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Free efile h&r block Publication 525 - Main Content Table of Contents Employee CompensationBabysitting. Free efile h&r block Miscellaneous Compensation Fringe Benefits Retirement Plan Contributions Stock Options Restricted Property Special Rules for Certain EmployeesClergy Members of Religious Orders Foreign Employer Military Volunteers Business and Investment IncomeRents From Personal Property Royalties Partnership Income S Corporation Income Sickness and Injury BenefitsDisability Pensions Long-Term Care Insurance Contracts Workers' Compensation Other Sickness and Injury Benefits Miscellaneous IncomeBartering Canceled Debts Host or Hostess Life Insurance Proceeds Recoveries Survivor Benefits Unemployment Benefits Welfare and Other Public Assistance Benefits Other Income RepaymentsMethod 1. Free efile h&r block Method 2. Free efile h&r block How To Get Tax HelpLow Income Taxpayer Clinics Employee Compensation In most cases, you must include in gross income everything you receive in payment for personal services. Free efile h&r block In addition to wages, salaries, commissions, fees, and tips, this includes other forms of compensation such as fringe benefits and stock options. Free efile h&r block You should receive a Form W-2 from your employer or former employer showing the pay you received for your services. Free efile h&r block Include all your pay on line 7 of Form 1040 or Form 1040A or on line 1 of Form 1040EZ, even if you do not receive Form W-2, or you receive a Form W-2 that does not include all pay that should be included on the Form W-2. Free efile h&r block If you performed services, other than as an independent contractor, and your employer did not withhold social security and Medicare taxes from your pay, you must file Form 8919, Uncollected Social Security and Medicare Tax on Wages, with your Form 1040. Free efile h&r block These wages must be included on line 7 of Form 1040. Free efile h&r block See Form 8919 for more information. Free efile h&r block Childcare providers. Free efile h&r block   If you provide childcare, either in the child's home or in your home or other place of business, the pay you receive must be included in your income. Free efile h&r block If you are not an employee, you are probably self-employed and must include payments for your services on Schedule C (Form 1040), Profit or Loss From Business, or Schedule C-EZ (Form 1040), Net Profit From Business. Free efile h&r block You generally are not an employee unless you are subject to the will and control of the person who employs you as to what you are to do and how you are to do it. Free efile h&r block Babysitting. Free efile h&r block   If you babysit for relatives or neighborhood children, whether on a regular basis or only periodically, the rules for childcare providers apply to you. Free efile h&r block Bankruptcy. Free efile h&r block   If you filed for bankruptcy under Chapter 11 of the Bankruptcy Code, you must allocate your wages and withheld income tax. Free efile h&r block Your W-2 will show your total wages and withheld income tax for the year. Free efile h&r block On your tax return, you report the wages and withheld income tax for the period before you filed for bankruptcy. Free efile h&r block Your bankruptcy estate reports the wages and withheld income tax for the period after you filed for bankruptcy. Free efile h&r block If you receive other information returns (such as Form 1099-DIV, Dividends and Distributions, or 1099-INT, Interest Income) that report gross income to you, rather than to the bankruptcy estate, you must allocate that income. Free efile h&r block   The only exception is for purposes of figuring your self-employment tax, if you are self-employed. Free efile h&r block For that purpose, you must take into account all your self-employment income for the year from services performed both before and after the beginning of the case. Free efile h&r block   You must file a statement with your income tax return stating you filed a Chapter 11 bankruptcy case. Free efile h&r block The statement must show the allocation and describe the method used to make the allocation. Free efile h&r block For a sample of this statement and other information, see Notice 2006-83, 2006-40 I. Free efile h&r block R. Free efile h&r block B. Free efile h&r block 596, available at www. Free efile h&r block irs. Free efile h&r block gov/irb/2006-40_IRB/ar12. Free efile h&r block html. Free efile h&r block Miscellaneous Compensation This section discusses many types of employee compensation. Free efile h&r block The subjects are arranged in alphabetical order. Free efile h&r block Advance commissions and other earnings. Free efile h&r block   If you receive advance commissions or other amounts for services to be performed in the future and you are a cash-method taxpayer, you must include these amounts in your income in the year you receive them. Free efile h&r block    If you repay unearned commissions or other amounts in the same year you receive them, reduce the amount included in your income by the repayment. Free efile h&r block If you repay them in a later tax year, you can deduct the repayment as an itemized deduction on your Schedule A (Form 1040), Itemized Deductions, or you may be able to take a credit for that year. Free efile h&r block See Repayments , later. Free efile h&r block Allowances and reimbursements. Free efile h&r block    If you receive travel, transportation, or other business expense allowances or reimbursements from your employer, see Publication 463, Travel, Entertainment, Gift, and Car Expenses. Free efile h&r block If you are reimbursed for moving expenses, see Publication 521, Moving Expenses. Free efile h&r block Back pay awards. Free efile h&r block   Include in income amounts you are awarded in a settlement or judgment for back pay. Free efile h&r block These include payments made to you for damages, unpaid life insurance premiums, and unpaid health insurance premiums. Free efile h&r block They should be reported to you by your employer on Form W-2. Free efile h&r block Bonuses and awards. Free efile h&r block    Bonuses or awards you receive for outstanding work are included in your income and should be shown on your Form W-2. Free efile h&r block These include prizes such as vacation trips for meeting sales goals. Free efile h&r block If the prize or award you receive is goods or services, you must include the fair market value of the goods or services in your income. Free efile h&r block However, if your employer merely promises to pay you a bonus or award at some future time, it is not taxable until you receive it or it is made available to you. Free efile h&r block Employee achievement award. Free efile h&r block   If you receive tangible personal property (other than cash, a gift certificate, or an equivalent item) as an award for length of service or safety achievement, you generally can exclude its value from your income. Free efile h&r block However, the amount you can exclude is limited to your employer's cost and cannot be more than $1,600 ($400 for awards that are not qualified plan awards) for all such awards you receive during the year. Free efile h&r block Your employer can tell you whether your award is a qualified plan award. Free efile h&r block Your employer must make the award as part of a meaningful presentation, under conditions and circumstances that do not create a significant likelihood of it being disguised pay. Free efile h&r block   However, the exclusion does not apply to the following awards. Free efile h&r block A length-of-service award if you received it for less than 5 years of service or if you received another length-of-service award during the year or the previous 4 years. Free efile h&r block A safety achievement award if you are a manager, administrator, clerical employee, or other professional employee or if more than 10% of eligible employees previously received safety achievement awards during the year. Free efile h&r block Example. Free efile h&r block Ben Green received three employee achievement awards during the year: a nonqualified plan award of a watch valued at $250, and two qualified plan awards of a stereo valued at $1,000 and a set of golf clubs valued at $500. Free efile h&r block Assuming that the requirements for qualified plan awards are otherwise satisfied, each award by itself would be excluded from income. Free efile h&r block However, because the $1,750 total value of the awards is more than $1,600, Ben must include $150 ($1,750 − $1,600) in his income. Free efile h&r block Differential wage payments. Free efile h&r block   This is any payment made by an employer to an individual for any period during which the individual is, for a period of more than 30 days, an active duty member of the uniformed services and represents all or a portion of the wages the individual would have received from the employer for that period. Free efile h&r block These payments are treated as wages and are subject to income tax withholding, but not FICA or FUTA taxes. Free efile h&r block The payments are reported as wages on Form W-2. Free efile h&r block Government cost-of-living allowances. Free efile h&r block   Most payments received by U. Free efile h&r block S. Free efile h&r block Government civilian employees for working abroad are taxable. Free efile h&r block However, certain cost-of-living allowances are tax free. Free efile h&r block Publication 516, U. Free efile h&r block S. Free efile h&r block Government Civilian Employees Stationed Abroad, explains the tax treatment of allowances, differentials, and other special pay you receive for employment abroad. Free efile h&r block Nonqualified deferred compensation plans. Free efile h&r block   Your employer will report to you the total amount of deferrals for the year under a nonqualified deferred compensation plan. Free efile h&r block This amount is shown on Form W-2, box 12, using code Y. Free efile h&r block This amount is not included in your income. Free efile h&r block   However, if at any time during the tax year, the plan fails to meet certain requirements, or is not operated under those requirements, all amounts deferred under the plan for the tax year and all preceding tax years are included in your income for the current year. Free efile h&r block This amount is included in your wages shown on Form W-2, box 1. Free efile h&r block It is also shown on Form W-2, box 12, using code Z. Free efile h&r block Nonqualified deferred compensation plans of nonqualified entities. Free efile h&r block   In most cases, any compensation deferred under a nonqualified deferred compensation plan of a nonqualified entity is included in gross income when there is no substantial risk of forfeiture of the rights to such compensation. Free efile h&r block For this purpose, a nonqualified entity is: A foreign corporation unless substantially all of its income is: Effectively connected with the conduct of a trade or business in the United States, or Subject to a comprehensive foreign income tax. Free efile h&r block A partnership unless substantially all of its income is allocated to persons other than: Foreign persons for whom the income is not subject to a comprehensive foreign income tax, and Tax-exempt organizations. Free efile h&r block Note received for services. Free efile h&r block   If your employer gives you a secured note as payment for your services, you must include the fair market value (usually the discount value) of the note in your income for the year you receive it. Free efile h&r block When you later receive payments on the note, a proportionate part of each payment is the recovery of the fair market value that you previously included in your income. Free efile h&r block Do not include that part again in your income. Free efile h&r block Include the rest of the payment in your income in the year of payment. Free efile h&r block   If your employer gives you a nonnegotiable unsecured note as payment for your services, payments on the note that are credited toward the principal amount of the note are compensation income when you receive them. Free efile h&r block Severance pay. Free efile h&r block   You must include in income amounts you receive as severance pay and any payment for the cancellation of your employment contract. Free efile h&r block Accrued leave payment. Free efile h&r block   If you are a federal employee and receive a lump-sum payment for accrued annual leave when you retire or resign, this amount will be included as wages on your Form W-2. Free efile h&r block   If you resign from one agency and are reemployed by another agency, you may have to repay part of your lump-sum annual leave payment to the second agency. Free efile h&r block You can reduce gross wages by the amount you repaid in the same tax year in which you received it. Free efile h&r block Attach to your tax return a copy of the receipt or statement given to you by the agency you repaid to explain the difference between the wages on your return and the wages on your Forms W-2. Free efile h&r block Outplacement services. Free efile h&r block   If you choose to accept a reduced amount of severance pay so that you can receive outplacement services (such as training in résumé writing and interview techniques), you must include the unreduced amount of the severance pay in income. Free efile h&r block    However, you can deduct the value of these outplacement services (up to the difference between the severance pay included in income and the amount actually received) as a miscellaneous deduction (subject to the 2%-of-adjusted-gross-income (AGI) limit) on Schedule A (Form 1040). Free efile h&r block Sick pay. Free efile h&r block   Pay you receive from your employer while you are sick or injured is part of your salary or wages. Free efile h&r block In addition, you must include in your income sick pay benefits received from any of the following payers. Free efile h&r block A welfare fund. Free efile h&r block A state sickness or disability fund. Free efile h&r block An association of employers or employees. Free efile h&r block An insurance company, if your employer paid for the plan. Free efile h&r block However, if you paid the premiums on an accident or health insurance policy, the benefits you receive under the policy are not taxable. Free efile h&r block For more information, see Other Sickness and Injury Benefits under Sickness and Injury Benefits, later. Free efile h&r block Social security and Medicare taxes paid by employer. Free efile h&r block   If you and your employer have an agreement that your employer pays your social security and Medicare taxes without deducting them from your gross wages, you must report the amount of tax paid for you as taxable wages on your tax return. Free efile h&r block The payment is also treated as wages for figuring your social security and Medicare taxes and your social security and Medicare benefits. Free efile h&r block However, these payments are not treated as social security and Medicare wages if you are a household worker or a farm worker. Free efile h&r block Stock appreciation rights. Free efile h&r block   Do not include a stock appreciation right granted by your employer in income until you exercise (use) the right. Free efile h&r block When you use the right, you are entitled to a cash payment equal to the fair market value of the corporation's stock on the date of use minus the fair market value on the date the right was granted. Free efile h&r block You include the cash payment in income in the year you use the right. Free efile h&r block Fringe Benefits Fringe benefits received in connection with the performance of your services are included in your income as compensation unless you pay fair market value for them or they are specifically excluded by law. Free efile h&r block Abstaining from the performance of services (for example, under a covenant not to compete) is treated as the performance of services for purposes of these rules. Free efile h&r block See Valuation of Fringe Benefits , later in this discussion, for information on how to determine the amount to include in income. Free efile h&r block Recipient of fringe benefit. Free efile h&r block   You are the recipient of a fringe benefit if you perform the services for which the fringe benefit is provided. Free efile h&r block You are considered to be the recipient even if it is given to another person, such as a member of your family. Free efile h&r block An example is a car your employer gives to your spouse for services you perform. Free efile h&r block The car is considered to have been provided to you and not to your spouse. Free efile h&r block   You do not have to be an employee of the provider to be a recipient of a fringe benefit. Free efile h&r block If you are a partner, director, or independent contractor, you also can be the recipient of a fringe benefit. Free efile h&r block Provider of benefit. Free efile h&r block   Your employer or another person for whom you perform services is the provider of a fringe benefit regardless of whether that person actually provides the fringe benefit to you. Free efile h&r block The provider can be a client or customer of an independent contractor. Free efile h&r block Accounting period. Free efile h&r block   You must use the same accounting period your employer uses to report your taxable noncash fringe benefits. Free efile h&r block Your employer has the option to report taxable noncash fringe benefits by using either of the following rules. Free efile h&r block The general rule: benefits are reported for a full calendar year (January 1–December 31). Free efile h&r block The special accounting period rule: benefits provided during the last 2 months of the calendar year (or any shorter period) are treated as paid during the following calendar year. Free efile h&r block For example, each year your employer reports the value of benefits provided during the last 2 months of the prior year and the first 10 months of the current year. Free efile h&r block Your employer does not have to use the same accounting period for each fringe benefit, but must use the same period for all employees who receive a particular benefit. Free efile h&r block   You must use the same accounting period that you use to report the benefit to claim an employee business deduction (for use of a car, for example). Free efile h&r block Form W-2. Free efile h&r block   Your employer must include all taxable fringe benefits in box 1 of Form W-2 as wages, tips and other compensation and, if applicable, in boxes 3 and 5 as social security and Medicare wages. Free efile h&r block Although not required, your employer may include the total value of fringe benefits in box 14 (or on a separate statement). Free efile h&r block However, if your employer provided you with a vehicle and included 100% of its annual lease value in your income, the employer must separately report this value to you in box 14 (or on a separate statement). Free efile h&r block Accident or Health Plan In most cases, the value of accident or health plan coverage provided to you by your employer is not included in your income. Free efile h&r block Benefits you receive from the plan may be taxable, as explained, later, under Sickness and Injury Benefits . Free efile h&r block For information on the items covered in this section, other than Long-term care coverage , see Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans. Free efile h&r block Long-term care coverage. Free efile h&r block   Contributions by your employer to provide coverage for long-term care services generally are not included in your income. Free efile h&r block However, contributions made through a flexible spending or similar arrangement (such as a cafeteria plan) must be included in your income. Free efile h&r block This amount will be reported as wages in box 1 of your Form W-2. Free efile h&r block Archer MSA contributions. Free efile h&r block    Contributions by your employer to your Archer MSA generally are not included in your income. Free efile h&r block Their total will be reported in box 12 of Form W-2, with code R. Free efile h&r block You must report this amount on Form 8853, Archer MSAs and Long-Term Care Insurance Contracts. Free efile h&r block File the form with your return. Free efile h&r block Health flexible spending arrangement (health FSA). Free efile h&r block   If your employer provides a health FSA that qualifies as an accident or health plan, the amount of your salary reduction, and reimbursements of your medical care expenses, in most cases, are not included in your income. Free efile h&r block   Health FSAs are subject to a $2,500 limit on salary reduction contributions for plan years beginning after 2012. Free efile h&r block The $2,500 limit is subject to an inflation adjustment for plan years beginning after 2013. Free efile h&r block For more information, see Notice 2012-40, 2012-26 I. Free efile h&r block R. Free efile h&r block B. Free efile h&r block 1046, available at www. Free efile h&r block irs. Free efile h&r block gov/irb/2012-26 IRB/ar09. Free efile h&r block html. Free efile h&r block Health reimbursement arrangement (HRA). Free efile h&r block   If your employer provides an HRA that qualifies as an accident or health plan, coverage and reimbursements of your medical care expenses generally are not included in your income. Free efile h&r block Health savings accounts (HSA). Free efile h&r block   If you are an eligible individual, you and any other person, including your employer or a family member, can make contributions to your HSA. Free efile h&r block Contributions, other than employer contributions, are deductible on your return whether or not you itemize deductions. Free efile h&r block Contributions made by your employer are not included in your income. Free efile h&r block Distributions from your HSA that are used to pay qualified medical expenses are not included in your income. Free efile h&r block Distributions not used for qualified medical expenses are included in your income. Free efile h&r block See Publication 969 for the requirements of an HSA. Free efile h&r block   Contributions by a partnership to a bona fide partner's HSA are not contributions by an employer. Free efile h&r block The contributions are treated as a distribution of money and are not included in the partner's gross income. Free efile h&r block Contributions by a partnership to a partner's HSA for services rendered are treated as guaranteed payments that are includible in the partner's gross income. Free efile h&r block In both situations, the partner can deduct the contribution made to the partner's HSA. Free efile h&r block   Contributions by an S corporation to a 2% shareholder-employee's HSA for services rendered are treated as guaranteed payments and are includible in the shareholder-employee's gross income. Free efile h&r block The shareholder-employee can deduct the contribution made to the shareholder-employee's HSA. Free efile h&r block Qualified HSA funding distribution. Free efile h&r block   You can make a one-time distribution from your individual retirement account (IRA) to an HSA and you generally will not include any of the distribution in your income. Free efile h&r block See Publication 590, Individual Retirement Arrangements (IRAs), for the requirements for these qualified HSA funding distributions. Free efile h&r block Failure to maintain eligibility. Free efile h&r block   If your HSA received qualified HSA distributions from a health FSA or HRA (discussed earlier) or a qualified HSA funding distribution, you must be an eligible individual for HSA purposes for the period beginning with the month in which the qualified distribution was made and ending on the last day of the 12th month following that month. Free efile h&r block If you fail to be an eligible individual during this period, other than because of death or disability, you must include the distribution in your income for the tax year in which you become ineligible. Free efile h&r block This income is also subject to an additional 10% tax. Free efile h&r block Adoption Assistance You may be able to exclude from your income amounts paid or expenses incurred by your employer for qualified adoption expenses in connection with your adoption of an eligible child. Free efile h&r block See Instructions for Form 8839, Qualified Adoption Expenses, for more information. Free efile h&r block Adoption benefits are reported by your employer in box 12 of Form W-2 with code T. Free efile h&r block They also are included as social security and Medicare wages in boxes 3 and 5. Free efile h&r block However, they are not included as wages in box 1. Free efile h&r block To determine the taxable and nontaxable amounts, you must complete Part III of Form 8839. Free efile h&r block File the form with your return. Free efile h&r block Athletic Facilities If your employer provides you with the free or low-cost use of an employer-operated gym or other athletic club on your employer's premises, the value is not included in your compensation. Free efile h&r block The gym must be used primarily by employees, their spouses, and their dependent children. Free efile h&r block If your employer pays for a fitness program provided to you at an off-site resort hotel or athletic club, the value of the program is included in your compensation. Free efile h&r block De Minimis (Minimal) Benefits If your employer provides you with a product or service and the cost of it is so small that it would be unreasonable for the employer to account for it, the value is not included in your income. Free efile h&r block In most cases, the value of benefits such as discounts at company cafeterias, cab fares home when working overtime, and company picnics are not included in your income. Free efile h&r block Also see Employee Discounts , later. Free efile h&r block Holiday gifts. Free efile h&r block   If your employer gives you a turkey, ham, or other item of nominal value at Christmas or other holidays, do not include the value of the gift in your income. Free efile h&r block However, if your employer gives you cash, a gift certificate, or a similar item that you can easily exchange for cash, you include the value of that gift as extra salary or wages regardless of the amount involved. Free efile h&r block Dependent Care Benefits If your employer provides dependent care benefits under a qualified plan, you may be able to exclude these benefits from your income. Free efile h&r block Dependent care benefits include: Amounts your employer pays directly to either you or your care provider for the care of your qualifying person while you work, and The fair market value of care in a daycare facility provided or sponsored by your employer. Free efile h&r block The amount you can exclude is limited to the lesser of: The total amount of dependent care benefits you received during the year, The total amount of qualified expenses you incurred during the year, Your earned income, Your spouse's earned income, or $5,000 ($2,500 if married filing separately). Free efile h&r block Your employer must show the total amount of dependent care benefits provided to you during the year under a qualified plan in box 10 of your Form W-2. Free efile h&r block Your employer also will include any dependent care benefits over $5,000 in your wages shown in box 1 of your Form W-2. Free efile h&r block To claim the exclusion, you must complete Part III of Form 2441, Child and Dependent Care Expenses. Free efile h&r block See the Instructions for Form 2441 for more information. Free efile h&r block Educational Assistance You can exclude from your income up to $5,250 of qualified employer-provided educational assistance. Free efile h&r block For more information, see Publication 970. Free efile h&r block Employee Discounts If your employer sells you property or services at a discount, you may be able to exclude the amount of the discount from your income. Free efile h&r block The exclusion applies to discounts on property or services offered to customers in the ordinary course of the line of business in which you work. Free efile h&r block However, it does not apply to discounts on real property or property commonly held for investment (such as stocks or bonds). Free efile h&r block The exclusion is limited to the price charged nonemployee customers multiplied by the following percentage. Free efile h&r block For a discount on property, your employer's gross profit percentage (gross profit divided by gross sales) on all property sold during the employer's previous tax year. Free efile h&r block (Ask your employer for this percentage. Free efile h&r block ) For a discount on services, 20%. Free efile h&r block Financial Counseling Fees Financial counseling fees paid for you by your employer are included in your income and must be reported as part of wages. Free efile h&r block If the fees are for tax or investment counseling, they can be deducted on Schedule A (Form 1040) as a miscellaneous deduction (subject to the 2%-of-AGI limit). Free efile h&r block Qualified retirement planning services paid for you by your employer may be excluded from your income. Free efile h&r block For more information, see Retirement Planning Services , later. Free efile h&r block Group-Term Life Insurance In most cases, the cost of up to $50,000 of group-term life insurance coverage provided to you by your employer (or former employer) is not included in your income. Free efile h&r block However, you must include in income the cost of employer-provided insurance that is more than the cost of $50,000 of coverage reduced by any amount you pay toward the purchase of the insurance. Free efile h&r block For exceptions to this rule, see Entire cost excluded , and Entire cost taxed , later. Free efile h&r block If your employer provided more than $50,000 of coverage, the amount included in your income is reported as part of your wages in box 1 of your Form W-2. Free efile h&r block Also, it is shown separately in box 12 with code C. Free efile h&r block Group-term life insurance. Free efile h&r block   This insurance is term life insurance protection (insurance for a fixed period of time) that: Provides a general death benefit, Is provided to a group of employees, Is provided under a policy carried by the employer, and Provides an amount of insurance to each employee based on a formula that prevents individual selection. Free efile h&r block Permanent benefits. Free efile h&r block   If your group-term life insurance policy includes permanent benefits, such as a paid-up or cash surrender value, you must include in your income, as wages, the cost of the permanent benefits minus the amount you pay for them. Free efile h&r block Your employer should be able to tell you the amount to include in your income. Free efile h&r block Accidental death benefits. Free efile h&r block   Insurance that provides accidental or other death benefits but does not provide general death benefits (travel insurance, for example) is not group-term life insurance. Free efile h&r block Former employer. Free efile h&r block   If your former employer provided more than $50,000 of group-term life insurance coverage during the year, the amount included in your income is reported as wages in box 1 of Form W-2. Free efile h&r block Also, it is shown separately in box 12 with code C. Free efile h&r block Box 12 also will show the amount of uncollected social security and Medicare taxes on the excess coverage, with codes M and N. Free efile h&r block You must pay these taxes with your income tax return. Free efile h&r block Include them on line 60, Form 1040, and follow the instructions forline 60. Free efile h&r block For more information, see the Instructions for Form 1040. Free efile h&r block Two or more employers. Free efile h&r block   Your exclusion for employer-provided group-term life insurance coverage cannot exceed the cost of $50,000 of coverage, whether the insurance is provided by a single employer or multiple employers. Free efile h&r block If two or more employers provide insurance coverage that totals more than $50,000, the amounts reported as wages on your Forms W-2 will not be correct. Free efile h&r block You must figure how much to include in your income. Free efile h&r block Reduce the amount you figure by any amount reported with code C in box 12 of your Forms W-2, add the result to the wages reported in box 1, and report the total on your return. Free efile h&r block Figuring the taxable cost. Free efile h&r block    Use the following worksheet to figure the amount to include in your income. Free efile h&r block   If you pay any part of the cost of the insurance, your entire payment reduces, dollar for dollar, the amount you otherwise would include in your income. Free efile h&r block However, you cannot reduce the amount to include in your income by: Payments for coverage in a different tax year, Payments for coverage through a cafeteria plan, unless the payments are after-tax contributions, or Payments for coverage not taxed to you because of the exceptions discussed later under Entire cost excluded . Free efile h&r block Worksheet 1. Free efile h&r block Figuring the Cost of Group-Term Life Insurance To Include in Income 1. Free efile h&r block Enter the total amount of your insurance coverage from your employer(s) 1. Free efile h&r block   2. Free efile h&r block Limit on exclusion for employer-provided group-term life insurance coverage 2. Free efile h&r block 50,000 3. Free efile h&r block Subtract line 2 from line 1 3. Free efile h&r block   4. Free efile h&r block Divide line 3 by $1,000. Free efile h&r block Figure to the nearest tenth 4. Free efile h&r block   5. Free efile h&r block Go to Table 1. Free efile h&r block Using your age on the last day of the tax year, find your age group in the left column, and enter the cost from the column on the right for your age group 5. Free efile h&r block   6. Free efile h&r block Multiply line 4 by line 5 6. Free efile h&r block     7. Free efile h&r block Enter the number of full months of coverage at this cost 7. Free efile h&r block   8. Free efile h&r block Multiply line 6 by line 7 8. Free efile h&r block   9. Free efile h&r block Enter the premiums you paid per month 9. Free efile h&r block       10. Free efile h&r block Enter the number of months you paid the  premiums 10. Free efile h&r block       11. Free efile h&r block Multiply line 9 by line 10. Free efile h&r block 11. Free efile h&r block   12. Free efile h&r block Subtract line 11 from line 8. Free efile h&r block Include this amount in your income as wages 12. Free efile h&r block   Table 1. Free efile h&r block Cost of $1,000 of Group-Term Life Insurance for One Month   Age Cost     Under 25 $ . Free efile h&r block 05     25 through 29 . Free efile h&r block 06     30 through 34 . Free efile h&r block 08     35 through 39 . Free efile h&r block 09     40 through 44 . Free efile h&r block 10     45 through 49 . Free efile h&r block 15     50 through 54 . Free efile h&r block 23     55 through 59 . Free efile h&r block 43     60 through 64 . Free efile h&r block 66     65 through 69 1. Free efile h&r block 27     70 and older 2. Free efile h&r block 06   Example. Free efile h&r block You are 51 years old and work for employers A and B. Free efile h&r block Both employers provide group-term life insurance coverage for you for the entire year. Free efile h&r block Your coverage is $35,000 with employer A and $45,000 with employer B. Free efile h&r block You pay premiums of $4. Free efile h&r block 15 a month under the employer B group plan. Free efile h&r block You figure the amount to include in your income as follows. Free efile h&r block   Worksheet 1. Free efile h&r block Figuring the Cost of Group-Term Life Insurance To Include in Income—Illustrated 1. Free efile h&r block Enter the total amount of your insurance coverage from your employer(s) 1. Free efile h&r block 80,000 2. Free efile h&r block Limit on exclusion for employer-provided group-term life insurance coverage 2. Free efile h&r block 50,000 3. Free efile h&r block Subtract line 2 from line 1 3. Free efile h&r block 30,000 4. Free efile h&r block Divide line 3 by $1,000. Free efile h&r block Figure to the nearest tenth 4. Free efile h&r block 30. Free efile h&r block 0 5. Free efile h&r block Go to Table 1. Free efile h&r block Using your age on the last day of the tax year, find your age group in the left column, and enter the cost from the column on the right for your age group 5. Free efile h&r block . Free efile h&r block 23 6. Free efile h&r block Multiply line 4 by line 5 6. Free efile h&r block 6. Free efile h&r block 90 7. Free efile h&r block Enter the number of full months of coverage at this cost. Free efile h&r block 7. Free efile h&r block 12 8. Free efile h&r block Multiply line 6 by line 7 8. Free efile h&r block 82. Free efile h&r block 80 9. Free efile h&r block Enter the premiums you paid per month 9. Free efile h&r block 4. Free efile h&r block 15     10. Free efile h&r block Enter the number of months you paid the premiums 10. Free efile h&r block 12     11. Free efile h&r block Multiply line 9 by line 10. Free efile h&r block 11. Free efile h&r block 49. Free efile h&r block 80 12. Free efile h&r block Subtract line 11 from line 8. Free efile h&r block Include this amount in your income as wages 12. Free efile h&r block 33. Free efile h&r block 00 The total amount to include in income for the cost of excess group-term life insurance is $33. Free efile h&r block Neither employer provided over $50,000 insurance coverage, so the wages shown on your Forms W-2 do not include any part of that $33. Free efile h&r block You must add it to the wages shown on your Forms W-2 and include the total on your return. Free efile h&r block Entire cost excluded. Free efile h&r block   You are not taxed on the cost of group-term life insurance if any of the following circumstances apply. Free efile h&r block You are permanently and totally disabled and have ended your employment. Free efile h&r block Your employer is the beneficiary of the policy for the entire period the insurance is in force during the tax year. Free efile h&r block A charitable organization to which contributions are deductible is the only beneficiary of the policy for the entire period the insurance is in force during the tax year. Free efile h&r block (You are not entitled to a deduction for a charitable contribution for naming a charitable organization as the beneficiary of your policy. Free efile h&r block ) The plan existed on January 1, 1984, and: You retired before January 2, 1984, and were covered by the plan when you retired, or You reached age 55 before January 2, 1984, and were employed by the employer or its predecessor in 1983. Free efile h&r block Entire cost taxed. Free efile h&r block   You are taxed on the entire cost of group-term life insurance if either of the following circumstances apply. Free efile h&r block The insurance is provided by your employer through a qualified employees' trust, such as a pension trust or a qualified annuity plan. Free efile h&r block You are a key employee and your employer's plan discriminates in favor of key employees. Free efile h&r block Meals and Lodging You do not include in your income the value of meals and lodging provided to you and your family by your employer at no charge if the following conditions are met. Free efile h&r block The meals are: Furnished on the business premises of your employer, and Furnished for the convenience of your employer. Free efile h&r block The lodging is: Furnished on the business premises of your employer, Furnished for the convenience of your employer, and A condition of your employment. Free efile h&r block (You must accept it in order to be able to properly perform your duties. Free efile h&r block ) You also do not include in your income the value of meals or meal money that qualifies as a de minimis fringe benefit. Free efile h&r block See De Minimis (Minimal) Benefits , earlier. Free efile h&r block Faculty lodging. Free efile h&r block   If you are an employee of an educational institution or an academic health center and you are provided with lodging that does not meet the three conditions given earlier, you still may not have to include the value of the lodging in income. Free efile h&r block However, the lodging must be qualified campus lodging, and you must pay an adequate rent. Free efile h&r block Academic health center. Free efile h&r block   This is an organization that meets the following conditions. Free efile h&r block Its principal purpose or function is to provide medical or hospital care or medical education or research. Free efile h&r block It receives payments for graduate medical education under the Social Security Act. Free efile h&r block One of its principal purposes or functions is to provide and teach basic and clinical medical science and research using its own faculty. Free efile h&r block Qualified campus lodging. Free efile h&r block   Qualified campus lodging is lodging furnished to you, your spouse, or one of your dependents by, or on behalf of, the institution or center for use as a home. Free efile h&r block The lodging must be located on or near a campus of the educational institution or academic health center. Free efile h&r block Adequate rent. Free efile h&r block   The amount of rent you pay for the year for qualified campus lodging is considered adequate if it is at least equal to the lesser of: 5% of the appraised value of the lodging, or The average of rentals paid by individuals (other than employees or students) for comparable lodging held for rent by the educational institution. Free efile h&r block If the amount you pay is less than the lesser of these amounts, you must include the difference in your income. Free efile h&r block   The lodging must be appraised by an independent appraiser and the appraisal must be reviewed on an annual basis. Free efile h&r block Example. Free efile h&r block Carl Johnson, a sociology professor for State University, rents a home from the university that is qualified campus lodging. Free efile h&r block The house is appraised at $200,000. Free efile h&r block The average rent paid for comparable university lodging by persons other than employees or students is $14,000 a year. Free efile h&r block Carl pays an annual rent of $11,000. Free efile h&r block Carl does not include in his income any rental value because the rent he pays equals at least 5% of the appraised value of the house (5% × $200,000 = $10,000). Free efile h&r block If Carl paid annual rent of only $8,000, he would have to include $2,000 in his income ($10,000 − $8,000). Free efile h&r block Moving Expense Reimbursements In most cases, if your employer pays for your moving expenses (either directly or indirectly) and the expenses would have been deductible if you paid them yourself, the value is not included in your income. Free efile h&r block See Publication 521 for more information. Free efile h&r block No-Additional-Cost Services The value of services you receive from your employer for free, at cost, or for a reduced price is not included in your income if your employer: Offers the same service for sale to customers in the ordinary course of the line of business in which you work, and Does not have a substantial additional cost (including any sales income given up) to provide you with the service (regardless of what you paid for the service). Free efile h&r block In most cases, no-additional-cost services are excess capacity services, such as airline, bus, or train tickets, hotel rooms, and telephone services. Free efile h&r block Example. Free efile h&r block You are employed as a flight attendant for a company that owns both an airline and a hotel chain. Free efile h&r block Your employer allows you to take personal flights (if there is an unoccupied seat) and stay in any one of their hotels (if there is an unoccupied room) at no cost to you. Free efile h&r block The value of the personal flight is not included in your income. Free efile h&r block However, the value of the hotel room is included in your income because you do not work in the hotel business. Free efile h&r block Retirement Planning Services If your employer has a qualified retirement plan, qualified retirement planning services provided to you (and your spouse) by your employer are not included in your income. Free efile h&r block Qualified services include retirement planning advice, information about your employer's retirement plan, and information about how the plan may fit into your overall individual retirement income plan. Free efile h&r block You cannot exclude the value of any tax preparation, accounting, legal, or brokerage services provided by your employer. Free efile h&r block Also, see Financial Counseling Fees , earlier. Free efile h&r block Transportation If your employer provides you with a qualified transportation fringe benefit, it can be excluded from your income, up to certain limits. Free efile h&r block A qualified transportation fringe benefit is: Transportation in a commuter highway vehicle (such as a van) between your home and work place, A transit pass, Qualified parking, or Qualified bicycle commuting reimbursement. Free efile h&r block Cash reimbursement by your employer for these expenses under a bona fide reimbursement arrangement is also excludable. Free efile h&r block However, cash reimbursement for a transit pass is excludable only if a voucher or similar item that can be exchanged only for a transit pass is not readily available for direct distribution to you. Free efile h&r block Exclusion limit. Free efile h&r block   The exclusion for commuter vehicle transportation and transit pass fringe benefits cannot be more than $245 a month. Free efile h&r block   The exclusion for the qualified parking fringe benefit cannot be more than $245 a month. Free efile h&r block   The exclusion for qualified bicycle commuting in a calendar year is $20 multiplied by the number of qualified bicycle commuting months that year. Free efile h&r block   If the benefits have a value that is more than these limits, the excess must be included in your income. Free efile h&r block You are not entitled to these exclusions if the reimbursements are made under a compensation reduction agreement. Free efile h&r block Commuter highway vehicle. Free efile h&r block   This is a highway vehicle that seats at least six adults (not including the driver). Free efile h&r block At least 80% of the vehicle's mileage must reasonably be expected to be: For transporting employees between their homes and work place, and On trips during which employees occupy at least half of the vehicle's adult seating capacity (not including the driver). Free efile h&r block Transit pass. Free efile h&r block   This is any pass, token, farecard, voucher, or similar item entitling a person to ride mass transit (whether public or private) free or at a reduced rate or to ride in a commuter highway vehicle operated by a person in the business of transporting persons for compensation. Free efile h&r block Qualified parking. Free efile h&r block   This is parking provided to an employee at or near the employer's place of business. Free efile h&r block It also includes parking provided on or near a location from which the employee commutes to work by mass transit, in a commuter highway vehicle, or by carpool. Free efile h&r block It does not include parking at or near the employee's home. Free efile h&r block Qualified bicycle commuting. Free efile h&r block   This is reimbursement based on the number of qualified bicycle commuting months for the year. Free efile h&r block A qualified bicycle commuting month is any month you use the bicycle regularly for a substantial portion of the travel between your home and place of employment and you do not receive any of the other qualified transportation fringe benefits. Free efile h&r block The reimbursement can be for expenses you incurred during the year for the purchase of a bicycle and bicycle improvements, repair, and storage. Free efile h&r block Tuition Reduction You can exclude a qualified tuition reduction from your income. Free efile h&r block This is the amount of a reduction in tuition: For education (below graduate level) furnished by an educational institution to an employee, former employee who retired or became disabled, or his or her spouse and dependent children. Free efile h&r block For education furnished to a graduate student at an educational institution if the graduate student is engaged in teaching or research activities for that institution. Free efile h&r block Representing payment for teaching, research, or other services if you receive the amount under the National Health Service Corps Scholarship Program or the Armed Forces Health Professions Scholarship and Financial Assistance program. Free efile h&r block For more information, see Publication 970. Free efile h&r block Working Condition Benefits If your employer provides you with a product or service and the cost of it would have been allowable as a business or depreciation deduction if you paid for it yourself, the cost is not included in your income. Free efile h&r block Example. Free efile h&r block You work as an engineer and your employer provides you with a subscription to an engineering trade magazine. Free efile h&r block The cost of the subscription is not included in your income because the cost would have been allowable to you as a business deduction if you had paid for the subscription yourself. Free efile h&r block Valuation of Fringe Benefits If a fringe benefit is included in your income, the amount included is generally its value determined under the general valuation rule or under the special valuation rules. Free efile h&r block For an exception, see Group-Term Life Insurance , earlier. Free efile h&r block General valuation rule. Free efile h&r block   You must include in your income the amount by which the fair market value of the fringe benefit is more than the sum of: The amount, if any, you paid for the benefit, plus The amount, if any, specifically excluded from your income by law. Free efile h&r block If you pay fair market value for a fringe benefit, no amount is included in your income. Free efile h&r block Fair market value. Free efile h&r block   The fair market value of a fringe benefit is determined by all the facts and circumstances. Free efile h&r block It is the amount you would have to pay a third party to buy or lease the benefit. Free efile h&r block This is determined without regard to: Your perceived value of the benefit, or The amount your employer paid for the benefit. Free efile h&r block Employer-provided vehicles. Free efile h&r block   If your employer provides a car (or other highway motor vehicle) to you, your personal use of the car is usually a taxable noncash fringe benefit. Free efile h&r block   Under the general valuation rules, the value of an employer-provided vehicle is the amount you would have to pay a third party to lease the same or a similar vehicle on the same or comparable terms in the same geographic area where you use the vehicle. Free efile h&r block An example of a comparable lease term is the amount of time the vehicle is available for your use, such as a 1-year period. Free efile h&r block The value cannot be determined by multiplying a cents-per-mile rate times the number of miles driven unless you prove the vehicle could have been leased on a cents-per-mile basis. Free efile h&r block Flights on employer-provided aircraft. Free efile h&r block   Under the general valuation rules, if your flight on an employer-provided piloted aircraft is primarily personal and you control the use of the aircraft for the flight, the value is the amount it would cost to charter the flight from a third party. Free efile h&r block   If there is more than one employee on the flight, the cost to charter the aircraft must be divided among those employees. Free efile h&r block The division must be based on all the facts, including which employee or employees control the use of the aircraft. Free efile h&r block Special valuation rules. Free efile h&r block   You generally can use a special valuation rule for a fringe benefit only if your employer uses the rule. Free efile h&r block If your employer uses a special valuation rule, you cannot use a different special rule to value that benefit. Free efile h&r block You always can use the general valuation rule discussed earlier, based on facts and circumstances, even if your employer uses a special rule. Free efile h&r block   If you and your employer use a special valuation rule, you must include in your income the amount your employer determines under the special rule minus the sum of: Any amount you repaid your employer, plus Any amount specifically excluded from income by law. Free efile h&r block The special valuation rules are the following. Free efile h&r block The automobile lease rule. Free efile h&r block The vehicle cents-per-mile rule. Free efile h&r block The commuting rule. Free efile h&r block The unsafe conditions commuting rule. Free efile h&r block The employer-operated eating-facility rule. Free efile h&r block   For more information on these rules, see Publication 15-B, Employer's Tax Guide to Fringe Benefits. Free efile h&r block    For information on the non-commercial flight and commercial flight valuation rules, see sections 1. Free efile h&r block 61-21(g) and 1. Free efile h&r block 61-21(h) of the regulations. Free efile h&r block Retirement Plan Contributions Your employer's contributions to a qualified retirement plan for you are not included in income at the time contributed. Free efile h&r block (Your employer can tell you whether your retirement plan is qualified. Free efile h&r block ) However, the cost of life insurance coverage included in the plan may have to be included. Free efile h&r block See Group-Term Life Insurance , earlier, under Fringe Benefits. Free efile h&r block If your employer pays into a nonqualified plan for you, you generally must include the contributions in your income as wages for the tax year in which the contributions are made. Free efile h&r block However, if your interest in the plan is not transferable or is subject to a substantial risk of forfeiture (you have a good chance of losing it) at the time of the contribution, you do not have to include the value of your interest in your income until it is transferable or is no longer subject to a substantial risk of forfeiture. Free efile h&r block For information on distributions from retirement plans, see Publication 575 (or Publication 721, Tax Guide to U. Free efile h&r block S. Free efile h&r block Civil Service Retirement Benefits, if you are a federal employee or retiree). Free efile h&r block Elective Deferrals If you are covered by certain kinds of retirement plans, you can choose to have part of your compensation contributed by your employer to a retirement fund, rather than have it paid to you. Free efile h&r block The amount you set aside (called an elective deferral) is treated as an employer contribution to a qualified plan. Free efile h&r block An elective deferral, other than a designated Roth contribution (discussed later), is not included in wages subject to income tax at the time contributed. Free efile h&r block However, it is included in wages subject to social security and Medicare taxes. Free efile h&r block Elective deferrals include elective contributions to the following retirement plans. Free efile h&r block Cash or deferred arrangements (section 401(k) plans). Free efile h&r block The Thrift Savings Plan for federal employees. Free efile h&r block Salary reduction simplified employee pension plans (SARSEP). Free efile h&r block Savings incentive match plans for employees (SIMPLE plans). Free efile h&r block Tax-sheltered annuity plans (403(b) plans). Free efile h&r block Section 501(c)(18)(D) plans. Free efile h&r block (But see Reporting by employer , later. Free efile h&r block ) Section 457 plans. Free efile h&r block Qualified automatic contribution arrangements. Free efile h&r block   Under a qualified automatic contribution arrangement, your employer can treat you as having elected to have a part of your compensation contributed to a section 401(k) plan. Free efile h&r block You are to receive written notice of your rights and obligations under the qualified automatic contribution arrangement. Free efile h&r block The notice must explain: Your rights to elect not to have elective contributions made, or to have contributions made at a different percentage, and How contributions made will be invested in the absence of any investment decision by you. Free efile h&r block   You must be given a reasonable period of time after receipt of the notice and before the first elective contribution is made to make an election with respect to the contributions. Free efile h&r block Overall limit on deferrals. Free efile h&r block   For 2013, in most cases, you should not have deferred more than a total of $17,500 of contributions to the plans listed in (1) through (3), earlier. Free efile h&r block The specific plan limits for the plans listed in (4) through (7), earlier, are discussed later. Free efile h&r block Amounts deferred under specific plan limits are part of the overall limit on deferrals. Free efile h&r block   Your employer or plan administrator should apply the proper annual limit when figuring your plan contributions. Free efile h&r block However, you are responsible for monitoring the total you defer to ensure that the deferrals are not more than the overall limit. Free efile h&r block Catch-up contributions. Free efile h&r block   You may be allowed catch-up contributions (additional elective deferrals) if you are age 50 or older by the end of your tax year. Free efile h&r block For more information about catch-up contributions to 403(b) plans, see chapter 6 of Publication 571, Tax Sheltered Annuity Plans. Free efile h&r block   For more information about additional elective deferrals to: SEPs (SARSEPs), see Salary Reduction Simplified Employee Pension in chapter 2 of Publication 560, Retirement Plans for Small Business. Free efile h&r block SIMPLE plans, see How Much Can Be Contributed on Your Behalf? in chapter 3 of Publication 590. Free efile h&r block Section 457 plans, see Limit for deferrals under section 457 plans , later. Free efile h&r block Limit for deferrals under SIMPLE plans. Free efile h&r block   If you are a participant in a SIMPLE plan, you generally should not have deferred more than $12,000 in 2013. Free efile h&r block Amounts you defer under a SIMPLE plan count toward the overall limit ($17,500 for 2013) and may affect the amount you can defer under other elective deferral plans. Free efile h&r block Limit for tax-sheltered annuities. Free efile h&r block   If you are a participant in a tax-sheltered annuity plan (403(b) plan), the limit on elective deferrals for 2013 generally is $17,500. Free efile h&r block However, if you have at least 15 years of service with a public school system, a hospital, a home health service agency, a health and welfare service agency, a church, or a convention or association of churches (or associated organization), the limit on elective deferrals is increased by the least of the following amounts. Free efile h&r block $3,000, $15,000, reduced by the sum of: The additional pre-tax elective deferrals made in earlier years because of this rule, plus The aggregate amount of designated Roth contributions permitted for prior tax years because of this rule, or $5,000 times the number of your years of service for the organization, minus the total elective deferrals made by your employer on your behalf for earlier years. Free efile h&r block   If you qualify for the 15-year rule, your elective deferrals under this limit can be as high as $20,500 for 2013. Free efile h&r block   For more information, see Publication 571. Free efile h&r block Limit for deferral under section 501(c)(18) plans. Free efile h&r block   If you are a participant in a section 501(c)(18) plan (a trust created before June 25, 1959, funded only by employee contributions), you should have deferred no more than the lesser of $7,000 or 25% of your compensation. Free efile h&r block Amounts you defer under a section 501(c)(18) plan count toward the overall limit ($17,500 in 2013) and may affect the amount you can defer under other elective deferral plans. Free efile h&r block Limit for deferrals under section 457 plans. Free efile h&r block   If you are a participant in a section 457 plan (a deferred compensation plan for employees of state or local governments or tax-exempt organizations), you should have deferred no more than the lesser of your includible compensation or $17,500 in 2013. Free efile h&r block However, if you are within 3 years of normal retirement age, you may be allowed an increased limit if the plan allows it. Free efile h&r block See Increased limit , later. Free efile h&r block Includible compensation. Free efile h&r block   This is the pay you received for the year from the employer who maintained the section 457 plan. Free efile h&r block In most cases, it includes all the following payments. Free efile h&r block Wages and salaries. Free efile h&r block Fees for professional services. Free efile h&r block The value of any employer-provided qualified transportation fringe benefit (defined under Transportation , earlier) that is not included in your income. Free efile h&r block Other amounts received (cash or noncash) for personal services you performed, including, but not limited to, the following items. Free efile h&r block Commissions and tips. Free efile h&r block Fringe benefits. Free efile h&r block Bonuses. Free efile h&r block Employer contributions (elective deferrals) to: The section 457 plan. Free efile h&r block Qualified cash or deferred arrangements (section 401(k) plans) that are not included in your income. Free efile h&r block A salary reduction simplified employee pension (SARSEP). Free efile h&r block A tax-sheltered annuity (section 403(b) plan). Free efile h&r block A savings incentive match plan for employees (SIMPLE plan). Free efile h&r block A section 125 cafeteria plan. Free efile h&r block   Instead of using the amounts listed earlier to determine your includible compensation, your employer can use any of the following amounts. Free efile h&r block Your wages as defined for income tax withholding purposes. Free efile h&r block Your wages as reported in box 1 of Form W-2. Free efile h&r block Your wages that are subject to social security withholding (including elective deferrals). Free efile h&r block Increased limit. Free efile h&r block   During any, or all, of the last 3 years ending before you reach normal retirement age under the plan, your plan may provide that your limit is the lesser of: Twice the annual limit ($35,000 for 2013), or The basic annual limit plus the amount of the basic limit not used in prior years (only allowed if not using age 50 or over catch-up contributions). Free efile h&r block Catch-up contributions. Free efile h&r block   You generally can have additional elective deferrals made to your governmental section 457 plan if: You reached age 50 by the end of the year, and No other elective deferrals can be made for you to the plan for the year because of limits or restrictions. Free efile h&r block If you qualify, your limit can be the lesser of your includible compensation or $17,500, plus $5,500. Free efile h&r block However, if you are within 3 years of retirement age and your plan provides the increased limit, discussed earlier, that limit may be higher. Free efile h&r block Designated Roth contributions. Free efile h&r block   Employers with section 401(k) and section 403(b) plans can create qualified Roth contribution programs so that you may elect to have part or all of your elective deferrals to the plan designated as after-tax Roth contributions. Free efile h&r block Designated Roth contributions are treated as elective deferrals, except that they are included in income. Free efile h&r block Your retirement plan must maintain separate accounts and recordkeeping for the designated Roth contributions. Free efile h&r block   Qualified distributions from a Roth plan are not included in income. Free efile h&r block In most cases, a distribution made before the end of the 5-tax-year period beginning with the first tax year for which you made a designated Roth contribution to the plan is not a qualified distribution. Free efile h&r block Reporting by employer. Free efile h&r block   Your employer generally should not include elective deferrals in your wages in box 1 of Form W-2. Free efile h&r block Instead, your employer should mark the Retirement plan checkbox in box 13 and show the total amount deferred in box 12. Free efile h&r block Section 501(c)(18)(D) contributions. Free efile h&r block   Wages shown in box 1 of your Form W-2 should not have been reduced for contributions you made to a section 501(c)(18)(D) retirement plan. Free efile h&r block The amount you contributed should be identified with code “H” in box 12. Free efile h&r block You may deduct the amount deferred subject to the limits that apply. Free efile h&r block Include your deduction in the total on Form 1040, line 36. Free efile h&r block Enter the amount and “501(c)(18)(D)” on the dotted line next to line 36. Free efile h&r block Designated Roth contributions. Free efile h&r block    These contributions are elective deferrals but are included in your wages in box 1 of Form W-2. Free efile h&r block Designated Roth contributions to a section 401(k) plan are reported using code AA in box 12, or, for section 403(b) plans, code BB in box 12. Free efile h&r block Excess deferrals. Free efile h&r block   If your deferrals exceed the limit, you must notify your plan by the date required by the plan. Free efile h&r block If the plan permits, the excess amount will be distributed to you. Free efile h&r block If you participate in more than one plan, you can have the excess paid out of any of the plans that permit these distributions. Free efile h&r block You must notify each plan by the date required by that plan of the amount to be paid from that particular plan. Free efile h&r block The plan then must pay you the amount of the excess, along with any income earned on that amount, by April 15 of the following year. Free efile h&r block   You must include the excess deferral in your income for the year of the deferral unless you have an excess deferral of a designated Roth contribution. Free efile h&r block File Form 1040 to add the excess deferral amount to your wages on line 7. Free efile h&r block Do not use Form 1040A or Form 1040EZ to report excess deferral amounts. Free efile h&r block Excess not distributed. Free efile h&r block   If you do not take out the excess amount, you cannot include it in the cost of the contract even though you included it in your income. Free efile h&r block Therefore, you are taxed twice on the excess deferral left in the plan—once when you contribute it, and again when you receive it as a distribution. Free efile h&r block Excess distributed to you. Free efile h&r block   If you take out the excess after the year of the deferral and you receive the corrective distribution by April 15 of the following year, do not include it in income again in the year you receive it. Free efile h&r block If you receive it later, you must include it in income in both the year of the deferral and the year you receive it. Free efile h&r block Any income on the excess deferral taken out is taxable in the tax year in which you take it out. Free efile h&r block If you take out part of the excess deferral and the income on it, allocate the distribution proportionately between the excess deferral and the income. Free efile h&r block    You should receive a Form 1099-R for the year in which the excess deferral is distributed to you. Free efile h&r block Use the following rules to report a corrective distribution shown on Form 1099-R for 2013. Free efile h&r block If the distribution was for a 2013 excess deferral, your Form 1099-R should have the code “8” in box 7. Free efile h&r block Add the excess deferral amount to your wages on your 2013 tax return. Free efile h&r block If the distribution was for a 2013 excess deferral to a designated Roth account, your Form 1099-R should have code “B” in box 7. Free efile h&r block Do not add this amount to your wages on your 2013 return. Free efile h&r block If the distribution was for a 2012 excess deferral, your Form 1099-R should have the code “P” in box 7. Free efile h&r block If you did not add the excess deferral amount to your wages on your 2012 tax return, you must file an amended return on Form 1040X, Amended U. Free efile h&r block S. Free efile h&r block Individual Income Tax Return. Free efile h&r block If you did not receive the distribution by April 15, 2013, you also must add it to your wages on your 2013 tax return. Free efile h&r block If the distribution was for the income earned on an excess deferral, your Form 1099-R should have the code “8” in box 7. Free efile h&r block Add the income amount to your wages on your 2013 income tax return, regardless of when the excess deferral was made. Free efile h&r block Report a loss on a corrective distribution of an excess deferral in the year the excess amount (reduced by the loss) is distributed to you. Free efile h&r block Include the loss as a negative amount on Form 1040, line 21 and identify it as “Loss on Excess Deferral Distribution. Free efile h&r block ”    Even though a corrective distribution of excess deferrals is reported on Form 1099-R, it is not otherwise treated as a distribution from the plan. Free efile h&r block It cannot be rolled over into another plan, and it is not subject to the additional tax on early distributions. Free efile h&r block Excess Contributions If you are a highly compensated employee, the total of your elective deferrals and other contributions made for you for any year under a section 401(k) plan or SARSEP can be, as a percentage of pay, no more than 125% of the average deferral percentage (ADP) of all eligible non-highly compensated employees. Free efile h&r block If the total contributed to the plan is more than the amount allowed under the ADP test, the excess contributions must be either distributed to you or recharacterized as after-tax employee contributions by treating them as distributed to you and then contributed by you to the plan. Free efile h&r block You must include the excess contributions in your income as wages on Form 1040, line 7. Free efile h&r block You cannot use Form 1040A or Form 1040EZ to report excess contribution amounts. Free efile h&r block If you receive a corrective distribution of excess contributions (and allocable income), it is included in your income in the year of the distribution. Free efile h&r block The allocable income is the amount of gain or loss through the end of the plan year for which the contribution was made that is allocable to the excess contributions. Free efile h&r block You should receive a Form 1099-R for the year the excess contributions are distributed to you. Free efile h&r block Add the distribution to your wages for that year. Free efile h&r block Even though a corrective distribution of excess contributions is reported on Form 1099-R, it is not otherwise treated as a distribution from the plan. Free efile h&r block It cannot be rolled over into another plan, and it is not subject to the additional tax on early distributions. Free efile h&r block Excess Annual Additions The amount contributed in 2013 to a defined contribution plan is generally limited to the lesser of 100% of your compensation or $51,000. Free efile h&r block Under certain circumstances, contributions that exceed these limits (excess annual additions) may be corrected by a distribution of your elective deferrals or a return of your after-tax contributions and earnings from these contributions. Free efile h&r block A corrective payment of excess annual additions consisting of elective deferrals or earnings from your after-tax contributions is fully taxable in the year paid. Free efile h&r block A corrective payment consisting of your after-tax contributions is not taxable. Free efile h&r block If you received a corrective payment of excess annual additions, you should receive a separate Form 1099-R for the year of the payment with the code “E” in box 7. Free efile h&r block Report the total payment shown in box 1 of Form 1099-R on line 16a of Form 1040 or line 12a of Form 1040A. Free efile h&r block Report the taxable amount shown in box 2a of Form 1099-R on line 16b of Form 1040 or line 12b of Form 1040A. Free efile h&r block Even though a corrective distribution of excess annual additions is reported on Form 1099-R, it is not otherwise treated as a distribution from the plan. Free efile h&r block It cannot be rolled over into another plan, and it is not subject to the additional tax on early distributions. Free efile h&r block Stock Options If you receive an option to buy or sell stock or other property as payment for your services, you may have income when you receive the option (the grant), when you exercise the option (use it to buy or sell the stock or other property), or when you sell or otherwise dispose of the option or property acquired through exercise of the option. Free efile h&r block The timing, type, and amount of income inclusion depend on whether you receive a nonstatutory stock option or a statutory stock option. Free efile h&r block Your employer can tell you which kind of option you hold. Free efile h&r block Nonstatutory Stock Options Grant of option. Free efile h&r block   If you are granted a nonstatutory stock option, you may have income when you receive the option. Free efile h&r block The amount of income to include and the time to include it depend on whether the fair market value of the option can be readily determined. Free efile h&r block The fair market value of an option can be readily determined if it is actively traded on an established market. Free efile h&r block    The fair market value of an option that is not traded on an established market can be readily determined only if all of the following conditions exist. Free efile h&r block You can transfer the option. Free efile h&r block You can exercise the option immediately in full. Free efile h&r block The option or the property subject to the option is not subject to any condition or restriction (other than a condition to secure payment of the purchase price) that has a significant effect on the fair market value of the option. Free efile h&r block The fair market value of the option privilege can be readily determined. Free efile h&r block The option privilege for an option to buy is the opportunity to benefit during the option's exercise period from any increase in the value of property subject to the option without risking any capital. Free efile h&r block For example, if during the exercise period the fair market value of stock subject to an option is greater than the option's exercise price, a profit may be realized by exercising the option and immediately selling the stock at its higher value. Free efile h&r block The option privilege for an option to sell is the opportunity to benefit during the exercise period from a decrease in the value of the property subject to the option. Free efile h&r block If you or a member of your family is an officer, director, or more-than-10% owner of an expatriated corporation, you may owe an excise tax on the value of nonstatutory options and other stock-based compensation from that corporation. Free efile h&r block For more information on the excise tax, see Internal Revenue Code section 4985. Free efile h&r block Option with readily determinable value. Free efile h&r block   If you receive a nonstatutory stock option that has a readily determinable fair market value at the time it is granted to you, the option is treated like other property received as compensation. Free efile h&r block See Restricted Property , later, for rules on how much income to include and when to include it. Free efile h&r block However, the rule described in that discussion for choosing to include the value of property in your income for the year of the transfer does not apply to a nonstatutory option. Free efile h&r block Option without readily determinable value. Free efile h&r block   If the fair market value of the option is not readily determinable at the time it is granted to you (even if it is determined later), you do not have income until you exercise or transfer the option. Free efile h&r block    Exercise or transfer of option. Free efile h&r block   When you exercise a nonstatutory stock option, the amount to include in your income depends on whether the option had a readily determinable value. Free efile h&r block Option with readily determinable value. Free efile h&r block   When you exercise a nonstatutory stock option that had a readily determinable value at the time the option was granted, you do not have to include any amount in income. Free efile h&r block Option without readily determinable value. Free efile h&r block   When you exercise a nonstatutory stock option that did not have a readily determinable value at the time the option was granted, the restricted prope
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The Free Efile H&r Block

Free efile h&r block 5. Free efile h&r block   Business Income Table of Contents Introduction Kinds of IncomeBartering for Property or Services Real Estate Rents Personal Property Rents Interest and Dividend Income Canceled Debt Other Income Items That Are Not IncomeAmount you can exclude. Free efile h&r block Short-term lease. Free efile h&r block Retail space. Free efile h&r block Qualified long-term real property. Free efile h&r block Guidelines for Selected Occupations Accounting for Your Income Introduction This chapter primarily explains business income and how to account for it on your tax return, what items are not considered income, and gives guidelines for selected occupations. Free efile h&r block If there is a connection between any income you receive and your business, the income is business income. Free efile h&r block A connection exists if it is clear that the payment of income would not have been made if you did not have the business. Free efile h&r block You can have business income even if you are not involved in the activity on a regular full-time basis. Free efile h&r block Income from work you do on the side in addition to your regular job can be business income. Free efile h&r block You report most business income, such as income from selling your products or services, on Schedule C or C-EZ. Free efile h&r block But you report the income from the sale of business assets, such as land and office buildings, on other forms instead of Schedule C or C-EZ. Free efile h&r block For information on selling business assets, see chapter 3. Free efile h&r block Nonemployee compensation. Free efile h&r block Business income includes amounts you received in your business that were properly shown on Forms 1099-MISC. Free efile h&r block This includes amounts reported as nonemployee compensation in box 7 of the form. Free efile h&r block You can find more information in the instructions on the back of the Form 1099-MISC you received. Free efile h&r block Kinds of Income You must report on your tax return all income you receive from your business unless it is excluded by law. Free efile h&r block In most cases, your business income will be in the form of cash, checks, and credit card charges. Free efile h&r block But business income can be in other forms, such as property or services. Free efile h&r block These and other types of income are explained next. Free efile h&r block If you are a U. Free efile h&r block S. Free efile h&r block citizen who has business income from sources outside the United States (foreign income), you must report that income on your tax return unless it is exempt from tax under U. Free efile h&r block S. Free efile h&r block law. Free efile h&r block If you live outside the United States, you may be able to exclude part or all of your foreign-source business income. Free efile h&r block For details, see Publication 54, Tax Guide for U. Free efile h&r block S. Free efile h&r block Citizens and Resident Aliens Abroad. Free efile h&r block Bartering for Property or Services Bartering is an exchange of property or services. Free efile h&r block You must include in your gross receipts, at the time received, the fair market value of property or services you receive in exchange for something else. Free efile h&r block If you exchange services with another person and you both have agreed ahead of time on the value of the services, that value will be accepted as the fair market value unless the value can be shown to be otherwise. Free efile h&r block Example 1. Free efile h&r block You are a self-employed lawyer. Free efile h&r block You perform legal services for a client, a small corporation. Free efile h&r block In payment for your services, you receive shares of stock in the corporation. Free efile h&r block You must include the fair market value of the shares in income. Free efile h&r block Example 2. Free efile h&r block You are an artist and create a work of art to compensate your landlord for the rent-free use of your apartment. Free efile h&r block You must include the fair rental value of the apartment in your gross receipts. Free efile h&r block Your landlord must include the fair market value of the work of art in his or her rental income. Free efile h&r block Example 3. Free efile h&r block You are a self-employed accountant. Free efile h&r block Both you and a house painter are members of a barter club, an organization that each year gives its members a directory of members and the services each member provides. Free efile h&r block Members get in touch with other members directly and bargain for the value of the services to be performed. Free efile h&r block In return for accounting services you provided for the house painter's business, the house painter painted your home. Free efile h&r block You must include in gross receipts the fair market value of the services you received from the house painter. Free efile h&r block The house painter must include the fair market value of your accounting services in his or her gross receipts. Free efile h&r block Example 4. Free efile h&r block You are a member of a barter club that uses credit units to credit or debit members' accounts for goods or services provided or received. Free efile h&r block As soon as units are credited to your account, you can use them to buy goods or services or sell or transfer the units to other members. Free efile h&r block You must include the value of credit units you received in your gross receipts for the tax year in which the units are credited to your account. Free efile h&r block The dollar value of units received for services by an employee of the club, who can use the units in the same manner as other members, must be included in the employee's gross income for the tax year in which received. Free efile h&r block It is wages subject to social security and Medicare taxes (FICA), federal unemployment taxes (FUTA), and income tax withholding. Free efile h&r block See Publication 15 (Circular E), Employer's Tax Guide. Free efile h&r block Example 5. Free efile h&r block You operate a plumbing business and use the cash method of accounting. Free efile h&r block You join a barter club and agree to provide plumbing services to any member for a specified number of hours. Free efile h&r block Each member has access to a directory that lists the members of the club and the services available. Free efile h&r block Members contact each other directly and request services to be performed. Free efile h&r block You are not required to provide services unless requested by another member, but you can use as many of the offered services as you wish without paying a fee. Free efile h&r block You must include the fair market value of any services you receive from club members in your gross receipts when you receive them even if you have not provided any services to club members. Free efile h&r block Information returns. Free efile h&r block   If you are involved in a bartering transaction, you may have to file either of the following forms. Free efile h&r block Form 1099-B, Proceeds From Broker and Barter Exchange Transactions. Free efile h&r block Form 1099-MISC, Miscellaneous Income. Free efile h&r block For information about these forms, see the General Instructions for Certain Information Returns. Free efile h&r block Real Estate Rents If you are a real estate dealer who receives income from renting real property or an owner of a hotel, motel, etc. Free efile h&r block , who provides services (maid services, etc. Free efile h&r block ) for guests, report the rental income and expenses on Schedule C or C-EZ. Free efile h&r block If you are not a real estate dealer or the kind of owner described in the preceding sentence, report the rental income and expenses on Schedule E. Free efile h&r block For more information, see Publication 527, Residential Rental Property (Including Rental of Vacation Homes). Free efile h&r block Real estate dealer. Free efile h&r block   You are a real estate dealer if you are engaged in the business of selling real estate to customers with the purpose of making a profit from those sales. Free efile h&r block Rent you receive from real estate held for sale to customers is subject to SE tax. Free efile h&r block However, rent you receive from real estate held for speculation or investment is not subject to SE tax. Free efile h&r block Trailer park owner. Free efile h&r block   Rental income from a trailer park is subject to SE tax if you are a self-employed trailer park owner who provides trailer lots and facilities and substantial services for the convenience of your tenants. Free efile h&r block    You generally are considered to provide substantial services for tenants if they are primarily for the tenants' convenience and normally are not provided to maintain the lots in a condition for occupancy. Free efile h&r block Services are substantial if the compensation for the services makes up a material part of the tenants' rental payments. Free efile h&r block   Examples of services that are not normally provided for the tenants' convenience include supervising and maintaining a recreational hall provided by the park, distributing a monthly newsletter to tenants, operating a laundry facility, and helping tenants buy or sell their trailers. Free efile h&r block   Examples of services that are normally provided to maintain the lots in a condition for tenant occupancy include city sewerage, electrical connections, and roadways. Free efile h&r block Hotels, boarding houses, and apartments. Free efile h&r block   Rental income you receive for the use or occupancy of hotels, boarding houses, or apartment houses is subject to SE tax if you provide services for the occupants. Free efile h&r block   Generally, you are considered to provide services for the occupants if the services are primarily for their convenience and are not services normally provided with the rental of rooms for occupancy only. Free efile h&r block An example of a service that is not normally provided for the convenience of the occupants is maid service. Free efile h&r block However, providing heat and light, cleaning stairways and lobbies, and collecting trash are services normally provided for the occupants' convenience. Free efile h&r block Prepaid rent. Free efile h&r block   Advance payments received under a lease that does not put any restriction on their use or enjoyment are income in the year you receive them. Free efile h&r block This is true no matter what accounting method or period you use. Free efile h&r block Lease bonus. Free efile h&r block   A bonus you receive from a lessee for granting a lease is an addition to the rent. Free efile h&r block Include it in your gross receipts in the year received. Free efile h&r block Lease cancellation payments. Free efile h&r block   Report payments you receive from your lessee for canceling a lease in your gross receipts in the year received. Free efile h&r block Payments to third parties. Free efile h&r block   If your lessee makes payments to someone else under an agreement to pay your debts or obligations, include the payments in your gross receipts when the lessee makes the payments. Free efile h&r block A common example of this kind of income is a lessee's payment of your property taxes on leased real property. Free efile h&r block Settlement payments. Free efile h&r block   Payments you receive in settlement of a lessee's obligation to restore the leased property to its original condition are income in the amount that the payments exceed the adjusted basis of the leasehold improvements destroyed, damaged, removed, or disconnected by the lessee. Free efile h&r block Personal Property Rents If you are in the business of renting personal property (equipment, vehicles, formal wear, etc. Free efile h&r block ), include the rental amount you receive in your gross receipts on Schedule C or C-EZ. Free efile h&r block Prepaid rent and other payments described in the preceding Real Estate Rents discussion can also be received for renting personal property. Free efile h&r block If you receive any of those payments, include them in your gross receipts as explained in that discussion. Free efile h&r block Interest and Dividend Income Interest and dividends may be considered business income. Free efile h&r block Interest. Free efile h&r block   Interest received on notes receivable that you have accepted in the ordinary course of business is business income. Free efile h&r block Interest received on loans is business income if you are in the business of lending money. Free efile h&r block Uncollectible loans. Free efile h&r block   If a loan payable to you becomes uncollectible during the tax year and you use an accrual method of accounting, you must include in gross income interest accrued up to the time the loan became uncollectible. Free efile h&r block If the accrued interest later becomes uncollectible, you may be able to take a bad debt deduction. Free efile h&r block See Bad Debts in chapter 8. Free efile h&r block Unstated interest. Free efile h&r block   If little or no interest is charged on an installment sale, you may have to treat a part of each payment as unstated interest. Free efile h&r block See Unstated Interest and Original Issue Discount (OID) in Publication 537, Installment Sales. Free efile h&r block Dividends. Free efile h&r block   Generally, dividends are business income to dealers in securities. Free efile h&r block For most sole proprietors and statutory employees, however, dividends are nonbusiness income. Free efile h&r block If you hold stock as a personal investment separately from your business activity, the dividends from the stock are nonbusiness income. Free efile h&r block   If you receive dividends from business insurance premiums you deducted in an earlier year, you must report all or part of the dividend as business income on your return. Free efile h&r block To find out how much you have to report, see   Recovery of items previously deducted under Other Income, later. Free efile h&r block Canceled Debt The following explains the general rule for including canceled debt in income and the exceptions to the general rule. Free efile h&r block General Rule Generally, if your debt is canceled or forgiven, other than as a gift or bequest to you, you must include the canceled amount in your gross income for tax purposes. Free efile h&r block Report the canceled amount on line 6 of Schedule C if you incurred the debt in your business. Free efile h&r block If the debt is a nonbusiness debt, report the canceled amount on line 21 of Form 1040. Free efile h&r block Exceptions The following discussion covers some exceptions to the general rule for canceled debt. Free efile h&r block Price reduced after purchase. Free efile h&r block   If you owe a debt to the seller for property you bought and the seller reduces the amount you owe, you generally do not have income from the reduction. Free efile h&r block Unless you are bankrupt or insolvent, treat the amount of the reduction as a purchase price adjustment and reduce your basis in the property. Free efile h&r block Deductible debt. Free efile h&r block   You do not realize income from a canceled debt to the extent the payment of the debt would have led to a deduction. Free efile h&r block Example. Free efile h&r block You get accounting services for your business on credit. Free efile h&r block Later, you have trouble paying your business debts, but you are not bankrupt or insolvent. Free efile h&r block Your accountant forgives part of the amount you owe for the accounting services. Free efile h&r block How you treat the canceled debt depends on your method of accounting. Free efile h&r block Cash method — You do not include the canceled debt in income because payment of the debt would have been deductible as a business expense. Free efile h&r block Accrual method — You include the canceled debt in income because the expense was deductible when you incurred the debt. Free efile h&r block   For information on the cash and accrual methods of accounting, see chapter 2. Free efile h&r block Exclusions Do not include canceled debt in income in the following situations. Free efile h&r block However, you may be required to file Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness. Free efile h&r block For more information, see Form 982. Free efile h&r block The cancellation takes place in a bankruptcy case under title 11 of the U. Free efile h&r block S. Free efile h&r block Code (relating to bankruptcy). Free efile h&r block See Publication 908, Bankruptcy Tax Guide. Free efile h&r block The cancellation takes place when you are insolvent. Free efile h&r block You can exclude the canceled debt to the extent you are insolvent. Free efile h&r block See Publication 908. Free efile h&r block The canceled debt is a qualified farm debt owed to a qualified person. Free efile h&r block See chapter 3 in Publication 225, Farmer's Tax Guide. Free efile h&r block The canceled debt is a qualified real property business debt. Free efile h&r block This situation is explained later. Free efile h&r block The canceled debt is qualified principal residence indebtedness which is discharged after 2006. Free efile h&r block See Form 982. Free efile h&r block If a canceled debt is excluded from income because it takes place in a bankruptcy case, the exclusions in situations 2 through 5 do not apply. Free efile h&r block If it takes place when you are insolvent, the exclusions in situations 3 and 4 do not apply to the extent you are insolvent. Free efile h&r block Debt. Free efile h&r block   For purposes of this discussion, debt includes any debt for which you are liable or which attaches to property you hold. Free efile h&r block Qualified real property business debt. Free efile h&r block   You can elect to exclude (up to certain limits) the cancellation of qualified real property business debt. Free efile h&r block If you make the election, you must reduce the basis of your depreciable real property by the amount excluded. Free efile h&r block Make this reduction at the beginning of your tax year following the tax year in which the cancellation occurs. Free efile h&r block However, if you dispose of the property before that time, you must reduce its basis immediately before the disposition. Free efile h&r block Cancellation of qualified real property business debt. Free efile h&r block   Qualified real property business debt is debt (other than qualified farm debt) that meets all the following conditions. Free efile h&r block It was incurred or assumed in connection with real property used in a trade or business. Free efile h&r block It was secured by such real property. Free efile h&r block It was incurred or assumed at either of the following times. Free efile h&r block Before January 1, 1993. Free efile h&r block After December 31, 1992, if incurred or assumed to acquire, construct, or substantially improve the real property. Free efile h&r block It is debt to which you choose to apply these rules. Free efile h&r block   Qualified real property business debt includes refinancing of debt described in (3) earlier, but only to the extent it does not exceed the debt being refinanced. Free efile h&r block   You cannot exclude more than either of the following amounts. Free efile h&r block The excess (if any) of: The outstanding principal of qualified real property business debt (immediately before the cancellation), over The fair market value (immediately before the cancellation) of the business real property that is security for the debt, reduced by the outstanding principal amount of any other qualified real property business debt secured by this property immediately before the cancellation. Free efile h&r block The total adjusted bases of depreciable real property held by you immediately before the cancellation. Free efile h&r block These adjusted bases are determined after any basis reduction due to a cancellation in bankruptcy, insolvency, or of qualified farm debt. Free efile h&r block Do not take into account depreciable real property acquired in contemplation of the cancellation. Free efile h&r block Election. Free efile h&r block   To make this election, complete Form 982 and attach it to your income tax return for the tax year in which the cancellation occurs. Free efile h&r block You must file your return by the due date (including extensions). Free efile h&r block If you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). Free efile h&r block For more information, see When To File in the form instructions. Free efile h&r block Other Income The following discussion explains how to treat other types of business income you may receive. Free efile h&r block Restricted property. Free efile h&r block   Restricted property is property that has certain restrictions that affect its value. Free efile h&r block If you receive restricted stock or other property for services performed, the fair market value of the property in excess of your cost is included in your income on Schedule C or C-EZ when the restriction is lifted. Free efile h&r block However, you can choose to be taxed in the year you receive the property. Free efile h&r block For more information on including restricted property in income, see Publication 525, Taxable and Nontaxable Income. Free efile h&r block Gains and losses. Free efile h&r block   Do not report on Schedule C or C-EZ a gain or loss from the disposition of property that is neither stock in trade nor held primarily for sale to customers. Free efile h&r block Instead, you must report these gains and losses on other forms. Free efile h&r block For more information, see chapter 3. Free efile h&r block Promissory notes. Free efile h&r block   Report promissory notes and other evidences of debt issued to you in a sale or exchange of property that is stock in trade or held primarily for sale to customers on Schedule C or C-EZ. Free efile h&r block In general, you report them at their stated principal amount (minus any unstated interest) when you receive them. Free efile h&r block Lost income payments. Free efile h&r block   If you reduce or stop your business activities, report on Schedule C or C-EZ any payment you receive for the lost income of your business from insurance or other sources. Free efile h&r block Report it on Schedule C or C-EZ even if your business is inactive when you receive the payment. Free efile h&r block Damages. Free efile h&r block   You must include in gross income compensation you receive during the tax year as a result of any of the following injuries connected with your business. Free efile h&r block Patent infringement. Free efile h&r block Breach of contract or fiduciary duty. Free efile h&r block Antitrust injury. Free efile h&r block Economic injury. Free efile h&r block   You may be entitled to a deduction against the income if it compensates you for actual economic injury. Free efile h&r block Your deduction is the smaller of the following amounts. Free efile h&r block The amount you receive or accrue for damages in the tax year reduced by the amount you pay or incur in the tax year to recover that amount. Free efile h&r block Your loss from the injury that you have not yet deducted. Free efile h&r block Punitive damages. Free efile h&r block   You must also include punitive damages in income. Free efile h&r block Kickbacks. Free efile h&r block   If you receive any kickbacks, include them in your income on Schedule C or C-EZ. Free efile h&r block However, do not include them if you properly treat them as a reduction of a related expense item, a capital expenditure, or cost of goods sold. Free efile h&r block Recovery of items previously deducted. Free efile h&r block   If you recover a bad debt or any other item deducted in a previous year, include the recovery in income on Schedule C or C-EZ. Free efile h&r block However, if all or part of the deduction in earlier years did not reduce your tax, you can exclude the part that did not reduce your tax. Free efile h&r block If you exclude part of the recovery from income, you must include with your return a computation showing how you figured the exclusion. Free efile h&r block Example. Free efile h&r block Joe Smith, a sole proprietor, had gross income of $8,000, a bad debt deduction of $300, and other allowable deductions of $7,700. Free efile h&r block He also had 2 personal exemptions for a total of $7,800. Free efile h&r block He would not pay income tax even if he did not deduct the bad debt. Free efile h&r block Therefore, he will not report as income any part of the $300 he may recover in any future year. Free efile h&r block Exception for depreciation. Free efile h&r block   This rule does not apply to depreciation. Free efile h&r block You recover depreciation using the rules explained next. Free efile h&r block Recapture of depreciation. Free efile h&r block   In the following situations, you have to recapture the depreciation deduction. Free efile h&r block This means you include in income part or all of the depreciation you deducted in previous years. Free efile h&r block Listed property. Free efile h&r block   If your business use of listed property (explained in chapter 8 under Depreciation ) falls to 50% or less in a tax year after the tax year you placed the property in service, you may have to recapture part of the depreciation deduction. Free efile h&r block You do this by including in income on Schedule C part of the depreciation you deducted in previous years. Free efile h&r block Use Part IV of Form 4797, Sales of Business Property, to figure the amount to include on Schedule C. Free efile h&r block For more information, see What is the Business-Use Requirement? in chapter 5 of Publication 946, How To Depreciate Property. Free efile h&r block That chapter explains how to determine whether property is used more than 50% in your business. Free efile h&r block Section 179 property. Free efile h&r block   If you take a section 179 deduction (explained in chapter 8 under Depreciation ) for an asset and before the end of the asset's recovery period the percentage of business use drops to 50% or less, you must recapture part of the section 179 deduction. Free efile h&r block You do this by including in income on Schedule C part of the deduction you took. Free efile h&r block Use Part IV of Form 4797 to figure the amount to include on Schedule C. Free efile h&r block See chapter 2 in Publication 946 to find out when you recapture the deduction. Free efile h&r block Sale or exchange of depreciable property. Free efile h&r block   If you sell or exchange depreciable property at a gain, you may have to treat all or part of the gain due to depreciation as ordinary income. Free efile h&r block You figure the income due to depreciation recapture in Part III of Form 4797. Free efile h&r block For more information, see chapter 4 in Publication 544, Sales and Other Dispositions of Assets. Free efile h&r block Items That Are Not Income In some cases the property or money you receive is not income. Free efile h&r block Appreciation. Free efile h&r block   Increases in value of your property are not income until you realize the increases through a sale or other taxable disposition. Free efile h&r block Consignments. Free efile h&r block   Consignments of merchandise to others to sell for you are not sales. Free efile h&r block The title of merchandise remains with you, the consignor, even after the consignee possesses the merchandise. Free efile h&r block Therefore, if you ship goods on consignment, you have no profit or loss until the consignee sells the merchandise. Free efile h&r block Merchandise you have shipped out on consignment is included in your inventory until it is sold. Free efile h&r block   Do not include merchandise you receive on consignment in your inventory. Free efile h&r block Include your profit or commission on merchandise consigned to you in your income when you sell the merchandise or when you receive your profit or commission, depending upon the method of accounting you use. Free efile h&r block Construction allowances. Free efile h&r block   If you enter into a lease after August 5, 1997, you can exclude from income the construction allowance you receive (in cash or as a rent reduction) from your landlord if you receive it under both the following conditions. Free efile h&r block Under a short-term lease of retail space. Free efile h&r block For the purpose of constructing or improving qualified long-term real property for use in your business at that retail space. Free efile h&r block Amount you can exclude. Free efile h&r block   You can exclude the construction allowance to the extent it does not exceed the amount you spent for construction or improvements. Free efile h&r block Short-term lease. Free efile h&r block   A short-term lease is a lease (or other agreement for occupancy or use) of retail space for 15 years or less. Free efile h&r block The following rules apply in determining whether the lease is for 15 years or less. Free efile h&r block Take into account options to renew when figuring whether the lease is for 15 years or less. Free efile h&r block But do not take into account any option to renew at fair market value determined at the time of renewal. Free efile h&r block Two or more successive leases that are part of the same transaction (or a series of related transactions) for the same or substantially similar retail space are treated as one lease. Free efile h&r block Retail space. Free efile h&r block   Retail space is real property leased, occupied, or otherwise used by you as a tenant in your business of selling tangible personal property or services to the general public. Free efile h&r block Qualified long-term real property. Free efile h&r block   Qualified long-term real property is nonresidential real property that is part of, or otherwise present at, your retail space and that reverts to the landlord when the lease ends. Free efile h&r block Exchange of like-kind property. Free efile h&r block   If you exchange your business property or property you hold for investment solely for property of a like kind to be used in your business or to be held for investment, no gain or loss is recognized. Free efile h&r block This means that the gain is not taxable and the loss is not deductible. Free efile h&r block A common type of nontaxable exchange is the trade-in of a business automobile for another business automobile. Free efile h&r block For more information, see Form 8824. Free efile h&r block Leasehold improvements. Free efile h&r block   If a tenant erects buildings or makes improvements to your property, the increase in the value of the property due to the improvements is not income to you. Free efile h&r block However, if the facts indicate that the improvements are a payment of rent to you, then the increase in value would be income. Free efile h&r block Loans. Free efile h&r block   Money borrowed through a bona fide loan is not income. Free efile h&r block Sales tax. Free efile h&r block   State and local sales taxes imposed on the buyer, which you were required to collect and pay over to state or local governments, are not income. Free efile h&r block Guidelines for Selected Occupations This section provides information to determine whether your earnings should be reported on Schedule C (Form 1040) or C-EZ (Form 1040). Free efile h&r block Direct seller. Free efile h&r block   You must report all income you receive as a direct seller on Schedule C or C-EZ. Free efile h&r block This includes any of the following. Free efile h&r block Income from sales—payments you receive from customers for products they buy from you. Free efile h&r block Commissions, bonuses, or percentages you receive for sales and the sales of others who work under you. Free efile h&r block Prizes, awards, and gifts you receive from your selling business. Free efile h&r block You must report this income regardless of whether it is reported to you on an information return. Free efile h&r block   You are a direct seller if you meet all the following conditions. Free efile h&r block You are engaged in one of the following trades or businesses. Free efile h&r block Selling or soliciting the sale of consumer products either in a home or other place that is not a permanent retail establishment, or to any buyer on a buy-sell basis or a deposit-commission basis for resale in a home or other place of business that is not a permanent retail establishment. Free efile h&r block Delivering or distributing newspapers or shopping news (including any services directly related to that trade or business). Free efile h&r block Substantially all your pay (whether paid in cash or not) for services described above is directly related to sales or other output (including performance of services) rather than to the number of hours worked. Free efile h&r block Your services are performed under a written contract between you and the person for whom you perform the services, and the contract provides that you will not be treated as an employee for federal tax purposes. Free efile h&r block Executor or administrator. Free efile h&r block   If you administer a deceased person's estate, your fees are reported on Schedule C or C-EZ if you are one of the following: A professional fiduciary. Free efile h&r block A nonprofessional fiduciary (personal representative) and both of the following apply. Free efile h&r block The estate includes an active trade or business in which you actively participate. Free efile h&r block Your fees are related to the operation of that trade or business. Free efile h&r block A nonprofessional fiduciary of a single estate that requires extensive managerial activities on your part for a long period of time, provided these activities are enough to be considered a trade or business. Free efile h&r block    If the fees do not meet the above requirements, report them on line 21 of Form 1040. Free efile h&r block Fishing crew member. Free efile h&r block    If you are a member of the crew that catches fish or other water life, your earnings are reported on Schedule C or C-EZ if you meet all the requirements shown in chapter 10 under Fishing crew member . Free efile h&r block Insurance agent, former. Free efile h&r block   Termination payments you receive as a former self-employed insurance agent from an insurance company because of services you performed for that company are not reported on Schedule C or C-EZ if all the following conditions are met. Free efile h&r block You received payments after your agreement to perform services for the company ended. Free efile h&r block You did not perform any services for the company after your service agreement ended and before the end of the year in which you received the payment. Free efile h&r block You entered into a covenant not to compete against the company for at least a 1-year period beginning on the date your service agreement ended. Free efile h&r block The amount of the payments depended primarily on policies sold by you or credited to your account during the last year of your service agreement or the extent to which those policies remain in force for some period after your service agreement ended, or both. Free efile h&r block The amount of the payment did not depend to any extent on length of service or overall earnings from services performed for the company (regardless of whether eligibility for the payments depended on length of service). Free efile h&r block Insurance agent, retired. Free efile h&r block   Income paid by an insurance company to a retired self-employed insurance agent based on a percentage of commissions received before retirement is reported on Schedule C or C-EZ. Free efile h&r block Also, renewal commissions and deferred commissions for sales made before retirement are generally reported on Schedule C or C-EZ. Free efile h&r block   However, renewal commissions paid to the survivor of an insurance agent are not reported on Schedule C or C-EZ. Free efile h&r block Newspaper carrier or distributor. Free efile h&r block   You are a direct seller and your earnings are reported on Schedule C or C-EZ if all the following conditions apply. Free efile h&r block You are in the business of delivering or distributing newspapers or shopping news (including directly related services such as soliciting customers and collecting receipts). Free efile h&r block Substantially all your pay for these services directly relates to your sales or other output rather than to the number of hours you work. Free efile h&r block You perform the services under a written contract that says you will not be treated as an employee for federal tax purposes. Free efile h&r block   This rule applies whether or not you hire others to help you make deliveries. Free efile h&r block It also applies whether you buy the papers from the publisher or are paid based on the number of papers you deliver. Free efile h&r block Newspaper or magazine vendor. Free efile h&r block   If you are 18 or older and you sell newspapers or magazines, your earnings are reported on Schedule C or C-EZ if all the following conditions apply. Free efile h&r block You sell newspapers or magazines to ultimate consumers. Free efile h&r block You sell them at a fixed price. Free efile h&r block Your earnings are based on the difference between the sales price and your cost of goods sold. Free efile h&r block   This rule applies whether or not you are guaranteed a minimum amount of earnings. Free efile h&r block It also applies whether or not you receive credit for unsold newspapers or magazines you return to your supplier. Free efile h&r block Notary public. Free efile h&r block   Fees you receive for services you perform as a notary public are reported on Schedule C or C-EZ. Free efile h&r block These payments are not subject to self-employment tax (see the instructions for Schedule SE (Form 1040)). Free efile h&r block Public official. Free efile h&r block   Public officials generally do not report what they earn for serving in public office on Schedule C or C-EZ. Free efile h&r block This rule applies to payments received by an elected tax collector from state funds on the basis of a fixed percentage of the taxes collected. Free efile h&r block Public office includes any elective or appointive office of the United States or its possessions, the District of Columbia, a state or its political subdivisions, or a wholly owned instrumentality of any of these. Free efile h&r block   Public officials of state or local governments report their fees on Schedule C or C-EZ if they are paid solely on a fee basis and if their services are eligible for, but not covered by, social security under a federal-state agreement. Free efile h&r block Real estate agent or direct seller. Free efile h&r block   If you are a licensed real estate agent or a direct seller, your earnings are reported on Schedule C or C-EZ if both the following apply. Free efile h&r block Substantially all your pay for services as a real estate agent or direct seller directly relates to your sales or other output rather than to the number of hours you work. Free efile h&r block You perform the services under a written contract that says you will not be treated as an employee for federal tax purposes. Free efile h&r block Securities dealer. Free efile h&r block   If you are a dealer in options or commodities, your gains and losses from dealing or trading in section 1256 contracts (regulated futures contracts, foreign currency contracts, nonequity options, dealer equity options, and dealer securities futures contracts) or property related to those contracts (such as stock used to hedge options) are reported on Schedule C or C-EZ. Free efile h&r block For more information, see sections 1256 and 1402(i). Free efile h&r block Securities trader. Free efile h&r block   You are a trader in securities if you are engaged in the business of buying and selling securities for your own account. Free efile h&r block As a trader in securities, your gain or loss from the disposition of securities is not reported on Schedule C or C-EZ. Free efile h&r block However, see Securities dealer , earlier, for an exception that applies to section 1256 contracts. Free efile h&r block For more information about securities traders, see Publication 550, Investment Income and Expenses. Free efile h&r block Accounting for Your Income Accounting for your income for income tax purposes differs at times from accounting for financial purposes. Free efile h&r block This section discusses some of the more common differences that may affect business transactions. Free efile h&r block Figure your business income on the basis of a tax year and according to your regular method of accounting (see chapter 2). Free efile h&r block If the sale of a product is an income-producing factor in your business, you usually have to use inventories to clearly show your income. Free efile h&r block Dealers in real estate are not allowed to use inventories. Free efile h&r block For more information on inventories, see chapter 2. Free efile h&r block Income paid to a third party. Free efile h&r block   All income you earn is taxable to you. Free efile h&r block You cannot avoid tax by having the income paid to a third party. Free efile h&r block Example. Free efile h&r block You rent out your property and the rental agreement directs the lessee to pay the rent to your son. Free efile h&r block The amount paid to your son is gross income to you. Free efile h&r block Cash discounts. Free efile h&r block   These are amounts the seller permits you to deduct from the invoice price for prompt payment. Free efile h&r block For income tax purposes, you can use either of the following two methods to account for cash discounts. Free efile h&r block Deduct the cash discount from purchases (see Line 36, Purchases Less Cost of Items Withdrawn for Personal Use in chapter 6). Free efile h&r block Credit the cash discount to a discount income account. Free efile h&r block You must use the chosen method every year for all your purchase discounts. Free efile h&r block   If you use the second method, the credit balance in the account at the end of your tax year is business income. Free efile h&r block Under this method, you do not reduce the cost of goods sold by the cash discounts you received. Free efile h&r block When valuing your closing inventory, you cannot reduce the invoice price of merchandise on hand at the close of the tax year by the average or estimated discounts received on the merchandise. Free efile h&r block Trade discounts. Free efile h&r block   These are reductions from list or catalog prices and usually are not written into the invoice or charged to the customer. Free efile h&r block Do not enter these discounts on your books of account. Free efile h&r block Instead, use only the net amount as the cost of the merchandise purchased. Free efile h&r block For more information, see Trade discounts in chapter 6. Free efile h&r block Payment placed in escrow. Free efile h&r block   If the buyer of your property places part or all of the purchase price in escrow, you do not include any part of it in gross sales until you actually or constructively receive it. Free efile h&r block However, upon completion of the terms of the contract and the escrow agreement, you will have taxable income, even if you do not accept the money until the next year. Free efile h&r block Sales returns and allowances. Free efile h&r block   Credits you allow customers for returned merchandise and any other allowances you make on sales are deductions from gross sales in figuring net sales. Free efile h&r block Advance payments. Free efile h&r block   Special rules dealing with an accrual method of accounting for payments received in advance are discussed in chapter 2 under Accrual Method. Free efile h&r block Insurance proceeds. Free efile h&r block   If you receive insurance or another type of reimbursement for a casualty or theft loss, you must subtract it from the loss when you figure your deduction. Free efile h&r block You cannot deduct the reimbursed part of a casualty or theft loss. Free efile h&r block   For information on casualty or theft losses, see Publication 547, Casualties, Disasters, and Thefts. Free efile h&r block Prev  Up  Next   Home   More Online Publications