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Irs Gov Form 1040x

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Irs Gov Form 1040x

Irs gov form 1040x 4. Irs gov form 1040x   Interest Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Allocation of InterestOrder of funds spent. Irs gov form 1040x Payments from checking accounts. Irs gov form 1040x Amounts paid within 30 days. Irs gov form 1040x Optional method for determining date of reallocation. Irs gov form 1040x Interest on a segregated account. Irs gov form 1040x How to report. Irs gov form 1040x Interest You Can DeductStatement. Irs gov form 1040x Expenses paid to obtain a mortgage. Irs gov form 1040x Prepayment penalty. Irs gov form 1040x De minimis OID. Irs gov form 1040x Constant-yield method. Irs gov form 1040x Loan or mortgage ends. Irs gov form 1040x Interest You Cannot DeductPenalties. Irs gov form 1040x Who is a key person? Exceptions for pre-June 1997 contracts. Irs gov form 1040x Interest allocated to unborrowed policy cash value. Irs gov form 1040x Capitalization of Interest When To Deduct InterestPrepaid interest. Irs gov form 1040x Discounted loan. Irs gov form 1040x Refunds of interest. Irs gov form 1040x Prepaid interest. Irs gov form 1040x Discounted loan. Irs gov form 1040x Tax deficiency. Irs gov form 1040x Related person. Irs gov form 1040x Below-Market LoansLimit on forgone interest for gift loans of $100,000 or less. Irs gov form 1040x Introduction This chapter discusses the tax treatment of business interest expense. Irs gov form 1040x Business interest expense is an amount charged for the use of money you borrowed for business activities. Irs gov form 1040x Topics - This chapter discusses: Allocation of interest Interest you can deduct Interest you cannot deduct Capitalization of interest When to deduct interest Below-market loans Useful Items - You may want to see: Publication 537 Installment Sales 550 Investment Income and Expenses 936 Home Mortgage Interest Deduction Form (and Instructions) Sch A (Form 1040) Itemized Deductions Sch E (Form 1040) Supplemental Income and Loss Sch K-1 (Form 1065) Partner's Share of Income, Deductions, Credits, etc. Irs gov form 1040x Sch K-1 (Form 1120S) Shareholder's Share of Income, Deductions, Credits, etc. Irs gov form 1040x 1098 Mortgage Interest Statement 3115 Application for Change in Accounting Method 4952 Investment Interest Expense Deduction 8582 Passive Activity Loss Limitations See chapter 12 for information about getting publications and forms. Irs gov form 1040x Allocation of Interest The rules for deducting interest vary, depending on whether the loan proceeds are used for business, personal, or investment activities. Irs gov form 1040x If you use the proceeds of a loan for more than one type of expense, you must allocate the interest based on the use of the loan's proceeds. Irs gov form 1040x Allocate your interest expense to the following categories. Irs gov form 1040x Nonpassive trade or business activity interest Passive trade or business activity interest Investment interest Portfolio interest Personal interest In general, you allocate interest on a loan the same way you allocate the loan proceeds. Irs gov form 1040x You allocate loan proceeds by tracing disbursements to specific uses. Irs gov form 1040x The easiest way to trace disbursements to specific uses is to keep the proceeds of a particular loan separate from any other funds. Irs gov form 1040x Secured loan. Irs gov form 1040x   The allocation of loan proceeds and the related interest is not generally affected by the use of property that secures the loan. Irs gov form 1040x Example. Irs gov form 1040x You secure a loan with property used in your business. Irs gov form 1040x You use the loan proceeds to buy an automobile for personal use. Irs gov form 1040x You must allocate interest expense on the loan to personal use (purchase of the automobile) even though the loan is secured by business property. Irs gov form 1040x    If the property that secures the loan is your home, you generally do not allocate the loan proceeds or the related interest. Irs gov form 1040x The interest is usually deductible as qualified home mortgage interest, regardless of how the loan proceeds are used. Irs gov form 1040x For more information, see Publication 936. Irs gov form 1040x Allocation period. Irs gov form 1040x   The period for which a loan is allocated to a particular use begins on the date the proceeds are used and ends on the earlier of the following dates. Irs gov form 1040x The date the loan is repaid. Irs gov form 1040x The date the loan is reallocated to another use. Irs gov form 1040x Proceeds not disbursed to borrower. Irs gov form 1040x   Even if the lender disburses the loan proceeds to a third party, the allocation of the loan is still based on your use of the funds. Irs gov form 1040x This applies whether you pay for property, services, or anything else by incurring a loan, or you take property subject to a debt. Irs gov form 1040x Proceeds deposited in borrower's account. Irs gov form 1040x   Treat loan proceeds deposited in an account as property held for investment. Irs gov form 1040x It does not matter whether the account pays interest. Irs gov form 1040x Any interest you pay on the loan is investment interest expense. Irs gov form 1040x If you withdraw the proceeds of the loan, you must reallocate the loan based on the use of the funds. Irs gov form 1040x Example. Irs gov form 1040x Celina, a calendar-year taxpayer, borrows $100,000 on January 4 and immediately uses the proceeds to open a checking account. Irs gov form 1040x No other amounts are deposited in the account during the year and no part of the loan principal is repaid during the year. Irs gov form 1040x On April 2, Celina uses $20,000 from the checking account for a passive activity expenditure. Irs gov form 1040x On September 4, Celina uses an additional $40,000 from the account for personal purposes. Irs gov form 1040x Under the interest allocation rules, the entire $100,000 loan is treated as property held for investment for the period from January 4 through April 1. Irs gov form 1040x From April 2 through September 3, Celina must treat $20,000 of the loan as used in the passive activity and $80,000 of the loan as property held for investment. Irs gov form 1040x From September 4 through December 31, she must treat $40,000 of the loan as used for personal purposes, $20,000 as used in the passive activity, and $40,000 as property held for investment. Irs gov form 1040x Order of funds spent. Irs gov form 1040x   Generally, you treat loan proceeds deposited in an account as used (spent) before either of the following amounts. Irs gov form 1040x Any unborrowed amounts held in the same account. Irs gov form 1040x Any amounts deposited after these loan proceeds. Irs gov form 1040x Example. Irs gov form 1040x On January 9, Olena opened a checking account, depositing $500 of the proceeds of Loan A and $1,000 of unborrowed funds. Irs gov form 1040x The following table shows the transactions in her account during the tax year. Irs gov form 1040x Date Transaction January 9 $500 proceeds of Loan A and $1,000 unborrowed funds deposited January 14 $500 proceeds of Loan B  deposited February 19 $800 used for personal purposes February 27 $700 used for passive activity June 19 $1,000 proceeds of Loan C  deposited November 20 $800 used for an investment December 18 $600 used for personal purposes Olena treats the $800 used for personal purposes as made from the $500 proceeds of Loan A and $300 of the proceeds of Loan B. Irs gov form 1040x She treats the $700 used for a passive activity as made from the remaining $200 proceeds of Loan B and $500 of unborrowed funds. Irs gov form 1040x She treats the $800 used for an investment as made entirely from the proceeds of Loan C. Irs gov form 1040x She treats the $600 used for personal purposes as made from the remaining $200 proceeds of Loan C and $400 of unborrowed funds. Irs gov form 1040x For the periods during which loan proceeds are held in the account, Olena treats them as property held for investment. Irs gov form 1040x Payments from checking accounts. Irs gov form 1040x   Generally, you treat a payment from a checking or similar account as made at the time the check is written if you mail or deliver it to the payee within a reasonable period after you write it. Irs gov form 1040x You can treat checks written on the same day as written in any order. Irs gov form 1040x Amounts paid within 30 days. Irs gov form 1040x   If you receive loan proceeds in cash or if the loan proceeds are deposited in an account, you can treat any payment (up to the amount of the proceeds) made from any account you own, or from cash, as made from those proceeds. Irs gov form 1040x This applies to any payment made within 30 days before or after the proceeds are received in cash or deposited in your account. Irs gov form 1040x   If the loan proceeds are deposited in an account, you can apply this rule even if the rules stated earlier under Order of funds spent would otherwise require you to treat the proceeds as used for other purposes. Irs gov form 1040x If you apply this rule to any payments, disregard those payments (and the proceeds from which they are made) when applying the rules stated under Order of funds spent. Irs gov form 1040x   If you received the loan proceeds in cash, you can treat the payment as made on the date you received the cash instead of the date you actually made the payment. Irs gov form 1040x Example. Irs gov form 1040x Giovanni gets a loan of $1,000 on August 4 and receives the proceeds in cash. Irs gov form 1040x Giovanni deposits $1,500 in an account on August 18 and on August 28 writes a check on the account for a passive activity expense. Irs gov form 1040x Also, Giovanni deposits his paycheck, deposits other loan proceeds, and pays his bills during the same period. Irs gov form 1040x Regardless of these other transactions, Giovanni can treat $1,000 of the deposit he made on August 18 as being paid on August 4 from the loan proceeds. Irs gov form 1040x In addition, Giovanni can treat the passive activity expense he paid on August 28 as made from the $1,000 loan proceeds treated as deposited in the account. Irs gov form 1040x Optional method for determining date of reallocation. Irs gov form 1040x   You can use the following method to determine the date loan proceeds are reallocated to another use. Irs gov form 1040x You can treat all payments from loan proceeds in the account during any month as taking place on the later of the following dates. Irs gov form 1040x The first day of that month. Irs gov form 1040x The date the loan proceeds are deposited in the account. Irs gov form 1040x However, you can use this optional method only if you treat all payments from the account during the same calendar month in the same way. Irs gov form 1040x Interest on a segregated account. Irs gov form 1040x   If you have an account that contains only loan proceeds and interest earned on the account, you can treat any payment from that account as being made first from the interest. Irs gov form 1040x When the interest earned is used up, any remaining payments are from loan proceeds. Irs gov form 1040x Example. Irs gov form 1040x You borrowed $20,000 and used the proceeds of this loan to open a new savings account. Irs gov form 1040x When the account had earned interest of $867, you withdrew $20,000 for personal purposes. Irs gov form 1040x You can treat the withdrawal as coming first from the interest earned on the account, $867, and then from the loan proceeds, $19,133 ($20,000 − $867). Irs gov form 1040x All the interest charged on the loan from the time it was deposited in the account until the time of the withdrawal is investment interest expense. Irs gov form 1040x The interest charged on the part of the proceeds used for personal purposes ($19,133) from the time you withdrew it until you either repay it or reallocate it to another use is personal interest expense. Irs gov form 1040x The interest charged on the loan proceeds you left in the account ($867) continues to be investment interest expense until you either repay it or reallocate it to another use. Irs gov form 1040x Loan repayment. Irs gov form 1040x   When you repay any part of a loan allocated to more than one use, treat it as being repaid in the following order. Irs gov form 1040x Personal use. Irs gov form 1040x Investments and passive activities (other than those included in (3)). Irs gov form 1040x Passive activities in connection with a rental real estate activity in which you actively participate. Irs gov form 1040x Former passive activities. Irs gov form 1040x Trade or business use and expenses for certain low-income housing projects. Irs gov form 1040x Line of credit (continuous borrowings). Irs gov form 1040x   The following rules apply if you have a line of credit or similar arrangement. Irs gov form 1040x Treat all borrowed funds on which interest accrues at the same fixed or variable rate as a single loan. Irs gov form 1040x Treat borrowed funds or parts of borrowed funds on which interest accrues at different fixed or variable rates as different loans. Irs gov form 1040x Treat these loans as repaid in the order shown on the loan agreement. Irs gov form 1040x Loan refinancing. Irs gov form 1040x   Allocate the replacement loan to the same uses to which the repaid loan was allocated. Irs gov form 1040x Make the allocation only to the extent you use the proceeds of the new loan to repay any part of the original loan. Irs gov form 1040x Debt-financed distribution. Irs gov form 1040x   A debt-financed distribution occurs when a partnership or S corporation borrows funds and allocates those funds to distributions made to partners or shareholders. Irs gov form 1040x The manner in which you report the interest expense associated with the distributed debt proceeds depends on your use of those proceeds. Irs gov form 1040x How to report. Irs gov form 1040x   If the proceeds were used in a nonpassive trade or business activity, report the interest on Schedule E (Form 1040), line 28; enter “interest expense” and the name of the partnership or S corporation in column (a) and the amount in column (h). Irs gov form 1040x If the proceeds were used in a passive activity, follow the Instructions for Form 8582, Passive Activity Loss Limitations, to determine the amount of interest expense that can be reported on Schedule E (Form 1040), line 28; enter “interest expense” and the name of the partnership in column (a) and the amount in column (f). Irs gov form 1040x If the proceeds were used in an investment activity, enter the interest on Form 4952. Irs gov form 1040x If the proceeds are used for personal purposes, the interest is generally not deductible. Irs gov form 1040x Interest You Can Deduct You can generally deduct as a business expense all interest you pay or accrue during the tax year on debts related to your trade or business. Irs gov form 1040x Interest relates to your trade or business if you use the proceeds of the loan for a trade or business expense. Irs gov form 1040x It does not matter what type of property secures the loan. Irs gov form 1040x You can deduct interest on a debt only if you meet all the following requirements. Irs gov form 1040x You are legally liable for that debt. Irs gov form 1040x Both you and the lender intend that the debt be repaid. Irs gov form 1040x You and the lender have a true debtor-creditor relationship. Irs gov form 1040x Partial liability. Irs gov form 1040x   If you are liable for part of a business debt, you can deduct only your share of the total interest paid or accrued. Irs gov form 1040x Example. Irs gov form 1040x You and your brother borrow money. Irs gov form 1040x You are liable for 50% of the note. Irs gov form 1040x You use your half of the loan in your business, and you make one-half of the loan payments. Irs gov form 1040x You can deduct your half of the total interest payments as a business deduction. Irs gov form 1040x Mortgage. Irs gov form 1040x   Generally, mortgage interest paid or accrued on real estate you own legally or equitably is deductible. Irs gov form 1040x However, rather than deducting the interest currently, you may have to add it to the cost basis of the property as explained later under Capitalization of Interest. Irs gov form 1040x Statement. Irs gov form 1040x   If you paid $600 or more of mortgage interest (including certain points) during the year on any one mortgage, you generally will receive a Form 1098 or a similar statement. Irs gov form 1040x You will receive the statement if you pay interest to a person (including a financial institution or a cooperative housing corporation) in the course of that person's trade or business. Irs gov form 1040x A governmental unit is a person for purposes of furnishing the statement. Irs gov form 1040x   If you receive a refund of interest you overpaid in an earlier year, this amount will be reported in box 3 of Form 1098. Irs gov form 1040x You cannot deduct this amount. Irs gov form 1040x For information on how to report this refund, see Refunds of interest, later in this chapter. Irs gov form 1040x Expenses paid to obtain a mortgage. Irs gov form 1040x   Certain expenses you pay to obtain a mortgage cannot be deducted as interest. Irs gov form 1040x These expenses, which include mortgage commissions, abstract fees, and recording fees, are capital expenses. Irs gov form 1040x If the property mortgaged is business or income-producing property, you can amortize the costs over the life of the mortgage. Irs gov form 1040x Prepayment penalty. Irs gov form 1040x   If you pay off your mortgage early and pay the lender a penalty for doing this, you can deduct the penalty as interest. Irs gov form 1040x Interest on employment tax deficiency. Irs gov form 1040x   Interest charged on employment taxes assessed on your business is deductible. Irs gov form 1040x Original issue discount (OID). Irs gov form 1040x   OID is a form of interest. Irs gov form 1040x A loan (mortgage or other debt) generally has OID when its proceeds are less than its principal amount. Irs gov form 1040x The OID is the difference between the stated redemption price at maturity and the issue price of the loan. Irs gov form 1040x   A loan's stated redemption price at maturity is the sum of all amounts (principal and interest) payable on it other than qualified stated interest. Irs gov form 1040x Qualified stated interest is stated interest that is unconditionally payable in cash or property (other than another loan of the issuer) at least annually over the term of the loan at a single fixed rate. Irs gov form 1040x You generally deduct OID over the term of the loan. Irs gov form 1040x Figure the amount to deduct each year using the constant-yield method, unless the OID on the loan is de minimis. Irs gov form 1040x De minimis OID. Irs gov form 1040x   The OID is de minimis if it is less than one-fourth of 1% (. Irs gov form 1040x 0025) of the stated redemption price of the loan at maturity multiplied by the number of full years from the date of original issue to maturity (the term of the loan). Irs gov form 1040x   If the OID is de minimis, you can choose one of the following ways to figure the amount you can deduct each year. Irs gov form 1040x On a constant-yield basis over the term of the loan. Irs gov form 1040x On a straight-line basis over the term of the loan. Irs gov form 1040x In proportion to stated interest payments. Irs gov form 1040x In its entirety at maturity of the loan. Irs gov form 1040x You make this choice by deducting the OID in a manner consistent with the method chosen on your timely filed tax return for the tax year in which the loan is issued. Irs gov form 1040x Example. Irs gov form 1040x On January 1, 2013, you took out a $100,000 discounted loan and received $98,500 in proceeds. Irs gov form 1040x The loan will mature on January 1, 2023 (a 10-year term), and the $100,000 principal is payable on that date. Irs gov form 1040x Interest of $10,000 is payable on January 1 of each year, beginning January 1, 2014. Irs gov form 1040x The $1,500 OID on the loan is de minimis because it is less than $2,500 ($100,000 × . Irs gov form 1040x 0025 × 10). Irs gov form 1040x You choose to deduct the OID on a straight-line basis over the term of the loan. Irs gov form 1040x Beginning in 2013, you can deduct $150 each year for 10 years. Irs gov form 1040x Constant-yield method. Irs gov form 1040x   If the OID is not de minimis, you must use the constant-yield method to figure how much you can deduct each year. Irs gov form 1040x You figure your deduction for the first year using the following steps. Irs gov form 1040x Determine the issue price of the loan. Irs gov form 1040x Generally, this equals the proceeds of the loan. Irs gov form 1040x If you paid points on the loan (as discussed later), the issue price generally is the difference between the proceeds and the points. Irs gov form 1040x Multiply the result in (1) by the yield to maturity. Irs gov form 1040x Subtract any qualified stated interest payments from the result in (2). Irs gov form 1040x This is the OID you can deduct in the first year. Irs gov form 1040x   To figure your deduction in any subsequent year, follow the above steps, except determine the adjusted issue price in step (1). Irs gov form 1040x To get the adjusted issue price, add to the issue price any OID previously deducted. Irs gov form 1040x Then follow steps (2) and (3) above. Irs gov form 1040x   The yield to maturity is generally shown in the literature you receive from your lender. Irs gov form 1040x If you do not have this information, consult your lender or tax advisor. Irs gov form 1040x In general, the yield to maturity is the discount rate that, when used in computing the present value of all principal and interest payments, produces an amount equal to the principal amount of the loan. Irs gov form 1040x Example. Irs gov form 1040x The facts are the same as in the previous example, except that you deduct the OID on a constant yield basis over the term of the loan. Irs gov form 1040x The yield to maturity on your loan is 10. Irs gov form 1040x 2467%, compounded annually. Irs gov form 1040x For 2013, you can deduct $93 [($98,500 × . Irs gov form 1040x 102467) − $10,000]. Irs gov form 1040x For 2014, you can deduct $103 [($98,593 × . Irs gov form 1040x 102467) − $10,000]. Irs gov form 1040x Loan or mortgage ends. Irs gov form 1040x   If your loan or mortgage ends, you may be able to deduct any remaining OID in the tax year in which the loan or mortgage ends. Irs gov form 1040x A loan or mortgage may end due to a refinancing, prepayment, foreclosure, or similar event. Irs gov form 1040x If you refinance with the original lender, you generally cannot deduct the remaining OID in the year in which the refinancing occurs, but you may be able to deduct it over the term of the new mortgage or loan. Irs gov form 1040x See Interest paid with funds borrowed from original lender under Interest You Cannot Deduct, later. Irs gov form 1040x Points. Irs gov form 1040x   The term “points” is used to describe certain charges paid, or treated as paid, by a borrower to obtain a loan or a mortgage. Irs gov form 1040x These charges are also called loan origination fees, maximum loan charges, discount points, or premium charges. Irs gov form 1040x If any of these charges (points) are solely for the use of money, they are interest. Irs gov form 1040x   Because points are prepaid interest, you generally cannot deduct the full amount in the year paid. Irs gov form 1040x However, you can choose to fully deduct points in the year paid if you meet certain tests. Irs gov form 1040x For exceptions to the general rule, see Publication 936. Irs gov form 1040x The points reduce the issue price of the loan and result in original issue discount (OID), deductible as explained in the preceding discussion. Irs gov form 1040x Partial payments on a nontax debt. Irs gov form 1040x   If you make partial payments on a debt (other than a debt owed the IRS), the payments are applied, in general, first to interest and any remainder to principal. Irs gov form 1040x You can deduct only the interest. Irs gov form 1040x This rule does not apply when it can be inferred that the borrower and lender understood that a different allocation of the payments would be made. Irs gov form 1040x Installment purchase. Irs gov form 1040x   If you make an installment purchase of business property, the contract between you and the seller generally provides for the payment of interest. Irs gov form 1040x If no interest or a low rate of interest is charged under the contract, a portion of the stated principal amount payable under the contract may be recharacterized as interest (unstated interest). Irs gov form 1040x The amount recharacterized as interest reduces your basis in the property and increases your interest expense. Irs gov form 1040x For more information on installment sales and unstated interest, see Publication 537. Irs gov form 1040x Interest You Cannot Deduct Certain interest payments cannot be deducted. Irs gov form 1040x In addition, certain other expenses that may seem to be interest but are not, cannot be deducted as interest. Irs gov form 1040x You cannot currently deduct interest that must be capitalized, and you generally cannot deduct personal interest. Irs gov form 1040x Interest paid with funds borrowed from original lender. Irs gov form 1040x   If you use the cash method of accounting, you cannot deduct interest you pay with funds borrowed from the original lender through a second loan, an advance, or any other arrangement similar to a loan. Irs gov form 1040x You can deduct the interest expense once you start making payments on the new loan. Irs gov form 1040x   When you make a payment on the new loan, you first apply the payment to interest and then to the principal. Irs gov form 1040x All amounts you apply to the interest on the first loan are deductible, along with any interest you pay on the second loan, subject to any limits that apply. Irs gov form 1040x Capitalized interest. Irs gov form 1040x   You cannot currently deduct interest you are required to capitalize under the uniform capitalization rules. Irs gov form 1040x See Capitalization of Interest, later. Irs gov form 1040x In addition, if you buy property and pay interest owed by the seller (for example, by assuming the debt and any interest accrued on the property), you cannot deduct the interest. Irs gov form 1040x Add this interest to the basis of the property. Irs gov form 1040x Commitment fees or standby charges. Irs gov form 1040x   Fees you incur to have business funds available on a standby basis, but not for the actual use of the funds, are not deductible as interest payments. Irs gov form 1040x You may be able to deduct them as business expenses. Irs gov form 1040x   If the funds are for inventory or certain property used in your business, the fees are indirect costs and you generally must capitalize them under the uniform capitalization rules. Irs gov form 1040x See Capitalization of Interest, later. Irs gov form 1040x Interest on income tax. Irs gov form 1040x   Interest charged on income tax assessed on your individual income tax return is not a business deduction even though the tax due is related to income from your trade or business. Irs gov form 1040x Treat this interest as a business deduction only in figuring a net operating loss deduction. Irs gov form 1040x Penalties. Irs gov form 1040x   Penalties on underpaid deficiencies and underpaid estimated tax are not interest. Irs gov form 1040x You cannot deduct them. Irs gov form 1040x Generally, you cannot deduct any fines or penalties. Irs gov form 1040x Interest on loans with respect to life insurance policies. Irs gov form 1040x   You generally cannot deduct interest on a debt incurred with respect to any life insurance, annuity, or endowment contract that covers any individual unless that individual is a key person. Irs gov form 1040x   If the policy or contract covers a key person, you can deduct the interest on up to $50,000 of debt for that person. Irs gov form 1040x However, the deduction for any month cannot be more than the interest figured using Moody's Composite Yield on Seasoned Corporate Bonds (formerly known as Moody's Corporate Bond Yield Average-Monthly Average Corporates) (Moody's rate) for that month. Irs gov form 1040x Who is a key person?   A key person is an officer or 20% owner. Irs gov form 1040x However, the number of individuals you can treat as key persons is limited to the greater of the following. Irs gov form 1040x Five individuals. Irs gov form 1040x The lesser of 5% of the total officers and employees of the company or 20 individuals. Irs gov form 1040x Exceptions for pre-June 1997 contracts. Irs gov form 1040x   You can generally deduct the interest if the contract was issued before June 9, 1997, and the covered individual is someone other than an employee, officer, or someone financially interested in your business. Irs gov form 1040x If the contract was purchased before June 21, 1986, you can generally deduct the interest no matter who is covered by the contract. Irs gov form 1040x Interest allocated to unborrowed policy cash value. Irs gov form 1040x   Corporations and partnerships generally cannot deduct any interest expense allocable to unborrowed cash values of life insurance, annuity, or endowment contracts. Irs gov form 1040x This rule applies to contracts issued after June 8, 1997, that cover someone other than an officer, director, employee, or 20% owner. Irs gov form 1040x For more information, see section 264(f) of the Internal Revenue Code. Irs gov form 1040x Capitalization of Interest Under the uniform capitalization rules, you generally must capitalize interest on debt equal to your expenditures to produce real property or certain tangible personal property. Irs gov form 1040x The property must be produced by you for use in your trade or business or for sale to customers. Irs gov form 1040x You cannot capitalize interest related to property that you acquire in any other manner. Irs gov form 1040x Interest you paid or incurred during the production period must be capitalized if the property produced is designated property. Irs gov form 1040x Designated property is any of the following. Irs gov form 1040x Real property. Irs gov form 1040x Tangible personal property with a class life of 20 years or more. Irs gov form 1040x Tangible personal property with an estimated production period of more than 2 years. Irs gov form 1040x Tangible personal property with an estimated production period of more than 1 year if the estimated cost of production is more than $1 million. Irs gov form 1040x Property you produce. Irs gov form 1040x   You produce property if you construct, build, install, manufacture, develop, improve, create, raise, or grow it. Irs gov form 1040x Treat property produced for you under a contract as produced by you up to the amount you pay or incur for the property. Irs gov form 1040x Carrying charges. Irs gov form 1040x   Carrying charges include taxes you pay to carry or develop real estate or to carry, transport, or install personal property. Irs gov form 1040x You can choose to capitalize carrying charges not subject to the uniform capitalization rules if they are otherwise deductible. Irs gov form 1040x For more information, see chapter 7. Irs gov form 1040x Capitalized interest. Irs gov form 1040x   Treat capitalized interest as a cost of the property produced. Irs gov form 1040x You recover your interest when you sell or use the property. Irs gov form 1040x If the property is inventory, recover capitalized interest through cost of goods sold. Irs gov form 1040x If the property is used in your trade or business, recover capitalized interest through an adjustment to basis, depreciation, amortization, or other method. Irs gov form 1040x Partnerships and S corporations. Irs gov form 1040x   The interest capitalization rules are applied first at the partnership or S corporation level. Irs gov form 1040x The rules are then applied at the partners' or shareholders' level to the extent the partnership or S corporation has insufficient debt to support the production or construction costs. Irs gov form 1040x   If you are a partner or a shareholder, you may have to capitalize interest you incur during the tax year for the production costs of the partnership or S corporation. Irs gov form 1040x You may also have to capitalize interest incurred by the partnership or S corporation for your own production costs. Irs gov form 1040x To properly capitalize interest under these rules, you must be given the required information in an attachment to the Schedule K-1 you receive from the partnership or S corporation. Irs gov form 1040x Additional information. Irs gov form 1040x   The procedures for applying the uniform capitalization rules are beyond the scope of this publication. Irs gov form 1040x For more information, see sections 1. Irs gov form 1040x 263A-8 through 1. Irs gov form 1040x 263A-15 of the regulations and Notice 88-99. Irs gov form 1040x Notice 88-99 is in Cumulative Bulletin 1988-2. Irs gov form 1040x When To Deduct Interest If the uniform capitalization rules, discussed under Capitalization of Interest, earlier, do not apply to you, deduct interest as follows. Irs gov form 1040x Cash method. Irs gov form 1040x   Under the cash method, you can generally deduct only the interest you actually paid during the tax year. Irs gov form 1040x You cannot deduct a promissory note you gave as payment because it is a promise to pay and not an actual payment. Irs gov form 1040x Prepaid interest. Irs gov form 1040x   You generally cannot deduct any interest paid before the year it is due. Irs gov form 1040x Interest paid in advance can be deducted only in the tax year in which it is due. Irs gov form 1040x Discounted loan. Irs gov form 1040x   If interest or a discount is subtracted from your loan proceeds, it is not a payment of interest and you cannot deduct it when you get the loan. Irs gov form 1040x For more information, see Original issue discount (OID) under Interest You Can Deduct, earlier. Irs gov form 1040x Refunds of interest. Irs gov form 1040x   If you pay interest and then receive a refund in the same tax year of any part of the interest, reduce your interest deduction by the refund. Irs gov form 1040x If you receive the refund in a later tax year, include the refund in your income to the extent the deduction for the interest reduced your tax. Irs gov form 1040x Accrual method. Irs gov form 1040x   Under an accrual method, you can deduct only interest that has accrued during the tax year. Irs gov form 1040x Prepaid interest. Irs gov form 1040x   See Prepaid interest, earlier. Irs gov form 1040x Discounted loan. Irs gov form 1040x   See Discounted loan, earlier. Irs gov form 1040x Tax deficiency. Irs gov form 1040x   If you contest a federal income tax deficiency, interest does not accrue until the tax year the final determination of liability is made. Irs gov form 1040x If you do not contest the deficiency, then the interest accrues in the year the tax was asserted and agreed to by you. Irs gov form 1040x   However, if you contest but pay the proposed tax deficiency and interest, and you do not designate the payment as a cash bond, then the interest is deductible in the year paid. Irs gov form 1040x Related person. Irs gov form 1040x   If you use an accrual method, you cannot deduct interest owed to a related person who uses the cash method until payment is made and the interest is includible in the gross income of that person. Irs gov form 1040x The relationship is determined as of the end of the tax year for which the interest would otherwise be deductible. Irs gov form 1040x See section 267 of the Internal Revenue Code for more information. Irs gov form 1040x Below-Market Loans If you receive a below-market gift or demand loan and use the proceeds in your trade or business, you may be able to deduct the forgone interest. Irs gov form 1040x See Treatment of gift and demand loans, later, in this discussion. Irs gov form 1040x A below-market loan is a loan on which no interest is charged or on which interest is charged at a rate below the applicable federal rate. Irs gov form 1040x A gift or demand loan that is a below-market loan generally is considered an arm's-length transaction in which you, the borrower, are considered as having received both the following. Irs gov form 1040x A loan in exchange for a note that requires the payment of interest at the applicable federal rate. Irs gov form 1040x An additional payment in an amount equal to the forgone interest. Irs gov form 1040x The additional payment is treated as a gift, dividend, contribution to capital, payment of compensation, or other payment, depending on the substance of the transaction. Irs gov form 1040x Forgone interest. Irs gov form 1040x   For any period, forgone interest is The interest that would be payable for that period if interest accrued on the loan at the applicable federal rate and was payable annually on December 31, minus Any interest actually payable on the loan for the period. Irs gov form 1040x Applicable federal rates are published by the IRS each month in the Internal Revenue Bulletin. Irs gov form 1040x Internal Revenue Bulletins are available on the IRS web site at www. Irs gov form 1040x irs. Irs gov form 1040x gov/irb. Irs gov form 1040x You can also contact an IRS office to get these rates. Irs gov form 1040x Loans subject to the rules. Irs gov form 1040x   The rules for below-market loans apply to the following. Irs gov form 1040x Gift loans (below-market loans where the forgone interest is in the nature of a gift). Irs gov form 1040x Compensation-related loans (below-market loans between an employer and an employee or between an independent contractor and a person for whom the contractor provides services). Irs gov form 1040x Corporation-shareholder loans. Irs gov form 1040x Tax avoidance loans (below-market loans where the avoidance of federal tax is one of the main purposes of the interest arrangement). Irs gov form 1040x Loans to qualified continuing care facilities under a continuing care contract (made after October 11, 1985). Irs gov form 1040x   Except as noted in (5) above, these rules apply to demand loans (loans payable in full at any time upon the lender's demand) outstanding after June 6, 1984, and to term loans (loans that are not demand loans) made after that date. Irs gov form 1040x Treatment of gift and demand loans. Irs gov form 1040x   If you receive a below-market gift loan or demand loan, you are treated as receiving an additional payment (as a gift, dividend, etc. Irs gov form 1040x ) equal to the forgone interest on the loan. Irs gov form 1040x You are then treated as transferring this amount back to the lender as interest. Irs gov form 1040x These transfers are considered to occur annually, generally on December 31. Irs gov form 1040x If you use the loan proceeds in your trade or business, you can deduct the forgone interest each year as a business interest expense. Irs gov form 1040x The lender must report it as interest income. Irs gov form 1040x Limit on forgone interest for gift loans of $100,000 or less. Irs gov form 1040x   For gift loans between individuals, forgone interest treated as transferred back to the lender is limited to the borrower's net investment income for the year. Irs gov form 1040x This limit applies if the outstanding loans between the lender and borrower total $100,000 or less. Irs gov form 1040x If the borrower's net investment income is $1,000 or less, it is treated as zero. Irs gov form 1040x This limit does not apply to a loan if the avoidance of any federal tax is one of the main purposes of the interest arrangement. Irs gov form 1040x Treatment of term loans. Irs gov form 1040x   If you receive a below-market term loan other than a gift or demand loan, you are treated as receiving an additional cash payment (as a dividend, etc. Irs gov form 1040x ) on the date the loan is made. Irs gov form 1040x This payment is equal to the loan amount minus the present value, at the applicable federal rate, of all payments due under the loan. Irs gov form 1040x The same amount is treated as original issue discount on the loan. Irs gov form 1040x See Original issue discount (OID) under Interest You Can Deduct, earlier. Irs gov form 1040x Exceptions for loans of $10,000 or less. Irs gov form 1040x   The rules for below-market loans do not apply to any day on which the total outstanding loans between the borrower and lender is $10,000 or less. Irs gov form 1040x This exception applies only to the following. Irs gov form 1040x Gift loans between individuals if the loan is not directly used to buy or carry income-producing assets. Irs gov form 1040x Compensation-related loans or corporation-shareholder loans if the avoidance of any federal tax is not a principal purpose of the interest arrangement. Irs gov form 1040x This exception does not apply to a term loan described in (2) above that was previously subject to the below-market loan rules. Irs gov form 1040x Those rules will continue to apply even if the outstanding balance is reduced to $10,000 or less. Irs gov form 1040x Exceptions for loans without significant tax effect. Irs gov form 1040x   The following loans are specifically exempted from the rules for below-market loans because their interest arrangements do not have a significant effect on the federal tax liability of the borrower or the lender. Irs gov form 1040x Loans made available by lenders to the general public on the same terms and conditions that are consistent with the lender's customary business practices. Irs gov form 1040x Loans subsidized by a federal, state, or municipal government that are made available under a program of general application to the public. Irs gov form 1040x Certain employee-relocation loans. Irs gov form 1040x Certain loans to or from a foreign person, unless the interest income would be effectively connected with the conduct of a U. Irs gov form 1040x S. Irs gov form 1040x trade or business and not exempt from U. Irs gov form 1040x S. Irs gov form 1040x tax under an income tax treaty. Irs gov form 1040x Any other loan if the taxpayer can show that the interest arrangement has no significant effect on the federal tax liability of the lender or the borrower. Irs gov form 1040x Whether an interest arrangement has a significant effect on the federal tax liability of the lender or the borrower will be determined by all the facts and circumstances. Irs gov form 1040x Consider all the following factors. Irs gov form 1040x Whether items of income and deduction generated by the loan offset each other. Irs gov form 1040x The amount of the items. Irs gov form 1040x The cost of complying with the below-market loan provisions if they were to apply. Irs gov form 1040x Any reasons, other than taxes, for structuring the transaction as a below-market loan. Irs gov form 1040x Exception for loans to qualified continuing care facilities. Irs gov form 1040x   The below-market interest rules do not apply to a loan owed by a qualified continuing care facility under a continuing care contract if the lender or lender's spouse is age 62 or older by the end of the calendar year. Irs gov form 1040x A qualified continuing care facility is one or more facilities (excluding nursing homes) meeting the requirements listed below. Irs gov form 1040x Designed to provide services under continuing care contracts (defined below). Irs gov form 1040x Includes an independent living unit, and either an assisted living or nursing facility, or both. Irs gov form 1040x Substantially all of the independent living unit residents are covered by continuing care contracts. Irs gov form 1040x A continuing care contract is a written contract between an individual and a qualified continuing care facility that includes all of the following conditions. Irs gov form 1040x The individual or individual's spouse must be entitled to use the facility for the rest of their life or lives. Irs gov form 1040x The individual or individual's spouse will be provided with housing, as appropriate for the health of the individual or individual's spouse in an: independent living unit (which has additional available facilities outside the unit for the provision of meals and other personal care), and assisted living or nursing facility available in the continuing care facility. Irs gov form 1040x The individual or individual's spouse will be provided with assisted living or nursing care available in the continuing care facility, as required for the health of the individual or the individual's spouse. Irs gov form 1040x For more information, see section 7872(h) of the Internal Revenue Code. Irs gov form 1040x Sale or exchange of property. Irs gov form 1040x   Different rules generally apply to a loan connected with the sale or exchange of property. Irs gov form 1040x If the loan does not provide adequate stated interest, part of the principal payment may be considered interest. Irs gov form 1040x However, there are exceptions that may require you to apply the below-market interest rate rules to these loans. Irs gov form 1040x See Unstated Interest and Original Issue Discount (OID) in Publication 537. Irs gov form 1040x More information. Irs gov form 1040x   For more information on below-market loans, see section 7872 of the Internal Revenue Code and section 1. Irs gov form 1040x 7872-5 of the regulations. Irs gov form 1040x Prev  Up  Next   Home   More Online Publications
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Irs gov form 1040x 10. Irs gov form 1040x   Self-Employment (SE) Tax Table of Contents Who Must Pay SE Tax?Special Rules and Exceptions Figuring Earnings Subject to SE Tax Farm Optional Method Using Both Optional Methods Reporting Self-Employment Tax The SE tax rules apply no matter how old you are and even if you are already receiving social security and Medicare benefits. Irs gov form 1040x Who Must Pay SE Tax? Generally, you must pay SE tax and file Schedule SE (Form 1040) if your net earnings from self-employment were $400 or more. Irs gov form 1040x Use Schedule SE to figure net earnings from self-employment. Irs gov form 1040x Sole proprietor or independent contractor. Irs gov form 1040x   If you are self-employed as a sole proprietor or independent contractor, you generally use Schedule C or C-EZ (Form 1040) to figure your earnings subject to SE tax. Irs gov form 1040x SE tax rate. Irs gov form 1040x    For 2013, the SE tax rate on net earnings is 15. Irs gov form 1040x 3% (12. Irs gov form 1040x 4% social security tax plus 2. Irs gov form 1040x 9% Medicare tax). Irs gov form 1040x Maximum earnings subject to self-employment tax. Irs gov form 1040x    Only the first $113,700 of your combined wages, tips, and net earnings in 2013 is subject to any combination of the 12. Irs gov form 1040x 4% social security part of SE tax, social security tax, or railroad retirement (tier 1) tax. Irs gov form 1040x   All of your combined wages, tips, and net earnings in 2013 are subject to any combination of the 2. Irs gov form 1040x 9% Medicare part of SE tax, social security tax, or railroad retirement (tier 1) tax. Irs gov form 1040x   If your wages and tips are subject to either social security or railroad retirement (tier 1) tax, or both, and total at least $113,700, do not pay the 12. Irs gov form 1040x 4% social security part of the SE tax on any of your net earnings. Irs gov form 1040x However, you must pay the 2. Irs gov form 1040x 9% Medicare part of the SE tax on all your net earnings. Irs gov form 1040x Special Rules and Exceptions Aliens. Irs gov form 1040x   Generally, resident aliens must pay self-employment tax under the same rules that apply to U. Irs gov form 1040x S. Irs gov form 1040x citizens. Irs gov form 1040x Nonresident aliens are not subject to SE tax unless an international social security agreement in effect determines that they are covered under the U. Irs gov form 1040x S. Irs gov form 1040x social security system. Irs gov form 1040x However, residents of the Virgin Islands, Puerto Rico, Guam, the Commonwealth of the Northern Mariana Islands, or American Samoa are subject to self-employment tax, as they are considered U. Irs gov form 1040x S. Irs gov form 1040x residents for self-employment tax purposes. Irs gov form 1040x For more information on aliens, see Publication 519, U. Irs gov form 1040x S. Irs gov form 1040x Tax Guide for Aliens. Irs gov form 1040x Child employed by parent. Irs gov form 1040x   You are not subject to SE tax if you are under age 18 and you are working for your father or mother. Irs gov form 1040x Church employee. Irs gov form 1040x    If you work for a church or a qualified church-controlled organization (other than as a minister or member of a religious order) that elected an exemption from social security and Medicare taxes, you are subject to SE tax if you receive $108. Irs gov form 1040x 28 or more in wages from the church or organization. Irs gov form 1040x For more information, see Publication 517, Social Security and Other Information for Members of the Clergy and Religious Workers. Irs gov form 1040x Fishing crew member. Irs gov form 1040x   If you are a member of the crew on a boat that catches fish or other water life, your earnings are subject to SE tax if all the following conditions apply. Irs gov form 1040x You do not get any pay for the work except your share of the catch or a share of the proceeds from the sale of the catch, unless the pay meets all the following conditions. Irs gov form 1040x The pay is not more than $100 per trip. Irs gov form 1040x The pay is received only if there is a minimum catch. Irs gov form 1040x The pay is solely for additional duties (such as mate, engineer, or cook) for which additional cash pay is traditional in the fishing industry. Irs gov form 1040x You get a share of the catch or a share of the proceeds from the sale of the catch. Irs gov form 1040x Your share depends on the amount of the catch. Irs gov form 1040x The boat's operating crew normally numbers fewer than 10 individuals. Irs gov form 1040x (An operating crew is considered as normally made up of fewer than 10 if the average size of the crew on trips made during the last four calendar quarters is fewer than 10. Irs gov form 1040x ) Notary public. Irs gov form 1040x   Fees you receive for services you perform as a notary public are reported on Schedule C or C-EZ but are not subject to self-employment tax (see the Instructions for Schedule SE (Form 1040)). Irs gov form 1040x State or local government employee. Irs gov form 1040x   You are subject to SE tax if you are an employee of a state or local government, are paid solely on a fee basis, and your services are not covered under a federal-state social security agreement. Irs gov form 1040x Foreign government or international organization employee. Irs gov form 1040x   You are subject to SE tax if both the following conditions are true. Irs gov form 1040x You are a U. Irs gov form 1040x S. Irs gov form 1040x citizen employed in the United States, Puerto Rico, Guam, American Samoa, the Commonwealth of the Northern Mariana Islands, or the Virgin Islands by: A foreign government, A wholly-owned agency of a foreign government, or An international organization. Irs gov form 1040x Your employer is not required to withhold social security and Medicare taxes from your wages. Irs gov form 1040x U. Irs gov form 1040x S. Irs gov form 1040x citizen or resident alien residing abroad. Irs gov form 1040x    If you are a self-employed U. Irs gov form 1040x S. Irs gov form 1040x citizen or resident alien living outside the United States, in most cases you must pay SE tax. Irs gov form 1040x Do not reduce your foreign earnings from self-employment by your foreign earned income exclusion. Irs gov form 1040x Exception. Irs gov form 1040x    The United States has social security agreements with many countries to eliminate double taxation under two social security systems. Irs gov form 1040x Under these agreements, you generally must only pay social security and Medicare taxes to the country in which you live. Irs gov form 1040x The country to which you must pay the tax will issue a certificate which serves as proof of exemption from social security tax in the other country. Irs gov form 1040x   For more information, see the Instructions for Schedule SE (Form 1040). Irs gov form 1040x More Than One Business If you have earnings subject to SE tax from more than one trade, business, or profession, you must combine the net profit (or loss) from each to determine your total earnings subject to SE tax. Irs gov form 1040x A loss from one business reduces your profit from another business. Irs gov form 1040x Community Property Income If any of the income from a trade or business, other than a partnership, is community property income under state law, it is included in the earnings subject to SE tax of the spouse carrying on the trade or business. Irs gov form 1040x Gain or Loss Do not include in earnings subject to SE tax a gain or loss from the disposition of property that is neither stock in trade nor held primarily for sale to customers. Irs gov form 1040x It does not matter whether the disposition is a sale, exchange, or an involuntary conversion. Irs gov form 1040x Lost Income Payments If you are self-employed and reduce or stop your business activities, any payment you receive from insurance or other sources for the lost business income is included in earnings subject to SE tax. Irs gov form 1040x If you are not working when you receive the payment, it still relates to your business and is included in earnings subject to SE tax, even though your business is temporarily inactive. Irs gov form 1040x Figuring Earnings Subject to SE Tax Methods for Figuring Net Earnings There are three ways to figure your net earnings from self-employment. Irs gov form 1040x The regular method. Irs gov form 1040x The nonfarm optional method. Irs gov form 1040x The farm optional method. Irs gov form 1040x You must use the regular method unless you are eligible to use one or both of the optional methods. Irs gov form 1040x Why use an optional method?    You may want to use the optional methods (discussed later) when you have a loss or a small net profit and any one of the following applies. Irs gov form 1040x You want to receive credit for social security benefit coverage. Irs gov form 1040x You incurred child or dependent care expenses for which you could claim a credit. Irs gov form 1040x (An optional method may increase your earned income, which could increase your credit. Irs gov form 1040x ) You are entitled to the earned income credit. Irs gov form 1040x (An optional method may increase your earned income, which could increase your credit. Irs gov form 1040x ) You are entitled to the additional child tax credit. Irs gov form 1040x (An optional method may increase your earned income, which could increase your credit. Irs gov form 1040x ) Effects of using an optional method. Irs gov form 1040x   Using an optional method could increase your SE tax. Irs gov form 1040x Paying more SE tax could result in your getting higher benefits when you retire. Irs gov form 1040x   If you use either or both optional methods, you must figure and pay the SE tax due under these methods even if you would have had a smaller tax or no tax using the regular method. Irs gov form 1040x   The optional methods may be used only to figure your SE tax. Irs gov form 1040x To figure your income tax, include your actual earnings in gross income, regardless of which method you use to determine SE tax. Irs gov form 1040x Regular Method Multiply your total earnings subject to SE tax by 92. Irs gov form 1040x 35% (. Irs gov form 1040x 9235) to get your net earnings under the regular method. Irs gov form 1040x See Short Schedule SE, line 4, or Long Schedule SE, line 4a. Irs gov form 1040x Net earnings figured using the regular method are also called actual net earnings. Irs gov form 1040x Nonfarm Optional Method Use the nonfarm optional method only for earnings that do not come from farming. Irs gov form 1040x You may use this method if you meet all the following tests. Irs gov form 1040x You are self-employed on a regular basis. Irs gov form 1040x This means that your actual net earnings from self-employment were $400 or more in at least 2 of the 3 tax years before the one for which you use this method. Irs gov form 1040x The net earnings can be from either farm or nonfarm earnings or both. Irs gov form 1040x You have used this method less than 5 years. Irs gov form 1040x (There is a 5-year lifetime limit. Irs gov form 1040x ) The years do not have to be one after another. Irs gov form 1040x Your net nonfarm profits were: Less than $5,024, and Less than 72. Irs gov form 1040x 189% of your gross nonfarm income. Irs gov form 1040x Net nonfarm profits. Irs gov form 1040x   Net nonfarm profit generally is the total of the amounts from: Line 31, Schedule C (Form 1040), Line 3, Schedule C-EZ (Form 1040), Box 14, code A, Schedule K-1 (Form 1065) (from nonfarm partnerships), and Box 9, code J1, Schedule K-1 (Form 1065-B). Irs gov form 1040x   However, you may need to adjust the amount reported on Schedule K-1 if you are a general partner or if it is a loss. Irs gov form 1040x Gross nonfarm income. Irs gov form 1040x   Your gross nonfarm income generally is the total of the amounts from: Line 7, Schedule C (Form 1040), Line 1, Schedule C-EZ (Form 1040), Box 14, code C, Schedule K-1 (Form 1065) (from nonfarm partnerships), and Box 9, code J2, Schedule K-1 (Form 1065-B). Irs gov form 1040x Figuring Nonfarm Net Earnings If you meet the three tests explained earlier, use the following table to figure your net earnings from self-employment under the nonfarm optional method. Irs gov form 1040x Table 10-1. Irs gov form 1040x Figuring Nonfarm Net Earnings IF your gross nonfarm income is. Irs gov form 1040x . Irs gov form 1040x . Irs gov form 1040x THEN your net earnings are equal to. Irs gov form 1040x . Irs gov form 1040x . Irs gov form 1040x $6,960 or less Two-thirds of your gross nonfarm income. Irs gov form 1040x More than $6,960 $4,640 Actual net earnings. Irs gov form 1040x   Your actual net earnings are 92. Irs gov form 1040x 35% of your total earnings subject to SE tax (that is, multiply total earnings subject to SE tax by 92. Irs gov form 1040x 35% (. Irs gov form 1040x 9235) to get actual net earnings). Irs gov form 1040x Actual net earnings are equivalent to net earnings figured using the regular method. Irs gov form 1040x Optional net earnings less than actual net earnings. Irs gov form 1040x   You cannot use this method to report an amount less than your actual net earnings from self-employment. Irs gov form 1040x Gross nonfarm income of $6,960 or less. Irs gov form 1040x   The following examples illustrate how to figure net earnings when gross nonfarm income is $6,960 or less. Irs gov form 1040x Example 1. Irs gov form 1040x Net nonfarm profit less than $5,024 and less than 72. Irs gov form 1040x 189% of gross nonfarm income. Irs gov form 1040x Ann Green runs a craft business. Irs gov form 1040x Her actual net earnings from self-employment were $800 in 2011 and $900 in 2012. Irs gov form 1040x She meets the test for being self-employed on a regular basis. Irs gov form 1040x She has used the nonfarm optional method less than 5 years. Irs gov form 1040x Her gross income and net profit in 2013 are as follows: Gross nonfarm income $5,400 Net nonfarm profit $1,200 Ann's actual net earnings for 2013 are $1,108 ($1,200 × . Irs gov form 1040x 9235). Irs gov form 1040x Because her net profit is less than $5,024 and less than 72. Irs gov form 1040x 189% of her gross income, she can use the nonfarm optional method to figure net earnings of $3,600 (2/3 × $5,400). Irs gov form 1040x Because these net earnings are higher than her actual net earnings, she can report net earnings of $3,600 for 2013. Irs gov form 1040x Example 2. Irs gov form 1040x Net nonfarm profit less than $5,024 but not less than 72. Irs gov form 1040x 189% of gross nonfarm income. Irs gov form 1040x Assume that in Example 1 Ann's gross income is $1,000 and her net profit is $800. Irs gov form 1040x She must use the regular method to figure her net earnings. Irs gov form 1040x She cannot use the nonfarm optional method because her net profit is not less than 72. Irs gov form 1040x 189% of her gross income. Irs gov form 1040x Example 3. Irs gov form 1040x Net loss from a nonfarm business. Irs gov form 1040x Assume that in Example 1 Ann has a net loss of $700. Irs gov form 1040x She can use the nonfarm optional method and report $3,600 (2/3 × $5,400) as her net earnings. Irs gov form 1040x Example 4. Irs gov form 1040x Nonfarm net earnings less than $400. Irs gov form 1040x Assume that in Example 1 Ann has gross income of $525 and a net profit of $175. Irs gov form 1040x In this situation, she would not pay any SE tax under either the regular method or the nonfarm optional method because her net earnings under both methods are less than $400. Irs gov form 1040x Gross nonfarm income of more than $6,960. Irs gov form 1040x   The following examples illustrate how to figure net earnings when gross nonfarm income is more than $6,960. Irs gov form 1040x Example 1. Irs gov form 1040x Net nonfarm profit less than $5,024 and less than 72. Irs gov form 1040x 189% of gross nonfarm income. Irs gov form 1040x John White runs an appliance repair shop. Irs gov form 1040x His actual net earnings from self-employment were $10,500 in 2011 and $9,500 in 2012. Irs gov form 1040x He meets the test for being self-employed on a regular basis. Irs gov form 1040x He has used the nonfarm optional method less than 5 years. Irs gov form 1040x His gross income and net profit in 2013 are as follows: Gross nonfarm income $12,000 Net nonfarm profit $1,200 John's actual net earnings for 2013 are $1,108 ($1,200 × . Irs gov form 1040x 9235). Irs gov form 1040x Because his net profit is less than $5,024 and less than 72. Irs gov form 1040x 189% of his gross income, he can use the nonfarm optional method to figure net earnings of $4,640. Irs gov form 1040x Because these net earnings are higher than his actual net earnings, he can report net earnings of $4,640 for 2013. Irs gov form 1040x Example 2. Irs gov form 1040x Net nonfarm profit not less than $5,024. Irs gov form 1040x Assume that in Example 1 John's net profit is $5,400. Irs gov form 1040x He must use the regular method. Irs gov form 1040x He cannot use the nonfarm optional method because his net nonfarm profit is not less than $5,024. Irs gov form 1040x Example 3. Irs gov form 1040x Net loss from a nonfarm business. Irs gov form 1040x Assume that in Example 1 John has a net loss of $700. Irs gov form 1040x He can use the nonfarm optional method and report $4,640 as his net earnings from self-employment. Irs gov form 1040x Farm Optional Method Use the farm optional method only for earnings from a farming business. Irs gov form 1040x See Publication 225 for information about this method. Irs gov form 1040x Using Both Optional Methods If you have both farm and nonfarm earnings, you may be able to use both optional methods to determine your net earnings from self-employment. Irs gov form 1040x To figure your net earnings using both optional methods, you must: Figure your farm and nonfarm net earnings separately under each method. Irs gov form 1040x Do not combine farm earnings with nonfarm earnings to figure your net earnings under either method. Irs gov form 1040x Add the net earnings figured under each method to arrive at your total net earnings from self-employment. Irs gov form 1040x You can report less than your total actual farm and nonfarm net earnings but not less than actual nonfarm net earnings. Irs gov form 1040x If you use both optional methods, you can report no more than $4,640 as your combined net earnings from self-employment. Irs gov form 1040x Example. Irs gov form 1040x You are a self-employed farmer. Irs gov form 1040x You also operate a retail grocery store. Irs gov form 1040x Your gross income, actual net earnings from self-employment, and optional farm and optional nonfarm net earnings from self-employment are shown in Table 10-2. Irs gov form 1040x Table 10-2. Irs gov form 1040x Example—Farm and Nonfarm Earnings Income and Earnings Farm Nonfarm Gross income $3,000 $6,000 Actual net earnings $900 $500 Optional net earnings (2/3 of gross income) $2,000 $4,000 Table 10-3 shows four methods or combinations of methods you can use to figure net earnings from self-employment using the farm and nonfarm gross income and actual net earnings shown in Table 10-2. Irs gov form 1040x Method 1. Irs gov form 1040x Using the regular method for both farm and nonfarm income. Irs gov form 1040x Method 2. Irs gov form 1040x Using the optional method for farm income and the regular method for nonfarm income. Irs gov form 1040x Method 3. Irs gov form 1040x Using the regular method for farm income and the optional method for nonfarm income. Irs gov form 1040x Method 4. Irs gov form 1040x Using the optional method for both farm and nonfarm income. Irs gov form 1040x Note. Irs gov form 1040x Actual net earnings is the same as net earnings figured using the regular method. Irs gov form 1040x Table 10-3. Irs gov form 1040x Example—Net Earnings Net Earnings 1 2 3 4 Actual  farm $ 900   $ 900   Optional  farm   $ 2,000   $ 2,000 Actual nonfarm $ 500 $ 500     Optional nonfarm     $4,000 $4,000 Amount you can report: $1,400 $2,500 $4,900 $4,640* *Limited to $4,640 because you used both optional methods. Irs gov form 1040x Fiscal Year Filer If you use a tax year other than the calendar year, you must use the tax rate and maximum earnings limit in effect at the beginning of your tax year. Irs gov form 1040x Even if the tax rate or maximum earnings limit changes during your tax year, continue to use the same rate and limit throughout your tax year. Irs gov form 1040x Reporting Self-Employment Tax Use Schedule SE (Form 1040) to figure and report your SE tax. Irs gov form 1040x Then enter the SE tax on line 56 of Form 1040 and attach Schedule SE to Form 1040. Irs gov form 1040x Most taxpayers can use Section A—Short Schedule SE to figure their SE tax. Irs gov form 1040x However, certain taxpayers must use Section B—Long Schedule SE. Irs gov form 1040x If you have to pay SE tax, you must file Form 1040 (with Schedule SE attached) even if you do not otherwise have to file a federal income tax return. Irs gov form 1040x Joint return. Irs gov form 1040x   Even if you file a joint return, you cannot file a joint Schedule SE. Irs gov form 1040x This is true whether one spouse or both spouses have earnings subject to SE tax. Irs gov form 1040x If both of you have earnings subject to SE tax, each of you must complete a separate Schedule SE. Irs gov form 1040x However, if one spouse uses the Short Schedule SE and the other spouse has to use the Long Schedule SE, both can use the same form. Irs gov form 1040x Attach both schedules to the joint return. Irs gov form 1040x More than one business. Irs gov form 1040x   If you have more than one trade or business, you must combine the net profit (or loss) from each business to figure your SE tax. Irs gov form 1040x A loss from one business will reduce your profit from another business. Irs gov form 1040x File one Schedule SE showing the earnings from self-employment, but file a separate Schedule C, C-EZ, or F for each business. Irs gov form 1040x Example. Irs gov form 1040x You are the sole proprietor of two separate businesses. Irs gov form 1040x You operate a restaurant that made a net profit of $25,000. Irs gov form 1040x You also have a cabinetmaking business that had a net loss of $500. Irs gov form 1040x You must file a Schedule C for the restaurant showing your net profit of $25,000 and another Schedule C for the cabinetmaking business showing your net loss of $500. Irs gov form 1040x You file Schedule SE showing total earnings subject to SE tax of $24,500. Irs gov form 1040x Prev  Up  Next   Home   More Online Publications