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2009 Amended Tax Return

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2009 Amended Tax Return

2009 amended tax return 1. 2009 amended tax return   Overview of Depreciation Table of Contents Introduction Useful Items - You may want to see: What Property Can Be Depreciated?Property You Own Property Used in Your Business or Income-Producing Activity Property Having a Determinable Useful Life Property Lasting More Than One Year What Property Cannot Be Depreciated?Land Excepted Property When Does Depreciation Begin and End?Placed in Service Idle Property Cost or Other Basis Fully Recovered Retired From Service What Method Can You Use To Depreciate Your Property?Property You Placed in Service Before 1987 Property Owned or Used in 1986 Intangible Property Corporate or Partnership Property Acquired in a Nontaxable Transfer Election To Exclude Property From MACRS What Is the Basis of Your Depreciable Property?Cost as Basis Other Basis Adjusted Basis How Do You Treat Repairs and Improvements? Do You Have To File Form 4562? How Do You Correct Depreciation Deductions?Filing an Amended Return Changing Your Accounting Method Introduction Depreciation is an annual income tax deduction that allows you to recover the cost or other basis of certain property over the time you use the property. 2009 amended tax return It is an allowance for the wear and tear, deterioration, or obsolescence of the property. 2009 amended tax return This chapter discusses the general rules for depreciating property and answers the following questions. 2009 amended tax return What property can be depreciated? What property cannot be depreciated? When does depreciation begin and end? What method can you use to depreciate your property? What is the basis of your depreciable property? How do you treat repairs and improvements? Do you have to file Form 4562? How do you correct depreciation deductions? Useful Items - You may want to see: Publication 534 Depreciating Property Placed in Service Before 1987 535 Business Expenses 538 Accounting Periods and Methods 551 Basis of Assets Form (and Instructions) Sch C (Form 1040) Profit or Loss From Business Sch C-EZ (Form 1040) Net Profit From Business 2106 Employee Business Expenses 2106-EZ Unreimbursed Employee Business Expenses 3115 Application for Change in Accounting Method 4562 Depreciation and Amortization See chapter 6 for information about getting publications and forms. 2009 amended tax return What Property Can Be Depreciated? You can depreciate most types of tangible property (except land), such as buildings, machinery, vehicles, furniture, and equipment. 2009 amended tax return You also can depreciate certain intangible property, such as patents, copyrights, and computer software. 2009 amended tax return To be depreciable, the property must meet all the following requirements. 2009 amended tax return It must be property you own. 2009 amended tax return It must be used in your business or income-producing activity. 2009 amended tax return It must have a determinable useful life. 2009 amended tax return It must be expected to last more than one year. 2009 amended tax return The following discussions provide information about these requirements. 2009 amended tax return Property You Own To claim depreciation, you usually must be the owner of the property. 2009 amended tax return You are considered as owning property even if it is subject to a debt. 2009 amended tax return Example 1. 2009 amended tax return You made a down payment to purchase rental property and assumed the previous owner's mortgage. 2009 amended tax return You own the property and you can depreciate it. 2009 amended tax return Example 2. 2009 amended tax return You bought a new van that you will use only for your courier business. 2009 amended tax return You will be making payments on the van over the next 5 years. 2009 amended tax return You own the van and you can depreciate it. 2009 amended tax return Leased property. 2009 amended tax return   You can depreciate leased property only if you retain the incidents of ownership in the property (explained below). 2009 amended tax return This means you bear the burden of exhaustion of the capital investment in the property. 2009 amended tax return Therefore, if you lease property from someone to use in your trade or business or for the production of income, you generally cannot depreciate its cost because you do not retain the incidents of ownership. 2009 amended tax return You can, however, depreciate any capital improvements you make to the property. 2009 amended tax return See How Do You Treat Repairs and Improvements later in this chapter and Additions and Improvements under Which Recovery Period Applies in chapter 4. 2009 amended tax return   If you lease property to someone, you generally can depreciate its cost even if the lessee (the person leasing from you) has agreed to preserve, replace, renew, and maintain the property. 2009 amended tax return However, if the lease provides that the lessee is to maintain the property and return to you the same property or its equivalent in value at the expiration of the lease in as good condition and value as when leased, you cannot depreciate the cost of the property. 2009 amended tax return Incidents of ownership. 2009 amended tax return   Incidents of ownership in property include the following. 2009 amended tax return The legal title to the property. 2009 amended tax return The legal obligation to pay for the property. 2009 amended tax return The responsibility to pay maintenance and operating expenses. 2009 amended tax return The duty to pay any taxes on the property. 2009 amended tax return The risk of loss if the property is destroyed, condemned, or diminished in value through obsolescence or exhaustion. 2009 amended tax return Life tenant. 2009 amended tax return   Generally, if you hold business or investment property as a life tenant, you can depreciate it as if you were the absolute owner of the property. 2009 amended tax return However, see Certain term interests in property under Excepted Property, later. 2009 amended tax return Cooperative apartments. 2009 amended tax return   If you are a tenant-stockholder in a cooperative housing corporation and use your cooperative apartment in your business or for the production of income, you can depreciate your stock in the corporation, even though the corporation owns the apartment. 2009 amended tax return   Figure your depreciation deduction as follows. 2009 amended tax return Figure the depreciation for all the depreciable real property owned by the corporation in which you have a proprietary lease or right of tenancy. 2009 amended tax return If you bought your cooperative stock after its first offering, figure the depreciable basis of this property as follows. 2009 amended tax return Multiply your cost per share by the total number of outstanding shares, including any shares held by the corporation. 2009 amended tax return Add to the amount figured in (a) any mortgage debt on the property on the date you bought the stock. 2009 amended tax return Subtract from the amount figured in (b) any mortgage debt that is not for the depreciable real property, such as the part for the land. 2009 amended tax return Subtract from the amount figured in (1) any depreciation for space owned by the corporation that can be rented but cannot be lived in by tenant-stockholders. 2009 amended tax return Divide the number of your shares of stock by the total number of outstanding shares, including any shares held by the corporation. 2009 amended tax return Multiply the result of (2) by the percentage you figured in (3). 2009 amended tax return This is your depreciation on the stock. 2009 amended tax return   Your depreciation deduction for the year cannot be more than the part of your adjusted basis in the stock of the corporation that is allocable to your business or income-producing property. 2009 amended tax return You must also reduce your depreciation deduction if only a portion of the property is used in a business or for the production of income. 2009 amended tax return Example. 2009 amended tax return You figure your share of the cooperative housing corporation's depreciation to be $30,000. 2009 amended tax return Your adjusted basis in the stock of the corporation is $50,000. 2009 amended tax return You use one half of your apartment solely for business purposes. 2009 amended tax return Your depreciation deduction for the stock for the year cannot be more than $25,000 (½ of $50,000). 2009 amended tax return Change to business use. 2009 amended tax return   If you change your cooperative apartment to business use, figure your allowable depreciation as explained earlier. 2009 amended tax return The basis of all the depreciable real property owned by the cooperative housing corporation is the smaller of the following amounts. 2009 amended tax return The fair market value of the property on the date you change your apartment to business use. 2009 amended tax return This is considered to be the same as the corporation's adjusted basis minus straight line depreciation, unless this value is unrealistic. 2009 amended tax return The corporation's adjusted basis in the property on that date. 2009 amended tax return Do not subtract depreciation when figuring the corporation's adjusted basis. 2009 amended tax return   If you bought the stock after its first offering, the corporation's adjusted basis in the property is the amount figured in (1), above. 2009 amended tax return The fair market value of the property is considered to be the same as the corporation's adjusted basis figured in this way minus straight line depreciation, unless the value is unrealistic. 2009 amended tax return   For a discussion of fair market value and adjusted basis, see Publication 551. 2009 amended tax return Property Used in Your Business or Income-Producing Activity To claim depreciation on property, you must use it in your business or income-producing activity. 2009 amended tax return If you use property to produce income (investment use), the income must be taxable. 2009 amended tax return You cannot depreciate property that you use solely for personal activities. 2009 amended tax return Partial business or investment use. 2009 amended tax return   If you use property for business or investment purposes and for personal purposes, you can deduct depreciation based only on the business or investment use. 2009 amended tax return For example, you cannot deduct depreciation on a car used only for commuting, personal shopping trips, family vacations, driving children to and from school, or similar activities. 2009 amended tax return    You must keep records showing the business, investment, and personal use of your property. 2009 amended tax return For more information on the records you must keep for listed property, such as a car, see What Records Must Be Kept in chapter 5. 2009 amended tax return    Although you can combine business and investment use of property when figuring depreciation deductions, do not treat investment use as qualified business use when determining whether the business-use requirement for listed property is met. 2009 amended tax return For information about qualified business use of listed property, see What Is the Business-Use Requirement in chapter 5. 2009 amended tax return Office in the home. 2009 amended tax return   If you use part of your home as an office, you may be able to deduct depreciation on that part based on its business use. 2009 amended tax return For information about depreciating your home office, see Publication 587. 2009 amended tax return Inventory. 2009 amended tax return   You cannot depreciate inventory because it is not held for use in your business. 2009 amended tax return Inventory is any property you hold primarily for sale to customers in the ordinary course of your business. 2009 amended tax return   If you are a rent-to-own dealer, you may be able to treat certain property held in your business as depreciable property rather than as inventory. 2009 amended tax return See Rent-to-own dealer under Which Property Class Applies Under GDS in chapter 4. 2009 amended tax return   In some cases, it is not clear whether property is held for sale (inventory) or for use in your business. 2009 amended tax return If it is unclear, examine carefully all the facts in the operation of the particular business. 2009 amended tax return The following example shows how a careful examination of the facts in two similar situations results in different conclusions. 2009 amended tax return Example. 2009 amended tax return Maple Corporation is in the business of leasing cars. 2009 amended tax return At the end of their useful lives, when the cars are no longer profitable to lease, Maple sells them. 2009 amended tax return Maple does not have a showroom, used car lot, or individuals to sell the cars. 2009 amended tax return Instead, it sells them through wholesalers or by similar arrangements in which a dealer's profit is not intended or considered. 2009 amended tax return Maple can depreciate the leased cars because the cars are not held primarily for sale to customers in the ordinary course of business, but are leased. 2009 amended tax return If Maple buys cars at wholesale prices, leases them for a short time, and then sells them at retail prices or in sales in which a dealer's profit is intended, the cars are treated as inventory and are not depreciable property. 2009 amended tax return In this situation, the cars are held primarily for sale to customers in the ordinary course of business. 2009 amended tax return Containers. 2009 amended tax return   Generally, containers for the products you sell are part of inventory and you cannot depreciate them. 2009 amended tax return However, you can depreciate containers used to ship your products if they have a life longer than one year and meet the following requirements. 2009 amended tax return They qualify as property used in your business. 2009 amended tax return Title to the containers does not pass to the buyer. 2009 amended tax return   To determine if these requirements are met, consider the following questions. 2009 amended tax return Does your sales contract, sales invoice, or other type of order acknowledgment indicate whether you have retained title? Does your invoice treat the containers as separate items? Do any of your records state your basis in the containers? Property Having a Determinable Useful Life To be depreciable, your property must have a determinable useful life. 2009 amended tax return This means that it must be something that wears out, decays, gets used up, becomes obsolete, or loses its value from natural causes. 2009 amended tax return Property Lasting More Than One Year To be depreciable, property must have a useful life that extends substantially beyond the year you place it in service. 2009 amended tax return Example. 2009 amended tax return You maintain a library for use in your profession. 2009 amended tax return You can depreciate it. 2009 amended tax return However, if you buy technical books, journals, or information services for use in your business that have a useful life of one year or less, you cannot depreciate them. 2009 amended tax return Instead, you deduct their cost as a business expense. 2009 amended tax return What Property Cannot Be Depreciated? Certain property cannot be depreciated. 2009 amended tax return This includes land and certain excepted property. 2009 amended tax return Land You cannot depreciate the cost of land because land does not wear out, become obsolete, or get used up. 2009 amended tax return The cost of land generally includes the cost of clearing, grading, planting, and landscaping. 2009 amended tax return Although you cannot depreciate land, you can depreciate certain land preparation costs, such as landscaping costs, incurred in preparing land for business use. 2009 amended tax return These costs must be so closely associated with other depreciable property that you can determine a life for them along with the life of the associated property. 2009 amended tax return Example. 2009 amended tax return You constructed a new building for use in your business and paid for grading, clearing, seeding, and planting bushes and trees. 2009 amended tax return Some of the bushes and trees were planted right next to the building, while others were planted around the outer border of the lot. 2009 amended tax return If you replace the building, you would have to destroy the bushes and trees right next to it. 2009 amended tax return These bushes and trees are closely associated with the building, so they have a determinable useful life. 2009 amended tax return Therefore, you can depreciate them. 2009 amended tax return Add your other land preparation costs to the basis of your land because they have no determinable life and you cannot depreciate them. 2009 amended tax return Excepted Property Even if the requirements explained in the preceding discussions are met, you cannot depreciate the following property. 2009 amended tax return Property placed in service and disposed of in the same year. 2009 amended tax return Determining when property is placed in service is explained later. 2009 amended tax return Equipment used to build capital improvements. 2009 amended tax return You must add otherwise allowable depreciation on the equipment during the period of construction to the basis of your improvements. 2009 amended tax return See Uniform Capitalization Rules in Publication 551. 2009 amended tax return Section 197 intangibles. 2009 amended tax return You must amortize these costs. 2009 amended tax return Section 197 intangibles are discussed in detail in Chapter 8 of Publication 535. 2009 amended tax return Intangible property, such as certain computer software, that is not section 197 intangible property, can be depreciated if it meets certain requirements. 2009 amended tax return See Intangible Property , later. 2009 amended tax return Certain term interests. 2009 amended tax return Certain term interests in property. 2009 amended tax return   You cannot depreciate a term interest in property created or acquired after July 27, 1989, for any period during which the remainder interest is held, directly or indirectly, by a person related to you. 2009 amended tax return A term interest in property means a life interest in property, an interest in property for a term of years, or an income interest in a trust. 2009 amended tax return Related persons. 2009 amended tax return   For a description of related persons, see Related Persons, later. 2009 amended tax return For this purpose, however, treat as related persons only the relationships listed in items (1) through (10) of that discussion and substitute “50%” for “10%” each place it appears. 2009 amended tax return Basis adjustments. 2009 amended tax return   If you would be allowed a depreciation deduction for a term interest in property except that the holder of the remainder interest is related to you, you generally must reduce your basis in the term interest by any depreciation or amortization not allowed. 2009 amended tax return   If you hold the remainder interest, you generally must increase your basis in that interest by the depreciation not allowed to the term interest holder. 2009 amended tax return However, do not increase your basis for depreciation not allowed for periods during which either of the following situations applies. 2009 amended tax return The term interest is held by an organization exempt from tax. 2009 amended tax return The term interest is held by a nonresident alien individual or foreign corporation, and the income from the term interest is not effectively connected with the conduct of a trade or business in the United States. 2009 amended tax return Exceptions. 2009 amended tax return   The above rules do not apply to the holder of a term interest in property acquired by gift, bequest, or inheritance. 2009 amended tax return They also do not apply to the holder of dividend rights that were separated from any stripped preferred stock if the rights were purchased after April 30, 1993, or to a person whose basis in the stock is determined by reference to the basis in the hands of the purchaser. 2009 amended tax return When Does Depreciation Begin and End? You begin to depreciate your property when you place it in service for use in your trade or business or for the production of income. 2009 amended tax return You stop depreciating property either when you have fully recovered your cost or other basis or when you retire it from service, whichever happens first. 2009 amended tax return Placed in Service You place property in service when it is ready and available for a specific use, whether in a business activity, an income-producing activity, a tax-exempt activity, or a personal activity. 2009 amended tax return Even if you are not using the property, it is in service when it is ready and available for its specific use. 2009 amended tax return Example 1. 2009 amended tax return Donald Steep bought a machine for his business. 2009 amended tax return The machine was delivered last year. 2009 amended tax return However, it was not installed and operational until this year. 2009 amended tax return It is considered placed in service this year. 2009 amended tax return If the machine had been ready and available for use when it was delivered, it would be considered placed in service last year even if it was not actually used until this year. 2009 amended tax return Example 2. 2009 amended tax return On April 6, Sue Thorn bought a house to use as residential rental property. 2009 amended tax return She made several repairs and had it ready for rent on July 5. 2009 amended tax return At that time, she began to advertise it for rent in the local newspaper. 2009 amended tax return The house is considered placed in service in July when it was ready and available for rent. 2009 amended tax return She can begin to depreciate it in July. 2009 amended tax return Example 3. 2009 amended tax return James Elm is a building contractor who specializes in constructing office buildings. 2009 amended tax return He bought a truck last year that had to be modified to lift materials to second-story levels. 2009 amended tax return The installation of the lifting equipment was completed and James accepted delivery of the modified truck on January 10 of this year. 2009 amended tax return The truck was placed in service on January 10, the date it was ready and available to perform the function for which it was bought. 2009 amended tax return Conversion to business use. 2009 amended tax return   If you place property in service in a personal activity, you cannot claim depreciation. 2009 amended tax return However, if you change the property's use to use in a business or income-producing activity, then you can begin to depreciate it at the time of the change. 2009 amended tax return You place the property in service in the business or income-producing activity on the date of the change. 2009 amended tax return Example. 2009 amended tax return You bought a home and used it as your personal home several years before you converted it to rental property. 2009 amended tax return Although its specific use was personal and no depreciation was allowable, you placed the home in service when you began using it as your home. 2009 amended tax return You can begin to claim depreciation in the year you converted it to rental property because its use changed to an income-producing use at that time. 2009 amended tax return Idle Property Continue to claim a deduction for depreciation on property used in your business or for the production of income even if it is temporarily idle (not in use). 2009 amended tax return For example, if you stop using a machine because there is a temporary lack of a market for a product made with that machine, continue to deduct depreciation on the machine. 2009 amended tax return Cost or Other Basis Fully Recovered You stop depreciating property when you have fully recovered your cost or other basis. 2009 amended tax return You recover your basis when your section 179 and allowed or allowable depreciation deductions equal your cost or investment in the property. 2009 amended tax return See What Is the Basis of Your Depreciable Property , later. 2009 amended tax return Retired From Service You stop depreciating property when you retire it from service, even if you have not fully recovered its cost or other basis. 2009 amended tax return You retire property from service when you permanently withdraw it from use in a trade or business or from use in the production of income because of any of the following events. 2009 amended tax return You sell or exchange the property. 2009 amended tax return You convert the property to personal use. 2009 amended tax return You abandon the property. 2009 amended tax return You transfer the property to a supplies or scrap account. 2009 amended tax return The property is destroyed. 2009 amended tax return If you included the property in a general asset account, see How Do You Use General Asset Accounts in chapter 4 for the rules that apply when you dispose of that property. 2009 amended tax return What Method Can You Use To Depreciate Your Property? You must use the Modified Accelerated Cost Recovery System (MACRS) to depreciate most property. 2009 amended tax return MACRS is discussed in chapter 4. 2009 amended tax return You cannot use MACRS to depreciate the following property. 2009 amended tax return Property you placed in service before 1987. 2009 amended tax return Certain property owned or used in 1986. 2009 amended tax return Intangible property. 2009 amended tax return Films, video tapes, and recordings. 2009 amended tax return Certain corporate or partnership property acquired in a nontaxable transfer. 2009 amended tax return Property you elected to exclude from MACRS. 2009 amended tax return The following discussions describe the property listed above and explain what depreciation method should be used. 2009 amended tax return Property You Placed in Service Before 1987 You cannot use MACRS for property you placed in service before 1987 (except property you placed in service after July 31, 1986, if MACRS was elected). 2009 amended tax return Property placed in service before 1987 must be depreciated under the methods discussed in Publication 534. 2009 amended tax return For a discussion of when property is placed in service, see When Does Depreciation Begin and End , earlier. 2009 amended tax return Use of real property changed. 2009 amended tax return   You generally must use MACRS to depreciate real property that you acquired for personal use before 1987 and changed to business or income-producing use after 1986. 2009 amended tax return Improvements made after 1986. 2009 amended tax return   You must treat an improvement made after 1986 to property you placed in service before 1987 as separate depreciable property. 2009 amended tax return Therefore, you can depreciate that improvement as separate property under MACRS if it is the type of property that otherwise qualifies for MACRS depreciation. 2009 amended tax return For more information about improvements, see How Do You Treat Repairs and Improvements , later and Additions and Improvements under Which Recovery Period Applies in chapter 4. 2009 amended tax return Property Owned or Used in 1986 You may not be able to use MACRS for property you acquired and placed in service after 1986 if any of the situations described below apply. 2009 amended tax return If you cannot use MACRS, the property must be depreciated under the methods discussed in Publication 534. 2009 amended tax return For the following discussions, do not treat property as owned before you placed it in service. 2009 amended tax return If you owned property in 1986 but did not place it in service until 1987, you do not treat it as owned in 1986. 2009 amended tax return Personal property. 2009 amended tax return   You cannot use MACRS for personal property (section 1245 property) in any of the following situations. 2009 amended tax return You or someone related to you owned or used the property in 1986. 2009 amended tax return You acquired the property from a person who owned it in 1986 and as part of the transaction the user of the property did not change. 2009 amended tax return You lease the property to a person (or someone related to this person) who owned or used the property in 1986. 2009 amended tax return You acquired the property in a transaction in which: The user of the property did not change, and The property was not MACRS property in the hands of the person from whom you acquired it because of (2) or (3) above. 2009 amended tax return Real property. 2009 amended tax return   You generally cannot use MACRS for real property (section 1250 property) in any of the following situations. 2009 amended tax return You or someone related to you owned the property in 1986. 2009 amended tax return You lease the property to a person who owned the property in 1986 (or someone related to that person). 2009 amended tax return You acquired the property in a like-kind exchange, involuntary conversion, or repossession of property you or someone related to you owned in 1986. 2009 amended tax return MACRS applies only to that part of your basis in the acquired property that represents cash paid or unlike property given up. 2009 amended tax return It does not apply to the carried-over part of the basis. 2009 amended tax return Exceptions. 2009 amended tax return   The rules above do not apply to the following. 2009 amended tax return Residential rental property or nonresidential real property. 2009 amended tax return Any property if, in the first tax year it is placed in service, the deduction under the Accelerated Cost Recovery System (ACRS) is more than the deduction under MACRS using the half-year convention. 2009 amended tax return For information on how to figure depreciation under ACRS, see Publication 534. 2009 amended tax return Property that was MACRS property in the hands of the person from whom you acquired it because of (2) above. 2009 amended tax return Related persons. 2009 amended tax return   For this purpose, the following are related persons. 2009 amended tax return An individual and a member of his or her family, including only a spouse, child, parent, brother, sister, half-brother, half-sister, ancestor, and lineal descendant. 2009 amended tax return A corporation and an individual who directly or indirectly owns more than 10% of the value of the outstanding stock of that corporation. 2009 amended tax return Two corporations that are members of the same controlled group. 2009 amended tax return A trust fiduciary and a corporation if more than 10% of the value of the outstanding stock is directly or indirectly owned by or for the trust or grantor of the trust. 2009 amended tax return The grantor and fiduciary, and the fiduciary and beneficiary, of any trust. 2009 amended tax return 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. 2009 amended tax return A tax-exempt educational or charitable organization and any person (or, if that person is an individual, a member of that person's family) who directly or indirectly controls the organization. 2009 amended tax return Two S corporations, and an S corporation and a regular corporation, if the same persons own more than 10% of the value of the outstanding stock of each corporation. 2009 amended tax return A corporation and a partnership if the same persons own both of the following. 2009 amended tax return More than 10% of the value of the outstanding stock of the corporation. 2009 amended tax return More than 10% of the capital or profits interest in the partnership. 2009 amended tax return The executor and beneficiary of any estate. 2009 amended tax return A partnership and a person who directly or indirectly owns more than 10% of the capital or profits interest in the partnership. 2009 amended tax return Two partnerships, if the same persons directly or indirectly own more than 10% of the capital or profits interest in each. 2009 amended tax return The related person and a person who is engaged in trades or businesses under common control. 2009 amended tax return See section 52(a) and 52(b) of the Internal Revenue Code. 2009 amended tax return When to determine relationship. 2009 amended tax return   You must determine whether you are related to another person at the time you acquire the property. 2009 amended tax return   A partnership acquiring property from a terminating partnership must determine whether it is related to the terminating partnership immediately before the event causing the termination. 2009 amended tax return For this rule, a terminating partnership is one that sells or exchanges, within 12 months, 50% or more of its total interest in partnership capital or profits. 2009 amended tax return Constructive ownership of stock or partnership interest. 2009 amended tax return   To determine whether a person directly or indirectly owns any of the outstanding stock of a corporation or an interest in a partnership, apply the following rules. 2009 amended tax return Stock or a partnership interest 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. 2009 amended tax return However, for a partnership interest owned by or for a C corporation, this applies only to shareholders who directly or indirectly own 5% or more of the value of the stock of the corporation. 2009 amended tax return An individual is considered to own the stock or partnership interest directly or indirectly owned by or for the individual's family. 2009 amended tax return An individual who owns, except by applying rule (2), any stock in a corporation is considered to own the stock directly or indirectly owned by or for the individual's partner. 2009 amended tax return For purposes of rules (1), (2), or (3), stock or a partnership interest considered to be owned by a person under rule (1) is treated as actually owned by that person. 2009 amended tax return However, stock or a partnership interest considered to be owned by an individual under rule (2) or (3) is not treated as owned by that individual for reapplying either rule (2) or (3) to make another person considered to be the owner of the same stock or partnership interest. 2009 amended tax return Intangible Property Generally, if you can depreciate intangible property, you usually use the straight line method of depreciation. 2009 amended tax return However, you can choose to depreciate certain intangible property under the income forecast method (discussed later). 2009 amended tax return You cannot depreciate intangible property that is a section 197 intangible or that otherwise does not meet all the requirements discussed earlier under What Property Can Be Depreciated. 2009 amended tax return Straight Line Method This method lets you deduct the same amount of depreciation each year over the useful life of the property. 2009 amended tax return To figure your deduction, first determine the adjusted basis, salvage value, and estimated useful life of your property. 2009 amended tax return Subtract the salvage value, if any, from the adjusted basis. 2009 amended tax return The balance is the total depreciation you can take over the useful life of the property. 2009 amended tax return Divide the balance by the number of years in the useful life. 2009 amended tax return This gives you your yearly depreciation deduction. 2009 amended tax return Unless there is a big change in adjusted basis or useful life, this amount will stay the same throughout the time you depreciate the property. 2009 amended tax return If, in the first year, you use the property for less than a full year, you must prorate your depreciation deduction for the number of months in use. 2009 amended tax return Example. 2009 amended tax return In April, Frank bought a patent for $5,100 that is not a section 197 intangible. 2009 amended tax return He depreciates the patent under the straight line method, using a 17-year useful life and no salvage value. 2009 amended tax return He divides the $5,100 basis by 17 years to get his $300 yearly depreciation deduction. 2009 amended tax return He only used the patent for 9 months during the first year, so he multiplies $300 by 9/12 to get his deduction of $225 for the first year. 2009 amended tax return Next year, Frank can deduct $300 for the full year. 2009 amended tax return Patents and copyrights. 2009 amended tax return   If you can depreciate the cost of a patent or copyright, use the straight line method over the useful life. 2009 amended tax return The useful life of a patent or copyright is the lesser of the life granted to it by the government or the remaining life when you acquire it. 2009 amended tax return However, if the patent or copyright becomes valueless before the end of its useful life, you can deduct in that year any of its remaining cost or other basis. 2009 amended tax return Computer software. 2009 amended tax return   Computer software is generally a section 197 intangible and cannot be depreciated if you acquired it in connection with the acquisition of assets constituting a business or a substantial part of a business. 2009 amended tax return   However, computer software is not a section 197 intangible and can be depreciated, even if acquired in connection with the acquisition of a business, if it meets all of the following tests. 2009 amended tax return It is readily available for purchase by the general public. 2009 amended tax return It is subject to a nonexclusive license. 2009 amended tax return It has not been substantially modified. 2009 amended tax return   If the software meets the tests above, it may also qualify for the section 179 deduction and the special depreciation allowance, discussed later. 2009 amended tax return If you can depreciate the cost of computer software, use the straight line method over a useful life of 36 months. 2009 amended tax return    Tax-exempt use property subject to a lease. 2009 amended tax return   The useful life of computer software 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), cannot be less than 125% of the lease term. 2009 amended tax return Certain created intangibles. 2009 amended tax return   You can amortize certain intangibles created on or after December 31, 2003, over a 15-year period using the straight line method and no salvage value, even though they have a useful life that cannot be estimated with reasonable accuracy. 2009 amended tax return For example, amounts paid to acquire memberships or privileges of indefinite duration, such as a trade association membership, are eligible costs. 2009 amended tax return   The following are not eligible. 2009 amended tax return Any intangible asset acquired from another person. 2009 amended tax return Created financial interests. 2009 amended tax return Any intangible asset that has a useful life that can be estimated with reasonable accuracy. 2009 amended tax return Any intangible asset that has an amortization period or limited useful life that is specifically prescribed or prohibited by the Code, regulations, or other published IRS guidance. 2009 amended tax return Any amount paid to facilitate an acquisition of a trade or business, a change in the capital structure of a business entity, and certain other transactions. 2009 amended tax return   You must also increase the 15-year safe harbor amortization period to a 25-year period for certain intangibles related to benefits arising from the provision, production, or improvement of real property. 2009 amended tax return For this purpose, real property includes property that will remain attached to the real property for an indefinite period of time, such as roads, bridges, tunnels, pavements, and pollution control facilities. 2009 amended tax return Income Forecast Method You can choose to use the income forecast method instead of the straight line method to depreciate the following depreciable intangibles. 2009 amended tax return Motion picture films or video tapes. 2009 amended tax return Sound recordings. 2009 amended tax return Copyrights. 2009 amended tax return Books. 2009 amended tax return Patents. 2009 amended tax return Under the income forecast method, each year's depreciation deduction is equal to the cost of the property, multiplied by a fraction. 2009 amended tax return The numerator of the fraction is the current year's net income from the property, and the denominator is the total income anticipated from the property through the end of the 10th taxable year following the taxable year the property is placed in service. 2009 amended tax return For more information, see section 167(g) of the Internal Revenue Code. 2009 amended tax return Films, video tapes, and recordings. 2009 amended tax return   You cannot use MACRS for motion picture films, video tapes, and sound recordings. 2009 amended tax return For this purpose, sound recordings are discs, tapes, or other phonorecordings resulting from the fixation of a series of sounds. 2009 amended tax return You can depreciate this property using either the straight line method or the income forecast method. 2009 amended tax return Participations and residuals. 2009 amended tax return   You can include participations and residuals in the adjusted basis of the property for purposes of computing your depreciation deduction under the income forecast method. 2009 amended tax return The participations and residuals must relate to income to be derived from the property before the end of the 10th taxable year after the property is placed in service. 2009 amended tax return For this purpose, participations and residuals are defined as costs which by contract vary with the amount of income earned in connection with the property. 2009 amended tax return   Instead of including these amounts in the adjusted basis of the property, you can deduct the costs in the taxable year that they are paid. 2009 amended tax return Videocassettes. 2009 amended tax return   If you are in the business of renting videocassettes, you can depreciate only those videocassettes bought for rental. 2009 amended tax return If the videocassette has a useful life of one year or less, you can currently deduct the cost as a business expense. 2009 amended tax return Corporate or Partnership Property Acquired in a Nontaxable Transfer MACRS does not apply to property used before 1987 and transferred after 1986 to a corporation or partnership (except property the transferor placed in service after July 31, 1986, if MACRS was elected) to the extent its basis is carried over from the property's adjusted basis in the transferor's hands. 2009 amended tax return You must continue to use the same depreciation method as the transferor and figure depreciation as if the transfer had not occurred. 2009 amended tax return However, if MACRS would otherwise apply, you can use it to depreciate the part of the property's basis that exceeds the carried-over basis. 2009 amended tax return The nontaxable transfers covered by this rule include the following. 2009 amended tax return A distribution in complete liquidation of a subsidiary. 2009 amended tax return A transfer to a corporation controlled by the transferor. 2009 amended tax return An exchange of property solely for corporate stock or securities in a reorganization. 2009 amended tax return A contribution of property to a partnership in exchange for a partnership interest. 2009 amended tax return A partnership distribution of property to a partner. 2009 amended tax return Election To Exclude Property From MACRS If you can properly depreciate any property under a method not based on a term of years, such as the unit-of-production method, you can elect to exclude that property from MACRS. 2009 amended tax return You make the election by reporting your depreciation for the property on line 15 in Part II of Form 4562 and attaching a statement as described in the instructions for Form 4562. 2009 amended tax return You must make this election by the return due date (including extensions) for the tax year you place your property in service. 2009 amended tax return 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 six months of the due date of the return (excluding extensions). 2009 amended tax return Attach the election to the amended return and write “Filed pursuant to section 301. 2009 amended tax return 9100-2” on the election statement. 2009 amended tax return File the amended return at the same address you filed the original return. 2009 amended tax return Use of standard mileage rate. 2009 amended tax return   If you use the standard mileage rate to figure your tax deduction for your business automobile, you are treated as having made an election to exclude the automobile from MACRS. 2009 amended tax return See Publication 463 for a discussion of the standard mileage rate. 2009 amended tax return What Is the Basis of Your Depreciable Property? To figure your depreciation deduction, you must determine the basis of your property. 2009 amended tax return To determine basis, you need to know the cost or other basis of your property. 2009 amended tax return Cost as Basis The basis of property you buy is its cost plus amounts you paid for items such as sales tax (see Exception , below), freight charges, and installation and testing fees. 2009 amended tax return The cost includes the amount you pay in cash, debt obligations, other property, or services. 2009 amended tax return Exception. 2009 amended tax return   You can elect to deduct state and local general sales taxes instead of state and local income taxes as an itemized deduction on Schedule A (Form 1040). 2009 amended tax return If you make that choice, you cannot include those sales taxes as part of your cost basis. 2009 amended tax return Assumed debt. 2009 amended tax return   If you buy property and assume (or buy subject to) an existing mortgage or other debt on the property, your basis includes the amount you pay for the property plus the amount of the assumed debt. 2009 amended tax return Example. 2009 amended tax return You make a $20,000 down payment on property and assume the seller's mortgage of $120,000. 2009 amended tax return Your total cost is $140,000, the cash you paid plus the mortgage you assumed. 2009 amended tax return Settlement costs. 2009 amended tax return   The basis of real property also includes certain fees and charges you pay in addition to the purchase price. 2009 amended tax return These generally are shown on your settlement statement and include the following. 2009 amended tax return Legal and recording fees. 2009 amended tax return Abstract fees. 2009 amended tax return Survey charges. 2009 amended tax return Owner's title insurance. 2009 amended tax return Amounts the seller owes that you agree to pay, such as back taxes or interest, recording or mortgage fees, charges for improvements or repairs, and sales commissions. 2009 amended tax return   For fees and charges you cannot include in the basis of property, see Real Property in Publication 551. 2009 amended tax return Property you construct or build. 2009 amended tax return   If you construct, build, or otherwise produce property for use in your business, you may have to use the uniform capitalization rules to determine the basis of your property. 2009 amended tax return For information about the uniform capitalization rules, see Publication 551 and the regulations under section 263A of the Internal Revenue Code. 2009 amended tax return Other Basis Other basis usually refers to basis that is determined by the way you received the property. 2009 amended tax return For example, your basis is other than cost if you acquired the property in exchange for other property, as payment for services you performed, as a gift, or as an inheritance. 2009 amended tax return If you acquired property in this or some other way, see Publication 551 to determine your basis. 2009 amended tax return Property changed from personal use. 2009 amended tax return   If you held property for personal use and later use it in your business or income-producing activity, your depreciable basis is the lesser of the following. 2009 amended tax return The fair market value (FMV) of the property on the date of the change in use. 2009 amended tax return Your original cost or other basis adjusted as follows. 2009 amended tax return Increased by the cost of any permanent improvements or additions and other costs that must be added to basis. 2009 amended tax return Decreased by any deductions you claimed for casualty and theft losses and other items that reduced your basis. 2009 amended tax return Example. 2009 amended tax return Several years ago, Nia paid $160,000 to have her home built on a lot that cost her $25,000. 2009 amended tax return Before changing the property to rental use last year, she paid $20,000 for permanent improvements to the house and claimed a $2,000 casualty loss deduction for damage to the house. 2009 amended tax return Land is not depreciable, so she includes only the cost of the house when figuring the basis for depreciation. 2009 amended tax return Nia's adjusted basis in the house when she changed its use was $178,000 ($160,000 + $20,000 − $2,000). 2009 amended tax return On the same date, her property had an FMV of $180,000, of which $15,000 was for the land and $165,000 was for the house. 2009 amended tax return The basis for depreciation on the house is the FMV on the date of change ($165,000), because it is less than her adjusted basis ($178,000). 2009 amended tax return Property acquired in a nontaxable transaction. 2009 amended tax return   Generally, if you receive property in a nontaxable exchange, the basis of the property you receive is the same as the adjusted basis of the property you gave up. 2009 amended tax return Special rules apply in determining the basis and figuring the MACRS depreciation deduction and special depreciation allowance for property acquired in a like-kind exchange or involuntary conversion. 2009 amended tax return See Like-kind exchanges and involuntary conversions. 2009 amended tax return under How Much Can You Deduct? in chapter 3 and Figuring the Deduction for Property Acquired in a Nontaxable Exchange in chapter 4. 2009 amended tax return   There are also special rules for determining the basis of MACRS property involved in a like-kind exchange or involuntary conversion when the property is contained in a general asset account. 2009 amended tax return See How Do You Use General Asset Accounts in chapter 4. 2009 amended tax return Adjusted Basis To find your property's basis for depreciation, you may have to make certain adjustments (increases and decreases) to the basis of the property for events occurring between the time you acquired the property and the time you placed it in service. 2009 amended tax return These events could include the following. 2009 amended tax return Installing utility lines. 2009 amended tax return Paying legal fees for perfecting the title. 2009 amended tax return Settling zoning issues. 2009 amended tax return Receiving rebates. 2009 amended tax return Incurring a casualty or theft loss. 2009 amended tax return For a discussion of adjustments to the basis of your property, see Adjusted Basis in Publication 551. 2009 amended tax return If you depreciate your property under MACRS, you also may have to reduce your basis by certain deductions and credits with respect to the property. 2009 amended tax return For more information, see What Is the Basis for Depreciation in chapter 4. 2009 amended tax return . 2009 amended tax return Basis adjustment for depreciation allowed or allowable. 2009 amended tax return   You must reduce the basis of property by the depreciation allowed or allowable, whichever is greater. 2009 amended tax return Depreciation allowed is depreciation you actually deducted (from which you received a tax benefit). 2009 amended tax return Depreciation allowable is depreciation you are entitled to deduct. 2009 amended tax return   If you do not claim depreciation you are entitled to deduct, you must still reduce the basis of the property by the full amount of depreciation allowable. 2009 amended tax return   If you deduct more depreciation than you should, you must reduce your basis by any amount deducted from which you received a tax benefit (the depreciation allowed). 2009 amended tax return How Do You Treat Repairs and Improvements? If you improve depreciable property, you must treat the improvement as separate depreciable property. 2009 amended tax return Improvement means an addition to or partial replacement of property that adds to its value, appreciably lengthens the time you can use it, or adapts it to a different use. 2009 amended tax return You generally deduct the cost of repairing business property in the same way as any other business expense. 2009 amended tax return However, if a repair or replacement increases the value of your property, makes it more useful, or lengthens its life, you must treat it as an improvement and depreciate it. 2009 amended tax return Example. 2009 amended tax return You repair a small section on one corner of the roof of a rental house. 2009 amended tax return You deduct the cost of the repair as a rental expense. 2009 amended tax return However, if you completely replace the roof, the new roof is an improvement because it increases the value and lengthens the life of the property. 2009 amended tax return You depreciate the cost of the new roof. 2009 amended tax return Improvements to rented property. 2009 amended tax return   You can depreciate permanent improvements you make to business property you rent from someone else. 2009 amended tax return Do You Have To File Form 4562? Use Form 4562 to figure your deduction for depreciation and amortization. 2009 amended tax return Attach Form 4562 to your tax return for the current tax year if you are claiming any of the following items. 2009 amended tax return A section 179 deduction for the current year or a section 179 carryover from a prior year. 2009 amended tax return See chapter 2 for information on the section 179 deduction. 2009 amended tax return Depreciation for property placed in service during the current year. 2009 amended tax return Depreciation on any vehicle or other listed property, regardless of when it was placed in service. 2009 amended tax return See chapter 5 for information on listed property. 2009 amended tax return A deduction for any vehicle if the deduction is reported on a form other than Schedule C (Form 1040) or Schedule C-EZ (Form 1040). 2009 amended tax return Amortization of costs if the current year is the first year of the amortization period. 2009 amended tax return Depreciation or amortization on any asset on a corporate income tax return (other than Form 1120S, U. 2009 amended tax return S. 2009 amended tax return Income Tax Return for an S Corporation) regardless of when it was placed in service. 2009 amended tax return You must submit a separate Form 4562 for each business or activity on your return for which a Form 4562 is required. 2009 amended tax return Table 1-1 presents an overview of the purpose of the various parts of Form 4562. 2009 amended tax return Employee. 2009 amended tax return   Do not use Form 4562 if you are an employee and you deduct job-related vehicle expenses using either actual expenses (including depreciation) or the standard mileage rate. 2009 amended tax return Instead, use either Form 2106 or Form 2106-EZ. 2009 amended tax return Use Form 2106-EZ if you are claiming the standard mileage rate and you are not reimbursed by your employer for any expenses. 2009 amended tax return How Do You Correct Depreciation Deductions? If you deducted an incorrect amount of depreciation in any year, you may be able to make a correction by filing an amended return for that year. 2009 amended tax return See Filing an Amended Return , next. 2009 amended tax return If you are not allowed to make the correction on an amended return, you may be able to change your accounting method to claim the correct amount of depreciation. 2009 amended tax return See Changing Your Accounting Method , later. 2009 amended tax return Filing an Amended Return You can file an amended return to correct the amount of depreciation claimed for any property in any of the following situations. 2009 amended tax return You claimed the incorrect amount because of a mathematical error made in any year. 2009 amended tax return You claimed the incorrect amount because of a posting error made in any year. 2009 amended tax return You have not adopted a method of accounting for property placed in service by you in tax years ending after December 29, 2003. 2009 amended tax return You claimed the incorrect amount on property placed in service by you in tax years ending before December 30, 2003. 2009 amended tax return Adoption of accounting method defined. 2009 amended tax return   Generally, you adopt a method of accounting for depreciation by using a permissible method of determining depreciation when you file your first tax return, or by using the same impermissible method of determining depreciation in two or more consecutively filed tax returns. 2009 amended tax return   For an exception to this 2-year rule, see Revenue Procedure 2011-14 on page 330 of the Internal Revenue Bulletin 2011-4, available at www. 2009 amended tax return irs. 2009 amended tax return gov/pub/irs-irbs/irb11-04. 2009 amended tax return pdf. 2009 amended tax return (Note. 2009 amended tax return Revenue Procedure 2011-14 is clarified and modified by Revenue Procedure 2012-20. 2009 amended tax return For more information, see Revenue Procedure 2012-20 on page 700 of the Internal Revenue Bulletin 2012-14, available at www. 2009 amended tax return irs. 2009 amended tax return gov/pub/irs-irbs/irb12-14. 2009 amended tax return pdf. 2009 amended tax return )   For a safe harbor method of accounting to treat rotable spare parts as depreciable assets and procedures to obtain automatic consent to change to the safe harbor method of accounting, see Revenue Procedure 2007-48 on page 110 of Internal Revenue Bulletin 2007-29, available at www. 2009 amended tax return irs. 2009 amended tax return gov/pub/irs-irbs/irb07-29. 2009 amended tax return pdf. 2009 amended tax return When to file. 2009 amended tax return   If an amended return is allowed, you must file it by the later of the following. 2009 amended tax return 3 years from the date you filed your original return for the year in which you did not deduct the correct amount. 2009 amended tax return A return filed before an unextended due date is considered filed on that due date. 2009 amended tax return 2 years from the time you paid your tax for that year. 2009 amended tax return Changing Your Accounting Method Generally, you must get IRS approval to change your method of accounting. 2009 amended tax return You generally must file Form 3115, Application for Change in Accounting Method, to request a change in your method of accounting for depreciation. 2009 amended tax return The following are examples of a change in method of accounting for depreciation. 2009 amended tax return A change from an impermissible method of determining depreciation for depreciable property, if the impermissible method was used in two or more consecutively filed tax returns. 2009 amended tax return A change in the treatment of an asset from nondepreciable to depreciable or vice versa. 2009 amended tax return A change in the depreciation method, period of recovery, or convention of a depreciable asset. 2009 amended tax return A change from not claiming to claiming the special depreciation allowance if you did not make the election to not claim any special allowance. 2009 amended tax return A change from claiming a 50% special depreciation allowance to claiming a 30% special depreciation allowance for qualified property (including property that is included in a class of property for which you elected a 30% special allowance instead of a 50% special allowance). 2009 amended tax return Changes in depreciation that are not a change in method of accounting (and may only be made on an amended return) include the following. 2009 amended tax return An adjustment in the useful life of a depreciable asset for which depreciation is determined under section 167. 2009 amended tax return A change in use of an asset in the hands of the same taxpayer. 2009 amended tax return Making a late depreciation election or revoking a timely valid depreciation election (including the election not to deduct the special depreciation allowance). 2009 amended tax return If you elected not to claim any special allowance, a change from not claiming to claiming the special allowance is a revocation of the election and is not an accounting method change. 2009 amended tax return Generally, you must get IRS approval to make a late depreciation election or revoke a depreciation election. 2009 amended tax return You must submit a request for a letter ruling to make a late election or revoke an election. 2009 amended tax return Any change in the placed in service date of a depreciable asset. 2009 amended tax return See section 1. 2009 amended tax return 446-1(e)(2)(ii)(d) of the regulations for more information and examples. 2009 amended tax return IRS approval. 2009 amended tax return   In some instances, you may be able to get approval from the IRS to change your method of accounting for depreciation under the automatic change request procedures generally covered in Revenue Procedure 2011-14. 2009 amended tax return If you do not qualify to use the automatic procedures to get approval, you must use the advance consent request procedures generally covered in Revenue Procedure 97-27, 1997-1 C. 2009 amended tax return B. 2009 amended tax return 680. 2009 amended tax return Also see the Instructions for Form 3115 for more information on getting approval, including lists of scope limitations and automatic accounting method changes. 2009 amended tax return Additional guidance. 2009 amended tax return    For additional guidance and special procedures for changing your accounting method, automatic change procedures, amending your return, and filing Form 3115, see Revenue Procedure 2011-14 on page 330 of the Internal Revenue Bulletin 2011-4, available at www. 2009 amended tax return irs. 2009 amended tax return gov/pub/irs-irbs/irb11-04. 2009 amended tax return pdf. 2009 amended tax return (Note. 2009 amended tax return Revenue Procedure 2011-14 is clarified and modified by Revenue Procedure 2012-20. 2009 amended tax return For more information, see Revenue Procedure 2012-20 on page 700 of the Internal Revenue Bulletin 2012-14, available at www. 2009 amended tax return irs. 2009 amended tax return gov/pub/irs-irbs/irb12-14. 2009 amended tax return pdf. 2009 amended tax return )   For a safe harbor method of accounting to treat rotable spare parts as depreciable assets, see Revenue Procedure 2007-48 on page 110 of Internal Revenue Bulletin 2007-29, available at www. 2009 amended tax return irs. 2009 amended tax return gov/pub/irs-irbs/irb07-29. 2009 amended tax return pdf. 2009 amended tax return Table 1-1. 2009 amended tax return Purpose of Form 4562 This table describes the purpose of the various parts of Form 4562. 2009 amended tax return For more information, see Form 4562 and its instructions. 2009 amended tax return Part Purpose I • Electing the section 179 deduction • Figuring the maximum section 179 deduction for the current year • Figuring any section 179 deduction carryover to the next year II • Reporting the special depreciation allowance for property (other than listed property) placed in service during the tax year • Reporting depreciation deductions on property being depreciated under any method other than Modified Accelerated Cost Recovery System (MACRS) III • Reporting MACRS depreciation deductions for property placed in service before this year • Reporting MACRS depreciation deductions for property (other than listed property) placed in service during the current year IV • Summarizing other parts V • Reporting the special depreciation allowance for automobiles and other listed property • Reporting MACRS depreciation on automobiles and other listed property • Reporting the section 179 cost elected for automobiles and other listed property • Reporting information on the use of automobiles and other transportation vehicles VI • Reporting amortization deductions Section 481(a) adjustment. 2009 amended tax return   If you file Form 3115 and change from an impermissible method to a permissible method of accounting for depreciation, you can make a section 481(a) adjustment for any unclaimed or excess amount of allowable depreciation. 2009 amended tax return The adjustment is the difference between the total depreciation actually deducted for the property and the total amount allowable prior to the year of change. 2009 amended tax return If no depreciation was deducted, the adjustment is the total depreciation allowable prior to the year of change. 2009 amended tax return A negative section 481(a) adjustment results in a decrease in taxable income. 2009 amended tax return It is taken into account in the year of change and is reported on your business tax returns as “other expenses. 2009 amended tax return ” A positive section 481(a) adjustment results in an increase in taxable income. 2009 amended tax return It is generally taken into account over 4 tax years and is reported on your business tax returns as “other income. 2009 amended tax return ” However, you can elect to use a one-year adjustment period and report the adjustment in the year of change if the total adjustment is less than $25,000. 2009 amended tax return Make the election by completing the appropriate line on Form 3115. 2009 amended tax return   If you file a Form 3115 and change from one permissible method to another permissible method, the section 481(a) adjustment is zero. 2009 amended tax return Prev  Up  Next   Home   More Online Publications
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Plug-In Electric Drive Vehicle Credit (IRC 30D)

Internal Revenue Code Section 30D provides a credit for Qualified Plug-in Electric Drive Motor Vehicles including passenger vehicles and light trucks.  

For vehicles acquired after December 31, 2009, the credit is equal to $2,500 plus, for a vehicle which draws propulsion energy from a battery with at least 5 kilowatt hours of capacity, $417, plus an additional $417 for each kilowatt hour of battery capacity in excess of 5 kilowatt hours. The total amount of the credit allowed for a vehicle is limited to $7,500.

The credit begins to phase out for a manufacturer’s vehicles when at least 200,000 qualifying vehicles have been sold for use in the United States (determined on a cumulative basis for sales after December 31, 2009). For additional information see Notice 2009-89.

Section 30D originally was enacted in the Energy Improvement and Extension Act of 2008. The American Recovery and Reinvestment Act of 2009 amended section 30D effective for vehicles acquired after December 31, 2009.  Section 30D was also modified by the American Taxpayer Relief Act (ATRA) 2013 for certain 2 or 3 wheeled vehicles acquired after December 31, 2011 and before January 1, 2014.

The vehicles must be acquired for use or lease and not for resale. Additionally, the original use of the vehicle must commence with the taxpayer and the vehicle must be used predominantly in the United States. For purposes of the 30D credit, a vehicle is not considered acquired prior to the time when title to the vehicle passes to the taxpayer under state law.

Notice 2009-89 applies to vehicles acquired subsequent to December 31, 2009 and provides procedures that a vehicle manufacturer may use if it chooses to certify that a vehicle meets certain requirements that must be satisfied to claim the Qualified Plug-in Electric Drive Motor Vehicle Credit and the amount of the credit allowable with respect to that vehicle

Credit Amounts for Qualified Vehicles Acquired After December 31, 2009

Qualified Plug-In Electric Drive Motor Vehicle Credit (IRC 30D) Phase Out
The qualified plug-in electric drive motor vehicle credit phases out for a manufacturer’s vehicles over the one-year period beginning with the second calendar quarter after the calendar quarter in which at least 200,000 qualifying vehicles manufactured by that manufacturer have been sold for use in the United States (determined on a cumulative basis for sales after December 31, 2009) (“phase-out period”). Qualifying vehicles manufactured by that manufacturer are eligible for 50 percent of the credit if acquired in the first two quarters of the phase-out period and 25 percent of the credit if acquired in the third or fourth quarter of the phase-out period.  Vehicles manufactured by that manufacturer are not eligible for a credit if acquired after the phase-out period.

Quarterly Sales by Manufacturer

Page Last Reviewed or Updated: 13-Feb-2014

The 2009 Amended Tax Return

2009 amended tax return 5. 2009 amended tax return   Exemptions, Deductions, and Credits Table of Contents Topics - This chapter discusses: Useful Items - You may want to see: Items Related to Excluded Income Exemptions Contributions to Foreign Charitable Organizations Moving ExpensesAllocation of Moving Expenses Forms To File Contributions to Individual Retirement Arrangements Taxes of Foreign Countries and U. 2009 amended tax return S. 2009 amended tax return PossessionsCredit for Foreign Income Taxes Deduction for Foreign Income Taxes Deduction for Other Foreign Taxes How To Report Deductions Topics - This chapter discusses: The rules concerning items related to excluded income, Exemptions, Contributions to foreign charitable organizations, Moving expenses, Contributions to individual retirement arrangements (IRAs), Taxes of foreign countries and U. 2009 amended tax return S. 2009 amended tax return possessions, and How to report deductions. 2009 amended tax return Useful Items - You may want to see: Publication 501 Exemptions, Standard Deduction, and Filing Information 514 Foreign Tax Credit for Individuals 521 Moving Expenses 523 Selling Your Home 590 Individual Retirement Arrangements (IRAs) 597 Information on the United States—Canada Income Tax Treaty Form (and Instructions) 1116 Foreign Tax Credit 2106 Employee Business Expenses 2555 Foreign Earned Income 2555-EZ Foreign Earned Income Exclusion 3903 Moving Expenses Schedule A (Form 1040) Itemized Deductions Schedule C (Form 1040) Profit or Loss From Business SS-5 Application for a Social Security Card W-7 Application for IRS Individual Taxpayer Identification Number See chapter 7 for information about getting these publications and forms. 2009 amended tax return Items Related to Excluded Income U. 2009 amended tax return S. 2009 amended tax return citizens and resident aliens living outside the United States generally are allowed the same deductions as citizens and residents living in the United States. 2009 amended tax return If you choose to exclude foreign earned income or housing amounts, you cannot deduct, exclude, or claim a credit for any item that can be allocated to or charged against the excluded amounts. 2009 amended tax return This includes any expenses, losses, and other normally deductible items that are allocable to the excluded income. 2009 amended tax return You can deduct only those expenses connected with earning includible income. 2009 amended tax return These rules apply only to items definitely related to the excluded earned income and they do not apply to other items that are not definitely related to any particular type of gross income. 2009 amended tax return These rules do not apply to items such as: Personal exemptions, Qualified retirement contributions, Alimony payments, Charitable contributions, Medical expenses, Mortgage interest, or Real estate taxes on your personal residence. 2009 amended tax return For purposes of these rules, your housing deduction is not treated as allocable to your excluded income, but the deduction for self- employment tax is. 2009 amended tax return If you receive foreign earned income in a tax year after the year in which you earned it, you may have to file an amended return for the earlier year to properly adjust the amounts of deductions, credits, or exclusions allocable to your foreign earned income and housing exclusions. 2009 amended tax return Example. 2009 amended tax return In 2012, you had $90,400 of foreign earned income and $9,500 of deductions allocable to your foreign earned income. 2009 amended tax return You did not have a housing exclusion. 2009 amended tax return Because you excluded all of your foreign earned income, you would not have been able to claim any of the deductions on your 2012 return. 2009 amended tax return In 2013, you received a $12,000 bonus for work you did abroad in 2012. 2009 amended tax return You can exclude $4,700 of the bonus because the limit on the foreign earned income exclusion for 2012 was $95,100 and you have already excluded $90,400. 2009 amended tax return Since you must include $7,300 of the bonus ($12,000 − $4,700) for work you did in 2012 in income, you can file an amended return for 2012 to claim $677 of the deductions. 2009 amended tax return This is the deductions allocable to the foreign earned income ($9,500) multiplied by the includible portion of the foreign earned income ($7,300) and divided by the total foreign earned income for 2012 ($102,400). 2009 amended tax return Exemptions You can claim an exemption for your nonresident alien spouse on your separate return, provided your spouse has no gross income for U. 2009 amended tax return S. 2009 amended tax return tax purposes and is not the dependent of another U. 2009 amended tax return S. 2009 amended tax return taxpayer. 2009 amended tax return You also can claim exemptions for individuals who qualify as your dependents. 2009 amended tax return To be your dependent, the individual must be a U. 2009 amended tax return S. 2009 amended tax return citizen, U. 2009 amended tax return S. 2009 amended tax return national, U. 2009 amended tax return S. 2009 amended tax return resident alien, or a resident of Canada or Mexico for some part of the calendar year in which your tax year begins. 2009 amended tax return Children. 2009 amended tax return   Children usually are citizens or residents of the same country as their parents. 2009 amended tax return If you were a U. 2009 amended tax return S. 2009 amended tax return citizen when your child was born, your child generally is a U. 2009 amended tax return S. 2009 amended tax return citizen. 2009 amended tax return This is true even if the child's other parent is a nonresident alien, the child was born in a foreign country, and the child lives abroad with the other parent. 2009 amended tax return   If you have a legally adopted child who is not a U. 2009 amended tax return S. 2009 amended tax return citizen, U. 2009 amended tax return S. 2009 amended tax return resident, or U. 2009 amended tax return S. 2009 amended tax return national, the child meets the citizen requirement if you are a U. 2009 amended tax return S. 2009 amended tax return citizen or U. 2009 amended tax return S. 2009 amended tax return national and the child lived with you as a member of your household all year. 2009 amended tax return Social security number. 2009 amended tax return   You must include on your return the social security number (SSN) of each dependent for whom you claim an exemption. 2009 amended tax return To get a social security number for a dependent, apply at a Social Security office or U. 2009 amended tax return S. 2009 amended tax return consulate. 2009 amended tax return You must provide original or certified copies of documents to verify the dependent's age, identity, and citizenship, and complete Form SS-5. 2009 amended tax return   If you do not have an SSN for a child who was born in 2013 and died in 2013, attach a copy of the child's birth certificate to your tax return. 2009 amended tax return Print “Died” in column (2) of line 6c of your Form 1040 or Form 1040A. 2009 amended tax return   If your dependent is a nonresident alien who is not eligible to get a social security number, you must list the dependent's individual taxpayer identification number (ITIN) instead of an SSN. 2009 amended tax return To apply for an ITIN, file Form W-7 with the IRS. 2009 amended tax return It usually takes 6 to 10 weeks to get an ITIN. 2009 amended tax return Enter your dependent's ITIN wherever an SSN is requested on your tax return. 2009 amended tax return More information. 2009 amended tax return   For more information about exemptions, see Publication 501. 2009 amended tax return Contributions to Foreign Charitable Organizations If you make contributions directly to a foreign church or other foreign charitable organization, you generally cannot deduct them. 2009 amended tax return Exceptions are explained under Canadian, Mexican, and Israeli charities, later. 2009 amended tax return You can deduct contributions to a U. 2009 amended tax return S. 2009 amended tax return organization that transfers funds to a charitable foreign organization if the U. 2009 amended tax return S. 2009 amended tax return organization controls the use of the funds by the foreign organization or if the foreign organization is just an administrative arm of the U. 2009 amended tax return S. 2009 amended tax return organization. 2009 amended tax return Canadian, Mexican, and Israeli charities. 2009 amended tax return   Under the income tax treaties with Canada, Mexico and Israel, you may be able to deduct contributions to certain Canadian, Mexican, and Israeli charitable organizations. 2009 amended tax return Generally, you must have income from sources in Canada, Mexico, or Israel, and the organization must meet certain requirements. 2009 amended tax return See Publication 597, Information on the United States-Canada Income Tax Treaty, and Publication 526, Charitable Contributions, for more information. 2009 amended tax return Moving Expenses If you moved to a new home in 2013 because of your job or business, you may be able to deduct the expenses of your move. 2009 amended tax return Generally, to be deductible, the moving expenses must have been paid or incurred in connection with starting work at a new job location. 2009 amended tax return See Publication 521 for a complete discussion of the deduction for moving expenses and information about moves within the United States. 2009 amended tax return Foreign moves. 2009 amended tax return   A foreign move is a move in connection with the start of work at a new job location outside the United States and its possessions. 2009 amended tax return A foreign move does not include a move back to the United States or its possessions. 2009 amended tax return Allocation of Moving Expenses When your new place of work is in a foreign country, your moving expenses are directly connected with the income earned in that foreign country. 2009 amended tax return If you exclude all or part of the income that you earn at the new location under the foreign earned income exclusion or the foreign housing exclusion, you cannot deduct the part of your moving expense that is allocable to the excluded income. 2009 amended tax return Also, you cannot deduct the part of the moving expense related to the excluded income for a move from a foreign country to the United States if you receive a reimbursement that you are able to treat as compensation for services performed in the foreign country. 2009 amended tax return Year to which expense is connected. 2009 amended tax return   The moving expense is connected with earning the income (including reimbursements, as discussed in chapter 4 under Reimbursement of moving expenses ) either entirely in the year of the move or in 2 years. 2009 amended tax return It is connected with earning the income entirely in the year of the move if you qualify for the foreign earned income exclusion under the bona fide residence test or physical presence test for at least 120 days during that tax year. 2009 amended tax return   If you do not qualify under either the bona fide residence test or the physical presence test for at least 120 days during the year of the move, the expense is connected with earning the income in 2 years. 2009 amended tax return The moving expense is connected with the year of the move and the following year if the move is from the United States to a foreign country. 2009 amended tax return The moving expense is connected with the year of the move and the preceding year if the move is from a foreign country to the United States. 2009 amended tax return Amount allocable to excluded income. 2009 amended tax return   To figure the amount of your moving expense that is allocable to your excluded foreign earned income (and not deductible), you must multiply your total moving expense deduction by a fraction. 2009 amended tax return The numerator (top number) of the fraction is the total of your excluded foreign earned income and housing amounts for both years and the denominator (bottom number) of the fraction is your total foreign earned income for both years. 2009 amended tax return Example. 2009 amended tax return On November 1, 2012, you transfer to Monaco. 2009 amended tax return Your tax home is in Monaco, and you are a bona fide resident of Monaco for the entire tax year 2013. 2009 amended tax return In 2012, you paid $6,000 for allowable moving expenses for your move from the United States to Monaco. 2009 amended tax return You were fully reimbursed (under a nonaccountable plan) for these expenses in the same year. 2009 amended tax return The reimbursement is included in your income. 2009 amended tax return Your only other income consists of $16,000 wages earned in 2012 after the date of your move, and $100,100 wages earned in Monaco for 2013. 2009 amended tax return Because you did not meet the bona fide residence test for at least 120 days during 2012, the year of the move, the moving expenses are for services you performed in both 2012 and the following year, 2013. 2009 amended tax return Your total foreign earned income for both years is $122,100, consisting of $16,000 wages for 2012, $100,100 wages for 2013, and $6,000 moving expense reimbursement for both years. 2009 amended tax return You have no housing exclusion. 2009 amended tax return The total amount you can exclude is $113,190, consisting of the $97,600 full-year exclusion for 2013 and a $15,590 part-year exclusion for 2012 ($95,100 times the fraction of 60 qualifying bona fide residence days over 366 total days in the year). 2009 amended tax return To find the part of your moving expenses that is not deductible, multiply your $6,000 total expenses by the fraction $113,190 over $122,100. 2009 amended tax return The result, $5,562, is your nondeductible amount. 2009 amended tax return    You must report the full amount of the moving expense reimbursement in the year in which you received the reimbursement. 2009 amended tax return In the preceding example, this year was 2012. 2009 amended tax return You attribute the reimbursement to both 2012 and 2013 only to figure the amount of foreign earned income eligible for exclusion for each year. 2009 amended tax return Move between foreign countries. 2009 amended tax return   If you move between foreign countries, your moving expense is allocable to income earned in the year of the move if you qualified under either the bona fide residence test or the physical presence test for a period that includes at least 120 days in the year of the move. 2009 amended tax return New place of work in U. 2009 amended tax return S. 2009 amended tax return   If your new place of work is in the United States, the deductible moving expenses are directly connected with the income earned in the United States. 2009 amended tax return If you treat a reimbursement from your employer as foreign earned income (see the discussion in chapter 4), you must allocate deductible moving expenses to foreign earned income. 2009 amended tax return Storage expenses. 2009 amended tax return   These expenses are attributable to work you do during the year in which you incur the storage expenses. 2009 amended tax return You cannot deduct the amount allocable to excluded income. 2009 amended tax return Moving Expense Attributable to Foreign Earnings in 2 Years If your moving expense deduction is attributable to your foreign earnings in 2 years (the year of the move and the following year), you should request an extension of time to file your return for the year of the move until after the end of the second year. 2009 amended tax return By then, you should have all the information needed to properly figure the moving expense deduction. 2009 amended tax return See Extensions under When To File and Pay in chapter 1. 2009 amended tax return If you do not request an extension, you should figure the part of the moving expense that you cannot deduct because it is allocable to the foreign earned income you are excluding. 2009 amended tax return You do this by multiplying the moving expense by a fraction, the numerator (top number) of which is your excluded foreign earned income for the year of the move, and the denominator (bottom number) of which is your total foreign earned income for the year of the move. 2009 amended tax return Once you know your foreign earnings and exclusion for the following year, you must either: Adjust the moving expense deduction by filing an amended return for the year of the move, or Recapture any additional unallowable amount as income on your return for the following year. 2009 amended tax return If, after you make the final computation, you have an additional amount of allowable moving expense deduction, you can claim this only on an amended return for the year of the move. 2009 amended tax return You cannot claim it on the return for the second year. 2009 amended tax return Forms To File Report your moving expenses on Form 3903. 2009 amended tax return Report your moving expense deduction on line 26 of Form 1040. 2009 amended tax return If you must reduce your moving expenses by the amount allocable to excluded income (as explained later under How To Report Deductions ), attach a statement to your return showing how you figured this amount. 2009 amended tax return For more information about figuring moving expenses, see Publication 521. 2009 amended tax return Contributions to Individual Retirement Arrangements Contributions to your individual retirement arrangements (IRAs) that are traditional IRAs or Roth IRAs are generally limited to the lesser of $5,500 ($6,500 if 50 or older) or your compensation that is includible in your gross income for the tax year. 2009 amended tax return In determining compensation for this purpose, do not take into account amounts you exclude under either the foreign earned income exclusion or the foreign housing exclusion. 2009 amended tax return Do not reduce your compensation by the foreign housing deduction. 2009 amended tax return If you are covered by an employer retirement plan at work, your deduction for your contributions to your traditional IRAs is generally limited based on your modified adjusted gross income. 2009 amended tax return This is your adjusted gross income figured without taking into account the foreign earned income exclusion, the foreign housing exclusion, or the foreign housing deduction. 2009 amended tax return Other modifications are also required. 2009 amended tax return For more information on IRAs, see Publication 590. 2009 amended tax return Taxes of Foreign Countries and U. 2009 amended tax return S. 2009 amended tax return Possessions You can take either a credit or a deduction for income taxes paid to a foreign country or a U. 2009 amended tax return S. 2009 amended tax return possession. 2009 amended tax return Taken as a deduction, foreign income taxes reduce your taxable income. 2009 amended tax return Taken as a credit, foreign income taxes reduce your tax liability. 2009 amended tax return You must treat all foreign income taxes the same way. 2009 amended tax return If you take a credit for any foreign income taxes, you cannot deduct any foreign income taxes. 2009 amended tax return However, you may be able to deduct other foreign taxes. 2009 amended tax return See Deduction for Other Foreign Taxes, later. 2009 amended tax return There is no rule to determine whether it is to your advantage to take a deduction or a credit for foreign income taxes. 2009 amended tax return In most cases, it is to your advantage to take foreign income taxes as a tax credit, which you subtract directly from your U. 2009 amended tax return S. 2009 amended tax return tax liability, rather than as a deduction in figuring taxable income. 2009 amended tax return However, if foreign income taxes were imposed at a high rate and the proportion of foreign income to U. 2009 amended tax return S. 2009 amended tax return income is small, a lower final tax may result from deducting the foreign income taxes. 2009 amended tax return In any event, you should figure your tax liability both ways and then use the one that is better for you. 2009 amended tax return You can make or change your choice within 10 years from the due date for filing the tax return on which you are entitled to take either the deduction or the credit. 2009 amended tax return Foreign income taxes. 2009 amended tax return   These are generally income taxes you pay to any foreign country or possession of the United States. 2009 amended tax return Foreign income taxes on U. 2009 amended tax return S. 2009 amended tax return return. 2009 amended tax return   Foreign income taxes can only be taken as a credit on Form 1040, line 47, or as an itemized deduction on Schedule A. 2009 amended tax return These amounts cannot be included as withheld income taxes on Form 1040, line 62. 2009 amended tax return Foreign taxes paid on excluded income. 2009 amended tax return   You cannot take a credit or deduction for foreign income taxes paid on earnings you exclude from tax under any of the following. 2009 amended tax return Foreign earned income exclusion. 2009 amended tax return Foreign housing exclusion. 2009 amended tax return Possession exclusion. 2009 amended tax return If your wages are completely excluded, you cannot deduct or take a credit for any of the foreign taxes paid on your wages. 2009 amended tax return   If only part of your wages is excluded, you cannot deduct or take a credit for the foreign income taxes allocable to the excluded part. 2009 amended tax return You find the taxes allocable to your excluded wages by applying a fraction to the foreign taxes paid on foreign earned income received during the tax year. 2009 amended tax return The numerator (top number) of the fraction is your excluded foreign earned income received during the tax year minus deductible expenses allocable to that income (not including the foreign housing deduction). 2009 amended tax return The denominator (bottom number) of the fraction is your total foreign earned income received during the tax year minus all deductible expenses allocable to that income (including the foreign housing deduction). 2009 amended tax return   If foreign law taxes both earned income and some other type of income and the taxes on the other type cannot be separated, the denominator of the fraction is the total amount of income subject to foreign tax minus deductible expenses allocable to that income. 2009 amended tax return    If you take a foreign tax credit for tax on income you could have excluded under your choice to exclude foreign earned income or your choice to exclude foreign housing costs, one or both of the choices may be considered revoked. 2009 amended tax return Credit for Foreign Income Taxes If you take the foreign tax credit, you may have to file Form 1116 with Form 1040. 2009 amended tax return Form 1116 is used to figure the amount of foreign tax paid or accrued that can be claimed as a foreign tax credit. 2009 amended tax return Do not include the amount of foreign tax paid or accrued as withheld federal income taxes on Form 1040, line 62. 2009 amended tax return The foreign income tax for which you can claim a credit is the amount of legal and actual tax liability you pay or accrue during the year. 2009 amended tax return The amount for which you can claim a credit is not necessarily the amount withheld by the foreign country. 2009 amended tax return You cannot take a foreign tax credit for income tax you paid to a foreign country that would be refunded by the foreign country if you made a claim for refund. 2009 amended tax return Subsidies. 2009 amended tax return   If a foreign country returns your foreign tax payments to you in the form of a subsidy, you cannot claim a foreign tax credit based on these payments. 2009 amended tax return This rule applies to a subsidy provided by any means that is determined, directly or indirectly, by reference to the amount of tax, or to the base used to figure the tax. 2009 amended tax return   Some ways of providing a subsidy are refunds, credits, deductions, payments, or discharges of obligations. 2009 amended tax return A credit is also not allowed if the subsidy is given to a person related to you, or persons who participated in a transaction or a related transaction with you. 2009 amended tax return Limit The foreign tax credit is limited to the part of your total U. 2009 amended tax return S. 2009 amended tax return tax that is in proportion to your taxable income from sources outside the United States compared to your total taxable income. 2009 amended tax return The allowable foreign tax credit cannot be more than your actual foreign tax liability. 2009 amended tax return Exemption from limit. 2009 amended tax return   You will not be subject to this limit and will not have to file Form 1116 if you meet all three of the following requirements. 2009 amended tax return Your only foreign source income for the year is passive income (dividends, interest, royalties, etc. 2009 amended tax return ) that is reported to you on a payee statement (such as a Form 1099-DIV or 1099-INT). 2009 amended tax return Your foreign taxes for the year that qualify for the credit are not more than $300 ($600 if you are filing a joint return) and are reported on a payee statement. 2009 amended tax return You elect this procedure. 2009 amended tax return If you make this election, you cannot carry back or carry over any unused foreign tax to or from this year. 2009 amended tax return Separate limit. 2009 amended tax return   You must figure the limit on a separate basis with regard to “passive category income” and “general category income” (see the instructions for Form 1116). 2009 amended tax return Figuring the limit. 2009 amended tax return   In figuring taxable income in each category, you take into account only the amount that you must include in income on your federal tax return. 2009 amended tax return Do not take any excluded amount into account. 2009 amended tax return   To determine your taxable income in each category, deduct expenses and losses that are definitely related to that income. 2009 amended tax return   Other expenses (such as itemized deductions or the standard deduction) not definitely related to specific items of income must be apportioned to the foreign income in each category by multiplying them by a fraction. 2009 amended tax return The numerator (top number) of the fraction is your gross foreign income in the separate limit category. 2009 amended tax return The denominator (bottom number) of the fraction is your gross income from all sources. 2009 amended tax return For this purpose, gross income includes income that is excluded under the foreign earned income provisions but does not include any other exempt income. 2009 amended tax return You must use special rules for deducting interest expenses. 2009 amended tax return For more information on allocating and apportioning your deductions, see Publication 514. 2009 amended tax return Exemptions. 2009 amended tax return   Do not take the deduction for exemptions for yourself, your spouse, or your dependents in figuring taxable income for purposes of the limit. 2009 amended tax return Recapture of foreign losses. 2009 amended tax return   If you have an overall foreign loss and the loss reduces your U. 2009 amended tax return S. 2009 amended tax return source income (resulting in a reduction of your U. 2009 amended tax return S. 2009 amended tax return tax liability), you must recapture the loss in later years when you have taxable income from foreign sources. 2009 amended tax return This is done by treating a part of your taxable income from foreign sources in later years as U. 2009 amended tax return S. 2009 amended tax return source income. 2009 amended tax return This reduces the numerator of the limiting fraction and the resulting foreign tax credit limit. 2009 amended tax return Recapture of domestic losses. 2009 amended tax return   If you have an overall domestic loss (resulting in no U. 2009 amended tax return S. 2009 amended tax return tax liability), you cannot claim a foreign tax credit for taxes paid during that year. 2009 amended tax return You must recapture the loss in later years when you have U. 2009 amended tax return S. 2009 amended tax return source taxable income. 2009 amended tax return This is done by treating a part of your taxable income from U. 2009 amended tax return S. 2009 amended tax return sources in later years as foreign source income. 2009 amended tax return This increases the numerator of the limiting fraction and the resulting foreign tax credit limit. 2009 amended tax return Foreign tax credit carryback and carryover. 2009 amended tax return   The amount of foreign income tax not allowed as a credit because of the limit can be carried back 1 year and carried forward 10 years. 2009 amended tax return   More information on figuring the foreign tax credit can be found in Publication 514. 2009 amended tax return Deduction for Foreign Income Taxes Instead of taking the foreign tax credit, you can deduct foreign income taxes as an itemized deduction on Schedule A (Form 1040). 2009 amended tax return You can deduct only foreign income taxes paid on income that is subject to U. 2009 amended tax return S. 2009 amended tax return tax. 2009 amended tax return You cannot deduct foreign taxes paid on earnings you exclude from tax under any of the following. 2009 amended tax return Foreign earned income exclusion. 2009 amended tax return Foreign housing exclusion. 2009 amended tax return Possession exclusion. 2009 amended tax return Example. 2009 amended tax return You are a U. 2009 amended tax return S. 2009 amended tax return citizen and qualify to exclude your foreign earned income. 2009 amended tax return Your excluded wages in Country X are $70,000 on which you paid income tax of $10,000. 2009 amended tax return You received dividends from Country X of $2,000 on which you paid income tax of $600. 2009 amended tax return You can deduct the $600 tax payment because the dividends relating to it are subject to U. 2009 amended tax return S. 2009 amended tax return tax. 2009 amended tax return Because you exclude your wages, you cannot deduct the income tax of $10,000. 2009 amended tax return If you exclude only a part of your wages, see the earlier discussion under Foreign taxes paid on excluded income. 2009 amended tax return Deduction for Other Foreign Taxes You can deduct real property taxes you pay that are imposed on you by a foreign country. 2009 amended tax return You take this deduction on Schedule A (Form 1040). 2009 amended tax return You cannot deduct other foreign taxes, such as personal property taxes, unless you incurred the expenses in a trade or business or in the production of income. 2009 amended tax return On the other hand, you generally can deduct personal property taxes when you pay them to U. 2009 amended tax return S. 2009 amended tax return possessions. 2009 amended tax return But if you claim the possession exclusion, see Publication 570. 2009 amended tax return The deduction for foreign taxes other than foreign income taxes is not related to the foreign tax credit. 2009 amended tax return You can take deductions for these miscellaneous foreign taxes and also claim the foreign tax credit for income taxes imposed by a foreign country. 2009 amended tax return How To Report Deductions If you exclude foreign earned income or housing amounts, how you show your deductions on your tax return and how you figure the amount allocable to your excluded income depends on whether the expenses are used in figuring adjusted gross income (Form 1040, line 38) or are itemized deductions. 2009 amended tax return If you have deductions used in figuring adjusted gross income, enter the total amount for each of these items on the appropriate lines and schedules of Form 1040. 2009 amended tax return Generally, you figure the amount of a deduction related to the excluded income by multiplying the deduction by a fraction, the numerator of which is your foreign earned income exclusion and the denominator of which is your foreign earned income. 2009 amended tax return Enter the amount of the deduction(s) related to excluded income on line 44 of Form 2555. 2009 amended tax return If you have itemized deductions related to excluded income, enter on Schedule A (Form 1040) only the part not related to excluded income. 2009 amended tax return You figure that amount by subtracting from the total deduction the amount related to excluded income. 2009 amended tax return Generally, you figure the amount that is related to the excluded income by multiplying the total deduction by a fraction, the numerator of which is your foreign earned income exclusion and the denominator of which is your foreign earned income. 2009 amended tax return Attach a statement to your return showing how you figured the deductible amount. 2009 amended tax return Example 1. 2009 amended tax return You are a U. 2009 amended tax return S. 2009 amended tax return citizen employed as an accountant. 2009 amended tax return Your tax home is in Germany for the entire tax year. 2009 amended tax return You meet the physical presence test. 2009 amended tax return Your foreign earned income for the year was $122,000 and your investment income was $10,380. 2009 amended tax return After excluding $97,600, your AGI is $34,780. 2009 amended tax return You had unreimbursed business expenses of $2,500 for travel and entertainment in earning your foreign income, of which $500 was for meals and entertainment. 2009 amended tax return These expenses are deductible only as miscellaneous deductions on Schedule A (Form 1040). 2009 amended tax return You also have $500 of miscellaneous expenses that are not related to your foreign income that you enter on line 23 of Schedule A. 2009 amended tax return You must fill out Form 2106. 2009 amended tax return On that form, reduce your deductible meal and entertainment expenses by 50% ($250). 2009 amended tax return You must reduce the remaining $2,250 of travel and entertainment expenses by 80% ($1,800) because you excluded 80% ($97,600/$122,000) of your foreign earned income. 2009 amended tax return You carry the remaining total of $450 to line 21 of Schedule A. 2009 amended tax return Add the $450 to the $500 that you have on line 23 and enter the total ($950) on line 24. 2009 amended tax return On line 26 of Schedule A, enter $696, which is 2% of your adjusted gross income of $34,780 (line 38, Form 1040) and subtract it from the amount on line 24. 2009 amended tax return Enter $254 on line 27 of Schedule A. 2009 amended tax return Example 2. 2009 amended tax return You are a U. 2009 amended tax return S. 2009 amended tax return citizen, have a tax home in Spain, and meet the physical presence test. 2009 amended tax return You are self-employed and personal services produce the business income. 2009 amended tax return Your gross income was $116,931, business expenses $66,895, and net income (profit) $50,036. 2009 amended tax return You choose the foreign earned income exclusion and exclude $97,600 of your gross income. 2009 amended tax return Since your excluded income is 83. 2009 amended tax return 47% of your total income, 83. 2009 amended tax return 47% of your business expenses are not deductible. 2009 amended tax return Report your total income and expenses on Schedule C (Form 1040). 2009 amended tax return On Form 2555 you will show the following: Line 20a, $116,931, gross income, Lines 42 and 43, $97,600, foreign earned income exclusion, and Line 44, $55,837 (83. 2009 amended tax return 47% × $66,895) business expenses attributable to the exclusion. 2009 amended tax return In this situation (Example 2), you cannot use Form 2555-EZ since you had self-employment income and business expenses. 2009 amended tax return Example 3. 2009 amended tax return Assume in Example 2 that both capital and personal services combine to produce the business income. 2009 amended tax return No more than 30% of your net income, or $15,011, assuming that this amount is a reasonable allowance for your services, is considered earned and can be excluded. 2009 amended tax return Your exclusion of $15,011 is 12. 2009 amended tax return 84% of your gross income ($15,011 ÷ $116,931). 2009 amended tax return Because you excluded 12. 2009 amended tax return 84% of your total income, $8,589 (. 2009 amended tax return 1284 x $66,895) of your business expenses is attributable to the excluded income and is not deductible. 2009 amended tax return Example 4. 2009 amended tax return You are a U. 2009 amended tax return S. 2009 amended tax return citizen, have a tax home in Brazil, and meet the physical presence test. 2009 amended tax return You are self-employed and both capital and personal services combine to produce business income. 2009 amended tax return Your gross income was $146,000, business expenses were $172,000, and your net loss was $26,000. 2009 amended tax return A reasonable allowance for the services you performed for the business is $77,000. 2009 amended tax return Because you incurred a net loss, the earned income limit of 30% of your net profit does not apply. 2009 amended tax return The $77,000 is foreign earned income. 2009 amended tax return If you choose to exclude the $77,000, you exclude 52. 2009 amended tax return 74% of your gross income ($77,000 ÷ $146,000), and 52. 2009 amended tax return 74% of your business expenses ($90,713) is attributable to that income and is not deductible. 2009 amended tax return Show your total income and expenses on Schedule C (Form 1040). 2009 amended tax return On Form 2555, exclude $77,000 and show $90,713 on line 44. 2009 amended tax return Subtract line 44 from line 43, and enter the difference as a negative (in parentheses) on line 45. 2009 amended tax return Because this amount is negative, enter it as a positive (no parentheses) on line 21, Form 1040, and combine it with your other income to arrive at total income on line 22 of Form 1040. 2009 amended tax return In this situation (Example 4), you would probably not want to choose the foreign earned income exclusion if this was the first year you were eligible. 2009 amended tax return If you had chosen the exclusion in an earlier year, you might want to revoke the choice for this year. 2009 amended tax return To do so would mean that you could not claim the exclusion again for the next 5 tax years without IRS approval. 2009 amended tax return See Choosing the Exclusion in chapter 4. 2009 amended tax return Example 5. 2009 amended tax return You are a U. 2009 amended tax return S. 2009 amended tax return citizen, have a tax home in Panama, and meet the bona fide residence test. 2009 amended tax return You have been performing services for clients as a partner in a firm that provides services exclusively in Panama. 2009 amended tax return Capital investment is not material in producing the partnership's income. 2009 amended tax return Under the terms of the partnership agreement, you are to receive 50% of the net profits. 2009 amended tax return The partnership received gross income of $244,000 and incurred operating expenses of $98,250. 2009 amended tax return Of the net profits of $145,750, you received $72,875 as your distributive share. 2009 amended tax return You choose to exclude $97,600 of your share of the gross income. 2009 amended tax return Because you exclude 80% ($97,600 ÷ $122,000) of your share of the gross income, you cannot deduct $39,300, 80% of your share of the operating expenses (. 2009 amended tax return 80 × $49,125). 2009 amended tax return Report $72,875, your distributive share of the partnership net profit, on Schedule E (Form 1040), Supplemental Income and Loss. 2009 amended tax return On Form 2555, show $97,600 on line 42 and show $39,300 on line 44. 2009 amended tax return Your exclusion on Form 2555 is $58,300. 2009 amended tax return In this situation (Example 5), you cannot use Form 2555-EZ since you had earned income other than salaries and wages and you had business expenses. 2009 amended tax return Prev  Up  Next   Home   More Online Publications