Filing Your Taxes Online is Fast, Easy and Secure.
Start now and receive your tax refund in as little as 7 days.

1. Get Answers

Your online questions are customized to your unique tax situation.

2. Maximize your Refund

Find tax credits for everything from school tuition to buying a hybri

3. E-File for FREE

E-file free with direct deposit to get your refund in as few as 7 days.

Filing your taxes with paper mail can be difficult and it could take weeks for your refund to arrive. IRS e-file is easy, fast and secure. There is no paperwork going to the IRS so tax refunds can be processed in as little as 7 days with direct deposit. As you prepare your taxes online, you can see your tax refund in real time.

FREE audit support and representation from an enrolled agent – NEW and only from H&R Block

2011taxes

Tax FormsFiling 2012 TaxesTurbo Tax 1040xTax Addendum FormFree State Income Tax Filing2012 Amended Tax FormTaxact Online 2010Tax Form 1040x2010 TaxactHow To Fill Out A 1040ez Tax FormSenior Income TaxFree E File State Tax ReturnFree Irs Tax PreparationFile 2012 Taxes OnlineFree Income Tax SoftwareFile Tax Return For 20111040File 2007 TaxesH R Block Tax ServiceWww Irs Gov 2012 Tax FormsIrs 1040ez Form 2012Income Tax Forms 1040ezTax Form 1040nr Ez2011 Tax Form 1040 EzWww Free State Taxes ComH&r Block 2011 TaxesTaxact.com 2010Tax 1040xAmending TaxesH&r Block Key Code Free State FilingFree Irs Tax Filing 2012Www Ir GovFile Amended Return OnlineFederal Tax Amended ReturnStatetaxformsWhere Can I File 2012 TaxesEfile Com10ezForm 1040 Ez 2013 InstructionsHow To File An Amended Tax Return For 2013

2011taxes

2011taxes 3. 2011taxes   Farm Income Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Schedule F (Form 1040) Sales of Farm ProductsSchedule F. 2011taxes Form 4797. 2011taxes Sales Caused by Weather-Related Conditions Rents (Including Crop Shares)Crop Shares Agricultural Program PaymentsCommodity Credit Corporation (CCC) Loans Conservation Reserve Program (CRP) Crop Insurance and Crop Disaster Payments Feed Assistance and Payments Cost-Sharing Exclusion (Improvements) Payments Under the Farm Security and Rural Investment Act of 2002 and Under the Food, Conservation, and Energy Act of 2008 Tobacco Quota Buyout Program Payments Other Payments Payment to More Than One Person Income From CooperativesPatronage Dividends Per-Unit Retain Certificates Cancellation of DebtGeneral Rule Exceptions Exclusions Income From Other SourcesSod. 2011taxes Granting the right to remove deposits. 2011taxes Income Averaging for FarmersElected Farm Income (EFI) How To Figure the Tax Effect on Other Tax Determinations Tax for Certain Children Who Have Unearned Income Alternative Minimum Tax (AMT) Schedule J Introduction You may receive income from many sources. 2011taxes You must report the income from all the different sources on your tax return, unless it is excluded by law. 2011taxes Where you report the income on your tax return depends on its source. 2011taxes This chapter discusses farm income you report on Schedule F (Form 1040), Profit or Loss From Farming. 2011taxes For information on where to report other income, see the Instructions for Form 1040, U. 2011taxes S. 2011taxes Individual Income Tax Return. 2011taxes Accounting method. 2011taxes   The rules discussed in this chapter assume you use the cash method of accounting. 2011taxes Under the cash method, you generally include an item of income in gross income in the year you receive it. 2011taxes See Cash Method in chapter 2. 2011taxes   If you use an accrual method of accounting, different rules may apply to your situation. 2011taxes See Accrual Method in chapter 2. 2011taxes Topics - This chapter discusses: Schedule F Sales of farm products Rents (including crop shares) Agricultural program payments Income from cooperatives Cancellation of debt Income from other sources Income averaging for farmers Useful Items - You may want to see: Publication 525 Taxable and Nontaxable Income 550 Investment Income and Expenses 908 Bankruptcy Tax Guide 925 Passive Activity and At-Risk Rules 4681 Canceled Debts, Foreclosures, Repossessions, and Abandonments Form (and Instructions) 982 Reduction of Tax Attributes Due to Discharge of Indebtedness Sch E (Form 1040) Supplemental Income and Loss Sch J (Form 1040) Income Averaging for Farmers and Fishermen 1099-G Certain Government Payments 1099-PATR Taxable Distributions Received From Cooperatives 4797 Sales of Business Property 4835 Farm Rental Income and Expenses See chapter 16 for information about getting publications and forms. 2011taxes Schedule F (Form 1040) Individuals, trusts, and partnerships report farm income on Schedule F (Form 1040), Profit or Loss From Farming. 2011taxes Use this schedule to figure the net profit or loss from regular farming operations. 2011taxes Income from farming reported on Schedule F includes amounts you receive from cultivating, operating, or managing a farm for gain or profit, either as owner or tenant. 2011taxes This includes income from operating a stock, dairy, poultry, fish, fruit, or truck farm and income from operating a plantation, ranch, range, or orchard. 2011taxes It also includes income from the sale of crop shares if you materially participate in producing the crop. 2011taxes See Rents (Including Crop Shares) , later. 2011taxes Income received from operating a nursery, which specializes in growing ornamental plants, is considered to be income from farming. 2011taxes Income reported on Schedule F does not include gains or losses from sales or other dispositions of the following farm assets. 2011taxes Land. 2011taxes Depreciable farm equipment. 2011taxes Buildings and structures. 2011taxes Livestock held for draft, breeding, sport, or dairy purposes. 2011taxes Gains and losses from most dispositions of farm assets are discussed in chapters 8 and 9. 2011taxes Gains and losses from casualties, thefts, and condemnations are discussed in chapter 11. 2011taxes Sales of Farm Products Where to report. 2011taxes    Table 3-1 shows where to report the sale of farm products on your tax return. 2011taxes Schedule F. 2011taxes   Amounts received from the sales of products you raised on your farm for sale (or bought for resale), such as livestock, produce, or grains, are reported on Schedule F. 2011taxes This includes money and the fair market value of any property or services you receive. 2011taxes When you sell farm products bought for resale, your profit or loss is the difference between your selling price (money plus the fair market value of any property) and your basis in the item (usually the cost). 2011taxes See chapter 6 for information on the basis of assets. 2011taxes You generally report these amounts on Schedule F for the year you receive payment. 2011taxes Example. 2011taxes In 2012, you bought 20 feeder calves for $11,000 for resale. 2011taxes You sold them in 2013 for $21,000. 2011taxes You report the $21,000 sales price on Schedule F, line 1b, subtract your $11,000 basis on line 1d, and report the resulting $10,000 profit on line 1e. 2011taxes Form 4797. 2011taxes   Sales of livestock held for draft, breeding, sport, or dairy purposes may result in ordinary or capital gains or losses, depending on the circumstances. 2011taxes In either case, you should always report these sales on Form 4797 instead of Schedule F. 2011taxes See Livestock under Ordinary or Capital Gain or Loss in chapter 8. 2011taxes Animals you do not hold primarily for sale are considered business assets of your farm. 2011taxes Table 3-1. 2011taxes Where To Report Sales of Farm Products Item Sold Schedule F Form 4797 Farm products raised for sale X   Farm products bought for resale X   Farm assets not held primarily for sale, such as livestock held for draft, breeding, sport, or dairy purposes (bought or raised)   X Sale by agent. 2011taxes   If your agent sells your farm products, you have constructive receipt of the income when your agent receives payment and you must include the net proceeds from the sale in gross income for the year the agent receives payment. 2011taxes This applies even if your agent pays you in a later year. 2011taxes For a discussion on constructive receipt of income, see Cash Method under Accounting Methods in chapter 2. 2011taxes Sales Caused by Weather-Related Conditions If you sell or exchange more livestock, including poultry, than you normally would in a year because of a drought, flood, or other weather-related condition, you may be able to postpone reporting the gain from the additional animals until the next year. 2011taxes You must meet all the following conditions to qualify. 2011taxes Your principal trade or business is farming. 2011taxes You use the cash method of accounting. 2011taxes You can show that, under your usual business practices, you would not have sold or exchanged the additional animals this year except for the weather-related condition. 2011taxes The weather-related condition caused an area to be designated as eligible for assistance by the federal government. 2011taxes Sales or exchanges made before an area became eligible for federal assistance qualify if the weather-related condition that caused the sale or exchange also caused the area to be designated as eligible for federal assistance. 2011taxes The designation can be made by the President, the Department of Agriculture (or any of its agencies), or by other federal departments or agencies. 2011taxes A weather-related sale or exchange of livestock (other than poultry) held for draft, breeding, or dairy purposes may be an involuntary conversion. 2011taxes See Other Involuntary Conversions in chapter 11. 2011taxes Usual business practice. 2011taxes   You must determine the number of animals you would have sold had you followed your usual business practice in the absence of the weather-related condition. 2011taxes Do this by considering all the facts and circumstances, but do not take into account your sales in any earlier year for which you postponed the gain. 2011taxes If you have not yet established a usual business practice, rely on the usual business practices of similarly situated farmers in your general region. 2011taxes Connection with affected area. 2011taxes   The livestock does not have to be raised or sold in an area affected by a weather-related condition for the postponement to apply. 2011taxes However, the sale must occur solely because of a weather-related condition that affected the water, grazing, or other requirements of the livestock. 2011taxes This requirement generally will not be met if the costs of feed, water, or other requirements of the livestock affected by the weather-related condition are not substantial in relation to the total costs of holding the livestock. 2011taxes Classes of livestock. 2011taxes   You must figure the amount to be postponed separately for each generic class of animals—for example, hogs, sheep, and cattle. 2011taxes Do not separate animals into classes based on age, sex, or breed. 2011taxes Amount to be postponed. 2011taxes   Follow these steps to figure the amount of gain to be postponed for each class of animals. 2011taxes Divide the total income realized from the sale of all livestock in the class during the tax year by the total number of such livestock sold. 2011taxes For this purpose, do not treat any postponed gain from the previous year as income received from the sale of livestock. 2011taxes Multiply the result in (1) by the excess number of such livestock sold solely because of weather-related conditions. 2011taxes Example. 2011taxes You are a calendar year taxpayer and you normally sell 100 head of beef cattle a year. 2011taxes As a result of drought, you sold 135 head during 2012. 2011taxes You realized $70,200 from the sale. 2011taxes On August 9, 2012, as a result of drought, the affected area was declared a disaster area eligible for federal assistance. 2011taxes The income you can postpone until 2013 is $18,200 [($70,200 ÷ 135) × 35]. 2011taxes How to postpone gain. 2011taxes   To postpone gain, attach a statement to your tax return for the year of the sale. 2011taxes The statement must include your name and address and give the following information for each class of livestock for which you are postponing gain. 2011taxes A statement that you are postponing gain under Internal Revenue Code (IRC) section 451(e). 2011taxes Evidence of the weather-related conditions that forced the early sale or exchange of the livestock and the date, if known, on which an area was designated as eligible for assistance by the federal government because of weather-related conditions. 2011taxes A statement explaining the relationship of the area affected by the weather-related condition to your early sale or exchange of the livestock. 2011taxes The number of animals sold in each of the 3 preceding years. 2011taxes The number of animals you would have sold in the tax year had you followed your normal business practice in the absence of weather-related conditions. 2011taxes The total number of animals sold and the number sold because of weather-related conditions during the tax year. 2011taxes A computation, as described above, of the income to be postponed for each class of livestock. 2011taxes   Generally, you must file the statement and the return by the due date of the return, including extensions. 2011taxes However, for sales or exchanges treated as an involuntary conversion from weather-related sales of livestock in an area eligible for federal assistance (discussed in chapter 11), you can file this statement at any time during the replacement period. 2011taxes For other sales or exchanges, if you timely filed your return for the year without postponing gain, you can still postpone gain by filing an amended return within 6 months of the due date of the return (excluding extensions). 2011taxes Attach the statement to the amended return and write “Filed pursuant to section 301. 2011taxes 9100-2” at the top of the amended return. 2011taxes File the amended return at the same address you filed the original return. 2011taxes Once you have filed the statement, you can cancel your postponement of gain only with the approval of the IRS. 2011taxes Rents (Including Crop Shares) The rent you receive for the use of your farmland is generally rental income, not farm income. 2011taxes However, if you materially participate in farming operations on the land, the rent is farm income. 2011taxes See Landlord Participation in Farming in chapter 12. 2011taxes Pasture income and rental. 2011taxes   If you pasture someone else's livestock and take care of them for a fee, the income is from your farming business. 2011taxes You must enter it as Other income on Schedule F. 2011taxes If you simply rent your pasture for a flat cash amount without providing services, report the income as rent on Part I of Schedule E (Form 1040), Supplemental Income and Loss. 2011taxes Crop Shares You must include rent you receive in the form of crop shares in income in the year you convert the shares to money or the equivalent of money. 2011taxes It does not matter whether you use the cash method of accounting or an accrual method of accounting. 2011taxes If you materially participate in operating a farm from which you receive rent in the form of crop shares or livestock, the rental income is included in self-employment income. 2011taxes See Landlord Participation in Farming in chapter 12. 2011taxes Report the rental income on Schedule F. 2011taxes If you do not materially participate in operating the farm, report this income on Form 4835 and carry the net income or loss to Schedule E (Form 1040). 2011taxes The income is not included in self-employment income. 2011taxes Crop shares you use to feed livestock. 2011taxes   Crop shares you receive as a landlord and feed to your livestock are considered converted to money when fed to the livestock. 2011taxes You must include the fair market value of the crop shares in income at that time. 2011taxes You are entitled to a business expense deduction for the livestock feed in the same amount and at the same time you include the fair market value of the crop share as rental income. 2011taxes Although these two transactions cancel each other for figuring adjusted gross income on Form 1040, they may be necessary to figure your self-employment tax. 2011taxes See  chapter 12. 2011taxes Crop shares you give to others (gift). 2011taxes   Crop shares you receive as a landlord and give to others are considered converted to money when you make the gift. 2011taxes You must report the fair market value of the crop share as income, even though someone else receives payment for the crop share. 2011taxes Example. 2011taxes A tenant farmed part of your land under a crop-share arrangement. 2011taxes The tenant harvested and delivered the crop in your name to an elevator company. 2011taxes Before selling any of the crop, you instructed the elevator company to cancel your warehouse receipt and make out new warehouse receipts in equal amounts of the crop in the names of your children. 2011taxes They sell their crop shares in the following year and the elevator company makes payments directly to your children. 2011taxes In this situation, you are considered to have received rental income and then made a gift of that income. 2011taxes You must include the fair market value of the crop shares in your income for the tax year you gave the crop shares to your children. 2011taxes Crop share loss. 2011taxes   If you are involved in a rental or crop-share lease arrangement, any loss from these activities may be subject to the limits under the passive loss rules. 2011taxes See Publication 925 for information on these rules. 2011taxes Agricultural Program Payments You must include in income most government payments, such as those for approved conservation practices, direct payments, and counter-cyclical payments, whether you receive them in cash, materials, services, or commodity certificates. 2011taxes However, you can exclude from income some payments you receive under certain cost-sharing conservation programs. 2011taxes See Cost-Sharing Exclusion (Improvements) , later. 2011taxes Report the agricultural program payment on the appropriate line of Schedule F, Part I. 2011taxes Report the full amount even if you return a government check for cancellation, refund any of the payment you receive, or the government collects all or part of the payment from you by reducing the amount of some other payment or Commodity Credit Corporation (CCC) loan. 2011taxes However, you can deduct the amount you refund or return or that reduces some other payment or loan to you. 2011taxes Claim the deduction on Schedule F for the year of repayment or reduction. 2011taxes Commodity Credit Corporation (CCC) Loans Generally, you do not report loans you receive as income. 2011taxes However, if you pledge part or all of your production to secure a CCC loan, you can treat the loan as if it were a sale of the crop and report the loan proceeds as income in the year you receive them. 2011taxes You do not need approval from the IRS to adopt this method of reporting CCC loans. 2011taxes Once you report a CCC loan as income for the year received, you generally must report all CCC loans in that year and later years in the same way. 2011taxes However, you can obtain for your tax year an automatic consent to change your method of accounting for loans received from the CCC, from including the loan amount in gross income for the tax year in which the loan is received to treating the loan amount as a loan. 2011taxes For more information, see Part I of the Instructions for Form 3115 and Revenue Procedure 2008-52. 2011taxes Revenue Procedure 2008-52, 2008-36 I. 2011taxes R. 2011taxes B. 2011taxes 587, is available at  www. 2011taxes irs. 2011taxes gov/irb/2008-36_IRB/ar09. 2011taxes html. 2011taxes You can request income tax withholding from CCC loan payments you receive. 2011taxes Use Form W-4V, Voluntary Withholding Request. 2011taxes See chapter 16 for information about ordering the form. 2011taxes To elect to report a CCC loan as income, include the loan proceeds as income on Schedule F, line 7a, for the year you receive it. 2011taxes Attach a statement to your return showing the details of the loan. 2011taxes You must file the statement and the return by the due date of the return, including extensions. 2011taxes If you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). 2011taxes Attach the statement to the amended return and write “Filed pursuant to section 301. 2011taxes 9100-2” at the top of the return. 2011taxes File the amended return at the same address you filed the original return. 2011taxes When you make this election, the amount you report as income becomes your basis in the commodity. 2011taxes See chapter 6 for information on the basis of assets. 2011taxes If you later repay the loan, redeem the pledged commodity, and sell it, you report as income at the time of sale the sale proceeds minus your basis in the commodity. 2011taxes If the sale proceeds are less than your basis in the commodity, you can report the difference as a loss on Schedule F. 2011taxes If you forfeit the pledged crops to the CCC in full payment of the loan, the forfeiture is treated for tax purposes as a sale of the crops. 2011taxes If you did not report the loan proceeds as income for the year you received them, you must include them in your income for the year of the forfeiture. 2011taxes Form 1099-A. 2011taxes   If you forfeit pledged crops to the CCC in full payment of a loan, you may receive a Form 1099-A, Acquisition or Abandonment of Secured Property. 2011taxes “CCC” should be shown in box 6. 2011taxes The amount of any CCC loan outstanding when you forfeited your commodity should also be indicated on the form. 2011taxes Market Gain Under the CCC nonrecourse marketing assistance loan program, your repayment amount for a loan secured by your pledge of an eligible commodity is generally based on the lower of the loan rate or the prevailing world market price for the commodity on the date of repayment. 2011taxes If you repay the loan when the world price is lower, the difference between that repayment amount and the original loan amount is market gain. 2011taxes Whether you use cash or CCC certificates to repay the loan, you will receive a Form 1099-G showing the market gain you realized. 2011taxes Market gain should be reported as follows. 2011taxes If you elected to include the CCC loan in income in the year you received it, do not include the market gain in income. 2011taxes However, adjust the basis of the commodity for the amount of the market gain. 2011taxes If you did not include the CCC loan in income in the year received, include the market gain in your income. 2011taxes The following examples show how to report market gain. 2011taxes Example 1. 2011taxes Mike Green is a cotton farmer. 2011taxes He uses the cash method of accounting and files his tax return on a calendar year basis. 2011taxes He has deducted all expenses incurred in producing the cotton and has a zero basis in the commodity. 2011taxes In 2012, Mike pledged 1,000 pounds of cotton as collateral for a CCC loan of $2,000 (a loan rate of $2. 2011taxes 00 per pound). 2011taxes In 2013, he repaid the loan and redeemed the cotton for $1,500 when the world price was $1. 2011taxes 50 per pound (lower than the loan amount). 2011taxes Later in 2013, he sold the cotton for $2,500. 2011taxes The market gain on the redemption was $. 2011taxes 50 ($2. 2011taxes 00 – $1. 2011taxes 50) per pound. 2011taxes Mike realized total market gain of $500 ($. 2011taxes 50 x 1,000 pounds). 2011taxes How he reports this market gain and figures his gain or loss from the sale of the cotton depends on whether he included CCC loans in income in 2012. 2011taxes Included CCC loan. 2011taxes   Mike reported the $2,000 CCC loan as income for 2012 on Schedule F, line 1b, so he is treated as if he sold the cotton for $2,000 when he pledged it and repurchased the cotton for $1,500 when he redeemed it. 2011taxes The $500 market gain is not recognized on the redemption. 2011taxes He reports it for 2013 as an agricultural program payment on Schedule F, line 4a, but does not include it as a taxable amount on line 4b. 2011taxes   Mike's basis in the cotton after he redeemed it was $1,500, which is the redemption (repurchase) price paid for the cotton. 2011taxes His gain from the sale is $1,000 ($2,500 – $1,500). 2011taxes He reports the $1,000 gain as income for 2013 on Schedule F, line 1b. 2011taxes Excluded CCC loan. 2011taxes   Mike has income of $500 from market gain in 2013. 2011taxes He reports it on Schedule F, lines 4a and 4b. 2011taxes His basis in the cotton is zero, so his gain from its sale is $2,500. 2011taxes He reports the $2,500 gain as income for 2013 on Schedule F, line 1b. 2011taxes Example 2. 2011taxes The facts are the same as in Example 1 except that, instead of selling the cotton for $2,500 after redeeming it, Mike entered into an option-to-purchase contract with a cotton buyer before redeeming the cotton. 2011taxes Under that contract, Mike authorized the cotton buyer to pay the CCC loan on Mike's behalf. 2011taxes In 2013, the cotton buyer repaid the loan for $1,500 and immediately exercised his option, buying the cotton for $1,500. 2011taxes How Mike reports the $500 market gain on the redemption of the cotton and figures his gain or loss from its sale depends on whether he included CCC loans in income in 2012. 2011taxes Included CCC loan. 2011taxes   As in Example 1, Mike is treated as though he sold the cotton for $2,000 when he pledged it and repurchased the cotton for $1,500 when the cotton buyer redeemed it for him. 2011taxes The $500 market gain is not recognized on the redemption. 2011taxes Mike reports it for 2013 as an agricultural program payment on Schedule F, line 4a, but does not include it as a taxable amount on line 4b. 2011taxes   Also, as in Example 1, Mike's basis in the cotton when the cotton buyer redeemed it for him was $1,500. 2011taxes Mike has no gain or loss on its sale to the cotton buyer for that amount. 2011taxes Excluded CCC loan. 2011taxes   As in Example 1, Mike has income of $500 from market gain in 2013. 2011taxes He reports it on Schedule F, lines 4a and 4b. 2011taxes His basis in the cotton is zero, so his gain from its sale is $1,500. 2011taxes He reports the $1,500 gain as income for 2013 on Schedule F, line 1b. 2011taxes Conservation Reserve Program (CRP) Under the Conservation Reserve Program (CRP), if you own or operate highly erodible or other specified cropland, you may enter into a long-term contract with the USDA, agreeing to convert to a less intensive use of that cropland. 2011taxes You must include the annual rental payments and any one-time incentive payment you receive under the program on Schedule F, lines 4a and 4b. 2011taxes Cost-share payments you receive may qualify for the cost-sharing exclusion. 2011taxes See Cost-Sharing Exclusion (Improvements) , later. 2011taxes CRP payments are reported to you on Form 1099-G. 2011taxes Individuals who are receiving Social Security retirement or disability benefits may exclude CRP payments when calculating self-employment tax. 2011taxes See the instructions for Schedule SE (Form 1040). 2011taxes Crop Insurance and Crop Disaster Payments You must include in income any crop insurance proceeds you receive as the result of physical crop damage or reduction of crop revenue, or both. 2011taxes You generally include them in the year you receive them. 2011taxes Treat as crop insurance proceeds the crop disaster payments you receive from the federal government as the result of destruction or damage to crops, or the inability to plant crops, because of drought, flood, or any other natural disaster. 2011taxes You can request income tax withholding from crop disaster payments you receive from the federal government. 2011taxes Use Form W-4V, Voluntary Withholding Request. 2011taxes See chapter 16 for information about ordering the form. 2011taxes Election to postpone reporting until the following year. 2011taxes   You can postpone reporting some or all crop insurance proceeds as income until the year following the year the physical damage occurred if you meet all the following conditions. 2011taxes You use the cash method of accounting. 2011taxes You receive the crop insurance proceeds in the same tax year the crops are damaged. 2011taxes You can show that under your normal business practice you would have included income from the damaged crops in any tax year following the year the damage occurred. 2011taxes   Deferral is not permitted for proceeds received from revenue insurance policies. 2011taxes   To postpone reporting some or all crop insurance proceeds received in 2013, report the amount you received on Schedule F, line 6a, but do not include it as a taxable amount on line 6b. 2011taxes Check the box on line 8c and attach a statement to your tax return. 2011taxes The statement must include your name and address and contain the following information. 2011taxes A statement that you are making an election under IRC section 451(d) and Regulations section 1. 2011taxes 451-6. 2011taxes The specific crop or crops physically destroyed or damaged. 2011taxes A statement that under your normal business practice you would have included income from some or all of the destroyed or damaged crops in gross income for a tax year following the year the crops were destroyed or damaged. 2011taxes The cause of the physical destruction or damage and the date or dates it occurred. 2011taxes The total payments you received from insurance carriers, itemized for each specific crop, and the date you received each payment. 2011taxes The name of each insurance carrier from whom you received payments. 2011taxes   One election covers all crops representing a single trade or business. 2011taxes If you have more than one farming business, make a separate election for each one. 2011taxes For example, if you operate two separate farms on which you grow different crops and you keep separate books for each farm, you should make two separate elections to postpone reporting insurance proceeds you receive for crops grown on each of your farms. 2011taxes   An election is binding for the year unless the IRS approves your request to change it. 2011taxes To request IRS approval to change your election, write to the IRS at the following address giving your name, address, identification number, the year you made the election, and your reasons for wanting to change it. 2011taxes Ogden Submission Processing Center P. 2011taxes O. 2011taxes Box 9941 Ogden, UT 84409 Feed Assistance and Payments The Disaster Assistance Act of 1988 authorizes programs to provide feed assistance, reimbursement payments, and other benefits to qualifying livestock producers if the Secretary of Agriculture determines that, because of a natural disaster, a livestock emergency exists. 2011taxes These programs include partial reimbursement for the cost of purchased feed and for certain transportation expenses. 2011taxes They also include the donation or sale at a below-market price of feed owned by the Commodity Credit Corporation. 2011taxes Include in income: The market value of donated feed, The difference between the market value and the price you paid for feed you buy at below-market prices, and Any cost reimbursement you receive. 2011taxes You must include these benefits in income in the year you receive them. 2011taxes You cannot postpone reporting them under the rules explained earlier for weather-related sales of livestock or crop insurance proceeds. 2011taxes Report the benefits on Schedule F, Part I, as agricultural program payments. 2011taxes You can usually take a current deduction for the same amount as a feed expense. 2011taxes Cost-Sharing Exclusion (Improvements) You can exclude from your income part or all of a payment you receive under certain federal or state cost-sharing conservation, reclamation, and restoration programs. 2011taxes A payment is any economic benefit you get as a result of an improvement. 2011taxes However, this exclusion applies only to that part of a payment that meets all three of the following tests. 2011taxes It was for a capital expense. 2011taxes You cannot exclude any part of a payment for an expense you can deduct in the year you pay or incur it. 2011taxes You must include the payment for a deductible expense in income, and you can take any offsetting deduction. 2011taxes See chapter 5 for information on deducting soil and water conservation expenses. 2011taxes It does not substantially increase your annual income from the property for which it is made. 2011taxes An increase in annual income is substantial if it is more than the greater of the following amounts. 2011taxes 10% of the average annual income derived from the affected property before receiving the improvement. 2011taxes $2. 2011taxes 50 times the number of affected acres. 2011taxes The Secretary of Agriculture certified that the payment was primarily made for conserving soil and water resources, protecting or restoring the environment, improving forests, or providing a habitat for wildlife. 2011taxes Qualifying programs. 2011taxes   If the three tests listed above are met, you can exclude part or all of the payments from the following programs. 2011taxes The rural clean water program authorized by the Federal Water Pollution Control Act. 2011taxes The rural abandoned mine program authorized by the Surface Mining Control and Reclamation Act of 1977. 2011taxes The water bank program authorized by the Water Bank Act. 2011taxes The emergency conservation measures program authorized by title IV of the Agricultural Credit Act of 1978. 2011taxes The agricultural conservation program authorized by the Soil Conservation and Domestic Allotment Act. 2011taxes The great plains conservation program authorized by the Soil Conservation and Domestic Policy Act. 2011taxes The resource conservation and development program authorized by the Bankhead-Jones Farm Tenant Act and by the Soil Conservation and Domestic Allotment Act. 2011taxes Certain small watershed programs, listed later. 2011taxes Any program of a state, possession of the United States, a political subdivision of any of these, or of the District of Columbia under which payments are made to individuals primarily for conserving soil, protecting or restoring the environment, improving forests, or providing a habitat for wildlife. 2011taxes Several state programs have been approved. 2011taxes For information about the status of those programs, contact the state offices of the Farm Service Agency (FSA) and the Natural Resources and Conservation Service (NRCS). 2011taxes Small watershed programs. 2011taxes   If the three tests listed earlier are met, you can exclude part or all of the payments you receive under the following programs for improvements made in connection with a watershed. 2011taxes The programs under the Watershed Protection and Flood Prevention Act. 2011taxes The flood prevention projects under the Flood Control Act of 1944. 2011taxes The Emergency Watershed Protection Program under the Flood Control Act of 1950. 2011taxes Certain programs under the Colorado River Basin Salinity Control Act. 2011taxes The Wetlands Reserve Program authorized by the Food Security Act of 1985, the Federal Agriculture Improvement and Reform Act of 1996 and the Farm Security and Rural Investment Act of 2002. 2011taxes The Environmental Quality Incentives Program (EQIP) authorized by the Federal Agriculture Improvement and Reform Act of 1996. 2011taxes The Wildlife Habitat Incentives Program (WHIP) authorized by the Federal Agriculture Improvement and Reform Act of 1996. 2011taxes The Soil and Water Conservation Assistance Program authorized by the Agricultural Risk Protection Act of 2000. 2011taxes The Agricultural Management Assistance Program authorized by the Agricultural Risk Protection Act of 2000. 2011taxes The Conservation Reserve Program authorized by the Food Security Act of 1985 and the Federal Agriculture Improvement and Reform Act of 1996. 2011taxes The Forest Land Enhancement Program authorized under the Farm Security and Rural Investment Act of 2002. 2011taxes The Conservation Security Program authorized by the Food Security Act of 1985. 2011taxes The Forest Health Protection Program (FHPP) authorized by the Cooperative Forestry Assistance Act of 1978. 2011taxes Income realized. 2011taxes   The gross income you realize upon getting an improvement under these cost-sharing programs is the value of the improvement reduced by the sum of the excludable portion and your share of the cost of the improvement (if any). 2011taxes Value of the improvement. 2011taxes   You determine the value of the improvement by multiplying its fair market value (defined in chapter 6) by a fraction. 2011taxes The numerator of the fraction is the total cost of the improvement (all amounts paid either by you or by the government for the improvement) reduced by the sum of the following items. 2011taxes Any government payments under a program not listed earlier. 2011taxes Any part of a government payment under a program listed earlier that the Secretary of Agriculture has not certified as primarily for conservation. 2011taxes Any government payment to you for rent or for your services. 2011taxes The denominator of the fraction is the total cost of the improvement. 2011taxes Excludable portion. 2011taxes   The excludable portion is the present fair market value of the right to receive annual income from the affected acreage of the greater of the following amounts. 2011taxes 10% of the prior average annual income from the affected acreage. 2011taxes The prior average annual income is the average of the gross receipts from the affected acreage for the last 3 tax years before the tax year in which you started to install the improvement. 2011taxes $2. 2011taxes 50 times the number of affected acres. 2011taxes The calculation of present fair market value of the right to receive annual income is too complex to discuss in this publication. 2011taxes You may need to consult your tax advisor for assistance. 2011taxes Example. 2011taxes One hundred acres of your land was reclaimed under a rural abandoned mine program contract with the Natural Resources Conservation Service of the USDA. 2011taxes The total cost of the improvement was $500,000. 2011taxes The USDA paid $490,000. 2011taxes You paid $10,000. 2011taxes The value of the cost-sharing improvement is $15,000. 2011taxes The present fair market value of the right to receive the annual income described in (1) above is $1,380, and the present fair market value of the right to receive the annual income described in (2) is $1,550. 2011taxes The excludable portion is the greater amount, $1,550. 2011taxes You figure the amount to include in gross income as follows: Value of cost-sharing improvement $15,000 Minus: Your share $10,000     Excludable portion 1,550 11,550 Amount included in income $ 3,450 Effects of the exclusion. 2011taxes   When you figure the basis of property you acquire or improve using cost-sharing payments excluded from income, subtract the excluded payments from your capital costs. 2011taxes Any payment excluded from income is not part of your basis. 2011taxes In the example above, the increase in basis is $500,000 – $490,000 + $3,450 = $13,450. 2011taxes   In addition, you cannot take depreciation, amortization, or depletion deductions for the part of the cost of the property for which you receive cost-sharing payments you exclude from income. 2011taxes How to report the exclusion. 2011taxes   Attach a statement to your tax return (or amended return) for the tax year you receive the last government payment for the improvement. 2011taxes The statement must include the following information. 2011taxes The dollar amount of the cost funded by the government payment. 2011taxes The value of the improvement. 2011taxes The amount you are excluding. 2011taxes   Report the total cost-sharing payments you receive on Schedule F, line 4a, and the taxable amount on line 4b. 2011taxes Recapture. 2011taxes   If you dispose of the property within 20 years after you received the excluded payments, you must treat as ordinary income part or all of the cost-sharing payments you excluded. 2011taxes In the above example, if the 100 acres were sold within 20 years of the exclusion for a gain of $2,000, $1,550 of that amount would be included in ordinary income. 2011taxes You must report the recapture on Form 4797. 2011taxes See Section 1255 property under Other Gains in chapter 9. 2011taxes Electing not to exclude payments. 2011taxes   You can elect not to exclude all or part of any payments you receive under these programs. 2011taxes If you make this election for all of these payments, none of the above restrictions and rules apply. 2011taxes You must make this election by the due date, including extensions, for filing your return. 2011taxes In the example above, an election not to exclude payments results in $5,000 included in income and a $15,000 increase in basis. 2011taxes If you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). 2011taxes Write “Filed pursuant to section 301. 2011taxes 9100-2” at the top of the amended return and file it at the same address you filed the original return. 2011taxes Payments Under the Farm Security and Rural Investment Act of 2002 and Under the Food, Conservation, and Energy Act of 2008 The Farm Security and Rural Investment Act of 2002 created two new types of payments—direct and counter-cyclical payments. 2011taxes You must include these payments on Schedule F, lines 4a and 4b. 2011taxes The Food, Conservation, and Energy Act of 2008 provides for direct and counter-cyclical payments (DCP) as well as Average Crop Revenue Election (ACRE) payments. 2011taxes You must include these payments on Schedule F, lines 6a and 6b. 2011taxes The American Taxpayer Relief Act of 2012, enacted on January 2, 2013, amends the Food, Conservation, and Energy Act of 2008 and provided a one-year extension for these payments. 2011taxes Tobacco Quota Buyout Program Payments The Fair and Equitable Tobacco Reform Act of 2004, title VI of the American Jobs Creation Act of 2004, terminated the tobacco marketing quota program and the tobacco price support program. 2011taxes As a result, the USDA offered to enter into contracts with eligible tobacco quota holders and growers to provide compensation for the lost value of the quotas and related price support. 2011taxes If you are an eligible tobacco quota holder, your contract entitles you to receive total payments of $7 per pound of quota in 10 equal annual payments in fiscal years 2005 through 2014. 2011taxes If you are an eligible tobacco grower, your contract entitles you to receive total payments of up to $3 per pound of quota in 10 equal annual payments in fiscal years 2005 through 2014. 2011taxes Tobacco Quota Holders Contract payments you receive are considered proceeds from a sale of your tobacco quota as of the date on which you and the USDA enter into the contract. 2011taxes Your taxable gain or loss is the total amount received for your quota reduced by any amount treated as interest (discussed below), over your adjusted basis. 2011taxes The gain or loss is capital or ordinary depending on how you used the quota. 2011taxes See Capital or ordinary gain or loss , later. 2011taxes Report the entire gain on your income tax return for the tax year that includes the date you entered into the contract if you elect not to use the installment method. 2011taxes Adjusted basis. 2011taxes   The adjusted basis of your quota is determined differently depending on how you obtained the quota. 2011taxes The basis of a quota derived from an original grant by the federal government is zero. 2011taxes The basis of a purchased quota is the purchase price. 2011taxes The basis of a quota received as a gift is generally the same as the donor's basis. 2011taxes However, under certain circumstances, the basis is increased by the amount of gift taxes paid. 2011taxes If the basis is greater than the fair market value of the quota at the time of the gift, the basis for determining loss is the fair market value. 2011taxes The basis of an inherited quota is generally the fair market value of the quota at the time of the decedent's death. 2011taxes Reduction of basis. 2011taxes   You are required to reduce the basis of your tobacco quota by the following amounts. 2011taxes Deductions you took for amortization, depletion, or depreciation. 2011taxes Amounts you previously deducted as a loss because of a reduction in the number of pounds of tobacco allowable under the quota. 2011taxes The entire cost of a purchased quota you deducted in an earlier year (which reduces your basis to zero). 2011taxes Amount treated as interest. 2011taxes   You must reduce your tobacco quota buyout program payment by the amount treated as interest. 2011taxes The interest is reportable as ordinary income. 2011taxes If payments total $3,000 or less, your total quota buyout program payment does not include any amount treated as interest and you are not required to reduce the total payment you receive. 2011taxes   In all other cases, a portion of each payment may be treated as interest for federal tax purposes. 2011taxes You may be required to reduce your total quota buyout program payment before you calculate your gain or loss. 2011taxes For more information, see Notice 2005-57, 2005-32 I. 2011taxes R. 2011taxes B. 2011taxes 267, available at www. 2011taxes irs. 2011taxes gov/irb/2005-32_IRB/ar13. 2011taxes html. 2011taxes Installment method. 2011taxes   You may use the installment method to report a gain if you receive at least one payment after the close of your tax year. 2011taxes Under the installment method, a portion of the gain is taken into account in each year in which a payment is received. 2011taxes See chapter 10 for more information. 2011taxes Capital or ordinary gain or loss. 2011taxes   Whether your gain or loss is ordinary or capital depends on how you used the quota. 2011taxes Quota used in the trade or business of farming. 2011taxes   If you used the quota in the trade or business of farming and you held it for more than one year, you report the transaction as a section 1231 transaction on Form 4797. 2011taxes See Section 1231 transactions in the Instructions for Form 4797 for detailed information on reporting section 1231 transactions. 2011taxes Quota held for investment. 2011taxes   If you held the quota for investment purposes, any gain or loss is capital gain or loss. 2011taxes The same result also applies if you held the quota for the production of income, though not connected with a trade or business. 2011taxes Gain treated as ordinary income. 2011taxes   If you previously deducted any of the following items, some or all of the capital gain must be recharacterized and reported as ordinary income. 2011taxes Any resulting capital gain is taxed as ordinary income up to the amount previously deducted. 2011taxes The cost of acquiring a quota. 2011taxes Amounts for amortization, depletion, or depreciation. 2011taxes Amounts to reflect a reduction in the quota pounds. 2011taxes   You should include the ordinary income on your return for the tax year even if you use the installment method to report the remainder of the gain. 2011taxes Self-employment income. 2011taxes   The tobacco quota buyout payments are not self-employment income. 2011taxes Income averaging for farmers. 2011taxes   The gain or loss resulting from the quota payments does not qualify for income averaging. 2011taxes A tobacco quota is considered an interest in land. 2011taxes Income averaging is not available for gain or loss arising from the sale or other disposition of land. 2011taxes Involuntary conversion. 2011taxes   The buyout of the tobacco quota is not an involuntary conversion. 2011taxes Form 1099-S. 2011taxes   A tobacco quota is considered an interest in land, so the USDA will generally report the total amount you receive under a contract on Form 1099-S, Proceeds From Real Estate Transactions, if the amount is $600 or more. 2011taxes The USDA will generally report any portion of a payment treated as interest of $600 or more to you on Form 1099-INT, Interest Income, for the year in which the payment is made. 2011taxes Like-kind exchange of quota. 2011taxes   You may postpone reporting the gain or loss from tobacco quota buyout payments by entering into a like-kind exchange if you comply with the requirements of section 1031 and the regulations thereunder. 2011taxes See Notice 2005-57 for more information. 2011taxes Tobacco Growers Contract payments you receive are determined by reference to the amount of quota under which you produced (or planted) quota tobacco during the 2002, 2003, and 2004 tobacco marketing years and are prorated based on the number of years that you produced (or planted) quota tobacco during those years. 2011taxes Taxation of payments to tobacco growers. 2011taxes   Payments to growers replace ordinary income that would have been earned had the tobacco marketing quota and price support programs continued. 2011taxes Individuals will generally report the payments as an Agricultural program payment on Schedule F. 2011taxes If you are a landowner who does not materially participate in the operation or management of the farm and are receiving the grower payment because your farm rental income is based on the tobacco grown by a tenant, the grower payment should be reported on Form 4835. 2011taxes Self-employment income. 2011taxes   Payments to growers generally represent self-employment income. 2011taxes If the grower is an individual carrying on a trade or business and deriving income (other than farm rental income properly reported on Form 4835) from that trade or business, the payments are net earnings from self-employment. 2011taxes Income averaging for farmers. 2011taxes   Payments to growers who are individuals qualify for farm income averaging. 2011taxes Form 1099-G. 2011taxes   If the amount received in a taxable year is $600 or more, the amount will generally be reported by the USDA on a Form 1099-G. 2011taxes Other Payments You must include most other government program payments in income. 2011taxes Fertilizer and Lime Include in income the value of fertilizer or lime you receive under a government program. 2011taxes How to claim the offsetting deduction is explained under Fertilizer and Lime in chapter 4. 2011taxes Improvements If government payments are based on improvements, such as a pollution control facility, you must include them in income. 2011taxes You must also capitalize the full cost of the improvement. 2011taxes Since you have included the payments in income, they do not reduce your basis. 2011taxes However, see Cost-Sharing Exclusion (Improvements) , earlier, for additional information. 2011taxes National Tobacco Growers' Settlement Trust Fund Payments If you are a producer, landowner, or tobacco quota owner who receives money from the National Tobacco Growers' Settlement Trust Fund, you must report those payments as income. 2011taxes You should receive a Form 1099-MISC, Miscellaneous Income, that shows the payment amount. 2011taxes If you produce a tobacco crop, report the payments as income from farming on your Schedule F. 2011taxes If you are a landowner or tobacco quota owner who leases tobacco-related property but you do not produce the crop, report the payments as farm rental income on Form 4835. 2011taxes Payment to More Than One Person The USDA reports program payments to the IRS. 2011taxes It reports a program payment intended for more than one person as having been paid to the person whose identification number is on record for that payment (payee of record). 2011taxes If you, as the payee of record, receive a program payment belonging to someone else, such as your landlord, the amount belonging to the other person is a nominee distribution. 2011taxes You should file Form 1099-G to report the identity of the actual recipient to the IRS. 2011taxes You should also give this information to the recipient. 2011taxes You can avoid the inconvenience of unnecessary inquiries about the identity of the recipient if you file this form. 2011taxes Report the total amount reported to you as the payee of record on Schedule F, line 4a or 6a. 2011taxes However, do not report as a taxable amount on line 4b or 6b any amount belonging to someone else. 2011taxes See chapter 16 for information about ordering Form 1099-G. 2011taxes Income From Cooperatives If you buy farm supplies through a cooperative, you may receive income from the cooperative in the form of patronage dividends (refunds). 2011taxes If you sell your farm products through a cooperative, you may receive either patronage dividends or a per-unit retain certificate, explained later, from the cooperative. 2011taxes Form 1099-PATR. 2011taxes   The cooperative will report the income to you on Form 1099-PATR or a similar form and send a copy to the IRS. 2011taxes Form 1099-PATR may also show an alternative minimum tax adjustment that you must include on Form 6251, Alternative Minimum Tax—Individuals, if you are required to file the form. 2011taxes For information on the alternative minimum tax, see the Instructions for Form 6251. 2011taxes Patronage Dividends You generally report patronage dividends as income on Schedule F, lines 3a and 3b, for the tax year you receive them. 2011taxes They include the following items. 2011taxes Money paid as a patronage dividend, including cash advances received (for example, from a marketing cooperative). 2011taxes The stated dollar value of qualified written notices of allocation. 2011taxes The fair market value of other property. 2011taxes Do not report as income on line 3b any patronage dividends you receive from expenditures that were not deductible, such as buying personal or family items, capital assets, or depreciable property. 2011taxes You must reduce the cost or other basis of these items by the amount of such patronage dividends received. 2011taxes Personal items include fuel purchased for personal use, basic local telephone service, and personal long distance calls. 2011taxes If you cannot determine what the dividend is for, report it as income on lines 3a and 3b. 2011taxes Qualified written notice of allocation. 2011taxes   If you receive a qualified written notice of allocation as part of a patronage dividend, you must generally include its stated dollar value in your income on Schedule F, lines 3a and 3b, in the year you receive it. 2011taxes A written notice of allocation is qualified if at least 20% of the patronage dividend is paid in money or by qualified check and either of the following conditions is met. 2011taxes The notice must be redeemable in cash for at least 90 days after it is issued, and you must have received a written notice of your right of redemption at the same time as the written notice of allocation. 2011taxes You must have agreed to include the stated dollar value in income in the year you receive the notice by doing one of the following. 2011taxes Signing and giving a written agreement to the cooperative. 2011taxes Getting or keeping membership in the cooperative after it adopted a bylaw providing that membership constitutes agreement. 2011taxes The cooperative must notify you in writing of this bylaw and give you a copy. 2011taxes Endorsing and cashing a qualified check paid as part of the same patronage dividend. 2011taxes You must cash the check by the 90th day after the close of the payment period for the cooperative's tax year for which the patronage dividend was paid. 2011taxes Qualified check. 2011taxes   A qualified check is any instrument that is redeemable in money and meets both of the following requirements. 2011taxes It is part of a patronage dividend that also includes a qualified written notice of allocation for which you met condition 2(c), above. 2011taxes It is imprinted with a statement that endorsing and cashing it constitutes the payee's consent to include in income the stated dollar value of any written notices of allocation paid as part of the same patronage dividend. 2011taxes Loss on redemption. 2011taxes   You can deduct on Schedule F, Part II, any loss incurred on the redemption of a qualified written notice of allocation you received in the ordinary course of your farming business. 2011taxes The loss is the difference between the stated dollar amount of the qualified written notice you included in income and the amount you received when you redeemed it. 2011taxes Nonqualified notice of allocation. 2011taxes   Do not include the stated dollar value of any nonqualified notice of allocation in income when you receive it. 2011taxes Your basis in the notice is zero. 2011taxes You must include in income for the tax year of disposition any amount you receive from its sale, redemption, or other disposition. 2011taxes Report that amount, up to the stated dollar value of the notice, on Schedule F, lines 3a and 3b. 2011taxes However, do not include that amount in your income if the notice resulted from buying or selling capital assets or depreciable property or from buying personal items, as explained in the following discussions. 2011taxes   If the amount you receive is more than the stated dollar value of the notice, report the excess as the type of income it represents. 2011taxes For example, if it represents interest income, report it on your return as interest. 2011taxes Buying or selling capital assets or depreciable property. 2011taxes   Do not include in income patronage dividends from buying capital assets or depreciable property used in your business. 2011taxes You must, however, reduce the basis of these assets by the dividends. 2011taxes This reduction is taken into account as of the first day of the tax year in which the dividends are received. 2011taxes If the dividends are more than your unrecovered basis, reduce the unrecovered basis to zero and include the difference on Schedule F, line 3a, for the tax year you receive them. 2011taxes   This rule and the exceptions explained below also apply to amounts you receive from the sale, redemption, or other disposition of a nonqualified notice of allocation that resulted from buying or selling capital assets or depreciable property. 2011taxes Example. 2011taxes On July 1, 2012, Mr. 2011taxes Brown, a patron of a cooperative association, bought a machine for his dairy farm business from the association for $2,900. 2011taxes The machine has a life of 7 years under MACRS (as provided in the Table of Class Lives and Recovery Periods in Appendix B of Publication 946, Depreciation and Amortization). 2011taxes Mr. 2011taxes Brown files his return on a calendar year basis. 2011taxes For 2012, he claimed a depreciation deduction of $311, using the 10. 2011taxes 71% depreciation rate from the 150% declining balance, half-year convention table (shown in Table A-14 in Appendix A of Publication 946). 2011taxes On July 2, 2013, the cooperative association paid Mr. 2011taxes Brown a $300 cash patronage dividend for buying the machine. 2011taxes Mr. 2011taxes Brown adjusts the basis of the machine and figures his depreciation deduction for 2013 (and later years) as follows. 2011taxes Cost of machine on July 1, 2012 $2,900 Minus: 2012 depreciation $311     2013 cash dividend 300 611 Adjusted basis for  depreciation for 2013: $2,289 Depreciation rate: 1 ÷ 6½ (remaining recovery period as of 1/1/2012) = 15. 2011taxes 38% × 1. 2011taxes 5 = 23. 2011taxes 07% Depreciation deduction for 2013 ($2,289 × 23. 2011taxes 07%) $528 Exceptions. 2011taxes   If the dividends are for buying or selling capital assets or depreciable property you did not own at any time during the year you received the dividends, you must include them on Schedule F, lines 3a and 3b, unless one of the following rules applies. 2011taxes If the dividends relate to a capital asset you held for more than 1 year for which a loss was or would have been deductible, treat them as gain from the sale or exchange of a capital asset held for more than 1 year. 2011taxes If the dividends relate to a capital asset for which a loss was not or would not have been deductible, do not report them as income (ordinary or capital gain). 2011taxes   If the dividends are for selling capital assets or depreciable property during the year you received the dividends, treat them as an additional amount received on the sale. 2011taxes Personal purchases. 2011taxes   Because you cannot deduct the cost of personal, living, or family items, such as supplies, equipment, or services not related to the production of farm income, you can omit from the taxable amount of patronage dividends on Schedule F, line 3b, any dividends from buying those items (and you must reduce the cost or other basis of those items by the amount of the dividends). 2011taxes This rule also applies to amounts you receive from the sale, redemption, or other disposition of a nonqualified written notice of allocation resulting from these purchases. 2011taxes Per-Unit Retain Certificates A per-unit retain certificate is any written notice that shows the stated dollar amount of a per-unit retain allocation made to you by the cooperative. 2011taxes A per-unit retain allocation is an amount paid to patrons for products sold for them that is fixed without regard to the net earnings of the cooperative. 2011taxes These allocations can be paid in money, other property, or qualified certificates. 2011taxes Per-unit retain certificates issued by a cooperative generally receive the same tax treatment as patronage dividends, discussed earlier. 2011taxes Qualified certificates. 2011taxes   Qualified per-unit retain certificates are those issued to patrons who have agreed to include the stated dollar amount of these certificates in income in the year of receipt. 2011taxes The agreement may be made in writing or by getting or keeping membership in a cooperative whose bylaws or charter states that membership constitutes agreement. 2011taxes If you receive qualified per-unit retain certificates, include the stated dollar amount of the certificates in income on Schedule F, lines 3a and 3b, for the tax year you receive them. 2011taxes Nonqualified certificates. 2011taxes   Do not include the stated dollar value of a nonqualified per-unit retain certificate in income when you receive it. 2011taxes Your basis in the certificate is zero. 2011taxes You must include in income any amount you receive from its sale, redemption, or other disposition. 2011taxes Report the amount you receive from the disposition as ordinary income on Schedule F, lines 3a and 3b, for the tax year of disposition. 2011taxes Cancellation of Debt This section explains the general rule for including canceled debt in income and the exceptions to the general rule. 2011taxes For more information on canceled debt, see Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments. 2011taxes General Rule Generally, if your debt is canceled or forgiven, other than as a gift or bequest to you, you must include the canceled amount in gross income for tax purposes. 2011taxes Discharge of qualified farm indebtedness (defined below) is one of the exceptions to the general rule. 2011taxes It is excluded from taxable income (see Exclusions , later). 2011taxes Report the canceled amount on Schedule F, line 8, if you incurred the debt in your farming business. 2011taxes If the debt is a nonbusiness debt, report the canceled amount as other income on Form 1040, line 21. 2011taxes Election to defer income from discharge of indebtedness. 2011taxes   You can elect to defer income from a discharge of business indebtedness that occurred after 2008 and before 2011. 2011taxes Generally, if the election is made, the deferred income is included in gross income ratably over a 5-year period beginning in 2014 (for calendar year taxpayers) and the exclusions listed below do not apply. 2011taxes See IRC section 108(i) and Publication 4681 for details. 2011taxes Form 1099-C. 2011taxes   If a federal agency, financial institution, credit union, finance company, or credit card company cancels or forgives your debt of $600 or more, you will receive a Form 1099-C, Cancellation of Debt. 2011taxes The amount of debt canceled is shown in box 2. 2011taxes Exceptions The following discussion covers some exceptions to the general rule for canceled debt. 2011taxes These exceptions apply before the exclusions discussed below. 2011taxes Price reduced after purchase. 2011taxes   If your purchase of property was financed by the seller and the seller reduces the amount of the debt at a time when you are not insolvent and the reduction does not occur in a chapter 11 bankruptcy case, the amount of the debt reduction will be treated as a reduction in the purchase price of the property. 2011taxes Reduce your basis in the property by the amount of the reduction in the debt. 2011taxes The rules that apply to bankruptcy and insolvency are explained below under Exclusions . 2011taxes Deductible debt. 2011taxes   You do not realize income from a canceled debt to the extent the payment of the debt would have been a deductible expense. 2011taxes This exception applies before the price reduction exception discussed above and the bankruptcy and insolvency exclusions discussed next. 2011taxes Example. 2011taxes You get accounting services for your farm on credit. 2011taxes Later, you have trouble paying your farm debts, but you are not bankrupt or insolvent. 2011taxes Your accountant forgives part of the amount you owe for the accounting services. 2011taxes How you treat the canceled debt depends on your method of accounting. 2011taxes Cash method — You do not include the canceled debt in income because payment of the debt would have been deductible as a business expense. 2011taxes Accrual method — You include the canceled debt in income because the expense was deductible when you incurred the debt. 2011taxes Exclusions Do not include canceled debt in income in the following situations. 2011taxes The cancellation takes place in a bankruptcy case under title 11 of the U. 2011taxes S. 2011taxes Code. 2011taxes The cancellation takes place when you are insolvent. 2011taxes The canceled debt is a qualified farm debt. 2011taxes The canceled debt is a qualified real property business debt (in the case of a taxpayer other than a C corporation). 2011taxes See Publication 334, Tax Guide for Small Business, chapter 5. 2011taxes The canceled debt is qualified principal residence indebtedness which is discharged after 2006 and before 2014. 2011taxes The exclusions do not apply in the following situations: If a canceled debt is excluded from income because it takes place in a bankruptcy case, the exclusions in situations (2), (3), (4), and (5) do not apply. 2011taxes If a canceled debt is excluded from income because it takes place when you are insolvent, the exclusions in situations (3) and (4) do not apply to the extent you are insolvent. 2011taxes If a canceled debt is excluded from income because it is qualified principal residence indebtedness, the exclusion in situation (2) does not apply unless you elect to apply situation (2) instead of the exclusion for qualified principal residence indebtedness. 2011taxes See Form 982 , later, for information on how to claim an exclusion for a canceled debt. 2011taxes Debt. 2011taxes   For this discussion, debt includes any debt for which you are liable or that attaches to property you hold. 2011taxes Bankruptcy and Insolvency You can exclude a canceled debt from income if you are bankrupt or to the extent you are insolvent. 2011taxes Bankruptcy. 2011taxes   A bankruptcy case is a case under title 11 of the U. 2011taxes S. 2011taxes Code if you are under the jurisdiction of the court and the cancellation of the debt is granted by the court or is the result of a plan approved by the court. 2011taxes   Do not include debt canceled in a bankruptcy case in your income in the year it is canceled. 2011taxes Instead, you must use the amount canceled to reduce your tax attributes, explained below under Reduction of tax attributes . 2011taxes Insolvency. 2011taxes   You are insolvent to the extent your liabilities are more than the fair market value of your assets immediately before the cancellation of debt. 2011taxes   You can exclude canceled debt from gross income up to the amount by which you are insolvent. 2011taxes If the canceled debt is more than this amount and the debt qualifies, you can apply the rules for qualified farm debt or qualified real property business debt to the difference. 2011taxes Otherwise, you include the difference in gross income. 2011taxes Use the amount excluded because of insolvency to reduce any tax attributes, as explained below under Reduction of tax attributes . 2011taxes You must reduce the tax attributes under the insolvency rules before applying the rules for qualified farm debt or for qualified real property business debt. 2011taxes Example. 2011taxes You had a $15,000 debt that was not qualified principal residence debt canceled outside of bankruptcy. 2011taxes Immediately before the cancellation, your liabilities totaled $80,000 and your assets totaled $75,000. 2011taxes Since your liabilities were more than your assets, you were insolvent to the extent of $5,000 ($80,000 − $75,000). 2011taxes You can exclude this amount from income. 2011taxes The remaining canceled debt ($10,000) may be subject to the qualified farm debt or qualified real property business debt rules. 2011taxes If not, you must include it in income. 2011taxes Reduction of tax attributes. 2011taxes   If you exclude canceled debt from income in a bankruptcy case or during insolvency, you must use the excluded debt to reduce certain tax attributes. 2011taxes Order of reduction. 2011taxes   You must use the excluded canceled debt to reduce the following tax attributes in the order listed unless you elect to reduce the basis of depreciable property first, as explained later. 2011taxes Net operating loss (NOL). 2011taxes Reduce any NOL for the tax year of the debt cancellation, and then any NOL carryover to that year. 2011taxes Reduce the NOL or NOL carryover one dollar for each dollar of excluded canceled debt. 2011taxes General business credit carryover. 2011taxes Reduce the credit carryover to or from the tax year of the debt cancellation. 2011taxes Reduce the carryover 331/3 cents for each dollar of excluded canceled debt. 2011taxes Minimum tax credit. 2011taxes Reduce the minimum tax credit available at the beginning of the tax year following the tax year of the debt cancellation. 2011taxes Reduce the credit 331/3 cents for each dollar of excluded canceled debt. 2011taxes Capital loss. 2011taxes Reduce any net capital loss for the tax year of the debt cancellation, and then any capital loss carryover to that year. 2011taxes Reduce the capital loss or loss carryover one dollar for each dollar of excluded canceled debt. 2011taxes Basis. 2011taxes Reduce the basis of the property you hold at the beginning of the tax year following the tax year of the debt cancellation in the following order. 2011taxes Real property (except inventory) used in your trade or business or held for investment that secured the canceled debt. 2011taxes Personal property (except inventory and accounts and notes receivable) used in your trade or business or held for investment that secured the canceled debt. 2011taxes Other property (except inventory and accounts and notes receivable) used in your trade or business or held for investment. 2011taxes Inventory and accounts and notes receivable. 2011taxes Other property. 2011taxes Reduce the basis one dollar for each dollar of excluded canceled debt. 2011taxes However, the reduction cannot be more than the total basis of property and the amount of money you hold immediately after the debt cancellation minus your total liabilities immediately after the cancellation. 2011taxes For allocation rules that apply to basis reductions for multiple canceled debts, see Regulations section 1. 2011taxes 1017-1(b)(2). 2011taxes Also see Electing to reduce the basis of depreciable property
Print - Click this link to Print this page

Special Identity Theft Enforcement Efforts - 2013

Identity theft perpetrators are hitting credit card companies, banks and other financial institutions. Unfortunately, the tax system isn't immune. This is not something the IRS takes lightly, and we've dramatically stepped up efforts to stop refund fraud as well as identity theft prevention and detection across the entire tax system.

Our goal is to detect these attempts at refund fraud before they occur and prevent them from happening in the first place, including detecting new schemes.

The IRS is utilizing the full capabilities and resources of our Criminal Investigation division to investigate those who steal from American taxpayers through identity theft.

Page Last Reviewed or Updated: 06-Dec-2013

The 2011taxes

2011taxes 3. 2011taxes   Investment Expenses Table of Contents Topics - This chapter discusses: Useful Items - You may want to see: Limits on DeductionsPassive activity. 2011taxes Other income (nonpassive income). 2011taxes Expenses. 2011taxes Additional information. 2011taxes Interest ExpensesInvestment Interest Limit on Deduction Bond Premium AmortizationSpecial rules to determine amounts payable on a bond. 2011taxes Basis. 2011taxes How To Figure Amortization Choosing To Amortize How To Report Amortization Expenses of Producing IncomeFees to buy or sell. 2011taxes Including mutual fund or REMIC expenses in income. 2011taxes Nondeductible ExpensesUsed as collateral. 2011taxes Short-sale expenses. 2011taxes Expenses for both tax-exempt and taxable income. 2011taxes State income taxes. 2011taxes Nondeductible amount. 2011taxes Basis adjustment. 2011taxes How To Report Investment Expenses When To Report Investment Expenses Topics - This chapter discusses: Limits on Deductions , Interest Expenses , Bond Premium Amortization , Expenses of Producing Income , Nondeductible Expenses , How To Report Investment Expenses , and When To Report Investment Expenses . 2011taxes Useful Items - You may want to see: Publication 535 Business Expenses 925 Passive Activity and At-Risk Rules 929 Tax Rules for Children and Dependents Form (and Instructions) Schedule A (Form 1040) Itemized Deductions 4952 Investment Interest Expense Deduction See chapter 5, How To Get Tax Help , for information about getting these publications and forms. 2011taxes Limits on Deductions Your deductions for investment expenses may be limited by: The at-risk rules, The passive activity loss limits, The limit on investment interest, or The 2% limit on certain miscellaneous itemized deductions. 2011taxes The at-risk rules and passive activity rules are explained briefly in this section. 2011taxes The limit on investment interest is explained later in this chapter under Interest Expenses . 2011taxes The 2% limit is explained later in this chapter under Expenses of Producing Income . 2011taxes At-risk rules. 2011taxes   Special at-risk rules apply to most income-producing activities. 2011taxes These rules limit the amount of loss you can deduct to the amount you risk losing in the activity. 2011taxes Generally, this is the cash and the adjusted basis of property you contribute to the activity. 2011taxes It also includes money you borrow for use in the activity if you are personally liable for repayment or if you use property not used in the activity as security for the loan. 2011taxes For more information, see Publication 925. 2011taxes Passive activity losses and credits. 2011taxes   The amount of losses and tax credits you can claim from passive activities is limited. 2011taxes Generally, you are allowed to deduct passive activity losses only up to the amount of your passive activity income. 2011taxes Also, you can use credits from passive activities only against tax on the income from passive activities. 2011taxes There are exceptions for certain activities, such as rental real estate activities. 2011taxes Passive activity. 2011taxes   A passive activity generally is any activity involving the conduct of any trade or business in which you do not materially participate and any rental activity. 2011taxes However, if you are involved in renting real estate, the activity is not a passive activity if both of the following are true. 2011taxes More than one-half of the personal services you perform during the year in all trades or businesses are performed in real property trades or businesses in which you materially participate. 2011taxes You perform more than 750 hours of services during the year in real property trades or businesses in which you materially participate. 2011taxes  The term “trade or business” generally means any activity that involves the conduct of a trade or business, is conducted in anticipation of starting a trade or business, or involves certain research or experimental expenditures. 2011taxes However, it does not include rental activities or certain activities treated as incidental to holding property for investment. 2011taxes   You are considered to materially participate in an activity if you are involved on a regular, continuous, and substantial basis in the operations of the activity. 2011taxes Other income (nonpassive income). 2011taxes    Generally, you can use losses from passive activities only to offset income from passive activities. 2011taxes You cannot use passive activity losses to offset your other income, such as your wages or your portfolio income. 2011taxes Portfolio income includes gross income from interest, dividends, annuities, or royalties that is not derived in the ordinary course of a trade or business. 2011taxes It also includes gains or losses (not derived in the ordinary course of a trade or business) from the sale or trade of property (other than an interest in a passive activity) producing portfolio income or held for investment. 2011taxes This includes capital gain distributions from mutual funds (and other regulated investment companies) and real estate investment trusts. 2011taxes   You cannot use passive activity losses to offset Alaska Permanent Fund dividends. 2011taxes Expenses. 2011taxes   Do not include in the computation of your passive activity income or loss: Expenses (other than interest) that are clearly and directly allocable to your portfolio income, or Interest expense properly allocable to portfolio income. 2011taxes However, this interest and other expenses may be subject to other limits. 2011taxes These limits are explained in the rest of this chapter. 2011taxes Additional information. 2011taxes   For more information about determining and reporting income and losses from passive activities, see Publication 925. 2011taxes Interest Expenses This section discusses interest expenses you may be able to deduct as an investor. 2011taxes For information on business interest, see chapter 4 of Publication 535. 2011taxes You cannot deduct personal interest expenses other than qualified home mortgage interest, as explained in Publication 936, Home Mortgage Interest Deduction, and interest on certain student loans, as explained in Publication 970. 2011taxes Investment Interest If you borrow money to buy property you hold for investment, the interest you pay is investment interest. 2011taxes You can deduct investment interest subject to the limit discussed later. 2011taxes However, you cannot deduct interest you incurred to produce tax-exempt income. 2011taxes See Tax-exempt income under Nondeductible Expenses, later. 2011taxes You also cannot deduct interest expenses on straddles discussed under Interest expense and carrying charges on straddles , later. 2011taxes Investment interest does not include any qualified home mortgage interest or any interest taken into account in computing income or loss from a passive activity. 2011taxes Investment property. 2011taxes   Property held for investment includes property that produces interest, dividends, annuities, or royalties not derived in the ordinary course of a trade or business. 2011taxes It also includes property that produces gain or loss (not derived in the ordinary course of a trade or business) from the sale or trade of property producing these types of income or held for investment (other than an interest in a passive activity). 2011taxes Investment property also includes an interest in a trade or business activity in which you did not materially participate (other than a passive activity). 2011taxes Partners, shareholders, and beneficiaries. 2011taxes   To determine your investment interest, combine your share of investment interest from a partnership, S corporation, estate, or trust with your other investment interest. 2011taxes Allocation of Interest Expense If you borrow money for business or personal purposes as well as for investment, you must allocate the debt among those purposes. 2011taxes Only the interest expense on the part of the debt used for investment purposes is treated as investment interest. 2011taxes The allocation is not affected by the use of property that secures the debt. 2011taxes Example 1. 2011taxes You borrow $10,000 and use $8,000 to buy stock. 2011taxes You use the other $2,000 to buy items for your home. 2011taxes Since 80% of the debt is used for, and allocated to, investment purposes, 80% of the interest on that debt is investment interest. 2011taxes The other 20% is nondeductible personal interest. 2011taxes Debt proceeds received in cash. 2011taxes   If you receive debt proceeds in cash, the proceeds are generally not treated as investment property. 2011taxes Debt proceeds deposited in account. 2011taxes   If you deposit debt proceeds in an account, that deposit is treated as investment property, regardless of whether the account bears interest. 2011taxes But, if you withdraw the funds and use them for another purpose, you must reallocate the debt to determine the amount considered to be for investment purposes. 2011taxes Example 2. 2011taxes Assume in Example 1 that you borrowed the money on March 1 and immediately bought the stock for $8,000. 2011taxes You did not buy the household items until June 1. 2011taxes You had deposited the $2,000 in the bank. 2011taxes You had no other transactions on the bank account until June. 2011taxes You did not sell the stock, and you made no principal payments on the debt. 2011taxes You paid interest from another account. 2011taxes The $8,000 is treated as being used for an investment purpose. 2011taxes The $2,000 is treated as being used for an investment purpose for the 3-month period. 2011taxes Your total interest expense for 3 months on this debt is investment interest. 2011taxes In June, when you spend the $2,000 for household items, you must begin to allocate 80% of the debt and the interest expense to investment purposes and 20% to personal purposes. 2011taxes Amounts paid within 30 days. 2011taxes   If you receive loan proceeds in cash or if the loan proceeds are deposited in an account, you can treat any payment (up to the amount of the proceeds) made from any account you own, or from cash, as made from those proceeds. 2011taxes This applies to any payment made within 30 days before or after the proceeds are received in cash or deposited in your account. 2011taxes   If you received the loan proceeds in cash, you can treat the payment as made on the date you received the cash instead of the date you actually made the payment. 2011taxes Payments on debt may require new allocation. 2011taxes   As you repay a debt used for more than one purpose, you must reallocate the balance. 2011taxes You must first reduce the amount allocated to personal purposes by the repayment. 2011taxes You then reallocate the rest of the debt to find what part is for investment purposes. 2011taxes Example 3. 2011taxes If, in Example 2 , you repay $500 on November 1, the entire repayment is applied against the amount allocated to personal purposes. 2011taxes The debt balance is now allocated as $8,000 for investment purposes and $1,500 for personal purposes. 2011taxes Until the next reallocation is necessary, 84% ($8,000 ÷ $9,500) of the debt and the interest expense is allocated to investment. 2011taxes Pass-through entities. 2011taxes   If you use borrowed funds to buy an interest in a partnership or S corporation, then the interest on those funds must be allocated based on the assets of the entity. 2011taxes If you contribute to the capital of the entity, you can make the allocation using any reasonable method. 2011taxes Additional allocation rules. 2011taxes   For more information about allocating interest expense, see chapter 4 of Publication 535. 2011taxes When To Deduct Investment Interest If you use the cash method of accounting, you must pay the interest before you can deduct it. 2011taxes If you use an accrual method of accounting, you can deduct interest over the period it accrues, regardless of when you pay it. 2011taxes For an exception, see Unpaid expenses owed to related party under When To Report Investment Expenses, later in this chapter. 2011taxes Example. 2011taxes You borrowed $1,000 on August 26, 2013, payable in 90 days at 12% interest. 2011taxes On November 26, 2013, you paid this with a new note for $1,030, due on February 26, 2014. 2011taxes If you use the cash method of accounting, you cannot deduct any part of the $30 interest on your return for 2013 because you did not actually pay it. 2011taxes If you use an accrual method, you may be able to deduct a portion of the interest on the loans through December 31, 2013, on your return for 2013. 2011taxes Interest paid in advance. 2011taxes   Generally, if you pay interest in advance for a period that goes beyond the end of the tax year, you must spread the interest over the tax years to which it belongs under the OID rules discussed in chapter 1. 2011taxes You can deduct in each year only the interest for that year. 2011taxes Interest on margin accounts. 2011taxes   If you are a cash method taxpayer, you can deduct interest on margin accounts to buy taxable securities as investment interest in the year you paid it. 2011taxes You are considered to have paid interest on these accounts only when you actually pay the broker or when payment becomes available to the broker through your account. 2011taxes Payment may become available to the broker through your account when the broker collects dividends or interest for your account, or sells securities held for you or received from you. 2011taxes   You cannot deduct any interest on money borrowed for personal reasons. 2011taxes Limit on interest deduction for market discount bonds. 2011taxes   The amount you can deduct for interest expense you paid or accrued during the year to buy or carry a market discount bond may be limited. 2011taxes This limit does not apply if you accrue the market discount and include it in your income currently. 2011taxes   Under this limit, the interest is deductible only to the extent it is more than: The total interest and OID includible in gross income for the bond for the year, plus The market discount for the number of days you held the bond during the year. 2011taxes Figure the amount in (2) above using the rules for figuring accrued market discount in chapter 1 under Market Discount Bonds . 2011taxes Interest not deducted due to limit. 2011taxes   In the year you dispose of the bond, you can deduct any interest expense you were not allowed to deduct in earlier years because of the limit. 2011taxes Choosing to deduct disallowed interest expense before the year of disposition. 2011taxes   You can choose to deduct disallowed interest expense in any year before the year you dispose of the bond, up to your net interest income from the bond during the year. 2011taxes The rest of the disallowed interest expense remains deductible in the year you dispose of the bond. 2011taxes Net interest income. 2011taxes   This is the interest income (including OID) from the bond that you include in income for the year, minus the interest expense paid or accrued during the year to purchase or carry the bond. 2011taxes Limit on interest deduction for short-term obligations. 2011taxes   If the current income inclusion rules discussed in chapter 1 under Discount on Short-Term Obligations do not apply to you, the amount you can deduct for interest expense you paid or accrued during the year to buy or carry a short-term obligation is limited. 2011taxes   The interest is deductible only to the extent it is more than: The amount of acquisition discount or OID on the obligation for the tax year, plus The amount of any interest payable on the obligation for the year that is not included in income because of your accounting method (other than interest taken into account in determining the amount of acquisition discount or OID). 2011taxes The method of determining acquisition discount and OID for short-term obligations is discussed in chapter 1 under Discount on Short-Term Obligations . 2011taxes Interest not deducted due to limit. 2011taxes   In the year you dispose of the obligation, or, if you choose, in another year in which you have net interest income from the obligation, you can deduct any interest expense you were not allowed to deduct for an earlier year because of the limit. 2011taxes Follow the same rules provided in the earlier discussion under Limit on interest deduction for market discount bonds , earlier. 2011taxes Limit on Deduction Generally, your deduction for investment interest expense is limited to your net investment income. 2011taxes You can carry over the amount of investment interest you could not deduct because of this limit to the next tax year. 2011taxes The interest carried over is treated as investment interest paid or accrued in that next year. 2011taxes You can carry over disallowed investment interest to the next tax year even if it is more than your taxable income in the year the interest was paid or accrued. 2011taxes Net Investment Income Determine the amount of your net investment income by subtracting your investment expenses (other than interest expense) from your investment income. 2011taxes Investment income. 2011taxes   This generally includes your gross income from property held for investment (such as interest, dividends, annuities, and royalties). 2011taxes Investment income does not include Alaska Permanent Fund dividends. 2011taxes It also does not include qualified dividends or net capital gain unless you choose to include them. 2011taxes Choosing to include qualified dividends. 2011taxes   Investment income generally does not include qualified dividends, discussed in chapter 1. 2011taxes However, you can choose to include all or part of your qualified dividends in investment income. 2011taxes   You make this choice by completing Form 4952, line 4g, according to its instructions. 2011taxes   If you choose to include any of your qualified dividends in investment income, you must reduce your qualified dividends that are eligible for the lower capital gains tax rates by the same amount. 2011taxes Choosing to include net capital gain. 2011taxes    Investment income generally does not include net capital gain from disposing of investment property (including capital gain distributions from mutual funds). 2011taxes However, you can choose to include all or part of your net capital gain in investment income. 2011taxes   You make this choice by completing Form 4952, line 4g, according to its instructions. 2011taxes   If you choose to include any of your net capital gain in investment income, you must reduce your net capital gain that is eligible for the lower capital gains tax rates by the same amount. 2011taxes   For more information about the capital gains rates, see Capital Gain Tax Rates in chapter 4. 2011taxes    Before making either choice, consider the overall effect on your tax liability. 2011taxes Compare your tax if you make one or both of these choices with your tax if you do not. 2011taxes Investment income of child reported on parent's return. 2011taxes   Investment income includes the part of your child's interest and dividend income you choose to report on your return. 2011taxes If the child does not have qualified dividends, Alaska Permanent Fund dividends, or capital gain distributions, this is the amount on line 6 of Form 8814. 2011taxes Include it on line 4a of Form 4952. 2011taxes Example. 2011taxes Your 8-year-old son has interest income of $2,200, which you choose to report on your own return. 2011taxes You enter $2,200 on Form 8814, lines 1a and 4, and $200 on lines 6 and 12 and complete Part II. 2011taxes Also enter $200 on Form 1040, line 21. 2011taxes Your investment income includes this $200. 2011taxes Child's qualified dividends. 2011taxes   If part of the amount you report is your child's qualified dividends, that part (which is reported on Form 1040, line 9b) generally does not count as investment income. 2011taxes However, you can choose to include all or part of it in investment income, as explained under Choosing to include qualified dividends , earlier. 2011taxes   Your investment income also includes the amount on Form 8814, line 12 (or, if applicable, the reduced amount figured next under Child's Alaska Permanent Fund dividends). 2011taxes Child's Alaska Permanent Fund dividends. 2011taxes   If part of the amount you report is your child's Alaska Permanent Fund dividends, that part does not count as investment income. 2011taxes To figure the amount of your child's income that you can consider your investment income, start with the amount on Form 8814, line 6. 2011taxes Multiply that amount by a percentage that is equal to the Alaska Permanent Fund dividends divided by the total amount on Form 8814, line 4. 2011taxes Subtract the result from the amount on Form 8814, line 12. 2011taxes Example. 2011taxes Your 10-year-old child has taxable interest income of $4,000 and Alaska Permanent Fund dividends of $2,000. 2011taxes You choose to report this on your return. 2011taxes You enter $4,000 on Form 8814, line 1a, $2,000 on line 2a, and $6,000 on line 4. 2011taxes You then enter $4,000 on Form 8814, lines 6 and 12, and Form 1040, line 21. 2011taxes You figure the amount of your child's income that you can consider your investment income as follows: $4,000 − ($4,000 × ($2,000 ÷ $6,000)) = $2,667 You include the result, $2,667, on Form 4952, line 4a. 2011taxes Child's capital gain distributions. 2011taxes   If part of the amount you report is your child's capital gain distributions, that part (which is reported on Schedule D (Form 1040), line 13, or Form 1040, line 13) generally does not count as investment income. 2011taxes However, you can choose to include all or part of it in investment income, as explained in Choosing to include net capital gain , earlier. 2011taxes   Your investment income also includes the amount on Form 8814, line 12 (or, if applicable, the reduced amount figured under Child's Alaska Permanent Fund dividends , earlier). 2011taxes Investment expenses. 2011taxes   Investment expenses are your allowed deductions (other than interest expense) directly connected with the production of investment income. 2011taxes Investment expenses that are included as a miscellaneous itemized deduction on Schedule A (Form 1040) are allowable deductions after applying the 2% limit that applies to miscellaneous itemized deductions. 2011taxes Use the smaller of: The investment expenses included on Schedule A (Form 1040), line 23, or The amount on Schedule A (Form 1040), line 27. 2011taxes See Expenses of Producing Income , later, for a discussion of the 2% limit. 2011taxes Losses from passive activities. 2011taxes   Income or expenses that you used in computing income or loss from a passive activity are not included in determining your investment income or investment expenses (including investment interest expense). 2011taxes See Publication 925 for information about passive activities. 2011taxes Example. 2011taxes Ted is a partner in a partnership that operates a business. 2011taxes However, he does not materially participate in the partnership's business. 2011taxes Ted's interest in the partnership is considered a passive activity. 2011taxes Ted's investment income from interest and dividends (other than qualified dividends) is $10,000. 2011taxes His investment expenses (other than interest) are $3,200 after taking into account the 2% limit on miscellaneous itemized deductions. 2011taxes His investment interest expense is $8,000. 2011taxes Ted also has income from the partnership of $2,000. 2011taxes Ted figures his net investment income and the limit on his investment interest expense deduction in the following way: Total investment income $10,000 Minus: Investment expenses (other than interest) 3,200 Net investment income $6,800 Deductible investment interest expense for the year $6,800 The $2,000 of income from the passive activity is not used in determining Ted's net investment income. 2011taxes His investment interest deduction for the year is limited to $6,800, the amount of his net investment income. 2011taxes Form 4952 Use Form 4952 to figure your deduction for investment interest. 2011taxes See Form 4952 for more information. 2011taxes Exception to use of Form 4952. 2011taxes   You do not have to complete Form 4952 or attach it to your return if you meet all of the following tests. 2011taxes Your investment interest expense is not more than your investment income from interest and ordinary dividends minus any qualified dividends. 2011taxes You do not have any other deductible investment expenses. 2011taxes You have no carryover of investment interest expense from 2012. 2011taxes   If you meet all of these tests, you can deduct all of your investment interest. 2011taxes    Bond Premium Amortization If you pay a premium to buy a bond, the premium is part of your basis in the bond. 2011taxes If the bond yields taxable interest, you can choose to amortize the premium. 2011taxes This generally means that each year, over the life of the bond, you use a part of the premium to reduce the amount of interest includible in your income. 2011taxes If you make this choice, you must reduce your basis in the bond by the amortization for the year. 2011taxes If the bond yields tax-exempt interest, you must amortize the premium. 2011taxes This amortized amount is not deductible in determining taxable income. 2011taxes However, each year you must reduce your basis in the bond (and tax-exempt interest otherwise reportable on Form 1040, line 8b) by the amortization for the year. 2011taxes Bond premium. 2011taxes   Bond premium is the amount by which your basis in the bond right after you get it is more than the total of all amounts payable on the bond after you get it (other than payments of qualified stated interest). 2011taxes For example, a bond with a maturity value of $1,000 generally would have a $50 premium if you buy it for $1,050. 2011taxes Special rules to determine amounts payable on a bond. 2011taxes   For special rules that apply to determine the amounts payable on a variable rate bond, an inflation-indexed debt instrument, a bond that provides for certain alternative payment schedules (for example, a bond callable prior to the stated maturity date of the bond), or a bond that provides for remote or incidental contingencies, see Regulations section 1. 2011taxes 171-3. 2011taxes Basis. 2011taxes   In general, your basis for figuring bond premium amortization is the same as your basis for figuring any loss on the sale of the bond. 2011taxes However, you may need to use a different basis for: Convertible bonds, Bonds you got in a trade, and Bonds whose basis has to be determined using the basis of the person who transferred the bond to you. 2011taxes See Regulations section 1. 2011taxes 171-1(e). 2011taxes Dealers. 2011taxes   A dealer in taxable bonds (or anyone who holds them mainly for sale to customers in the ordinary course of a trade or business or who would properly include bonds in inventory at the close of the tax year) cannot claim a deduction for amortizable bond premium. 2011taxes   See section 75 of the Internal Revenue Code for the treatment of bond premium by a dealer in tax-exempt bonds. 2011taxes How To Figure Amortization For bonds issued after September 27, 1985, you must amortize bond premium using a constant yield method on the basis of the bond's yield to maturity, determined by using the bond's basis and compounding at the close of each accrual period. 2011taxes Constant yield method. 2011taxes   Figure the bond premium amortization for each accrual period as follows. 2011taxes Step 1: Determine your yield. 2011taxes   Your yield is the discount rate that, when used in figuring the present value of all remaining payments to be made on the bond (including payments of qualified stated interest), produces an amount equal to your basis in the bond. 2011taxes Figure the yield as of the date you got the bond. 2011taxes It must be constant over the term of the bond and must be figured to at least two decimal places when expressed as a percentage. 2011taxes   If you do not know the yield, consult your broker or tax advisor. 2011taxes Databases available to them are likely to show the yield at the date of purchase. 2011taxes Step 2: Determine the accrual periods. 2011taxes   You can choose the accrual periods to use. 2011taxes They may be of any length and may vary in length over the term of the bond, but each accrual period can be no longer than 1 year and each scheduled payment of principal or interest must occur either on the first or the final day of an accrual period. 2011taxes The computation is simplest if accrual periods are the same as the intervals between interest payment dates. 2011taxes Step 3: Determine the bond premium for the accrual period. 2011taxes   To do this, multiply your adjusted acquisition price at the beginning of the accrual period by your yield. 2011taxes Then subtract the result from the qualified stated interest for the period. 2011taxes   Your adjusted acquisition price at the beginning of the first accrual period is the same as your basis. 2011taxes After that, it is your basis decreased by the amount of bond premium amortized for earlier periods and the amount of any payment previously made on the bond other than a payment of qualified stated interest. 2011taxes Example. 2011taxes On February 1, 2012, you bought a taxable bond for $110,000. 2011taxes The bond has a stated principal amount of $100,000, payable at maturity on February 1, 2019, making your premium $10,000 ($110,000 − $100,000). 2011taxes The bond pays qualified stated interest of $10,000 on February 1 of each year. 2011taxes Your yield is 8. 2011taxes 07439% compounded annually. 2011taxes You choose to use annual accrual periods ending on February 1 of each year. 2011taxes To find your bond premium amortization for the accrual period ending on February 1, 2013, you multiply the adjusted acquisition price at the beginning of the period ($110,000) by your yield. 2011taxes When you subtract the result ($8,881. 2011taxes 83) from the qualified stated interest for the period ($10,000), you find that your bond premium amortization for the period is $1,118. 2011taxes 17. 2011taxes Special rules to figure amortization. 2011taxes   For special rules to figure the bond premium amortization on a variable rate bond, an inflation-indexed debt instrument, a bond that provides for certain alternative payment schedules (for example, a bond callable prior to the stated maturity date of the bond), or a bond that provides for remote or incidental contingencies, see Regulations section 1. 2011taxes 171-3. 2011taxes Bonds Issued Before September 28, 1985 For these bonds, you can amortize bond premium using any reasonable method. 2011taxes Reasonable methods include: The straight-line method, and The Revenue Ruling 82-10 method. 2011taxes Straight-line method. 2011taxes   Under this method, the amount of your bond premium amortization is the same each month. 2011taxes Divide the number of months you held the bond during the year by the number of months from the beginning of the tax year (or, if later, the date of acquisition) to the date of maturity or earlier call date. 2011taxes Then multiply the result by the bond premium (reduced by any bond premium amortization claimed in earlier years). 2011taxes This gives you your bond premium amortization for the year. 2011taxes Revenue Ruling 82-10 method. 2011taxes   Under this method, the amount of your bond premium amortization increases each month over the life of the bond. 2011taxes This method is explained in Revenue Ruling 82-10, 1982-1 C. 2011taxes B. 2011taxes 46. 2011taxes Choosing To Amortize You choose to amortize the premium on taxable bonds by reporting the amortization for the year on your income tax return for the first tax year you want the choice to apply. 2011taxes You should attach a statement to your return that you are making this choice under section 171. 2011taxes See How To Report Amortization, next. 2011taxes This choice is binding for the year you make it and for later tax years. 2011taxes It applies to all taxable bonds you own in the year you make the choice and also to those you acquire in later years. 2011taxes You can change your decision to amortize bond premium only with the written approval of the IRS. 2011taxes To request approval, use Form 3115. 2011taxes For more information on requesting approval, see section 5 of the Appendix to Revenue Procedure 2011-14 in Internal Revenue Bulletin 2011-4. 2011taxes You can find Revenue Procedure 2011-14 at www. 2011taxes irs. 2011taxes gov/irb/2011-04_IRB/ar08. 2011taxes html. 2011taxes How To Report Amortization Subtract the bond premium amortization from your interest income from these bonds. 2011taxes Report the bond's interest on Schedule B (Form 1040A or 1040), line 1. 2011taxes Under your last entry on line 1, put a subtotal of all interest listed on line 1. 2011taxes Below this subtotal, print “ABP Adjustment,” and the total interest you received. 2011taxes Subtract this amount from the subtotal, and enter the result on line 2. 2011taxes Bond premium amortization more than interest. 2011taxes   If the amount of your bond premium amortization for an accrual period is more than the qualified stated interest for the period, you can deduct the difference as a miscellaneous itemized deduction on Schedule A (Form 1040), line 28. 2011taxes    But your deduction is limited to the amount by which your total interest inclusions on the bond in prior accrual periods is more than your total bond premium deductions on the bond in prior periods. 2011taxes Any amount you cannot deduct because of this limit can be carried forward to the next accrual period. 2011taxes Pre-1998 election to amortize bond premium. 2011taxes   Generally, if you first elected to amortize bond premium before 1998, the above treatment of the premium does not apply to bonds you acquired before 1988. 2011taxes Bonds acquired before October 23, 1986. 2011taxes   The amortization of the premium on these bonds is a miscellaneous itemized deduction not subject to the 2%-of-adjusted-gross-income limit. 2011taxes Bonds acquired after October 22, 1986, but before 1988. 2011taxes    The amortization of the premium on these bonds is investment interest expense subject to the investment interest limit, unless you choose to treat it as an offset to interest income on the bond. 2011taxes Expenses of Producing Income You deduct investment expenses (other than interest expenses) as miscellaneous itemized deductions on Schedule A (Form 1040). 2011taxes To be deductible, these expenses must be ordinary and necessary expenses paid or incurred: To produce or collect income, or To manage property held for producing income. 2011taxes The expenses must be directly related to the income or income-producing property, and the income must be taxable to you. 2011taxes The deduction for most income-producing expenses is subject to a 2% limit that also applies to certain other miscellaneous itemized deductions. 2011taxes The amount deductible is limited to the total of these miscellaneous deductions that is more than 2% of your adjusted gross income. 2011taxes For information on how to report expenses of producing income, see How To Report Investment Expenses , later. 2011taxes Attorney or accounting fees. 2011taxes   You can deduct attorney or accounting fees that are necessary to produce or collect taxable income. 2011taxes However, in some cases, attorney or accounting fees are part of the basis of property. 2011taxes See Basis of Investment Property in chapter 4. 2011taxes Automatic investment service and dividend reinvestment plans. 2011taxes   A bank may offer its checking account customers an automatic investment service so that, for a charge, each customer can choose to invest a part of the checking account each month in common stock. 2011taxes Or a bank that is a dividend disbursing agent for a number of publicly-owned corporations may set up an automatic dividend reinvestment service. 2011taxes Through that service, cash dividends are reinvested in more shares of stock after the bank deducts a service charge. 2011taxes   A corporation in which you own stock also may have a dividend reinvestment plan. 2011taxes This plan lets you choose to use your dividends to buy more shares of stock in the corporation instead of receiving the dividends in cash. 2011taxes   You can deduct the monthly service charge you pay to a bank to participate in an automatic investment service. 2011taxes If you participate in a dividend reinvestment plan, you can deduct any service charge subtracted from your cash dividends before the dividends are used to buy more shares of stock. 2011taxes Deduct the charges in the year you pay them. 2011taxes Clerical help and office rent. 2011taxes   You can deduct office expenses, such as rent and clerical help, you incurred in connection with your investments and collecting the taxable income on your investments. 2011taxes Cost of replacing missing securities. 2011taxes   To replace your taxable securities that are mislaid, lost, stolen, or destroyed, you may have to post an indemnity bond. 2011taxes You can deduct the premium you pay to buy the indemnity bond and the related incidental expenses. 2011taxes   You may, however, get a refund of part of the bond premium if the missing securities are recovered within a specified time. 2011taxes Under certain types of insurance policies, you can recover some of the expenses. 2011taxes   If you receive the refund in the tax year you pay the amounts, you can deduct only the difference between the expenses paid and the amount refunded. 2011taxes If the refund is made in a later tax year, you must include the refund in income in the year you received it, but only to the extent that the expenses decreased your tax in the year you deducted them. 2011taxes Fees to collect income. 2011taxes   You can deduct fees you pay to a broker, bank, trustee, or similar agent to collect investment income, such as your taxable bond or mortgage interest, or your dividends on shares of stock. 2011taxes Fees to buy or sell. 2011taxes   You cannot deduct a fee you pay to a broker to acquire investment property, such as stocks or bonds. 2011taxes You must add the fee to the cost of the property. 2011taxes See Basis of Investment Property in chapter 4. 2011taxes    You cannot deduct any broker's fees, commissions, or option premiums you pay (or that were netted out) in connection with the sale of investment property. 2011taxes They can be used only to figure gain or loss from the sale. 2011taxes See Reporting Capital Gains and Losses , in chapter 4, for more information about the treatment of these sale expenses. 2011taxes Investment counsel and advice. 2011taxes   You can deduct fees you pay for counsel and advice about investments that produce taxable income. 2011taxes This includes amounts you pay for investment advisory services. 2011taxes Safe deposit box rent. 2011taxes   You can deduct rent you pay for a safe deposit box if you use the box to store taxable income-producing stocks, bonds, or other investment-related papers and documents. 2011taxes If you also use the box to store tax-exempt securities or personal items, you can deduct only part of the rent. 2011taxes See Tax-exempt income under Nondeductible Expenses, later, to figure what part you can deduct. 2011taxes State and local transfer taxes. 2011taxes   You cannot deduct the state and local transfer taxes you pay when you buy or sell securities. 2011taxes If you pay these transfer taxes when you buy securities, you must treat them as part of the cost of the property. 2011taxes If you pay these transfer taxes when you sell securities, you must treat them as a reduction in the amount realized. 2011taxes Trustee's commissions for revocable trust. 2011taxes   If you set up a revocable trust and have its income distributed to you, you can deduct the commission you pay the trustee for managing the trust to the extent it is to produce or collect taxable income or to manage property. 2011taxes However, you cannot deduct any part of the commission used for producing or collecting tax-exempt income or for managing property that produces tax-exempt income. 2011taxes   If you are a cash-basis taxpayer and pay the commissions for several years in advance, you must deduct a part of the commission each year. 2011taxes You cannot deduct the entire amount in the year you pay it. 2011taxes Investment expenses from pass-through entities. 2011taxes   If you hold an interest in a partnership, S corporation, real estate mortgage investment conduit (REMIC), or a nonpublicly offered mutual fund, you can deduct your share of that entity's investment expenses. 2011taxes A partnership or S corporation will show your share of these expenses on your Schedule K-1 (Form 1065) or Schedule K-1 (Form 1120S). 2011taxes A nonpublicly offered mutual fund will indicate your share of these expenses in box 5 of Form 1099-DIV (or substitute statement). 2011taxes Publicly-offered mutual funds are discussed later. 2011taxes   If you hold an interest in a REMIC, any expenses relating to your residual interest investment will be shown on Schedule Q (Form 1066), line 3b. 2011taxes Any expenses relating to your regular interest investment will appear in box 5 of Form 1099-INT (or substitute statement) or box 9 of Form 1099-OID (or substitute statement). 2011taxes   Report your share of these investment expenses on Schedule A (Form 1040), subject to the 2% limit, in the same manner as your other investment expenses. 2011taxes Including mutual fund or REMIC expenses in income. 2011taxes   Your share of the investment expenses of a REMIC or a nonpublicly offered mutual fund, as described above, are considered to be indirect deductions through that pass-through entity. 2011taxes You must include in your gross income an amount equal to the expenses allocated to you, whether or not you are able to claim a deduction for those expenses. 2011taxes If you are a shareholder in a nonpublicly offered mutual fund, you must include on your return the full amount of ordinary dividends or other distributions of stock, as shown in box 1a of Form 1099-DIV (or substitute statement). 2011taxes If you are a residual interest holder in a REMIC, you must report as ordinary income on Schedule E (Form 1040) the total amounts shown on Schedule Q (Form 1066), lines 1b and 3b. 2011taxes If you are a REMIC regular interest holder, you must include the amount of any expense allocation you received on Form 1040, line 8a. 2011taxes Publicly-offered mutual funds. 2011taxes   Most mutual funds are publicly offered. 2011taxes These mutual funds, generally, are traded on an established securities exchange. 2011taxes These funds do not pass investment expenses through to you. 2011taxes Instead, the dividend income they report to you in box 1a of Form 1099-DIV (or substitute statement) is already reduced by your share of investment expenses. 2011taxes As a result, you cannot deduct the expenses on your return. 2011taxes   Include the amount from box 1a of Form 1099-DIV (or substitute statement) in your income. 2011taxes    A publicly offered mutual fund is one that: Is continuously offered pursuant to a public offering, Is regularly traded on an established securities market, and Is held by or for no fewer than 500 persons at any time during the year. 2011taxes Contact your mutual fund if you are not sure whether it is publicly offered. 2011taxes Nondeductible Expenses Some expenses that you incur as an investor are not deductible. 2011taxes Stockholders' meetings. 2011taxes   You cannot deduct transportation and other expenses you pay to attend stockholders' meetings of companies in which you have no interest other than owning stock. 2011taxes This is true even if your purpose in attending is to get information that would be useful in making further investments. 2011taxes Investment-related seminar. 2011taxes   You cannot deduct expenses for attending a convention, seminar, or similar meeting for investment purposes. 2011taxes Single-premium life insurance, endowment, and annuity contracts. 2011taxes   You cannot deduct interest on money you borrow to buy or carry a single-premium life insurance, endowment, or annuity contract. 2011taxes Used as collateral. 2011taxes   If you use a single premium annuity contract as collateral to obtain or continue a mortgage loan, you cannot deduct any interest on the loan that is collateralized by the annuity contract. 2011taxes Figure the amount of interest expense disallowed by multiplying the current interest rate on the mortgage loan by the lesser of the amount of the annuity contract used as collateral or the amount of the loan. 2011taxes Borrowing on insurance. 2011taxes   Generally, you cannot deduct interest on money you borrow to buy or carry a life insurance, endowment, or annuity contract if you plan to systematically borrow part or all of the increases in the cash value of the contract. 2011taxes This rule applies to the interest on the total amount borrowed to buy or carry the contract, not just the interest on the borrowed increases in the cash value. 2011taxes Tax-exempt income. 2011taxes   You cannot deduct expenses you incur to produce tax-exempt income. 2011taxes Nor can you deduct interest on money you borrow to buy tax-exempt securities or shares in a mutual fund or other regulated investment company that distributes only exempt-interest dividends. 2011taxes Short-sale expenses. 2011taxes   The rule disallowing a deduction for interest expenses on tax-exempt securities applies to amounts you pay in connection with personal property used in a short sale or amounts paid by others for the use of any collateral in connection with the short sale. 2011taxes However, it does not apply to the expenses you incur if you deposit cash as collateral for the property used in the short sale and the cash does not earn a material return during the period of the sale. 2011taxes Short sales are discussed in Short Sales in chapter 4. 2011taxes Expenses for both tax-exempt and taxable income. 2011taxes   You may have expenses that are for both tax-exempt and taxable income. 2011taxes If you cannot specifically identify what part of the expenses is for each type of income, you can divide the expenses, using reasonable proportions based on facts and circumstances. 2011taxes You must attach a statement to your return showing how you divided the expenses and stating that each deduction claimed is not based on tax-exempt income. 2011taxes   One accepted method for dividing expenses is to do it in the same proportion that each type of income is to the total income. 2011taxes If the expenses relate in part to capital gains and losses, include the gains, but not the losses, in figuring this proportion. 2011taxes To find the part of the expenses that is for the tax-exempt income, divide your tax-exempt income by the total income and multiply your expenses by the result. 2011taxes Example. 2011taxes You received $6,000 interest; $4,800 was tax-exempt and $1,200 was taxable. 2011taxes In earning this income, you had $500 of expenses. 2011taxes You cannot specifically identify the amount of each expense item that is for each income item, so you must divide your expenses. 2011taxes 80% ($4,800 tax-exempt interest divided by $6,000 total interest) of your expenses is for the tax-exempt income. 2011taxes You cannot deduct $400 (80% of $500) of the expenses. 2011taxes You can deduct $100 (the rest of the expenses) because they are for the taxable interest. 2011taxes State income taxes. 2011taxes   If you itemize your deductions, you can deduct, as taxes, state income taxes on interest income that is exempt from federal income tax. 2011taxes But you cannot deduct, as either taxes or investment expenses, state income taxes on other exempt income. 2011taxes Interest expense and carrying charges on straddles. 2011taxes   You cannot deduct interest and carrying charges allocable to personal property that is part of a straddle. 2011taxes The nondeductible interest and carrying charges are added to the basis of the straddle property. 2011taxes However, this treatment does not apply if: All the offsetting positions making up the straddle either consist of one or more qualified covered call options and the optioned stock, or consist of section 1256 contracts (and the straddle is not part of a larger straddle); or The straddle is a hedging transaction. 2011taxes  For information about straddles, including definitions of the terms used in this discussion, see Straddles in chapter 4. 2011taxes   Interest includes any amount you pay or incur in connection with personal property used in a short sale. 2011taxes However, you must first apply the rules discussed in Payments in lieu of dividends under Short Sales in chapter 4. 2011taxes   To determine the interest on market discount bonds and short-term obligations that are part of a straddle, you must first apply the rules discussed under Limit on interest deduction for market discount bonds and Limit on interest deduction for short-term obligations (both under Interest Expenses, earlier). 2011taxes Nondeductible amount. 2011taxes   Figure the nondeductible interest and carrying charges on straddle property as follows. 2011taxes Add: Interest on indebtedness incurred or continued to buy or carry the personal property, and All other amounts (including charges to insure, store, or transport the personal property) paid or incurred to carry the personal property. 2011taxes Subtract from the amount in (1): Interest (including OID) includible in gross income for the year on the personal property, Any income from the personal property treated as ordinary income on the disposition of short-term government obligations or as ordinary income under the market discount and short-term bond provisions — see Discount on Debt Instruments in chapter 1, The dividends includible in gross income for the year from the personal property, and Any payment on a loan of the personal property for use in a short sale that is includible in gross income. 2011taxes Basis adjustment. 2011taxes   Add the nondeductible amount to the basis of your straddle property. 2011taxes How To Report Investment Expenses To deduct your investment expenses, you must itemize deductions on Schedule A (Form 1040). 2011taxes Enter your deductible investment interest expense on Schedule A (Form1040), line 14. 2011taxes Include any deductible short sale expenses. 2011taxes (See Short Sales in chapter 4 for information on these expenses. 2011taxes ) Also attach a completed Form 4952 if you used that form to figure your investment interest expense. 2011taxes Enter the total amount of your other investment expenses (other than interest expenses) on Schedule A (Form 1040), line 23. 2011taxes List the type and amount of each expense on the dotted lines next to line 23. 2011taxes (If necessary, you can show the required information on an attached statement. 2011taxes ) For information on how to report amortizable bond premium, see Bond Premium Amortization , earlier in this chapter. 2011taxes When To Report Investment Expenses If you use the cash method to report income and expenses, you generally deduct your expenses, except for certain prepaid interest, in the year you pay them. 2011taxes If you use an accrual method, you generally deduct your expenses when you incur a liability for them, rather than when you pay them. 2011taxes Also see When To Deduct Investment Interest , earlier in this chapter. 2011taxes Unpaid expenses owed to related party. 2011taxes   If you use an accrual method, you cannot deduct interest and other expenses owed to a related cash-basis person until payment is made and the amount is includible in the gross income of that person. 2011taxes The relationship, for purposes of this rule, is determined as of the end of the tax year for which the interest or expense would otherwise be deductible. 2011taxes If a deduction is denied under this rule, this rule will continue to apply even if your relationship with the person ceases to exist before the amount is includible in the gross income of that person. 2011taxes   This rule generally applies to those relationships listed in chapter 4 under Related Party Transactions . 2011taxes It also applies to accruals by partnerships to partners, partners to partnerships, shareholders to S corporations, and S corporations to shareholders. 2011taxes   The postponement of deductions for unpaid expenses and interest under the related party rule does not apply to OID, regardless of when payment is made. 2011taxes This rule also does not apply to loans with below-market interest rates or to certain payments for the use of property and services when the lender or recipient has to include payments periodically in income, even if a payment has not been made. 2011taxes Prev  Up  Next   Home   More Online Publications