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File federal and state taxes free 4. File federal and state taxes free   Qualified Plans Table of Contents Topics - This chapter discusses: Useful Items - You may want to see: Kinds of PlansDefined Contribution Plan Defined Benefit Plan Qualification RulesEarly retirement. File federal and state taxes free Loan secured by benefits. File federal and state taxes free Waiver of survivor benefits. File federal and state taxes free Waiver of 30-day waiting period before annuity starting date. File federal and state taxes free Involuntary cash-out of benefits not more than dollar limit. File federal and state taxes free Exception for certain loans. File federal and state taxes free Exception for QDRO. File federal and state taxes free SIMPLE and safe harbor 401(k) plan exception. File federal and state taxes free Setting Up a Qualified PlanAdopting a Written Plan Investing Plan Assets Minimum Funding RequirementDue dates. File federal and state taxes free Installment percentage. File federal and state taxes free Extended period for making contributions. File federal and state taxes free ContributionsEmployer Contributions Employee Contributions When Contributions Are Considered Made Employer DeductionDeduction Limits Deduction Limit for Self-Employed Individuals Where To Deduct Contributions Carryover of Excess Contributions Excise Tax for Nondeductible (Excess) Contributions Elective Deferrals (401(k) Plans)Limit on Elective Deferrals Automatic Enrollment Treatment of Excess Deferrals Qualified Roth Contribution ProgramElective Deferrals Qualified Distributions Reporting Requirements DistributionsRequired Distributions Distributions From 401(k) Plans Tax Treatment of Distributions Tax on Early Distributions Tax on Excess Benefits Excise Tax on Reversion of Plan Assets Notification of Significant Benefit Accrual Reduction Prohibited TransactionsTax on Prohibited Transactions Reporting RequirementsOne-participant plan. File federal and state taxes free Caution: Form 5500-EZ not required. File federal and state taxes free Form 5500. File federal and state taxes free Electronic filing of Forms 5500 and 5500-SF. File federal and state taxes free Topics - This chapter discusses: Kinds of plans Qualification rules Setting up a qualified plan Minimum funding requirement Contributions Employer deduction Elective deferrals (401(k) plans) Qualified Roth contribution program Distributions Prohibited transactions Reporting requirements Useful Items - You may want to see: Publications 575 Pension and Annuity Income 590 Individual Retirement Arrangements (IRAs) 3066 Have you had your Check-up this year? for Retirement Plans 3998 Choosing A Retirement Solution for Your Small Business 4222 401(k) Plans for Small Businesses 4530 Designated Roth Accounts under a 401(k), 403(b), or governmental 457(b) plans 4531 401(k) Plan Checklist 4674 Automatic Enrollment 401(k) Plans for Small Businesses 4806 Profit Sharing Plans for Small Businesses Forms (and Instructions) www. File federal and state taxes free dol. File federal and state taxes free gov/ebsa/pdf/2013-5500. File federal and state taxes free pdf www. File federal and state taxes free dol. File federal and state taxes free gov/ebsa/pdf/2013-5500-SF. File federal and state taxes free pdf W-2 Wage and Tax Statement Schedule K-1 (Form 1065) Partner's Share of Income, Deductions, Credits, etc. File federal and state taxes free 1099-R Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. File federal and state taxes free 1040 U. File federal and state taxes free S. File federal and state taxes free Individual Income Tax Return Schedule C (Form 1040) Profit or Loss From Business Schedule F (Form 1040) Profit or Loss From Farming 5300 Application for Determination for Employee Benefit Plan 5310 Application for Determination for Terminating Plan 5329 Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts 5330 Return of Excise Taxes Related to Employee Benefit Plans 5500 Annual Return/Report of Employee Benefit Plan. File federal and state taxes free For copies of this form, go to: 5500-EZ Annual Return of One-Participant (Owners and Their Spouses) Retirement Plan 5500-SF Short Form Annual Return/Report of Small Employee Benefit Plan. File federal and state taxes free For copies of this form, go to: 8717 User Fee for Employee Plan Determination Letter Request 8880 Credit for Qualified Retirement Savings Contributions 8881 Credit for Small Employer Pension Plan Startup Costs 8955-SSA Annual Registration Statement Identifying Separated Participants With Deferred Vested Benefits These qualified retirement plans set up by self-employed individuals are sometimes called Keogh or H. File federal and state taxes free R. File federal and state taxes free 10 plans. File federal and state taxes free A sole proprietor or a partnership can set up one of these plans. File federal and state taxes free A common-law employee or a partner cannot set up one of these plans. File federal and state taxes free The plans described here can also be set up and maintained by employers that are corporations. File federal and state taxes free All the rules discussed here apply to corporations except where specifically limited to the self-employed. File federal and state taxes free The plan must be for the exclusive benefit of employees or their beneficiaries. File federal and state taxes free These qualified plans can include coverage for a self-employed individual. File federal and state taxes free As an employer, you can usually deduct, subject to limits, contributions you make to a qualified plan, including those made for your own retirement. File federal and state taxes free The contributions (and earnings and gains on them) are generally tax free until distributed by the plan. File federal and state taxes free Kinds of Plans There are two basic kinds of qualified plans—defined contribution plans and defined benefit plans—and different rules apply to each. File federal and state taxes free You can have more than one qualified plan, but your contributions to all the plans must not total more than the overall limits discussed under Contributions and Employer Deduction, later. File federal and state taxes free Defined Contribution Plan A defined contribution plan provides an individual account for each participant in the plan. File federal and state taxes free It provides benefits to a participant largely based on the amount contributed to that participant's account. File federal and state taxes free Benefits are also affected by any income, expenses, gains, losses, and forfeitures of other accounts that may be allocated to an account. File federal and state taxes free A defined contribution plan can be either a profit-sharing plan or a money purchase pension plan. File federal and state taxes free Profit-sharing plan. File federal and state taxes free   Although it is called a “profit-sharing plan,” you do not actually have to make a business profit for the year in order to make a contribution (except for yourself if you are self-employed as discussed under Self-employed Individual, later). File federal and state taxes free A profit-sharing plan can be set up to allow for discretionary employer contributions, meaning the amount contributed each year to the plan is not fixed. File federal and state taxes free An employer may even make no contribution to the plan for a given year. File federal and state taxes free   The plan must provide a definite formula for allocating the contribution among the participants and for distributing the accumulated funds to the employees after they reach a certain age, after a fixed number of years, or upon certain other occurrences. File federal and state taxes free   In general, you can be more flexible in making contributions to a profit-sharing plan than to a money purchase pension plan (discussed next) or a defined benefit plan (discussed later). File federal and state taxes free Money purchase pension plan. File federal and state taxes free   Contributions to a money purchase pension plan are fixed and are not based on your business profits. File federal and state taxes free For example, if the plan requires that contributions be 10% of the participants' compensation without regard to whether you have profits (or the self-employed person has earned income), the plan is a money purchase pension plan. File federal and state taxes free This applies even though the compensation of a self-employed individual as a participant is based on earned income derived from business profits. File federal and state taxes free Defined Benefit Plan A defined benefit plan is any plan that is not a defined contribution plan. File federal and state taxes free Contributions to a defined benefit plan are based on what is needed to provide definitely determinable benefits to plan participants. File federal and state taxes free Actuarial assumptions and computations are required to figure these contributions. File federal and state taxes free Generally, you will need continuing professional help to have a defined benefit plan. File federal and state taxes free Qualification Rules To qualify for the tax benefits available to qualified plans, a plan must meet certain requirements (qualification rules) of the tax law. File federal and state taxes free Generally, unless you write your own plan, the financial institution that provided your plan will take the continuing responsibility for meeting qualification rules that are later changed. File federal and state taxes free The following is a brief overview of important qualification rules that generally have not yet been discussed. File federal and state taxes free It is not intended to be all-inclusive. File federal and state taxes free See Setting Up a Qualified Plan , later. File federal and state taxes free Generally, the following qualification rules also apply to a SIMPLE 401(k) retirement plan. File federal and state taxes free A SIMPLE 401(k) plan is, however, not subject to the top-heavy plan rules and nondiscrimination rules if the plan satisfies the provisions discussed in chapter 3 under SIMPLE 401(k) Plan. File federal and state taxes free Plan assets must not be diverted. File federal and state taxes free   Your plan must make it impossible for its assets to be used for, or diverted to, purposes other than the benefit of employees and their beneficiaries. File federal and state taxes free As a general rule, the assets cannot be diverted to the employer. File federal and state taxes free Minimum coverage requirement must be met. File federal and state taxes free   To be a qualified plan, a defined benefit plan must benefit at least the lesser of the following. File federal and state taxes free 50 employees, or The greater of: 40% of all employees, or Two employees. File federal and state taxes free If there is only one employee, the plan must benefit that employee. File federal and state taxes free Contributions or benefits must not discriminate. File federal and state taxes free   Under the plan, contributions or benefits to be provided must not discriminate in favor of highly compensated employees. File federal and state taxes free Contributions and benefits must not be more than certain limits. File federal and state taxes free   Your plan must not provide for contributions or benefits that are more than certain limits. File federal and state taxes free The limits apply to the annual contributions and other additions to the account of a participant in a defined contribution plan and to the annual benefit payable to a participant in a defined benefit plan. File federal and state taxes free These limits are discussed later in this chapter under Contributions. File federal and state taxes free Minimum vesting standard must be met. File federal and state taxes free   Your plan must satisfy certain requirements regarding when benefits vest. File federal and state taxes free A benefit is vested (you have a fixed right to it) when it becomes nonforfeitable. File federal and state taxes free A benefit is nonforfeitable if it cannot be lost upon the happening, or failure to happen, of any event. File federal and state taxes free Special rules apply to forfeited benefit amounts. File federal and state taxes free In defined contribution plans, forfeitures can be allocated to the accounts of remaining participants in a nondiscriminatory way, or they can be used to reduce your contributions. File federal and state taxes free   Forfeitures under a defined benefit plan cannot be used to increase the benefits any employee would otherwise receive under the plan. File federal and state taxes free Forfeitures must be used instead to reduce employer contributions. File federal and state taxes free Participation. File federal and state taxes free   In general, an employee must be allowed to participate in your plan if he or she meets both the following requirements. File federal and state taxes free Has reached age 21. File federal and state taxes free Has at least 1 year of service (2 years if the plan is not a 401(k) plan and provides that after not more than 2 years of service the employee has a nonforfeitable right to all his or her accrued benefit). File federal and state taxes free A plan cannot exclude an employee because he or she has reached a specified age. File federal and state taxes free Leased employee. File federal and state taxes free   A leased employee, defined in chapter 1, who performs services for you (recipient of the services) is treated as your employee for certain plan qualification rules. File federal and state taxes free These rules include those in all the following areas. File federal and state taxes free Nondiscrimination in coverage, contributions, and benefits. File federal and state taxes free Minimum age and service requirements. File federal and state taxes free Vesting. File federal and state taxes free Limits on contributions and benefits. File federal and state taxes free Top-heavy plan requirements. File federal and state taxes free Contributions or benefits provided by the leasing organization for services performed for you are treated as provided by you. File federal and state taxes free Benefit payment must begin when required. File federal and state taxes free   Your plan must provide that, unless the participant chooses otherwise, the payment of benefits to the participant must begin within 60 days after the close of the latest of the following periods. File federal and state taxes free The plan year in which the participant reaches the earlier of age 65 or the normal retirement age specified in the plan. File federal and state taxes free The plan year in which the 10th anniversary of the year in which the participant began participating in the plan occurs. File federal and state taxes free The plan year in which the participant separates from service. File federal and state taxes free Early retirement. File federal and state taxes free   Your plan can provide for payment of retirement benefits before the normal retirement age. File federal and state taxes free If your plan offers an early retirement benefit, a participant who separates from service before satisfying the early retirement age requirement is entitled to that benefit if he or she meets both the following requirements. File federal and state taxes free Satisfies the service requirement for the early retirement benefit. File federal and state taxes free Separates from service with a nonforfeitable right to an accrued benefit. File federal and state taxes free The benefit, which may be actuarially reduced, is payable when the early retirement age requirement is met. File federal and state taxes free Required minimum distributions. File federal and state taxes free   Special rules require minimum annual distributions from qualified plans, generally beginning after age  70½. File federal and state taxes free See Required Distributions , under Distributions, later. File federal and state taxes free Survivor benefits. File federal and state taxes free   Defined benefit and money purchase pension plans must provide automatic survivor benefits in both the following forms. File federal and state taxes free A qualified joint and survivor annuity for a vested participant who does not die before the annuity starting date. File federal and state taxes free A qualified pre-retirement survivor annuity for a vested participant who dies before the annuity starting date and who has a surviving spouse. File federal and state taxes free   The automatic survivor benefit also applies to any participant under a profit-sharing plan unless all the following conditions are met. File federal and state taxes free The participant does not choose benefits in the form of a life annuity. File federal and state taxes free The plan pays the full vested account balance to the participant's surviving spouse (or other beneficiary if the surviving spouse consents or if there is no surviving spouse) if the participant dies. File federal and state taxes free The plan is not a direct or indirect transferee of a plan that must provide automatic survivor benefits. File federal and state taxes free Loan secured by benefits. File federal and state taxes free   If automatic survivor benefits are required for a spouse under a plan, he or she must consent to a loan that uses as security the accrued benefits in the plan. File federal and state taxes free Waiver of survivor benefits. File federal and state taxes free   Each plan participant may be permitted to waive the joint and survivor annuity or the pre-retirement survivor annuity (or both), but only if the participant has the written consent of the spouse. File federal and state taxes free The plan also must allow the participant to withdraw the waiver. File federal and state taxes free The spouse's consent must be witnessed by a plan representative or notary public. File federal and state taxes free Waiver of 30-day waiting period before annuity starting date. File federal and state taxes free    A plan may permit a participant to waive (with spousal consent) the 30-day minimum waiting period after a written explanation of the terms and conditions of a joint and survivor annuity is provided to each participant. File federal and state taxes free   The waiver is allowed only if the distribution begins more than 7 days after the written explanation is provided. File federal and state taxes free Involuntary cash-out of benefits not more than dollar limit. File federal and state taxes free   A plan may provide for the immediate distribution of the participant's benefit under the plan if the present value of the benefit is not greater than $5,000. File federal and state taxes free   However, the distribution cannot be made after the annuity starting date unless the participant and the spouse or surviving spouse of a participant who died (if automatic survivor benefits are required for a spouse under the plan) consents in writing to the distribution. File federal and state taxes free If the present value is greater than $5,000, the plan must have the written consent of the participant and the spouse or surviving spouse (if automatic survivor benefits are required for a spouse under the plan) for any immediate distribution of the benefit. File federal and state taxes free   Benefits attributable to rollover contributions and earnings on them can be ignored in determining the present value of these benefits. File federal and state taxes free   A plan must provide for the automatic rollover of any cash-out distribution of more than $1,000 to an individual retirement account or annuity, unless the participant chooses otherwise. File federal and state taxes free A section 402(f) notice must be sent prior to an involuntary cash-out of an eligible rollover distribution. File federal and state taxes free See Section 402(f) Notice under Distributions, later, for more details. File federal and state taxes free Consolidation, merger, or transfer of assets or liabilities. File federal and state taxes free   Your plan must provide that, in the case of any merger or consolidation with, or transfer of assets or liabilities to, any other plan, each participant would (if the plan then terminated) receive a benefit equal to or more than the benefit he or she would have been entitled to just before the merger, etc. File federal and state taxes free (if the plan had then terminated). File federal and state taxes free Benefits must not be assigned or alienated. File federal and state taxes free   Your plan must provide that a participant's or beneficiary's benefits under the plan cannot be taken away by any legal or equitable proceeding except as provided below or pursuant to certain judgements or settlements against the participant for violations of plan rules. File federal and state taxes free Exception for certain loans. File federal and state taxes free   A loan from the plan (not from a third party) to a participant or beneficiary is not treated as an assignment or alienation if the loan is secured by the participant's accrued nonforfeitable benefit and is exempt from the tax on prohibited transactions under section 4975(d)(1) or would be exempt if the participant were a disqualified person. File federal and state taxes free A disqualified person is defined later in this chapter under Prohibited Transactions. File federal and state taxes free Exception for QDRO. File federal and state taxes free   Compliance with a QDRO (qualified domestic relations order) does not result in a prohibited assignment or alienation of benefits. File federal and state taxes free   Payments to an alternate payee under a QDRO before the participant attains age 59½ are not subject to the 10% additional tax that would otherwise apply under certain circumstances. File federal and state taxes free Benefits distributed to an alternate payee under a QDRO can be rolled over tax free to an individual retirement account or to an individual retirement annuity. File federal and state taxes free No benefit reduction for social security increases. File federal and state taxes free   Your plan must not permit a benefit reduction for a post-separation increase in the social security benefit level or wage base for any participant or beneficiary who is receiving benefits under your plan, or who is separated from service and has nonforfeitable rights to benefits. File federal and state taxes free This rule also applies to plans supplementing the benefits provided by other federal or state laws. File federal and state taxes free Elective deferrals must be limited. File federal and state taxes free   If your plan provides for elective deferrals, it must limit those deferrals to the amount in effect for that particular year. File federal and state taxes free See Limit on Elective Deferrals later in this chapter. File federal and state taxes free Top-heavy plan requirements. File federal and state taxes free   A top-heavy plan is one that mainly favors partners, sole proprietors, and other key employees. File federal and state taxes free   A plan is top-heavy for a plan year if, for the preceding plan year, the total value of accrued benefits or account balances of key employees is more than 60% of the total value of accrued benefits or account balances of all employees. File federal and state taxes free Additional requirements apply to a top-heavy plan primarily to provide minimum benefits or contributions for non-key employees covered by the plan. File federal and state taxes free   Most qualified plans, whether or not top-heavy, must contain provisions that meet the top-heavy requirements and will take effect in plan years in which the plans are top-heavy. File federal and state taxes free These qualification requirements for top-heavy plans are explained in section 416 and its regulations. File federal and state taxes free SIMPLE and safe harbor 401(k) plan exception. File federal and state taxes free   The top-heavy plan requirements do not apply to SIMPLE 401(k) plans, discussed earlier in chapter 3, or to safe harbor 401(k) plans that consist solely of safe harbor contributions, discussed later in this chapter. File federal and state taxes free QACAs (discussed later) also are not subject to top-heavy requirements. File federal and state taxes free Setting Up a Qualified Plan There are two basic steps in setting up a qualified plan. File federal and state taxes free First you adopt a written plan. File federal and state taxes free Then you invest the plan assets. File federal and state taxes free You, the employer, are responsible for setting up and maintaining the plan. File federal and state taxes free If you are self-employed, it is not necessary to have employees besides yourself to sponsor and set up a qualified plan. File federal and state taxes free If you have employees, see Participation, under Qualification Rules, earlier. File federal and state taxes free Set-up deadline. File federal and state taxes free   To take a deduction for contributions for a tax year, your plan must be set up (adopted) by the last day of that year (December 31 for calendar-year employers). File federal and state taxes free Credit for startup costs. File federal and state taxes free   You may be able to claim a tax credit for part of the ordinary and necessary costs of starting a qualified plan that first became effective in 2013. File federal and state taxes free For more information, see Credit for startup costs under Reminders, earlier. File federal and state taxes free Adopting a Written Plan You must adopt a written plan. File federal and state taxes free The plan can be an IRS-approved master or prototype plan offered by a sponsoring organization. File federal and state taxes free Or it can be an individually designed plan. File federal and state taxes free Written plan requirement. File federal and state taxes free   To qualify, the plan you set up must be in writing and must be communicated to your employees. File federal and state taxes free The plan's provisions must be stated in the plan. File federal and state taxes free It is not sufficient for the plan to merely refer to a requirement of the Internal Revenue Code. File federal and state taxes free Master or prototype plans. File federal and state taxes free   Most qualified plans follow a standard form of plan (a master or prototype plan) approved by the IRS. File federal and state taxes free Master and prototype plans are plans made available by plan providers for adoption by employers (including self-employed individuals). File federal and state taxes free Under a master plan, a single trust or custodial account is established, as part of the plan, for the joint use of all adopting employers. File federal and state taxes free Under a prototype plan, a separate trust or custodial account is established for each employer. File federal and state taxes free Plan providers. File federal and state taxes free   The following organizations generally can provide IRS-approved master or prototype plans. File federal and state taxes free Banks (including some savings and loan associations and federally insured credit unions). File federal and state taxes free Trade or professional organizations. File federal and state taxes free Insurance companies. File federal and state taxes free Mutual funds. File federal and state taxes free Individually designed plan. File federal and state taxes free   If you prefer, you can set up an individually designed plan to meet specific needs. File federal and state taxes free Although advance IRS approval is not required, you can apply for approval by paying a fee and requesting a determination letter. File federal and state taxes free You may need professional help for this. File federal and state taxes free See Rev. File federal and state taxes free Proc. File federal and state taxes free 2014-6, 2014-1 I. File federal and state taxes free R. File federal and state taxes free B. File federal and state taxes free 198, available at www. File federal and state taxes free irs. File federal and state taxes free gov/irb/2014-1_IRB/ar10. File federal and state taxes free html, as annually updated, that may help you decide whether to apply for approval. File federal and state taxes free Internal Revenue Bulletins are available on the IRS website at IRS. File federal and state taxes free gov They are also available at most IRS offices and at certain libraries. File federal and state taxes free User fee. File federal and state taxes free   The fee mentioned earlier for requesting a determination letter does not apply to employers who have 100 or fewer employees who received at least $5,000 of compensation from the employer for the preceding year. File federal and state taxes free At least one of them must be a non-highly compensated employee participating in the plan. File federal and state taxes free The fee does not apply to requests made by the later of the following dates. File federal and state taxes free The end of the 5th plan year the plan is in effect. File federal and state taxes free The end of any remedial amendment period for the plan that begins within the first 5 plan years. File federal and state taxes free The request cannot be made by the sponsor of a prototype or similar plan the sponsor intends to market to participating employers. File federal and state taxes free   For more information about whether the user fee applies, see Rev. File federal and state taxes free Proc. File federal and state taxes free 2014-8, 2014-1 I. File federal and state taxes free R. File federal and state taxes free B. File federal and state taxes free 242, available at www. File federal and state taxes free irs. File federal and state taxes free gov/irb/2014-1_IRB/ar12. File federal and state taxes free html, as may be annually updated; Notice 2003-49, 2003-32 I. File federal and state taxes free R. File federal and state taxes free B. File federal and state taxes free 294, available at www. File federal and state taxes free irs. File federal and state taxes free gov/irb/2003-32_IRB/ar13. File federal and state taxes free html; and Notice 2011-86, 2011-45 I. File federal and state taxes free R. File federal and state taxes free B. File federal and state taxes free 698, available at www. File federal and state taxes free irs. File federal and state taxes free gov/irb/2011-45_IRB/ar11. File federal and state taxes free html. File federal and state taxes free Investing Plan Assets In setting up a qualified plan, you arrange how the plan's funds will be used to build its assets. File federal and state taxes free You can establish a trust or custodial account to invest the funds. File federal and state taxes free You, the trust, or the custodial account can buy an annuity contract from an insurance company. File federal and state taxes free Life insurance can be included only if it is incidental to the retirement benefits. File federal and state taxes free You set up a trust by a legal instrument (written document). File federal and state taxes free You may need professional help to do this. File federal and state taxes free You can set up a custodial account with a bank, savings and loan association, credit union, or other person who can act as the plan trustee. File federal and state taxes free You do not need a trust or custodial account, although you can have one, to invest the plan's funds in annuity contracts or face-amount certificates. File federal and state taxes free If anyone other than a trustee holds them, however, the contracts or certificates must state they are not transferable. File federal and state taxes free Other plan requirements. File federal and state taxes free   For information on other important plan requirements, see Qualification Rules , earlier in this chapter. File federal and state taxes free Minimum Funding Requirement In general, if your plan is a money purchase pension plan or a defined benefit plan, you must actually pay enough into the plan to satisfy the minimum funding standard for each year. File federal and state taxes free Determining the amount needed to satisfy the minimum funding standard for a defined benefit plan is complicated, and you should seek professional help in order to meet these contribution requirements. File federal and state taxes free For information on this funding requirement, see section 412 and its regulations. File federal and state taxes free Quarterly installments of required contributions. File federal and state taxes free   If your plan is a defined benefit plan subject to the minimum funding requirements, you generally must make quarterly installment payments of the required contributions. File federal and state taxes free If you do not pay the full installments timely, you may have to pay interest on any underpayment for the period of the underpayment. File federal and state taxes free Due dates. File federal and state taxes free   The due dates for the installments are 15 days after the end of each quarter. File federal and state taxes free For a calendar-year plan, the installments are due April 15, July 15, October 15, and January 15 (of the following year). File federal and state taxes free Installment percentage. File federal and state taxes free   Each quarterly installment must be 25% of the required annual payment. File federal and state taxes free Extended period for making contributions. File federal and state taxes free   Additional contributions required to satisfy the minimum funding requirement for a plan year will be considered timely if made by 8½ months after the end of that year. File federal and state taxes free Contributions A qualified plan is generally funded by your contributions. File federal and state taxes free However, employees participating in the plan may be permitted to make contributions, and you may be permitted to make contributions on your own behalf. File federal and state taxes free See Employee Contributions and Elective Deferrals later. File federal and state taxes free Contributions deadline. File federal and state taxes free   You can make deductible contributions for a tax year up to the due date of your return (plus extensions) for that year. File federal and state taxes free Self-employed individual. File federal and state taxes free   You can make contributions on behalf of yourself only if you have net earnings (compensation) from self-employment in the trade or business for which the plan was set up. File federal and state taxes free Your net earnings must be from your personal services, not from your investments. File federal and state taxes free If you have a net loss from self-employment, you cannot make contributions for yourself for the year, even if you can contribute for common-law employees based on their compensation. File federal and state taxes free Employer Contributions There are certain limits on the contributions and other annual additions you can make each year for plan participants. File federal and state taxes free There are also limits on the amount you can deduct. File federal and state taxes free See Deduction Limits , later. File federal and state taxes free Limits on Contributions and Benefits Your plan must provide that contributions or benefits cannot exceed certain limits. File federal and state taxes free The limits differ depending on whether your plan is a defined contribution plan or a defined benefit plan. File federal and state taxes free Defined benefit plan. File federal and state taxes free   For 2013, the annual benefit for a participant under a defined benefit plan cannot exceed the lesser of the following amounts. File federal and state taxes free 100% of the participant's average compensation for his or her highest 3 consecutive calendar years. File federal and state taxes free $205,000 ($210,000 for 2014). File federal and state taxes free Defined contribution plan. File federal and state taxes free   For 2013, a defined contribution plan's annual contributions and other additions (excluding earnings) to the account of a participant cannot exceed the lesser of the following amounts. File federal and state taxes free 100% of the participant's compensation. File federal and state taxes free $51,000 ($52,000 for 2014). File federal and state taxes free   Catch-up contributions (discussed later under Limit on Elective Deferrals) are not subject to the above limit. File federal and state taxes free Employee Contributions Participants may be permitted to make nondeductible contributions to a plan in addition to your contributions. File federal and state taxes free Even though these employee contributions are not deductible, the earnings on them are tax free until distributed in later years. File federal and state taxes free Also, these contributions must satisfy the actual contribution percentage (ACP) test of section 401(m)(2), a nondiscrimination test that applies to employee contributions and matching contributions. File federal and state taxes free See Regulations sections 1. File federal and state taxes free 401(k)-2 and 1. File federal and state taxes free 401(m)-2 for further guidance relating to the nondiscrimination rules under sections 401(k) and 401(m). File federal and state taxes free When Contributions Are Considered Made You generally apply your plan contributions to the year in which you make them. File federal and state taxes free But you can apply them to the previous year if all the following requirements are met. File federal and state taxes free You make them by the due date of your tax return for the previous year (plus extensions). File federal and state taxes free The plan was established by the end of the previous year. File federal and state taxes free The plan treats the contributions as though it had received them on the last day of the previous year. File federal and state taxes free You do either of the following. File federal and state taxes free You specify in writing to the plan administrator or trustee that the contributions apply to the previous year. File federal and state taxes free You deduct the contributions on your tax return for the previous year. File federal and state taxes free A partnership shows contributions for partners on Form 1065. File federal and state taxes free Employer's promissory note. File federal and state taxes free   Your promissory note made out to the plan is not a payment that qualifies for the deduction. File federal and state taxes free Also, issuing this note is a prohibited transaction subject to tax. File federal and state taxes free See Prohibited Transactions , later. File federal and state taxes free Employer Deduction You can usually deduct, subject to limits, contributions you make to a qualified plan, including those made for your own retirement. File federal and state taxes free The contributions (and earnings and gains on them) are generally tax free until distributed by the plan. File federal and state taxes free Deduction Limits The deduction limit for your contributions to a qualified plan depends on the kind of plan you have. File federal and state taxes free Defined contribution plans. File federal and state taxes free   The deduction for contributions to a defined contribution plan (profit-sharing plan or money purchase pension plan) cannot be more than 25% of the compensation paid (or accrued) during the year to your eligible employees participating in the plan. File federal and state taxes free If you are self-employed, you must reduce this limit in figuring the deduction for contributions you make for your own account. File federal and state taxes free See Deduction Limit for Self-Employed Individuals , later. File federal and state taxes free   When figuring the deduction limit, the following rules apply. File federal and state taxes free Elective deferrals (discussed later) are not subject to the limit. File federal and state taxes free Compensation includes elective deferrals. File federal and state taxes free The maximum compensation that can be taken into account for each employee in 2013 is $255,000 ($260,000 for 2014). File federal and state taxes free Defined benefit plans. File federal and state taxes free   The deduction for contributions to a defined benefit plan is based on actuarial assumptions and computations. File federal and state taxes free Consequently, an actuary must figure your deduction limit. File federal and state taxes free    In figuring the deduction for contributions, you cannot take into account any contributions or benefits that are more than the limits discussed earlier under Limits on Contributions and Benefits, earlier. File federal and state taxes free Table 4–1. File federal and state taxes free Carryover of Excess Contributions Illustrated—Profit-Sharing Plan (000's omitted) Year Participants' compensation Participants' share of required contribution (10% of annual profit) Deductible  limit for current year (25% of compensation) Contribution Excess contribution carryover used1 Total  deduction including carryovers Excess contribution carryover available at end of year 2010 $1,000 $100 $250 $100 $ 0 $100 $ 0 2011 400 165 100 165 0 100 65 2012 500 100 125 100 25 125 40 2013 600 100 150 100 40 140 0  1There were no carryovers from years before 2010. File federal and state taxes free Deduction Limit for Self-Employed Individuals If you make contributions for yourself, you need to make a special computation to figure your maximum deduction for these contributions. File federal and state taxes free Compensation is your net earnings from self-employment, defined in chapter 1. File federal and state taxes free This definition takes into account both the following items. File federal and state taxes free The deduction for the deductible part of your self-employment tax. File federal and state taxes free The deduction for contributions on your behalf to the plan. File federal and state taxes free The deduction for your own contributions and your net earnings depend on each other. File federal and state taxes free For this reason, you determine the deduction for your own contributions indirectly by reducing the contribution rate called for in your plan. File federal and state taxes free To do this, use either the Rate Table for Self-Employed or the Rate Worksheet for Self-Employed in chapter 5. File federal and state taxes free Then figure your maximum deduction by using the Deduction Worksheet for Self-Employed in chapter 5. File federal and state taxes free Where To Deduct Contributions Deduct the contributions you make for your common-law employees on your tax return. File federal and state taxes free For example, sole proprietors deduct them on Schedule C (Form 1040) or Schedule F (Form 1040); partnerships deduct them on Form 1065; and corporations deduct them on Form 1120, or Form 1120S. File federal and state taxes free Sole proprietors and partners deduct contributions for themselves on line 28 of Form 1040. File federal and state taxes free (If you are a partner, contributions for yourself are shown on the Schedule K-1 (Form 1065) you get from the partnership. File federal and state taxes free ) Carryover of Excess Contributions If you contribute more to the plans than you can deduct for the year, you can carry over and deduct the difference in later years, combined with your contributions for those years. File federal and state taxes free Your combined deduction in a later year is limited to 25% of the participating employees' compensation for that year. File federal and state taxes free For purposes of this limit, a SEP is treated as a profit-sharing (defined contribution) plan. File federal and state taxes free However, this percentage limit must be reduced to figure your maximum deduction for contributions you make for yourself. File federal and state taxes free See Deduction Limit for Self-Employed Individuals, earlier. File federal and state taxes free The amount you carry over and deduct may be subject to the excise tax discussed next. File federal and state taxes free Table 4-1, earlier, illustrates the carryover of excess contributions to a profit-sharing plan. File federal and state taxes free Excise Tax for Nondeductible (Excess) Contributions If you contribute more than your deduction limit to a retirement plan, you have made nondeductible contributions and you may be liable for an excise tax. File federal and state taxes free In general, a 10% excise tax applies to nondeductible contributions made to qualified pension and profit-sharing plans and to SEPs. File federal and state taxes free Special rule for self-employed individuals. File federal and state taxes free   The 10% excise tax does not apply to any contribution made to meet the minimum funding requirements in a money purchase pension plan or a defined benefit plan. File federal and state taxes free Even if that contribution is more than your earned income from the trade or business for which the plan is set up, the difference is not subject to this excise tax. File federal and state taxes free See Minimum Funding Requirement , earlier. File federal and state taxes free Reporting the tax. File federal and state taxes free   You must report the tax on your nondeductible contributions on Form 5330. File federal and state taxes free Form 5330 includes a computation of the tax. File federal and state taxes free See the separate instructions for completing the form. File federal and state taxes free Elective Deferrals (401(k) Plans) Your qualified plan can include a cash or deferred arrangement under which participants can choose to have you contribute part of their before-tax compensation to the plan rather than receive the compensation in cash. File federal and state taxes free A plan with this type of arrangement is popularly known as a “401(k) plan. File federal and state taxes free ” (As a self-employed individual participating in the plan, you can contribute part of your before-tax net earnings from the business. File federal and state taxes free ) This contribution is called an “elective deferral” because participants choose (elect) to defer receipt of the money. File federal and state taxes free In general, a qualified plan can include a cash or deferred arrangement only if the qualified plan is one of the following plans. File federal and state taxes free A profit-sharing plan. File federal and state taxes free A money purchase pension plan in existence on June 27, 1974, that included a salary reduction arrangement on that date. File federal and state taxes free Partnership. File federal and state taxes free   A partnership can have a 401(k) plan. File federal and state taxes free Restriction on conditions of participation. File federal and state taxes free   The plan cannot require, as a condition of participation, that an employee complete more than 1 year of service. File federal and state taxes free Matching contributions. File federal and state taxes free   If your plan permits, you can make matching contributions for an employee who makes an elective deferral to your 401(k) plan. File federal and state taxes free For example, the plan might provide that you will contribute 50 cents for each dollar your participating employees choose to defer under your 401(k) plan. File federal and state taxes free Matching contributions are generally subject to the ACP test discussed earlier under Employee Contributions. File federal and state taxes free Nonelective contributions. File federal and state taxes free   You can also make contributions (other than matching contributions) for your participating employees without giving them the choice to take cash instead. File federal and state taxes free These are called nonelective contributions. File federal and state taxes free Employee compensation limit. File federal and state taxes free   No more than $255,000 of the employee's compensation can be taken into account when figuring contributions other than elective deferrals in 2013. File federal and state taxes free This limit is $260,000 in 2014. File federal and state taxes free SIMPLE 401(k) plan. File federal and state taxes free   If you had 100 or fewer employees who earned $5,000 or more in compensation during the preceding year, you may be able to set up a SIMPLE 401(k) plan. File federal and state taxes free A SIMPLE 401(k) plan is not subject to the nondiscrimination and top-heavy plan requirements discussed earlier under Qualification Rules. File federal and state taxes free For details about SIMPLE 401(k) plans, see SIMPLE 401(k) Plan in chapter 3. File federal and state taxes free Distributions. File federal and state taxes free   Certain rules apply to distributions from 401(k) plans. File federal and state taxes free See Distributions From 401(k) Plans , later. File federal and state taxes free Limit on Elective Deferrals There is a limit on the amount an employee can defer each year under these plans. File federal and state taxes free This limit applies without regard to community property laws. File federal and state taxes free Your plan must provide that your employees cannot defer more than the limit that applies for a particular year. File federal and state taxes free For 2013 and 2014, the basic limit on elective deferrals is $17,500. File federal and state taxes free This limit applies to all salary reduction contributions and elective deferrals. File federal and state taxes free If, in conjunction with other plans, the deferral limit is exceeded, the difference is included in the employee's gross income. File federal and state taxes free Catch-up contributions. File federal and state taxes free   A 401(k) plan can permit participants who are age 50 or over at the end of the calendar year to also make catch-up contributions. File federal and state taxes free The catch-up contribution limit for 2013 and 2014 is $5,500. File federal and state taxes free Elective deferrals are not treated as catch-up contributions for 2013 until they exceed the $17,500 limit, the actual deferral percentage (ADP) test limit of section 401(k)(3), or the plan limit (if any). File federal and state taxes free However, the catch-up contribution a participant can make for a year cannot exceed the lesser of the following amounts. File federal and state taxes free The catch-up contribution limit. File federal and state taxes free The excess of the participant's compensation over the elective deferrals that are not catch-up contributions. File federal and state taxes free Treatment of contributions. File federal and state taxes free   Your contributions to your own 401(k) plan are generally deductible by you for the year they are contributed to the plan. File federal and state taxes free Matching or nonelective contributions made to the plan are also deductible by you in the year of contribution. File federal and state taxes free Your employees' elective deferrals other than designated Roth contributions are tax free until distributed from the plan. File federal and state taxes free Elective deferrals are included in wages for social security, Medicare, and federal unemployment (FUTA) tax. File federal and state taxes free Forfeiture. File federal and state taxes free   Employees have a nonforfeitable right at all times to their accrued benefit attributable to elective deferrals. File federal and state taxes free Reporting on Form W-2. File federal and state taxes free   Do not include elective deferrals in the “Wages, tips, other compensation” box of Form W-2. File federal and state taxes free You must, however, include them in the “Social security wages” and “Medicare wages and tips” boxes. File federal and state taxes free You must also include them in box 12. File federal and state taxes free Mark the “Retirement plan” checkbox in box 13. File federal and state taxes free For more information, see the Form W-2 instructions. File federal and state taxes free Automatic Enrollment Your 401(k) plan can have an automatic enrollment feature. File federal and state taxes free Under this feature, you can automatically reduce an employee's pay by a fixed percentage and contribute that amount to the 401(k) plan on his or her behalf unless the employee affirmatively chooses not to have his or her pay reduced or chooses to have it reduced by a different percentage. File federal and state taxes free These contributions are elective deferrals. File federal and state taxes free An automatic enrollment feature will encourage employees' saving for retirement and will help your plan pass nondiscrimination testing (if applicable). File federal and state taxes free For more information, see Publication 4674, Automatic Enrollment 401(k) Plans for Small Businesses. File federal and state taxes free Eligible automatic contribution arrangement. File federal and state taxes free   Under an eligible automatic contribution arrangement (EACA), a participant is treated as having elected to have the employer make contributions in an amount equal to a uniform percentage of compensation. File federal and state taxes free This automatic election will remain in place until the participant specifically elects not to have such deferral percentage made (or elects a different percentage). File federal and state taxes free There is no required deferral percentage. File federal and state taxes free Withdrawals. File federal and state taxes free   Under an EACA, you may allow participants to withdraw their automatic contributions to the plan if certain conditions are met. File federal and state taxes free The participant must elect the withdrawal no later than 90 days after the date of the first elective contributions under the EACA. File federal and state taxes free The participant must withdraw the entire amount of EACA default contributions, including any earnings thereon. File federal and state taxes free   If the plan allows withdrawals under the EACA, the amount of the withdrawal other than the amount of any designated Roth contributions must be included in the employee's gross income for the tax year in which the distribution is made. File federal and state taxes free The additional 10% tax on early distributions will not apply to the distribution. File federal and state taxes free Notice requirement. File federal and state taxes free   Under an EACA, employees must be given written notice of the terms of the EACA within a reasonable period of time before each plan year. File federal and state taxes free The notice must be written in a manner calculated to be understood by the average employee and be sufficiently accurate and comprehensive in order to apprise the employee of his or her rights and obligations under the EACA. File federal and state taxes free The notice must include an explanation of the employee's right to elect not to have elective contributions made on his or her behalf, or to elect a different percentage, and the employee must be given a reasonable period of time after receipt of the notice before the first elective contribution is made. File federal and state taxes free The notice also must explain how contributions will be invested in the absence of an investment election by the employee. File federal and state taxes free Qualified automatic contribution arrangement. File federal and state taxes free    A qualified automatic contribution arrangement (QACA) is a type of safe harbor plan. File federal and state taxes free It contains an automatic enrollment feature, and mandatory employer contributions are required. File federal and state taxes free If your plan includes a QACA, it will not be subject to the ADP test (discussed later) nor the top-heavy requirements (discussed earlier). File federal and state taxes free Additionally, your plan will not be subject to the actual contribution percentage (ACP) test if certain additional requirements are met. File federal and state taxes free Under a QACA, each employee who is eligible to participate in the plan will be treated as having elected to make elective deferral contributions equal to a certain default percentage of compensation. File federal and state taxes free In order to not have default elective deferrals made, an employee must make an affirmative election specifying a deferral percentage (including zero, if desired). File federal and state taxes free If an employee does not make an affirmative election, the default deferral percentage must meet the following conditions. File federal and state taxes free It must be applied uniformly. File federal and state taxes free It must not exceed 10%. File federal and state taxes free It must be at least 3% in the first plan year it applies to an employee and through the end of the following year. File federal and state taxes free It must increase to at least 4% in the following plan year. File federal and state taxes free It must increase to at least 5% in the following plan year. File federal and state taxes free It must increase to at least 6% in subsequent plan years. File federal and state taxes free Matching or nonelective contributions. File federal and state taxes free   Under the terms of the QACA, you must make either matching or nonelective contributions according to the following terms. File federal and state taxes free Matching contributions. File federal and state taxes free You must make matching contributions on behalf of each non-highly compensated employee in the following amounts. File federal and state taxes free An amount equal to 100% of elective deferrals, up to 1% of compensation. File federal and state taxes free An amount equal to 50% of elective deferrals, from 1% up to 6% of compensation. File federal and state taxes free Other formulas may be used as long as they are at least as favorable to non-highly compensated employees. File federal and state taxes free The rate of matching contributions for highly compensated employees, including yourself, must not exceed the rates for non-highly compensated employees. File federal and state taxes free Nonelective contributions. File federal and state taxes free You must make nonelective contributions on behalf of every non-highly compensated employee eligible to participate in the plan, regardless of whether they elected to participate, in an amount equal to at least 3% of their compensation. File federal and state taxes free Vesting requirements. File federal and state taxes free   All accrued benefits attributed to matching or nonelective contributions under the QACA must be 100% vested for all employees who complete 2 years of service. File federal and state taxes free These contributions are subject to special withdrawal restrictions, discussed later. File federal and state taxes free Notice requirements. File federal and state taxes free   Each employee eligible to participate in the QACA must receive written notice of their rights and obligations under the QACA, within a reasonable period before each plan year. File federal and state taxes free The notice must be written in a manner calculated to be understood by the average employee, and it must be accurate and comprehensive. File federal and state taxes free The notice must explain their right to elect not to have elective contributions made on their behalf, or to have contributions made at a different percentage than the default percentage. File federal and state taxes free Additionally, the notice must explain how contributions will be invested in the absence of any investment election by the employee. File federal and state taxes free The employee must have a reasonable period of time after receiving the notice to make such contribution and investment elections prior to the first contributions under the QACA. File federal and state taxes free Treatment of Excess Deferrals If the total of an employee's deferrals is more than the limit for 2013, the employee can have the difference (called an excess deferral) paid out of any of the plans that permit these distributions. File federal and state taxes free He or she must notify the plan by April 15, 2014 (or an earlier date specified in the plan), of the amount to be paid from each plan. File federal and state taxes free The plan must then pay the employee that amount, plus earnings on the amount through the end of 2013, by April 15, 2014. File federal and state taxes free Excess withdrawn by April 15. File federal and state taxes free   If the employee takes out the excess deferral by April 15, 2014, it is not reported again by including it in the employee's gross income for 2014. File federal and state taxes free However, any income earned in 2013 on the excess deferral taken out is taxable in the tax year in which it is taken out. File federal and state taxes free The distribution is not subject to the additional 10% tax on early distributions. File federal and state taxes free   If the employee takes out part of the excess deferral and the income on it, the distribution is treated as made proportionately from the excess deferral and the income. File federal and state taxes free   Even if the employee takes out the excess deferral by April 15, the amount will be considered for purposes of nondiscrimination testing requirements of the plan, unless the distributed amount is for a non-highly compensated employee who participates in only one employer's 401(k) plan or plans. File federal and state taxes free Excess not withdrawn by April 15. File federal and state taxes free   If the employee does not take out the excess deferral by April 15, 2014, the excess, though taxable in 2013, is not included in the employee's cost basis in figuring the taxable amount of any eventual distributions under the plan. File federal and state taxes free In effect, an excess deferral left in the plan is taxed twice, once when contributed and again when distributed. File federal and state taxes free Also, if the employee's excess deferral is allowed to stay in the plan and the employee participates in no other employer's plan, the plan can be disqualified. File federal and state taxes free Reporting corrective distributions on Form 1099-R. File federal and state taxes free   Report corrective distributions of excess deferrals (including any earnings) on Form 1099-R. File federal and state taxes free For specific information about reporting corrective distributions, see the Instructions for Forms 1099-R and 5498. File federal and state taxes free Tax on excess contributions of highly compensated employees. File federal and state taxes free   The law provides tests to detect discrimination in a plan. File federal and state taxes free If tests, such as the actual deferral percentage test (ADP test) (see section 401(k)(3)) and the actual contribution percentage test (ACP test) (see section 401(m)(2)), show that contributions for highly compensated employees are more than the test limits for these contributions, the employer may have to pay a 10% excise tax. File federal and state taxes free Report the tax on Form 5330. File federal and state taxes free The ADP test does not apply to a safe harbor 401(k) plan (discussed next) nor to a QACA. File federal and state taxes free Also, the ACP test does not apply to these plans if certain additional requirements are met. File federal and state taxes free   The tax for the year is 10% of the excess contributions for the plan year ending in your tax year. File federal and state taxes free Excess contributions are elective deferrals, employee contributions, or employer matching or nonelective contributions that are more than the amount permitted under the ADP test or the ACP test. File federal and state taxes free   See Regulations sections 1. File federal and state taxes free 401(k)-2 and 1. File federal and state taxes free 401(m)-2 for further guidance relating to the nondiscrimination rules under sections 401(k) and 401(m). File federal and state taxes free    If the plan fails the ADP or ACP testing, and the failure is not corrected by the end of the next plan year, the plan can be disqualified. File federal and state taxes free Safe harbor 401(k) plan. File federal and state taxes free If you meet the requirements for a safe harbor 401(k) plan, you do not have to satisfy the ADP test, nor the ACP test, if certain additional requirements are met. File federal and state taxes free For your plan to be a safe harbor plan, you must meet the following conditions. File federal and state taxes free Matching or nonelective contributions. File federal and state taxes free You must make matching or nonelective contributions according to one of the following formulas. File federal and state taxes free Matching contributions. File federal and state taxes free You must make matching contributions according to the following rules. File federal and state taxes free You must contribute an amount equal to 100% of each non-highly compensated employee's elective deferrals, up to 3% of compensation. File federal and state taxes free You must contribute an amount equal to 50% of each non-highly compensated employee's elective deferrals, from 3% up to 5% of compensation. File federal and state taxes free The rate of matching contributions for highly compensated employees, including yourself, must not exceed the rates for non-highly compensated employees. File federal and state taxes free Nonelective contributions. File federal and state taxes free You must make nonelective contributions, without regard to whether the employee made elective deferrals, on behalf of all non-highly compensated employees eligible to participate in the plan, equal to at least 3% of the employee's compensation. File federal and state taxes free These mandatory matching and nonelective contributions must be immediately 100% vested and are subject to special withdrawal restrictions. File federal and state taxes free Notice requirement. File federal and state taxes free You must give eligible employees written notice of their rights and obligations with regard to contributions under the plan, within a reasonable period before the plan year. File federal and state taxes free The other requirements for a 401(k) plan, including withdrawal and vesting rules, must also be met for your plan to qualify as a safe harbor 401(k) plan. File federal and state taxes free Qualified Roth Contribution Program Under this program an eligible employee can designate all or a portion of his or her elective deferrals as after-tax Roth contributions. File federal and state taxes free Elective deferrals designated as Roth contributions must be maintained in a separate Roth account. File federal and state taxes free However, unlike other elective deferrals, designated Roth contributions are not excluded from employees' gross income, but qualified distributions from a Roth account are excluded from employees' gross income. File federal and state taxes free Elective Deferrals Under a qualified Roth contribution program, the amount of elective deferrals that an employee may designate as a Roth contribution is limited to the maximum amount of elective deferrals excludable from gross income for the year (for 2013 and 2014, $17,500 if under age 50 and $23,000 if age 50 or over) less the total amount of the employee's elective deferrals not designated as Roth contributions. File federal and state taxes free Designated Roth deferrals are treated the same as pre-tax elective deferrals for most purposes, including: The annual individual elective deferral limit (total of all designated Roth contributions and traditional, pre-tax elective deferrals) of $17,500 for 2013 and 2014, with an additional $5,500 if age 50 or over for 2013 and 2014, Determining the maximum employee and employer annual contributions of the lesser of 100% of compensation or $51,000 for 2013 ($52,000 for 2014), Nondiscrimination testing, Required distributions, and Elective deferrals not taken into account for purposes of deduction limits. File federal and state taxes free Qualified Distributions A qualified distribution is a distribution that is made after the employee's nonexclusion period and: On or after the employee attains age   59½, On account of the employee's being disabled, or On or after the employee's death. File federal and state taxes free An employee's nonexclusion period for a plan is the 5-tax-year period beginning with the earlier of the following tax years. File federal and state taxes free The first tax year in which the employee made a contribution to his or her Roth account in the plan, or If a rollover contribution was made to the employee's designated Roth account from a designated Roth account previously established for the employee under another plan, then the first tax year the employee made a designated Roth contribution to the previously established account. File federal and state taxes free Rollover. File federal and state taxes free   Beginning September 28, 2010, a rollover from another account can be made to a designated Roth account in the same plan. File federal and state taxes free For additional information on these in-plan Roth rollovers, see Notice 2010-84, 2010-51 I. File federal and state taxes free R. File federal and state taxes free B. File federal and state taxes free 872, available at www. File federal and state taxes free irs. File federal and state taxes free gov/irb/2010-51_IRB/ar11. File federal and state taxes free html, and Notice 2013-74. File federal and state taxes free A distribution from a designated Roth account can only be rolled over to another designated Roth account or a Roth IRA. File federal and state taxes free Rollover amounts do not apply toward the annual deferral limit. File federal and state taxes free Reporting Requirements You must report a contribution to a Roth account on Form W-2 and a distribution from a Roth account on Form 1099-R. File federal and state taxes free See the Form W-2 and 1099-R instructions for detailed information. File federal and state taxes free Distributions Amounts paid to plan participants from a qualified plan are called distributions. File federal and state taxes free Distributions may be nonperiodic, such as lump-sum distributions, or periodic, such as annuity payments. File federal and state taxes free Also, certain loans may be treated as distributions. File federal and state taxes free See Loans Treated as Distributions in Publication 575. File federal and state taxes free Required Distributions A qualified plan must provide that each participant will either: Receive his or her entire interest (benefits) in the plan by the required beginning date (defined later), or Begin receiving regular periodic distributions by the required beginning date in annual amounts calculated to distribute the participant's entire interest (benefits) over his or her life expectancy or over the joint life expectancy of the participant and the designated beneficiary (or over a shorter period). File federal and state taxes free These distribution rules apply individually to each qualified plan. File federal and state taxes free You cannot satisfy the requirement for one plan by taking a distribution from another. File federal and state taxes free The plan must provide that these rules override any inconsistent distribution options previously offered. File federal and state taxes free Minimum distribution. File federal and state taxes free   If the account balance of a qualified plan participant is to be distributed (other than as an annuity), the plan administrator must figure the minimum amount required to be distributed each distribution calendar year. File federal and state taxes free This minimum is figured by dividing the account balance by the applicable life expectancy. File federal and state taxes free The plan administrator can use the life expectancy tables in Appendix C of Publication 590 for this purpose. File federal and state taxes free For more information on figuring the minimum distribution, see Tax on Excess Accumulation in Publication 575. File federal and state taxes free Required beginning date. File federal and state taxes free   Generally, each participant must receive his or her entire benefits in the plan or begin to receive periodic distributions of benefits from the plan by the required beginning date. File federal and state taxes free   A participant must begin to receive distributions from his or her qualified retirement plan by April 1 of the first year after the later of the following years. File federal and state taxes free Calendar year in which he or she reaches age 70½. File federal and state taxes free Calendar year in which he or she retires from employment with the employer maintaining the plan. File federal and state taxes free However, the plan may require the participant to begin receiving distributions by April 1 of the year after the participant reaches age 70½ even if the participant has not retired. File federal and state taxes free   If the participant is a 5% owner of the employer maintaining the plan, the participant must begin receiving distributions by April 1 of the first year after the calendar year in which the participant reached age 70½. File federal and state taxes free For more information, see Tax on Excess Accumulation in Publication 575. File federal and state taxes free Distributions after the starting year. File federal and state taxes free   The distribution required to be made by April 1 is treated as a distribution for the starting year. File federal and state taxes free (The starting year is the year in which the participant meets (1) or (2) above, whichever applies. File federal and state taxes free ) After the starting year, the participant must receive the required distribution for each year by December 31 of that year. File federal and state taxes free If no distribution is made in the starting year, required distributions for 2 years must be made in the next year (one by April 1 and one by December 31). File federal and state taxes free Distributions after participant's death. File federal and state taxes free   See Publication 575 for the special rules covering distributions made after the death of a participant. File federal and state taxes free Distributions From 401(k) Plans Generally, distributions cannot be made until one of the following occurs. File federal and state taxes free The employee retires, dies, becomes disabled, or otherwise severs employment. File federal and state taxes free The plan ends and no other defined contribution plan is established or continued. File federal and state taxes free In the case of a 401(k) plan that is part of a profit-sharing plan, the employee reaches age 59½ or suffers financial hardship. File federal and state taxes free For the rules on hardship distributions, including the limits on them, see Regulations section 1. File federal and state taxes free 401(k)-1(d). File federal and state taxes free The employee becomes eligible for a qualified reservist distribution (defined next). File federal and state taxes free Certain distributions listed above may be subject to the tax on early distributions discussed later. File federal and state taxes free Qualified reservist distributions. File federal and state taxes free   A qualified reservist distribution is a distribution from an IRA or an elective deferral account made after September 11, 2001, to a military reservist or a member of the National Guard who has been called to active duty for at least 180 days or for an indefinite period. File federal and state taxes free All or part of a qualified reservist distribution can be recontributed to an IRA. File federal and state taxes free The additional 10% tax on early distributions does not apply to a qualified reservist distribution. File federal and state taxes free Tax Treatment of Distributions Distributions from a qualified plan minus a prorated part of any cost basis are subject to income tax in the year they are distributed. File federal and state taxes free Since most recipients have no cost basis, a distribution is generally fully taxable. File federal and state taxes free An exception is a distribution that is properly rolled over as discussed under Rollover, next. File federal and state taxes free The tax treatment of distributions depends on whether they are made periodically over several years or life (periodic distributions) or are nonperiodic distributions. File federal and state taxes free See Taxation of Periodic Payments and Taxation of Nonperiodic Payments in Publication 575 for a detailed description of how distributions are taxed, including the 10-year tax option or capital gain treatment of a lump-sum distribution. File federal and state taxes free Note. File federal and state taxes free A recipient of a distribution from a designated Roth account will have a cost basis since designated Roth contributions are made on an after-tax basis. File federal and state taxes free Also, a distribution from a designated Roth account is entirely tax-free if certain conditions are met. File federal and state taxes free See Qualified distributions under Qualified Roth Contribution Program, earlier. File federal and state taxes free Rollover. File federal and state taxes free   The recipient of an eligible rollover distribution from a qualified plan can defer the tax on it by rolling it over into a traditional IRA or another eligible retirement plan. File federal and state taxes free However, it may be subject to withholding as discussed under Withholding requirement, later. File federal and state taxes free A rollover can also be made to a Roth IRA, in which case, any previously untaxed amounts are includible in gross income unless the rollover is from a designated Roth account. File federal and state taxes free Eligible rollover distribution. File federal and state taxes free   This is a distribution of all or any part of an employee's balance in a qualified retirement plan that is not any of the following. File federal and state taxes free A required minimum distribution. File federal and state taxes free See Required Distributions , earlier. File federal and state taxes free Any of a series of substantially equal payments made at least once a year over any of the following periods. File federal and state taxes free The employee's life or life expectancy. File federal and state taxes free The joint lives or life expectancies of the employee and beneficiary. File federal and state taxes free A period of 10 years or longer. File federal and state taxes free A hardship distribution. File federal and state taxes free The portion of a distribution that represents the return of an employee's nondeductible contributions to the plan. File federal and state taxes free See Employee Contributions , earlier, and Rollover of nontaxable amounts, next. File federal and state taxes free Loans treated as distributions. File federal and state taxes free Dividends on employer securities. File federal and state taxes free The cost of any life insurance coverage provided under a qualified retirement plan. File federal and state taxes free Similar items designated by the IRS in published guidance. File federal and state taxes free See, for example, the Instructions for Forms 1099-R and 5498. File federal and state taxes free Rollover of nontaxable amounts. File federal and state taxes free   You may be able to roll over the nontaxable part of a distribution to another qualified retirement plan or a section 403(b) plan, or to an IRA. File federal and state taxes free If the rollover is to a qualified retirement plan or a section 403(b) plan that separately accounts for the taxable and nontaxable parts of the rollover, the transfer must be made through a direct (trustee-to-trustee) rollover. File federal and state taxes free If the rollover is to an IRA, the transfer can be made by any rollover method. File federal and state taxes free Note. File federal and state taxes free A distribution from a designated Roth account can be rolled over to another designated Roth account or to a Roth IRA. File federal and state taxes free If the rollover is to a Roth IRA, it can be rolled over by any rollover method, but if the rollover is to another designated Roth account, it must be rolled over directly (trustee-to-trustee). File federal and state taxes free More information. File federal and state taxes free   For more information about rollovers, see Rollovers in Pubs. File federal and state taxes free 575 and 590. File federal and state taxes free Withholding requirement. File federal and state taxes free   If, during a year, a qualified plan pays to a participant one or more eligible rollover distributions (defined earlier) that are reasonably expected to total $200 or more, the payor must withhold 20% of the taxable portion of each distribution for federal income tax. File federal and state taxes free Exceptions. File federal and state taxes free   If, instead of having the distribution paid to him or her, the participant chooses to have the plan pay it directly to an IRA or another eligible retirement plan (a direct rollover), no withholding is required. File federal and state taxes free   If the distribution is not an eligible rollover distribution, defined earlier, the 20% withholding requirement does not apply. File federal and state taxes free Other withholding rules apply to distributions that are not eligible rollover distributions, such as long-term periodic distributions and required distributions (periodic or nonperiodic). File federal and state taxes free However, the participant can choose not to have tax withheld from these distributions. File federal and state taxes free If the participant does not make this choice, the following withholding rules apply. File federal and state taxes free For periodic distributions, withholding is based on their treatment as wages. File federal and state taxes free For nonperiodic distributions, 10% of the taxable part is withheld. File federal and state taxes free Estimated tax payments. File federal and state taxes free   If no income tax is withheld or not enough tax is withheld, the recipient of a distribution may have to make estimated tax payments. File federal and state taxes free For more information, see Withholding Tax and Estimated Tax in Publication 575. File federal and state taxes free Section 402(f) Notice. File federal and state taxes free   If a distribution is an eligible rollover distribution, as defined earlier, you must provide a written notice to the recipient that explains the following rules regarding such distributions. File federal and state taxes free That the distribution may be directly transferred to an eligible retirement plan and information about which distributions are eligible for this direct transfer. File federal and state taxes free That tax will be withheld from the distribution if it is not directly transferred to an eligible retirement plan. File federal and state taxes free That the distribution will not be subject to tax if transferred to an eligible retirement plan within 60 days after the date the recipient receives the distribution. File federal and state taxes free Certain other rules that may be applicable. File federal and state taxes free   Notice 2009-68, 2009-39 I. File federal and state taxes free R. File federal and state taxes free B. File federal and state taxes free 423, available at www. File federal and state taxes free irs. File federal and state taxes free gov/irb/2009-39_IRB/ar14. File federal and state taxes free html, contains two updated safe harbor section 402(f) notices that plan administrators may provide recipients of eligible rollover distributions. File federal and state taxes free If the plan allows in-plan Roth rollovers, the 402(f) notice must be amended to reflect this. File federal and state taxes free Notice 2010-84 contains guidance on how to modify a 402(f) notice for in-plan Roth rollovers. File federal and state taxes free Timing of notice. File federal and state taxes free   The notice generally must be provided no less than 30 days and no more than 180 days before the date of a distribution. File federal and state taxes free Method of notice. File federal and state taxes free   The written notice must be provided individually to each distributee of an eligible rollover distribution. File federal and state taxes free Posting of the notice is not sufficient. File federal and state taxes free However, the written requirement may be satisfied through the use of electronic media if certain additional conditions are met. File federal and state taxes free See Regulations section 1. File federal and state taxes free 401(a)-21. File federal and state taxes free Tax on failure to give notice. File federal and state taxes free   Failure to give a 402(f) notice will result in a tax of $100 for each failure, with a total not exceeding $50,000 per calendar year. File federal and state taxes free The tax will not be imposed if it is shown that such failure is due to reasonable cause and not to willful neglect. File federal and state taxes free Tax on Early Distributions If a distribution is made to an employee under the plan before he or she reaches age 59½, the employee may have to pay a 10% additional tax on the distribution. File federal and state taxes free This tax applies to the amount received that the employee must include in income. File federal and state taxes free Exceptions. File federal and state taxes free   The 10% tax will not apply if distributions before age 59½ are made in any of the following circumstances. File federal and state taxes free Made to a beneficiary (or to the estate of the employee) on or after the death of the employee. File federal and state taxes free Made due to the employee having a qualifying disability. File federal and state taxes free Made as part of a series of substantially equal periodic payments beginning after separation from service and made at least annually for the life or life expectancy of the employee or the joint lives or life expectancies of the employee and his or her designated beneficiary. File federal and state taxes free (The payments under this exception, except in the case of death or disability, must continue for at least 5 years or until the employee reaches age 59½, whichever is the longer period. File federal and state taxes free ) Made to an employee after separation from service if the separation occurred during o
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SOI Tax Stats - Tax-Exempt Bond Statistics

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Snapshot of Tax-Exempt Bond Statistics

  • Includes data on "public purpose" (Governmental) bonds, obtained from Form 8038-G, Information Return for Tax-Exempt Governmental Obligations; as well as data on "private-activity" bonds, obtained from Form 8038, Information Return for Tax-Exempt Private Activity Bonds.
  • Analyzes the types of projects financed and the entire issue price of bonds.

For information about selected terms and concepts, a description of the data sources and limitations, and links to recent revisions of Forms 8038-G and 8038, please visit the Tax-Exempt Bonds Studies Metadata page.

 


Statistical Tables

The following tables are available as Microsoft Excel® files.  A free Excel viewer is available for download, if needed.

All Municipal Bonds Reported on Forms 8038, 8038-B, 8038-G, and 8038-TC
 

    Classified by: Bond Type, Year of Issue
    Issue Years: 2010   2009

 

Tax-Exempt Governmental Bonds (Form 8038-G):
 

 All Bonds—Number of Bonds Issued, Entire Issue Price
    Classified by: Type of Bond, Term, Year of Issue
    Issue Years:

2011   2010   2009   2008   2007   2006   2003–2004   1996–2002

1991–1995


 

 Long-Term Bonds—Number of Bonds Issued, Entire Issue Price
    Classified by: Purpose of Bond, Year of Issue
    Issue Years:

2011   2010   2009   2008   2007   2006   2005   2003–2004   1996–2002

1991–1995


 

 Long-Term Bonds—Computation of Lendable Proceeds
    Classified by: Selected Purpose of Bond
    Issue Years:

2011   2010    2009    2008   2007   2006   2005   2003–2004   2002

1995


 

 New Money, Long-Term Bonds
    Classified by: Purpose of Bond, Size of Issue
    Issue Years:

2011   2010   2009   2008   2007   2006   2003–2004   2002

1995


 

 New Money, Long-Term Bonds
    Classified by: State, Purpose of Bond
    Issue Years:

2011   2010   2009   2008   2007   2006   2005   2003–2004   1996–2002

1995



Tax-Exempt Private-Activity Bonds (Form 8038):
 

 All Bonds—Number of Bonds Issued, Entire Issue Price
    Classified by: Type of Bond, Term, Year of Issue
    Issue Years:

2011   2010   2009   2008   2007   2006   2003–2004   1996–2002

1988–1995


 

  Long-Term Bonds—Number of Bonds Issued, Entire Issue Price
    Classified by: Purpose of Bond, Year of Issue
    Issue Years:

2011   2010   2009   2008   2007   2006   2005   2003–2004   1996–2002

1988–1995


 

 Long-Term Bonds—Computation of Lendable Proceeds
     Classified by: Selected Purpose of Bond
    Issue Years:

2011   2010   2009   2008   2007   2006   2005   2003–2004   2002

1995


 

  New Money, Long-Term Bonds
    Classified by: Purpose of Bond, Size of Issue
    Issue Years:

2011   2010   2009   2008   2007   2006   2003–2004   2002

1995


 

  New Money, Long-Term Bonds
    Classified by: State, Purpose of Bond
    Issue Years:

2011   2010   2009   2008   2007   2006   2005   2003–2004   1996–2002

1988–1995


 

Taxable Direct Payment Bonds 

    Classified by: Direct Payment Bond Type, Year of Issue
    Issue Years: 2010   2009

 
    Classified by: Purpose of Bond, Size of Issue
    Issue Years: 2010    2009

 
    Classified by: Selected States of Issue
    Issue Years: 2010    2009

 
 
  Specified Tax Credit Bonds
    Classified by: Selected States of Issue
    Issue Years: 2010


 

Tax Credit Bonds

    Classified by: Type
    Issue Years: 2011   2010

 
 
    Classified by: Tax Credit Bond Type, Size of Issue
    Issue Years: 2009

 
    Classified by: Selected States of Issue
    Issue Years: 2009

SOI Bulletin Articles

The following are available as PDF files.  A free Adobe® reader is available for download, if needed.


Other IRS Data and Related Links

For tax administration data on this topic, as well as other types of taxes, choose from the links below.

 

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Page Last Reviewed or Updated: 22-Oct-2013

The File Federal And State Taxes Free

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