you travel for qualifying educational purposes. 1040x efile You cannot use the standard meal allowance to figure the cost of your meals when you travel for medical or charitable purposes. 1040x efile Amount of standard meal allowance. 1040x efile   The standard meal allowance is the federal M&IE rate. 1040x efile For travel in 2013, the rate for most small localities in the United States is $46 a day. 1040x efile    Most major cities and many other localities in the United States are designated as high-cost areas, qualifying for higher standard meal allowances. 1040x efile    You can find this information (organized by state) on the Internet at www. 1040x efile gsa. 1040x efile gov/perdiem. 1040x efile Enter a zip code or select a city and state for the per diem rates for the current fiscal year. 1040x efile Per diem rates for prior fiscal years are available by using the drop down menu under “Search by State. 1040x efile ”   Per diem rates are listed by the Federal government's fiscal year which runs from October 1 to September 30. 1040x efile You can choose to use the rates from the 2013 fiscal year per diem tables or the rates from the 2014 fiscal year tables, but you must consistently use the same tables for all travel you are reporting on your income tax return for the year. 1040x efile   If you travel to more than one location in one day, use the rate in effect for the area where you stop for sleep or rest. 1040x efile If you work in the transportation industry, however, see Special rate for transportation workers , later. 1040x efile Standard meal allowance for areas outside the continental United States. 1040x efile   The standard meal allowance rates above do not apply to travel in Alaska, Hawaii, or any other location outside the continental United States. 1040x efile The Department of Defense establishes per diem rates for Alaska, Hawaii, Puerto Rico, American Samoa, Guam, Midway, the Northern Mariana Islands, the U. 1040x efile S. 1040x efile Virgin Islands, Wake Island, and other non-foreign areas outside the continental United States. 1040x efile The Department of State establishes per diem rates for all other foreign areas. 1040x efile    You can access per diem rates for non-foreign areas outside the continental United States at: www. 1040x efile defensetravel. 1040x efile dod. 1040x efile mil/site/perdiemCalc. 1040x efile cfm. 1040x efile You can access all other foreign per diem rates at: www. 1040x efile state. 1040x efile gov/travel/. 1040x efile Click on “Travel Per Diem Allowances for Foreign Areas,” under “Foreign Per Diem Rates” to obtain the latest foreign per diem rates. 1040x efile Special rate for transportation workers. 1040x efile   You can use a special standard meal allowance if you work in the transportation industry. 1040x efile You are in the transportation industry if your work: Directly involves moving people or goods by airplane, barge, bus, ship, train, or truck, and Regularly requires you to travel away from home and, during any single trip, usually involves travel to areas eligible for different standard meal allowance rates. 1040x efile If this applies to you, you can claim a standard meal allowance of $59 a day ($65 for travel outside the continental United States). 1040x efile   Using the special rate for transportation workers eliminates the need for you to determine the standard meal allowance for every area where you stop for sleep or rest. 1040x efile If you choose to use the special rate for any trip, you must use the special rate (and not use the regular standard meal allowance rates) for all trips you take that year. 1040x efile Travel for days you depart and return. 1040x efile   For both the day you depart for and the day you return from a business trip, you must prorate the standard meal allowance (figure a reduced amount for each day). 1040x efile You can do so by one of two methods. 1040x efile Method 1: You can claim 3/4 of the standard meal allowance. 1040x efile Method 2: You can prorate using any method that you consistently apply and that is in accordance with reasonable business practice. 1040x efile Example. 1040x efile Jen is employed in New Orleans as a convention planner. 1040x efile In March, her employer sent her on a 3-day trip to Washington, DC, to attend a planning seminar. 1040x efile She left her home in New Orleans at 10 a. 1040x efile m. 1040x efile on Wednesday and arrived in Washington, DC, at 5:30 p. 1040x efile m. 1040x efile After spending two nights there, she flew back to New Orleans on Friday and arrived back home at 8:00 p. 1040x efile m. 1040x efile Jen's employer gave her a flat amount to cover her expenses and included it with her wages. 1040x efile Under Method 1, Jen can claim 2½ days of the standard meal allowance for Washington, DC: 3/4 of the daily rate for Wednesday and Friday (the days she departed and returned), and the full daily rate for Thursday. 1040x efile Under Method 2, Jen could also use any method that she applies consistently and that is in accordance with reasonable business practice. 1040x efile For example, she could claim 3 days of the standard meal allowance even though a federal employee would have to use Method 1 and be limited to only 2½ days. 1040x efile Travel in the United States The following discussion applies to travel in the United States. 1040x efile For this purpose, the United States includes the 50 states and the District of Columbia. 1040x efile The treatment of your travel expenses depends on how much of your trip was business related and on how much of your trip occurred within the United States. 1040x efile See Part of Trip Outside the United States , later. 1040x efile Trip Primarily for Business You can deduct all of your travel expenses if your trip was entirely business related. 1040x efile If your trip was primarily for business and, while at your business destination, you extended your stay for a vacation, made a personal side trip, or had other personal activities, you can deduct only your business-related travel expenses. 1040x efile These expenses include the travel costs of getting to and from your business destination and any business-related expenses at your business destination. 1040x efile Example. 1040x efile You work in Atlanta and take a business trip to New Orleans in May. 1040x efile Your business travel totals 850 miles round trip. 1040x efile On your way, you stop in Mobile to visit your parents. 1040x efile You spend $2,120 for the 9 days you are away from home for travel, meals, lodging, and other travel expenses. 1040x efile If you had not stopped in Mobile, you would have been gone only 6 days, and your total cost would have been $1,820. 1040x efile You can deduct $1,820 for your trip, including the cost of round-trip transportation to and from New Orleans. 1040x efile The deduction for your meals is subject to the 50% limit on meals mentioned earlier. 1040x efile Trip Primarily for Personal Reasons If your trip was primarily for personal reasons, such as a vacation, the entire cost of the trip is a nondeductible personal expense. 1040x efile However, you can deduct any expenses you have while at your destination that are directly related to your business. 1040x efile A trip to a resort or on a cruise ship may be a vacation even if the promoter advertises that it is primarily for business. 1040x efile The scheduling of incidental business activities during a trip, such as viewing videotapes or attending lectures dealing with general subjects, will not change what is really a vacation into a business trip. 1040x efile Part of Trip Outside the United States If part of your trip is outside the United States, use the rules described later in this chapter under Travel Outside the United States for that part of the trip. 1040x efile For the part of your trip that is inside the United States, use the rules for travel in the United States. 1040x efile Travel outside the United States does not include travel from one point in the United States to another point in the United States. 1040x efile The following discussion can help you determine whether your trip was entirely within the United States. 1040x efile Public transportation. 1040x efile   If you travel by public transportation, any place in the United States where that vehicle makes a scheduled stop is a point in the United States. 1040x efile Once the vehicle leaves the last scheduled stop in the United States on its way to a point outside the United States, you apply the rules under Travel Outside the United States . 1040x efile Example. 1040x efile You fly from New York to Puerto Rico with a scheduled stop in Miami. 1040x efile You return to New York nonstop. 1040x efile The flight from New York to Miami is in the United States, so only the flight from Miami to Puerto Rico is outside the United States. 1040x efile Because there are no scheduled stops between Puerto Rico and New York, all of the return trip is outside the United States. 1040x efile Private car. 1040x efile   Travel by private car in the United States is travel between points in the United States, even though you are on your way to a destination outside the United States. 1040x efile Example. 1040x efile You travel by car from Denver to Mexico City and return. 1040x efile Your travel from Denver to the border and from the border back to Denver is travel in the United States, and the rules in this section apply. 1040x efile The rules under Travel Outside the United States apply to your trip from the border to Mexico City and back to the border. 1040x efile Travel Outside the United States If any part of your business travel is outside the United States, some of your deductions for the cost of getting to and from your destination may be limited. 1040x efile For this purpose, the United States includes the 50 states and the District of Columbia. 1040x efile How much of your travel expenses you can deduct depends in part upon how much of your trip outside the United States was business related. 1040x efile Travel Entirely for Business or Considered Entirely for Business You can deduct all your travel expenses of getting to and from your business destination if your trip is entirely for business or considered entirely for business. 1040x efile Travel entirely for business. 1040x efile   If you travel outside the United States and you spend the entire time on business activities, you can deduct all of your travel expenses. 1040x efile Travel considered entirely for business. 1040x efile   Even if you did not spend your entire time on business activities, your trip is considered entirely for business if you meet at least one of the following four exceptions. 1040x efile Exception 1 - No substantial control. 1040x efile   Your trip is considered entirely for business if you did not have substantial control over arranging the trip. 1040x efile The fact that you control the timing of your trip does not, by itself, mean that you have substantial control over arranging your trip. 1040x efile   You do not have substantial control over your trip if you: Are an employee who was reimbursed or paid a travel expense allowance, and Are not related to your employer, or Are not a managing executive. 1040x efile    “Related to your employer” is defined later in chapter 6 under Per Diem and Car Allowances . 1040x efile   A “managing executive” is an employee who has the authority and responsibility, without being subject to the veto of another, to decide on the need for the business travel. 1040x efile   A self-employed person generally has substantial control over arranging business trips. 1040x efile Exception 2 - Outside United States no more than a week. 1040x efile   Your trip is considered entirely for business if you were outside the United States for a week or less, combining business and nonbusiness activities. 1040x efile One week means 7 consecutive days. 1040x efile In counting the days, do not count the day you leave the United States, but do count the day you return to the United States. 1040x efile Example. 1040x efile You traveled to Brussels primarily for business. 1040x efile You left Denver on Tuesday and flew to New York. 1040x efile On Wednesday, you flew from New York to Brussels, arriving the next morning. 1040x efile On Thursday and Friday, you had business discussions, and from Saturday until Tuesday, you were sightseeing. 1040x efile You flew back to New York, arriving Wednesday afternoon. 1040x efile On Thursday, you flew back to Denver. 1040x efile Although you were away from your home in Denver for more than a week, you were not outside the United States for more than a week. 1040x efile This is because the day you depart does not count as a day outside the United States. 1040x efile You can deduct your cost of the round-trip flight between Denver and Brussels. 1040x efile You can also deduct the cost of your stay in Brussels for Thursday and Friday while you conducted business. 1040x efile However, you cannot deduct the cost of your stay in Brussels from Saturday through Tuesday because those days were spent on nonbusiness activities. 1040x efile Exception 3 - Less than 25% of time on personal activities. 1040x efile   Your trip is considered entirely for business if: You were outside the United States for more than a week, and You spent less than 25% of the total time you were outside the United States on nonbusiness activities. 1040x efile For this purpose, count both the day your trip began and the day it ended. 1040x efile Example. 1040x efile You flew from Seattle to Tokyo, where you spent 14 days on business and 5 days on personal matters. 1040x efile You then flew back to Seattle. 1040x efile You spent 1 day flying in each direction. 1040x efile Because only 5/21 (less than 25%) of your total time abroad was for nonbusiness activities, you can deduct as travel expenses what it would have cost you to make the trip if you had not engaged in any nonbusiness activity. 1040x efile The amount you can deduct is the cost of the round-trip plane fare and 16 days of meals (subject to the 50% limit), lodging, and other related expenses. 1040x efile Exception 4 - Vacation not a major consideration. 1040x efile   Your trip is considered entirely for business if you can establish that a personal vacation was not a major consideration, even if you have substantial control over arranging the trip. 1040x efile Travel Primarily for Business If you travel outside the United States primarily for business but spend some of your time on other activities, you generally cannot deduct all of your travel expenses. 1040x efile You can only deduct the business portion of your cost of getting to and from your destination. 1040x efile You must allocate the costs between your business and other activities to determine your deductible amount. 1040x efile See Travel allocation rules , later. 1040x efile You do not have to allocate your travel expenses if you meet one of the four exceptions listed earlier under Travel considered entirely for business . 1040x efile In those cases, you can deduct the total cost of getting to and from your destination. 1040x efile Travel allocation rules. 1040x efile   If your trip outside the United States was primarily for business, you must allocate your travel time on a day-to-day basis between business days and nonbusiness days. 1040x efile The days you depart from and return to the United States are both counted as days outside the United States. 1040x efile   To figure the deductible amount of your round-trip travel expenses, use the following fraction. 1040x efile The numerator (top number) is the total number of business days outside the United States. 1040x efile The denominator (bottom number) is the total number of business and nonbusiness days of travel. 1040x efile Counting business days. 1040x efile   Your business days include transportation days, days your presence was required, days you spent on business, and certain weekends and holidays. 1040x efile Transportation day. 1040x efile   Count as a business day any day you spend traveling to or from a business destination. 1040x efile However, if because of a nonbusiness activity you do not travel by a direct route, your business days are the days it would take you to travel a reasonably direct route to your business destination. 1040x efile Extra days for side trips or nonbusiness activities cannot be counted as business days. 1040x efile Presence required. 1040x efile   Count as a business day any day your presence is required at a particular place for a specific business purpose. 1040x efile Count it as a business day even if you spend most of the day on nonbusiness activities. 1040x efile Day spent on business. 1040x efile   If your principal activity during working hours is the pursuit of your trade or business, count the day as a business day. 1040x efile Also, count as a business day any day you are prevented from working because of circumstances beyond your control. 1040x efile Certain weekends and holidays. 1040x efile   Count weekends, holidays, and other necessary standby days as business days if they fall between business days. 1040x efile But if they follow your business meetings or activity and you remain at your business destination for nonbusiness or personal reasons, do not count them as business days. 1040x efile Example 1. 1040x efile Your tax home is New York City. 1040x efile You travel to Quebec, where you have a business appointment on Friday. 1040x efile You have another appointment on the following Monday. 1040x efile Because your presence was required on both Friday and Monday, they are business days. 1040x efile Because the weekend is between business days, Saturday and Sunday are counted as business days. 1040x efile This is true even though you use the weekend for sightseeing, visiting friends, or other nonbusiness activity. 1040x efile Example 2. 1040x efile If, in Example 1, you had no business in Quebec after Friday, but stayed until Monday before starting home, Saturday and Sunday would be nonbusiness days. 1040x efile Nonbusiness activity on the way to or from your business destination. 1040x efile   If you stopped for a vacation or other nonbusiness activity either on the way from the United States to your business destination, or on the way back to the United States from your business destination, you must allocate part of your travel expenses to the nonbusiness activity. 1040x efile   The part you must allocate is the amount it would have cost you to travel between the point where travel outside the United States begins and your nonbusiness destination and a return to the point where travel outside the United States ends. 1040x efile   You determine the nonbusiness portion of that expense by multiplying it by a fraction. 1040x efile The numerator (top number) of the fraction is the number of nonbusiness days during your travel outside the United States and the denominator (bottom number) is the total number of days you spend outside the United States. 1040x efile Example. 1040x efile You live in New York. 1040x efile On May 4 you flew to Paris to attend a business conference that began on May 5. 1040x efile The conference ended at noon on May 14. 1040x efile That evening you flew to Dublin where you visited with friends until the afternoon of May 21, when you flew directly home to New York. 1040x efile The primary purpose for the trip was to attend the conference. 1040x efile If you had not stopped in Dublin, you would have arrived home the evening of May 14. 1040x efile You do not meet any of the exceptions that would allow you to consider your travel entirely for business. 1040x efile May 4 through May 14 (11 days) are business days and May 15 through May 21 (7 days) are nonbusiness days. 1040x efile You can deduct the cost of your meals (subject to the 50% limit), lodging, and other business-related travel expenses while in Paris. 1040x efile You cannot deduct your expenses while in Dublin. 1040x efile You also cannot deduct 7/18 of what it would have cost you to travel round-trip between New York and Dublin. 1040x efile You paid $750 to fly from New York to Paris, $400 to fly from Paris to Dublin, and $700 to fly from Dublin back to New York. 1040x efile Round-trip airfare from New York to Dublin would have been $1,250. 1040x efile You figure the deductible part of your air travel expenses by subtracting 7/18 of the round-trip fare and other expenses you would have had in traveling directly between New York and Dublin ($1,250 × 7/18 = $486) from your total expenses in traveling from New York to Paris to Dublin and back to New York ($750 + $400 + $700 = $1,850). 1040x efile Your deductible air travel expense is $1,364 ($1,850 − $486). 1040x efile Nonbusiness activity at, near, or beyond business destination. 1040x efile   If you had a vacation or other nonbusiness activity at, near, or beyond your business destination, you must allocate part of your travel expenses to the nonbusiness activity. 1040x efile   The part you must allocate is the amount it would have cost you to travel between the point where travel outside the United States begins and your business destination and a return to the point where travel outside the United States ends. 1040x efile   You determine the nonbusiness portion of that expense by multiplying it by a fraction. 1040x efile The numerator (top number) of the fraction is the number of nonbusiness days during your travel outside the United States and the denominator (bottom number) is the total number of days you spend outside the United States. 1040x efile   None of your travel expenses for nonbusiness activities at, near, or beyond your business destination are deductible. 1040x efile Example. 1040x efile Assume that the dates are the same as in the previous example but that instead of going to Dublin for your vacation, you fly to Venice, Italy, for a vacation. 1040x efile You cannot deduct any part of the cost of your trip from Paris to Venice and return to Paris. 1040x efile In addition, you cannot deduct 7/18 of the airfare and other expenses from New York to Paris and back to New York. 1040x efile You can deduct 11/18 of the round-trip plane fare and other travel expenses from New York to Paris, plus your meals (subject to the 50% limit), lodging, and any other business expenses you had in Paris. 1040x efile (Assume these expenses total $4,939. 1040x efile ) If the round-trip plane fare and other travel-related expenses (such as food during the trip) are $1,750, you can deduct travel costs of $1,069 (11/18 × $1,750), plus the full $4,939 for the expenses you had in Paris. 1040x efile Other methods. 1040x efile   You can use another method of counting business days if you establish that it more clearly reflects the time spent on other than business activities outside the United States. 1040x efile Travel Primarily for Personal Reasons If you travel outside the United States primarily for vacation or for investment purposes, the entire cost of the trip is a nondeductible personal expense. 1040x efile However, if you spend some time attending brief professional seminars or a continuing education program, you can deduct your registration fees and other expenses you have that are directly related to your business. 1040x efile Example. 1040x efile The university from which you graduated has a continuing education program for members of its alumni association. 1040x efile This program consists of trips to various foreign countries where academic exercises and conferences are set up to acquaint individuals in most occupations with selected facilities in several regions of the world. 1040x efile However, none of the conferences are directed toward specific occupations or professions. 1040x efile It is up to each participant to seek out specialists and organizational settings appropriate to his or her occupational interests. 1040x efile Three-hour sessions are held each day over a 5-day period at each of the selected overseas facilities where participants can meet with individual practitioners. 1040x efile These sessions are composed of a variety of activities including workshops, mini-lectures, role playing, skill development, and exercises. 1040x efile Professional conference directors schedule and conduct the sessions. 1040x efile Participants can choose those sessions they wish to attend. 1040x efile You can participate in this program since you are a member of the alumni association. 1040x efile You and your family take one of the trips. 1040x efile You spend about 2 hours at each of the planned sessions. 1040x efile The rest of the time you go touring and sightseeing with your family. 1040x efile The trip lasts less than 1 week. 1040x efile Your travel expenses for the trip are not deductible since the trip was primarily a vacation. 1040x efile However, registration fees and any other incidental expenses you have for the five planned sessions you attended that are directly related and beneficial to your business are deductible business expenses. 1040x efile These expenses should be specifically stated in your records to ensure proper allocation of your deductible business expenses. 1040x efile Luxury Water Travel If you travel by ocean liner, cruise ship, or other form of luxury water transportation for business purposes, there is a daily limit on the amount you can deduct. 1040x efile The limit is twice the highest federal per diem rate allowable at the time of your travel. 1040x efile (Generally, the federal per diem is the amount paid to federal government employees for daily living expenses when they travel away from home, but in the United States, for business purposes. 1040x efile ) Daily limit on luxury water travel. 1040x efile   The highest federal per diem rate allowed and the daily limit for luxury water travel in 2013 is shown in the following table. 1040x efile   2013 Dates Highest Federal Per Diem Daily Limit on Luxury Water Travel   Jan. 1040x efile 1 – Mar. 1040x efile 31 $367 $734   Apr. 1040x efile 1 – June 30 312 624   July 1 – Aug. 1040x efile 31 310 620   Sept. 1040x efile 1 – Sept. 1040x efile 30 366 732   Oct. 1040x efile 1 – Dec. 1040x efile 31 374 748 Example. 1040x efile Caroline, a travel agent, traveled by ocean liner from New York to London, England, on business in May. 1040x efile Her expense for the 6-day cruise was $5,200. 1040x efile Caroline's deduction for the cruise cannot exceed $3,744 (6 days × $624 daily limit). 1040x efile Meals and entertainment. 1040x efile   If your expenses for luxury water travel include separately stated amounts for meals or entertainment, those amounts are subject to the 50% limit on meals and entertainment before you apply the daily limit. 1040x efile For a discussion of the 50% Limit , see chapter 2. 1040x efile Example. 1040x efile In the previous example, Caroline's luxury water travel had a total cost of $5,200. 1040x efile Of that amount, $3,700 was separately stated as meals and entertainment. 1040x efile Caroline, who is self-employed, is not reimbursed for any of her travel expenses. 1040x efile Caroline figures her deductible travel expenses as follows. 1040x efile Meals and entertainment $3,700   50% limit × . 1040x efile 50   Allowable meals &     entertainment $1,850   Other travel expenses + 1,800   Allowable cost before the daily limit $3,650 Daily limit for May 2013 $624   Times number of days × 6   Maximum luxury water travel     deduction $3,744 Amount of allowable deduction $3,650 Caroline's deduction for her cruise is limited to $3,650, even though the limit on luxury water travel is slightly higher. 1040x efile Not separately stated. 1040x efile   If your meal or entertainment charges are not separately stated or are not clearly identifiable, you do not have to allocate any portion of the total charge to meals or entertainment. 1040x efile Exceptions The daily limit on luxury water travel (discussed earlier) does not apply to expenses you have to attend a convention, seminar, or meeting on board a cruise ship. 1040x efile See Cruise Ships under Conventions. 1040x efile Conventions You can deduct your travel expenses when you attend a convention if you can show that your attendance benefits your trade or business. 1040x efile You cannot deduct the travel expenses for your family. 1040x efile If the convention is for investment, political, social, or other purposes unrelated to your trade or business, you cannot deduct the expenses. 1040x efile Your appointment or election as a delegate does not, in itself, determine whether you can deduct travel expenses. 1040x efile You can deduct your travel expenses only if your attendance is connected to your own trade or business. 1040x efile Convention agenda. 1040x efile   The convention agenda or program generally shows the purpose of the convention. 1040x efile You can show your attendance at the convention benefits your trade or business by comparing the agenda with the official duties and responsibilities of your position. 1040x efile The agenda does not have to deal specifically with your official duties and responsibilities; it will be enough if the agenda is so related to your position that it shows your attendance was for business purposes. 1040x efile Conventions Held Outside the North American Area You cannot deduct expenses for attending a convention, seminar, or similar meeting held outside the North American area unless: The meeting is directly related to your trade or business, and It is reasonable to hold the meeting outside the North American area. 1040x efile See Reasonableness test , later. 1040x efile If the meeting meets these requirements, you also must satisfy the rules for deducting expenses for business trips in general, discussed earlier under Travel Outside the United States . 1040x efile North American area. 1040x efile   The North American area includes the following locations. 1040x efile American Samoa Johnston Island Antigua and Barbuda Kingman Reef Aruba Marshall Islands Bahamas Mexico Baker Island Micronesia Barbados Midway Islands Bermuda Netherlands Antilles Canada Northern Mariana Costa Rica Islands Dominica Palau Dominican Republic Palmyra Atoll Grenada Panama Guam Puerto Rico Guyana Trinidad and Tobago Honduras USA Howland Island U. 1040x efile S. 1040x efile Virgin Islands Jamaica Wake Island Jarvis Island   The North American area also includes U. 1040x efile S. 1040x efile islands, cays, and reefs that are possessions of the United States and not part of the fifty states or the District of Columbia. 1040x efile Reasonableness test. 1040x efile   The following factors are taken into account to determine if it was reasonable to hold the meeting outside the North American area. 1040x efile The purpose of the meeting and the activities taking place at the meeting. 1040x efile The purposes and activities of the sponsoring organizations or groups. 1040x efile The homes of the active members of the sponsoring organizations and the places at which other meetings of the sponsoring organizations or groups have been or will be held. 1040x efile Other relevant factors you may present. 1040x efile Cruise Ships You can deduct up to $2,000 per year of your expenses of attending conventions, seminars, or similar meetings held on cruise ships. 1040x efile All ships that sail are considered cruise ships. 1040x efile You can deduct these expenses only if all of the following requirements are met. 1040x efile The convention, seminar, or meeting is directly related to your trade or business. 1040x efile The cruise ship is a vessel registered in the United States. 1040x efile All of the cruise ship's ports of call are in the United States or in possessions of the United States. 1040x efile You attach to your return a written statement signed by you that includes information about: The total days of the trip (not including the days of transportation to and from the cruise ship port), The number of hours each day that you devoted to scheduled business activities, and A program of the scheduled business activities of the meeting. 1040x efile You attach to your return a written statement signed by an officer of the organization or group sponsoring the meeting that includes: A schedule of the business activities of each day of the meeting, and The number of hours you attended the scheduled business activities. 1040x efile Prev  Up  Next   Home   More Online Publications
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Is Appeals the Place for You?

Appeals is the place for you if ALL of the following apply:  

  • You received a letter from the IRS explaining your right to appeal the IRS’s decision.
  • You do not agree with the IRS’s decision.
  • You are not signing an agreement form sent to you.

If all of the above are true, then you may be ready to request an Appeals conference or hearing.

Appeals is not for you if ANY of the following apply:

  • The correspondence you received from the IRS was a bill and there was no mention of Appeals.
  • You did not provide all information to support your position to the examiner during the audit.
  • Your only concern is that you cannot afford to pay the amount you owe.

If you cannot identify the requirements or if you do not meet the conditions for having your case enter the Appeals process as explained above, contact the IRS employee you have been working with or call Taxpayer Service for assistance at 1-800-829-1040.

Alternative Dispute Resolution

Appeals offers mediation programs that can expedite the resolution of disputed issues.

Page Last Reviewed or Updated: 14-Jan-2014

The 1040x Efile

1040x efile 6. 1040x efile   Basis of Assets Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Cost BasisReal Property Allocating the Basis Uniform Capitalization Rules Adjusted BasisIncreases to Basis Decreases to Basis Basis Other Than CostTaxable Exchanges Involuntary Conversions Nontaxable Exchanges Property Received as a Gift Property Transferred From a Spouse Inherited Property Property Distributed From a Partnership or Corporation Introduction Your basis is the amount of your investment in property for tax purposes. 1040x efile Use basis to figure the gain or loss on the sale, exchange, or other disposition of property. 1040x efile Also use basis to figure depreciation, amortization, depletion, and casualty losses. 1040x efile If you use property for both business or investment purposes and for personal purposes, you must allocate the basis based on the use. 1040x efile Only the basis allocated to the business or investment use of the property can be depreciated. 1040x efile Your original basis in property is adjusted (increased or decreased) by certain events. 1040x efile For example, if you make improvements to the property, increase your basis. 1040x efile If you take deductions for depreciation, or casualty losses, or claim certain credits, reduce your basis. 1040x efile Keep accurate records of all items that affect the basis of your assets. 1040x efile For information on keeping records, see chapter 1. 1040x efile Topics - This chapter discusses: Cost basis Adjusted basis Basis other than cost Useful Items - You may want to see: Publication 535 Business Expenses 544 Sales and Other Dispositions of Assets 551 Basis of Assets 946 How To Depreciate Property See chapter 16 for information about getting publications and forms. 1040x efile Cost Basis The basis of property you buy is usually its cost. 1040x efile Cost is the amount you pay in cash, debt obligations, other property, or services. 1040x efile Your cost includes amounts you pay for sales tax, freight, installation, and testing. 1040x efile The basis of real estate and business assets will include other items, discussed later. 1040x efile Basis generally does not include interest payments. 1040x efile However, see Carrying charges and Capitalized interest in chapter 4 of Publication 535. 1040x efile You also may have to capitalize (add to basis) certain other costs related to buying or producing property. 1040x efile Under the uniform capitalization rules, discussed later, you may have to capitalize direct costs and certain indirect costs of producing property. 1040x efile Loans with low or no interest. 1040x efile   If you buy property on a time-payment plan that charges little or no interest, the basis of your property is your stated purchase price minus the amount considered to be unstated interest. 1040x efile You generally have unstated interest if your interest rate is less than the applicable federal rate. 1040x efile See the discussion of unstated interest in Publication 537, Installment Sales. 1040x efile Real Property Real property, also called real estate, is land and generally anything built on, growing on, or attached to land. 1040x efile If you buy real property, certain fees and other expenses you pay are part of your cost basis in the property. 1040x efile Some of these expenses are discussed next. 1040x efile Lump sum purchase. 1040x efile   If you buy improvements, such as buildings, and the land on which they stand for a lump sum, allocate your cost basis between the land and improvements. 1040x efile Allocate the cost basis according to the respective fair market values (FMVs) of the land and improvements at the time of purchase. 1040x efile Figure the basis of each asset by multiplying the lump sum by a fraction. 1040x efile The numerator is the FMV of that asset and the denominator is the FMV of the whole property at the time of purchase. 1040x efile Fair market value (FMV). 1040x efile   FMV is the price at which property would change hands between a willing buyer and a willing seller, neither having to buy or sell, and both having reasonable knowledge of all necessary facts. 1040x efile Sales of similar property on or about the same date may help in figuring the FMV of the property. 1040x efile If you are not certain of the FMV of the land and improvements, you can allocate the basis according to their assessed values for real estate tax purposes. 1040x efile Real estate taxes. 1040x efile   If you pay the real estate taxes the seller owed on real property you bought, and the seller did not reimburse you, treat those taxes as part of your basis. 1040x efile   If you reimburse the seller for taxes the seller paid for you, you generally can deduct that amount as a tax expense. 1040x efile Whether or not you reimburse the seller, do not include that amount in the basis of your property. 1040x efile Settlement costs. 1040x efile   Your basis includes the settlement fees and closing costs for buying the property. 1040x efile See Publication 551 for a detailed list of items you can and cannot include in basis. 1040x efile   Do not include fees and costs for getting a loan on the property. 1040x efile Also, do not include amounts placed in escrow for the future payment of items such as taxes and insurance. 1040x efile Points. 1040x efile   If you pay points to get a loan (including a mortgage, second mortgage, or line-of-credit), do not add the points to the basis of the related property. 1040x efile You may be able to deduct the points currently or over the term of the loan. 1040x efile For more information about deducting points, see Points in chapter 4 of Publication 535. 1040x efile Assumption of a mortgage. 1040x efile   If you buy property and assume (or buy the property subject to) an existing mortgage, your basis includes the amount you pay for the property plus the amount you owe on the mortgage. 1040x efile Example. 1040x efile If you buy a farm for $100,000 cash and assume a mortgage of $400,000, your basis is $500,000. 1040x efile Constructing assets. 1040x efile   If you build property or have assets built for you, your expenses for this construction are part of your basis. 1040x efile Some of these expenses include the following costs: Land, Labor and materials, Architect's fees, Building permit charges, Payments to contractors, Payments for rental equipment, and Inspection fees. 1040x efile   In addition, if you use your own employees, farm materials, and equipment to build an asset, do not deduct the following expenses. 1040x efile You must capitalize them (include them in the asset's basis). 1040x efile Employee wages paid for the construction work, reduced by any employment credits allowed. 1040x efile Depreciation on equipment you own while it is used in the construction. 1040x efile Operating and maintenance costs for equipment used in the construction. 1040x efile The cost of business supplies and materials used in the construction. 1040x efile    Do not include the value of your own labor, or any other labor you did not pay for, in the basis of any property you construct. 1040x efile Allocating the Basis In some instances, the rules for determining basis apply to a group of assets acquired in the same transaction or to property that consists of separate items. 1040x efile To determine the basis of these assets or separate items, there must be an allocation of basis. 1040x efile Group of assets acquired. 1040x efile   If you buy multiple assets for a lump sum, allocate the amount you pay among the assets. 1040x efile Use this allocation to figure your basis for depreciation and gain or loss on a later disposition of any of these assets. 1040x efile You and the seller may agree in the sales contract to a specific allocation of the purchase price among the assets. 1040x efile If this allocation is based on the value of each asset and you and the seller have adverse tax interests, the allocation generally will be accepted. 1040x efile Farming business acquired. 1040x efile   If you buy a group of assets that makes up a farming business, there are special rules you must use to allocate the purchase price among the assets. 1040x efile Generally, reduce the purchase price by any cash received. 1040x efile Allocate the remaining purchase price to the other business assets received in proportion to (but not more than) their FMV and in a certain order. 1040x efile See Trade or Business Acquired under Allocating the Basis in Publication 551 for more information. 1040x efile Transplanted embryo. 1040x efile   If you buy a cow that is pregnant with a transplanted embryo, allocate to the basis of the cow the part of the purchase price equal to the FMV of the cow without the implant. 1040x efile Allocate the rest of the purchase price to the basis of the calf. 1040x efile Neither the cost allocated to the cow nor the cost allocated to the calf is deductible as a current business expense. 1040x efile Uniform Capitalization Rules Under the uniform capitalization rules, you must include certain direct and indirect costs in the basis of property you produce or in your inventory costs, rather than claim them as a current deduction. 1040x efile You recover these costs through depreciation, amortization, or cost of goods sold when you use, sell, or otherwise dispose of the property. 1040x efile Generally, you are subject to the uniform capitalization rules if you do any of the following: Produce real or tangible personal property, or Acquire property for resale. 1040x efile However, this rule does not apply to personal property if your average annual gross receipts for the 3-tax-year period ending with the year preceding the current tax year are $10 million or less. 1040x efile You produce property if you construct, build, install, manufacture, develop, improve, or create the property. 1040x efile You are not subject to the uniform capitalization rules if the property is produced for personal use. 1040x efile In a farming business, you produce property if you raise or grow any agricultural or horticultural commodity, including plants and animals. 1040x efile Plants. 1040x efile   A plant produced in a farming business includes the following items: A fruit, nut, or other crop-bearing tree; An ornamental tree; A vine; A bush; Sod; and The crop or yield of a plant that will have more than one crop or yield. 1040x efile Animals. 1040x efile   An animal produced in a farming business includes any stock, poultry or other bird, and fish or other sea life. 1040x efile The direct and indirect costs of producing plants or animals include preparatory costs and preproductive period costs. 1040x efile Preparatory costs include the acquisition costs of the seed, seedling, plant, or animal. 1040x efile For plants, preproductive period costs include the costs of items such as irrigation, pruning, frost protection, spraying, and harvesting. 1040x efile For animals, preproductive period costs include the costs of items such as feed, maintaining pasture or pen areas, breeding, veterinary services, and bedding. 1040x efile Exceptions. 1040x efile   In a farming business, the uniform capitalization rules do not apply to: Any animal, Any plant with a preproductive period of 2 years or less, or Any costs of replanting certain plants lost or damaged due to casualty. 1040x efile   Exceptions (1) and (2) do not apply to a corporation, partnership, or tax shelter required to use an accrual method of accounting. 1040x efile See Accrual Method Required under Accounting Methods in chapter 2. 1040x efile   In addition, you can elect not to use the uniform capitalization rules for plants with a preproductive period of more than 2 years. 1040x efile If you make this election, special rules apply. 1040x efile This election cannot be made by a corporation, partnership, or tax shelter required to use an accrual method of accounting. 1040x efile This election also does not apply to any costs incurred for the planting, cultivation, maintenance, or development of any citrus or almond grove (or any part thereof) within the first 4 years the trees were planted. 1040x efile    If you elect not to use the uniform capitalization rules, you must use the alternative depreciation system for all property used in any of your farming businesses and placed in service in any tax year during which the election is in effect. 1040x efile See chapter 7, for additional information on depreciation. 1040x efile Example. 1040x efile You grow trees that have a preproductive period of more than 2 years. 1040x efile The trees produce an annual crop. 1040x efile You are an individual and the uniform capitalization rules apply to your farming business. 1040x efile You must capitalize the direct costs and an allocable part of indirect costs incurred due to the production of the trees. 1040x efile You are not required to capitalize the costs of producing the annual crop because its preproductive period is 2 years or less. 1040x efile Preproductive period of more than 2 years. 1040x efile   The preproductive period of plants grown in commercial quantities in the United States is based on their nationwide weighted average preproductive period. 1040x efile Plants producing the crops or yields shown in Table 6-1 have a nationwide weighted average preproductive period of more than 2 years. 1040x efile Other plants (not shown in Table 6-1) may also have a nationwide weighted average preproductive period of more than 2 years. 1040x efile More information. 1040x efile   For more information on the uniform capitalization rules that apply to property produced in a farming business, see Regulations section 1. 1040x efile 263A-4. 1040x efile Table 6-1. 1040x efile Plants With a Preproductive Period of More Than 2 Years Plants producing the following crops or yields have a nationwide weighted average preproductive period of more than 2 years. 1040x efile Almonds Apples Apricots Avocados Blueberries Cherries Chestnuts Coffee beans Currants Dates Figs Grapefruit Grapes Guavas Kiwifruit Kumquats Lemons Limes Macadamia nuts Mangoes Nectarines Olives Oranges Peaches Pears Pecans Persimmons Pistachio nuts Plums Pomegranates Prunes Tangelos Tangerines Tangors Walnuts Adjusted Basis Before figuring gain or loss on a sale, exchange, or other disposition of property or figuring allowable depreciation, depletion, or amortization, you must usually make certain adjustments to the cost basis or basis other than cost (discussed later) of the property. 1040x efile The adjustments to the original basis are increases or decreases to the cost basis or other basis which result in the adjusted basis of the property. 1040x efile Increases to Basis Increase the basis of any property by all items properly added to a capital account. 1040x efile These include the cost of any improvements having a useful life of more than 1 year. 1040x efile The following costs increase the basis of property. 1040x efile The cost of extending utility service lines to property. 1040x efile Legal fees, such as the cost of defending and perfecting title. 1040x efile Legal fees for seeking a decrease in an assessment levied against property to pay for local improvements. 1040x efile Assessments for items such as paving roads and building ditches that increase the value of the property assessed. 1040x efile Do not deduct these expenses as taxes. 1040x efile However, you can deduct as taxes amounts assessed for maintenance or repairs, or for meeting interest charges related to the improvements. 1040x efile If you make additions or improvements to business property, depreciate the basis of each addition or improvement as separate depreciable property using the rules that would apply to the original property if you had placed it in service at the same time you placed the addition or improvement in service. 1040x efile See chapter 7. 1040x efile Deducting vs. 1040x efile capitalizing costs. 1040x efile   Do not add to your basis costs you can deduct as current expenses. 1040x efile For example, amounts paid for incidental repairs or maintenance are deductible as business expenses and are not added to basis. 1040x efile However, you can elect either to deduct or to capitalize certain other costs. 1040x efile See chapter 7 in Publication 535. 1040x efile Decreases to Basis The following are some items that reduce the basis of property. 1040x efile Section 179 deduction. 1040x efile Deductions previously allowed or allowable for amortization, depreciation, and depletion. 1040x efile Alternative motor vehicle credit. 1040x efile See Form 8910. 1040x efile Alternative fuel vehicle refueling property credit. 1040x efile See Form 8911. 1040x efile Residential energy efficient property credits. 1040x efile See Form 5695. 1040x efile Investment credit (part or all) taken. 1040x efile Casualty and theft losses and insurance reimbursements. 1040x efile Payments you receive for granting an easement. 1040x efile Exclusion from income of subsidies for energy conservation measures. 1040x efile Certain canceled debt excluded from income. 1040x efile Rebates from a manufacturer or seller. 1040x efile Patronage dividends received from a cooperative association as a result of a purchase of property. 1040x efile See Patronage Dividends in chapter 3. 1040x efile Gas-guzzler tax. 1040x efile See Form 6197. 1040x efile Some of these items are discussed next. 1040x efile For a more detailed list of items that decrease basis, see section 1016 of the Internal Revenue Code and Publication 551. 1040x efile Depreciation and section 179 deduction. 1040x efile   The adjustments you must make to the basis of the property if you take the section 179 deduction or depreciate the property are explained next. 1040x efile For more information on these deductions, see chapter 7. 1040x efile Section 179 deduction. 1040x efile   If you take the section 179 expense deduction for all or part of the cost of qualifying business property, decrease the basis of the property by the deduction. 1040x efile Depreciation. 1040x efile   Decrease the basis of property by the depreciation you deducted or could have deducted on your tax returns under the method of depreciation you chose. 1040x efile If you took less depreciation than you could have under the method chosen, decrease the basis by the amount you could have taken under that method. 1040x efile If you did not take a depreciation deduction, reduce the basis by the full amount of the depreciation you could have taken. 1040x efile   If you deducted more depreciation than you should have, decrease your basis by the amount you should have deducted plus the part of the excess depreciation you deducted that actually reduced your tax liability for any year. 1040x efile   See chapter 7 for information on figuring the depreciation you should have claimed. 1040x efile   In decreasing your basis for depreciation, take into account the amount deducted on your tax returns as depreciation and any depreciation you must capitalize under the uniform capitalization rules. 1040x efile Casualty and theft losses. 1040x efile   If you have a casualty or theft loss, decrease the basis of the property by any insurance or other reimbursement. 1040x efile Also, decrease it by any deductible loss not covered by insurance. 1040x efile See chapter 11 for information about figuring your casualty or theft loss. 1040x efile   You must increase your basis in the property by the amount you spend on clean-up costs (such as debris removal) and repairs that restore the property to its pre-casualty condition. 1040x efile To make this determination, compare the repaired property to the property before the casualty. 1040x efile Easements. 1040x efile   The amount you receive for granting an easement is usually considered to be proceeds from the sale of an interest in the real property. 1040x efile It reduces the basis of the affected part of the property. 1040x efile If the amount received is more than the basis of the part of the property affected by the easement, reduce your basis in that part to zero and treat the excess as a recognized gain. 1040x efile See Easements and rights-of-way in chapter 3. 1040x efile Exclusion from income of subsidies for energy conservation measures. 1040x efile   You can exclude from gross income any subsidy you received from a public utility company for the purchase or installation of an energy conservation measure for a dwelling unit. 1040x efile Reduce the basis of the property by the excluded amount. 1040x efile Canceled debt excluded from income. 1040x efile   If a debt you owe is canceled or forgiven, other than as a gift or bequest, you generally must include the canceled amount in your gross income for tax purposes. 1040x efile A debt includes any indebtedness for which you are liable or which attaches to property you hold. 1040x efile   You can exclude your canceled debt from income if the debt is any of the following. 1040x efile Debt canceled in a bankruptcy case or when you are insolvent. 1040x efile Qualified farm debt. 1040x efile Qualified real property business debt (provided you are not a C corporation). 1040x efile Qualified principal residence indebtedness. 1040x efile Discharge of certain indebtedness of a qualified individual because of Midwestern disasters. 1040x efile If you exclude canceled debt described in (1) or (2), you may have to reduce the basis of your depreciable and nondepreciable property. 1040x efile If you exclude canceled debt described in (3), you must only reduce the basis of your depreciable property by the excluded amount. 1040x efile   For more information about canceled debt in a bankruptcy case, see Publication 908, Bankruptcy Tax Guide. 1040x efile For more information about insolvency and canceled debt that is qualified farm debt or qualified principal residence indebtedness, see chapter 3. 1040x efile For more information about qualified real property business debt, see Publication 334, Tax Guide for Small Business. 1040x efile For more information about canceled debt in Midwestern disaster areas, see Publication 4492-B, Information for Affected Taxpayers in the Midwestern Disaster Areas. 1040x efile Basis Other Than Cost There are times when you cannot use cost as basis. 1040x efile In these situations, the fair market value or the adjusted basis of property may be used. 1040x efile Examples are discussed next. 1040x efile Property changed from personal to business or rental use. 1040x efile   When you hold property for personal use and then change it to business use or use it to produce rent, you must figure its basis for depreciation. 1040x efile An example of changing property from personal to business use would be changing the use of your pickup truck that you originally purchased for your personal use to use in your farming business. 1040x efile   The basis for depreciation is the lesser of: The FMV of the property on the date of the change, or Your adjusted basis on the date of the change. 1040x efile   If you later sell or dispose of this property, the basis you use will depend on whether you are figuring a gain or loss. 1040x efile The basis for figuring a gain is your adjusted basis in the property when you sell the property. 1040x efile Figure the basis for a loss starting with the smaller of your adjusted basis or the FMV of the property at the time of the change to business or rental use. 1040x efile Then make adjustments (increases and decreases) for the period after the change in the property's use, as discussed earlier under Adjusted Basis . 1040x efile Property received for services. 1040x efile   If you receive property for services, include the property's FMV in income. 1040x efile The amount you include in income becomes your basis. 1040x efile If the services were performed for a price agreed on beforehand, it will be accepted as the FMV of the property if there is no evidence to the contrary. 1040x efile Example. 1040x efile George Smith is an accountant and also operates a farming business. 1040x efile George agreed to do some accounting work for his neighbor in exchange for a dairy cow. 1040x efile The accounting work and the cow are each worth $1,500. 1040x efile George must include $1,500 in income for his accounting services. 1040x efile George's basis in the cow is $1,500. 1040x efile Taxable Exchanges A taxable exchange is one in which the gain is taxable, or the loss is deductible. 1040x efile A taxable gain or deductible loss also is known as a recognized gain or loss. 1040x efile A taxable exchange occurs when you receive cash or get property that is not similar or related in use to the property exchanged. 1040x efile If you receive property in exchange for other property in a taxable exchange, the basis of the property you receive is usually its FMV at the time of the exchange. 1040x efile Example. 1040x efile You trade a tract of farmland with an adjusted basis of $2,000 for a tractor that has an FMV of $6,000. 1040x efile You must report a taxable gain of $4,000 for the land. 1040x efile The tractor has a basis of $6,000. 1040x efile Involuntary Conversions If you receive property as a result of an involuntary conversion, such as a casualty, theft, or condemnation, figure the basis of the replacement property you receive using the basis of the converted property. 1040x efile Similar or related property. 1040x efile   If the replacement property is similar or related in service or use to the converted property, the replacement property's basis is the same as the old property's basis on the date of the conversion. 1040x efile However, make the following adjustments. 1040x efile Decrease the basis by the following amounts. 1040x efile Any loss you recognize on the involuntary conversion. 1040x efile Any money you receive that you do not spend on similar property. 1040x efile Increase the basis by the following amounts. 1040x efile Any gain you recognize on the involuntary conversion. 1040x efile Any cost of acquiring the replacement property. 1040x efile Money or property not similar or related. 1040x efile   If you receive money or property not similar or related in service or use to the converted property and you buy replacement property similar or related in service or use to the converted property, the basis of the replacement property is its cost decreased by the gain not recognized on the involuntary conversion. 1040x efile Allocating the basis. 1040x efile   If you buy more than one piece of replacement property, allocate your basis among the properties based on their respective costs. 1040x efile Basis for depreciation. 1040x efile   Special rules apply in determining and depreciating the basis of MACRS property acquired in an involuntary conversion. 1040x efile For information, see Figuring the Deduction for Property Acquired in a Nontaxable Exchange under Figuring Depreciation Under MACRS in chapter 7. 1040x efile For more information about involuntary conversions, see chapter 11. 1040x efile Nontaxable Exchanges A nontaxable exchange is an exchange in which you are not taxed on any gain and you cannot deduct any loss. 1040x efile A nontaxable gain or loss also is known as an unrecognized gain or loss. 1040x efile If you receive property in a nontaxable exchange, its basis is usually the same as the basis of the property you transferred. 1040x efile Like-Kind Exchanges The exchange of property for the same kind of property is the most common type of nontaxable exchange. 1040x efile For an exchange to qualify as a like-kind exchange, you must hold for business or investment purposes both the property you transfer and the property you receive. 1040x efile There must also be an exchange of like-kind property. 1040x efile For more information, see Like-Kind Exchanges in  chapter 8. 1040x efile The basis of the property you receive generally is the same as the adjusted basis of the property you gave up. 1040x efile Example 1. 1040x efile You traded a truck you used in your farming business for a new smaller truck to use in farming. 1040x efile The adjusted basis of the old truck was $10,000. 1040x efile The FMV of the new truck is $30,000. 1040x efile Because this is a nontaxable exchange, you do not recognize any gain, and your basis in the new truck is $10,000, the same as the adjusted basis of the truck you traded. 1040x efile Example 2. 1040x efile You trade a field cultivator (adjusted basis of $8,000) for a planter (FMV of $9,000). 1040x efile You use both the field cultivator and the planter in your farming business. 1040x efile The basis of the planter you receive is $8,000, the same as the field cultivator traded Exchange expenses. 1040x efile   Exchange expenses generally are the closing costs that you pay. 1040x efile They include such items as brokerage commissions, attorney fees, and deed preparation fees. 1040x efile Add them to the basis of the like-kind property you receive. 1040x efile Property plus cash. 1040x efile   If you trade property in a like-kind exchange and also pay money, the basis of the property you receive is the adjusted basis of the property you gave up plus the money you paid. 1040x efile Example. 1040x efile You trade in a truck (adjusted basis of $3,000) for another truck (FMV of $7,500) and pay $4,000. 1040x efile Your basis in the new truck is $7,000 (the $3,000 adjusted basis of the old truck plus the $4,000 cash). 1040x efile Special rules for related persons. 1040x efile   If a like-kind exchange takes place directly or indirectly between related persons and either party disposes of the property within 2 years after the exchange, the exchange no longer qualifies for like-kind exchange treatment. 1040x efile Each person must report any gain or loss not recognized on the original exchange unless the loss is not deductible under the related party rules. 1040x efile Each person reports it on the tax return filed for the year in which the later disposition occurred. 1040x efile If this rule applies, the basis of the property received in the original exchange will be its FMV. 1040x efile For more information, see chapter 8. 1040x efile Exchange of business property. 1040x efile   Exchanging the property of one business for the property of another business generally is a multiple property exchange. 1040x efile For information on figuring basis, see Multiple Property Exchanges in chapter 1 of Publication 544. 1040x efile Basis for depreciation. 1040x efile   Special rules apply in determining and depreciating the basis of MACRS property acquired in a like-kind transaction. 1040x efile For information, see Figuring the Deduction for Property Acquired in a Nontaxable Exchange under Figuring Depreciation Under MACRS in chapter 7. 1040x efile Partially Nontaxable Exchanges A partially nontaxable exchange is an exchange in which you receive unlike property or money in addition to like-kind property. 1040x efile The basis of the property you receive is the same as the adjusted basis of the property you gave up with the following adjustments. 1040x efile Decrease the basis by the following amounts. 1040x efile Any money you receive. 1040x efile Any loss you recognize on the exchange. 1040x efile Increase the basis by the following amounts. 1040x efile Any additional costs you incur. 1040x efile Any gain you recognize on the exchange. 1040x efile If the other party to the exchange assumes your liabilities, treat the debt assumption as money you received in the exchange. 1040x efile Example 1. 1040x efile You trade farmland (basis of $100,000) for another tract of farmland (FMV of $110,000) and $30,000 cash. 1040x efile You realize a gain of $40,000. 1040x efile This is the FMV of the land received plus the cash minus the basis of the land you traded ($110,000 + $30,000 − $100,000). 1040x efile Include your gain in income (recognize gain) only to the extent of the cash received. 1040x efile Your basis in the land you received is figured as follows. 1040x efile Basis of land traded $100,000 Minus: Cash received (adjustment 1(a)) − 30,000   $70,000 Plus: Gain recognized (adjustment 2(b)) + 30,000 Basis of land received $100,000 Example 2. 1040x efile You trade a truck (adjusted basis of $22,750) for another truck (FMV of $20,000) and $10,000 cash. 1040x efile You realize a gain of $7,250. 1040x efile This is the FMV of the truck received plus the cash minus the adjusted basis of the truck you traded ($20,000 + $10,000 − $22,750). 1040x efile You include all the gain in your income (recognize gain) because the gain is less than the cash you received. 1040x efile Your basis in the truck you received is figured as follows. 1040x efile Adjusted basis of truck traded $22,750 Minus: Cash received (adjustment 1(a)) −10,000   $12,750 Plus: Gain recognized (adjustment 2(b)) + 7,250 Basis of truck received $20,000 Allocation of basis. 1040x efile   If you receive like-kind and unlike properties in the exchange, allocate the basis first to the unlike property, other than money, up to its FMV on the date of the exchange. 1040x efile The rest is the basis of the like-kind property. 1040x efile Example. 1040x efile You traded a tractor with an adjusted basis of $15,000 for another tractor that had an FMV of $12,500. 1040x efile You also received $1,000 cash and a truck that had an FMV of $3,000. 1040x efile The truck is unlike property. 1040x efile You realized a gain of $1,500. 1040x efile This is the FMV of the tractor received plus the FMV of the truck received plus the cash minus the adjusted basis of the tractor you traded ($12,500 + $3,000 + $1,000 − $15,000). 1040x efile You include in income (recognize) all $1,500 of the gain because it is less than the FMV of the unlike property plus the cash received. 1040x efile Your basis in the properties you received is figured as follows. 1040x efile Adjusted basis of old tractor $15,000 Minus: Cash received (adjustment 1(a)) − 1,000   $14,000 Plus: Gain recognized (adjustment 2(b)) + 1,500 Total basis of properties received $15,500 Allocate the total basis of $15,500 first to the unlike property—the truck ($3,000). 1040x efile This is the truck's FMV. 1040x efile The rest ($12,500) is the basis of the tractor. 1040x efile Sale and Purchase If you sell property and buy similar property in two mutually dependent transactions, you may have to treat the sale and purchase as a single nontaxable exchange. 1040x efile Example. 1040x efile You used a tractor on your farm for 3 years. 1040x efile Its adjusted basis is $22,000 and its FMV is $40,000. 1040x efile You are interested in a new tractor, which sells for $60,000. 1040x efile Ordinarily, you would trade your old tractor for the new one and pay the dealer $20,000. 1040x efile Your basis for depreciating the new tractor would then be $42,000 ($20,000 + $22,000, the adjusted basis of your old tractor). 1040x efile However, you want a higher basis for depreciating the new tractor, so you agree to pay the dealer $60,000 for the new tractor if he will pay you $40,000 for your old tractor. 1040x efile Because the two transactions are dependent on each other, you are treated as having exchanged your old tractor for the new one and paid $20,000 ($60,000 − $40,000). 1040x efile Your basis for depreciating the new tractor is $42,000, the same as if you traded the old tractor. 1040x efile Property Received as a Gift To figure the basis of property you receive as a gift, you must know its adjusted basis (defined earlier) to the donor just before it was given to you. 1040x efile You also must know its FMV at the time it was given to you and any gift tax paid on it. 1040x efile FMV equal to or greater than donor's adjusted basis. 1040x efile   If the FMV of the property is equal to or greater than the donor's adjusted basis, your basis is the donor's adjusted basis when you received the gift. 1040x efile Increase your basis by all or part of any gift tax paid, depending on the date of the gift. 1040x efile   Also, for figuring gain or loss from a sale or other disposition of the property, or for figuring depreciation, depletion, or amortization deductions on business property, you must increase or decrease your basis (the donor's adjusted basis) by any required adjustments to basis while you held the property. 1040x efile See Adjusted Basis , earlier. 1040x efile   If you received a gift during the tax year, increase your basis in the gift (the donor's adjusted basis) by the part of the gift tax paid on it due to the net increase in value of the gift. 1040x efile Figure the increase by multiplying the gift tax paid by the following fraction. 1040x efile Net increase in value of the gift Amount of the gift   The net increase in value of the gift is the FMV of the gift minus the donor's adjusted basis. 1040x efile The amount of the gift is its value for gift tax purposes after reduction by any annual exclusion and marital or charitable deduction that applies to the gift. 1040x efile Example. 1040x efile In 2013, you received a gift of property from your mother that had an FMV of $50,000. 1040x efile Her adjusted basis was $20,000. 1040x efile The amount of the gift for gift tax purposes was $36,000 ($50,000 minus the $14,000 annual exclusion). 1040x efile She paid a gift tax of $7,320. 1040x efile Your basis, $26,076, is figured as follows. 1040x efile Fair market value $50,000 Minus: Adjusted basis −20,000 Net increase in value $30,000 Gift tax paid $7,320 Multiplied by ($30,000 ÷ $36,000) × . 1040x efile 83 Gift tax due to net increase in value $6,076 Adjusted basis of property to your mother +20,000 Your basis in the property $26,076 Note. 1040x efile If you received a gift before 1977, your basis in the gift (the donor's adjusted basis) includes any gift tax paid on it. 1040x efile However, your basis cannot exceed the FMV of the gift when it was given to you. 1040x efile FMV less than donor's adjusted basis. 1040x efile   If the FMV of the property at the time of the gift is less than the donor's adjusted basis, your basis depends on whether you have a gain or a loss when you dispose of the property. 1040x efile Your basis for figuring gain is the donor's adjusted basis plus or minus any required adjustments to basis while you held the property. 1040x efile Your basis for figuring loss is its FMV when you received the gift plus or minus any required adjustments to basis while you held the property. 1040x efile (See Adjusted Basis , earlier. 1040x efile )   If you use the donor's adjusted basis for figuring a gain and get a loss, and then use the FMV for figuring a loss and get a gain, you have neither gain nor loss on the sale or other disposition of the property. 1040x efile Example. 1040x efile You received farmland as a gift from your parents when they retired from farming. 1040x efile At the time of the gift, the land had an FMV of $80,000. 1040x efile Your parents' adjusted basis was $100,000. 1040x efile After you received the land, no events occurred that would increase or decrease your basis. 1040x efile If you sell the land for $120,000, you will have a $20,000 gain because you must use the donor's adjusted basis at the time of the gift ($100,000) as your basis to figure a gain. 1040x efile If you sell the land for $70,000, you will have a $10,000 loss because you must use the FMV at the time of the gift ($80,000) as your basis to figure a loss. 1040x efile If the sales price is between $80,000 and $100,000, you have neither gain nor loss. 1040x efile For instance, if the sales price was $90,000 and you tried to figure a gain using the donor's adjusted basis ($100,000), you would get a $10,000 loss. 1040x efile If you then tried to figure a loss using the FMV ($80,000), you would get a $10,000 gain. 1040x efile Business property. 1040x efile   If you hold the gift as business property, your basis for figuring any depreciation, depletion, or amortization deductions is the same as the donor's adjusted basis plus or minus any required adjustments to basis while you hold the property. 1040x efile Property Transferred From a Spouse The basis of property transferred to you or transferred in trust for your benefit by your spouse is the same as your spouse's adjusted basis. 1040x efile The same rule applies to a transfer by your former spouse if the transfer is incident to divorce. 1040x efile However, for property transferred in trust, adjust your basis for any gain recognized by your spouse or former spouse if the liabilities assumed plus the liabilities to which the property is subject are more than the adjusted basis of the property transferred. 1040x efile The transferor must give you the records needed to determine the adjusted basis and holding period of the property as of the date of the transfer. 1040x efile For more information, see Property Settlements in Publication 504, Divorced or Separated Individuals. 1040x efile Inherited Property Your basis in property you inherited from a decedent, who died before January 1, 2010, or after December 31, 2010, is generally one of the following: The FMV of the property at the date of the decedent's death. 1040x efile If a federal estate return is filed, you can use its appraised value. 1040x efile The FMV on the alternate valuation date, if the personal representative for the estate elects to use alternate valuation. 1040x efile For information on the alternate valuation, see the Instructions for Form 706. 1040x efile The decedent's adjusted basis in land to the extent of the value that is excluded from the decedent's taxable estate as a qualified conservation easement. 1040x efile If a federal estate tax return does not have to be filed, your basis in the inherited property is its appraised value at the date of death for state inheritance or transmission taxes. 1040x efile Special-use valuation method. 1040x efile   Under certain conditions, when a person dies, the executor or personal representative of that person's estate may elect to value qualified real property at other than its FMV. 1040x efile If so, the executor or personal representative values the qualified real property based on its use as a farm or other closely held business. 1040x efile If the executor or personal representative elects this method of valuation for estate tax purposes, this value is the basis of the property for the qualified heirs. 1040x efile The qualified heirs should be able to get the necessary value from the executor or personal representative of the estate. 1040x efile   If you are a qualified heir who received special-use valuation property, increase your basis by any gain recognized by the estate or trust because of post-death appreciation. 1040x efile Post-death appreciation is the property's FMV on the date of distribution minus the property's FMV either on the date of the individual's death or on the alternate valuation date. 1040x efile Figure all FMVs without regard to the special-use valuation. 1040x efile   You may be liable for an additional estate tax if, within 10 years after the death of the decedent, you transfer the property or the property stops being used as a farm. 1040x efile This tax does not apply if you dispose of the property in a like-kind exchange or in an involuntary conversion in which all of the proceeds are reinvested in qualified replacement property. 1040x efile The tax also does not apply if you transfer the property to a member of your family and certain requirements are met. 1040x efile   You can elect to increase your basis in special-use valuation property if it becomes subject to the additional estate tax. 1040x efile To increase your basis, you must make an irrevocable election and pay interest on the additional estate tax figured from the date 9 months after the decedent's death until the date of payment of the additional estate tax. 1040x efile If you meet these requirements, increase your basis in the property to its FMV on the date of the decedent's death or the alternate valuation date. 1040x efile The increase in your basis is considered to have occurred immediately before the event that resulted in the additional estate tax. 1040x efile   You make the election by filing, with Form 706-A, United States Additional Estate Tax Return, a statement that: Contains your (and the estate's) name, address, and taxpayer identification number; Identifies the election as an election under section 1016(c) of the Internal Revenue Code; Specifies the property for which you are making the election; and Provides any additional information required by the Form 706-A instructions. 1040x efile   For more information, see Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, Form 706-A, and the related instructions. 1040x efile Property inherited from a decedent who died in 2010. 1040x efile   If you inherited property from a decedent who died in 2010, different rules may apply. 1040x efile See Publication 4895, Tax Treatment of Property Acquired From a Decendent Dying in 2010, for details. 1040x efile Property Distributed From a Partnership or Corporation The following rules apply to determine a partner's basis and a shareholder's basis in property distributed respectively from a partnership to the partner with respect to the partner's interest in the partnership and from a corporation to the shareholder with respect to the shareholder's ownership of stock in the corporation. 1040x efile Partner's basis. 1040x efile   Unless there is a complete liquidation of a partner's interest, the basis of property (other than money) distributed by a partnership to the partner is its adjusted basis to the partnership immediately before the distribution. 1040x efile However, the basis of the property to the partner cannot be more than the adjusted basis of his or her interest in the partnership reduced by any money received in the same transaction. 1040x efile For more information, see Partner's Basis for Distributed Property in Publication 541, Partnerships. 1040x efile Shareholder's basis. 1040x efile   The basis of property distributed by a corporation to a shareholder is its fair market value. 1040x efile For more information about corporate distributions, see Distributions to Shareholders in Publication 542, Corporations. 1040x efile Prev  Up  Next   Home   More Online Publications