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1080ez

1080ez 2. 1080ez   Possession Source Income Table of Contents Types of IncomeCompensation for Labor or Personal Services Investment Income Sales or Other Dispositions of Property Scholarships, Fellowships, Grants, Prizes, and Awards Effectively Connected Income In order to determine where to file your return and which form(s) you need to complete, you must determine the source of each item of income you received during the tax year. 1080ez Income you received from sources within, or that was effectively connected with the conduct of a trade or business within, the relevant possession must be identified separately from U. 1080ez S. 1080ez or foreign source income. 1080ez This chapter discusses the rules for determining if the source of your income is from: American Samoa, The Commonwealth of the Northern Mariana Islands (CNMI), The Commonwealth of Puerto Rico (Puerto Rico), Guam, or The U. 1080ez S. 1080ez Virgin Islands (USVI). 1080ez Generally, the same rules that apply for determining U. 1080ez S. 1080ez source income also apply for determining possession source income. 1080ez However, there are some important exceptions to these rules. 1080ez Both the general rules and the exceptions are discussed in this chapter. 1080ez U. 1080ez S. 1080ez income rule. 1080ez   This rule states that income is not possession source income if, under the rules of Internal Revenue Code sections 861–865, it is treated as income: From sources within the United States, or Effectively connected with the conduct of a trade or business within the United States. 1080ez Table 2-1 shows the general rules for determining whether income is from sources within the United States. 1080ez Table 2-1. 1080ez General Rules for Determining U. 1080ez S. 1080ez Source of Income Item of Income Factor Determining Source Salaries, wages, and other compensation for labor or personal services Where labor or services performed Pensions Contributions: Where services were performed that earned the pension Investment earnings: Where pension trust is located Interest Residence of payer Dividends Where corporation created or organized Rents Location of property Royalties:   Natural resources Location of property Patents, copyrights, etc. 1080ez Where property is used Sale of business inventory—purchased Where sold Sale of business inventory—produced Allocation if produced and sold in different locations Sale of real property Location of property Sale of personal property Seller's tax home (but see Special Rules for Gains From Dispositions of Certain Property , later, for exceptions) Sale of natural resources Allocation based on fair market value of product at export terminal. 1080ez For more information, see Regulations section 1. 1080ez 863-1(b). 1080ez Types of Income This section looks at the most common types of income received by individuals, and the rules for determining the source of the income. 1080ez Generally, the same rules shown in Table 2-1 are used to determine if you have possession source income. 1080ez Compensation for Labor or Personal Services Income from labor or personal services includes wages, salaries, commissions, fees, per diem allowances, employee allowances and bonuses, and fringe benefits. 1080ez It also includes income earned by sole proprietors and general partners from providing personal services in the course of their trade or business. 1080ez Services performed wholly within a relevant possession. 1080ez   Generally, all pay you receive for services performed in a relevant possession is considered to be from sources within that possession. 1080ez However, there is an exception for income earned as a member of the U. 1080ez S. 1080ez Armed Forces or a civilian spouse. 1080ez U. 1080ez S. 1080ez Armed Forces. 1080ez   If you are a bona fide resident of a relevant possession, your military service pay will be sourced in that possession even if you perform the services in the United States or another possession. 1080ez However, if you are not a bona fide resident of a possession, your military service pay will be income from the  United States even if you perform services in a possession. 1080ez Civilian spouse of active duty member of the U. 1080ez S. 1080ez Armed Forces. 1080ez   If you are a bona fide resident of a U. 1080ez S. 1080ez possession and choose to keep that possession as your tax residence under MSRRA when relocating with your servicemember spouse under military orders, the source of income for your labor or personal services is considered to be that possession. 1080ez Likewise, if your tax residence is in one of the 50 states or the District of Columbia before relocating and you choose to keep it as your tax residence, the source of income for services performed in any of the U. 1080ez S. 1080ez possessions is considered to be the United States and, specifically, your state of residence or the District of Columbia. 1080ez Services performed partly inside and partly outside a relevant possession. 1080ez   If you are an employee and receive compensation for labor or personal services performed both inside and outside the relevant possession, special rules apply in determining the source of the compensation. 1080ez Compensation (other than certain fringe benefits) is sourced on a time basis. 1080ez Certain fringe benefits (such as housing and education) are sourced on a geographical basis. 1080ez   Or, you may be permitted to use an alternative basis to determine the source of compensation. 1080ez See Alternative basis , later. 1080ez   If you are self-employed, determine the source of your income for labor or personal services from self-employment on the basis that most correctly reflects the proper source of that income under the facts and circumstances of your particular case. 1080ez In many cases, the facts and circumstances will call for an apportionment on a time basis as explained next. 1080ez Time basis. 1080ez   Use a time basis to figure your compensation for labor or personal services from the relevant possession (other than the fringe benefits discussed later). 1080ez Do this by multiplying your total compensation (other than the fringe benefits discussed later) by the following fraction:   Number of days you performed  services in the relevant  possession during the year     Total number of days you  performed services during the year           You can use a unit of time less than a day in the above fraction, if appropriate. 1080ez The time period for which the income is made does not have to be a year. 1080ez Instead, you can use another distinct, separate, and continuous time period if you can establish to the satisfaction of the IRS that this other period is more appropriate. 1080ez Example. 1080ez In 2013, you worked in your employer's office in the United States for 60 days and in the Puerto Rico office for 180 days, earning a total of $80,000 for the year. 1080ez Your Puerto Rico source income is $60,000, figured as follows. 1080ez       180 days 240 days × $80,000 = $60,000                 Multi-year compensation. 1080ez   The source of multi-year compensation is generally determined on a time basis over the period to which the compensation is attributable. 1080ez Multi-year compensation is compensation that is included in your income in 1 tax year but is attributable to a period that includes 2 or more tax years. 1080ez You determine the period to which the income is attributable based on the facts and circumstances of your case. 1080ez For more information on multi-year compensation, see Treasury Decision (T. 1080ez D. 1080ez ) 9212 and Regulations section 1. 1080ez 861-4, 2005-35 I. 1080ez R. 1080ez B. 1080ez 429, available at www. 1080ez irs. 1080ez gov/irb/2005-35_IRB/ar14. 1080ez html. 1080ez Certain fringe benefits sourced on a geographical basis. 1080ez   If you received any of the following fringe benefits as compensation for labor or services performed as an employee partly inside and partly outside a relevant possession, you must source that income on a geographical basis. 1080ez Housing. 1080ez Education. 1080ez Local transportation. 1080ez Tax reimbursement. 1080ez Hazardous or hardship duty pay. 1080ez Moving expense reimbursement. 1080ez For information on determining the source of the fringe benefits listed above, see Regulations section 1. 1080ez 861-4. 1080ez Alternative basis. 1080ez   You can determine the source of your compensation under an alternative basis if you establish to the satisfaction of the IRS that, under the facts and circumstances of your case, the alternative basis more properly determines the source of your income than the time or geographical basis. 1080ez If you use an alternative basis, you must keep (and have available for inspection) records to document why the alternative basis more properly determines the source of your income. 1080ez De minimis exception. 1080ez   There is an exception to the rule for determining the source of income earned in a possession. 1080ez Generally, you will not have income from a possession if during a tax year you: Are a U. 1080ez S. 1080ez citizen or resident, Are not a bona fide resident of that possession, Are not employed by or under contract with an individual, partnership, or corporation that is engaged in a trade or business in that possession, Temporarily perform services in that possession for 90 days or less, and Earned $3,000 or less from such services. 1080ez This exception began with income earned during your 2008 tax year. 1080ez Pensions. 1080ez   Generally, pension income has two components: contributions to the pension plan and the earnings accrued from investing those contributions. 1080ez The contribution portion is sourced according to where services were performed that earned the pension. 1080ez The investment earnings portion is sourced according to the location of the pension trust. 1080ez Example. 1080ez You are a U. 1080ez S. 1080ez citizen who worked in Puerto Rico for a U. 1080ez S. 1080ez company. 1080ez All services were performed in Puerto Rico. 1080ez Upon retirement you remained in Puerto Rico and began receiving your pension from the U. 1080ez S. 1080ez pension trust of your employer. 1080ez Distributions from the U. 1080ez S. 1080ez pension trust must be allocated between (1) contributions, which are Puerto Rico source income, and (2) investment earnings, which are U. 1080ez S. 1080ez source income. 1080ez Investment Income This category includes such income as interest, dividends, rents, and royalties. 1080ez Interest income. 1080ez   The source of interest income is generally determined by the residence of the payer. 1080ez Interest paid by corporations created or organized in a relevant possession (possession corporation) or by individuals who are bona fide residents of a relevant possession is considered income from sources within that possession. 1080ez   However, there is an exception to this rule if you are a bona fide resident of a relevant possession, receive interest from a corporation created or organized in that possession, and are a shareholder of that corporation who owns, directly or indirectly, at least 10% of the total voting stock of the corporation. 1080ez See Regulations section 1. 1080ez 937-2(i) for more information. 1080ez Dividends. 1080ez   Generally, dividends paid by a corporation created or organized in a relevant possession will be considered income from sources within that possession. 1080ez There are additional rules for bona fide residents of a relevant possession who receive dividend income from possession corporations, and who own, directly or indirectly, at least 10% of the voting stock of the corporation. 1080ez For more information, see Regulations section 1. 1080ez 937-2(g). 1080ez Rental income. 1080ez   Rents from property located in a relevant possession are treated as income from sources within that possession. 1080ez Royalties. 1080ez   Royalties from natural resources located in a relevant possession are considered income from sources within that possession. 1080ez   Also considered possession source income are royalties received for the use of, or for the privilege of using, in a relevant possession, patents, copyrights, secret processes and formulas, goodwill, trademarks, trade brands, franchises, and other like property. 1080ez Sales or Other Dispositions of Property The source rules for sales or other dispositions of property are varied. 1080ez The most common situations are discussed below. 1080ez Real property. 1080ez   Real property includes land and buildings, and generally anything built on, growing on, or attached to land. 1080ez The location of the property generally determines the source of income from the sale. 1080ez For example, if you are a bona fide resident of Guam and sell your home that is located in Guam, the gain on the sale is sourced in Guam. 1080ez If, however, the home you sold was located in the United States, the gain is U. 1080ez S. 1080ez source income. 1080ez Personal property. 1080ez   The term “personal property” refers to property (such as machinery, equipment, or furniture) that is not real property. 1080ez Generally, gain (or loss) from the sale or other disposition is sourced according to the seller's tax home. 1080ez If personal property is sold by a bona fide resident of a relevant possession, the gain (or loss) from the sale is treated as sourced within that possession. 1080ez   This rule does not apply to the sale of inventory, intangible property, depreciable personal property, or property sold through a foreign office or fixed place of business. 1080ez The rules applying to sales of inventory are discussed below. 1080ez For information on sales of the other types of property mentioned, see Internal Revenue Code section 865. 1080ez Inventory. 1080ez   Your inventory is personal property that is stock in trade or that is held primarily for sale to customers in the ordinary course of your trade or business. 1080ez The source of income from the sale of inventory depends on whether the inventory was purchased or produced. 1080ez Purchased. 1080ez   Income from the sale of inventory that you purchased is sourced where you sell the property. 1080ez Generally, this is where title to the property passes to the buyer. 1080ez Produced. 1080ez   Income from the sale of inventory that you produced in a relevant possession and sold outside that possession (or vice versa) is sourced based on an allocation. 1080ez For information on making the allocation, see Regulations section 1. 1080ez 863-3(f). 1080ez Special Rules for Gains From Dispositions of Certain Property There are special rules for gains from dispositions of certain investment property (for example, stocks, bonds, debt instruments, diamonds, and gold) owned by a U. 1080ez S. 1080ez citizen or resident alien prior to becoming a bona fide resident of a possession. 1080ez You are subject to these special rules if you meet both of the following conditions. 1080ez For the tax year for which the source of the gain must be determined, you are a bona fide resident of the relevant possession. 1080ez For any of the 10 years preceding that year, you were a citizen or resident alien of the United States (other than a bona fide resident of the relevant possession). 1080ez If you meet these conditions, gains from the disposition of this property will not be treated as income from sources within the relevant possession for purposes of the Internal Revenue Code. 1080ez Accordingly, bona fide residents of American Samoa and Puerto Rico, for example, may not exclude the gain on their U. 1080ez S. 1080ez tax return. 1080ez (See chapter 3 for additional filing information. 1080ez ) With respect to the CNMI, Guam, and the USVI, the gain from the disposition of this property will not meet the requirements for certain tax rules that may allow bona fide residents of those possessions to reduce or obtain a rebate of taxes on income from sources within the relevant possessions. 1080ez These rules apply to dispositions after April 11, 2005. 1080ez For details, see Regulations section 1. 1080ez 937-2(f)(1) and Examples 1 and 2 of section 1. 1080ez 937-2(k). 1080ez Example 1. 1080ez In 2007, Cheryl Jones, a U. 1080ez S. 1080ez citizen, lived in the United States and paid $1,000 for 100 shares of stock in the Rose Corporation, a U. 1080ez S. 1080ez corporation listed on the New York Stock Exchange. 1080ez On March 1, 2010, she moved to Puerto Rico and changed her tax home to Puerto Rico on the same date. 1080ez Cheryl satisfied the presence test in 2010 and, under the year-of-move exception, she was considered a bona fide resident of Puerto Rico for the rest of 2010. 1080ez On March 1, 2010, the closing value of Cheryl's stock in the Rose Corporation was $2,000. 1080ez On January 5, 2013, while still a bona fide resident of Puerto Rico, Cheryl sold all her Rose Corporation stock for $7,000. 1080ez Under the earlier rules, none of Cheryl's $6,000 gain will be treated as income from sources within Puerto Rico. 1080ez The source rules discussed in the preceding paragraphs supplement, and may apply in conjunction with, an existing special rule. 1080ez This existing special rule applies if you are a U. 1080ez S. 1080ez citizen or resident alien who becomes a bona fide resident of American Samoa, the CNMI, or Guam, and who has gain from the disposition of certain U. 1080ez S. 1080ez assets during the 10-year period beginning when you became a bona fide resident. 1080ez The gain is U. 1080ez S. 1080ez source income that generally is subject to U. 1080ez S. 1080ez tax if the property is either (1) located in the United States; (2) stock issued by a U. 1080ez S. 1080ez corporation or a debt obligation of a U. 1080ez S. 1080ez person or of the United States, a state (or political subdivision), or the District of Columbia; or (3) property that has a basis in whole or in part by reference to property described in (1) or (2). 1080ez See chapter 3 for filing information. 1080ez Special election. 1080ez   For dispositions after April 11, 2005, you can choose to treat the part of gain (or loss) attributable to the time you held the property while a bona fide resident of the relevant possession (the possession holding period) as gain (or loss) from sources within that possession. 1080ez Make the election by reporting the gain attributable to the possession holding period on your income tax return for the year of disposition. 1080ez This election overrides both of the special rules discussed earlier. 1080ez   There are two methods for figuring the gain for the possession holding period, one for marketable securities and another for other types of investment property. 1080ez Marketable securities. 1080ez   Marketable securities are those actively traded on an established financial market, such as stock in a publicly held corporation. 1080ez Under the special election, allocate the gain (or loss) by figuring the appreciation separately for your possession and U. 1080ez S. 1080ez holding periods. 1080ez   Your possession holding period begins on the first day you do not have a tax home outside the relevant possession. 1080ez The gain (or loss) attributable to the possession holding period is the difference in fair market value of the security at the close of the market on the first and last days of this holding period. 1080ez This is your gain (or loss) that is treated as being from sources within the relevant possession. 1080ez If you were a bona fide resident of the relevant possession for more than one continuous period, combine the gains (or losses) from each possession holding period. 1080ez Example 2. 1080ez Assume the same facts as in Example 1, except that Cheryl makes the special election to allocate the gain between her U. 1080ez S. 1080ez and possession holding periods. 1080ez Cheryl's possession holding period began March 1, 2010, the date her tax home changed to Puerto Rico. 1080ez Therefore, the portion of gain attributable to her possession holding period is $5,000 ($7,000 sale price – $2,000 closing value on first day of the possession holding period). 1080ez By reporting $5,000 of her $6,000 gain as Puerto Rico source income on her 2013 Puerto Rico tax return (and the remainder as non-Puerto Rico source income), Cheryl elects to treat that amount as Puerto Rico source income. 1080ez Other personal property. 1080ez   For personal property other than marketable securities, use a time-based allocation. 1080ez Figure the gain (or loss) attributable to the possession holding period by multiplying your total gain (or loss) by the following fraction. 1080ez      Number of days in the  possession holding period     Total number of days  in your holding period         The result is your gain (or loss) that is treated as being from sources within the relevant possession. 1080ez Example 3. 1080ez In addition to the stock in Rose Corporation, Cheryl acquired a 5% interest in the Alder Partnership on January 1, 2009. 1080ez On March 1, 2010, when she established bona fide residency in Puerto Rico, her partnership interest was not considered a marketable security. 1080ez On September 16, 2013, while still a bona fide resident of Puerto Rico, Cheryl sold her interest in Alder Partnership for a $100,000 gain. 1080ez She had owned the interest for a total of 1,720 days. 1080ez Cheryl's possession holding period (from March 1, 2010, through September 16, 2013) is 1,296 days. 1080ez The portion of her gain attributable to Puerto Rico is $75,349 ($100,000 x (1,296 Puerto Rico days ÷ 1,720 total days)). 1080ez By reporting $75,349 of her $100,000 gain as Puerto Rico source income on her 2013 Puerto Rico tax return (and the remainder as non-Puerto Rico source income), Cheryl elects to treat that amount as Puerto Rico source income. 1080ez Scholarships, Fellowships, Grants, Prizes, and Awards The source of these types of income is generally the residence of the payer, regardless of who actually disburses the funds. 1080ez Therefore, in order to be possession source income, the payer must be a resident of the relevant possession, such as an individual who is a bona fide resident or a corporation created or organized in that possession. 1080ez These rules do not apply to amounts paid as salary or other compensation for services. 1080ez See Compensation for Labor or Personal Services, earlier in this chapter, for the source rules that apply. 1080ez Effectively Connected Income In limited circumstances, some kinds of income from sources outside the relevant possession must be treated as effectively connected with a trade or business in that possession. 1080ez These circumstances are listed below. 1080ez You have an office or other fixed place of business in the relevant possession to which the income can be attributed. 1080ez That office or place of business is a material factor in producing the income. 1080ez The income is produced in the ordinary course of the trade or business carried on through that office or other fixed place of business. 1080ez An office or other fixed place of business is a material factor if it significantly contributes to, and is an essential economic element in, the earning of the income. 1080ez The three kinds of income from sources outside the relevant possession to which these rules apply are the following. 1080ez Rents and royalties for the use of, or for the privilege of using, intangible personal property located outside the relevant possession or from any interest in such property. 1080ez Included are rents or royalties for the use of, or for the privilege of using, outside the relevant possession, patents, copyrights, secret processes and formulas, goodwill, trademarks, trade brands, franchises, and similar properties if the rents or royalties are from the active conduct of a trade or business in the relevant possession. 1080ez Dividends or interest from the active conduct of a banking, financing, or similar business in the relevant possession. 1080ez Income, gain, or loss from the sale or exchange outside the relevant possession, through the office or other fixed place of business in the relevant possession, of: Stock in trade, Property that would be included in inventory if on hand at the end of the tax year, or Property held primarily for sale to customers in the ordinary course of business. 1080ez Item (3) will not apply if you sold the property for use, consumption, or disposition outside the relevant possession and an office or other fixed place of business in a foreign country was a material factor in the sale. 1080ez Example. 1080ez Marcy Jackson is a bona fide resident of American Samoa. 1080ez Her business, which she conducts from an office in American Samoa, is developing and selling specialized computer software. 1080ez A software purchaser will frequently pay Marcy an additional amount to install the software on the purchaser's operating system and to ensure that the software is functioning properly. 1080ez Marcy installs the software at the purchaser's place of business, which may be in American Samoa, in the United States, or in another country. 1080ez The income from selling the software is effectively connected with the conduct of Marcy's business in American Samoa, even though the product's destination may be outside the possession. 1080ez However, the compensation she receives for installing the software (personal services) outside of American Samoa is not effectively connected with the conduct of her business in the possession—the income is sourced where she performs the services. 1080ez Prev  Up  Next   Home   More Online Publications
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The 1080ez

1080ez 8. 1080ez   Amortization Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: How To Deduct Amortization Starting a BusinessBusiness Start-Up Costs Costs of Organizing a Corporation Costs of Organizing a Partnership How To Amortize Getting a Lease Section 197 IntangiblesSection 197 Intangibles Defined Assets That Are Not Section 197 Intangibles Safe Harbor for Creative Property Costs Anti-Churning Rules Incorrect Amount of Amortization Deducted Disposition of Section 197 Intangibles Reforestation Costs Geological and Geophysical Costs Pollution Control FacilitiesNew identifiable treatment facility. 1080ez Research and Experimental Costs Optional Write-off of Certain Tax Preferences Introduction Amortization is a method of recovering (deducting) certain capital costs over a fixed period of time. 1080ez It is similar to the straight line method of depreciation. 1080ez The various amortizable costs covered in this chapter are included in the list below. 1080ez However, this chapter does not discuss amortization of bond premium. 1080ez For information on that topic, see chapter 3 of Publication 550, Investment Income and Expenses. 1080ez Topics - This chapter discusses: Deducting amortization Amortizing costs of starting a business Amortizing costs of getting a lease Amortizing costs of section 197 intangibles Amortizing reforestation costs Amortizing costs of geological and geophysical costs Amortizing costs of pollution control facilities Amortizing costs of research and experimentation Amortizing costs of certain tax preferences Useful Items - You may want to see: Publication 544 Sales and Other Dispositions of Assets 550 Investment Income and Expenses 946 How To Depreciate Property Form (and Instructions) 4562 Depreciation and Amortization 4626 Alternative Minimum Tax—Corporations 6251 Alternative Minimum Tax—Individuals See chapter 12 for information about getting publications and forms. 1080ez How To Deduct Amortization To deduct amortization that begins during the current tax year, complete Part VI of Form 4562 and attach it to your income tax return. 1080ez To report amortization from previous years, in addition to amortization that begins in the current year, list on Form 4562 each item separately. 1080ez For example, in 2012, you began to amortize a lease. 1080ez In 2013, you began to amortize a second lease. 1080ez Report amortization from the new lease on line 42 of your 2013 Form 4562. 1080ez Report amortization from the 2012 lease on line 43 of your 2013 Form 4562. 1080ez If you do not have any new amortizable expenses for the current year, you are not required to complete Form 4562 (unless you are claiming depreciation). 1080ez Report the current year's deduction for amortization that began in a prior year directly on the “Other deduction” or “Other expense line” of your return. 1080ez Starting a Business When you start a business, treat all eligible costs you incur before you begin operating the business as capital expenditures which are part of your basis in the business. 1080ez Generally, you recover costs for particular assets through depreciation deductions. 1080ez However, you generally cannot recover other costs until you sell the business or otherwise go out of business. 1080ez For a discussion on how to treat these costs, see If your attempt to go into business is unsuccessful under Capital Expenses in chapter 1. 1080ez For costs paid or incurred after September 8, 2008, you can deduct a limited amount of start-up and organizational costs. 1080ez The costs that are not deducted currently can be amortized ratably over a 180-month period. 1080ez The amortization period starts with the month you begin operating your active trade or business. 1080ez You are not required to attach a statement to make this election. 1080ez You can choose to forgo this election by affirmatively electing to capitalize your start-up costs on your income tax return filed by the due date (including extensions) for the tax year in which the active trade or business begins. 1080ez Once made, the election to either amortize or capitalize start-up costs is irrevocable and applies to all start-up costs that are related to your trade or business. 1080ez See Regulations sections 1. 1080ez 195-1, 1. 1080ez 248-1, and 1. 1080ez 709-1. 1080ez For costs paid or incurred after October 22, 2004, and before September 9, 2008, you can elect to deduct a limited amount of business start-up and organizational costs in the year your active trade or business begins. 1080ez Any costs not deducted can be amortized ratably over a 180-month period, beginning with the month you begin business. 1080ez If the election is made, you must attach any statement required by Regulations sections 1. 1080ez 195-1(b), 1. 1080ez 248-1(c), and 1. 1080ez 709-1(c), as in effect before September 9, 2008. 1080ez Note. 1080ez You can apply the provisions of Regulations sections 1. 1080ez 195-1, 1. 1080ez 248-1, and 1. 1080ez 709-1 to all business start-up and organizational costs paid or incurred after October 22, 2004, provided the period of limitations on assessment has not expired for the year of the election. 1080ez Otherwise, the provisions under Regulations sections 1. 1080ez 195-1(b), 1. 1080ez 248-1(c), and 1. 1080ez 709-1(c), as in effect before September 9, 2008, will apply. 1080ez For costs paid or incurred before October 23, 2004, you can elect to amortize business start-up and organization costs over an amortization period of 60 months or more. 1080ez See How To Make the Election , later. 1080ez The cost must qualify as one of the following. 1080ez A business start-up cost. 1080ez An organizational cost for a corporation. 1080ez An organizational cost for a partnership. 1080ez Business Start-Up Costs Start-up costs are amounts paid or incurred for: (a) creating an active trade or business; or (b) investigating the creation or acquisition of an active trade or business. 1080ez Start-up costs include amounts paid or incurred in connection with an existing activity engaged in for profit; and for the production of income in anticipation of the activity becoming an active trade or business. 1080ez Qualifying costs. 1080ez   A start-up cost is amortizable if it meets both of the following tests. 1080ez It is a cost you could deduct if you paid or incurred it to operate an existing active trade or business (in the same field as the one you entered into). 1080ez It is a cost you pay or incur before the day your active trade or business begins. 1080ez   Start-up costs include amounts paid for the following: An analysis or survey of potential markets, products, labor supply, transportation facilities, etc. 1080ez Advertisements for the opening of the business. 1080ez Salaries and wages for employees who are being trained and their instructors. 1080ez Travel and other necessary costs for securing prospective distributors, suppliers, or customers. 1080ez Salaries and fees for executives and consultants, or for similar professional services. 1080ez Nonqualifying costs. 1080ez   Start-up costs do not include deductible interest, taxes, or research and experimental costs. 1080ez See Research and Experimental Costs , later. 1080ez Purchasing an active trade or business. 1080ez   Amortizable start-up costs for purchasing an active trade or business include only investigative costs incurred in the course of a general search for or preliminary investigation of the business. 1080ez These are costs that help you decide whether to purchase a business. 1080ez Costs you incur in an attempt to purchase a specific business are capital expenses that you cannot amortize. 1080ez Example. 1080ez On June 1st, you hired an accounting firm and a law firm to assist you in the potential purchase of XYZ, Inc. 1080ez They researched XYZ's industry and analyzed the financial projections of XYZ, Inc. 1080ez In September, the law firm prepared and submitted a letter of intent to XYZ, Inc. 1080ez The letter stated that a binding commitment would result only after a purchase agreement was signed. 1080ez The law firm and accounting firm continued to provide services including a review of XYZ's books and records and the preparation of a purchase agreement. 1080ez On October 22nd, you signed a purchase agreement with XYZ, Inc. 1080ez All amounts paid or incurred to investigate the business before October 22nd are amortizable investigative costs. 1080ez Amounts paid on or after that date relate to the attempt to purchase the business and therefore must be capitalized. 1080ez Disposition of business. 1080ez   If you completely dispose of your business before the end of the amortization period, you can deduct any remaining deferred start-up costs. 1080ez However, you can deduct these deferred start-up costs only to the extent they qualify as a loss from a business. 1080ez Costs of Organizing a Corporation Amounts paid to organize a corporation are the direct costs of creating the corporation. 1080ez Qualifying costs. 1080ez   To qualify as an organizational cost, it must be: For the creation of the corporation, Chargeable to a capital account (see chapter 1), Amortized over the life of the corporation if the corporation had a fixed life, and Incurred before the end of the first tax year in which the corporation is in business. 1080ez   A corporation using the cash method of accounting can amortize organizational costs incurred within the first tax year, even if it does not pay them in that year. 1080ez   Examples of organizational costs include: The cost of temporary directors. 1080ez The cost of organizational meetings. 1080ez State incorporation fees. 1080ez The cost of legal services. 1080ez Nonqualifying costs. 1080ez   The following items are capital expenses that cannot be amortized: Costs for issuing and selling stock or securities, such as commissions, professional fees, and printing costs. 1080ez Costs associated with the transfer of assets to the corporation. 1080ez Costs of Organizing a Partnership The costs to organize a partnership are the direct costs of creating the partnership. 1080ez Qualifying costs. 1080ez   A partnership can amortize an organizational cost only if it meets all the following tests. 1080ez It is for the creation of the partnership and not for starting or operating the partnership trade or business. 1080ez It is chargeable to a capital account (see chapter 1). 1080ez It could be amortized over the life of the partnership if the partnership had a fixed life. 1080ez It is incurred by the due date of the partnership return (excluding extensions) for the first tax year in which the partnership is in business. 1080ez However, if the partnership uses the cash method of accounting and pays the cost after the end of its first tax year, see Cash method partnership under How To Amortize, later. 1080ez It is for a type of item normally expected to benefit the partnership throughout its entire life. 1080ez   Organizational costs include the following fees. 1080ez Legal fees for services incident to the organization of the partnership, such as negotiation and preparation of the partnership agreement. 1080ez Accounting fees for services incident to the organization of the partnership. 1080ez Filing fees. 1080ez Nonqualifying costs. 1080ez   The following costs cannot be amortized. 1080ez The cost of acquiring assets for the partnership or transferring assets to the partnership. 1080ez The cost of admitting or removing partners, other than at the time the partnership is first organized. 1080ez The cost of making a contract concerning the operation of the partnership trade or business including a contract between a partner and the partnership. 1080ez The costs for issuing and marketing interests in the partnership such as brokerage, registration, and legal fees and printing costs. 1080ez These “syndication fees” are capital expenses that cannot be depreciated or amortized. 1080ez Liquidation of partnership. 1080ez   If a partnership is liquidated before the end of the amortization period, the unamortized amount of qualifying organizational costs can be deducted in the partnership's final tax year. 1080ez However, these costs can be deducted only to the extent they qualify as a loss from a business. 1080ez How To Amortize Deduct start-up and organizational costs in equal amounts over the applicable amortization period (discussed earlier). 1080ez You can choose an amortization period for start-up costs that is different from the period you choose for organizational costs, as long as both are not less than the applicable amortization period. 1080ez Once you choose an amortization period, you cannot change it. 1080ez To figure your deduction, divide your total start-up or organizational costs by the months in the amortization period. 1080ez The result is the amount you can deduct for each month. 1080ez Cash method partnership. 1080ez   A partnership using the cash method of accounting can deduct an organizational cost only if it has been paid by the end of the tax year. 1080ez However, any cost the partnership could have deducted as an organizational cost in an earlier tax year (if it had been paid that year) can be deducted in the tax year of payment. 1080ez How To Make the Election To elect to amortize start-up or organizational costs, you must complete and attach Form 4562 to your return for the first tax year you are in business. 1080ez You may also be required to attach an accompanying statement (described later) to your return. 1080ez For start-up or organizational costs paid or incurred after September 8, 2008, an accompanying statement is not required. 1080ez Generally, for start-up or organizational costs paid or incurred before September 9, 2008, and after October 22, 2004, unless you choose to apply Regulations sections 1. 1080ez 195-1, 1. 1080ez 248-1, and 1. 1080ez 709-1, you must also attach an accompanying statement to elect to amortize the costs. 1080ez If you have both start-up and organizational costs, attach a separate statement (if required) to your return for each type of cost. 1080ez See Starting a Business , earlier, for more information. 1080ez Generally, you must file the return by the due date (including any extensions). 1080ez However, if you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). 1080ez For more information, see the instructions for Part VI of Form 4562. 1080ez You can choose to forgo the election to amortize by affirmatively electing to capitalize your start-up or organizational costs on your income tax return filed by the due date (including extensions) for the tax year in which the active trade or business begins. 1080ez Note. 1080ez The election to either amortize or capitalize start-up or organizational costs is irrevocable and applies to all start-up and organizational costs that are related to the trade or business. 1080ez If your business is organized as a corporation or partnership, only the corporation or partnership can elect to amortize its start-up or organizational costs. 1080ez A shareholder or partner cannot make this election. 1080ez You, as a shareholder or partner, cannot amortize any costs you incur in setting up your corporation or partnership. 1080ez Only the corporation or partnership can amortize these costs. 1080ez However, you, as an individual, can elect to amortize costs you incur to investigate an interest in an existing partnership. 1080ez These costs qualify as business start-up costs if you acquire the partnership interest. 1080ez Start-up costs election statement. 1080ez   If you elect to amortize your start-up costs, attach a separate statement (if required) that contains the following information. 1080ez A description of the business to which the start-up costs relate. 1080ez A description of each start-up cost incurred. 1080ez The month your active business began (or was acquired). 1080ez The number of months in your amortization period (which is generally 180 months). 1080ez Filing the statement early. 1080ez   You can elect to amortize your start-up costs by filing the statement with a return for any tax year before the year your active business begins. 1080ez If you file the statement early, the election becomes effective in the month of the tax year your active business begins. 1080ez Revised statement. 1080ez   You can file a revised statement to include any start-up costs not included in your original statement. 1080ez However, you cannot include on the revised statement any cost you previously treated on your return as a cost other than a start-up cost. 1080ez You can file the revised statement with a return filed after the return on which you elected to amortize your start-up costs. 1080ez Organizational costs election statement. 1080ez   If you elect to amortize your corporation's or partnership's organizational costs, attach a separate statement (if required) that contains the following information. 1080ez A description of each cost. 1080ez The amount of each cost. 1080ez The date each cost was incurred. 1080ez The month your corporation or partnership began active business (or acquired the business). 1080ez The number of months in your amortization period (which is generally 180 months). 1080ez Partnerships. 1080ez   The statement prepared for a cash basis partnership must also indicate the amount paid before the end of the year for each cost. 1080ez   You do not need to separately list any partnership organizational cost that is less than $10. 1080ez Instead, you can list the total amount of these costs with the dates the first and last costs were incurred. 1080ez   After a partnership makes the election to amortize organizational costs, it can later file an amended return to include additional organizational costs not included in the partnership's original return and statement. 1080ez Getting a Lease If you get a lease for business property, you may recover the cost of acquiring the lease by amortizing it over the term of the lease. 1080ez The term of the lease for amortization purposes generally includes all renewal options (and any other period for which you and the lessor reasonably expect the lease to be renewed). 1080ez However, renewal periods are not included if 75% or more of the cost of acquiring the lease is for the term of the lease remaining on the acquisition date (not including any period for which you may choose to renew, extend, or continue the lease). 1080ez For more information on the costs of getting a lease, see Cost of Getting a Lease in  chapter 3. 1080ez How to amortize. 1080ez   Enter your deduction in Part VI of Form 4562 if you are deducting amortization that begins during the current year, or on the appropriate line of your tax return if you are not otherwise required to file Form 4562. 1080ez Section 197 Intangibles Generally, you may amortize the capitalized costs of “section 197 intangibles” (defined later) ratably over a 15-year period. 1080ez You must amortize these costs if you hold the section 197 intangibles in connection with your trade or business or in an activity engaged in for the production of income. 1080ez You may not be able to amortize section 197 intangibles acquired in a transaction that did not result in a significant change in ownership or use. 1080ez See Anti-Churning Rules, later. 1080ez Your amortization deduction each year is the applicable part of the intangible's adjusted basis (for purposes of determining gain), figured by amortizing it ratably over 15 years (180 months). 1080ez The 15-year period begins with the later of: The month the intangible is acquired, or The month the trade or business or activity engaged in for the production of income begins. 1080ez You cannot deduct amortization for the month you dispose of the intangible. 1080ez If you pay or incur an amount that increases the basis of an amortizable section 197 intangible after the 15-year period begins, amortize it over the remainder of the 15-year period beginning with the month the basis increase occurs. 1080ez You are not allowed any other depreciation or amortization deduction for an amortizable section 197 intangible. 1080ez Tax-exempt use property subject to a lease. 1080ez   The amortization period for any section 197 intangible leased under a lease agreement entered into after March 12, 2004, to a tax-exempt organization, governmental unit, or foreign person or entity (other than a partnership), shall not be less than 125 percent of the lease term. 1080ez Cost attributable to other property. 1080ez   The rules for section 197 intangibles do not apply to any amount that is included in determining the cost of property that is not a section 197 intangible. 1080ez For example, if the cost of computer software is not separately stated from the cost of hardware or other tangible property and you consistently treat it as part of the cost of the hardware or other tangible property, these rules do not apply. 1080ez Similarly, none of the cost of acquiring real property held for the production of rental income is considered the cost of goodwill, going concern value, or any other section 197 intangible. 1080ez Section 197 Intangibles Defined The following assets are section 197 intangibles and must be amortized over 180 months: Goodwill; Going concern value; Workforce in place; Business books and records, operating systems, or any other information base, including lists or other information concerning current or prospective customers; A patent, copyright, formula, process, design, pattern, know-how, format, or similar item; A customer-based intangible; A supplier-based intangible; Any item similar to items (3) through (7); A license, permit, or other right granted by a governmental unit or agency (including issuances and renewals); A covenant not to compete entered into in connection with the acquisition of an interest in a trade or business; Any franchise, trademark, or trade name; and A contract for the use of, or a term interest in, any item in this list. 1080ez You cannot amortize any of the intangibles listed in items (1) through (8) that you created rather than acquired unless you created them in acquiring assets that make up a trade or business or a substantial part of a trade or business. 1080ez Goodwill. 1080ez   This is the value of a trade or business based on expected continued customer patronage due to its name, reputation, or any other factor. 1080ez Going concern value. 1080ez   This is the additional value of a trade or business that attaches to property because the property is an integral part of an ongoing business activity. 1080ez It includes value based on the ability of a business to continue to function and generate income even though there is a change in ownership (but does not include any other section 197 intangible). 1080ez It also includes value based on the immediate use or availability of an acquired trade or business, such as the use of earnings during any period in which the business would not otherwise be available or operational. 1080ez Workforce in place, etc. 1080ez   This includes the composition of a workforce (for example, its experience, education, or training). 1080ez It also includes the terms and conditions of employment, whether contractual or otherwise, and any other value placed on employees or any of their attributes. 1080ez   For example, you must amortize the part of the purchase price of a business that is for the existence of a highly skilled workforce. 1080ez Also, you must amortize the cost of acquiring an existing employment contract or relationship with employees or consultants. 1080ez Business books and records, etc. 1080ez   This includes the intangible value of technical manuals, training manuals or programs, data files, and accounting or inventory control systems. 1080ez It also includes the cost of customer lists, subscription lists, insurance expirations, patient or client files, and lists of newspaper, magazine, radio, and television advertisers. 1080ez Patents, copyrights, etc. 1080ez   This includes package design, computer software, and any interest in a film, sound recording, videotape, book, or other similar property, except as discussed later under Assets That Are Not Section 197 Intangibles . 1080ez Customer-based intangible. 1080ez   This is the composition of market, market share, and any other value resulting from the future provision of goods or services because of relationships with customers in the ordinary course of business. 1080ez For example, you must amortize the part of the purchase price of a business that is for the existence of the following intangibles. 1080ez A customer base. 1080ez A circulation base. 1080ez An undeveloped market or market growth. 1080ez Insurance in force. 1080ez A mortgage servicing contract. 1080ez An investment management contract. 1080ez Any other relationship with customers involving the future provision of goods or services. 1080ez   Accounts receivable or other similar rights to income for goods or services provided to customers before the acquisition of a trade or business are not section 197 intangibles. 1080ez Supplier-based intangible. 1080ez   A supplier-based intangible is the value resulting from the future acquisitions, (through contract or other relationships with suppliers in the ordinary course of business) of goods or services that you will sell or use. 1080ez The amount you pay or incur for supplier-based intangibles includes, for example, any portion of the purchase price of an acquired trade or business that is attributable to the existence of a favorable relationship with persons providing distribution services (such as a favorable shelf or display space or a retail outlet), or the existence of favorable supply contracts. 1080ez Do not include any amount required to be paid for the goods or services to honor the terms of the agreement or other relationship. 1080ez Also, see Assets That Are Not Section 197 Intangibles below. 1080ez Government-granted license, permit, etc. 1080ez   This is any right granted by a governmental unit or an agency or instrumentality of a governmental unit. 1080ez For example, you must amortize the capitalized costs of acquiring (including issuing or renewing) a liquor license, a taxicab medallion or license, or a television or radio broadcasting license. 1080ez Covenant not to compete. 1080ez   Section 197 intangibles include a covenant not to compete (or similar arrangement) entered into in connection with the acquisition of an interest in a trade or business, or a substantial portion of a trade or business. 1080ez An interest in a trade or business includes an interest in a partnership or a corporation engaged in a trade or business. 1080ez   An arrangement that requires the former owner to perform services (or to provide property or the use of property) is not similar to a covenant not to compete to the extent the amount paid under the arrangement represents reasonable compensation for those services or for that property or its use. 1080ez Franchise, trademark, or trade name. 1080ez   A franchise, trademark, or trade name is a section 197 intangible. 1080ez You must amortize its purchase or renewal costs, other than certain contingent payments that you can deduct currently. 1080ez For information on currently deductible contingent payments, see chapter 11. 1080ez Professional sports franchise. 1080ez   A franchise engaged in professional sports and any intangible assets acquired in connection with acquiring the franchise (including player contracts) is a section 197 intangible amortizable over a 15-year period. 1080ez Contract for the use of, or a term interest in, a section 197 intangible. 1080ez   Section 197 intangibles include any right under a license, contract, or other arrangement providing for the use of any section 197 intangible. 1080ez It also includes any term interest in any section 197 intangible, whether the interest is outright or in trust. 1080ez Assets That Are Not Section 197 Intangibles The following assets are not section 197 intangibles. 1080ez Any interest in a corporation, partnership, trust, or estate. 1080ez Any interest under an existing futures contract, foreign currency contract, notional principal contract, interest rate swap, or similar financial contract. 1080ez Any interest in land. 1080ez Most computer software. 1080ez (See Computer software , later. 1080ez ) Any of the following assets not acquired in connection with the acquisition of a trade or business or a substantial part of a trade or business. 1080ez An interest in a film, sound recording, video tape, book, or similar property. 1080ez A right to receive tangible property or services under a contract or from a governmental agency. 1080ez An interest in a patent or copyright. 1080ez Certain rights that have a fixed duration or amount. 1080ez (See Rights of fixed duration or amount , later. 1080ez ) An interest under either of the following. 1080ez An existing lease or sublease of tangible property. 1080ez A debt that was in existence when the interest was acquired. 1080ez A right to service residential mortgages unless the right is acquired in connection with the acquisition of a trade or business or a substantial part of a trade or business. 1080ez Certain transaction costs incurred by parties to a corporate organization or reorganization in which any part of a gain or loss is not recognized. 1080ez Intangible property that is not amortizable under the rules for section 197 intangibles can be depreciated if it meets certain requirements. 1080ez You generally must use the straight line method over its useful life. 1080ez For certain intangibles, the depreciation period is specified in the law and regulations. 1080ez For example, the depreciation period for computer software that is not a section 197 intangible is generally 36 months. 1080ez For more information on depreciating intangible property, see Intangible Property under What Method Can You Use To Depreciate Your Property? in chapter 1 of Publication 946. 1080ez Computer software. 1080ez   Section 197 intangibles do not include the following types of computer software. 1080ez Software that meets all the following requirements. 1080ez It is, or has been, readily available for purchase by the general public. 1080ez It is subject to a nonexclusive license. 1080ez It has not been substantially modified. 1080ez This requirement is considered met if the cost of all modifications is not more than the greater of 25% of the price of the publicly available unmodified software or $2,000. 1080ez Software that is not acquired in connection with the acquisition of a trade or business or a substantial part of a trade or business. 1080ez Computer software defined. 1080ez   Computer software includes all programs designed to cause a computer to perform a desired function. 1080ez It also includes any database or similar item that is in the public domain and is incidental to the operation of qualifying software. 1080ez Rights of fixed duration or amount. 1080ez   Section 197 intangibles do not include any right under a contract or from a governmental agency if the right is acquired in the ordinary course of a trade or business (or in an activity engaged in for the production of income) but not as part of a purchase of a trade or business and either: Has a fixed life of less than 15 years, or Is of a fixed amount that, except for the rules for section 197 intangibles, would be recovered under a method similar to the unit-of-production method of cost recovery. 1080ez However, this does not apply to the following intangibles. 1080ez Goodwill. 1080ez Going concern value. 1080ez A covenant not to compete. 1080ez A franchise, trademark, or trade name. 1080ez A customer-related information base, customer-based intangible, or similar item. 1080ez Safe Harbor for Creative Property Costs If you are engaged in the trade or business of film production, you may be able to amortize the creative property costs for properties not set for production within 3 years of the first capitalized transaction. 1080ez You may amortize these costs ratably over a 15-year period beginning on the first day of the second half of the tax year in which you properly write off the costs for financial accounting purposes. 1080ez If, during the 15-year period, you dispose of the creative property rights, you must continue to amortize the costs over the remainder of the 15-year period. 1080ez Creative property costs include costs paid or incurred to acquire and develop screenplays, scripts, story outlines, motion picture production rights to books and plays, and other similar properties for purposes of potential future film development, production, and exploitation. 1080ez Amortize these costs using the rules of Revenue Procedure 2004-36. 1080ez For more information, see Revenue Procedure 2004-36, 2004-24 I. 1080ez R. 1080ez B. 1080ez 1063, available at  www. 1080ez irs. 1080ez gov/irb/2004-24_IRB/ar16. 1080ez html. 1080ez A change in the treatment of creative property costs is a change in method of accounting. 1080ez Anti-Churning Rules Anti-churning rules prevent you from amortizing most section 197 intangibles if the transaction in which you acquired them did not result in a significant change in ownership or use. 1080ez These rules apply to goodwill and going concern value, and to any other section 197 intangible that is not otherwise depreciable or amortizable. 1080ez Under the anti-churning rules, you cannot use 15-year amortization for the intangible if any of the following conditions apply. 1080ez You or a related person (defined later) held or used the intangible at any time from July 25, 1991, through August 10, 1993. 1080ez You acquired the intangible from a person who held it at any time during the period in (1) and, as part of the transaction, the user did not change. 1080ez You granted the right to use the intangible to a person (or a person related to that person) who held or used it at any time during the period in (1). 1080ez This applies only if the transaction in which you granted the right and the transaction in which you acquired the intangible are part of a series of related transactions. 1080ez See Related person , later, for more information. 1080ez Exceptions. 1080ez   The anti-churning rules do not apply in the following situations. 1080ez You acquired the intangible from a decedent and its basis was stepped up to its fair market value. 1080ez The intangible was amortizable as a section 197 intangible by the seller or transferor you acquired it from. 1080ez This exception does not apply if the transaction in which you acquired the intangible and the transaction in which the seller or transferor acquired it are part of a series of related transactions. 1080ez The gain-recognition exception, discussed later, applies. 1080ez Related person. 1080ez   For purposes of the anti-churning rules, the following are related persons. 1080ez An individual and his or her brothers, sisters, half-brothers, half-sisters, spouse, ancestors (parents, grandparents, etc. 1080ez ), and lineal descendants (children, grandchildren, etc. 1080ez ). 1080ez A corporation and an individual who owns, directly or indirectly, more than 20% of the value of the corporation's outstanding stock. 1080ez Two corporations that are members of the same controlled group as defined in section 1563(a) of the Internal Revenue Code, except that “more than 20%” is substituted for “at least 80%” in that definition and the determination is made without regard to subsections (a)(4) and (e)(3)(C) of section 1563. 1080ez (For an exception, see section 1. 1080ez 197-2(h)(6)(iv) of the regulations. 1080ez ) A trust fiduciary and a corporation if more than 20% of the value of the corporation's outstanding stock is owned, directly or indirectly, by or for the trust or grantor of the trust. 1080ez The grantor and fiduciary, and the fiduciary and beneficiary, of any trust. 1080ez The fiduciaries of two different trusts, and the fiduciaries and beneficiaries of two different trusts, if the same person is the grantor of both trusts. 1080ez The executor and beneficiary of an estate. 1080ez A tax-exempt educational or charitable organization and a person who directly or indirectly controls the organization (or whose family members control it). 1080ez A corporation and a partnership if the same persons own more than 20% of the value of the outstanding stock of the corporation and more than 20% of the capital or profits interest in the partnership. 1080ez Two S corporations, and an S corporation and a regular corporation, if the same persons own more than 20% of the value of the outstanding stock of each corporation. 1080ez Two partnerships if the same persons own, directly or indirectly, more than 20% of the capital or profits interests in both partnerships. 1080ez A partnership and a person who owns, directly or indirectly, more than 20% of the capital or profits interests in the partnership. 1080ez Two persons who are engaged in trades or businesses under common control (as described in section 41(f)(1) of the Internal Revenue Code). 1080ez When to determine relationship. 1080ez   Persons are treated as related if the relationship existed at the following time. 1080ez In the case of a single transaction, immediately before or immediately after the transaction in which the intangible was acquired. 1080ez In the case of a series of related transactions (or a series of transactions that comprise a qualified stock purchase under section 338(d)(3) of the Internal Revenue Code), immediately before the earliest transaction or immediately after the last transaction. 1080ez Ownership of stock. 1080ez   In determining whether an individual directly or indirectly owns any of the outstanding stock of a corporation, the following rules apply. 1080ez Rule 1. 1080ez   Stock directly or indirectly owned by or for a corporation, partnership, estate, or trust is considered owned proportionately by or for its shareholders, partners, or beneficiaries. 1080ez Rule 2. 1080ez   An individual is considered to own the stock directly or indirectly owned by or for his or her family. 1080ez Family includes only brothers and sisters, half-brothers and half-sisters, spouse, ancestors, and lineal descendants. 1080ez Rule 3. 1080ez   An individual owning (other than by applying Rule 2) any stock in a corporation is considered to own the stock directly or indirectly owned by or for his or her partner. 1080ez Rule 4. 1080ez   For purposes of applying Rule 1, 2, or 3, treat stock constructively owned by a person under Rule 1 as actually owned by that person. 1080ez Do not treat stock constructively owned by an individual under Rule 2 or 3 as owned by the individual for reapplying Rule 2 or 3 to make another person the constructive owner of the stock. 1080ez Gain-recognition exception. 1080ez   This exception to the anti-churning rules applies if the person you acquired the intangible from (the transferor) meets both of the following requirements. 1080ez That person would not be related to you (as described under Related person , earlier) if the 20% test for ownership of stock and partnership interests were replaced by a 50% test. 1080ez That person chose to recognize gain on the disposition of the intangible and pay income tax on the gain at the highest tax rate. 1080ez See chapter 2 in Publication 544 for information on making this choice. 1080ez   If this exception applies, the anti-churning rules apply only to the amount of your adjusted basis in the intangible that is more than the gain recognized by the transferor. 1080ez Notification. 1080ez   If the person you acquired the intangible from chooses to recognize gain under the rules for this exception, that person must notify you in writing by the due date of the return on which the choice is made. 1080ez Anti-abuse rule. 1080ez   You cannot amortize any section 197 intangible acquired in a transaction for which the principal purpose was either of the following. 1080ez To avoid the requirement that the intangible be acquired after August 10, 1993. 1080ez To avoid any of the anti-churning rules. 1080ez More information. 1080ez   For more information about the anti-churning rules, including additional rules for partnerships, see Regulations section 1. 1080ez 197-2(h). 1080ez Incorrect Amount of Amortization Deducted If you later discover that you deducted an incorrect amount for amortization for a section 197 intangible in any year, you may be able to make a correction for that year by filing an amended return. 1080ez See Amended Return , next. 1080ez If you are not allowed to make the correction on an amended return, you can change your accounting method to claim the correct amortization. 1080ez See Changing Your Accounting Method , later. 1080ez Amended Return If you deducted an incorrect amount for amortization, you can file an amended return to correct the following. 1080ez A mathematical error made in any year. 1080ez A posting error made in any year. 1080ez An amortization deduction for a section 197 intangible for which you have not adopted a method of accounting. 1080ez When to file. 1080ez   If an amended return is allowed, you must file it by the later of the following dates. 1080ez 3 years from the date you filed your original return for the year in which you did not deduct the correct amount. 1080ez (A return filed early is considered filed on the due date. 1080ez ) 2 years from the time you paid your tax for that year. 1080ez Changing Your Accounting Method Generally, you must get IRS approval to change your method of accounting. 1080ez File Form 3115, Application for Change in Accounting Method, to request a change to a permissible method of accounting for amortization. 1080ez The following are examples of a change in method of accounting for amortization. 1080ez A change in the amortization method, period of recovery, or convention of an amortizable asset. 1080ez A change in the accounting for amortizable assets from a single asset account to a multiple asset account (pooling), or vice versa. 1080ez A change in the accounting for amortizable assets from one type of multiple asset account to a different type of multiple asset account. 1080ez Changes in amortization that are not a change in method of accounting include the following: A change in computing amortization in the tax year in which your use of the asset changes. 1080ez An adjustment in the useful life of an amortizable asset. 1080ez Generally, the making of a late amortization election or the revocation of a timely valid amortization election. 1080ez Any change in the placed-in-service date of an amortizable asset. 1080ez See Regulations section 1. 1080ez 446-1(e)(2)(ii)(a) for more information and examples. 1080ez Automatic approval. 1080ez   In some instances, you may be able to get automatic approval from the IRS to change your method of accounting for amortization. 1080ez For a list of automatic accounting method changes, see the Instructions for Form 3115. 1080ez Also see the Instructions for Form 3115 for more information on getting approval, automatic approval procedures, and a list of exceptions to the automatic approval process. 1080ez For more information, see Revenue Procedure 2006-12, as modified by Revenue Procedure 2006-37, and Revenue Procedure 2008-52, as amplified, clarified, and modified by Revenue Procedure 2009-39, as clarified and modified by Revenue Procedure 2011-14, as modified and amplified by Revenue Procedure 2011-22, as modified by Revenue Procedure 2012-39, or any successor. 1080ez See Revenue Procedure 2006-12, 2006-3 I. 1080ez R. 1080ez B. 1080ez 310, available at  www. 1080ez irs. 1080ez gov/irb/2006-03_IRB/ar14. 1080ez html. 1080ez  See Revenue Procedure 2006-37, 2006-38 I. 1080ez R. 1080ez B. 1080ez 499, available at  www. 1080ez irs. 1080ez gov/irb/2006-38_IRB/ar10. 1080ez html. 1080ez  See Revenue Procedure 2008-52, 2008-36 I. 1080ez R. 1080ez B. 1080ez 587, available at www. 1080ez irs. 1080ez gov/irb/2008-36_IRB/ar09. 1080ez html. 1080ez  See Revenue Procedure 2009-39, 2009-38 I. 1080ez R. 1080ez B. 1080ez 371, available at  www. 1080ez irs. 1080ez gov/irb/2009-38_IRB/ar08. 1080ez html. 1080ez  See Revenue Procedure 2011-14, 2011-4 I. 1080ez R. 1080ez B. 1080ez 330, available at  www. 1080ez irs. 1080ez gov/irb/2011-04_IRB/ar08. 1080ez html. 1080ez  See Revenue Procedure 2011-22, 2011-18 I. 1080ez R. 1080ez B. 1080ez 737, available at  www. 1080ez irs. 1080ez gov/irb/2011-18_IRB/ar08. 1080ez html. 1080ez Also, see Revenue Procedure 2012-39, 2012-41 I. 1080ez R. 1080ez B. 1080ez 470 available at www. 1080ez irs. 1080ez gov/irb/2012-41_IRB/index. 1080ez html. 1080ez Disposition of Section 197 Intangibles A section 197 intangible is treated as depreciable property used in your trade or business. 1080ez If you held the intangible for more than 1 year, any gain on its disposition, up to the amount of allowable amortization, is ordinary income (section 1245 gain). 1080ez If multiple section 197 intangibles are disposed of in a single transaction or a series of related transactions, treat all of the section 197 intangibles as if they were a single asset for purposes of determining the amount of gain that is ordinary income. 1080ez Any remaining gain, or any loss, is a section 1231 gain or loss. 1080ez If you held the intangible 1 year or less, any gain or loss on its disposition is an ordinary gain or loss. 1080ez For more information on ordinary or capital gain or loss on business property, see chapter 3 in Publication 544. 1080ez Nondeductible loss. 1080ez   You cannot deduct any loss on the disposition or worthlessness of a section 197 intangible that you acquired in the same transaction (or series of related transactions) as other section 197 intangibles you still have. 1080ez Instead, increase the adjusted basis of each remaining amortizable section 197 intangible by a proportionate part of the nondeductible loss. 1080ez Figure the increase by multiplying the nondeductible loss on the disposition of the intangible by the following fraction. 1080ez The numerator is the adjusted basis of each remaining intangible on the date of the disposition. 1080ez The denominator is the total adjusted bases of all remaining amortizable section 197 intangibles on the date of the disposition. 1080ez Covenant not to compete. 1080ez   A covenant not to compete, or similar arrangement, is not considered disposed of or worthless before you dispose of your entire interest in the trade or business for which you entered into the covenant. 1080ez Nonrecognition transfers. 1080ez   If you acquire a section 197 intangible in a nonrecognition transfer, you are treated as the transferor with respect to the part of your adjusted basis in the intangible that is not more than the transferor's adjusted basis. 1080ez You amortize this part of the adjusted basis over the intangible's remaining amortization period in the hands of the transferor. 1080ez Nonrecognition transfers include transfers to a corporation, partnership contributions and distributions, like-kind exchanges, and involuntary conversions. 1080ez   In a like-kind exchange or involuntary conversion of a section 197 intangible, you must continue to amortize the part of your adjusted basis in the acquired intangible that is not more than your adjusted basis in the exchanged or converted intangible over the remaining amortization period of the exchanged or converted intangible. 1080ez Amortize over a new 15-year period the part of your adjusted basis in the acquired intangible that is more than your adjusted basis in the exchanged or converted intangible. 1080ez Example. 1080ez You own a section 197 intangible you have amortized for 4 full years. 1080ez It has a remaining unamortized basis of $30,000. 1080ez You exchange the asset plus $10,000 for a like-kind section 197 intangible. 1080ez The nonrecognition provisions of like-kind exchanges apply. 1080ez You amortize $30,000 of the $40,000 adjusted basis of the acquired intangible over the 11 years remaining in the original 15-year amortization period for the transferred asset. 1080ez You amortize the other $10,000 of adjusted basis over a new 15-year period. 1080ez For more information, see Regulations section 1. 1080ez 197-2(g). 1080ez Reforestation Costs You can elect to deduct a limited amount of reforestation costs paid or incurred during the tax year. 1080ez See Reforestation Costs in chapter 7. 1080ez You can elect to amortize the qualifying costs that are not deducted currently over an 84-month period. 1080ez There is no limit on the amount of your amortization deduction for reforestation costs paid or incurred during the tax year. 1080ez The election to amortize reforestation costs incurred by a partnership, S corporation, or estate must be made by the partnership, corporation, or estate. 1080ez A partner, shareholder, or beneficiary cannot make that election. 1080ez A partner's or shareholder's share of amortizable costs is figured under the general rules for allocating items of income, loss, deduction, etc. 1080ez , of a partnership or S corporation. 1080ez The amortizable costs of an estate are divided between the estate and the income beneficiary based on the income of the estate allocable to each. 1080ez Qualifying costs. 1080ez   Reforestation costs are the direct costs of planting or seeding for forestation or reforestation. 1080ez Qualifying costs include only those costs you must capitalize and include in the adjusted basis of the property. 1080ez They include costs for the following items. 1080ez Site preparation. 1080ez Seeds or seedlings. 1080ez Labor. 1080ez Tools. 1080ez Depreciation on equipment used in planting and seeding. 1080ez Qualifying costs do not include costs for which the government reimburses you under a cost-sharing program, unless you include the reimbursement in your income. 1080ez Qualified timber property. 1080ez   Qualified timber property is property that contains trees in significant commercial quantities. 1080ez It can be a woodlot or other site that you own or lease. 1080ez The property qualifies only if it meets all of the following requirements. 1080ez It is located in the United States. 1080ez It is held for the growing and cutting of timber you will either use in, or sell for use in, the commercial production of timber products. 1080ez It consists of at least one acre planted with tree seedlings in the manner normally used in forestation or reforestation. 1080ez Qualified timber property does not include property on which you have planted shelter belts or ornamental trees, such as Christmas trees. 1080ez Amortization period. 1080ez   The 84-month amortization period starts on the first day of the first month of the second half of the tax year you incur the costs (July 1 for a calendar year taxpayer), regardless of the month you actually incur the costs. 1080ez You can claim amortization deductions for no more than 6 months of the first and last (eighth) tax years of the period. 1080ez Life tenant and remainderman. 1080ez   If one person holds the property for life with the remainder going to another person, the life tenant is entitled to the full amortization for qualifying reforestation costs incurred by the life tenant. 1080ez Any remainder interest in the property is ignored for amortization purposes. 1080ez Recapture. 1080ez   If you dispose of qualified timber property within 10 years after the tax year you incur qualifying reforestation expenses, report any gain as ordinary income up to the amortization you took. 1080ez See chapter 3 of Publication 544 for more information. 1080ez How to make the election. 1080ez   To elect to amortize qualifying reforestation costs, complete Part VI of Form 4562 and attach a statement that contains the following information. 1080ez A description of the costs and the dates you incurred them. 1080ez A description of the type of timber being grown and the purpose for which it is grown. 1080ez Attach a separate statement for each property for which you amortize reforestation costs. 1080ez   Generally, you must make the election on a timely filed return (including extensions) for the tax year in which you incurred the costs. 1080ez However, if you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). 1080ez Attach Form 4562 and the statement to the amended return and write “Filed pursuant to section 301. 1080ez 9100-2” on Form 4562. 1080ez File the amended return at the same address you filed the original return. 1080ez Revoking the election. 1080ez   You must get IRS approval to revoke your election to amortize qualifying reforestation costs. 1080ez Your application to revoke the election must include your name, address, the years for which your election was in effect, and your reason for revoking it. 1080ez Please provide your daytime telephone number (optional), in case we need to contact you. 1080ez You, or your duly authorized representative, must sign the application and file it at least 90 days before the due date (without extensions) for filing your income tax return for the first tax year for which your election is to end. 1080ez    Send the application to: Internal Revenue Service Associate Chief Counsel Passthroughs and Special Industries CC:PSI:6 1111 Constitution Ave. 1080ez NW, IR-5300 Washington, DC 20224 Geological and Geophysical Costs You can amortize the cost of geological and geophysical expenses paid or incurred in connection with oil and gas exploration or development within the United States. 1080ez These costs can be amortized ratably over a 24-month period beginning on the mid-point of the tax year in which the expenses were paid or incurred. 1080ez For major integrated oil companies (as defined in section 167(h)(5)), these costs must be amortized ratably over a 5-year period for costs paid or incurred after May 17, 2006 (a 7-year period for costs paid or incurred after December 19, 2007). 1080ez If you retire or abandon the property during the amortization period, no amortization deduction is allowed in the year of retirement or abandonment. 1080ez Pollution Control Facilities You can elect to amortize the cost of a certified pollution control facility over 60 months. 1080ez However, see Atmospheric pollution control facilities for an exception. 1080ez The cost of a pollution control facility that is not eligible for amortization can be depreciated under the regular rules for depreciation. 1080ez Also, you can claim a special depreciation allowance on a certified pollution control facility that is qualified property even if you elect to amortize its cost. 1080ez You must reduce its cost (amortizable basis) by the amount of any special allowance you claim. 1080ez See chapter 3 of Publication 946. 1080ez A certified pollution control facility is a new identifiable treatment facility used in connection with a plant or other property in operation before 1976, to reduce or control water or atmospheric pollution or contamination. 1080ez The facility must do so by removing, changing, disposing, storing, or preventing the creation or emission of pollutants, contaminants, wastes, or heat. 1080ez The facility must be certified by state and federal certifying authorities. 1080ez The facility must not significantly increase the output or capacity, extend the useful life, or reduce the total operating costs of the plant or other property. 1080ez Also, it must not significantly change the nature of the manufacturing or production process or facility. 1080ez The federal certifying authority will not certify your property to the extent it appears you will recover (over the property's useful life) all or part of its cost from the profit based on its operation (such as through sales of recovered wastes). 1080ez The federal certifying authority will describe the nature of the potential cost recovery. 1080ez You must then reduce the amortizable basis of the facility by this potential recovery. 1080ez New identifiable treatment facility. 1080ez   A new identifiable treatment facility is tangible depreciable property that is identifiable as a treatment facility. 1080ez It does not include a building and its structural components unless the building is exclusively a treatment facility. 1080ez Atmospheric pollution control facilities. 1080ez   Certain atmospheric pollution control facilities can be amortized over 84 months. 1080ez To qualify, the following must apply. 1080ez The facility must be acquired and placed in service after April 11, 2005. 1080ez If acquired, the original use must begin with you after April 11, 2005. 1080ez The facility must be used in connection with an electric generation plant or other property placed in operation after December 31, 1975, that is primarily coal fired. 1080ez If you construct, reconstruct, or erect the facility, only the basis attributable to the construction, reconstruction, or erection completed after April 11, 2005, qualifies. 1080ez Basis reduction for corporations. 1080ez   A corporation must reduce the amortizable basis of a pollution control facility by 20% before figuring the amortization deduction. 1080ez More information. 1080ez   For more information on the amortization of pollution control facilities, see Code sections 169 and 291(c) and the related regulations. 1080ez Research and Experimental Costs You can elect to amortize your research and experimental costs, deduct them as current business expenses, or write them off over a 10-year period (see Optional write-off method below). 1080ez If you elect to amortize these costs, deduct them in equal amounts over 60 months or more. 1080ez The amortization period begins the month you first receive an economic benefit from the costs. 1080ez For a definition of “research and experimental costs” and information on deducting them as current business expenses, see chapter 7. 1080ez Optional write-off method. 1080ez   Rather than amortize these costs or deduct them as a current expense, you have the option of deducting (writing off) research and experimental costs ratably over a 10-year period beginning with the tax year in which you incurred the costs. 1080ez For more information, see Optional Write-off of Certain Tax Preferences , later, and section 59(e) of the Internal Revenue Code. 1080ez Costs you can amortize. 1080ez   You can amortize costs chargeable to a capital account (see chapter 1) if you meet both of the following requirements. 1080ez You paid or incurred the costs in your trade or business. 1080ez You are not deducting the costs currently. 1080ez How to make the election. 1080ez   To elect to amortize research and experimental costs, complete Part VI of Form 4562 and attach it to your income tax return. 1080ez Generally, you must file the return by the due date (including extensions). 1080ez However, if you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). 1080ez Attach Form 4562 to the amended return and write “Filed pursuant to section 301. 1080ez 9100-2” on Form 4562. 1080ez File the amended return at the same address you filed the original return. 1080ez   Your election is binding for the year it is made and for all later years unless you obtain approval from the IRS to change to a different method. 1080ez Optional Write-off of Certain Tax Preferences You can elect to amortize certain tax preference items over an optional period beginning in the tax year in which you incurred the costs. 1080ez If you make this election, there is no AMT adjustment. 1080ez The applicable costs and the optional recovery periods are as follows: Circulation costs — 3 years, Intangible drilling and development costs — 60 months, Mining exploration and development costs — 10 years, and Research and experimental costs — 10 years. 1080ez How to make the election. 1080ez   To elect to amortize qualifying costs over the optional recovery period, complete Part VI of Form 4562 and attach a statement containing the following information to your return for the tax year in which the election begins: Your name, address, and taxpayer identification number; and The type of cost and the specific amount of the cost for which you are making the election. 1080ez   Generally, the election must be made on a timely filed return (including extensions) for the tax year in which you incurred the costs. 1080ez However, if you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). 1080ez Attach Form 4562 to the amended return and write “Filed pursuant to section 301. 1080ez 9100-2” on Form 4562. 1080ez File the amended return at the same address you filed the original return. 1080ez Revoking the election. 1080ez   You must obtain consent from the IRS to revoke your election. 1080ez Your request to revoke the election must be submitted to the IRS in the form of a letter ruling before the end of the tax year in which the optional recovery period ends. 1080ez The request must contain all of the information necessary to demonstrate the rare and unusual circumstances that would justify granting revocation. 1080ez If the request for revocation is approved, any unamortized costs are deductible in the year the revocation is effective. 1080ez Prev  Up  Next   Home   More Online Publications