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Income Tax Extension

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Income Tax Extension

Income tax extension Publication 541 - Main Content Table of Contents Forming a PartnershipOrganizations Classified as Partnerships Family Partnership Partnership Agreement Terminating a PartnershipIRS e-file (Electronic Filing) Exclusion From Partnership Rules Partnership Return (Form 1065) Partnership DistributionsSubstantially appreciated inventory items. Income tax extension Partner's Gain or Loss Partner's Basis for Distributed Property Transactions Between Partnership and PartnersGuaranteed Payments Sale or Exchange of Property Contribution of Property Contribution of Services Basis of Partner's InterestAdjusted Basis Effect of Partnership Liabilities Disposition of Partner's InterestSale, Exchange, or Other Transfer Payments for Unrealized Receivables and Inventory Items Liquidation at Partner's Retirement or Death Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA)Partnership Item. Income tax extension Small Partnerships and the Small Partnership Exception Small Partnership TEFRA Election Role of Tax Matters Partner (TMP) in TEFRA Proceedings Statute of Limitations and TEFRA Amended Returns and Administrative Adjustment Requests (AARs) How To Get Tax Help Forming a Partnership The following sections contain general information about partnerships. Income tax extension Organizations Classified as Partnerships An unincorporated organization with two or more members is generally classified as a partnership for federal tax purposes if its members carry on a trade, business, financial operation, or venture and divide its profits. Income tax extension However, a joint undertaking merely to share expenses is not a partnership. Income tax extension For example, co-ownership of property maintained and rented or leased is not a partnership unless the co-owners provide services to the tenants. Income tax extension The rules you must use to determine whether an organization is classified as a partnership changed for organizations formed after 1996. Income tax extension Organizations formed after 1996. Income tax extension   An organization formed after 1996 is classified as a partnership for federal tax purposes if it has two or more members and it is none of the following. Income tax extension An organization formed under a federal or state law that refers to it as incorporated or as a corporation, body corporate, or body politic. Income tax extension An organization formed under a state law that refers to it as a joint-stock company or joint-stock association. Income tax extension An insurance company. Income tax extension Certain banks. Income tax extension An organization wholly owned by a state, local, or foreign government. Income tax extension An organization specifically required to be taxed as a corporation by the Internal Revenue Code (for example, certain publicly traded partnerships). Income tax extension Certain foreign organizations identified in section 301. Income tax extension 7701-2(b)(8) of the regulations. Income tax extension A tax-exempt organization. Income tax extension A real estate investment trust. Income tax extension An organization classified as a trust under section 301. Income tax extension 7701-4 of the regulations or otherwise subject to special treatment under the Internal Revenue Code. Income tax extension Any other organization that elects to be classified as a corporation by filing Form 8832. Income tax extension For more information, see the instructions for Form 8832. Income tax extension Limited liability company. Income tax extension   A limited liability company (LLC) is an entity formed under state law by filing articles of organization as an LLC. Income tax extension Unlike a partnership, none of the members of an LLC are personally liable for its debts. Income tax extension An LLC may be classified for federal income tax purposes as either a partnership, a corporation, or an entity disregarded as an entity separate from its owner by applying the rules in Regulations section 301. Income tax extension 7701-3. Income tax extension See Form 8832 and section 301. Income tax extension 7701-3 of the regulations for more details. Income tax extension A domestic LLC with at least two members that does not file Form 8832 is classified as a partnership for federal income tax purposes. Income tax extension Organizations formed before 1997. Income tax extension   An organization formed before 1997 and classified as a partnership under the old rules will generally continue to be classified as a partnership as long as the organization has at least two members and does not elect to be classified as a corporation by filing Form 8832. Income tax extension Community property. Income tax extension    Spouses who own a qualified entity (defined later) can choose to classify the entity as a partnership for federal tax purposes by filing the appropriate partnership tax returns. Income tax extension They can choose to classify the entity as a sole proprietorship by filing a Schedule C (Form 1040) listing one spouse as the sole proprietor. Income tax extension A change in reporting position will be treated for federal tax purposes as a conversion of the entity. Income tax extension   A qualified entity is a business entity that meets all the following requirements. Income tax extension The business entity is wholly owned by spouses as community property under the laws of a state, a foreign country, or a possession of the United States. Income tax extension No person other than one or both spouses would be considered an owner for federal tax purposes. Income tax extension The business entity is not treated as a corporation. Income tax extension   For more information about community property, see Publication 555, Community Property. Income tax extension Publication 555 discusses the community property laws of Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. Income tax extension Family Partnership Members of a family can be partners. Income tax extension However, family members (or any other person) will be recognized as partners only if one of the following requirements is met. Income tax extension If capital is a material income-producing factor, they acquired their capital interest in a bona fide transaction (even if by gift or purchase from another family member), actually own the partnership interest, and actually control the interest. Income tax extension If capital is not a material income-producing factor, they joined together in good faith to conduct a business. Income tax extension They agreed that contributions of each entitle them to a share in the profits, and some capital or service has been (or is) provided by each partner. Income tax extension Capital is material. Income tax extension   Capital is a material income-producing factor if a substantial part of the gross income of the business comes from the use of capital. Income tax extension Capital is ordinarily an income-producing factor if the operation of the business requires substantial inventories or investments in plants, machinery, or equipment. Income tax extension Capital is not material. Income tax extension   In general, capital is not a material income-producing factor if the income of the business consists principally of fees, commissions, or other compensation for personal services performed by members or employees of the partnership. Income tax extension Capital interest. Income tax extension   A capital interest in a partnership is an interest in its assets that is distributable to the owner of the interest in either of the following situations. Income tax extension The owner withdraws from the partnership. Income tax extension The partnership liquidates. Income tax extension   The mere right to share in earnings and profits is not a capital interest in the partnership. Income tax extension Gift of capital interest. Income tax extension   If a family member (or any other person) receives a gift of a capital interest in a partnership in which capital is a material income-producing factor, the donee's distributive share of partnership income is subject to both of the following restrictions. Income tax extension It must be figured by reducing the partnership income by reasonable compensation for services the donor renders to the partnership. Income tax extension The donee's distributive share of partnership income attributable to donated capital must not be proportionately greater than the donor's distributive share attributable to the donor's capital. Income tax extension Purchase. Income tax extension   For purposes of determining a partner's distributive share, an interest purchased by one family member from another family member is considered a gift from the seller. Income tax extension The fair market value of the purchased interest is considered donated capital. Income tax extension For this purpose, members of a family include only spouses, ancestors, and lineal descendants (or a trust for the primary benefit of those persons). Income tax extension Example. Income tax extension A father sold 50% of his business to his son. Income tax extension The resulting partnership had a profit of $60,000. Income tax extension Capital is a material income-producing factor. Income tax extension The father performed services worth $24,000, which is reasonable compensation, and the son performed no services. Income tax extension The $24,000 must be allocated to the father as compensation. Income tax extension Of the remaining $36,000 of profit due to capital, at least 50%, or $18,000, must be allocated to the father since he owns a 50% capital interest. Income tax extension The son's share of partnership profit cannot be more than $18,000. Income tax extension Business owned and operated by spouses. Income tax extension   If spouses carry on a business together and share in the profits and losses, they may be partners whether or not they have a formal partnership agreement. Income tax extension If so, they should report income or loss from the business on Form 1065. Income tax extension They should not report the income on a Schedule C (Form 1040) in the name of one spouse as a sole proprietor. Income tax extension However, the spouses can elect not to treat the joint venture as a partnership by making a Qualified Joint Venture Election. Income tax extension Qualified Joint Venture Election. Income tax extension   A "qualified joint venture," whose only members are spouses filing a joint return, can elect not to be treated as a partnership for federal tax purposes. Income tax extension A qualified joint venture conducts a trade or business where: the only members of the joint venture are spouses filing jointly; both spouses elect not to be treated as a partnership; both spouses materially participate in the trade or business (see Passive Activity Limitations in the Instructions for Form 1065 for a definition of material participation); and the business is co-owned by both spouses and is not held in the name of a state law entity such as a partnership or LLC. Income tax extension   Under this election, a qualified joint venture conducted by spouses who file a joint return is not treated as a partnership for federal tax purposes and therefore does not have a Form 1065 filing requirement. Income tax extension All items of income, gain, deduction, loss, and credit are divided between the spouses based on their respective interests in the venture. Income tax extension Each spouse takes into account his or her respective share of these items as a sole proprietor. Income tax extension Each spouse would account for his or her respective share on the appropriate form, such as Schedule C (Form 1040). Income tax extension For purposes of determining net earnings from self-employment, each spouse's share of income or loss from a qualified joint venture is taken into account just as it is for federal income tax purposes (i. Income tax extension e. Income tax extension , based on their respective interests in the venture). Income tax extension   If the spouses do not make the election to treat their respective interests in the joint venture as sole proprietorships, each spouse should carry his or her share of the partnership income or loss from Schedule K-1 (Form 1065) to their joint or separate Form(s) 1040. Income tax extension Each spouse should include his or her respective share of self-employment income on a separate Schedule SE (Form 1040), Self-Employment Tax. Income tax extension   This generally does not increase the total tax on the return, but it does give each spouse credit for social security earnings on which retirement benefits are based. Income tax extension However, this may not be true if either spouse exceeds the social security tax limitation. Income tax extension   For more information on qualified joint ventures, go to IRS. Income tax extension gov, enter “Election for Qualified Joint Ventures” in the search box and select the link reading “Election for Husband and Wife Unincorporated Businesses. Income tax extension ” Partnership Agreement The partnership agreement includes the original agreement and any modifications. Income tax extension The modifications must be agreed to by all partners or adopted in any other manner provided by the partnership agreement. Income tax extension The agreement or modifications can be oral or written. Income tax extension Partners can modify the partnership agreement for a particular tax year after the close of the year but not later than the date for filing the partnership return for that year. Income tax extension This filing date does not include any extension of time. Income tax extension If the partnership agreement or any modification is silent on any matter, the provisions of local law are treated as part of the agreement. Income tax extension Terminating a Partnership A partnership terminates when one of the following events takes place. Income tax extension All its operations are discontinued and no part of any business, financial operation, or venture is continued by any of its partners in a partnership. Income tax extension At least 50% of the total interest in partnership capital and profits is sold or exchanged within a 12-month period, including a sale or exchange to another partner. Income tax extension Unlike other partnerships, an electing large partnership does not terminate on the sale or exchange of 50% or more of the partnership interests within a 12-month period. Income tax extension See section 1. Income tax extension 708-1(b) of the regulations for more information on the termination of a partnership. Income tax extension For special rules that apply to a merger, consolidation, or division of a partnership, see sections 1. Income tax extension 708-1(c) and 1. Income tax extension 708-1(d) of the regulations. Income tax extension Date of termination. Income tax extension   The partnership's tax year ends on the date of termination. Income tax extension For the event described in (1), above, the date of termination is the date the partnership completes the winding up of its affairs. Income tax extension For the event described in (2), above, the date of termination is the date of the sale or exchange of a partnership interest that, by itself or together with other sales or exchanges in the preceding 12 months, transfers an interest of 50% or more in both capital and profits. Income tax extension Short period return. Income tax extension   If a partnership is terminated before the end of what would otherwise be its tax year, Form 1065 must be filed for the short period, which is the period from the beginning of the tax year through the date of termination. Income tax extension The return is due the 15th day of the fourth month following the date of termination. Income tax extension See Partnership Return (Form 1065), later, for information about filing Form 1065. Income tax extension Conversion of partnership into limited liability company (LLC). Income tax extension   The conversion of a partnership into an LLC classified as a partnership for federal tax purposes does not terminate the partnership. Income tax extension The conversion is not a sale, exchange, or liquidation of any partnership interest; the partnership's tax year does not close; and the LLC can continue to use the partnership's taxpayer identification number. Income tax extension   However, the conversion may change some of the partners' bases in their partnership interests if the partnership has recourse liabilities that become nonrecourse liabilities. Income tax extension Because the partners share recourse and nonrecourse liabilities differently, their bases must be adjusted to reflect the new sharing ratios. Income tax extension If a decrease in a partner's share of liabilities exceeds the partner's basis, he or she must recognize gain on the excess. Income tax extension For more information, see Effect of Partnership Liabilities under Basis of Partner's Interest, later. Income tax extension   The same rules apply if an LLC classified as a partnership is converted into a partnership. Income tax extension IRS e-file (Electronic Filing) Please click here for the text description of the image. Income tax extension e-file Certain partnerships with more than 100 partners are required to file Form 1065, Schedules K-1, and related forms and schedules electronically (e-file). Income tax extension Other partnerships generally have the option to file electronically. Income tax extension For details about IRS e-file, see the Form 1065 instructions. Income tax extension Exclusion From Partnership Rules Certain partnerships that do not actively conduct a business can choose to be completely or partially excluded from being treated as partnerships for federal income tax purposes. Income tax extension All the partners must agree to make the choice, and the partners must be able to compute their own taxable income without computing the partnership's income. Income tax extension However, the partners are not exempt from the rule that limits a partner's distributive share of partnership loss to the adjusted basis of the partner's partnership interest. Income tax extension Nor are they exempt from the requirement of a business purpose for adopting a tax year for the partnership that differs from its required tax year. Income tax extension Investing partnership. Income tax extension   An investing partnership can be excluded if the participants in the joint purchase, retention, sale, or exchange of investment property meet all the following requirements. Income tax extension They own the property as co-owners. Income tax extension They reserve the right separately to take or dispose of their shares of any property acquired or retained. Income tax extension They do not actively conduct business or irrevocably authorize some person acting in a representative capacity to purchase, sell, or exchange the investment property. Income tax extension Each separate participant can delegate authority to purchase, sell, or exchange his or her share of the investment property for the time being for his or her account, but not for a period of more than a year. Income tax extension Operating agreement partnership. Income tax extension   An operating agreement partnership group can be excluded if the participants in the joint production, extraction, or use of property meet all the following requirements. Income tax extension They own the property as co-owners, either in fee or under lease or other form of contract granting exclusive operating rights. Income tax extension They reserve the right separately to take in kind or dispose of their shares of any property produced, extracted, or used. Income tax extension They do not jointly sell services or the property produced or extracted. Income tax extension Each separate participant can delegate authority to sell his or her share of the property produced or extracted for the time being for his or her account, but not for a period of time in excess of the minimum needs of the industry, and in no event for more than one year. Income tax extension However, this exclusion does not apply to an unincorporated organization one of whose principal purposes is cycling, manufacturing, or processing for persons who are not members of the organization. Income tax extension Electing the exclusion. Income tax extension   An eligible organization that wishes to be excluded from the partnership rules must make the election not later than the time for filing the partnership return for the first tax year for which exclusion is desired. Income tax extension This filing date includes any extension of time. Income tax extension See Regulations section 1. Income tax extension 761-2(b) for the procedures to follow. Income tax extension Partnership Return (Form 1065) Every partnership that engages in a trade or business or has gross income must file an information return on Form 1065 showing its income, deductions, and other required information. Income tax extension The partnership return must show the names and addresses of each partner and each partner's distributive share of taxable income. Income tax extension The return must be signed by a general partner. Income tax extension If a limited liability company is treated as a partnership, it must file Form 1065 and one of its members must sign the return. Income tax extension A partnership is not considered to engage in a trade or business, and is not required to file a Form 1065, for any tax year in which it neither receives income nor pays or incurs any expenses treated as deductions or credits for federal income tax purposes. Income tax extension See the Instructions for Form 1065 for more information about who must file Form 1065. Income tax extension Partnership Distributions Partnership distributions include the following. Income tax extension A withdrawal by a partner in anticipation of the current year's earnings. Income tax extension A distribution of the current year's or prior years' earnings not needed for working capital. Income tax extension A complete or partial liquidation of a partner's interest. Income tax extension A distribution to all partners in a complete liquidation of the partnership. Income tax extension A partnership distribution is not taken into account in determining the partner's distributive share of partnership income or loss. Income tax extension If any gain or loss from the distribution is recognized by the partner, it must be reported on his or her return for the tax year in which the distribution is received. Income tax extension Money or property withdrawn by a partner in anticipation of the current year's earnings is treated as a distribution received on the last day of the partnership's tax year. Income tax extension Effect on partner's basis. Income tax extension   A partner's adjusted basis in his or her partnership interest is decreased (but not below zero) by the money and adjusted basis of property distributed to the partner. Income tax extension See Adjusted Basis under Basis of Partner's Interest, later. Income tax extension Effect on partnership. Income tax extension   A partnership generally does not recognize any gain or loss because of distributions it makes to partners. Income tax extension The partnership may be able to elect to adjust the basis of its undistributed property. Income tax extension Certain distributions treated as a sale or exchange. Income tax extension   When a partnership distributes the following items, the distribution may be treated as a sale or exchange of property rather than a distribution. Income tax extension Unrealized receivables or substantially appreciated inventory items distributed in exchange for any part of the partner's interest in other partnership property, including money. Income tax extension Other property (including money) distributed in exchange for any part of a partner's interest in unrealized receivables or substantially appreciated inventory items. Income tax extension   See Payments for Unrealized Receivables and Inventory Items under Disposition of Partner's Interest, later. Income tax extension   This treatment does not apply to the following distributions. Income tax extension A distribution of property to the partner who contributed the property to the partnership. Income tax extension Payments made to a retiring partner or successor in interest of a deceased partner that are the partner's distributive share of partnership income or guaranteed payments. Income tax extension Substantially appreciated inventory items. Income tax extension   Inventory items of the partnership are considered to have appreciated substantially in value if, at the time of the distribution, their total fair market value is more than 120% of the partnership's adjusted basis for the property. Income tax extension However, if a principal purpose for acquiring inventory property is to avoid ordinary income treatment by reducing the appreciation to less than 120%, that property is excluded. Income tax extension Partner's Gain or Loss A partner generally recognizes gain on a partnership distribution only to the extent any money (and marketable securities treated as money) included in the distribution exceeds the adjusted basis of the partner's interest in the partnership. Income tax extension Any gain recognized is generally treated as capital gain from the sale of the partnership interest on the date of the distribution. Income tax extension If partnership property (other than marketable securities treated as money) is distributed to a partner, he or she generally does not recognize any gain until the sale or other disposition of the property. Income tax extension For exceptions to these rules, see Distribution of partner's debt and Net precontribution gain, later. Income tax extension Also, see Payments for Unrealized Receivables and Inventory Items under Disposition of Partner's Interest, later. Income tax extension Example. Income tax extension The adjusted basis of Jo's partnership interest is $14,000. Income tax extension She receives a distribution of $8,000 cash and land that has an adjusted basis of $2,000 and a fair market value of $3,000. Income tax extension Because the cash received does not exceed the basis of her partnership interest, Jo does not recognize any gain on the distribution. Income tax extension Any gain on the land will be recognized when she sells or otherwise disposes of it. Income tax extension The distribution decreases the adjusted basis of Jo's partnership interest to $4,000 [$14,000 − ($8,000 + $2,000)]. Income tax extension Marketable securities treated as money. Income tax extension   Generally, a marketable security distributed to a partner is treated as money in determining whether gain is recognized on the distribution. Income tax extension This treatment, however, does not generally apply if that partner contributed the security to the partnership or an investment partnership made the distribution to an eligible partner. Income tax extension   The amount treated as money is the security's fair market value when distributed, reduced (but not below zero) by the excess (if any) of: The partner's distributive share of the gain that would be recognized had the partnership sold all its marketable securities at their fair market value immediately before the transaction resulting in the distribution, over The partner's distributive share of the gain that would be recognized had the partnership sold all such securities it still held after the distribution at the fair market value in (1). Income tax extension   For more information, including the definition of marketable securities, see section 731(c) of the Internal Revenue Code. Income tax extension Loss on distribution. Income tax extension   A partner does not recognize loss on a partnership distribution unless all the following requirements are met. Income tax extension The adjusted basis of the partner's interest in the partnership exceeds the distribution. Income tax extension The partner's entire interest in the partnership is liquidated. Income tax extension The distribution is in money, unrealized receivables, or inventory items. Income tax extension   There are exceptions to these general rules. Income tax extension See the following discussions. Income tax extension Also, see Liquidation at Partner's Retirement or Death under Disposition of Partner's Interest, later. Income tax extension Distribution of partner's debt. Income tax extension   If a partnership acquires a partner's debt and extinguishes the debt by distributing it to the partner, the partner will recognize capital gain or loss to the extent the fair market value of the debt differs from the basis of the debt (determined under the rules discussed in Partner's Basis for Distributed Property, later). Income tax extension   The partner is treated as having satisfied the debt for its fair market value. Income tax extension If the issue price (adjusted for any premium or discount) of the debt exceeds its fair market value when distributed, the partner may have to include the excess amount in income as canceled debt. Income tax extension   Similarly, a deduction may be available to a corporate partner if the fair market value of the debt at the time of distribution exceeds its adjusted issue price. Income tax extension Net precontribution gain. Income tax extension   A partner generally must recognize gain on the distribution of property (other than money) if the partner contributed appreciated property to the partnership during the 7-year period before the distribution. Income tax extension   The gain recognized is the lesser of the following amounts. Income tax extension The excess of: The fair market value of the property received in the distribution, over The adjusted basis of the partner's interest in the partnership immediately before the distribution, reduced (but not below zero) by any money received in the distribution. Income tax extension The “net precontribution gain” of the partner. Income tax extension This is the net gain the partner would recognize if all the property contributed by the partner within 7 years of the distribution, and held by the partnership immediately before the distribution, were distributed to another partner, other than a partner who owns more than 50% of the partnership. Income tax extension For information about the distribution of contributed property to another partner, see Contribution of Property , under Transactions Between Partnership and Partners, later. Income tax extension   The character of the gain is determined by reference to the character of the net precontribution gain. Income tax extension This gain is in addition to any gain the partner must recognize if the money distributed is more than his or her basis in the partnership. Income tax extension For these rules, the term “money” includes marketable securities treated as money, as discussed earlier. Income tax extension Effect on basis. Income tax extension   The adjusted basis of the partner's interest in the partnership is increased by any net precontribution gain recognized by the partner. Income tax extension Other than for purposes of determining the gain, the increase is treated as occurring immediately before the distribution. Income tax extension See Basis of Partner's Interest , later. Income tax extension   The partnership must adjust its basis in any property the partner contributed within 7 years of the distribution to reflect any gain that partner recognizes under this rule. Income tax extension Exceptions. Income tax extension   Any part of a distribution that is property the partner previously contributed to the partnership is not taken into account in determining the amount of the excess distribution or the partner's net precontribution gain. Income tax extension For this purpose, the partner's previously contributed property does not include a contributed interest in an entity to the extent its value is due to property contributed to the entity after the interest was contributed to the partnership. Income tax extension   Recognition of gain under this rule also does not apply to a distribution of unrealized receivables or substantially appreciated inventory items if the distribution is treated as a sale or exchange, as discussed earlier. Income tax extension Partner's Basis for Distributed Property Unless there is a complete liquidation of a partner's interest, the basis of property (other than money) distributed to the partner by a partnership is its adjusted basis to the partnership immediately before the distribution. Income tax extension However, the basis of the property to the partner cannot be more than the adjusted basis of his or her interest in the partnership reduced by any money received in the same transaction. Income tax extension Example 1. Income tax extension The adjusted basis of Emily's partnership interest is $30,000. Income tax extension She receives a distribution of property that has an adjusted basis of $20,000 to the partnership and $4,000 in cash. Income tax extension Her basis for the property is $20,000. Income tax extension Example 2. Income tax extension The adjusted basis of Steve's partnership interest is $10,000. Income tax extension He receives a distribution of $4,000 cash and property that has an adjusted basis to the partnership of $8,000. Income tax extension His basis for the distributed property is limited to $6,000 ($10,000 − $4,000, the cash he receives). Income tax extension Complete liquidation of partner's interest. Income tax extension   The basis of property received in complete liquidation of a partner's interest is the adjusted basis of the partner's interest in the partnership reduced by any money distributed to the partner in the same transaction. Income tax extension Partner's holding period. Income tax extension   A partner's holding period for property distributed to the partner includes the period the property was held by the partnership. Income tax extension If the property was contributed to the partnership by a partner, then the period it was held by that partner is also included. Income tax extension Basis divided among properties. Income tax extension   If the basis of property received is the adjusted basis of the partner's interest in the partnership (reduced by money received in the same transaction), it must be divided among the properties distributed to the partner. Income tax extension For property distributed after August 5, 1997, allocate the basis using the following rules. Income tax extension Allocate the basis first to unrealized receivables and inventory items included in the distribution by assigning a basis to each item equal to the partnership's adjusted basis in the item immediately before the distribution. Income tax extension If the total of these assigned bases exceeds the allocable basis, decrease the assigned bases by the amount of the excess. Income tax extension Allocate any remaining basis to properties other than unrealized receivables and inventory items by assigning a basis to each property equal to the partnership's adjusted basis in the property immediately before the distribution. Income tax extension If the allocable basis exceeds the total of these assigned bases, increase the assigned bases by the amount of the excess. Income tax extension If the total of these assigned bases exceeds the allocable basis, decrease the assigned bases by the amount of the excess. Income tax extension Allocating a basis increase. Income tax extension   Allocate any basis increase required in rule (2), above, first to properties with unrealized appreciation to the extent of the unrealized appreciation. Income tax extension If the basis increase is less than the total unrealized appreciation, allocate it among those properties in proportion to their respective amounts of unrealized appreciation. Income tax extension Allocate any remaining basis increase among all the properties in proportion to their respective fair market values. Income tax extension Example. Income tax extension Eun's basis in her partnership interest is $55,000. Income tax extension In a distribution in liquidation of her entire interest, she receives properties A and B, neither of which is inventory or unrealized receivables. Income tax extension Property A has an adjusted basis to the partnership of $5,000 and a fair market value of $40,000. Income tax extension Property B has an adjusted basis to the partnership of $10,000 and a fair market value of $10,000. Income tax extension To figure her basis in each property, Eun first assigns bases of $5,000 to property A and $10,000 to property B (their adjusted bases to the partnership). Income tax extension This leaves a $40,000 basis increase (the $55,000 allocable basis minus the $15,000 total of the assigned bases). Income tax extension She first allocates $35,000 to property A (its unrealized appreciation). Income tax extension The remaining $5,000 is allocated between the properties based on their fair market values. Income tax extension $4,000 ($40,000/$50,000) is allocated to property A and $1,000 ($10,000/$50,000) is allocated to property B. Income tax extension Eun's basis in property A is $44,000 ($5,000 + $35,000 + $4,000) and her basis in property B is $11,000 ($10,000 + $1,000). Income tax extension Allocating a basis decrease. Income tax extension   Use the following rules to allocate any basis decrease required in rule (1) or rule (2), earlier. Income tax extension Allocate the basis decrease first to items with unrealized depreciation to the extent of the unrealized depreciation. Income tax extension If the basis decrease is less than the total unrealized depreciation, allocate it among those items in proportion to their respective amounts of unrealized depreciation. Income tax extension Allocate any remaining basis decrease among all the items in proportion to their respective assigned basis amounts (as decreased in (1)). Income tax extension Example. Income tax extension Armando's basis in his partnership interest is $20,000. Income tax extension In a distribution in liquidation of his entire interest, he receives properties C and D, neither of which is inventory or unrealized receivables. Income tax extension Property C has an adjusted basis to the partnership of $15,000 and a fair market value of $15,000. Income tax extension Property D has an adjusted basis to the partnership of $15,000 and a fair market value of $5,000. Income tax extension To figure his basis in each property, Armando first assigns bases of $15,000 to property C and $15,000 to property D (their adjusted bases to the partnership). Income tax extension This leaves a $10,000 basis decrease (the $30,000 total of the assigned bases minus the $20,000 allocable basis). Income tax extension He allocates the entire $10,000 to property D (its unrealized depreciation). Income tax extension Armando's basis in property C is $15,000 and his basis in property D is $5,000 ($15,000 − $10,000). Income tax extension Distributions before August 6, 1997. Income tax extension   For property distributed before August 6, 1997, allocate the basis using the following rules. Income tax extension Allocate the basis first to unrealized receivables and inventory items included in the distribution to the extent of the partnership's adjusted basis in those items. Income tax extension If the partnership's adjusted basis in those items exceeded the allocable basis, allocate the basis among the items in proportion to their adjusted bases to the partnership. Income tax extension Allocate any remaining basis to other distributed properties in proportion to their adjusted bases to the partnership. Income tax extension Partner's interest more than partnership basis. Income tax extension   If the basis of a partner's interest to be divided in a complete liquidation of the partner's interest is more than the partnership's adjusted basis for the unrealized receivables and inventory items distributed, and if no other property is distributed to which the partner can apply the remaining basis, the partner has a capital loss to the extent of the remaining basis of the partnership interest. Income tax extension Special adjustment to basis. Income tax extension   A partner who acquired any part of his or her partnership interest in a sale or exchange or upon the death of another partner may be able to choose a special basis adjustment for property distributed by the partnership. Income tax extension To choose the special adjustment, the partner must have received the distribution within 2 years after acquiring the partnership interest. Income tax extension Also, the partnership must not have chosen the optional adjustment to basis when the partner acquired the partnership interest. Income tax extension   If a partner chooses this special basis adjustment, the partner's basis for the property distributed is the same as it would have been if the partnership had chosen the optional adjustment to basis. Income tax extension However, this assigned basis is not reduced by any depletion or depreciation that would have been allowed or allowable if the partnership had previously chosen the optional adjustment. Income tax extension   The choice must be made with the partner's tax return for the year of the distribution if the distribution includes any property subject to depreciation, depletion, or amortization. Income tax extension If the choice does not have to be made for the distribution year, it must be made with the return for the first year in which the basis of the distributed property is pertinent in determining the partner's income tax. Income tax extension   A partner choosing this special basis adjustment must attach a statement to his or her tax return that the partner chooses under section 732(d) of the Internal Revenue Code to adjust the basis of property received in a distribution. Income tax extension The statement must show the computation of the special basis adjustment for the property distributed and list the properties to which the adjustment has been allocated. Income tax extension Example. Income tax extension Chin Ho purchased a 25% interest in X partnership for $17,000 cash. Income tax extension At the time of the purchase, the partnership owned inventory having a basis to the partnership of $14,000 and a fair market value of $16,000. Income tax extension Thus, $4,000 of the $17,000 he paid was attributable to his share of inventory with a basis to the partnership of $3,500. Income tax extension Within 2 years after acquiring his interest, Chin Ho withdrew from the partnership and for his entire interest received cash of $1,500, inventory with a basis to the partnership of $3,500, and other property with a basis of $6,000. Income tax extension The value of the inventory received was 25% of the value of all partnership inventory. Income tax extension (It is immaterial whether the inventory he received was on hand when he acquired his interest. Income tax extension ) Since the partnership from which Chin Ho withdrew did not make the optional adjustment to basis, he chose to adjust the basis of the inventory received. Income tax extension His share of the partnership's basis for the inventory is increased by $500 (25% of the $2,000 difference between the $16,000 fair market value of the inventory and its $14,000 basis to the partnership at the time he acquired his interest). Income tax extension The adjustment applies only for purposes of determining his new basis in the inventory, and not for purposes of partnership gain or loss on disposition. Income tax extension The total to be allocated among the properties Chin Ho received in the distribution is $15,500 ($17,000 basis of his interest − $1,500 cash received). Income tax extension His basis in the inventory items is $4,000 ($3,500 partnership basis + $500 special adjustment). Income tax extension The remaining $11,500 is allocated to his new basis for the other property he received. Income tax extension Mandatory adjustment. Income tax extension   A partner does not always have a choice of making this special adjustment to basis. Income tax extension The special adjustment to basis must be made for a distribution of property (whether or not within 2 years after the partnership interest was acquired) if all the following conditions existed when the partner received the partnership interest. Income tax extension The fair market value of all partnership property (other than money) was more than 110% of its adjusted basis to the partnership. Income tax extension If there had been a liquidation of the partner's interest immediately after it was acquired, an allocation of the basis of that interest under the general rules (discussed earlier under Basis divided among properties) would have decreased the basis of property that could not be depreciated, depleted, or amortized and increased the basis of property that could be. Income tax extension The optional basis adjustment, if it had been chosen by the partnership, would have changed the partner's basis for the property actually distributed. Income tax extension Required statement. Income tax extension   Generally, if a partner chooses a special basis adjustment and notifies the partnership, or if the partnership makes a distribution for which the special basis adjustment is mandatory, the partnership must provide a statement to the partner. Income tax extension The statement must provide information necessary for the partner to compute the special basis adjustment. Income tax extension Marketable securities. Income tax extension   A partner's basis in marketable securities received in a partnership distribution, as determined in the preceding discussions, is increased by any gain recognized by treating the securities as money. Income tax extension See Marketable securities treated as money under Partner's Gain or Loss, earlier. Income tax extension The basis increase is allocated among the securities in proportion to their respective amounts of unrealized appreciation before the basis increase. Income tax extension Transactions Between Partnership and Partners For certain transactions between a partner and his or her partnership, the partner is treated as not being a member of the partnership. Income tax extension These transactions include the following. Income tax extension Performing services for, or transferring property to, a partnership if: There is a related allocation and distribution to a partner, and The entire transaction, when viewed together, is properly characterized as occurring between the partnership and a partner not acting in the capacity of a partner. Income tax extension Transferring money or other property to a partnership if: There is a related transfer of money or other property by the partnership to the contributing partner or another partner, and The transfers together are properly characterized as a sale or exchange of property. Income tax extension Payments by accrual basis partnership to cash basis partner. Income tax extension   A partnership that uses an accrual method of accounting cannot deduct any business expense owed to a cash basis partner until the amount is paid. Income tax extension However, this rule does not apply to guaranteed payments made to a partner, which are generally deductible when accrued. Income tax extension Guaranteed Payments Guaranteed payments are those made by a partnership to a partner that are determined without regard to the partnership's income. Income tax extension A partnership treats guaranteed payments for services, or for the use of capital, as if they were made to a person who is not a partner. Income tax extension This treatment is for purposes of determining gross income and deductible business expenses only. Income tax extension For other tax purposes, guaranteed payments are treated as a partner's distributive share of ordinary income. Income tax extension Guaranteed payments are not subject to income tax withholding. Income tax extension The partnership generally deducts guaranteed payments on line 10 of Form 1065 as a business expense. Income tax extension They are also listed on Schedules K and K-1 of the partnership return. Income tax extension The individual partner reports guaranteed payments on Schedule E (Form 1040) as ordinary income, along with his or her distributive share of the partnership's other ordinary income. Income tax extension Guaranteed payments made to partners for organizing the partnership or syndicating interests in the partnership are capital expenses. Income tax extension Generally, organizational and syndication expenses are not deductible by the partnership. Income tax extension However, a partnership can elect to deduct a portion of its organizational expenses and amortize the remaining expenses (see Business start-up and organizational costs in the Instructions for Form 1065). Income tax extension Organizational expenses (if the election is not made) and syndication expenses paid to partners must be reported on the partners' Schedule K-1 as guaranteed payments. Income tax extension Minimum payment. Income tax extension   If a partner is to receive a minimum payment from the partnership, the guaranteed payment is the amount by which the minimum payment is more than the partner's distributive share of the partnership income before taking into account the guaranteed payment. Income tax extension Example. Income tax extension Under a partnership agreement, Divya is to receive 30% of the partnership income, but not less than $8,000. Income tax extension The partnership has net income of $20,000. Income tax extension Divya's share, without regard to the minimum guarantee, is $6,000 (30% × $20,000). Income tax extension The guaranteed payment that can be deducted by the partnership is $2,000 ($8,000 − $6,000). Income tax extension Divya's income from the partnership is $8,000, and the remaining $12,000 of partnership income will be reported by the other partners in proportion to their shares under the partnership agreement. Income tax extension If the partnership net income had been $30,000, there would have been no guaranteed payment since her share, without regard to the guarantee, would have been greater than the guarantee. Income tax extension Self-employed health insurance premiums. Income tax extension   Premiums for health insurance paid by a partnership on behalf of a partner, for services as a partner, are treated as guaranteed payments. Income tax extension The partnership can deduct the payments as a business expense, and the partner must include them in gross income. Income tax extension However, if the partnership accounts for insurance paid for a partner as a reduction in distributions to the partner, the partnership cannot deduct the premiums. Income tax extension   A partner who qualifies can deduct 100% of the health insurance premiums paid by the partnership on his or her behalf as an adjustment to income. Income tax extension The partner cannot deduct the premiums for any calendar month, or part of a month, in which the partner is eligible to participate in any subsidized health plan maintained by any employer of the partner, the partner's spouse, the partner's dependents, or any children under age 27 who are not dependents. Income tax extension For more information on the self-employed health insurance deduction, see chapter 6 in Publication 535. Income tax extension Including payments in partner's income. Income tax extension   Guaranteed payments are included in income in the partner's tax year in which the partnership's tax year ends. Income tax extension Example 1. Income tax extension Under the terms of a partnership agreement, Erica is entitled to a fixed annual payment of $10,000 without regard to the income of the partnership. Income tax extension Her distributive share of the partnership income is 10%. Income tax extension The partnership has $50,000 of ordinary income after deducting the guaranteed payment. Income tax extension She must include ordinary income of $15,000 ($10,000 guaranteed payment + $5,000 ($50,000 × 10%) distributive share) on her individual income tax return for her tax year in which the partnership's tax year ends. Income tax extension Example 2. Income tax extension Lamont is a calendar year taxpayer who is a partner in a partnership. Income tax extension The partnership uses a fiscal year that ended January 31, 2013. Income tax extension Lamont received guaranteed payments from the partnership from February 1, 2012, until December 31, 2012. Income tax extension He must include these guaranteed payments in income for 2013 and report them on his 2013 income tax return. Income tax extension Payments resulting in loss. Income tax extension   If guaranteed payments to a partner result in a partnership loss in which the partner shares, the partner must report the full amount of the guaranteed payments as ordinary income. Income tax extension The partner separately takes into account his or her distributive share of the partnership loss, to the extent of the adjusted basis of the partner's partnership interest. Income tax extension Sale or Exchange of Property Special rules apply to a sale or exchange of property between a partnership and certain persons. Income tax extension Losses. Income tax extension   Losses will not be allowed from a sale or exchange of property (other than an interest in the partnership) directly or indirectly between a partnership and a person whose direct or indirect interest in the capital or profits of the partnership is more than 50%. Income tax extension   If the sale or exchange is between two partnerships in which the same persons directly or indirectly own more than 50% of the capital or profits interests in each partnership, no deduction of a loss is allowed. Income tax extension   The basis of each partner's interest in the partnership is decreased (but not below zero) by the partner's share of the disallowed loss. Income tax extension   If the purchaser later sells the property, only the gain realized that is greater than the loss not allowed will be taxable. Income tax extension If any gain from the sale of the property is not recognized because of this rule, the basis of each partner's interest in the partnership is increased by the partner's share of that gain. Income tax extension Gains. Income tax extension   Gains are treated as ordinary income in a sale or exchange of property directly or indirectly between a person and a partnership, or between two partnerships, if both of the following tests are met. Income tax extension More than 50% of the capital or profits interest in the partnership(s) is directly or indirectly owned by the same person(s). Income tax extension The property in the hands of the transferee immediately after the transfer is not a capital asset. Income tax extension Property that is not a capital asset includes accounts receivable, inventory, stock-in-trade, and depreciable or real property used in a trade or business. Income tax extension More than 50% ownership. Income tax extension   To determine if there is more than 50% ownership in partnership capital or profits, the following rules apply. Income tax extension An interest directly or indirectly owned by, or for, a corporation, partnership, estate, or trust is considered to be owned proportionately by, or for, its shareholders, partners, or beneficiaries. Income tax extension An individual is considered to own the interest directly or indirectly owned by, or for, the individual's family. Income tax extension For this rule, “family” includes only brothers, sisters, half-brothers, half-sisters, spouses, ancestors, and lineal descendants. Income tax extension If a person is considered to own an interest using rule (1), that person (the “constructive owner”) is treated as if actually owning that interest when rules (1) and (2) are applied. Income tax extension However, if a person is considered to own an interest using rule (2), that person is not treated as actually owning that interest in reapplying rule (2) to make another person the constructive owner. Income tax extension Example. Income tax extension Individuals A and B and Trust T are equal partners in Partnership ABT. Income tax extension A's husband, AH, is the sole beneficiary of Trust T. Income tax extension Trust T's partnership interest will be attributed to AH only for the purpose of further attributing the interest to A. Income tax extension As a result, A is a more-than-50% partner. Income tax extension This means that any deduction for losses on transactions between her and ABT will not be allowed, and gain from property that in the hands of the transferee is not a capital asset is treated as ordinary, rather than capital, gain. Income tax extension More information. Income tax extension   For more information on these special rules, see Sales and Exchanges Between Related Persons in chapter 2 of Publication 544. Income tax extension Contribution of Property Usually, neither the partner nor the partnership recognizes a gain or loss when property is contributed to the partnership in exchange for a partnership interest. Income tax extension This applies whether a partnership is being formed or is already operating. Income tax extension The partnership's holding period for the property includes the partner's holding period. Income tax extension The contribution of limited partnership interests in one partnership for limited partnership interests in another partnership qualifies as a tax-free contribution of property to the second partnership if the transaction is made for business purposes. Income tax extension The exchange is not subject to the rules explained later under Disposition of Partner's Interest. Income tax extension Disguised sales. Income tax extension   A contribution of money or other property to the partnership followed by a distribution of different property from the partnership to the partner is treated not as a contribution and distribution, but as a sale of property, if both of the following tests are met. Income tax extension The distribution would not have been made but for the contribution. Income tax extension The partner's right to the distribution does not depend on the success of partnership operations. Income tax extension   All facts and circumstances are considered in determining if the contribution and distribution are more properly characterized as a sale. Income tax extension However, if the contribution and distribution occur within 2 years of each other, the transfers are presumed to be a sale unless the facts clearly indicate that the transfers are not a sale. Income tax extension If the contribution and distribution occur more than 2 years apart, the transfers are presumed not to be a sale unless the facts clearly indicate that the transfers are a sale. Income tax extension Form 8275 required. Income tax extension   A partner must attach Form 8275, Disclosure Statement, (or other statement) to his or her return if the partner contributes property to a partnership and, within 2 years (before or after the contribution), the partnership transfers money or other consideration to the partner. Income tax extension For exceptions to this requirement, see section 1. Income tax extension 707-3(c)(2) of the regulations. Income tax extension   A partnership must attach Form 8275 (or other statement) to its return if it distributes property to a partner, and, within 2 years (before or after the distribution), the partner transfers money or other consideration to the partnership. Income tax extension   Form 8275 must include the following information. Income tax extension A caption identifying the statement as a disclosure under section 707 of the Internal Revenue Code. Income tax extension A description of the transferred property or money, including its value. Income tax extension A description of any relevant facts in determining if the transfers are properly viewed as a disguised sale. Income tax extension See section 1. Income tax extension 707-3(b)(2) of the regulations for a description of the facts and circumstances considered in determining if the transfers are a disguised sale. Income tax extension Contribution to partnership treated as investment company. Income tax extension   Gain is recognized when property is contributed (in exchange for an interest in the partnership) to a partnership that would be treated as an investment company if it were incorporated. Income tax extension   A partnership is generally treated as an investment company if over 80% of the value of its assets is held for investment and consists of certain readily marketable items. Income tax extension These items include money, stocks and other equity interests in a corporation, and interests in regulated investment companies and real estate investment trusts. Income tax extension For more information, see section 351(e)(1) of the Internal Revenue Code and the related regulations. Income tax extension Whether a partnership is treated as an investment company under this test is ordinarily determined immediately after the transfer of property. Income tax extension   This rule applies to limited partnerships and general partnerships, regardless of whether they are privately formed or publicly syndicated. Income tax extension Contribution to foreign partnership. Income tax extension   A domestic partnership that contributed property after August 5, 1997, to a foreign partnership in exchange for a partnership interest may have to file Form 8865 if either of the following apply. Income tax extension Immediately after the contribution, the partnership owned, directly or indirectly, at least a 10% interest in the foreign partnership. Income tax extension The fair market value of the property contributed to the foreign partnership, when added to other contributions of property made to the partnership during the preceding 12-month period, is greater than $100,000. Income tax extension   The partnership may also have to file Form 8865, even if no contributions are made during the tax year, if it owns a 10% or more interest in a foreign partnership at any time during the year. Income tax extension See the form instructions for more information. Income tax extension Basis of contributed property. Income tax extension   If a partner contributes property to a partnership, the partnership's basis for determining depreciation, depletion, gain, or loss for the property is the same as the partner's adjusted basis for the property when it was contributed, increased by any gain recognized by the partner at the time of contribution. Income tax extension Allocations to account for built-in gain or loss. Income tax extension   The fair market value of property at the time it is contributed may be different from the partner's adjusted basis. Income tax extension The partnership must allocate among the partners any income, deduction, gain, or loss on the property in a manner that will account for the difference. Income tax extension This rule also applies to contributions of accounts payable and other accrued but unpaid items of a cash basis partner. Income tax extension   The partnership can use different allocation methods for different items of contributed property. Income tax extension A single reasonable method must be consistently applied to each item, and the overall method or combination of methods must be reasonable. Income tax extension See section 1. Income tax extension 704-3 of the regulations for allocation methods generally considered reasonable. Income tax extension   If the partnership sells contributed property and recognizes gain or loss, built-in gain or loss is allocated to the contributing partner. Income tax extension If contributed property is subject to depreciation or other cost recovery, the allocation of deductions for these items takes into account built-in gain or loss on the property. Income tax extension However, the total depreciation, depletion, gain, or loss allocated to partners cannot be more than the depreciation or depletion allowable to the partnership or the gain or loss realized by the partnership. Income tax extension Example. Income tax extension Areta and Sofia formed an equal partnership. Income tax extension Areta contributed $10,000 in cash to the partnership and Sofia contributed depreciable property with a fair market value of $10,000 and an adjusted basis of $4,000. Income tax extension The partnership's basis for depreciation is limited to the adjusted basis of the property in Sofia's hands, $4,000. Income tax extension In effect, Areta purchased an undivided one-half interest in the depreciable property with her contribution of $10,000. Income tax extension Assuming that the depreciation rate is 10% a year under the General Depreciation System (GDS), she would have been entitled to a depreciation deduction of $500 per year, based on her interest in the partnership, if the adjusted basis of the property equaled its fair market value when contributed. Income tax extension To simplify this example, the depreciation deductions are determined without regard to any first-year depreciation conventions. Income tax extension However, since the partnership is allowed only $400 per year of depreciation (10% of $4,000), no more than $400 can be allocated between the partners. Income tax extension The entire $400 must be allocated to Areta. Income tax extension Distribution of contributed property to another partner. Income tax extension   If a partner contributes property to a partnership and the partnership distributes the property to another partner within 7 years of the contribution, the contributing partner must recognize gain or loss on the distribution. Income tax extension   The recognized gain or loss is the amount the contributing partner would have recognized if the property had been sold for its fair market value when it was distributed. Income tax extension This amount is the difference between the property's basis and its fair market value at the time of contribution. Income tax extension The character of the gain or loss will be the same as the character of the gain or loss that would have resulted if the partnership had sold the property to the distributee partner. Income tax extension Appropriate adjustments must be made to the adjusted basis of the contributing partner's partnership interest and to the adjusted basis of the property distributed to reflect the recognized gain or loss. Income tax extension Disposition of certain contributed property. Income tax extension   The following rules determine the character of the partnership's gain or loss on a disposition of certain types of contributed property. Income tax extension Unrealized receivables. Income tax extension If the property was an unrealized receivable in the hands of the contributing partner, any gain or loss on its disposition by the partnership is ordinary income or loss. Income tax extension Unrealized receivables are defined later under Payments for Unrealized Receivables and Inventory Items. Income tax extension When reading the definition, substitute “partner” for “partnership. Income tax extension ” Inventory items. Income tax extension If the property was an inventory item in the hands of the contributing partner, any gain or loss on its disposition by the partnership within 5 years after the contribution is ordinary income or loss. Income tax extension Inventory items are defined later in Payments for Unrealized Receivables and Inventory Items. Income tax extension Capital loss property. Income tax extension If the property was a capital asset in the contributing partner's hands, any loss on its disposition by the partnership within 5 years after the contribution is a capital loss. Income tax extension The capital loss is limited to the amount by which the partner's adjusted basis for the property exceeded the property's fair market value immediately before the contribution. Income tax extension Substituted basis property. Income tax extension If the disposition of any of the property listed in (1), (2), or (3) is a nonrecognition transaction, these rules apply when the recipient of the property disposes of any substituted basis property (other than certain corporate stock) resulting from the transaction. Income tax extension Contribution of Services A partner can acquire an interest in partnership capital or profits as compensation for services performed or to be performed. Income tax extension Capital interest. Income tax extension   A capital interest is an interest that would give the holder a share of the proceeds if the partnership's assets were sold at fair market value and the proceeds were distributed in a complete liquidation of the partnership. Income tax extension This determination generally is made at the time of receipt of the partnership interest. Income tax extension The fair market value of such an interest received by a partner as compensation for services must generally be included in the partner's gross income in the first tax year in which the partner can transfer the interest or the interest is not subject to a substantial risk of forfeiture. Income tax extension The capital interest transferred as compensation for services is subject to the rules for restricted property discussed in Publication 525 under Employee Compensation. Income tax extension   The fair market value of an interest in partnership capital transferred to a partner as payment for services to the partnership is a guaranteed payment, discussed earlier. Income tax extension Profits interest. Income tax extension   A profits interest is a partnership interest other than a capital interest. Income tax extension If a person receives a profits interest for providing services to, or for the benefit of, a partnership in a partner capacity or in anticipation of being a partner, the receipt of such an interest is not a taxable event for the partner or the partnership. Income tax extension However, this does not apply in the following situations. Income tax extension The profits interest relates to a substantially certain and predictable stream of income from partnership assets, such as income from high-quality debt securities or a high-quality net lease. Income tax extension Within 2 years of receipt, the partner disposes of the profits interest. Income tax extension The profits interest is a limited partnership interest in a publicly traded partnership. Income tax extension   A profits interest transferred as compensation for services is not subject to the rules for restricted property that apply to capital interests. Income tax extension Basis of Partner's Interest The basis of a partnership interest is the money plus the adjusted basis of any property the partner contributed. Income tax extension If the partner must recognize gain as a result of the contribution, this gain is included in the basis of his or her interest. Income tax extension Any increase in a partner's individual liabilities because of an assumption of partnership liabilities is considered a contribution of money to the partnership by the partner. Income tax extension Interest acquired by gift, etc. Income tax extension   If a partner acquires an interest in a partnership by gift, inheritance, or under any circumstance other than by a contribution of money or property to the partnership, the partner's basis must be determined using the basis rules described in Publication 551. Income tax extension Adjusted Basis There is a worksheet for adjusting the basis of a partner's interest in the partnership in the Partner's Instructions for Schedule K-1 (Form 1065). Income tax extension The basis of an interest in a partnership is increased or decreased by certain items. Income tax extension Increases. Income tax extension   A partner's basis is increased by the following items. Income tax extension The partner's additional contributions to the partnership, including an increased share of, or assumption of, partnership liabilities. Income tax extension The partner's distributive share of taxable and nontaxable partnership income. Income tax extension The partner's distributive share of the excess of the deductions for depletion over the basis of the depletable property, unless the property is oil or gas wells whose basis has been allocated to partners. Income tax extension Decreases. Income tax extension   The partner's basis is decreased (but never below zero) by the following items. Income tax extension The money (including a decreased share of partnership liabilities or an assumption of the partner's individual liabilities by the partnership) and adjusted basis of property distributed to the partner by the partnership. Income tax extension The partner's distributive share of the partnership losses (including capital losses). Income tax extension The partner's distributive share of nondeductible partnership expenses that are not capital expenditures. Income tax extension This includes the partner's share of any section 179 expenses, even if the partner cannot deduct the entire amount on his or her individual income tax return. Income tax extension The partner's deduction for depletion for any partnership oil and gas wells, up to the proportionate share of the adjusted basis of the wells allocated to the partner. Income tax extension Partner's liabilities assumed by partnership. Income tax extension   If contributed property is subject to a debt or if a partner's liabilities are assumed by the partnership, the basis of that partner's interest is reduced (but not below zero) by the liability assumed by the other partners. Income tax extension This partner must reduce his or her basis because the assumption of the liability is treated as a distribution of money to that partner. Income tax extension The other partners' assumption of the liability is treated as a contribution by them of money to the partnership. Income tax extension See Effect of Partnership Liabilities , later. Income tax extension Example 1. Income tax extension Ivan acquired a 20% interest in a partnership by contributing property that had an adjusted basis to him of $8,000 and a $4,000 mortgage. Income tax extension The partnership assumed payment of the mortgage. Income tax extension The basis of Ivan's interest is: Adjusted basis of contributed property $8,000 Minus: Part of mortgage assumed by other partners (80% × $4,000) 3,200 Basis of Ivan's partnership interest $4,800 Example 2. Income tax extension If, in Example 1, the contributed property had a $12,000 mortgage, the basis of Ivan's partnership interest would be zero. Income tax extension The $1,600 difference between the mortgage assumed by the other partners, $9,600 (80% × $12,000), and his basis of $8,000 would be treated as capital gain from the sale or exchange of a partnership interest. Income tax extension However, this gain would not increase the basis of his partnership interest. Income tax extension Book value of partner's interest. Income tax extension   The adjusted basis of a partner's interest is determined without considering any amount shown in the partnership books as a capital, equity, or similar account. Income tax extension Example. Income tax extension Enzo contributes to his partnership property that has an adjusted basis of $400 and a fair market value of $1,000. Income tax extension His partner contributes $1,000 cash. Income tax extension While each partner has increased his capital account by $1,000, which will be re
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The Income Tax Extension

Income tax extension 1. Income tax extension   Overview of Depreciation Table of Contents Introduction Useful Items - You may want to see: What Property Can Be Depreciated?Property You Own Property Used in Your Business or Income-Producing Activity Property Having a Determinable Useful Life Property Lasting More Than One Year What Property Cannot Be Depreciated?Land Excepted Property When Does Depreciation Begin and End?Placed in Service Idle Property Cost or Other Basis Fully Recovered Retired From Service What Method Can You Use To Depreciate Your Property?Property You Placed in Service Before 1987 Property Owned or Used in 1986 Intangible Property Corporate or Partnership Property Acquired in a Nontaxable Transfer Election To Exclude Property From MACRS What Is the Basis of Your Depreciable Property?Cost as Basis Other Basis Adjusted Basis How Do You Treat Repairs and Improvements? Do You Have To File Form 4562? How Do You Correct Depreciation Deductions?Filing an Amended Return Changing Your Accounting Method Introduction Depreciation is an annual income tax deduction that allows you to recover the cost or other basis of certain property over the time you use the property. Income tax extension It is an allowance for the wear and tear, deterioration, or obsolescence of the property. Income tax extension This chapter discusses the general rules for depreciating property and answers the following questions. Income tax extension What property can be depreciated? What property cannot be depreciated? When does depreciation begin and end? What method can you use to depreciate your property? What is the basis of your depreciable property? How do you treat repairs and improvements? Do you have to file Form 4562? How do you correct depreciation deductions? Useful Items - You may want to see: Publication 534 Depreciating Property Placed in Service Before 1987 535 Business Expenses 538 Accounting Periods and Methods 551 Basis of Assets Form (and Instructions) Sch C (Form 1040) Profit or Loss From Business Sch C-EZ (Form 1040) Net Profit From Business 2106 Employee Business Expenses 2106-EZ Unreimbursed Employee Business Expenses 3115 Application for Change in Accounting Method 4562 Depreciation and Amortization See chapter 6 for information about getting publications and forms. Income tax extension What Property Can Be Depreciated? You can depreciate most types of tangible property (except land), such as buildings, machinery, vehicles, furniture, and equipment. Income tax extension You also can depreciate certain intangible property, such as patents, copyrights, and computer software. Income tax extension To be depreciable, the property must meet all the following requirements. Income tax extension It must be property you own. Income tax extension It must be used in your business or income-producing activity. Income tax extension It must have a determinable useful life. Income tax extension It must be expected to last more than one year. Income tax extension The following discussions provide information about these requirements. Income tax extension Property You Own To claim depreciation, you usually must be the owner of the property. Income tax extension You are considered as owning property even if it is subject to a debt. Income tax extension Example 1. Income tax extension You made a down payment to purchase rental property and assumed the previous owner's mortgage. Income tax extension You own the property and you can depreciate it. Income tax extension Example 2. Income tax extension You bought a new van that you will use only for your courier business. Income tax extension You will be making payments on the van over the next 5 years. Income tax extension You own the van and you can depreciate it. Income tax extension Leased property. Income tax extension   You can depreciate leased property only if you retain the incidents of ownership in the property (explained below). Income tax extension This means you bear the burden of exhaustion of the capital investment in the property. Income tax extension Therefore, if you lease property from someone to use in your trade or business or for the production of income, you generally cannot depreciate its cost because you do not retain the incidents of ownership. Income tax extension You can, however, depreciate any capital improvements you make to the property. Income tax extension See How Do You Treat Repairs and Improvements later in this chapter and Additions and Improvements under Which Recovery Period Applies in chapter 4. Income tax extension   If you lease property to someone, you generally can depreciate its cost even if the lessee (the person leasing from you) has agreed to preserve, replace, renew, and maintain the property. Income tax extension However, if the lease provides that the lessee is to maintain the property and return to you the same property or its equivalent in value at the expiration of the lease in as good condition and value as when leased, you cannot depreciate the cost of the property. Income tax extension Incidents of ownership. Income tax extension   Incidents of ownership in property include the following. Income tax extension The legal title to the property. Income tax extension The legal obligation to pay for the property. Income tax extension The responsibility to pay maintenance and operating expenses. Income tax extension The duty to pay any taxes on the property. Income tax extension The risk of loss if the property is destroyed, condemned, or diminished in value through obsolescence or exhaustion. Income tax extension Life tenant. Income tax extension   Generally, if you hold business or investment property as a life tenant, you can depreciate it as if you were the absolute owner of the property. Income tax extension However, see Certain term interests in property under Excepted Property, later. Income tax extension Cooperative apartments. Income tax extension   If you are a tenant-stockholder in a cooperative housing corporation and use your cooperative apartment in your business or for the production of income, you can depreciate your stock in the corporation, even though the corporation owns the apartment. Income tax extension   Figure your depreciation deduction as follows. Income tax extension Figure the depreciation for all the depreciable real property owned by the corporation in which you have a proprietary lease or right of tenancy. Income tax extension If you bought your cooperative stock after its first offering, figure the depreciable basis of this property as follows. Income tax extension Multiply your cost per share by the total number of outstanding shares, including any shares held by the corporation. Income tax extension Add to the amount figured in (a) any mortgage debt on the property on the date you bought the stock. Income tax extension Subtract from the amount figured in (b) any mortgage debt that is not for the depreciable real property, such as the part for the land. Income tax extension Subtract from the amount figured in (1) any depreciation for space owned by the corporation that can be rented but cannot be lived in by tenant-stockholders. Income tax extension Divide the number of your shares of stock by the total number of outstanding shares, including any shares held by the corporation. Income tax extension Multiply the result of (2) by the percentage you figured in (3). Income tax extension This is your depreciation on the stock. Income tax extension   Your depreciation deduction for the year cannot be more than the part of your adjusted basis in the stock of the corporation that is allocable to your business or income-producing property. Income tax extension You must also reduce your depreciation deduction if only a portion of the property is used in a business or for the production of income. Income tax extension Example. Income tax extension You figure your share of the cooperative housing corporation's depreciation to be $30,000. Income tax extension Your adjusted basis in the stock of the corporation is $50,000. Income tax extension You use one half of your apartment solely for business purposes. Income tax extension Your depreciation deduction for the stock for the year cannot be more than $25,000 (½ of $50,000). Income tax extension Change to business use. Income tax extension   If you change your cooperative apartment to business use, figure your allowable depreciation as explained earlier. Income tax extension The basis of all the depreciable real property owned by the cooperative housing corporation is the smaller of the following amounts. Income tax extension The fair market value of the property on the date you change your apartment to business use. Income tax extension This is considered to be the same as the corporation's adjusted basis minus straight line depreciation, unless this value is unrealistic. Income tax extension The corporation's adjusted basis in the property on that date. Income tax extension Do not subtract depreciation when figuring the corporation's adjusted basis. Income tax extension   If you bought the stock after its first offering, the corporation's adjusted basis in the property is the amount figured in (1), above. Income tax extension The fair market value of the property is considered to be the same as the corporation's adjusted basis figured in this way minus straight line depreciation, unless the value is unrealistic. Income tax extension   For a discussion of fair market value and adjusted basis, see Publication 551. Income tax extension Property Used in Your Business or Income-Producing Activity To claim depreciation on property, you must use it in your business or income-producing activity. Income tax extension If you use property to produce income (investment use), the income must be taxable. Income tax extension You cannot depreciate property that you use solely for personal activities. Income tax extension Partial business or investment use. Income tax extension   If you use property for business or investment purposes and for personal purposes, you can deduct depreciation based only on the business or investment use. Income tax extension For example, you cannot deduct depreciation on a car used only for commuting, personal shopping trips, family vacations, driving children to and from school, or similar activities. Income tax extension    You must keep records showing the business, investment, and personal use of your property. Income tax extension For more information on the records you must keep for listed property, such as a car, see What Records Must Be Kept in chapter 5. Income tax extension    Although you can combine business and investment use of property when figuring depreciation deductions, do not treat investment use as qualified business use when determining whether the business-use requirement for listed property is met. Income tax extension For information about qualified business use of listed property, see What Is the Business-Use Requirement in chapter 5. Income tax extension Office in the home. Income tax extension   If you use part of your home as an office, you may be able to deduct depreciation on that part based on its business use. Income tax extension For information about depreciating your home office, see Publication 587. Income tax extension Inventory. Income tax extension   You cannot depreciate inventory because it is not held for use in your business. Income tax extension Inventory is any property you hold primarily for sale to customers in the ordinary course of your business. Income tax extension   If you are a rent-to-own dealer, you may be able to treat certain property held in your business as depreciable property rather than as inventory. Income tax extension See Rent-to-own dealer under Which Property Class Applies Under GDS in chapter 4. Income tax extension   In some cases, it is not clear whether property is held for sale (inventory) or for use in your business. Income tax extension If it is unclear, examine carefully all the facts in the operation of the particular business. Income tax extension The following example shows how a careful examination of the facts in two similar situations results in different conclusions. Income tax extension Example. Income tax extension Maple Corporation is in the business of leasing cars. Income tax extension At the end of their useful lives, when the cars are no longer profitable to lease, Maple sells them. Income tax extension Maple does not have a showroom, used car lot, or individuals to sell the cars. Income tax extension Instead, it sells them through wholesalers or by similar arrangements in which a dealer's profit is not intended or considered. Income tax extension Maple can depreciate the leased cars because the cars are not held primarily for sale to customers in the ordinary course of business, but are leased. Income tax extension If Maple buys cars at wholesale prices, leases them for a short time, and then sells them at retail prices or in sales in which a dealer's profit is intended, the cars are treated as inventory and are not depreciable property. Income tax extension In this situation, the cars are held primarily for sale to customers in the ordinary course of business. Income tax extension Containers. Income tax extension   Generally, containers for the products you sell are part of inventory and you cannot depreciate them. Income tax extension However, you can depreciate containers used to ship your products if they have a life longer than one year and meet the following requirements. Income tax extension They qualify as property used in your business. Income tax extension Title to the containers does not pass to the buyer. Income tax extension   To determine if these requirements are met, consider the following questions. Income tax extension Does your sales contract, sales invoice, or other type of order acknowledgment indicate whether you have retained title? Does your invoice treat the containers as separate items? Do any of your records state your basis in the containers? Property Having a Determinable Useful Life To be depreciable, your property must have a determinable useful life. Income tax extension This means that it must be something that wears out, decays, gets used up, becomes obsolete, or loses its value from natural causes. Income tax extension Property Lasting More Than One Year To be depreciable, property must have a useful life that extends substantially beyond the year you place it in service. Income tax extension Example. Income tax extension You maintain a library for use in your profession. Income tax extension You can depreciate it. Income tax extension However, if you buy technical books, journals, or information services for use in your business that have a useful life of one year or less, you cannot depreciate them. Income tax extension Instead, you deduct their cost as a business expense. Income tax extension What Property Cannot Be Depreciated? Certain property cannot be depreciated. Income tax extension This includes land and certain excepted property. Income tax extension Land You cannot depreciate the cost of land because land does not wear out, become obsolete, or get used up. Income tax extension The cost of land generally includes the cost of clearing, grading, planting, and landscaping. Income tax extension Although you cannot depreciate land, you can depreciate certain land preparation costs, such as landscaping costs, incurred in preparing land for business use. Income tax extension These costs must be so closely associated with other depreciable property that you can determine a life for them along with the life of the associated property. Income tax extension Example. Income tax extension You constructed a new building for use in your business and paid for grading, clearing, seeding, and planting bushes and trees. Income tax extension Some of the bushes and trees were planted right next to the building, while others were planted around the outer border of the lot. Income tax extension If you replace the building, you would have to destroy the bushes and trees right next to it. Income tax extension These bushes and trees are closely associated with the building, so they have a determinable useful life. Income tax extension Therefore, you can depreciate them. Income tax extension Add your other land preparation costs to the basis of your land because they have no determinable life and you cannot depreciate them. Income tax extension Excepted Property Even if the requirements explained in the preceding discussions are met, you cannot depreciate the following property. Income tax extension Property placed in service and disposed of in the same year. Income tax extension Determining when property is placed in service is explained later. Income tax extension Equipment used to build capital improvements. Income tax extension You must add otherwise allowable depreciation on the equipment during the period of construction to the basis of your improvements. Income tax extension See Uniform Capitalization Rules in Publication 551. Income tax extension Section 197 intangibles. Income tax extension You must amortize these costs. Income tax extension Section 197 intangibles are discussed in detail in Chapter 8 of Publication 535. Income tax extension Intangible property, such as certain computer software, that is not section 197 intangible property, can be depreciated if it meets certain requirements. Income tax extension See Intangible Property , later. Income tax extension Certain term interests. Income tax extension Certain term interests in property. Income tax extension   You cannot depreciate a term interest in property created or acquired after July 27, 1989, for any period during which the remainder interest is held, directly or indirectly, by a person related to you. Income tax extension A term interest in property means a life interest in property, an interest in property for a term of years, or an income interest in a trust. Income tax extension Related persons. Income tax extension   For a description of related persons, see Related Persons, later. Income tax extension For this purpose, however, treat as related persons only the relationships listed in items (1) through (10) of that discussion and substitute “50%” for “10%” each place it appears. Income tax extension Basis adjustments. Income tax extension   If you would be allowed a depreciation deduction for a term interest in property except that the holder of the remainder interest is related to you, you generally must reduce your basis in the term interest by any depreciation or amortization not allowed. Income tax extension   If you hold the remainder interest, you generally must increase your basis in that interest by the depreciation not allowed to the term interest holder. Income tax extension However, do not increase your basis for depreciation not allowed for periods during which either of the following situations applies. Income tax extension The term interest is held by an organization exempt from tax. Income tax extension The term interest is held by a nonresident alien individual or foreign corporation, and the income from the term interest is not effectively connected with the conduct of a trade or business in the United States. Income tax extension Exceptions. Income tax extension   The above rules do not apply to the holder of a term interest in property acquired by gift, bequest, or inheritance. Income tax extension They also do not apply to the holder of dividend rights that were separated from any stripped preferred stock if the rights were purchased after April 30, 1993, or to a person whose basis in the stock is determined by reference to the basis in the hands of the purchaser. Income tax extension When Does Depreciation Begin and End? You begin to depreciate your property when you place it in service for use in your trade or business or for the production of income. Income tax extension You stop depreciating property either when you have fully recovered your cost or other basis or when you retire it from service, whichever happens first. Income tax extension Placed in Service You place property in service when it is ready and available for a specific use, whether in a business activity, an income-producing activity, a tax-exempt activity, or a personal activity. Income tax extension Even if you are not using the property, it is in service when it is ready and available for its specific use. Income tax extension Example 1. Income tax extension Donald Steep bought a machine for his business. Income tax extension The machine was delivered last year. Income tax extension However, it was not installed and operational until this year. Income tax extension It is considered placed in service this year. Income tax extension If the machine had been ready and available for use when it was delivered, it would be considered placed in service last year even if it was not actually used until this year. Income tax extension Example 2. Income tax extension On April 6, Sue Thorn bought a house to use as residential rental property. Income tax extension She made several repairs and had it ready for rent on July 5. Income tax extension At that time, she began to advertise it for rent in the local newspaper. Income tax extension The house is considered placed in service in July when it was ready and available for rent. Income tax extension She can begin to depreciate it in July. Income tax extension Example 3. Income tax extension James Elm is a building contractor who specializes in constructing office buildings. Income tax extension He bought a truck last year that had to be modified to lift materials to second-story levels. Income tax extension The installation of the lifting equipment was completed and James accepted delivery of the modified truck on January 10 of this year. Income tax extension The truck was placed in service on January 10, the date it was ready and available to perform the function for which it was bought. Income tax extension Conversion to business use. Income tax extension   If you place property in service in a personal activity, you cannot claim depreciation. Income tax extension However, if you change the property's use to use in a business or income-producing activity, then you can begin to depreciate it at the time of the change. Income tax extension You place the property in service in the business or income-producing activity on the date of the change. Income tax extension Example. Income tax extension You bought a home and used it as your personal home several years before you converted it to rental property. Income tax extension Although its specific use was personal and no depreciation was allowable, you placed the home in service when you began using it as your home. Income tax extension You can begin to claim depreciation in the year you converted it to rental property because its use changed to an income-producing use at that time. Income tax extension Idle Property Continue to claim a deduction for depreciation on property used in your business or for the production of income even if it is temporarily idle (not in use). Income tax extension For example, if you stop using a machine because there is a temporary lack of a market for a product made with that machine, continue to deduct depreciation on the machine. Income tax extension Cost or Other Basis Fully Recovered You stop depreciating property when you have fully recovered your cost or other basis. Income tax extension You recover your basis when your section 179 and allowed or allowable depreciation deductions equal your cost or investment in the property. Income tax extension See What Is the Basis of Your Depreciable Property , later. Income tax extension Retired From Service You stop depreciating property when you retire it from service, even if you have not fully recovered its cost or other basis. Income tax extension You retire property from service when you permanently withdraw it from use in a trade or business or from use in the production of income because of any of the following events. Income tax extension You sell or exchange the property. Income tax extension You convert the property to personal use. Income tax extension You abandon the property. Income tax extension You transfer the property to a supplies or scrap account. Income tax extension The property is destroyed. Income tax extension If you included the property in a general asset account, see How Do You Use General Asset Accounts in chapter 4 for the rules that apply when you dispose of that property. Income tax extension What Method Can You Use To Depreciate Your Property? You must use the Modified Accelerated Cost Recovery System (MACRS) to depreciate most property. Income tax extension MACRS is discussed in chapter 4. Income tax extension You cannot use MACRS to depreciate the following property. Income tax extension Property you placed in service before 1987. Income tax extension Certain property owned or used in 1986. Income tax extension Intangible property. Income tax extension Films, video tapes, and recordings. Income tax extension Certain corporate or partnership property acquired in a nontaxable transfer. Income tax extension Property you elected to exclude from MACRS. Income tax extension The following discussions describe the property listed above and explain what depreciation method should be used. Income tax extension Property You Placed in Service Before 1987 You cannot use MACRS for property you placed in service before 1987 (except property you placed in service after July 31, 1986, if MACRS was elected). Income tax extension Property placed in service before 1987 must be depreciated under the methods discussed in Publication 534. Income tax extension For a discussion of when property is placed in service, see When Does Depreciation Begin and End , earlier. Income tax extension Use of real property changed. Income tax extension   You generally must use MACRS to depreciate real property that you acquired for personal use before 1987 and changed to business or income-producing use after 1986. Income tax extension Improvements made after 1986. Income tax extension   You must treat an improvement made after 1986 to property you placed in service before 1987 as separate depreciable property. Income tax extension Therefore, you can depreciate that improvement as separate property under MACRS if it is the type of property that otherwise qualifies for MACRS depreciation. Income tax extension For more information about improvements, see How Do You Treat Repairs and Improvements , later and Additions and Improvements under Which Recovery Period Applies in chapter 4. Income tax extension Property Owned or Used in 1986 You may not be able to use MACRS for property you acquired and placed in service after 1986 if any of the situations described below apply. Income tax extension If you cannot use MACRS, the property must be depreciated under the methods discussed in Publication 534. Income tax extension For the following discussions, do not treat property as owned before you placed it in service. Income tax extension If you owned property in 1986 but did not place it in service until 1987, you do not treat it as owned in 1986. Income tax extension Personal property. Income tax extension   You cannot use MACRS for personal property (section 1245 property) in any of the following situations. Income tax extension You or someone related to you owned or used the property in 1986. Income tax extension You acquired the property from a person who owned it in 1986 and as part of the transaction the user of the property did not change. Income tax extension You lease the property to a person (or someone related to this person) who owned or used the property in 1986. Income tax extension You acquired the property in a transaction in which: The user of the property did not change, and The property was not MACRS property in the hands of the person from whom you acquired it because of (2) or (3) above. Income tax extension Real property. Income tax extension   You generally cannot use MACRS for real property (section 1250 property) in any of the following situations. Income tax extension You or someone related to you owned the property in 1986. Income tax extension You lease the property to a person who owned the property in 1986 (or someone related to that person). Income tax extension You acquired the property in a like-kind exchange, involuntary conversion, or repossession of property you or someone related to you owned in 1986. Income tax extension MACRS applies only to that part of your basis in the acquired property that represents cash paid or unlike property given up. Income tax extension It does not apply to the carried-over part of the basis. Income tax extension Exceptions. Income tax extension   The rules above do not apply to the following. Income tax extension Residential rental property or nonresidential real property. Income tax extension Any property if, in the first tax year it is placed in service, the deduction under the Accelerated Cost Recovery System (ACRS) is more than the deduction under MACRS using the half-year convention. Income tax extension For information on how to figure depreciation under ACRS, see Publication 534. Income tax extension Property that was MACRS property in the hands of the person from whom you acquired it because of (2) above. Income tax extension Related persons. Income tax extension   For this purpose, the following are related persons. Income tax extension An individual and a member of his or her family, including only a spouse, child, parent, brother, sister, half-brother, half-sister, ancestor, and lineal descendant. Income tax extension A corporation and an individual who directly or indirectly owns more than 10% of the value of the outstanding stock of that corporation. Income tax extension Two corporations that are members of the same controlled group. Income tax extension A trust fiduciary and a corporation if more than 10% of the value of the outstanding stock is directly or indirectly owned by or for the trust or grantor of the trust. Income tax extension The grantor and fiduciary, and the fiduciary and beneficiary, of any trust. Income tax extension The fiduciaries of two different trusts, and the fiduciaries and beneficiaries of two different trusts, if the same person is the grantor of both trusts. Income tax extension A tax-exempt educational or charitable organization and any person (or, if that person is an individual, a member of that person's family) who directly or indirectly controls the organization. Income tax extension Two S corporations, and an S corporation and a regular corporation, if the same persons own more than 10% of the value of the outstanding stock of each corporation. Income tax extension A corporation and a partnership if the same persons own both of the following. Income tax extension More than 10% of the value of the outstanding stock of the corporation. Income tax extension More than 10% of the capital or profits interest in the partnership. Income tax extension The executor and beneficiary of any estate. Income tax extension A partnership and a person who directly or indirectly owns more than 10% of the capital or profits interest in the partnership. Income tax extension Two partnerships, if the same persons directly or indirectly own more than 10% of the capital or profits interest in each. Income tax extension The related person and a person who is engaged in trades or businesses under common control. Income tax extension See section 52(a) and 52(b) of the Internal Revenue Code. Income tax extension When to determine relationship. Income tax extension   You must determine whether you are related to another person at the time you acquire the property. Income tax extension   A partnership acquiring property from a terminating partnership must determine whether it is related to the terminating partnership immediately before the event causing the termination. Income tax extension For this rule, a terminating partnership is one that sells or exchanges, within 12 months, 50% or more of its total interest in partnership capital or profits. Income tax extension Constructive ownership of stock or partnership interest. Income tax extension   To determine whether a person directly or indirectly owns any of the outstanding stock of a corporation or an interest in a partnership, apply the following rules. Income tax extension Stock or a partnership interest directly or indirectly owned by or for a corporation, partnership, estate, or trust is considered owned proportionately by or for its shareholders, partners, or beneficiaries. Income tax extension However, for a partnership interest owned by or for a C corporation, this applies only to shareholders who directly or indirectly own 5% or more of the value of the stock of the corporation. Income tax extension An individual is considered to own the stock or partnership interest directly or indirectly owned by or for the individual's family. Income tax extension An individual who owns, except by applying rule (2), any stock in a corporation is considered to own the stock directly or indirectly owned by or for the individual's partner. Income tax extension For purposes of rules (1), (2), or (3), stock or a partnership interest considered to be owned by a person under rule (1) is treated as actually owned by that person. Income tax extension However, stock or a partnership interest considered to be owned by an individual under rule (2) or (3) is not treated as owned by that individual for reapplying either rule (2) or (3) to make another person considered to be the owner of the same stock or partnership interest. Income tax extension Intangible Property Generally, if you can depreciate intangible property, you usually use the straight line method of depreciation. Income tax extension However, you can choose to depreciate certain intangible property under the income forecast method (discussed later). Income tax extension You cannot depreciate intangible property that is a section 197 intangible or that otherwise does not meet all the requirements discussed earlier under What Property Can Be Depreciated. Income tax extension Straight Line Method This method lets you deduct the same amount of depreciation each year over the useful life of the property. Income tax extension To figure your deduction, first determine the adjusted basis, salvage value, and estimated useful life of your property. Income tax extension Subtract the salvage value, if any, from the adjusted basis. Income tax extension The balance is the total depreciation you can take over the useful life of the property. Income tax extension Divide the balance by the number of years in the useful life. Income tax extension This gives you your yearly depreciation deduction. Income tax extension Unless there is a big change in adjusted basis or useful life, this amount will stay the same throughout the time you depreciate the property. Income tax extension If, in the first year, you use the property for less than a full year, you must prorate your depreciation deduction for the number of months in use. Income tax extension Example. Income tax extension In April, Frank bought a patent for $5,100 that is not a section 197 intangible. Income tax extension He depreciates the patent under the straight line method, using a 17-year useful life and no salvage value. Income tax extension He divides the $5,100 basis by 17 years to get his $300 yearly depreciation deduction. Income tax extension He only used the patent for 9 months during the first year, so he multiplies $300 by 9/12 to get his deduction of $225 for the first year. Income tax extension Next year, Frank can deduct $300 for the full year. Income tax extension Patents and copyrights. Income tax extension   If you can depreciate the cost of a patent or copyright, use the straight line method over the useful life. Income tax extension The useful life of a patent or copyright is the lesser of the life granted to it by the government or the remaining life when you acquire it. Income tax extension However, if the patent or copyright becomes valueless before the end of its useful life, you can deduct in that year any of its remaining cost or other basis. Income tax extension Computer software. Income tax extension   Computer software is generally a section 197 intangible and cannot be depreciated if you acquired it in connection with the acquisition of assets constituting a business or a substantial part of a business. Income tax extension   However, computer software is not a section 197 intangible and can be depreciated, even if acquired in connection with the acquisition of a business, if it meets all of the following tests. Income tax extension It is readily available for purchase by the general public. Income tax extension It is subject to a nonexclusive license. Income tax extension It has not been substantially modified. Income tax extension   If the software meets the tests above, it may also qualify for the section 179 deduction and the special depreciation allowance, discussed later. Income tax extension If you can depreciate the cost of computer software, use the straight line method over a useful life of 36 months. Income tax extension    Tax-exempt use property subject to a lease. Income tax extension   The useful life of computer software leased under a lease agreement entered into after March 12, 2004, to a tax-exempt organization, governmental unit, or foreign person or entity (other than a partnership), cannot be less than 125% of the lease term. Income tax extension Certain created intangibles. Income tax extension   You can amortize certain intangibles created on or after December 31, 2003, over a 15-year period using the straight line method and no salvage value, even though they have a useful life that cannot be estimated with reasonable accuracy. Income tax extension For example, amounts paid to acquire memberships or privileges of indefinite duration, such as a trade association membership, are eligible costs. Income tax extension   The following are not eligible. Income tax extension Any intangible asset acquired from another person. Income tax extension Created financial interests. Income tax extension Any intangible asset that has a useful life that can be estimated with reasonable accuracy. Income tax extension Any intangible asset that has an amortization period or limited useful life that is specifically prescribed or prohibited by the Code, regulations, or other published IRS guidance. Income tax extension Any amount paid to facilitate an acquisition of a trade or business, a change in the capital structure of a business entity, and certain other transactions. Income tax extension   You must also increase the 15-year safe harbor amortization period to a 25-year period for certain intangibles related to benefits arising from the provision, production, or improvement of real property. Income tax extension For this purpose, real property includes property that will remain attached to the real property for an indefinite period of time, such as roads, bridges, tunnels, pavements, and pollution control facilities. Income tax extension Income Forecast Method You can choose to use the income forecast method instead of the straight line method to depreciate the following depreciable intangibles. Income tax extension Motion picture films or video tapes. Income tax extension Sound recordings. Income tax extension Copyrights. Income tax extension Books. Income tax extension Patents. Income tax extension Under the income forecast method, each year's depreciation deduction is equal to the cost of the property, multiplied by a fraction. Income tax extension The numerator of the fraction is the current year's net income from the property, and the denominator is the total income anticipated from the property through the end of the 10th taxable year following the taxable year the property is placed in service. Income tax extension For more information, see section 167(g) of the Internal Revenue Code. Income tax extension Films, video tapes, and recordings. Income tax extension   You cannot use MACRS for motion picture films, video tapes, and sound recordings. Income tax extension For this purpose, sound recordings are discs, tapes, or other phonorecordings resulting from the fixation of a series of sounds. Income tax extension You can depreciate this property using either the straight line method or the income forecast method. Income tax extension Participations and residuals. Income tax extension   You can include participations and residuals in the adjusted basis of the property for purposes of computing your depreciation deduction under the income forecast method. Income tax extension The participations and residuals must relate to income to be derived from the property before the end of the 10th taxable year after the property is placed in service. Income tax extension For this purpose, participations and residuals are defined as costs which by contract vary with the amount of income earned in connection with the property. Income tax extension   Instead of including these amounts in the adjusted basis of the property, you can deduct the costs in the taxable year that they are paid. Income tax extension Videocassettes. Income tax extension   If you are in the business of renting videocassettes, you can depreciate only those videocassettes bought for rental. Income tax extension If the videocassette has a useful life of one year or less, you can currently deduct the cost as a business expense. Income tax extension Corporate or Partnership Property Acquired in a Nontaxable Transfer MACRS does not apply to property used before 1987 and transferred after 1986 to a corporation or partnership (except property the transferor placed in service after July 31, 1986, if MACRS was elected) to the extent its basis is carried over from the property's adjusted basis in the transferor's hands. Income tax extension You must continue to use the same depreciation method as the transferor and figure depreciation as if the transfer had not occurred. Income tax extension However, if MACRS would otherwise apply, you can use it to depreciate the part of the property's basis that exceeds the carried-over basis. Income tax extension The nontaxable transfers covered by this rule include the following. Income tax extension A distribution in complete liquidation of a subsidiary. Income tax extension A transfer to a corporation controlled by the transferor. Income tax extension An exchange of property solely for corporate stock or securities in a reorganization. Income tax extension A contribution of property to a partnership in exchange for a partnership interest. Income tax extension A partnership distribution of property to a partner. Income tax extension Election To Exclude Property From MACRS If you can properly depreciate any property under a method not based on a term of years, such as the unit-of-production method, you can elect to exclude that property from MACRS. Income tax extension You make the election by reporting your depreciation for the property on line 15 in Part II of Form 4562 and attaching a statement as described in the instructions for Form 4562. Income tax extension You must make this election by the return due date (including extensions) for the tax year you place your property in service. Income tax extension However, if you timely filed your return for the year without making the election, you can still make the election by filing an amended return within six months of the due date of the return (excluding extensions). Income tax extension Attach the election to the amended return and write “Filed pursuant to section 301. Income tax extension 9100-2” on the election statement. Income tax extension File the amended return at the same address you filed the original return. Income tax extension Use of standard mileage rate. Income tax extension   If you use the standard mileage rate to figure your tax deduction for your business automobile, you are treated as having made an election to exclude the automobile from MACRS. Income tax extension See Publication 463 for a discussion of the standard mileage rate. Income tax extension What Is the Basis of Your Depreciable Property? To figure your depreciation deduction, you must determine the basis of your property. Income tax extension To determine basis, you need to know the cost or other basis of your property. Income tax extension Cost as Basis The basis of property you buy is its cost plus amounts you paid for items such as sales tax (see Exception , below), freight charges, and installation and testing fees. Income tax extension The cost includes the amount you pay in cash, debt obligations, other property, or services. Income tax extension Exception. Income tax extension   You can elect to deduct state and local general sales taxes instead of state and local income taxes as an itemized deduction on Schedule A (Form 1040). Income tax extension If you make that choice, you cannot include those sales taxes as part of your cost basis. Income tax extension Assumed debt. Income tax extension   If you buy property and assume (or buy subject to) an existing mortgage or other debt on the property, your basis includes the amount you pay for the property plus the amount of the assumed debt. Income tax extension Example. Income tax extension You make a $20,000 down payment on property and assume the seller's mortgage of $120,000. Income tax extension Your total cost is $140,000, the cash you paid plus the mortgage you assumed. Income tax extension Settlement costs. Income tax extension   The basis of real property also includes certain fees and charges you pay in addition to the purchase price. Income tax extension These generally are shown on your settlement statement and include the following. Income tax extension Legal and recording fees. Income tax extension Abstract fees. Income tax extension Survey charges. Income tax extension Owner's title insurance. Income tax extension Amounts the seller owes that you agree to pay, such as back taxes or interest, recording or mortgage fees, charges for improvements or repairs, and sales commissions. Income tax extension   For fees and charges you cannot include in the basis of property, see Real Property in Publication 551. Income tax extension Property you construct or build. Income tax extension   If you construct, build, or otherwise produce property for use in your business, you may have to use the uniform capitalization rules to determine the basis of your property. Income tax extension For information about the uniform capitalization rules, see Publication 551 and the regulations under section 263A of the Internal Revenue Code. Income tax extension Other Basis Other basis usually refers to basis that is determined by the way you received the property. Income tax extension For example, your basis is other than cost if you acquired the property in exchange for other property, as payment for services you performed, as a gift, or as an inheritance. Income tax extension If you acquired property in this or some other way, see Publication 551 to determine your basis. Income tax extension Property changed from personal use. Income tax extension   If you held property for personal use and later use it in your business or income-producing activity, your depreciable basis is the lesser of the following. Income tax extension The fair market value (FMV) of the property on the date of the change in use. Income tax extension Your original cost or other basis adjusted as follows. Income tax extension Increased by the cost of any permanent improvements or additions and other costs that must be added to basis. Income tax extension Decreased by any deductions you claimed for casualty and theft losses and other items that reduced your basis. Income tax extension Example. Income tax extension Several years ago, Nia paid $160,000 to have her home built on a lot that cost her $25,000. Income tax extension Before changing the property to rental use last year, she paid $20,000 for permanent improvements to the house and claimed a $2,000 casualty loss deduction for damage to the house. Income tax extension Land is not depreciable, so she includes only the cost of the house when figuring the basis for depreciation. Income tax extension Nia's adjusted basis in the house when she changed its use was $178,000 ($160,000 + $20,000 − $2,000). Income tax extension On the same date, her property had an FMV of $180,000, of which $15,000 was for the land and $165,000 was for the house. Income tax extension The basis for depreciation on the house is the FMV on the date of change ($165,000), because it is less than her adjusted basis ($178,000). Income tax extension Property acquired in a nontaxable transaction. Income tax extension   Generally, if you receive property in a nontaxable exchange, the basis of the property you receive is the same as the adjusted basis of the property you gave up. Income tax extension Special rules apply in determining the basis and figuring the MACRS depreciation deduction and special depreciation allowance for property acquired in a like-kind exchange or involuntary conversion. Income tax extension See Like-kind exchanges and involuntary conversions. Income tax extension under How Much Can You Deduct? in chapter 3 and Figuring the Deduction for Property Acquired in a Nontaxable Exchange in chapter 4. Income tax extension   There are also special rules for determining the basis of MACRS property involved in a like-kind exchange or involuntary conversion when the property is contained in a general asset account. Income tax extension See How Do You Use General Asset Accounts in chapter 4. Income tax extension Adjusted Basis To find your property's basis for depreciation, you may have to make certain adjustments (increases and decreases) to the basis of the property for events occurring between the time you acquired the property and the time you placed it in service. Income tax extension These events could include the following. Income tax extension Installing utility lines. Income tax extension Paying legal fees for perfecting the title. Income tax extension Settling zoning issues. Income tax extension Receiving rebates. Income tax extension Incurring a casualty or theft loss. Income tax extension For a discussion of adjustments to the basis of your property, see Adjusted Basis in Publication 551. Income tax extension If you depreciate your property under MACRS, you also may have to reduce your basis by certain deductions and credits with respect to the property. Income tax extension For more information, see What Is the Basis for Depreciation in chapter 4. Income tax extension . Income tax extension Basis adjustment for depreciation allowed or allowable. Income tax extension   You must reduce the basis of property by the depreciation allowed or allowable, whichever is greater. Income tax extension Depreciation allowed is depreciation you actually deducted (from which you received a tax benefit). Income tax extension Depreciation allowable is depreciation you are entitled to deduct. Income tax extension   If you do not claim depreciation you are entitled to deduct, you must still reduce the basis of the property by the full amount of depreciation allowable. Income tax extension   If you deduct more depreciation than you should, you must reduce your basis by any amount deducted from which you received a tax benefit (the depreciation allowed). Income tax extension How Do You Treat Repairs and Improvements? If you improve depreciable property, you must treat the improvement as separate depreciable property. Income tax extension Improvement means an addition to or partial replacement of property that adds to its value, appreciably lengthens the time you can use it, or adapts it to a different use. Income tax extension You generally deduct the cost of repairing business property in the same way as any other business expense. Income tax extension However, if a repair or replacement increases the value of your property, makes it more useful, or lengthens its life, you must treat it as an improvement and depreciate it. Income tax extension Example. Income tax extension You repair a small section on one corner of the roof of a rental house. Income tax extension You deduct the cost of the repair as a rental expense. Income tax extension However, if you completely replace the roof, the new roof is an improvement because it increases the value and lengthens the life of the property. Income tax extension You depreciate the cost of the new roof. Income tax extension Improvements to rented property. Income tax extension   You can depreciate permanent improvements you make to business property you rent from someone else. Income tax extension Do You Have To File Form 4562? Use Form 4562 to figure your deduction for depreciation and amortization. Income tax extension Attach Form 4562 to your tax return for the current tax year if you are claiming any of the following items. Income tax extension A section 179 deduction for the current year or a section 179 carryover from a prior year. Income tax extension See chapter 2 for information on the section 179 deduction. Income tax extension Depreciation for property placed in service during the current year. Income tax extension Depreciation on any vehicle or other listed property, regardless of when it was placed in service. Income tax extension See chapter 5 for information on listed property. Income tax extension A deduction for any vehicle if the deduction is reported on a form other than Schedule C (Form 1040) or Schedule C-EZ (Form 1040). Income tax extension Amortization of costs if the current year is the first year of the amortization period. Income tax extension Depreciation or amortization on any asset on a corporate income tax return (other than Form 1120S, U. Income tax extension S. Income tax extension Income Tax Return for an S Corporation) regardless of when it was placed in service. Income tax extension You must submit a separate Form 4562 for each business or activity on your return for which a Form 4562 is required. Income tax extension Table 1-1 presents an overview of the purpose of the various parts of Form 4562. Income tax extension Employee. Income tax extension   Do not use Form 4562 if you are an employee and you deduct job-related vehicle expenses using either actual expenses (including depreciation) or the standard mileage rate. Income tax extension Instead, use either Form 2106 or Form 2106-EZ. Income tax extension Use Form 2106-EZ if you are claiming the standard mileage rate and you are not reimbursed by your employer for any expenses. Income tax extension How Do You Correct Depreciation Deductions? If you deducted an incorrect amount of depreciation in any year, you may be able to make a correction by filing an amended return for that year. Income tax extension See Filing an Amended Return , next. Income tax extension If you are not allowed to make the correction on an amended return, you may be able to change your accounting method to claim the correct amount of depreciation. Income tax extension See Changing Your Accounting Method , later. Income tax extension Filing an Amended Return You can file an amended return to correct the amount of depreciation claimed for any property in any of the following situations. Income tax extension You claimed the incorrect amount because of a mathematical error made in any year. Income tax extension You claimed the incorrect amount because of a posting error made in any year. Income tax extension You have not adopted a method of accounting for property placed in service by you in tax years ending after December 29, 2003. Income tax extension You claimed the incorrect amount on property placed in service by you in tax years ending before December 30, 2003. Income tax extension Adoption of accounting method defined. Income tax extension   Generally, you adopt a method of accounting for depreciation by using a permissible method of determining depreciation when you file your first tax return, or by using the same impermissible method of determining depreciation in two or more consecutively filed tax returns. Income tax extension   For an exception to this 2-year rule, see Revenue Procedure 2011-14 on page 330 of the Internal Revenue Bulletin 2011-4, available at www. Income tax extension irs. Income tax extension gov/pub/irs-irbs/irb11-04. Income tax extension pdf. Income tax extension (Note. Income tax extension Revenue Procedure 2011-14 is clarified and modified by Revenue Procedure 2012-20. Income tax extension For more information, see Revenue Procedure 2012-20 on page 700 of the Internal Revenue Bulletin 2012-14, available at www. Income tax extension irs. Income tax extension gov/pub/irs-irbs/irb12-14. Income tax extension pdf. Income tax extension )   For a safe harbor method of accounting to treat rotable spare parts as depreciable assets and procedures to obtain automatic consent to change to the safe harbor method of accounting, see Revenue Procedure 2007-48 on page 110 of Internal Revenue Bulletin 2007-29, available at www. Income tax extension irs. Income tax extension gov/pub/irs-irbs/irb07-29. Income tax extension pdf. Income tax extension When to file. Income tax extension   If an amended return is allowed, you must file it by the later of the following. Income tax extension 3 years from the date you filed your original return for the year in which you did not deduct the correct amount. Income tax extension A return filed before an unextended due date is considered filed on that due date. Income tax extension 2 years from the time you paid your tax for that year. Income tax extension Changing Your Accounting Method Generally, you must get IRS approval to change your method of accounting. Income tax extension You generally must file Form 3115, Application for Change in Accounting Method, to request a change in your method of accounting for depreciation. Income tax extension The following are examples of a change in method of accounting for depreciation. Income tax extension A change from an impermissible method of determining depreciation for depreciable property, if the impermissible method was used in two or more consecutively filed tax returns. Income tax extension A change in the treatment of an asset from nondepreciable to depreciable or vice versa. Income tax extension A change in the depreciation method, period of recovery, or convention of a depreciable asset. Income tax extension A change from not claiming to claiming the special depreciation allowance if you did not make the election to not claim any special allowance. Income tax extension A change from claiming a 50% special depreciation allowance to claiming a 30% special depreciation allowance for qualified property (including property that is included in a class of property for which you elected a 30% special allowance instead of a 50% special allowance). Income tax extension Changes in depreciation that are not a change in method of accounting (and may only be made on an amended return) include the following. Income tax extension An adjustment in the useful life of a depreciable asset for which depreciation is determined under section 167. Income tax extension A change in use of an asset in the hands of the same taxpayer. Income tax extension Making a late depreciation election or revoking a timely valid depreciation election (including the election not to deduct the special depreciation allowance). Income tax extension If you elected not to claim any special allowance, a change from not claiming to claiming the special allowance is a revocation of the election and is not an accounting method change. Income tax extension Generally, you must get IRS approval to make a late depreciation election or revoke a depreciation election. Income tax extension You must submit a request for a letter ruling to make a late election or revoke an election. Income tax extension Any change in the placed in service date of a depreciable asset. Income tax extension See section 1. Income tax extension 446-1(e)(2)(ii)(d) of the regulations for more information and examples. Income tax extension IRS approval. Income tax extension   In some instances, you may be able to get approval from the IRS to change your method of accounting for depreciation under the automatic change request procedures generally covered in Revenue Procedure 2011-14. Income tax extension If you do not qualify to use the automatic procedures to get approval, you must use the advance consent request procedures generally covered in Revenue Procedure 97-27, 1997-1 C. Income tax extension B. Income tax extension 680. Income tax extension Also see the Instructions for Form 3115 for more information on getting approval, including lists of scope limitations and automatic accounting method changes. Income tax extension Additional guidance. Income tax extension    For additional guidance and special procedures for changing your accounting method, automatic change procedures, amending your return, and filing Form 3115, see Revenue Procedure 2011-14 on page 330 of the Internal Revenue Bulletin 2011-4, available at www. Income tax extension irs. Income tax extension gov/pub/irs-irbs/irb11-04. Income tax extension pdf. Income tax extension (Note. Income tax extension Revenue Procedure 2011-14 is clarified and modified by Revenue Procedure 2012-20. Income tax extension For more information, see Revenue Procedure 2012-20 on page 700 of the Internal Revenue Bulletin 2012-14, available at www. Income tax extension irs. Income tax extension gov/pub/irs-irbs/irb12-14. Income tax extension pdf. Income tax extension )   For a safe harbor method of accounting to treat rotable spare parts as depreciable assets, see Revenue Procedure 2007-48 on page 110 of Internal Revenue Bulletin 2007-29, available at www. Income tax extension irs. Income tax extension gov/pub/irs-irbs/irb07-29. Income tax extension pdf. Income tax extension Table 1-1. Income tax extension Purpose of Form 4562 This table describes the purpose of the various parts of Form 4562. Income tax extension For more information, see Form 4562 and its instructions. Income tax extension Part Purpose I • Electing the section 179 deduction • Figuring the maximum section 179 deduction for the current year • Figuring any section 179 deduction carryover to the next year II • Reporting the special depreciation allowance for property (other than listed property) placed in service during the tax year • Reporting depreciation deductions on property being depreciated under any method other than Modified Accelerated Cost Recovery System (MACRS) III • Reporting MACRS depreciation deductions for property placed in service before this year • Reporting MACRS depreciation deductions for property (other than listed property) placed in service during the current year IV • Summarizing other parts V • Reporting the special depreciation allowance for automobiles and other listed property • Reporting MACRS depreciation on automobiles and other listed property • Reporting the section 179 cost elected for automobiles and other listed property • Reporting information on the use of automobiles and other transportation vehicles VI • Reporting amortization deductions Section 481(a) adjustment. Income tax extension   If you file Form 3115 and change from an impermissible method to a permissible method of accounting for depreciation, you can make a section 481(a) adjustment for any unclaimed or excess amount of allowable depreciation. Income tax extension The adjustment is the difference between the total depreciation actually deducted for the property and the total amount allowable prior to the year of change. Income tax extension If no depreciation was deducted, the adjustment is the total depreciation allowable prior to the year of change. Income tax extension A negative section 481(a) adjustment results in a decrease in taxable income. Income tax extension It is taken into account in the year of change and is reported on your business tax returns as “other expenses. Income tax extension ” A positive section 481(a) adjustment results in an increase in taxable income. Income tax extension It is generally taken into account over 4 tax years and is reported on your business tax returns as “other income. Income tax extension ” However, you can elect to use a one-year adjustment period and report the adjustment in the year of change if the total adjustment is less than $25,000. Income tax extension Make the election by completing the appropriate line on Form 3115. Income tax extension   If you file a Form 3115 and change from one permissible method to another permissible method, the section 481(a) adjustment is zero. Income tax extension Prev  Up  Next   Home   More Online Publications