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2011 Federal Tax Forms 1040

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2011 Federal Tax Forms 1040

2011 federal tax forms 1040 Publication 537 - Main Content Table of Contents What Is an Installment Sale?Special rule. 2011 federal tax forms 1040 General RulesFiguring Installment Sale Income Reporting Installment Sale Income Other RulesElecting Out of the Installment Method Payments Received or Considered Received Escrow Account Depreciation Recapture Income Sale to a Related Person Like-Kind Exchange Contingent Payment Sale Single Sale of Several Assets Sale of a Business Unstated Interest and Original Issue Discount (OID) Disposition of an Installment Obligation Repossession Interest on Deferred Tax Reporting an Installment SaleRelated person. 2011 federal tax forms 1040 Several assets. 2011 federal tax forms 1040 Special situations. 2011 federal tax forms 1040 Schedule D (Form 1040). 2011 federal tax forms 1040 Form 4797. 2011 federal tax forms 1040 How To Get Tax Help What Is an Installment Sale? An installment sale is a sale of property where you receive at least one payment after the tax year of the sale. 2011 federal tax forms 1040 The rules for installment sales do not apply if you elect not to use the installment method (see Electing Out of the Installment Method under Other Rules, later) or the transaction is one for which the installment method may not apply. 2011 federal tax forms 1040 The installment sales method cannot be used for the following. 2011 federal tax forms 1040 Sale of inventory. 2011 federal tax forms 1040   The regular sale of inventory of personal property does not qualify as an installment sale even if you receive a payment after the year of sale. 2011 federal tax forms 1040 See Sale of a Business under Other Rules, later. 2011 federal tax forms 1040 Dealer sales. 2011 federal tax forms 1040   Sales of personal property by a person who regularly sells or otherwise disposes of the same type of personal property on the installment plan are not installment sales. 2011 federal tax forms 1040 This rule also applies to real property held for sale to customers in the ordinary course of a trade or business. 2011 federal tax forms 1040 However, the rule does not apply to an installment sale of property used or produced in farming. 2011 federal tax forms 1040 Special rule. 2011 federal tax forms 1040   Dealers of time-shares and residential lots can treat certain sales as installment sales and report them under the installment method if they elect to pay a special interest charge. 2011 federal tax forms 1040 For more information, see section 453(l). 2011 federal tax forms 1040 Stock or securities. 2011 federal tax forms 1040   You cannot use the installment method to report gain from the sale of stock or securities traded on an established securities market. 2011 federal tax forms 1040 You must report the entire gain on the sale in the year in which the trade date falls. 2011 federal tax forms 1040 Installment obligation. 2011 federal tax forms 1040   The buyer's obligation to make future payments to you can be in the form of a deed of trust, note, land contract, mortgage, or other evidence of the buyer's debt to you. 2011 federal tax forms 1040 General Rules If a sale qualifies as an installment sale, the gain must be reported under the installment method unless you elect out of using the installment method. 2011 federal tax forms 1040 See Electing Out of the Installment Method under Other Rules, later, for information on recognizing the entire gain in the year of sale. 2011 federal tax forms 1040 Sale at a loss. 2011 federal tax forms 1040   If your sale results in a loss, you cannot use the installment method. 2011 federal tax forms 1040 If the loss is on an installment sale of business or investment property, you can deduct it only in the tax year of sale. 2011 federal tax forms 1040 Unstated interest. 2011 federal tax forms 1040   If your sale calls for payments in a later year and the sales contract provides for little or no interest, you may have to figure unstated interest, even if you have a loss. 2011 federal tax forms 1040 See Unstated Interest and Original Issue Discount (OID) under Other Rules, later. 2011 federal tax forms 1040 Figuring Installment Sale Income You can use the following discussions or Form 6252 to help you determine gross profit, contract price, gross profit percentage, and installment sale income. 2011 federal tax forms 1040 Each payment on an installment sale usually consists of the following three parts. 2011 federal tax forms 1040 Interest income. 2011 federal tax forms 1040 Return of your adjusted basis in the property. 2011 federal tax forms 1040 Gain on the sale. 2011 federal tax forms 1040 In each year you receive a payment, you must include in income both the interest part and the part that is your gain on the sale. 2011 federal tax forms 1040 You do not include in income the part that is the return of your basis in the property. 2011 federal tax forms 1040 Basis is the amount of your investment in the property for installment sale purposes. 2011 federal tax forms 1040 Interest Income You must report interest as ordinary income. 2011 federal tax forms 1040 Interest is generally not included in a down payment. 2011 federal tax forms 1040 However, you may have to treat part of each later payment as interest, even if it is not called interest in your agreement with the buyer. 2011 federal tax forms 1040 Interest provided in the agreement is called stated interest. 2011 federal tax forms 1040 If the agreement does not provide for enough stated interest, there may be unstated interest or original issue discount. 2011 federal tax forms 1040 See Unstated Interest and Original Issue Discount (OID) under Other Rules, later. 2011 federal tax forms 1040 Adjusted Basis and Installment Sale Income (Gain on Sale) After you have determined how much of each payment to treat as interest, you treat the rest of each payment as if it were made up of two parts. 2011 federal tax forms 1040 A tax-free return of your adjusted basis in the property, and Your gain (referred to as installment sale income on Form 6252). 2011 federal tax forms 1040 Figuring adjusted basis for installment sale purposes. 2011 federal tax forms 1040   You can use Worksheet A to figure your adjusted basis in the property for installment sale purposes. 2011 federal tax forms 1040 When you have completed the worksheet, you will also have determined the gross profit percentage necessary to figure your installment sale income (gain) for this year. 2011 federal tax forms 1040 Worksheet A. 2011 federal tax forms 1040 Figuring Adjusted Basis and Gross Profit Percentage 1. 2011 federal tax forms 1040 Enter the selling price for the property   2. 2011 federal tax forms 1040 Enter your adjusted basis for the property     3. 2011 federal tax forms 1040 Enter your selling expenses     4. 2011 federal tax forms 1040 Enter any depreciation recapture     5. 2011 federal tax forms 1040 Add lines 2, 3, and 4. 2011 federal tax forms 1040  This is your adjusted basis for installment sale purposes   6. 2011 federal tax forms 1040 Subtract line 5 from line 1. 2011 federal tax forms 1040 If zero or less, enter -0-. 2011 federal tax forms 1040  This is your gross profit     If the amount entered on line 6 is zero, stop here. 2011 federal tax forms 1040 You cannot use the installment method. 2011 federal tax forms 1040   7. 2011 federal tax forms 1040 Enter the contract price for the property   8. 2011 federal tax forms 1040 Divide line 6 by line 7. 2011 federal tax forms 1040 This is your gross profit percentage   Selling price. 2011 federal tax forms 1040   The selling price is the total cost of the property to the buyer and includes any of the following. 2011 federal tax forms 1040 Any money you are to receive. 2011 federal tax forms 1040 The fair market value (FMV) of any property you are to receive (FMV is discussed in Property Used As a Payment under Other Rules, later). 2011 federal tax forms 1040 Any existing mortgage or other debt the buyer pays, assumes, or takes (a note, mortgage, or any other liability, such as a lien, accrued interest, or taxes you owe on the property). 2011 federal tax forms 1040 Any of your selling expenses the buyer pays. 2011 federal tax forms 1040   Do not include stated interest, unstated interest, any amount recomputed or recharacterized as interest, or original issue discount. 2011 federal tax forms 1040 Adjusted basis for installment sale purposes. 2011 federal tax forms 1040   Your adjusted basis is the total of the following three items. 2011 federal tax forms 1040 Adjusted basis. 2011 federal tax forms 1040 Selling expenses. 2011 federal tax forms 1040 Depreciation recapture. 2011 federal tax forms 1040 Adjusted basis. 2011 federal tax forms 1040   Basis is your investment in the property for installment sale purposes. 2011 federal tax forms 1040 The way you figure basis depends on how you acquire the property. 2011 federal tax forms 1040 The basis of property you buy is generally its cost. 2011 federal tax forms 1040 The basis of property you inherit, receive as a gift, build yourself, or receive in a tax-free exchange is figured differently. 2011 federal tax forms 1040   While you own property, various events may change your original basis. 2011 federal tax forms 1040 Some events, such as adding rooms or making permanent improvements, increase basis. 2011 federal tax forms 1040 Others, such as deductible casualty losses or depreciation previously allowed or allowable, decrease basis. 2011 federal tax forms 1040 The result is adjusted basis. 2011 federal tax forms 1040   For more information on how to figure basis and adjusted basis, see Publication 551. 2011 federal tax forms 1040 For more information regarding your basis in property you inherited from someone who died in 2010 and whose executor filed Form 8939, Allocation of Increase In Basis for Property Acquired From a Decedent, see Publication 4895. 2011 federal tax forms 1040 Selling expenses. 2011 federal tax forms 1040   Selling expenses relate to the sale of the property. 2011 federal tax forms 1040 They include commissions, attorney fees, and any other expenses paid on the sale. 2011 federal tax forms 1040 Selling expenses are added to the basis of the sold property. 2011 federal tax forms 1040 Depreciation recapture. 2011 federal tax forms 1040   If the property you sold was depreciable property, you may need to recapture part of the gain on the sale as ordinary income. 2011 federal tax forms 1040 See Depreciation Recapture Income under Other Rules, later. 2011 federal tax forms 1040 Gross profit. 2011 federal tax forms 1040   Gross profit is the total gain you report on the installment method. 2011 federal tax forms 1040   To figure your gross profit, subtract your adjusted basis for installment sale purposes from the selling price. 2011 federal tax forms 1040 If the property you sold was your home, subtract from the gross profit any gain you can exclude. 2011 federal tax forms 1040 See Sale of Your Home , later, under Reporting Installment Sale Income. 2011 federal tax forms 1040 Contract price. 2011 federal tax forms 1040   Contract price equals: The selling price, minus The mortgages, debts, and other liabilities assumed or taken by the buyer, plus The amount by which the mortgages, debts, and other liabilities assumed or taken by the buyer exceed your adjusted basis for installment sale purposes. 2011 federal tax forms 1040 Gross profit percentage. 2011 federal tax forms 1040   A certain percentage of each payment (after subtracting interest) is reported as installment sale income. 2011 federal tax forms 1040 This percentage is called the gross profit percentage and is figured by dividing your gross profit from the sale by the contract price. 2011 federal tax forms 1040   The gross profit percentage generally remains the same for each payment you receive. 2011 federal tax forms 1040 However, see the Example under Selling Price Reduced, later, for a situation where the gross profit percentage changes. 2011 federal tax forms 1040 Example. 2011 federal tax forms 1040 You sell property at a contract price of $6,000 and your gross profit is $1,500. 2011 federal tax forms 1040 Your gross profit percentage is 25% ($1,500 ÷ $6,000). 2011 federal tax forms 1040 After subtracting interest, you report 25% of each payment, including the down payment, as installment sale income from the sale for the tax year you receive the payment. 2011 federal tax forms 1040 The remainder (balance) of each payment is the tax-free return of your adjusted basis. 2011 federal tax forms 1040 Amount to report as installment sale income. 2011 federal tax forms 1040   Multiply the payments you receive each year (less interest) by the gross profit percentage. 2011 federal tax forms 1040 The result is your installment sale income for the tax year. 2011 federal tax forms 1040 In certain circumstances, you may be treated as having received a payment, even though you received nothing directly. 2011 federal tax forms 1040 A receipt of property or the assumption of a mortgage on the property sold may be treated as a payment. 2011 federal tax forms 1040 For a detailed discussion, see Payments Received or Considered Received under Other Rules, later. 2011 federal tax forms 1040 Selling Price Reduced If the selling price is reduced at a later date, the gross profit on the sale also will change. 2011 federal tax forms 1040 You then must refigure the gross profit percentage for the remaining payments. 2011 federal tax forms 1040 Refigure your gross profit using Worksheet B. 2011 federal tax forms 1040 You will spread any remaining gain over future installments. 2011 federal tax forms 1040 Worksheet B. 2011 federal tax forms 1040 New Gross Profit Percentage — Selling Price Reduced 1. 2011 federal tax forms 1040 Enter the reduced selling  price for the property   2. 2011 federal tax forms 1040 Enter your adjusted  basis for the  property     3. 2011 federal tax forms 1040 Enter your selling  expenses     4. 2011 federal tax forms 1040 Enter any depreciation  recapture     5. 2011 federal tax forms 1040 Add lines 2, 3, and 4. 2011 federal tax forms 1040   6. 2011 federal tax forms 1040 Subtract line 5 from line 1. 2011 federal tax forms 1040  This is your adjusted  gross profit   7. 2011 federal tax forms 1040 Enter any installment sale  income reported in  prior year(s)   8. 2011 federal tax forms 1040 Subtract line 7 from line 6   9. 2011 federal tax forms 1040 Future installments   10. 2011 federal tax forms 1040 Divide line 8 by line 9. 2011 federal tax forms 1040  This is your new gross profit percentage*   * Apply this percentage to all future payments to determine how much of each of those payments is installment sale income. 2011 federal tax forms 1040 Example. 2011 federal tax forms 1040 In 2011, you sold land with a basis of $40,000 for $100,000. 2011 federal tax forms 1040 Your gross profit was $60,000. 2011 federal tax forms 1040 You received a $20,000 down payment and the buyer's note for $80,000. 2011 federal tax forms 1040 The note provides for four annual payments of $20,000 each, plus 8% interest, beginning in 2012. 2011 federal tax forms 1040 Your gross profit percentage is 60%. 2011 federal tax forms 1040 You reported a gain of $12,000 on each payment received in 2011 and 2012. 2011 federal tax forms 1040 In 2013, you and the buyer agreed to reduce the purchase price to $85,000 and payments during 2013, 2014, and 2015 are reduced to $15,000 for each year. 2011 federal tax forms 1040 The new gross profit percentage, 46. 2011 federal tax forms 1040 67%, is figured on Example—Worksheet B. 2011 federal tax forms 1040 You will report a gain of $7,000 (46. 2011 federal tax forms 1040 67% of $15,000) on each of the $15,000 installments due in 2013, 2014, and 2015. 2011 federal tax forms 1040 Example — Worksheet B. 2011 federal tax forms 1040 New Gross Profit Percentage — Selling Price Reduced 1. 2011 federal tax forms 1040 Enter the reduced selling  price for the property 85,000 2. 2011 federal tax forms 1040 Enter your adjusted  basis for the  property 40,000   3. 2011 federal tax forms 1040 Enter your selling  expenses -0-   4. 2011 federal tax forms 1040 Enter any depreciation  recapture -0-   5. 2011 federal tax forms 1040 Add lines 2, 3, and 4. 2011 federal tax forms 1040 40,000 6. 2011 federal tax forms 1040 Subtract line 5 from line 1. 2011 federal tax forms 1040  This is your adjusted  gross profit 45,000 7. 2011 federal tax forms 1040 Enter any installment sale  income reported in  prior year(s) 24,000 8. 2011 federal tax forms 1040 Subtract line 7 from line 6 21,000 9. 2011 federal tax forms 1040 Future installments 45,000 10. 2011 federal tax forms 1040 Divide line 8 by line 9. 2011 federal tax forms 1040  This is your new gross profit percentage* 46. 2011 federal tax forms 1040 67% * Apply this percentage to all future payments to determine how much of each of those payments is installment sale income. 2011 federal tax forms 1040 Reporting Installment Sale Income Generally, you will use Form 6252 to report installment sale income from casual sales of real or personal property during the tax year. 2011 federal tax forms 1040 You also will have to report the installment sale income on Schedule D (Form 1040), Capital Gains and Losses, or Form 4797, or both. 2011 federal tax forms 1040 See Schedule D (Form 1040) and Form 4797 , later. 2011 federal tax forms 1040 If the property was your main home, you may be able to exclude part or all of the gain. 2011 federal tax forms 1040 See Sale of Your Home , later. 2011 federal tax forms 1040 Form 6252 Use Form 6252 to report an installment sale in the year it takes place and to report payments received, or considered received because of related party resales, in later years. 2011 federal tax forms 1040 Attach it to your tax return for each year. 2011 federal tax forms 1040 Form 6252 will help you determine the gross profit, contract price, gross profit percentage, and installment sale income. 2011 federal tax forms 1040 Which parts to complete. 2011 federal tax forms 1040   Which part to complete depends on whether you are filing the form for the year of sale or a later year. 2011 federal tax forms 1040 Year of sale. 2011 federal tax forms 1040   Complete lines 1 through 4, Part I, and Part II. 2011 federal tax forms 1040 If you sold property to a related party during the year, also complete Part III. 2011 federal tax forms 1040 Later years. 2011 federal tax forms 1040   Complete lines 1 through 4 and Part II for any year in which you receive a payment from an installment sale. 2011 federal tax forms 1040   If you sold a marketable security to a related party after May 14, 1980, and before January 1, 1987, complete Form 6252 for each year of the installment agreement, even if you did not receive a payment. 2011 federal tax forms 1040 (After December 31, 1986, the installment method is not available for the sale of marketable securities. 2011 federal tax forms 1040 ) Complete lines 1 through 4 and Part II for any year in which you receive a payment from the sale. 2011 federal tax forms 1040 Complete Part III unless you received the final payment during the tax year. 2011 federal tax forms 1040   If you sold property other than a marketable security to a related party after May 14, 1980, complete Form 6252 for the year of sale and for 2 years after the year of sale, even if you did not receive a payment. 2011 federal tax forms 1040 Complete lines 1 through 4 and Part II for any year during this 2-year period in which you receive a payment from the sale. 2011 federal tax forms 1040 Complete Part III for the 2 years after the year of sale unless you received the final payment during the tax year. 2011 federal tax forms 1040 Schedule D (Form 1040) Enter the gain figured on Form 6252 (line 26) for personal-use property (capital assets) on Schedule D (Form 1040), as a short-term gain (line 4) or long-term gain (line 11). 2011 federal tax forms 1040 If your gain from the installment sale qualifies for long-term capital gain treatment in the year of sale, it will continue to qualify in later tax years. 2011 federal tax forms 1040 Your gain is long-term if you owned the property for more than 1 year when you sold it. 2011 federal tax forms 1040 Form 4797 An installment sale of property used in your business or that earns rent or royalty income may result in a capital gain, an ordinary gain, or both. 2011 federal tax forms 1040 All or part of any gain from the disposition of the property may be ordinary gain from depreciation recapture. 2011 federal tax forms 1040 For trade or business property held for more than 1 year, enter the amount from line 26 of Form 6252 on Form 4797, line 4. 2011 federal tax forms 1040 If the property was held 1 year or less or you have an ordinary gain from the sale of a noncapital asset (even if the holding period is more than 1 year), enter this amount on Form 4797, line 10, and write “From Form 6252. 2011 federal tax forms 1040 ” Sale of Your Home If you sell your home, you may be able to exclude all or part of the gain on the sale. 2011 federal tax forms 1040 See Publication 523 for information about excluding the gain. 2011 federal tax forms 1040 If the sale is an installment sale, any gain you exclude is not included in gross profit when figuring your gross profit percentage. 2011 federal tax forms 1040 Seller-financed mortgage. 2011 federal tax forms 1040   If you finance the sale of your home to an individual, both you and the buyer may have to follow special reporting procedures. 2011 federal tax forms 1040   When you report interest income received from a buyer who uses the property as a personal residence, write the buyer's name, address, and social security number (SSN) on line 1 of Schedule B (Form 1040A or 1040), Interest and Ordinary Dividends. 2011 federal tax forms 1040   When deducting the mortgage interest, the buyer must write your name, address, and SSN on line 11 of Schedule A (Form 1040), Itemized Deductions. 2011 federal tax forms 1040   If either person fails to include the other person's SSN, a $50 penalty will be assessed. 2011 federal tax forms 1040 Other Rules The rules discussed in this part of the publication apply only in certain circumstances or to certain types of property. 2011 federal tax forms 1040 The following topics are discussed. 2011 federal tax forms 1040 Electing out of the installment method. 2011 federal tax forms 1040 Payments received or considered received. 2011 federal tax forms 1040 Escrow account. 2011 federal tax forms 1040 Depreciation recapture income. 2011 federal tax forms 1040 Sale to a related person. 2011 federal tax forms 1040 Like-kind exchange. 2011 federal tax forms 1040 Contingent payment sale. 2011 federal tax forms 1040 Single sale of several assets. 2011 federal tax forms 1040 Sale of a business. 2011 federal tax forms 1040 Unstated interest and original issue discount. 2011 federal tax forms 1040 Disposition of an installment obligation. 2011 federal tax forms 1040 Repossession. 2011 federal tax forms 1040 Interest on deferred tax. 2011 federal tax forms 1040 Electing Out of the Installment Method If you elect not to use the installment method, you generally report the entire gain in the year of sale, even though you do not receive all the sale proceeds in that year. 2011 federal tax forms 1040 To figure the amount of gain to report, use the fair market value (FMV) of the buyer's installment obligation that represents the buyer's debt to you. 2011 federal tax forms 1040 Notes, mortgages, and land contracts are examples of obligations that are included at FMV. 2011 federal tax forms 1040 You must figure the FMV of the buyer's installment obligation, whether or not you would actually be able to sell it. 2011 federal tax forms 1040 If you use the cash method of accounting, the FMV of the obligation will never be considered to be less than the FMV of the property sold (minus any other consideration received). 2011 federal tax forms 1040 Example. 2011 federal tax forms 1040 You sold a parcel of land for $50,000. 2011 federal tax forms 1040 You received a $10,000 down payment and will receive the balance over the next 10 years at $4,000 a year, plus 8% interest. 2011 federal tax forms 1040 The buyer gave you a note for $40,000. 2011 federal tax forms 1040 The note had an FMV of $40,000. 2011 federal tax forms 1040 You paid a commission of 6%, or $3,000, to a broker for negotiating the sale. 2011 federal tax forms 1040 The land cost $25,000, and you owned it for more than one year. 2011 federal tax forms 1040 You decide to elect out of the installment method and report the entire gain in the year of sale. 2011 federal tax forms 1040 Gain realized:     Selling price $50,000 Minus: Property's adj. 2011 federal tax forms 1040 basis $25,000     Commission 3,000 28,000 Gain realized $22,000 Gain recognized in year of sale:   Cash $10,000 Market value of note 40,000 Total realized in year of sale $50,000 Minus: Property's adj. 2011 federal tax forms 1040 basis $25,000     Commission 3,000 28,000 Gain recognized $22,000 The recognized gain of $22,000 is long-term capital gain. 2011 federal tax forms 1040 You include the entire gain in income in the year of sale, so you do not include in income any principal payments you receive in later tax years. 2011 federal tax forms 1040 The interest on the note is ordinary income and is reported as interest income each year. 2011 federal tax forms 1040 How to elect out. 2011 federal tax forms 1040   To make this election, do not report your sale on Form 6252. 2011 federal tax forms 1040 Instead, report it on Form 8949, Sales and Other Dispositions of Capital Assets, Form 4797, or both. 2011 federal tax forms 1040 When to elect out. 2011 federal tax forms 1040   Make this election by the due date, including extensions, for filing your tax return for the year the sale takes place. 2011 federal tax forms 1040 Automatic six-month extension. 2011 federal tax forms 1040   If you timely file your tax return without making the election, you still can make the election by filing an amended return within 6 months of the due date of your return (excluding extensions). 2011 federal tax forms 1040 Write “Filed pursuant to section 301. 2011 federal tax forms 1040 9100-2” at the top of the amended return and file it where the original return was filed. 2011 federal tax forms 1040 Revoking the election. 2011 federal tax forms 1040   Once made, the election can be revoked only with IRS approval. 2011 federal tax forms 1040 A revocation is retroactive. 2011 federal tax forms 1040 You will not be allowed to revoke the election if either of the following applies. 2011 federal tax forms 1040 One of the purposes is to avoid federal income tax. 2011 federal tax forms 1040 The tax year in which any payment was received has closed. 2011 federal tax forms 1040 Payments Received or Considered Received You must figure your gain each year on the payments you receive, or are treated as receiving, from an installment sale. 2011 federal tax forms 1040 In certain situations, you are considered to have received a payment, even though the buyer does not pay you directly. 2011 federal tax forms 1040 These situations occur when the buyer assumes or pays any of your debts, such as a loan, or pays any of your expenses, such as a sales commission. 2011 federal tax forms 1040 However, as discussed later, the buyer's assumption of your debt is treated as a recovery of your basis rather than as a payment in many cases. 2011 federal tax forms 1040 Buyer Pays Seller's Expenses If the buyer pays any of your expenses related to the sale of your property, it is considered a payment to you in the year of sale. 2011 federal tax forms 1040 Include these expenses in the selling and contract prices when figuring the gross profit percentage. 2011 federal tax forms 1040 Buyer Assumes Mortgage If the buyer assumes or pays off your mortgage, or otherwise takes the property subject to the mortgage, the following rules apply. 2011 federal tax forms 1040 Mortgage not more than basis. 2011 federal tax forms 1040   If the buyer assumes a mortgage that is not more than your installment sale basis in the property, it is not considered a payment to you. 2011 federal tax forms 1040 It is considered a recovery of your basis. 2011 federal tax forms 1040 The contract price is the selling price minus the mortgage. 2011 federal tax forms 1040 Example. 2011 federal tax forms 1040 You sell property with an adjusted basis of $19,000. 2011 federal tax forms 1040 You have selling expenses of $1,000. 2011 federal tax forms 1040 The buyer assumes your existing mortgage of $15,000 and agrees to pay you $10,000 (a cash down payment of $2,000 and $2,000 (plus 12% interest) in each of the next 4 years). 2011 federal tax forms 1040 The selling price is $25,000 ($15,000 + $10,000). 2011 federal tax forms 1040 Your gross profit is $5,000 ($25,000 − $20,000 installment sale basis). 2011 federal tax forms 1040 The contract price is $10,000 ($25,000 − $15,000 mortgage). 2011 federal tax forms 1040 Your gross profit percentage is 50% ($5,000 ÷ $10,000). 2011 federal tax forms 1040 You report half of each $2,000 payment received as gain from the sale. 2011 federal tax forms 1040 You also report all interest you receive as ordinary income. 2011 federal tax forms 1040 Mortgage more than basis. 2011 federal tax forms 1040   If the buyer assumes a mortgage that is more than your installment sale basis in the property, you recover your entire basis. 2011 federal tax forms 1040 The part of the mortgage greater than your basis is treated as a payment received in the year of sale. 2011 federal tax forms 1040   To figure the contract price, subtract the mortgage from the selling price. 2011 federal tax forms 1040 This is the total amount (other than interest) you will receive directly from the buyer. 2011 federal tax forms 1040 Add to this amount the payment you are considered to have received (the difference between the mortgage and your installment sale basis). 2011 federal tax forms 1040 The contract price is then the same as your gross profit from the sale. 2011 federal tax forms 1040    If the mortgage the buyer assumes is equal to or more than your installment sale basis, the gross profit percentage always will be 100%. 2011 federal tax forms 1040 Example. 2011 federal tax forms 1040 The selling price for your property is $9,000. 2011 federal tax forms 1040 The buyer will pay you $1,000 annually (plus 8% interest) over the next 3 years and assume an existing mortgage of $6,000. 2011 federal tax forms 1040 Your adjusted basis in the property is $4,400. 2011 federal tax forms 1040 You have selling expenses of $600, for a total installment sale basis of $5,000. 2011 federal tax forms 1040 The part of the mortgage that is more than your installment sale basis is $1,000 ($6,000 − $5,000). 2011 federal tax forms 1040 This amount is included in the contract price and treated as a payment received in the year of sale. 2011 federal tax forms 1040 The contract price is $4,000: Selling price $9,000 Minus: Mortgage (6,000) Amount actually received $3,000 Add difference:   Mortgage $6,000   Minus: Installment sale basis 5,000 1,000 Contract price $4,000       Your gross profit on the sale is also $4,000: Selling price $9,000 Minus: Installment sale basis (5,000) Gross profit $4,000 Your gross profit percentage is 100%. 2011 federal tax forms 1040 Report 100% of each payment (less interest) as gain from the sale. 2011 federal tax forms 1040 Treat the $1,000 difference between the mortgage and your installment sale basis as a payment and report 100% of it as gain in the year of sale. 2011 federal tax forms 1040 Mortgage Canceled If the buyer of your property is the person who holds the mortgage on it, your debt is canceled, not assumed. 2011 federal tax forms 1040 You are considered to receive a payment equal to the outstanding canceled debt. 2011 federal tax forms 1040 Example. 2011 federal tax forms 1040 Mary Jones loaned you $45,000 in 2009 in exchange for a note and a mortgage in a tract of land you owned. 2011 federal tax forms 1040 On April 4, 2013, she bought the land for $70,000. 2011 federal tax forms 1040 At that time, $30,000 of her loan to you was outstanding. 2011 federal tax forms 1040 She agreed to forgive this $30,000 debt and to pay you $20,000 (plus interest) on August 1, 2013, and $20,000 on August 1, 2014. 2011 federal tax forms 1040 She did not assume an existing mortgage. 2011 federal tax forms 1040 She canceled the $30,000 debt you owed her. 2011 federal tax forms 1040 You are considered to have received a $30,000 payment at the time of the sale. 2011 federal tax forms 1040 Buyer Assumes Other Debts If the buyer assumes any other debts, such as a loan or back taxes, it may be considered a payment to you in the year of sale. 2011 federal tax forms 1040 If the buyer assumes the debt instead of paying it off, only part of it may have to be treated as a payment. 2011 federal tax forms 1040 Compare the debt to your installment sale basis in the property being sold. 2011 federal tax forms 1040 If the debt is less than your installment sale basis, none of it is treated as a payment. 2011 federal tax forms 1040 If it is more, only the difference is treated as a payment. 2011 federal tax forms 1040 If the buyer assumes more than one debt, any part of the total that is more than your installment sale basis is considered a payment. 2011 federal tax forms 1040 These rules are the same as the rules discussed earlier under Buyer Assumes Mortgage . 2011 federal tax forms 1040 However, they apply only to the following types of debt the buyer assumes. 2011 federal tax forms 1040 Those acquired from ownership of the property you are selling, such as a mortgage, lien, overdue interest, or back taxes. 2011 federal tax forms 1040 Those acquired in the ordinary course of your business, such as a balance due for inventory you purchased. 2011 federal tax forms 1040 If the buyer assumes any other type of debt, such as a personal loan or your legal fees relating to the sale, it is treated as if the buyer had paid off the debt at the time of the sale. 2011 federal tax forms 1040 The value of the assumed debt is then considered a payment to you in the year of sale. 2011 federal tax forms 1040 Property Used As a Payment If you receive property other than money from the buyer, it is still considered a payment in the year received. 2011 federal tax forms 1040 However, see Like-Kind Exchange , later. 2011 federal tax forms 1040 Generally, the amount of the payment is the property's FMV on the date you receive it. 2011 federal tax forms 1040 Exception. 2011 federal tax forms 1040   If the property the buyer gives you is payable on demand or readily tradable, the amount you should consider as payment in the year received is: The FMV of the property on the date you receive it if you use the cash method of accounting, The face amount of the obligation on the date you receive it if you use the accrual method of accounting, or The stated redemption price at maturity less any original issue discount (OID) or, if there is no OID, the stated redemption price at maturity appropriately discounted to reflect total unstated interest. 2011 federal tax forms 1040 See Unstated Interest and Original Issue Discount (OID) , later. 2011 federal tax forms 1040 Debt not payable on demand. 2011 federal tax forms 1040   Any evidence of debt you receive from the buyer not payable on demand is not considered a payment. 2011 federal tax forms 1040 This is true even if the debt is guaranteed by a third party, including a government agency. 2011 federal tax forms 1040 Fair market value (FMV). 2011 federal tax forms 1040   This is the price at which property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having a reasonable knowledge of all the necessary facts. 2011 federal tax forms 1040 Third-party note. 2011 federal tax forms 1040   If the property the buyer gives you is a third-party note (or other obligation of a third party), you are considered to have received a payment equal to the note's FMV. 2011 federal tax forms 1040 Because the FMV of the note is itself a payment on your installment sale, any payments you later receive from the third party are not considered payments on the sale. 2011 federal tax forms 1040 The excess of the note's face value over its FMV is interest. 2011 federal tax forms 1040 Exclude this interest in determining the selling price of the property. 2011 federal tax forms 1040 However, see Exception under Property Used As a Payment, earlier. 2011 federal tax forms 1040 Example. 2011 federal tax forms 1040 You sold real estate in an installment sale. 2011 federal tax forms 1040 As part of the down payment, the buyer assigned to you a $50,000, 8% interest third-party note. 2011 federal tax forms 1040 The FMV of the third-party note at the time of the sale was $30,000. 2011 federal tax forms 1040 This amount, not $50,000, is a payment to you in the year of sale. 2011 federal tax forms 1040 The third-party note had an FMV equal to 60% of its face value ($30,000 ÷ $50,000), so 60% of each principal payment you receive on this note is a nontaxable return of capital. 2011 federal tax forms 1040 The remaining 40% is interest taxed as ordinary income. 2011 federal tax forms 1040 Bond. 2011 federal tax forms 1040   A bond or other evidence of debt you receive from the buyer that is payable on demand or readily tradable in an established securities market is treated as a payment in the year you receive it. 2011 federal tax forms 1040 For more information on the amount you should treat as a payment, see Exception under Property Used As a Payment, earlier. 2011 federal tax forms 1040    If you receive a government or corporate bond for a sale before October 22, 2004, and the bond has interest coupons attached or can be readily traded in an established securities market, you are considered to have received payment equal to the bond's FMV. 2011 federal tax forms 1040 However, see Exception under Property Used As a Payment, earlier. 2011 federal tax forms 1040 Buyer's note. 2011 federal tax forms 1040   The buyer's note (unless payable on demand) is not considered payment on the sale. 2011 federal tax forms 1040 However, its full face value is included when figuring the selling price and the contract price. 2011 federal tax forms 1040 Payments you receive on the note are used to figure your gain in the year received. 2011 federal tax forms 1040 Installment Obligation Used as Security (Pledge Rule) If you use an installment obligation to secure any debt, the net proceeds from the debt may be treated as a payment on the installment obligation. 2011 federal tax forms 1040 This is known as the pledge rule, and it applies if the selling price of the property is over $150,000. 2011 federal tax forms 1040 It does not apply to the following dispositions. 2011 federal tax forms 1040 Sales of property used or produced in farming. 2011 federal tax forms 1040 Sales of personal-use property. 2011 federal tax forms 1040 Qualifying sales of time-shares and residential lots. 2011 federal tax forms 1040 The net debt proceeds are the gross debt minus the direct expenses of getting the debt. 2011 federal tax forms 1040 The amount treated as a payment is considered received on the later of the following dates. 2011 federal tax forms 1040 The date the debt becomes secured. 2011 federal tax forms 1040 The date you receive the debt proceeds. 2011 federal tax forms 1040 A debt is secured by an installment obligation to the extent that payment of principal or interest on the debt is directly secured (under the terms of the loan or any underlying arrangement) by any interest in the installment obligation. 2011 federal tax forms 1040 For sales after December 16, 1999, payment on a debt is treated as directly secured by an interest in an installment obligation to the extent an arrangement allows you to satisfy all or part of the debt with the installment obligation. 2011 federal tax forms 1040 Limit. 2011 federal tax forms 1040   The net debt proceeds treated as a payment on the pledged installment obligation cannot be more than the excess of item (1) over item (2), below. 2011 federal tax forms 1040 The total contract price on the installment sale. 2011 federal tax forms 1040 Any payments received on the installment obligation before the date the net debt proceeds are treated as a payment. 2011 federal tax forms 1040 Installment payments. 2011 federal tax forms 1040   The pledge rule accelerates the reporting of the installment obligation payments. 2011 federal tax forms 1040 Do not report payments received on the obligation after it has been pledged until the payments received exceed the amount reported under the pledge rule. 2011 federal tax forms 1040 Exception. 2011 federal tax forms 1040   The pledge rule does not apply to pledges made after December 17, 1987, to refinance a debt under the following circumstances. 2011 federal tax forms 1040 The debt was outstanding on December 17, 1987. 2011 federal tax forms 1040 The debt was secured by that installment sale obligation on that date and at all times thereafter until the refinancing occurred. 2011 federal tax forms 1040   A refinancing as a result of the creditor's calling of the debt is treated as a continuation of the original debt so long as a person other than the creditor or a person related to the creditor provides the refinancing. 2011 federal tax forms 1040   This exception applies only to refinancing that does not exceed the principal of the original debt immediately before the refinancing. 2011 federal tax forms 1040 Any excess is treated as a payment on the installment obligation. 2011 federal tax forms 1040 Escrow Account In some cases, the sales agreement or a later agreement may call for the buyer to establish an irrevocable escrow account from which the remaining installment payments (including interest) are to be made. 2011 federal tax forms 1040 These sales cannot be reported on the installment method. 2011 federal tax forms 1040 The buyer's obligation is paid in full when the balance of the purchase price is deposited into the escrow account. 2011 federal tax forms 1040 When an escrow account is established, you no longer rely on the buyer for the rest of the payments, but on the escrow arrangement. 2011 federal tax forms 1040 Example. 2011 federal tax forms 1040 You sell property for $100,000. 2011 federal tax forms 1040 The sales agreement calls for a down payment of $10,000 and payment of $15,000 in each of the next 6 years to be made from an irrevocable escrow account containing the balance of the purchase price plus interest. 2011 federal tax forms 1040 You cannot report the sale on the installment method because the full purchase price is considered received in the year of sale. 2011 federal tax forms 1040 You report the entire gain in the year of sale. 2011 federal tax forms 1040 Escrow established in a later year. 2011 federal tax forms 1040   If you make an installment sale and in a later year an irrevocable escrow account is established to pay the remaining installments plus interest, the amount placed in the escrow account represents payment of the balance of the installment obligation. 2011 federal tax forms 1040 Substantial restriction. 2011 federal tax forms 1040   If an escrow arrangement imposes a substantial restriction on your right to receive the sale proceeds, the sale can be reported on the installment method, provided it otherwise qualifies. 2011 federal tax forms 1040 For an escrow arrangement to impose a substantial restriction, it must serve a bona fide purpose of the buyer, that is, a real and definite restriction placed on the seller or a specific economic benefit conferred on the buyer. 2011 federal tax forms 1040 Depreciation Recapture Income If you sell property for which you claimed or could have claimed a depreciation deduction, you must report any depreciation recapture income in the year of sale, whether or not an installment payment was received that year. 2011 federal tax forms 1040 Figure your depreciation recapture income (including the section 179 deduction and the section 179A deduction recapture) in Part III of Form 4797. 2011 federal tax forms 1040 Report the recapture income in Part II of Form 4797 as ordinary income in the year of sale. 2011 federal tax forms 1040 The recapture income is also included in Part I of Form 6252. 2011 federal tax forms 1040 However, the gain equal to the recapture income is reported in full in the year of the sale. 2011 federal tax forms 1040 Only the gain greater than the recapture income is reported on the installment method. 2011 federal tax forms 1040 For more information on depreciation recapture, see chapter 3 in Publication 544. 2011 federal tax forms 1040 The recapture income reported in the year of sale is included in your installment sale basis in determining your gross profit on the installment sale. 2011 federal tax forms 1040 Determining gross profit is discussed under General Rules , earlier. 2011 federal tax forms 1040 Sale to a Related Person If you sell depreciable property to a related person and the sale is an installment sale, you may not be able to report the sale using the installment method. 2011 federal tax forms 1040 If you sell property to a related person and the related person disposes of the property before you receive all payments with respect to the sale, you may have to treat the amount realized by the related person as received by you when the related person disposes of the property. 2011 federal tax forms 1040 These rules are explained under Sale of Depreciable Property and under Sale and Later Disposition , later. 2011 federal tax forms 1040 Sale of Depreciable Property If you sell depreciable property to certain related persons, you generally cannot report the sale using the installment method. 2011 federal tax forms 1040 Instead, all payments to be received are considered received in the year of sale. 2011 federal tax forms 1040 However, see Exception , below. 2011 federal tax forms 1040 Depreciable property for this rule is any property the purchaser can depreciate. 2011 federal tax forms 1040 Payments to be received include the total of all noncontingent payments and the FMV of any payments contingent as to amount. 2011 federal tax forms 1040 In the case of contingent payments for which the FMV cannot be reasonably determined, your basis in the property is recovered proportionately. 2011 federal tax forms 1040 The purchaser cannot increase the basis of the property acquired in the sale before the seller includes a like amount in income. 2011 federal tax forms 1040 Exception. 2011 federal tax forms 1040   You can use the installment method to report a sale of depreciable property to a related person if no significant tax deferral benefit will be derived from the sale. 2011 federal tax forms 1040 You must show to the satisfaction of the IRS that avoidance of federal income tax was not one of the principal purposes of the sale. 2011 federal tax forms 1040 Related person. 2011 federal tax forms 1040   Related persons include the following. 2011 federal tax forms 1040 A person and all controlled entities with respect to that person. 2011 federal tax forms 1040 A taxpayer and any trust in which such taxpayer (or his spouse) is a beneficiary, unless that beneficiary's interest in the trust is a remote contingent interest. 2011 federal tax forms 1040 Except in the case of a sale or exchange in satisfaction of a pecuniary bequest, an executor of an estate and a beneficiary of that estate. 2011 federal tax forms 1040 Two or more partnerships in which the same person owns, directly or indirectly, more than 50% of the capital interests or the profits interests. 2011 federal tax forms 1040   For information about which entities are controlled entities, see section 1239(c). 2011 federal tax forms 1040 Sale and Later Disposition Generally, a special rule applies if you sell or exchange property to a related person on the installment method (first disposition) who then sells, exchanges, or gives away the property (second disposition) under the following circumstances. 2011 federal tax forms 1040 The related person makes the second disposition before making all payments on the first disposition. 2011 federal tax forms 1040 The related person disposes of the property within 2 years of the first disposition. 2011 federal tax forms 1040 This rule does not apply if the property involved is marketable securities. 2011 federal tax forms 1040 Under this rule, you treat part or all of the amount the related person realizes (or the FMV if the disposed property is not sold or exchanged) from the second disposition as if you received it at the time of the second disposition. 2011 federal tax forms 1040 See Exception , later. 2011 federal tax forms 1040 Related person. 2011 federal tax forms 1040   Related persons include the following. 2011 federal tax forms 1040 Members of a family, including only brothers and sisters (either whole or half), husband and wife, ancestors, and lineal descendants. 2011 federal tax forms 1040 A partnership or estate and a partner or beneficiary. 2011 federal tax forms 1040 A trust (other than a section 401(a) employees trust) and a beneficiary. 2011 federal tax forms 1040 A trust and an owner of the trust. 2011 federal tax forms 1040 Two corporations that are members of the same controlled group as defined in section 267(f). 2011 federal tax forms 1040 The fiduciaries of two different trusts, and the fiduciary and beneficiary of two different trusts, if the same person is the grantor of both trusts. 2011 federal tax forms 1040 A tax-exempt educational or charitable organization and a person (if an individual, including members of the individual's family) who directly or indirectly controls such an organization. 2011 federal tax forms 1040 An individual and a corporation when the individual owns, directly or indirectly, more than 50% of the value of the outstanding stock of the corporation. 2011 federal tax forms 1040 A fiduciary of a trust and a corporation when the trust or the grantor of the trust owns, directly or indirectly, more than 50% in value of the outstanding stock of the corporation. 2011 federal tax forms 1040 The grantor and fiduciary, and the fiduciary and beneficiary, of any trust. 2011 federal tax forms 1040 Any two S corporations if the same persons own more than 50% in value of the outstanding stock of each corporation. 2011 federal tax forms 1040 An S corporation and a corporation that is not an S corporation if the same persons own more than 50% in value of the outstanding stock of each corporation. 2011 federal tax forms 1040 A corporation and a partnership if the same persons own more than 50% in value of the outstanding stock of the corporation and more than 50% of the capital or profits interest in the partnership. 2011 federal tax forms 1040 An executor and a beneficiary of an estate unless the sale is in satisfaction of a pecuniary bequest. 2011 federal tax forms 1040 Example 1. 2011 federal tax forms 1040 In 2012, Harvey Green sold farm land to his son Bob for $500,000, which was to be paid in five equal payments over 5 years, plus adequate stated interest on the balance due. 2011 federal tax forms 1040 His installment sale basis for the farm land was $250,000 and the property was not subject to any outstanding liens or mortgages. 2011 federal tax forms 1040 His gross profit percentage is 50% (gross profit of $250,000 ÷ contract price of $500,000). 2011 federal tax forms 1040 He received $100,000 in 2012 and included $50,000 in income for that year ($100,000 × 0. 2011 federal tax forms 1040 50). 2011 federal tax forms 1040 Bob made no improvements to the property and sold it to Alfalfa Inc. 2011 federal tax forms 1040 , in 2013 for $600,000 after making the payment for that year. 2011 federal tax forms 1040 The amount realized from the second disposition is $600,000. 2011 federal tax forms 1040 Harvey figures his installment sale income for 2013 as follows: Lesser of: 1) Amount realized on second disposition, or 2) Contract price on first disposition $500,000 Subtract: Sum of payments from Bob in 2012 and 2013 - 200,000 Amount treated as received because of second disposition $300,000 Add: Payment from Bob in 2013 + 100,000 Total payments received and treated as received for 2013 $400,000 Multiply by gross profit % × . 2011 federal tax forms 1040 50 Installment sale income for 2013 $200,000 Harvey will not include in his installment sale income any principal payments he receives on the installment obligation for 2014, 2015, and 2016 because he has already reported the total payments of $500,000 from the first disposition ($100,000 in 2012 and $400,000 in 2013). 2011 federal tax forms 1040 Example 2. 2011 federal tax forms 1040 Assume the facts are the same as Example 1 except that Bob sells the property for only $400,000. 2011 federal tax forms 1040 The gain for 2013 is figured as follows: Lesser of: 1) Amount realized on second disposition, or 2) Contract price on first disposition $400,000 Subtract: Sum of payments from Bob in 2012 and 2013 − 200,000 Amount treated as received because of second disposition $200,000 Add: Payment from Bob in 2013 + 100,000 Total payments received and treated as received for 2013 $300,000 Multiply by gross profit % × . 2011 federal tax forms 1040 50 Installment sale income for 2013 $150,000     Harvey receives a $100,000 payment in 2014 and another in 2015. 2011 federal tax forms 1040 They are not taxed because he treated the $200,000 from the disposition in 2013 as a payment received and paid tax on the installment sale income. 2011 federal tax forms 1040 In 2016, he receives the final $100,000 payment. 2011 federal tax forms 1040 He figures the installment sale income he must recognize in 2016 as follows: Total payments from the first disposition received by the end of 2016 $500,000 Minus the sum of:     Payment from 2012 $100,000   Payment from 2013 100,000   Amount treated as received in 2013 200,000   Total on which gain was previously recognized  − 400,000 Payment on which gain is recognized for 2016  $100,000 Multiply by gross profit % × . 2011 federal tax forms 1040 50 Installment sale income for 2016 $ 50,000 Exception. 2011 federal tax forms 1040   This rule does not apply to a second disposition, and any later transfer, if you can show to the satisfaction of the IRS that neither the first disposition (to the related person) nor the second disposition had as one of its principal purposes the avoidance of federal income tax. 2011 federal tax forms 1040 Generally, an involuntary second disposition will qualify under the nontax avoidance exception, such as when a creditor of the related person forecloses on the property or the related person declares bankruptcy. 2011 federal tax forms 1040   The nontax avoidance exception also applies to a second disposition that is also an installment sale if the terms of payment under the installment resale are substantially equal to or longer than those for the first installment sale. 2011 federal tax forms 1040 However, the exception does not apply if the resale terms permit significant deferral of recognition of gain from the first sale. 2011 federal tax forms 1040   In addition, any sale or exchange of stock to the issuing corporation is not treated as a first disposition. 2011 federal tax forms 1040 An involuntary conversion is not treated as a second disposition if the first disposition occurred before the threat of conversion. 2011 federal tax forms 1040 A transfer after the death of the person making the first disposition or the related person's death, whichever is earlier, is not treated as a second disposition. 2011 federal tax forms 1040 Like-Kind Exchange If you trade business or investment property solely for the same kind of property to be held as business or investment property, you can postpone reporting the gain. 2011 federal tax forms 1040 These trades are known as like-kind exchanges. 2011 federal tax forms 1040 The property you receive in a like-kind exchange is treated as if it were a continuation of the property you gave up. 2011 federal tax forms 1040 You do not have to report any part of your gain if you receive only like-kind property. 2011 federal tax forms 1040 However, if you also receive money or other property (boot) in the exchange, you must report your gain to the extent of the money and the FMV of the other property received. 2011 federal tax forms 1040 For more information on like-kind exchanges, see Like-Kind Exchanges in chapter 1 of Publication 544. 2011 federal tax forms 1040 Installment payments. 2011 federal tax forms 1040   If, in addition to like-kind property, you receive an installment obligation in the exchange, the following rules apply to determine the installment sale income each year. 2011 federal tax forms 1040 The contract price is reduced by the FMV of the like-kind property received in the trade. 2011 federal tax forms 1040 The gross profit is reduced by any gain on the trade that can be postponed. 2011 federal tax forms 1040 Like-kind property received in the trade is not considered payment on the installment obligation. 2011 federal tax forms 1040 Example. 2011 federal tax forms 1040 In 2013, George Brown trades personal property with an installment sale basis of $400,000 for like-kind property having an FMV of $200,000. 2011 federal tax forms 1040 He also receives an installment note for $800,000 in the trade. 2011 federal tax forms 1040 Under the terms of the note, he is to receive $100,000 (plus interest) in 2014 and the balance of $700,000 (plus interest) in 2015. 2011 federal tax forms 1040 George's selling price is $1,000,000 ($800,000 installment note + $200,000 FMV of like-kind property received). 2011 federal tax forms 1040 His gross profit is $600,000 ($1,000,000 − $400,000 installment sale basis). 2011 federal tax forms 1040 The contract price is $800,000 ($1,000,000 − $200,000). 2011 federal tax forms 1040 The gross profit percentage is 75% ($600,000 ÷ $800,000). 2011 federal tax forms 1040 He reports no gain in 2013 because the like-kind property he receives is not treated as a payment for figuring gain. 2011 federal tax forms 1040 He reports $75,000 gain for 2014 (75% of $100,000 payment received) and $525,000 gain for 2015 (75% of $700,000 payment received). 2011 federal tax forms 1040 Deferred exchanges. 2011 federal tax forms 1040   A deferred exchange is one in which you transfer property you use in business or hold for investment and receive like-kind property later that you will use in business or hold for investment. 2011 federal tax forms 1040 Under this type of exchange, the person receiving your property may be required to place funds in an escrow account or trust. 2011 federal tax forms 1040 If certain rules are met, these funds will not be considered a payment until you have the right to receive the funds or, if earlier, the end of the exchange period. 2011 federal tax forms 1040 See Regulations section 1. 2011 federal tax forms 1040 1031(k)-1(j)(2) for these rules. 2011 federal tax forms 1040 Contingent Payment Sale A contingent payment sale is one in which the total selling price cannot be determined by the end of the tax year of sale. 2011 federal tax forms 1040 This happens, for example, if you sell your business and the selling price includes a percentage of its profits in future years. 2011 federal tax forms 1040 If the selling price cannot be determined by the end of the tax year, you must use different rules to figure the contract price and the gross profit percentage than those you use for an installment sale with a fixed selling price. 2011 federal tax forms 1040 For rules on using the installment method for a contingent payment sale, see Regulations section 15a. 2011 federal tax forms 1040 453-1(c). 2011 federal tax forms 1040 Single Sale of Several Assets If you sell different types of assets in a single sale, you must identify each asset to determine whether you can use the installment method to report the sale of that asset. 2011 federal tax forms 1040 You also have to allocate part of the selling price to each asset. 2011 federal tax forms 1040 If you sell assets that constitute a trade or business, see Sale of a Business , later. 2011 federal tax forms 1040 Unless an allocation of the selling price has been agreed to by both parties in an arm's-length transaction, you must allocate the selling price to an asset based on its FMV. 2011 federal tax forms 1040 If the buyer assumes a debt, or takes the property subject to a debt, you must reduce the FMV of the property by the debt. 2011 federal tax forms 1040 This becomes the net FMV. 2011 federal tax forms 1040 A sale of separate and unrelated assets of the same type under a single contract is reported as one transaction for the installment method. 2011 federal tax forms 1040 However, if an asset is sold at a loss, its disposition cannot be reported on the installment method. 2011 federal tax forms 1040 It must be reported separately. 2011 federal tax forms 1040 The remaining assets sold at a gain are reported together. 2011 federal tax forms 1040 Example. 2011 federal tax forms 1040 You sold three separate and unrelated parcels of real property (A, B, and C) under a single contract calling for a total selling price of $130,000. 2011 federal tax forms 1040 The total selling price consisted of a cash payment of $20,000, the buyer's assumption of a $30,000 mortgage on parcel B, and an installment obligation of $80,000 payable in eight annual installments, plus interest at 8% a year. 2011 federal tax forms 1040 Your installment sale basis for each parcel was $15,000. 2011 federal tax forms 1040 Your net gain was $85,000 ($130,000 − $45,000). 2011 federal tax forms 1040 You report the gain on the installment method. 2011 federal tax forms 1040 The sales contract did not allocate the selling price or the cash payment received in the year of sale among the individual parcels. 2011 federal tax forms 1040 The FMV of parcels A, B, and C were $60,000, $60,000, and $10,000, respectively. 2011 federal tax forms 1040 The installment sale basis for parcel C was more than its FMV, so it was sold at a loss and must be treated separately. 2011 federal tax forms 1040 You must allocate the total selling price and the amounts received in the year of sale between parcel C and the remaining parcels. 2011 federal tax forms 1040 Of the total $130,000 selling price, you must allocate $120,000 to parcels A and B together and $10,000 to parcel C. 2011 federal tax forms 1040 You should allocate the cash payment of $20,000 received in the year of sale and the note receivable on the basis of their proportionate net FMV. 2011 federal tax forms 1040 The allocation is figured as follows:   Parcels   A and B Parcel C FMV $120,000 $10,000 Minus: Mortgage assumed 30,000 -0- Net FMV $ 90,000 $10,000 Proportionate net FMV:     Percentage of total 90% 10% Payments in year of sale:     $20,000 × 90% $18,000   $20,000 × 10%   $2,000 Excess of parcel B mortgage over installment sale basis 15,000 -0- Allocation of payments  received (or considered  received) in year of sale $ 33,000 $ 2,000 You cannot report the sale of parcel C on the installment method because the sale results in a loss. 2011 federal tax forms 1040 You report this loss of $5,000 ($10,000 selling price − $15,000 installment sale basis) in the year of sale. 2011 federal tax forms 1040 However, if parcel C was held for personal use, the loss is not deductible. 2011 federal tax forms 1040 You allocate the installment obligation of $80,000 to the properties sold based on their proportionate net FMVs (90% to parcels A and B, 10% to parcel C). 2011 federal tax forms 1040 Sale of a Business The installment sale of an entire business for one overall price under a single contract is not the sale of a single asset. 2011 federal tax forms 1040 Allocation of Selling Price To determine whether any of the gain on the sale of the business can be reported on the installment method, you must allocate the total selling price and the payments received in the year of sale between each of the following classes of assets. 2011 federal tax forms 1040 Assets sold at a loss. 2011 federal tax forms 1040 Real and personal property eligible for the installment method. 2011 federal tax forms 1040 Real and personal property ineligible for the installment method, including: Inventory, Dealer property, and Stocks and securities. 2011 federal tax forms 1040 Inventory. 2011 federal tax forms 1040   The sale of inventories of personal property cannot be reported on the installment method. 2011 federal tax forms 1040 All gain or loss on their sale must be reported in the year of sale, even if you receive payment in later years. 2011 federal tax forms 1040   If inventory items are included in an installment sale, you may have an agreement stating which payments are for inventory and which are for the other assets being sold. 2011 federal tax forms 1040 If you do not, each payment must be allocated between the inventory and the other assets sold. 2011 federal tax forms 1040   Report the amount you receive (or will receive) on the sale of inventory items as ordinary business income. 2011 federal tax forms 1040 Use your basis in the inventory to figure the cost of goods sold. 2011 federal tax forms 1040 Deduct the part of the selling expenses allocated to inventory as an ordinary business expense. 2011 federal tax forms 1040 Residual method. 2011 federal tax forms 1040   Except for assets exchanged under the like-kind exchange rules, both the buyer and seller of a business must use the residual method to allocate the sale price to each business asset sold. 2011 federal tax forms 1040 This method determines gain or loss from the transfer of each asset and the buyer's basis in the assets. 2011 federal tax forms 1040   The residual method must be used for any transfer of a group of assets that constitutes a trade or business and for which the buyer's basis is determined only by the amount paid for the assets. 2011 federal tax forms 1040 This applies to both direct and indirect transfers, such as the sale of a business or the sale of a partnership interest in which the basis of the buyer's share of the partnership assets is adjusted for the amount paid under section 743(b). 2011 federal tax forms 1040   A group of assets constitutes a trade or business if goodwill or going concern value could, under any circumstances, attach to the assets or if the use of the assets would constitute an active trade or business under section 355. 2011 federal tax forms 1040   The residual method provides for the consideration to be reduced first by cash and general deposit accounts (including checking and savings accounts but excluding certificates of deposit). 2011 federal tax forms 1040 The consideration remaining after this reduction must be allocated among the various business assets in a certain order. 2011 federal tax forms 1040   For asset acquisitions occurring after March 15, 2001, make the allocation among the following assets in proportion to (but not more than) their fair market value on the purchase date in the following order. 2011 federal tax forms 1040 Certificates of deposit, U. 2011 federal tax forms 1040 S. 2011 federal tax forms 1040 Government securities, foreign currency, and actively traded personal property, including stock and securities. 2011 federal tax forms 1040 Accounts receivable, other debt instruments, and assets that you mark to market at least annually for federal income tax purposes. 2011 federal tax forms 1040 However, see Regulations section 1. 2011 federal tax forms 1040 338-6(b)(2)(iii) for exceptions that apply to debt instruments issued by persons related to a target corporation, contingent debt instruments, and debt instruments convertible into stock or other property. 2011 federal tax forms 1040 Property of a kind that would properly be included in inventory if on hand at the end of the tax year or property held by the taxpayer primarily for sale to customers in the ordinary course of business. 2011 federal tax forms 1040 All other assets except section 197 intangibles. 2011 federal tax forms 1040 Section 197 intangibles except goodwill and going concern value. 2011 federal tax forms 1040 Goodwill and going concern value (whether or not they qualify as section 197 intangibles). 2011 federal tax forms 1040   If an asset described in (1) through (6) is includible in more than one category, include it in the lower number category. 2011 federal tax forms 1040 For example, if an asset is described in both (4) and (6), include it in (4). 2011 federal tax forms 1040 Agreement. 2011 federal tax forms 1040   The buyer and seller may enter into a written agreement as to the allocation of any consideration or the fair market value of any of the assets. 2011 federal tax forms 1040 This agreement is binding on both parties unless the IRS determines the amounts are not appropriate. 2011 federal tax forms 1040 Reporting requirement. 2011 federal tax forms 1040   Both the buyer and seller involved in the sale of business assets must report to the IRS the allocation of the sales price among section 197 intangibles and the other business assets. 2011 federal tax forms 1040 Use Form 8594, Asset Acquisition Statement Under Section 1060, to provide this information. 2011 federal tax forms 1040 The buyer and seller should each attach Form 8594 to their federal income tax return for the year in which the sale occurred. 2011 federal tax forms 1040 Sale of Partnership Interest A partner who sells a partnership interest at a gain may be able to report the sale on the installment method. 2011 federal tax forms 1040 The sale of a partnership interest is treated as the sale of a single capital asset. 2011 federal tax forms 1040 The part of any gain or loss from unrealized receivables or inventory items will be treated as ordinary income. 2011 federal tax forms 1040 (The term “unrealized receivables” includes depreciation recapture income, discussed earlier. 2011 federal tax forms 1040 ) The gain allocated to the unrealized receivables and the inventory cannot be reported under the installment method. 2011 federal tax forms 1040 The gain allocated to the other assets can be reported under the installment method. 2011 federal tax forms 1040 For more information on the treatment of unrealized receivables and inventory, see Publication 541. 2011 federal tax forms 1040 Example — Sale of a Business On June 4, 2013, you sold the machine shop you had operated since 2005. 2011 federal tax forms 1040 You received a $100,000 down payment and the buyer's note for $120,000. 2011 federal tax forms 1040 The note payments are $15,000 each, plus 10% interest, due every July 1 and January 1, beginning in 2014. 2011 federal tax forms 1040 The total selling price is $220,000. 2011 federal tax forms 1040 Your selling expenses are $11,000. 2011 federal tax forms 1040 The selling expenses are divided among all the assets sold, including inventory. 2011 federal tax forms 1040 Your selling expense for each asset is 5% of the asset's selling price ($11,000 selling expense ÷ $220,000 total selling price). 2011 federal tax forms 1040 The FMV, adjusted basis, and depreciation claimed on each asset sold are as follows:     Depre- ciation Adj. 2011 federal tax forms 1040 Asset FMV Claimed Basis Inventory $ 10,000 -0- $ 8,000 Land 42,000 -0- 15,000 Building 48,000 $9,000 36,000 Machine A 71,000 27,200 63,800 Machine B 24,000 12,960 22,040 Truck 6,500 18,624 5,376   $201,500 $67,784 $150,216         Under the residual method, you allocate the selling price to each of the assets based on their FMV ($201,500). 2011 federal tax forms 1040 The remaining $18,500 ($220,000 - $201,500) is allocated to your section 197 intangible, goodwill. 2011 federal tax forms 1040 The assets included in the sale, their selling prices based on their FMVs, the selling expense allocated to each asset, the adjusted basis, and the gain for each asset are shown in the following chart. 2011 federal tax forms 1040   Sale  Price Sale   Exp. 2011 federal tax forms 1040 Adj. 2011 federal tax forms 1040   Basis Gain Inventory $ 10,000 $ 500 $ 8,000 $ 1,500 Land 42,000 2,100 15,000 24,900 Building 48,000 2,400 36,000 9,600 Mch. 2011 federal tax forms 1040 A 71,000 3,550 63,800 3,650 Mch. 2011 federal tax forms 1040 B 24,000 1,200 22,040 760 Truck 6,500 325 5,376 799 Goodwill 18,500 925 -0- 17,575   $220,000 $11,000 $150,216 $58,784 The building was acquired in 2005, the year the business began, and it is section 1250 property. 2011 federal tax forms 1040 There is no depreciation recapture income because the building was depreciated using the straight line method. 2011 federal tax forms 1040 All gain on the truck, machine A, and machine B is depreciation recapture income since it is the lesser of the depreciation claimed or the gain on the sale. 2011 federal tax forms 1040 Figure depreciation recapture in Part III of Form 4797. 2011 federal tax forms 1040 The total depreciation recapture income reported in Part II of Form 4797 is $5,209. 2011 federal tax forms 1040 This consists of $3,650 on machine A, $799 on the truck, and $760 on machine B (the gain on each item because it was less than the depreciation claimed). 2011 federal tax forms 1040 These gains are reported in full in the year of sale and are not included in the installment sale computation. 2011 federal tax forms 1040 Of the $220,000 total selling price, the $10,000 for inventory assets cannot be reported using the installment method. 2011 federal tax forms 1040 The selling prices of the truck and machines are also removed from the total selling price because gain on these items is reported in full in the year of sale. 2011 federal tax forms 1040 The selling price equals the contract price for the installment sale ($108,500). 2011 federal tax forms 1040 The assets included in the installment sale, their selling price, and their installment sale bases are shown in the following chart. 2011 federal tax forms 1040   Selling  Price Install- ment  Sale  Basis Gross  Profit Land $ 42,000 $17,100 $24,900 Building 48,000 38,400 9,600 Goodwill 18,500 925 17,575 Total $108,500 $56,425 $52,075         The gross profit percentage (gross profit ÷ contract price) for the installment sale is 48% ($52,075 ÷ $108,500). 2011 federal tax forms 1040 The gross profit percentage for each asset is figured as follows: Percentage Land— $24,900 ÷ $108,500 22. 2011 federal tax forms 1040 95 Building— $9,600 ÷ $108,500 8. 2011 federal tax forms 1040 85 Goodwill— $17,575 ÷ $108,500 16. 2011 federal tax forms 1040 20 Total 48. 2011 federal tax forms 1040 00 The sale includes assets sold on the installment method and assets for which the gain is reported in full in the year of sale, so payments must be allocated between the installment part of the sale and the part reported in the year of sale. 2011 federal tax forms 1040 The selling price for the installment sale is $108,500. 2011 federal tax forms 1040 This is 49. 2011 federal tax forms 1040 3% of the total selling price of $220,000 ($108,500 ÷ $220,000). 2011 federal tax forms 1040 The selling price of assets not reported on the installment method is $111,500. 2011 federal tax forms 1040 This is 50. 2011 federal tax forms 1040 7% ($111,500 ÷ $220,000) of the total selling price. 2011 federal tax forms 1040 Multiply principal payments by 49. 2011 federal tax forms 1040 3% to determine the part of the payment for the installment sale. 2011 federal tax forms 1040 The balance, 50. 2011 federal tax forms 1040 7%, is for the part reported in the year of the sale. 2011 federal tax forms 1040 The gain on the sale of the inventory, machines, and truck is reported in full in the year of sale. 2011 federal tax forms 1040 When you receive principal payments in later years, no part of the payment for the sale of these assets is included in gross income. 2011 federal tax forms 1040 Only the part for the installment sale (49. 2011 federal tax forms 1040 3%) is used in the installment sale computation. 2011 federal tax forms 1040 The only payment received in 2013 is the down payment of $100,000. 2011 federal tax forms 1040 The part of the payment for the installment sale is $49,300 ($100,000 × 49. 2011 federal tax forms 1040 3%). 2011 federal tax forms 1040 This amount is used in the installment sale computation. 2011 federal tax forms 1040 Installment income for 2013. 2011 federal tax forms 1040   Your installment income for each asset is the gross profit percentage for that asset times $49,300, the installment income received in 2013. 2011 federal tax forms 1040 Income Land—22. 2011 federal tax forms 1040 95% of $49,300 $11,314 Building—8. 2011 federal tax forms 1040 85% of $49,300 4,363 Goodwill—16. 2011 federal tax forms 1040 2% of $49,300 7,987 Total installment income for 2013 $23,664 Installment income after 2013. 2011 federal tax forms 1040   You figure installment income for years after 2013 by applying the same gross profit percentages to 49. 2011 federal tax forms 1040 3% of the total payments you receive on the buyer's note during the year. 2011 federal tax forms 1040 Unstated Interest and Original Issue Discount (OID) An installment sale contract may provide that each deferred payment on the sale will include interest or that there will be an interest payment in addition to the principal payment. 2011 federal tax forms 1040 Interest provided in the contract is called stated interest. 2011 federal tax forms 1040 If an installment sale contract does not provide for adequate stated interest, part of the stated principal amount of the contract may be recharacterized as interest. 2011 federal tax forms 1040 If section 483 applies to the contract, this interest is called unstated interest. 2011 federal tax forms 1040 If section 1274 applies to the contract, this interest is called original issue discount (OID). 2011 federal tax forms 1040 An installment sale contract does not provide for adequate stated interest if the stated interest rate is lower than the test rate (defined later). 2011 federal tax forms 1040 Treatment of unstated interest and OID. 2011 federal tax forms 1040   Generally, if a buyer gives a debt in consideration for personal use property, the unstated interest rules do not apply. 2011 federal tax forms 1040 As a result, the buyer cannot deduct the unstated interest. 2011 federal tax forms 1040 The seller must report the unstated interest as income. 2011 federal tax forms 1040   Personal-use property is any property in which substantially all of its use by the buyer is not in connection with a trade or business or an investment activity. 2011 federal tax forms 1040   If the debt is subject to the section 483 rules and is also subject to the below-market loan rules, such as a gift loan, compensation-related loan, or corporation-shareholder loan, then both parties are subject to the below-market loan rules rather than the unstated interest rules. 2011 federal tax forms 1040 Rules for the seller. 2011 federal tax forms 1040   If either section 1274 or section 483 applies to the installment sale contract, you must treat part of the installment sale price as interest, even though interest is not called for in the sales agreement. 2011 federal tax forms 1040 If either section applies, you must reduce the stated selling price of the property and increase your interest income by this unstated interest. 2011 federal tax forms 1040   Include the unstated interest in income based on your regular method of accounting. 2011 federal tax forms 1040 Include OID in income over the term of the contract. 2011 federal tax forms 1040   The OID includible in income each year is based on the constant yield method described in section 1272. 2011 federal tax forms 1040 (In some cases, the OID on an installment sale contract also may include all or part of the stated interest, especially if the stated interest is not paid at least annually. 2011 federal tax forms 1040 )   If you do not use the installment method to report the sale, report the entire gain under your method of accounting in the year of sale. 2011 federal tax forms 1040 Reduce the selling price by any stated principal treated as interest to determine the gain. 2011 federal tax forms 1040   Report unstated interest or OID on your tax return, in addition to stated interest. 2011 federal tax forms 1040 Rules for the buyer. 2011 federal tax forms 1040   Any part of the stated selling price of an installment sale contract treated by the buyer as interest reduces the buyer's basis in the property and increases the buyer's interest expense. 2011 federal tax forms 1040 These rules do not apply to personal-use property (for example, property not used in a trade or business). 2011 federal tax forms 1040 Adequate stated interest. 2011 federal tax forms 1040   An installment sale contract generally provides for adequate stated interest if the contract's stated principal amount is at least equal to the sum of the present values of all principal and interest payments called for under the contract. 2011 federal tax forms 1040 The present value of a payment is determined based on the test rate of interest, defined next. 2011 federal tax forms 1040 (If section 483 applies to the contract, payments due within six months after the sale are taken into account at face value. 2011 federal tax forms 1040 ) In general, an installment sale contract provides for adequate stated interest if the stated interest rate (based on an appropriate compounding period) is at least equal to the test rate of interest. 2011 federal tax forms 1040 Test rate of interest. 2011 federal tax forms 1040   The test rate of interest for a contract is the 3-month rate. 2011 federal tax forms 1040 The 3-month rate is the lower of the following applicable federal rates (AFRs). 2011 federal tax forms 1040 The lowest AFR (based on the appropriate compounding period) in effect during the 3-month period ending with the first month in which there is a binding written contract that substantially provides the terms under which the sale or exchange is ultimately completed. 2011 federal tax forms 1040 The lowest AFR (based on the appropriate compounding period) in effect during the 3-month period ending with the month in which the sale or exchange occurs. 2011 federal tax forms 1040 Applicable federal rate (AFR). 2011 federal tax forms 1040   The AFR depends on the month the binding
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Understanding Your 1099-K

The 1099-K is an IRS information return for reporting certain payment transactions to improve voluntary tax compliance. You should get a 1099-K by the end of January 2014 if, in 2013 you received payments from:

  • payment card transactions (e.g., debit or credit cards)
  • in settlement of third party payment networks (i.e., online sellers) above the minimum reporting thresholds
    -gross payments that exceed $20,000, AND
    -more than 200 such transactions.

Report 1099-K Income
Report the gross receipts or sales from all business operations in any amounts shown on Form(s) 1099-K.

If you get a Form 1099-K for amounts that belong to another person, or are a co-owner who may need to file a Form 1099-K or other information returns for other owners, check the General Instructions for Certain Information Returns.

If you are an independent contractor, the trade or business should continue to report payments made to you on Form 1099-MISC as they have done in the past. No Form 1099-K should be issued.

Make sure the merchant card or third-party clearing house has your correct Taxpayer Identification Number (TIN) by checking the TIN on Form 1099-K against the TIN you reported on Form W-9.

More Info
If you have questions about the amount reported, contact the filer (see the upper left corner of Form 1099-K). If you have questions about the merchant or third party transaction network, find the contact in the lower left corner of Form 1099-K.

 

 

Page Last Reviewed or Updated: 20-Mar-2014

The 2011 Federal Tax Forms 1040

2011 federal tax forms 1040 1. 2011 federal tax forms 1040   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. 2011 federal tax forms 1040 It is an allowance for the wear and tear, deterioration, or obsolescence of the property. 2011 federal tax forms 1040 This chapter discusses the general rules for depreciating property and answers the following questions. 2011 federal tax forms 1040 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. 2011 federal tax forms 1040 What Property Can Be Depreciated? You can depreciate most types of tangible property (except land), such as buildings, machinery, vehicles, furniture, and equipment. 2011 federal tax forms 1040 You also can depreciate certain intangible property, such as patents, copyrights, and computer software. 2011 federal tax forms 1040 To be depreciable, the property must meet all the following requirements. 2011 federal tax forms 1040 It must be property you own. 2011 federal tax forms 1040 It must be used in your business or income-producing activity. 2011 federal tax forms 1040 It must have a determinable useful life. 2011 federal tax forms 1040 It must be expected to last more than one year. 2011 federal tax forms 1040 The following discussions provide information about these requirements. 2011 federal tax forms 1040 Property You Own To claim depreciation, you usually must be the owner of the property. 2011 federal tax forms 1040 You are considered as owning property even if it is subject to a debt. 2011 federal tax forms 1040 Example 1. 2011 federal tax forms 1040 You made a down payment to purchase rental property and assumed the previous owner's mortgage. 2011 federal tax forms 1040 You own the property and you can depreciate it. 2011 federal tax forms 1040 Example 2. 2011 federal tax forms 1040 You bought a new van that you will use only for your courier business. 2011 federal tax forms 1040 You will be making payments on the van over the next 5 years. 2011 federal tax forms 1040 You own the van and you can depreciate it. 2011 federal tax forms 1040 Leased property. 2011 federal tax forms 1040   You can depreciate leased property only if you retain the incidents of ownership in the property (explained below). 2011 federal tax forms 1040 This means you bear the burden of exhaustion of the capital investment in the property. 2011 federal tax forms 1040 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. 2011 federal tax forms 1040 You can, however, depreciate any capital improvements you make to the property. 2011 federal tax forms 1040 See How Do You Treat Repairs and Improvements later in this chapter and Additions and Improvements under Which Recovery Period Applies in chapter 4. 2011 federal tax forms 1040   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. 2011 federal tax forms 1040 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. 2011 federal tax forms 1040 Incidents of ownership. 2011 federal tax forms 1040   Incidents of ownership in property include the following. 2011 federal tax forms 1040 The legal title to the property. 2011 federal tax forms 1040 The legal obligation to pay for the property. 2011 federal tax forms 1040 The responsibility to pay maintenance and operating expenses. 2011 federal tax forms 1040 The duty to pay any taxes on the property. 2011 federal tax forms 1040 The risk of loss if the property is destroyed, condemned, or diminished in value through obsolescence or exhaustion. 2011 federal tax forms 1040 Life tenant. 2011 federal tax forms 1040   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. 2011 federal tax forms 1040 However, see Certain term interests in property under Excepted Property, later. 2011 federal tax forms 1040 Cooperative apartments. 2011 federal tax forms 1040   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. 2011 federal tax forms 1040   Figure your depreciation deduction as follows. 2011 federal tax forms 1040 Figure the depreciation for all the depreciable real property owned by the corporation in which you have a proprietary lease or right of tenancy. 2011 federal tax forms 1040 If you bought your cooperative stock after its first offering, figure the depreciable basis of this property as follows. 2011 federal tax forms 1040 Multiply your cost per share by the total number of outstanding shares, including any shares held by the corporation. 2011 federal tax forms 1040 Add to the amount figured in (a) any mortgage debt on the property on the date you bought the stock. 2011 federal tax forms 1040 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. 2011 federal tax forms 1040 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. 2011 federal tax forms 1040 Divide the number of your shares of stock by the total number of outstanding shares, including any shares held by the corporation. 2011 federal tax forms 1040 Multiply the result of (2) by the percentage you figured in (3). 2011 federal tax forms 1040 This is your depreciation on the stock. 2011 federal tax forms 1040   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. 2011 federal tax forms 1040 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. 2011 federal tax forms 1040 Example. 2011 federal tax forms 1040 You figure your share of the cooperative housing corporation's depreciation to be $30,000. 2011 federal tax forms 1040 Your adjusted basis in the stock of the corporation is $50,000. 2011 federal tax forms 1040 You use one half of your apartment solely for business purposes. 2011 federal tax forms 1040 Your depreciation deduction for the stock for the year cannot be more than $25,000 (½ of $50,000). 2011 federal tax forms 1040 Change to business use. 2011 federal tax forms 1040   If you change your cooperative apartment to business use, figure your allowable depreciation as explained earlier. 2011 federal tax forms 1040 The basis of all the depreciable real property owned by the cooperative housing corporation is the smaller of the following amounts. 2011 federal tax forms 1040 The fair market value of the property on the date you change your apartment to business use. 2011 federal tax forms 1040 This is considered to be the same as the corporation's adjusted basis minus straight line depreciation, unless this value is unrealistic. 2011 federal tax forms 1040 The corporation's adjusted basis in the property on that date. 2011 federal tax forms 1040 Do not subtract depreciation when figuring the corporation's adjusted basis. 2011 federal tax forms 1040   If you bought the stock after its first offering, the corporation's adjusted basis in the property is the amount figured in (1), above. 2011 federal tax forms 1040 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. 2011 federal tax forms 1040   For a discussion of fair market value and adjusted basis, see Publication 551. 2011 federal tax forms 1040 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. 2011 federal tax forms 1040 If you use property to produce income (investment use), the income must be taxable. 2011 federal tax forms 1040 You cannot depreciate property that you use solely for personal activities. 2011 federal tax forms 1040 Partial business or investment use. 2011 federal tax forms 1040   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. 2011 federal tax forms 1040 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. 2011 federal tax forms 1040    You must keep records showing the business, investment, and personal use of your property. 2011 federal tax forms 1040 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. 2011 federal tax forms 1040    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. 2011 federal tax forms 1040 For information about qualified business use of listed property, see What Is the Business-Use Requirement in chapter 5. 2011 federal tax forms 1040 Office in the home. 2011 federal tax forms 1040   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. 2011 federal tax forms 1040 For information about depreciating your home office, see Publication 587. 2011 federal tax forms 1040 Inventory. 2011 federal tax forms 1040   You cannot depreciate inventory because it is not held for use in your business. 2011 federal tax forms 1040 Inventory is any property you hold primarily for sale to customers in the ordinary course of your business. 2011 federal tax forms 1040   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. 2011 federal tax forms 1040 See Rent-to-own dealer under Which Property Class Applies Under GDS in chapter 4. 2011 federal tax forms 1040   In some cases, it is not clear whether property is held for sale (inventory) or for use in your business. 2011 federal tax forms 1040 If it is unclear, examine carefully all the facts in the operation of the particular business. 2011 federal tax forms 1040 The following example shows how a careful examination of the facts in two similar situations results in different conclusions. 2011 federal tax forms 1040 Example. 2011 federal tax forms 1040 Maple Corporation is in the business of leasing cars. 2011 federal tax forms 1040 At the end of their useful lives, when the cars are no longer profitable to lease, Maple sells them. 2011 federal tax forms 1040 Maple does not have a showroom, used car lot, or individuals to sell the cars. 2011 federal tax forms 1040 Instead, it sells them through wholesalers or by similar arrangements in which a dealer's profit is not intended or considered. 2011 federal tax forms 1040 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. 2011 federal tax forms 1040 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. 2011 federal tax forms 1040 In this situation, the cars are held primarily for sale to customers in the ordinary course of business. 2011 federal tax forms 1040 Containers. 2011 federal tax forms 1040   Generally, containers for the products you sell are part of inventory and you cannot depreciate them. 2011 federal tax forms 1040 However, you can depreciate containers used to ship your products if they have a life longer than one year and meet the following requirements. 2011 federal tax forms 1040 They qualify as property used in your business. 2011 federal tax forms 1040 Title to the containers does not pass to the buyer. 2011 federal tax forms 1040   To determine if these requirements are met, consider the following questions. 2011 federal tax forms 1040 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. 2011 federal tax forms 1040 This means that it must be something that wears out, decays, gets used up, becomes obsolete, or loses its value from natural causes. 2011 federal tax forms 1040 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. 2011 federal tax forms 1040 Example. 2011 federal tax forms 1040 You maintain a library for use in your profession. 2011 federal tax forms 1040 You can depreciate it. 2011 federal tax forms 1040 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. 2011 federal tax forms 1040 Instead, you deduct their cost as a business expense. 2011 federal tax forms 1040 What Property Cannot Be Depreciated? Certain property cannot be depreciated. 2011 federal tax forms 1040 This includes land and certain excepted property. 2011 federal tax forms 1040 Land You cannot depreciate the cost of land because land does not wear out, become obsolete, or get used up. 2011 federal tax forms 1040 The cost of land generally includes the cost of clearing, grading, planting, and landscaping. 2011 federal tax forms 1040 Although you cannot depreciate land, you can depreciate certain land preparation costs, such as landscaping costs, incurred in preparing land for business use. 2011 federal tax forms 1040 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. 2011 federal tax forms 1040 Example. 2011 federal tax forms 1040 You constructed a new building for use in your business and paid for grading, clearing, seeding, and planting bushes and trees. 2011 federal tax forms 1040 Some of the bushes and trees were planted right next to the building, while others were planted around the outer border of the lot. 2011 federal tax forms 1040 If you replace the building, you would have to destroy the bushes and trees right next to it. 2011 federal tax forms 1040 These bushes and trees are closely associated with the building, so they have a determinable useful life. 2011 federal tax forms 1040 Therefore, you can depreciate them. 2011 federal tax forms 1040 Add your other land preparation costs to the basis of your land because they have no determinable life and you cannot depreciate them. 2011 federal tax forms 1040 Excepted Property Even if the requirements explained in the preceding discussions are met, you cannot depreciate the following property. 2011 federal tax forms 1040 Property placed in service and disposed of in the same year. 2011 federal tax forms 1040 Determining when property is placed in service is explained later. 2011 federal tax forms 1040 Equipment used to build capital improvements. 2011 federal tax forms 1040 You must add otherwise allowable depreciation on the equipment during the period of construction to the basis of your improvements. 2011 federal tax forms 1040 See Uniform Capitalization Rules in Publication 551. 2011 federal tax forms 1040 Section 197 intangibles. 2011 federal tax forms 1040 You must amortize these costs. 2011 federal tax forms 1040 Section 197 intangibles are discussed in detail in Chapter 8 of Publication 535. 2011 federal tax forms 1040 Intangible property, such as certain computer software, that is not section 197 intangible property, can be depreciated if it meets certain requirements. 2011 federal tax forms 1040 See Intangible Property , later. 2011 federal tax forms 1040 Certain term interests. 2011 federal tax forms 1040 Certain term interests in property. 2011 federal tax forms 1040   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. 2011 federal tax forms 1040 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. 2011 federal tax forms 1040 Related persons. 2011 federal tax forms 1040   For a description of related persons, see Related Persons, later. 2011 federal tax forms 1040 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. 2011 federal tax forms 1040 Basis adjustments. 2011 federal tax forms 1040   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. 2011 federal tax forms 1040   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. 2011 federal tax forms 1040 However, do not increase your basis for depreciation not allowed for periods during which either of the following situations applies. 2011 federal tax forms 1040 The term interest is held by an organization exempt from tax. 2011 federal tax forms 1040 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. 2011 federal tax forms 1040 Exceptions. 2011 federal tax forms 1040   The above rules do not apply to the holder of a term interest in property acquired by gift, bequest, or inheritance. 2011 federal tax forms 1040 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. 2011 federal tax forms 1040 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. 2011 federal tax forms 1040 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. 2011 federal tax forms 1040 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. 2011 federal tax forms 1040 Even if you are not using the property, it is in service when it is ready and available for its specific use. 2011 federal tax forms 1040 Example 1. 2011 federal tax forms 1040 Donald Steep bought a machine for his business. 2011 federal tax forms 1040 The machine was delivered last year. 2011 federal tax forms 1040 However, it was not installed and operational until this year. 2011 federal tax forms 1040 It is considered placed in service this year. 2011 federal tax forms 1040 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. 2011 federal tax forms 1040 Example 2. 2011 federal tax forms 1040 On April 6, Sue Thorn bought a house to use as residential rental property. 2011 federal tax forms 1040 She made several repairs and had it ready for rent on July 5. 2011 federal tax forms 1040 At that time, she began to advertise it for rent in the local newspaper. 2011 federal tax forms 1040 The house is considered placed in service in July when it was ready and available for rent. 2011 federal tax forms 1040 She can begin to depreciate it in July. 2011 federal tax forms 1040 Example 3. 2011 federal tax forms 1040 James Elm is a building contractor who specializes in constructing office buildings. 2011 federal tax forms 1040 He bought a truck last year that had to be modified to lift materials to second-story levels. 2011 federal tax forms 1040 The installation of the lifting equipment was completed and James accepted delivery of the modified truck on January 10 of this year. 2011 federal tax forms 1040 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. 2011 federal tax forms 1040 Conversion to business use. 2011 federal tax forms 1040   If you place property in service in a personal activity, you cannot claim depreciation. 2011 federal tax forms 1040 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. 2011 federal tax forms 1040 You place the property in service in the business or income-producing activity on the date of the change. 2011 federal tax forms 1040 Example. 2011 federal tax forms 1040 You bought a home and used it as your personal home several years before you converted it to rental property. 2011 federal tax forms 1040 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. 2011 federal tax forms 1040 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. 2011 federal tax forms 1040 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). 2011 federal tax forms 1040 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. 2011 federal tax forms 1040 Cost or Other Basis Fully Recovered You stop depreciating property when you have fully recovered your cost or other basis. 2011 federal tax forms 1040 You recover your basis when your section 179 and allowed or allowable depreciation deductions equal your cost or investment in the property. 2011 federal tax forms 1040 See What Is the Basis of Your Depreciable Property , later. 2011 federal tax forms 1040 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. 2011 federal tax forms 1040 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. 2011 federal tax forms 1040 You sell or exchange the property. 2011 federal tax forms 1040 You convert the property to personal use. 2011 federal tax forms 1040 You abandon the property. 2011 federal tax forms 1040 You transfer the property to a supplies or scrap account. 2011 federal tax forms 1040 The property is destroyed. 2011 federal tax forms 1040 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. 2011 federal tax forms 1040 What Method Can You Use To Depreciate Your Property? You must use the Modified Accelerated Cost Recovery System (MACRS) to depreciate most property. 2011 federal tax forms 1040 MACRS is discussed in chapter 4. 2011 federal tax forms 1040 You cannot use MACRS to depreciate the following property. 2011 federal tax forms 1040 Property you placed in service before 1987. 2011 federal tax forms 1040 Certain property owned or used in 1986. 2011 federal tax forms 1040 Intangible property. 2011 federal tax forms 1040 Films, video tapes, and recordings. 2011 federal tax forms 1040 Certain corporate or partnership property acquired in a nontaxable transfer. 2011 federal tax forms 1040 Property you elected to exclude from MACRS. 2011 federal tax forms 1040 The following discussions describe the property listed above and explain what depreciation method should be used. 2011 federal tax forms 1040 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). 2011 federal tax forms 1040 Property placed in service before 1987 must be depreciated under the methods discussed in Publication 534. 2011 federal tax forms 1040 For a discussion of when property is placed in service, see When Does Depreciation Begin and End , earlier. 2011 federal tax forms 1040 Use of real property changed. 2011 federal tax forms 1040   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. 2011 federal tax forms 1040 Improvements made after 1986. 2011 federal tax forms 1040   You must treat an improvement made after 1986 to property you placed in service before 1987 as separate depreciable property. 2011 federal tax forms 1040 Therefore, you can depreciate that improvement as separate property under MACRS if it is the type of property that otherwise qualifies for MACRS depreciation. 2011 federal tax forms 1040 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. 2011 federal tax forms 1040 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. 2011 federal tax forms 1040 If you cannot use MACRS, the property must be depreciated under the methods discussed in Publication 534. 2011 federal tax forms 1040 For the following discussions, do not treat property as owned before you placed it in service. 2011 federal tax forms 1040 If you owned property in 1986 but did not place it in service until 1987, you do not treat it as owned in 1986. 2011 federal tax forms 1040 Personal property. 2011 federal tax forms 1040   You cannot use MACRS for personal property (section 1245 property) in any of the following situations. 2011 federal tax forms 1040 You or someone related to you owned or used the property in 1986. 2011 federal tax forms 1040 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. 2011 federal tax forms 1040 You lease the property to a person (or someone related to this person) who owned or used the property in 1986. 2011 federal tax forms 1040 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. 2011 federal tax forms 1040 Real property. 2011 federal tax forms 1040   You generally cannot use MACRS for real property (section 1250 property) in any of the following situations. 2011 federal tax forms 1040 You or someone related to you owned the property in 1986. 2011 federal tax forms 1040 You lease the property to a person who owned the property in 1986 (or someone related to that person). 2011 federal tax forms 1040 You acquired the property in a like-kind exchange, involuntary conversion, or repossession of property you or someone related to you owned in 1986. 2011 federal tax forms 1040 MACRS applies only to that part of your basis in the acquired property that represents cash paid or unlike property given up. 2011 federal tax forms 1040 It does not apply to the carried-over part of the basis. 2011 federal tax forms 1040 Exceptions. 2011 federal tax forms 1040   The rules above do not apply to the following. 2011 federal tax forms 1040 Residential rental property or nonresidential real property. 2011 federal tax forms 1040 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. 2011 federal tax forms 1040 For information on how to figure depreciation under ACRS, see Publication 534. 2011 federal tax forms 1040 Property that was MACRS property in the hands of the person from whom you acquired it because of (2) above. 2011 federal tax forms 1040 Related persons. 2011 federal tax forms 1040   For this purpose, the following are related persons. 2011 federal tax forms 1040 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. 2011 federal tax forms 1040 A corporation and an individual who directly or indirectly owns more than 10% of the value of the outstanding stock of that corporation. 2011 federal tax forms 1040 Two corporations that are members of the same controlled group. 2011 federal tax forms 1040 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. 2011 federal tax forms 1040 The grantor and fiduciary, and the fiduciary and beneficiary, of any trust. 2011 federal tax forms 1040 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. 2011 federal tax forms 1040 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. 2011 federal tax forms 1040 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. 2011 federal tax forms 1040 A corporation and a partnership if the same persons own both of the following. 2011 federal tax forms 1040 More than 10% of the value of the outstanding stock of the corporation. 2011 federal tax forms 1040 More than 10% of the capital or profits interest in the partnership. 2011 federal tax forms 1040 The executor and beneficiary of any estate. 2011 federal tax forms 1040 A partnership and a person who directly or indirectly owns more than 10% of the capital or profits interest in the partnership. 2011 federal tax forms 1040 Two partnerships, if the same persons directly or indirectly own more than 10% of the capital or profits interest in each. 2011 federal tax forms 1040 The related person and a person who is engaged in trades or businesses under common control. 2011 federal tax forms 1040 See section 52(a) and 52(b) of the Internal Revenue Code. 2011 federal tax forms 1040 When to determine relationship. 2011 federal tax forms 1040   You must determine whether you are related to another person at the time you acquire the property. 2011 federal tax forms 1040   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. 2011 federal tax forms 1040 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. 2011 federal tax forms 1040 Constructive ownership of stock or partnership interest. 2011 federal tax forms 1040   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. 2011 federal tax forms 1040 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. 2011 federal tax forms 1040 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. 2011 federal tax forms 1040 An individual is considered to own the stock or partnership interest directly or indirectly owned by or for the individual's family. 2011 federal tax forms 1040 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. 2011 federal tax forms 1040 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. 2011 federal tax forms 1040 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. 2011 federal tax forms 1040 Intangible Property Generally, if you can depreciate intangible property, you usually use the straight line method of depreciation. 2011 federal tax forms 1040 However, you can choose to depreciate certain intangible property under the income forecast method (discussed later). 2011 federal tax forms 1040 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. 2011 federal tax forms 1040 Straight Line Method This method lets you deduct the same amount of depreciation each year over the useful life of the property. 2011 federal tax forms 1040 To figure your deduction, first determine the adjusted basis, salvage value, and estimated useful life of your property. 2011 federal tax forms 1040 Subtract the salvage value, if any, from the adjusted basis. 2011 federal tax forms 1040 The balance is the total depreciation you can take over the useful life of the property. 2011 federal tax forms 1040 Divide the balance by the number of years in the useful life. 2011 federal tax forms 1040 This gives you your yearly depreciation deduction. 2011 federal tax forms 1040 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. 2011 federal tax forms 1040 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. 2011 federal tax forms 1040 Example. 2011 federal tax forms 1040 In April, Frank bought a patent for $5,100 that is not a section 197 intangible. 2011 federal tax forms 1040 He depreciates the patent under the straight line method, using a 17-year useful life and no salvage value. 2011 federal tax forms 1040 He divides the $5,100 basis by 17 years to get his $300 yearly depreciation deduction. 2011 federal tax forms 1040 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. 2011 federal tax forms 1040 Next year, Frank can deduct $300 for the full year. 2011 federal tax forms 1040 Patents and copyrights. 2011 federal tax forms 1040   If you can depreciate the cost of a patent or copyright, use the straight line method over the useful life. 2011 federal tax forms 1040 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. 2011 federal tax forms 1040 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. 2011 federal tax forms 1040 Computer software. 2011 federal tax forms 1040   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. 2011 federal tax forms 1040   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. 2011 federal tax forms 1040 It is readily available for purchase by the general public. 2011 federal tax forms 1040 It is subject to a nonexclusive license. 2011 federal tax forms 1040 It has not been substantially modified. 2011 federal tax forms 1040   If the software meets the tests above, it may also qualify for the section 179 deduction and the special depreciation allowance, discussed later. 2011 federal tax forms 1040 If you can depreciate the cost of computer software, use the straight line method over a useful life of 36 months. 2011 federal tax forms 1040    Tax-exempt use property subject to a lease. 2011 federal tax forms 1040   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. 2011 federal tax forms 1040 Certain created intangibles. 2011 federal tax forms 1040   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. 2011 federal tax forms 1040 For example, amounts paid to acquire memberships or privileges of indefinite duration, such as a trade association membership, are eligible costs. 2011 federal tax forms 1040   The following are not eligible. 2011 federal tax forms 1040 Any intangible asset acquired from another person. 2011 federal tax forms 1040 Created financial interests. 2011 federal tax forms 1040 Any intangible asset that has a useful life that can be estimated with reasonable accuracy. 2011 federal tax forms 1040 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. 2011 federal tax forms 1040 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. 2011 federal tax forms 1040   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. 2011 federal tax forms 1040 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. 2011 federal tax forms 1040 Income Forecast Method You can choose to use the income forecast method instead of the straight line method to depreciate the following depreciable intangibles. 2011 federal tax forms 1040 Motion picture films or video tapes. 2011 federal tax forms 1040 Sound recordings. 2011 federal tax forms 1040 Copyrights. 2011 federal tax forms 1040 Books. 2011 federal tax forms 1040 Patents. 2011 federal tax forms 1040 Under the income forecast method, each year's depreciation deduction is equal to the cost of the property, multiplied by a fraction. 2011 federal tax forms 1040 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. 2011 federal tax forms 1040 For more information, see section 167(g) of the Internal Revenue Code. 2011 federal tax forms 1040 Films, video tapes, and recordings. 2011 federal tax forms 1040   You cannot use MACRS for motion picture films, video tapes, and sound recordings. 2011 federal tax forms 1040 For this purpose, sound recordings are discs, tapes, or other phonorecordings resulting from the fixation of a series of sounds. 2011 federal tax forms 1040 You can depreciate this property using either the straight line method or the income forecast method. 2011 federal tax forms 1040 Participations and residuals. 2011 federal tax forms 1040   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. 2011 federal tax forms 1040 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. 2011 federal tax forms 1040 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. 2011 federal tax forms 1040   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. 2011 federal tax forms 1040 Videocassettes. 2011 federal tax forms 1040   If you are in the business of renting videocassettes, you can depreciate only those videocassettes bought for rental. 2011 federal tax forms 1040 If the videocassette has a useful life of one year or less, you can currently deduct the cost as a business expense. 2011 federal tax forms 1040 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. 2011 federal tax forms 1040 You must continue to use the same depreciation method as the transferor and figure depreciation as if the transfer had not occurred. 2011 federal tax forms 1040 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. 2011 federal tax forms 1040 The nontaxable transfers covered by this rule include the following. 2011 federal tax forms 1040 A distribution in complete liquidation of a subsidiary. 2011 federal tax forms 1040 A transfer to a corporation controlled by the transferor. 2011 federal tax forms 1040 An exchange of property solely for corporate stock or securities in a reorganization. 2011 federal tax forms 1040 A contribution of property to a partnership in exchange for a partnership interest. 2011 federal tax forms 1040 A partnership distribution of property to a partner. 2011 federal tax forms 1040 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. 2011 federal tax forms 1040 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. 2011 federal tax forms 1040 You must make this election by the return due date (including extensions) for the tax year you place your property in service. 2011 federal tax forms 1040 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). 2011 federal tax forms 1040 Attach the election to the amended return and write “Filed pursuant to section 301. 2011 federal tax forms 1040 9100-2” on the election statement. 2011 federal tax forms 1040 File the amended return at the same address you filed the original return. 2011 federal tax forms 1040 Use of standard mileage rate. 2011 federal tax forms 1040   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. 2011 federal tax forms 1040 See Publication 463 for a discussion of the standard mileage rate. 2011 federal tax forms 1040 What Is the Basis of Your Depreciable Property? To figure your depreciation deduction, you must determine the basis of your property. 2011 federal tax forms 1040 To determine basis, you need to know the cost or other basis of your property. 2011 federal tax forms 1040 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. 2011 federal tax forms 1040 The cost includes the amount you pay in cash, debt obligations, other property, or services. 2011 federal tax forms 1040 Exception. 2011 federal tax forms 1040   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). 2011 federal tax forms 1040 If you make that choice, you cannot include those sales taxes as part of your cost basis. 2011 federal tax forms 1040 Assumed debt. 2011 federal tax forms 1040   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. 2011 federal tax forms 1040 Example. 2011 federal tax forms 1040 You make a $20,000 down payment on property and assume the seller's mortgage of $120,000. 2011 federal tax forms 1040 Your total cost is $140,000, the cash you paid plus the mortgage you assumed. 2011 federal tax forms 1040 Settlement costs. 2011 federal tax forms 1040   The basis of real property also includes certain fees and charges you pay in addition to the purchase price. 2011 federal tax forms 1040 These generally are shown on your settlement statement and include the following. 2011 federal tax forms 1040 Legal and recording fees. 2011 federal tax forms 1040 Abstract fees. 2011 federal tax forms 1040 Survey charges. 2011 federal tax forms 1040 Owner's title insurance. 2011 federal tax forms 1040 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. 2011 federal tax forms 1040   For fees and charges you cannot include in the basis of property, see Real Property in Publication 551. 2011 federal tax forms 1040 Property you construct or build. 2011 federal tax forms 1040   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. 2011 federal tax forms 1040 For information about the uniform capitalization rules, see Publication 551 and the regulations under section 263A of the Internal Revenue Code. 2011 federal tax forms 1040 Other Basis Other basis usually refers to basis that is determined by the way you received the property. 2011 federal tax forms 1040 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. 2011 federal tax forms 1040 If you acquired property in this or some other way, see Publication 551 to determine your basis. 2011 federal tax forms 1040 Property changed from personal use. 2011 federal tax forms 1040   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. 2011 federal tax forms 1040 The fair market value (FMV) of the property on the date of the change in use. 2011 federal tax forms 1040 Your original cost or other basis adjusted as follows. 2011 federal tax forms 1040 Increased by the cost of any permanent improvements or additions and other costs that must be added to basis. 2011 federal tax forms 1040 Decreased by any deductions you claimed for casualty and theft losses and other items that reduced your basis. 2011 federal tax forms 1040 Example. 2011 federal tax forms 1040 Several years ago, Nia paid $160,000 to have her home built on a lot that cost her $25,000. 2011 federal tax forms 1040 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. 2011 federal tax forms 1040 Land is not depreciable, so she includes only the cost of the house when figuring the basis for depreciation. 2011 federal tax forms 1040 Nia's adjusted basis in the house when she changed its use was $178,000 ($160,000 + $20,000 − $2,000). 2011 federal tax forms 1040 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. 2011 federal tax forms 1040 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). 2011 federal tax forms 1040 Property acquired in a nontaxable transaction. 2011 federal tax forms 1040   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. 2011 federal tax forms 1040 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. 2011 federal tax forms 1040 See Like-kind exchanges and involuntary conversions. 2011 federal tax forms 1040 under How Much Can You Deduct? in chapter 3 and Figuring the Deduction for Property Acquired in a Nontaxable Exchange in chapter 4. 2011 federal tax forms 1040   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. 2011 federal tax forms 1040 See How Do You Use General Asset Accounts in chapter 4. 2011 federal tax forms 1040 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. 2011 federal tax forms 1040 These events could include the following. 2011 federal tax forms 1040 Installing utility lines. 2011 federal tax forms 1040 Paying legal fees for perfecting the title. 2011 federal tax forms 1040 Settling zoning issues. 2011 federal tax forms 1040 Receiving rebates. 2011 federal tax forms 1040 Incurring a casualty or theft loss. 2011 federal tax forms 1040 For a discussion of adjustments to the basis of your property, see Adjusted Basis in Publication 551. 2011 federal tax forms 1040 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. 2011 federal tax forms 1040 For more information, see What Is the Basis for Depreciation in chapter 4. 2011 federal tax forms 1040 . 2011 federal tax forms 1040 Basis adjustment for depreciation allowed or allowable. 2011 federal tax forms 1040   You must reduce the basis of property by the depreciation allowed or allowable, whichever is greater. 2011 federal tax forms 1040 Depreciation allowed is depreciation you actually deducted (from which you received a tax benefit). 2011 federal tax forms 1040 Depreciation allowable is depreciation you are entitled to deduct. 2011 federal tax forms 1040   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. 2011 federal tax forms 1040   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). 2011 federal tax forms 1040 How Do You Treat Repairs and Improvements? If you improve depreciable property, you must treat the improvement as separate depreciable property. 2011 federal tax forms 1040 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. 2011 federal tax forms 1040 You generally deduct the cost of repairing business property in the same way as any other business expense. 2011 federal tax forms 1040 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. 2011 federal tax forms 1040 Example. 2011 federal tax forms 1040 You repair a small section on one corner of the roof of a rental house. 2011 federal tax forms 1040 You deduct the cost of the repair as a rental expense. 2011 federal tax forms 1040 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. 2011 federal tax forms 1040 You depreciate the cost of the new roof. 2011 federal tax forms 1040 Improvements to rented property. 2011 federal tax forms 1040   You can depreciate permanent improvements you make to business property you rent from someone else. 2011 federal tax forms 1040 Do You Have To File Form 4562? Use Form 4562 to figure your deduction for depreciation and amortization. 2011 federal tax forms 1040 Attach Form 4562 to your tax return for the current tax year if you are claiming any of the following items. 2011 federal tax forms 1040 A section 179 deduction for the current year or a section 179 carryover from a prior year. 2011 federal tax forms 1040 See chapter 2 for information on the section 179 deduction. 2011 federal tax forms 1040 Depreciation for property placed in service during the current year. 2011 federal tax forms 1040 Depreciation on any vehicle or other listed property, regardless of when it was placed in service. 2011 federal tax forms 1040 See chapter 5 for information on listed property. 2011 federal tax forms 1040 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). 2011 federal tax forms 1040 Amortization of costs if the current year is the first year of the amortization period. 2011 federal tax forms 1040 Depreciation or amortization on any asset on a corporate income tax return (other than Form 1120S, U. 2011 federal tax forms 1040 S. 2011 federal tax forms 1040 Income Tax Return for an S Corporation) regardless of when it was placed in service. 2011 federal tax forms 1040 You must submit a separate Form 4562 for each business or activity on your return for which a Form 4562 is required. 2011 federal tax forms 1040 Table 1-1 presents an overview of the purpose of the various parts of Form 4562. 2011 federal tax forms 1040 Employee. 2011 federal tax forms 1040   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. 2011 federal tax forms 1040 Instead, use either Form 2106 or Form 2106-EZ. 2011 federal tax forms 1040 Use Form 2106-EZ if you are claiming the standard mileage rate and you are not reimbursed by your employer for any expenses. 2011 federal tax forms 1040 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. 2011 federal tax forms 1040 See Filing an Amended Return , next. 2011 federal tax forms 1040 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. 2011 federal tax forms 1040 See Changing Your Accounting Method , later. 2011 federal tax forms 1040 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. 2011 federal tax forms 1040 You claimed the incorrect amount because of a mathematical error made in any year. 2011 federal tax forms 1040 You claimed the incorrect amount because of a posting error made in any year. 2011 federal tax forms 1040 You have not adopted a method of accounting for property placed in service by you in tax years ending after December 29, 2003. 2011 federal tax forms 1040 You claimed the incorrect amount on property placed in service by you in tax years ending before December 30, 2003. 2011 federal tax forms 1040 Adoption of accounting method defined. 2011 federal tax forms 1040   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. 2011 federal tax forms 1040   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. 2011 federal tax forms 1040 irs. 2011 federal tax forms 1040 gov/pub/irs-irbs/irb11-04. 2011 federal tax forms 1040 pdf. 2011 federal tax forms 1040 (Note. 2011 federal tax forms 1040 Revenue Procedure 2011-14 is clarified and modified by Revenue Procedure 2012-20. 2011 federal tax forms 1040 For more information, see Revenue Procedure 2012-20 on page 700 of the Internal Revenue Bulletin 2012-14, available at www. 2011 federal tax forms 1040 irs. 2011 federal tax forms 1040 gov/pub/irs-irbs/irb12-14. 2011 federal tax forms 1040 pdf. 2011 federal tax forms 1040 )   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. 2011 federal tax forms 1040 irs. 2011 federal tax forms 1040 gov/pub/irs-irbs/irb07-29. 2011 federal tax forms 1040 pdf. 2011 federal tax forms 1040 When to file. 2011 federal tax forms 1040   If an amended return is allowed, you must file it by the later of the following. 2011 federal tax forms 1040 3 years from the date you filed your original return for the year in which you did not deduct the correct amount. 2011 federal tax forms 1040 A return filed before an unextended due date is considered filed on that due date. 2011 federal tax forms 1040 2 years from the time you paid your tax for that year. 2011 federal tax forms 1040 Changing Your Accounting Method Generally, you must get IRS approval to change your method of accounting. 2011 federal tax forms 1040 You generally must file Form 3115, Application for Change in Accounting Method, to request a change in your method of accounting for depreciation. 2011 federal tax forms 1040 The following are examples of a change in method of accounting for depreciation. 2011 federal tax forms 1040 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. 2011 federal tax forms 1040 A change in the treatment of an asset from nondepreciable to depreciable or vice versa. 2011 federal tax forms 1040 A change in the depreciation method, period of recovery, or convention of a depreciable asset. 2011 federal tax forms 1040 A change from not claiming to claiming the special depreciation allowance if you did not make the election to not claim any special allowance. 2011 federal tax forms 1040 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). 2011 federal tax forms 1040 Changes in depreciation that are not a change in method of accounting (and may only be made on an amended return) include the following. 2011 federal tax forms 1040 An adjustment in the useful life of a depreciable asset for which depreciation is determined under section 167. 2011 federal tax forms 1040 A change in use of an asset in the hands of the same taxpayer. 2011 federal tax forms 1040 Making a late depreciation election or revoking a timely valid depreciation election (including the election not to deduct the special depreciation allowance). 2011 federal tax forms 1040 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. 2011 federal tax forms 1040 Generally, you must get IRS approval to make a late depreciation election or revoke a depreciation election. 2011 federal tax forms 1040 You must submit a request for a letter ruling to make a late election or revoke an election. 2011 federal tax forms 1040 Any change in the placed in service date of a depreciable asset. 2011 federal tax forms 1040 See section 1. 2011 federal tax forms 1040 446-1(e)(2)(ii)(d) of the regulations for more information and examples. 2011 federal tax forms 1040 IRS approval. 2011 federal tax forms 1040   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. 2011 federal tax forms 1040 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. 2011 federal tax forms 1040 B. 2011 federal tax forms 1040 680. 2011 federal tax forms 1040 Also see the Instructions for Form 3115 for more information on getting approval, including lists of scope limitations and automatic accounting method changes. 2011 federal tax forms 1040 Additional guidance. 2011 federal tax forms 1040    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. 2011 federal tax forms 1040 irs. 2011 federal tax forms 1040 gov/pub/irs-irbs/irb11-04. 2011 federal tax forms 1040 pdf. 2011 federal tax forms 1040 (Note. 2011 federal tax forms 1040 Revenue Procedure 2011-14 is clarified and modified by Revenue Procedure 2012-20. 2011 federal tax forms 1040 For more information, see Revenue Procedure 2012-20 on page 700 of the Internal Revenue Bulletin 2012-14, available at www. 2011 federal tax forms 1040 irs. 2011 federal tax forms 1040 gov/pub/irs-irbs/irb12-14. 2011 federal tax forms 1040 pdf. 2011 federal tax forms 1040 )   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. 2011 federal tax forms 1040 irs. 2011 federal tax forms 1040 gov/pub/irs-irbs/irb07-29. 2011 federal tax forms 1040 pdf. 2011 federal tax forms 1040 Table 1-1. 2011 federal tax forms 1040 Purpose of Form 4562 This table describes the purpose of the various parts of Form 4562. 2011 federal tax forms 1040 For more information, see Form 4562 and its instructions. 2011 federal tax forms 1040 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. 2011 federal tax forms 1040   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. 2011 federal tax forms 1040 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. 2011 federal tax forms 1040 If no depreciation was deducted, the adjustment is the total depreciation allowable prior to the year of change. 2011 federal tax forms 1040 A negative section 481(a) adjustment results in a decrease in taxable income. 2011 federal tax forms 1040 It is taken into account in the year of change and is reported on your business tax returns as “other expenses. 2011 federal tax forms 1040 ” A positive section 481(a) adjustment results in an increase in taxable income. 2011 federal tax forms 1040 It is generally taken into account over 4 tax years and is reported on your business tax returns as “other income. 2011 federal tax forms 1040 ” 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. 2011 federal tax forms 1040 Make the election by completing the appropriate line on Form 3115. 2011 federal tax forms 1040   If you file a Form 3115 and change from one permissible method to another permissible method, the section 481(a) adjustment is zero. 2011 federal tax forms 1040 Prev  Up  Next   Home   More Online Publications