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State Income Tax E File

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State Income Tax E File

State income tax e file 1. State income tax e file   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. State income tax e file It is an allowance for the wear and tear, deterioration, or obsolescence of the property. State income tax e file This chapter discusses the general rules for depreciating property and answers the following questions. State income tax e file 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. State income tax e file What Property Can Be Depreciated? You can depreciate most types of tangible property (except land), such as buildings, machinery, vehicles, furniture, and equipment. State income tax e file You also can depreciate certain intangible property, such as patents, copyrights, and computer software. State income tax e file To be depreciable, the property must meet all the following requirements. State income tax e file It must be property you own. State income tax e file It must be used in your business or income-producing activity. State income tax e file It must have a determinable useful life. State income tax e file It must be expected to last more than one year. State income tax e file The following discussions provide information about these requirements. State income tax e file Property You Own To claim depreciation, you usually must be the owner of the property. State income tax e file You are considered as owning property even if it is subject to a debt. State income tax e file Example 1. State income tax e file You made a down payment to purchase rental property and assumed the previous owner's mortgage. State income tax e file You own the property and you can depreciate it. State income tax e file Example 2. State income tax e file You bought a new van that you will use only for your courier business. State income tax e file You will be making payments on the van over the next 5 years. State income tax e file You own the van and you can depreciate it. State income tax e file Leased property. State income tax e file   You can depreciate leased property only if you retain the incidents of ownership in the property (explained below). State income tax e file This means you bear the burden of exhaustion of the capital investment in the property. State income tax e file 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. State income tax e file You can, however, depreciate any capital improvements you make to the property. State income tax e file See How Do You Treat Repairs and Improvements later in this chapter and Additions and Improvements under Which Recovery Period Applies in chapter 4. State income tax e file   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. State income tax e file 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. State income tax e file Incidents of ownership. State income tax e file   Incidents of ownership in property include the following. State income tax e file The legal title to the property. State income tax e file The legal obligation to pay for the property. State income tax e file The responsibility to pay maintenance and operating expenses. State income tax e file The duty to pay any taxes on the property. State income tax e file The risk of loss if the property is destroyed, condemned, or diminished in value through obsolescence or exhaustion. State income tax e file Life tenant. State income tax e file   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. State income tax e file However, see Certain term interests in property under Excepted Property, later. State income tax e file Cooperative apartments. State income tax e file   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. State income tax e file   Figure your depreciation deduction as follows. State income tax e file Figure the depreciation for all the depreciable real property owned by the corporation in which you have a proprietary lease or right of tenancy. State income tax e file If you bought your cooperative stock after its first offering, figure the depreciable basis of this property as follows. State income tax e file Multiply your cost per share by the total number of outstanding shares, including any shares held by the corporation. State income tax e file Add to the amount figured in (a) any mortgage debt on the property on the date you bought the stock. State income tax e file 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. State income tax e file 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. State income tax e file Divide the number of your shares of stock by the total number of outstanding shares, including any shares held by the corporation. State income tax e file Multiply the result of (2) by the percentage you figured in (3). State income tax e file This is your depreciation on the stock. State income tax e file   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. State income tax e file 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. State income tax e file Example. State income tax e file You figure your share of the cooperative housing corporation's depreciation to be $30,000. State income tax e file Your adjusted basis in the stock of the corporation is $50,000. State income tax e file You use one half of your apartment solely for business purposes. State income tax e file Your depreciation deduction for the stock for the year cannot be more than $25,000 (½ of $50,000). State income tax e file Change to business use. State income tax e file   If you change your cooperative apartment to business use, figure your allowable depreciation as explained earlier. State income tax e file The basis of all the depreciable real property owned by the cooperative housing corporation is the smaller of the following amounts. State income tax e file The fair market value of the property on the date you change your apartment to business use. State income tax e file This is considered to be the same as the corporation's adjusted basis minus straight line depreciation, unless this value is unrealistic. State income tax e file The corporation's adjusted basis in the property on that date. State income tax e file Do not subtract depreciation when figuring the corporation's adjusted basis. State income tax e file   If you bought the stock after its first offering, the corporation's adjusted basis in the property is the amount figured in (1), above. State income tax e file 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. State income tax e file   For a discussion of fair market value and adjusted basis, see Publication 551. State income tax e file 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. State income tax e file If you use property to produce income (investment use), the income must be taxable. State income tax e file You cannot depreciate property that you use solely for personal activities. State income tax e file Partial business or investment use. State income tax e file   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. State income tax e file 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. State income tax e file    You must keep records showing the business, investment, and personal use of your property. State income tax e file 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. State income tax e file    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. State income tax e file For information about qualified business use of listed property, see What Is the Business-Use Requirement in chapter 5. State income tax e file Office in the home. State income tax e file   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. State income tax e file For information about depreciating your home office, see Publication 587. State income tax e file Inventory. State income tax e file   You cannot depreciate inventory because it is not held for use in your business. State income tax e file Inventory is any property you hold primarily for sale to customers in the ordinary course of your business. State income tax e file   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. State income tax e file See Rent-to-own dealer under Which Property Class Applies Under GDS in chapter 4. State income tax e file   In some cases, it is not clear whether property is held for sale (inventory) or for use in your business. State income tax e file If it is unclear, examine carefully all the facts in the operation of the particular business. State income tax e file The following example shows how a careful examination of the facts in two similar situations results in different conclusions. State income tax e file Example. State income tax e file Maple Corporation is in the business of leasing cars. State income tax e file At the end of their useful lives, when the cars are no longer profitable to lease, Maple sells them. State income tax e file Maple does not have a showroom, used car lot, or individuals to sell the cars. State income tax e file Instead, it sells them through wholesalers or by similar arrangements in which a dealer's profit is not intended or considered. State income tax e file 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. State income tax e file 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. State income tax e file In this situation, the cars are held primarily for sale to customers in the ordinary course of business. State income tax e file Containers. State income tax e file   Generally, containers for the products you sell are part of inventory and you cannot depreciate them. State income tax e file However, you can depreciate containers used to ship your products if they have a life longer than one year and meet the following requirements. State income tax e file They qualify as property used in your business. State income tax e file Title to the containers does not pass to the buyer. State income tax e file   To determine if these requirements are met, consider the following questions. State income tax e file 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. State income tax e file This means that it must be something that wears out, decays, gets used up, becomes obsolete, or loses its value from natural causes. State income tax e file 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. State income tax e file Example. State income tax e file You maintain a library for use in your profession. State income tax e file You can depreciate it. State income tax e file 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. State income tax e file Instead, you deduct their cost as a business expense. State income tax e file What Property Cannot Be Depreciated? Certain property cannot be depreciated. State income tax e file This includes land and certain excepted property. State income tax e file Land You cannot depreciate the cost of land because land does not wear out, become obsolete, or get used up. State income tax e file The cost of land generally includes the cost of clearing, grading, planting, and landscaping. State income tax e file Although you cannot depreciate land, you can depreciate certain land preparation costs, such as landscaping costs, incurred in preparing land for business use. State income tax e file 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. State income tax e file Example. State income tax e file You constructed a new building for use in your business and paid for grading, clearing, seeding, and planting bushes and trees. State income tax e file Some of the bushes and trees were planted right next to the building, while others were planted around the outer border of the lot. State income tax e file If you replace the building, you would have to destroy the bushes and trees right next to it. State income tax e file These bushes and trees are closely associated with the building, so they have a determinable useful life. State income tax e file Therefore, you can depreciate them. State income tax e file Add your other land preparation costs to the basis of your land because they have no determinable life and you cannot depreciate them. State income tax e file Excepted Property Even if the requirements explained in the preceding discussions are met, you cannot depreciate the following property. State income tax e file Property placed in service and disposed of in the same year. State income tax e file Determining when property is placed in service is explained later. State income tax e file Equipment used to build capital improvements. State income tax e file You must add otherwise allowable depreciation on the equipment during the period of construction to the basis of your improvements. State income tax e file See Uniform Capitalization Rules in Publication 551. State income tax e file Section 197 intangibles. State income tax e file You must amortize these costs. State income tax e file Section 197 intangibles are discussed in detail in Chapter 8 of Publication 535. State income tax e file Intangible property, such as certain computer software, that is not section 197 intangible property, can be depreciated if it meets certain requirements. State income tax e file See Intangible Property , later. State income tax e file Certain term interests. State income tax e file Certain term interests in property. State income tax e file   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. State income tax e file 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. State income tax e file Related persons. State income tax e file   For a description of related persons, see Related Persons, later. State income tax e file 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. State income tax e file Basis adjustments. State income tax e file   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. State income tax e file   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. State income tax e file However, do not increase your basis for depreciation not allowed for periods during which either of the following situations applies. State income tax e file The term interest is held by an organization exempt from tax. State income tax e file 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. State income tax e file Exceptions. State income tax e file   The above rules do not apply to the holder of a term interest in property acquired by gift, bequest, or inheritance. State income tax e file 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. State income tax e file 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. State income tax e file 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. State income tax e file 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. State income tax e file Even if you are not using the property, it is in service when it is ready and available for its specific use. State income tax e file Example 1. State income tax e file Donald Steep bought a machine for his business. State income tax e file The machine was delivered last year. State income tax e file However, it was not installed and operational until this year. State income tax e file It is considered placed in service this year. State income tax e file 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. State income tax e file Example 2. State income tax e file On April 6, Sue Thorn bought a house to use as residential rental property. State income tax e file She made several repairs and had it ready for rent on July 5. State income tax e file At that time, she began to advertise it for rent in the local newspaper. State income tax e file The house is considered placed in service in July when it was ready and available for rent. State income tax e file She can begin to depreciate it in July. State income tax e file Example 3. State income tax e file James Elm is a building contractor who specializes in constructing office buildings. State income tax e file He bought a truck last year that had to be modified to lift materials to second-story levels. State income tax e file The installation of the lifting equipment was completed and James accepted delivery of the modified truck on January 10 of this year. State income tax e file 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. State income tax e file Conversion to business use. State income tax e file   If you place property in service in a personal activity, you cannot claim depreciation. State income tax e file 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. State income tax e file You place the property in service in the business or income-producing activity on the date of the change. State income tax e file Example. State income tax e file You bought a home and used it as your personal home several years before you converted it to rental property. State income tax e file 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. State income tax e file 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. State income tax e file 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). State income tax e file 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. State income tax e file Cost or Other Basis Fully Recovered You stop depreciating property when you have fully recovered your cost or other basis. State income tax e file You recover your basis when your section 179 and allowed or allowable depreciation deductions equal your cost or investment in the property. State income tax e file See What Is the Basis of Your Depreciable Property , later. State income tax e file 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. State income tax e file 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. State income tax e file You sell or exchange the property. State income tax e file You convert the property to personal use. State income tax e file You abandon the property. State income tax e file You transfer the property to a supplies or scrap account. State income tax e file The property is destroyed. State income tax e file 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. State income tax e file What Method Can You Use To Depreciate Your Property? You must use the Modified Accelerated Cost Recovery System (MACRS) to depreciate most property. State income tax e file MACRS is discussed in chapter 4. State income tax e file You cannot use MACRS to depreciate the following property. State income tax e file Property you placed in service before 1987. State income tax e file Certain property owned or used in 1986. State income tax e file Intangible property. State income tax e file Films, video tapes, and recordings. State income tax e file Certain corporate or partnership property acquired in a nontaxable transfer. State income tax e file Property you elected to exclude from MACRS. State income tax e file The following discussions describe the property listed above and explain what depreciation method should be used. State income tax e file 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). State income tax e file Property placed in service before 1987 must be depreciated under the methods discussed in Publication 534. State income tax e file For a discussion of when property is placed in service, see When Does Depreciation Begin and End , earlier. State income tax e file Use of real property changed. State income tax e file   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. State income tax e file Improvements made after 1986. State income tax e file   You must treat an improvement made after 1986 to property you placed in service before 1987 as separate depreciable property. State income tax e file Therefore, you can depreciate that improvement as separate property under MACRS if it is the type of property that otherwise qualifies for MACRS depreciation. State income tax e file 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. State income tax e file 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. State income tax e file If you cannot use MACRS, the property must be depreciated under the methods discussed in Publication 534. State income tax e file For the following discussions, do not treat property as owned before you placed it in service. State income tax e file If you owned property in 1986 but did not place it in service until 1987, you do not treat it as owned in 1986. State income tax e file Personal property. State income tax e file   You cannot use MACRS for personal property (section 1245 property) in any of the following situations. State income tax e file You or someone related to you owned or used the property in 1986. State income tax e file 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. State income tax e file You lease the property to a person (or someone related to this person) who owned or used the property in 1986. State income tax e file 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. State income tax e file Real property. State income tax e file   You generally cannot use MACRS for real property (section 1250 property) in any of the following situations. State income tax e file You or someone related to you owned the property in 1986. State income tax e file You lease the property to a person who owned the property in 1986 (or someone related to that person). State income tax e file You acquired the property in a like-kind exchange, involuntary conversion, or repossession of property you or someone related to you owned in 1986. State income tax e file MACRS applies only to that part of your basis in the acquired property that represents cash paid or unlike property given up. State income tax e file It does not apply to the carried-over part of the basis. State income tax e file Exceptions. State income tax e file   The rules above do not apply to the following. State income tax e file Residential rental property or nonresidential real property. State income tax e file 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. State income tax e file For information on how to figure depreciation under ACRS, see Publication 534. State income tax e file Property that was MACRS property in the hands of the person from whom you acquired it because of (2) above. State income tax e file Related persons. State income tax e file   For this purpose, the following are related persons. State income tax e file 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. State income tax e file A corporation and an individual who directly or indirectly owns more than 10% of the value of the outstanding stock of that corporation. State income tax e file Two corporations that are members of the same controlled group. State income tax e file 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. State income tax e file The grantor and fiduciary, and the fiduciary and beneficiary, of any trust. State income tax e file 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. State income tax e file 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. State income tax e file 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. State income tax e file A corporation and a partnership if the same persons own both of the following. State income tax e file More than 10% of the value of the outstanding stock of the corporation. State income tax e file More than 10% of the capital or profits interest in the partnership. State income tax e file The executor and beneficiary of any estate. State income tax e file A partnership and a person who directly or indirectly owns more than 10% of the capital or profits interest in the partnership. State income tax e file Two partnerships, if the same persons directly or indirectly own more than 10% of the capital or profits interest in each. State income tax e file The related person and a person who is engaged in trades or businesses under common control. State income tax e file See section 52(a) and 52(b) of the Internal Revenue Code. State income tax e file When to determine relationship. State income tax e file   You must determine whether you are related to another person at the time you acquire the property. State income tax e file   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. State income tax e file 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. State income tax e file Constructive ownership of stock or partnership interest. State income tax e file   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. State income tax e file 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. State income tax e file 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. State income tax e file An individual is considered to own the stock or partnership interest directly or indirectly owned by or for the individual's family. State income tax e file 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. State income tax e file 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. State income tax e file 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. State income tax e file Intangible Property Generally, if you can depreciate intangible property, you usually use the straight line method of depreciation. State income tax e file However, you can choose to depreciate certain intangible property under the income forecast method (discussed later). State income tax e file 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. State income tax e file Straight Line Method This method lets you deduct the same amount of depreciation each year over the useful life of the property. State income tax e file To figure your deduction, first determine the adjusted basis, salvage value, and estimated useful life of your property. State income tax e file Subtract the salvage value, if any, from the adjusted basis. State income tax e file The balance is the total depreciation you can take over the useful life of the property. State income tax e file Divide the balance by the number of years in the useful life. State income tax e file This gives you your yearly depreciation deduction. State income tax e file 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. State income tax e file 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. State income tax e file Example. State income tax e file In April, Frank bought a patent for $5,100 that is not a section 197 intangible. State income tax e file He depreciates the patent under the straight line method, using a 17-year useful life and no salvage value. State income tax e file He divides the $5,100 basis by 17 years to get his $300 yearly depreciation deduction. State income tax e file 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. State income tax e file Next year, Frank can deduct $300 for the full year. State income tax e file Patents and copyrights. State income tax e file   If you can depreciate the cost of a patent or copyright, use the straight line method over the useful life. State income tax e file 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. State income tax e file 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. State income tax e file Computer software. State income tax e file   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. State income tax e file   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. State income tax e file It is readily available for purchase by the general public. State income tax e file It is subject to a nonexclusive license. State income tax e file It has not been substantially modified. State income tax e file   If the software meets the tests above, it may also qualify for the section 179 deduction and the special depreciation allowance, discussed later. State income tax e file If you can depreciate the cost of computer software, use the straight line method over a useful life of 36 months. State income tax e file    Tax-exempt use property subject to a lease. State income tax e file   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. State income tax e file Certain created intangibles. State income tax e file   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. State income tax e file For example, amounts paid to acquire memberships or privileges of indefinite duration, such as a trade association membership, are eligible costs. State income tax e file   The following are not eligible. State income tax e file Any intangible asset acquired from another person. State income tax e file Created financial interests. State income tax e file Any intangible asset that has a useful life that can be estimated with reasonable accuracy. State income tax e file 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. State income tax e file 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. State income tax e file   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. State income tax e file 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. State income tax e file Income Forecast Method You can choose to use the income forecast method instead of the straight line method to depreciate the following depreciable intangibles. State income tax e file Motion picture films or video tapes. State income tax e file Sound recordings. State income tax e file Copyrights. State income tax e file Books. State income tax e file Patents. State income tax e file Under the income forecast method, each year's depreciation deduction is equal to the cost of the property, multiplied by a fraction. State income tax e file 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. State income tax e file For more information, see section 167(g) of the Internal Revenue Code. State income tax e file Films, video tapes, and recordings. State income tax e file   You cannot use MACRS for motion picture films, video tapes, and sound recordings. State income tax e file For this purpose, sound recordings are discs, tapes, or other phonorecordings resulting from the fixation of a series of sounds. State income tax e file You can depreciate this property using either the straight line method or the income forecast method. State income tax e file Participations and residuals. State income tax e file   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. State income tax e file 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. State income tax e file 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. State income tax e file   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. State income tax e file Videocassettes. State income tax e file   If you are in the business of renting videocassettes, you can depreciate only those videocassettes bought for rental. State income tax e file If the videocassette has a useful life of one year or less, you can currently deduct the cost as a business expense. State income tax e file 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. State income tax e file You must continue to use the same depreciation method as the transferor and figure depreciation as if the transfer had not occurred. State income tax e file 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. State income tax e file The nontaxable transfers covered by this rule include the following. State income tax e file A distribution in complete liquidation of a subsidiary. State income tax e file A transfer to a corporation controlled by the transferor. State income tax e file An exchange of property solely for corporate stock or securities in a reorganization. State income tax e file A contribution of property to a partnership in exchange for a partnership interest. State income tax e file A partnership distribution of property to a partner. State income tax e file 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. State income tax e file 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. State income tax e file You must make this election by the return due date (including extensions) for the tax year you place your property in service. State income tax e file 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). State income tax e file Attach the election to the amended return and write “Filed pursuant to section 301. State income tax e file 9100-2” on the election statement. State income tax e file File the amended return at the same address you filed the original return. State income tax e file Use of standard mileage rate. State income tax e file   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. State income tax e file See Publication 463 for a discussion of the standard mileage rate. State income tax e file What Is the Basis of Your Depreciable Property? To figure your depreciation deduction, you must determine the basis of your property. State income tax e file To determine basis, you need to know the cost or other basis of your property. State income tax e file 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. State income tax e file The cost includes the amount you pay in cash, debt obligations, other property, or services. State income tax e file Exception. State income tax e file   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). State income tax e file If you make that choice, you cannot include those sales taxes as part of your cost basis. State income tax e file Assumed debt. State income tax e file   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. State income tax e file Example. State income tax e file You make a $20,000 down payment on property and assume the seller's mortgage of $120,000. State income tax e file Your total cost is $140,000, the cash you paid plus the mortgage you assumed. State income tax e file Settlement costs. State income tax e file   The basis of real property also includes certain fees and charges you pay in addition to the purchase price. State income tax e file These generally are shown on your settlement statement and include the following. State income tax e file Legal and recording fees. State income tax e file Abstract fees. State income tax e file Survey charges. State income tax e file Owner's title insurance. State income tax e file 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. State income tax e file   For fees and charges you cannot include in the basis of property, see Real Property in Publication 551. State income tax e file Property you construct or build. State income tax e file   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. State income tax e file For information about the uniform capitalization rules, see Publication 551 and the regulations under section 263A of the Internal Revenue Code. State income tax e file Other Basis Other basis usually refers to basis that is determined by the way you received the property. State income tax e file 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. State income tax e file If you acquired property in this or some other way, see Publication 551 to determine your basis. State income tax e file Property changed from personal use. State income tax e file   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. State income tax e file The fair market value (FMV) of the property on the date of the change in use. State income tax e file Your original cost or other basis adjusted as follows. State income tax e file Increased by the cost of any permanent improvements or additions and other costs that must be added to basis. State income tax e file Decreased by any deductions you claimed for casualty and theft losses and other items that reduced your basis. State income tax e file Example. State income tax e file Several years ago, Nia paid $160,000 to have her home built on a lot that cost her $25,000. State income tax e file 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. State income tax e file Land is not depreciable, so she includes only the cost of the house when figuring the basis for depreciation. State income tax e file Nia's adjusted basis in the house when she changed its use was $178,000 ($160,000 + $20,000 − $2,000). State income tax e file 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. State income tax e file 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). State income tax e file Property acquired in a nontaxable transaction. State income tax e file   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. State income tax e file 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. State income tax e file See Like-kind exchanges and involuntary conversions. State income tax e file under How Much Can You Deduct? in chapter 3 and Figuring the Deduction for Property Acquired in a Nontaxable Exchange in chapter 4. State income tax e file   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. State income tax e file See How Do You Use General Asset Accounts in chapter 4. State income tax e file 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. State income tax e file These events could include the following. State income tax e file Installing utility lines. State income tax e file Paying legal fees for perfecting the title. State income tax e file Settling zoning issues. State income tax e file Receiving rebates. State income tax e file Incurring a casualty or theft loss. State income tax e file For a discussion of adjustments to the basis of your property, see Adjusted Basis in Publication 551. State income tax e file 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. State income tax e file For more information, see What Is the Basis for Depreciation in chapter 4. State income tax e file . State income tax e file Basis adjustment for depreciation allowed or allowable. State income tax e file   You must reduce the basis of property by the depreciation allowed or allowable, whichever is greater. State income tax e file Depreciation allowed is depreciation you actually deducted (from which you received a tax benefit). State income tax e file Depreciation allowable is depreciation you are entitled to deduct. State income tax e file   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. State income tax e file   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). State income tax e file How Do You Treat Repairs and Improvements? If you improve depreciable property, you must treat the improvement as separate depreciable property. State income tax e file 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. State income tax e file You generally deduct the cost of repairing business property in the same way as any other business expense. State income tax e file 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. State income tax e file Example. State income tax e file You repair a small section on one corner of the roof of a rental house. State income tax e file You deduct the cost of the repair as a rental expense. State income tax e file 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. State income tax e file You depreciate the cost of the new roof. State income tax e file Improvements to rented property. State income tax e file   You can depreciate permanent improvements you make to business property you rent from someone else. State income tax e file Do You Have To File Form 4562? Use Form 4562 to figure your deduction for depreciation and amortization. State income tax e file Attach Form 4562 to your tax return for the current tax year if you are claiming any of the following items. State income tax e file A section 179 deduction for the current year or a section 179 carryover from a prior year. State income tax e file See chapter 2 for information on the section 179 deduction. State income tax e file Depreciation for property placed in service during the current year. State income tax e file Depreciation on any vehicle or other listed property, regardless of when it was placed in service. State income tax e file See chapter 5 for information on listed property. State income tax e file 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). State income tax e file Amortization of costs if the current year is the first year of the amortization period. State income tax e file Depreciation or amortization on any asset on a corporate income tax return (other than Form 1120S, U. State income tax e file S. State income tax e file Income Tax Return for an S Corporation) regardless of when it was placed in service. State income tax e file You must submit a separate Form 4562 for each business or activity on your return for which a Form 4562 is required. State income tax e file Table 1-1 presents an overview of the purpose of the various parts of Form 4562. State income tax e file Employee. State income tax e file   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. State income tax e file Instead, use either Form 2106 or Form 2106-EZ. State income tax e file Use Form 2106-EZ if you are claiming the standard mileage rate and you are not reimbursed by your employer for any expenses. State income tax e file 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. State income tax e file See Filing an Amended Return , next. State income tax e file 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. State income tax e file See Changing Your Accounting Method , later. State income tax e file 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. State income tax e file You claimed the incorrect amount because of a mathematical error made in any year. State income tax e file You claimed the incorrect amount because of a posting error made in any year. State income tax e file You have not adopted a method of accounting for property placed in service by you in tax years ending after December 29, 2003. State income tax e file You claimed the incorrect amount on property placed in service by you in tax years ending before December 30, 2003. State income tax e file Adoption of accounting method defined. State income tax e file   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. State income tax e file   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. State income tax e file irs. State income tax e file gov/pub/irs-irbs/irb11-04. State income tax e file pdf. State income tax e file (Note. State income tax e file Revenue Procedure 2011-14 is clarified and modified by Revenue Procedure 2012-20. State income tax e file For more information, see Revenue Procedure 2012-20 on page 700 of the Internal Revenue Bulletin 2012-14, available at www. State income tax e file irs. State income tax e file gov/pub/irs-irbs/irb12-14. State income tax e file pdf. State income tax e file )   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. State income tax e file irs. State income tax e file gov/pub/irs-irbs/irb07-29. State income tax e file pdf. State income tax e file When to file. State income tax e file   If an amended return is allowed, you must file it by the later of the following. State income tax e file 3 years from the date you filed your original return for the year in which you did not deduct the correct amount. State income tax e file A return filed before an unextended due date is considered filed on that due date. State income tax e file 2 years from the time you paid your tax for that year. State income tax e file Changing Your Accounting Method Generally, you must get IRS approval to change your method of accounting. State income tax e file You generally must file Form 3115, Application for Change in Accounting Method, to request a change in your method of accounting for depreciation. State income tax e file The following are examples of a change in method of accounting for depreciation. State income tax e file 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. State income tax e file A change in the treatment of an asset from nondepreciable to depreciable or vice versa. State income tax e file A change in the depreciation method, period of recovery, or convention of a depreciable asset. State income tax e file A change from not claiming to claiming the special depreciation allowance if you did not make the election to not claim any special allowance. State income tax e file 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). State income tax e file Changes in depreciation that are not a change in method of accounting (and may only be made on an amended return) include the following. State income tax e file An adjustment in the useful life of a depreciable asset for which depreciation is determined under section 167. State income tax e file A change in use of an asset in the hands of the same taxpayer. State income tax e file Making a late depreciation election or revoking a timely valid depreciation election (including the election not to deduct the special depreciation allowance). State income tax e file 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. State income tax e file Generally, you must get IRS approval to make a late depreciation election or revoke a depreciation election. State income tax e file You must submit a request for a letter ruling to make a late election or revoke an election. State income tax e file Any change in the placed in service date of a depreciable asset. State income tax e file See section 1. State income tax e file 446-1(e)(2)(ii)(d) of the regulations for more information and examples. State income tax e file IRS approval. State income tax e file   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. State income tax e file 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. State income tax e file B. State income tax e file 680. State income tax e file Also see the Instructions for Form 3115 for more information on getting approval, including lists of scope limitations and automatic accounting method changes. State income tax e file Additional guidance. State income tax e file    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. State income tax e file irs. State income tax e file gov/pub/irs-irbs/irb11-04. State income tax e file pdf. State income tax e file (Note. State income tax e file Revenue Procedure 2011-14 is clarified and modified by Revenue Procedure 2012-20. State income tax e file For more information, see Revenue Procedure 2012-20 on page 700 of the Internal Revenue Bulletin 2012-14, available at www. State income tax e file irs. State income tax e file gov/pub/irs-irbs/irb12-14. State income tax e file pdf. State income tax e file )   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. State income tax e file irs. State income tax e file gov/pub/irs-irbs/irb07-29. State income tax e file pdf. State income tax e file Table 1-1. State income tax e file Purpose of Form 4562 This table describes the purpose of the various parts of Form 4562. State income tax e file For more information, see Form 4562 and its instructions. State income tax e file 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. State income tax e file   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. State income tax e file 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. State income tax e file If no depreciation was deducted, the adjustment is the total depreciation allowable prior to the year of change. State income tax e file A negative section 481(a) adjustment results in a decrease in taxable income. State income tax e file It is taken into account in the year of change and is reported on your business tax returns as “other expenses. State income tax e file ” A positive section 481(a) adjustment results in an increase in taxable income. State income tax e file It is generally taken into account over 4 tax years and is reported on your business tax returns as “other income. State income tax e file ” 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. State income tax e file Make the election by completing the appropriate line on Form 3115. State income tax e file   If you file a Form 3115 and change from one permissible method to another permissible method, the section 481(a) adjustment is zero. State income tax e file Prev  Up  Next   Home   More Online Publications
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The State Income Tax E File

State income tax e file 4. State income tax e file   Communications and Air Transportation Taxes Table of Contents Uncollected Tax Report Communications TaxLocal-only service. State income tax e file Private communication service. State income tax e file Exemptions Credits or Refunds Air Transportation TaxesTransportation of Persons by Air International Air Travel Facilities Transportation of Property by Air Special Rules on Transportation Taxes Excise taxes are imposed on amounts paid for certain facilities and services. State income tax e file If you receive any payment on which tax is imposed, you are required to collect the tax, file returns, and pay the tax over to the government. State income tax e file If you fail to collect and pay over the taxes, you may be liable for the trust fund recovery penalty. State income tax e file See chapter 14, later. State income tax e file Uncollected Tax Report A separate report is required to be filed by collecting agents of communications services and air transportation taxes if the person from whom the facilities or services tax (the tax) is required to be collected (the taxpayer) refuses to pay the tax, or it is impossible for the collecting agent to collect the tax. State income tax e file The report must contain the name and address of the taxpayer, the type of facility provided or service rendered, the amount paid for the facility or service (the amount on which the tax is based), and the date paid. State income tax e file Regular method taxpayers. State income tax e file   For regular method taxpayers, the report must be filed by the due date of the Form 720 on which the tax would have been reported. State income tax e file Alternative method taxpayers. State income tax e file   For alternative method taxpayers, the report must be filed by the due date of the Form 720 that includes an adjustment to the separate account for the uncollected tax. State income tax e file See Alternative method in  chapter 11. State income tax e file Where to file. State income tax e file    Do not file the uncollected tax report with Form 720. State income tax e file Instead, mail the report to: Internal Revenue Service Excise Tax Program SE:S:SP:EX MS C9-109 5000 Ellin Rd. State income tax e file  Lanham, MD 20706 Communications Tax A 3% tax is imposed on amounts paid for local telephone service and teletypewriter exchange service. State income tax e file Local telephone service. State income tax e file   This includes access to a local telephone system and the privilege of telephonic quality communication with most people who are part of the system. State income tax e file Local telephone service also includes any facility or services provided in connection with this service. State income tax e file The tax applies to lease payments for certain customer premises equipment (CPE) even though the lessor does not also provide access to a local telecommunications system. State income tax e file Local-only service. State income tax e file   Local-only service is local telephone service as described above, provided under a plan that does not include long distance telephone service or that separately states the charge for local service on the bill to customers. State income tax e file Local-only service also includes any facility or services provided in connection with this service, even though these services and facilities may also be used with long-distance service. State income tax e file Private communication service. State income tax e file   Private communication service is not local telephone service. State income tax e file Private communication service includes accessory-type services provided in connection with a Centrex, PBX, or other similar system for dual use accessory equipment. State income tax e file However, the charge for the service must be stated separately from the charge for the basic system, and the accessory must function, in whole or in part, in connection with intercommunication among the subscriber's stations. State income tax e file Teletypewriter exchange service. State income tax e file   This includes access from a teletypewriter or other data station to a teletypewriter exchange system and the privilege of intercommunication by that station with most persons having teletypewriter or other data stations in the same exchange system. State income tax e file Figuring the tax. State income tax e file   The tax is based on the sum of all charges for local telephone service included in the bill. State income tax e file However, if the bill groups individual items for billing and tax purposes, the tax is based on the sum of the individual items within that group. State income tax e file The tax on the remaining items not included in any group is based on the charge for each item separately. State income tax e file Do not include in the tax base state or local sales or use taxes that are separately stated on the taxpayer's bill. State income tax e file Exemptions Payments for certain services or payments from certain users are exempt from the communications tax. State income tax e file Nontaxable service. State income tax e file   Nontaxable service means bundled service and long distance service. State income tax e file Nontaxable service also includes pre-paid telephone cards and pre-paid cellular service. State income tax e file Bundled service. State income tax e file   Bundled service is local and long distance service provided under a plan that does not separately state the charge for the local telephone service. State income tax e file Bundled service includes plans that provide both local and long distance service for either a flat monthly fee or a charge that varies with the elapsed transmission time for which the service is used. State income tax e file Telecommunications companies provide bundled service for both landlines and wireless (cellular) service. State income tax e file If Voice over Internet Protocol service provides both local and long distance service and the charges are not separately stated, such service is bundled service. State income tax e file   The method for sending or receiving a call, such as on a landline telephone, wireless (cellular), or some other method, does not affect whether a service is local-only or bundled. State income tax e file Long distance service. State income tax e file   Long distance service is telephonic quality communication with persons whose telephones are outside the local telephone system of the caller. State income tax e file Pre-paid telephone cards (PTC). State income tax e file   A PTC will be treated as bundled service unless a PTC expressly states it is for local-only service. State income tax e file Generally, the person responsible for collecting the tax is the carrier who transfers the PTC to the transferee. State income tax e file The transferee is the first person that is not a carrier to whom a PTC is transferred by the carrier. State income tax e file The transferee is the person liable for the tax and is eligible to request a credit or refund. State income tax e file For more information, see Regulations section 49. State income tax e file 4251-4. State income tax e file   The holder is the person that purchases a PTC to use and not to resell. State income tax e file Holders are not liable for the tax and cannot request a credit or refund. State income tax e file Pre-paid cellular telephones. State income tax e file   Rules similar to the PTC rules described above apply to pre-paid cellular telephones. State income tax e file The transferee is the person eligible to request the credit or refund. State income tax e file Installation charges. State income tax e file   The tax does not apply to payments received for the installation of any instrument, wire, pole, switchboard, apparatus, or equipment. State income tax e file However, the tax does apply to payments for the repair or replacement of those items incidental to ordinary maintenance. State income tax e file Answering services. State income tax e file   The tax does not apply to amounts paid for a private line, an answering service, and a one-way paging or message service if they do not provide access to a local telephone system and the privilege of telephonic communication as part of the local telephone system. State income tax e file Mobile radio telephone service. State income tax e file   The tax does not apply to payments for a two-way radio service that does not provide access to a local telephone system. State income tax e file Coin-operated telephones. State income tax e file   The tax for local telephone service does not apply to payments made for services by inserting coins in public coin-operated telephones. State income tax e file But the tax applies if the coin-operated telephone service is furnished for a guaranteed amount. State income tax e file Figure the tax on the amount paid under the guarantee plus any fixed monthly or other periodic charge. State income tax e file Telephone-operated security systems. State income tax e file   The tax does not apply to amounts paid for telephones used only to originate calls to a limited number of telephone stations for security entry into a building. State income tax e file In addition, the tax does not apply to any amounts paid for rented communication equipment used in the security system. State income tax e file News services. State income tax e file   The tax on teletypewriter exchange service does not apply to charges for the following news services. State income tax e file Services dealing exclusively with the collection or dissemination of news for or through the public press or radio or television broadcasting. State income tax e file Services used exclusively in the collection or dissemination of news by a news ticker service furnishing a general news service similar to that of the public press. State income tax e file This exemption applies to payments received for messages from one member of the news media to another member (or to or from their bona fide correspondents). State income tax e file For the exemption to apply, the charge for these services must be billed in writing to the person paying for the service and that person must certify in writing that the services are used for an exempt purpose. State income tax e file Services not exempted. State income tax e file   The tax applies to amounts paid by members of the news media for local telephone service. State income tax e file International organizations and the American Red Cross. State income tax e file   The tax does not apply to communication services furnished to an international organization or to the American National Red Cross. State income tax e file Nonprofit hospitals. State income tax e file   The tax does not apply to telephone services furnished to income tax-exempt nonprofit hospitals for their use. State income tax e file Also, the tax does not apply to amounts paid by these hospitals to provide local telephone service in the homes of their personnel who must be reached during their off-duty hours. State income tax e file Nonprofit educational organizations. State income tax e file   The tax does not apply to payments received for services and facilities furnished to a nonprofit educational organization for its use. State income tax e file A nonprofit educational organization is one that satisfies all the following requirements. State income tax e file It normally maintains a regular faculty and curriculum. State income tax e file It normally has a regularly enrolled body of pupils or students in attendance at the place where its educational activities are regularly carried on. State income tax e file It is exempt from income tax under section 501(a). State income tax e file This includes a school operated by an organization exempt under section 501(c)(3) if the school meets the above qualifications. State income tax e file Qualified blood collector organizations. State income tax e file   The tax does not apply to telephone services furnished to qualified blood collector organizations for their use. State income tax e file A qualified blood collector organization is one that is: Described in section 501(c)(3) and exempt from tax under section 501(a), Primarily engaged in the activity of collecting human blood, Registered with the IRS, and Registered by the Food and Drug Administration to collect blood. State income tax e file Federal, state, and local government. State income tax e file   The tax does not apply to communication services provided to the government of the United States, the government of any state or its political subdivisions, the District of Columbia, or the United Nations. State income tax e file Treat an Indian tribal government as a state for the exemption from the communications tax only if the services involve the exercise of an essential tribal government function. State income tax e file Exemption certificate. State income tax e file   Any form of exemption certificate will be acceptable if it includes all the information required by the Internal Revenue Code and Regulations. State income tax e file See Regulations section 49. State income tax e file 4253-11. State income tax e file File the certificate with the provider of the communication services. State income tax e file An exemption certificate is not required for nontaxable services. State income tax e file   The following users that are exempt from the communications tax do not have to file an annual exemption certificate after they have filed the initial certificate to claim an exemption from the communications tax. State income tax e file The American National Red Cross and other international organizations. State income tax e file Nonprofit hospitals. State income tax e file Nonprofit educational organizations. State income tax e file Qualified blood collector organizations. State income tax e file State and local governments. State income tax e file   The federal government does not have to file any exemption certificate. State income tax e file   All other organizations must furnish exemption certificates when required. State income tax e file Credits or Refunds If tax is collected and paid over for nontaxable services, or for certain services or users exempt from the communications tax, the collector or taxpayer may claim a credit or refund if it has repaid the tax to the person from whom the tax was collected or obtained the consent of that person to the allowance of the credit or refund. State income tax e file Alternatively, the person who paid the tax may claim a refund. State income tax e file For more information on how to file for credits or refunds, see the Instructions for Form 720 or Form 8849. State income tax e file Collectors. State income tax e file   The collector may request a credit or refund if it has repaid the tax to the person from whom the tax was collected, or obtained the consent of that person to the allowance of the credit or refund. State income tax e file These requirements also apply to nontaxable service refunds. State income tax e file Collectors using the regular method for deposits. State income tax e file   Collectors using the regular method for deposits must use Form 720X to request a credit or refund if the collector has repaid the tax to the person from whom the tax was collected, or obtained the consent of that person to the allowance of the credit or refund. State income tax e file Collectors using the alternative method for deposits. State income tax e file   Collectors using the alternative method for deposits must adjust their separate accounts for the credit or refund if it has repaid the tax to the person from whom the tax was collected, or obtained the consent of that person to the allowance of the credit or refund. State income tax e file For more information, see the Instructions for Form 720. State income tax e file Air Transportation Taxes Taxes are imposed on amounts paid for: Transportation of persons by air, Use of international air travel facilities, and Transportation of property by air. State income tax e file Transportation of Persons by Air The tax on transportation of persons by air is made up of the: Percentage tax, and Domestic-segment tax. State income tax e file Percentage tax. State income tax e file   A tax of 7. State income tax e file 5% applies to amounts paid for taxable transportation of persons by air. State income tax e file Amounts paid for transportation include charges for layover or waiting time and movement of aircraft in deadhead service. State income tax e file Mileage awards. State income tax e file   The percentage tax may apply to an amount paid (in cash or in kind) to an air carrier (or any related person) for the right to provide mileage awards for, or other reductions in the cost of, any transportation of persons by air. State income tax e file For example, this applies to mileage awards purchased by credit card companies, telephone companies, restaurants, hotels, and other businesses. State income tax e file   Generally, the percentage tax does not apply to amounts paid for mileage awards where the mileage awards cannot, under any circumstances, be redeemed for air transportation that is subject to the tax. State income tax e file Until regulations are issued, the following rules apply to mileage awards. State income tax e file Amounts paid for mileage awards that cannot be redeemed for taxable transportation beginning and ending in the United States are not subject to the tax. State income tax e file For this rule, mileage awards issued by a foreign air carrier are considered to be usable only on that foreign air carrier and thus not redeemable for taxable transportation beginning and ending in the United States. State income tax e file Therefore, amounts paid to a foreign air carrier for mileage awards are not subject to the tax. State income tax e file Amounts paid by an air carrier to a domestic air carrier for mileage awards that can be redeemed for taxable transportation are not subject to the tax to the extent those miles will be awarded in connection with the purchase of taxable transportation. State income tax e file Amounts paid by an air carrier to a domestic air carrier for mileage awards that can be redeemed for taxable transportation are subject to the tax to the extent those miles will not be awarded in connection with the purchase of taxable transportation. State income tax e file Domestic-segment tax. State income tax e file   The domestic-segment tax is a flat dollar amount for each segment of taxable transportation for which an amount is paid. State income tax e file However, see Rural airports, later. State income tax e file A segment is a single takeoff and a single landing. State income tax e file The amount of the domestic-segment tax is in the Instructions for Form 720. State income tax e file Charter flights. State income tax e file    If an aircraft is chartered, the domestic-segment tax for each segment of taxable transportation is figured by multiplying the tax by the number of passengers transported on the aircraft. State income tax e file Rural airports. State income tax e file   The domestic-segment tax does not apply to a segment to or from a rural airport. State income tax e file An airport is a rural airport for a calendar year if fewer than 100,000 commercial passengers departed from the airport by air during the second preceding calendar year (the 100,000 passenger rule), and one of the following is true: The airport is not located within 75 miles of another airport from which 100,000 or more commercial passengers departed during the second preceding calendar year, The airport was receiving essential air service subsidies as of August 5, 1997, or The airport is not connected by paved roads to another airport. State income tax e file   To apply the 100,000 passenger rule to any airport described in (3) above, only count commercial passengers departing from the airport by air on flight segments of at least 100 miles. State income tax e file   An updated list of rural airports can be found on the Department of Transportation website at www. State income tax e file dot. State income tax e file gov and enter the phrase “Essential Air Service” in the search box. State income tax e file Taxable transportation. State income tax e file   Taxable transportation is transportation by air that meets either of the following tests. State income tax e file It begins and ends either in the United States or at any place in Canada or Mexico not more than 225 miles from the nearest point on the continental United States boundary (this is the 225-mile zone). State income tax e file It is directly or indirectly from one port or station in the United States to another port or station in the United States, but only if it is not a part of uninterrupted international air transportation, discussed later. State income tax e file Round trip. State income tax e file   A round trip is considered two separate trips. State income tax e file The first trip is from the point of departure to the destination. State income tax e file The second trip is the return trip from that destination. State income tax e file Uninterrupted international air transportation. State income tax e file   This means transportation entirely by air that does not begin and end in the United States or in the 225-mile zone if there is not more than a 12-hour scheduled interval between arrival and departure at any station in the United States. State income tax e file For a special rule that applies to military personnel, see Exemptions, later. State income tax e file Transportation between the continental U. State income tax e file S. State income tax e file and Alaska or Hawaii. State income tax e file   This transportation is partially exempt from the tax on transportation of persons by air. State income tax e file The tax does not apply to the part of the trip between the point at which the route of transportation leaves or enters the continental United States (or a port or station in the 225-mile zone) and the point at which it enters or leaves Hawaii or Alaska. State income tax e file Leaving or entering occurs when the route of the transportation passes over either the United States border or a point 3 nautical miles (3. State income tax e file 45 statute miles) from low tide on the coast line, or when it leaves a port or station in the 225-mile zone. State income tax e file Therefore, this transportation is subject to the percentage tax on the part of the trip in U. State income tax e file S. State income tax e file airspace, the domestic-segment tax for each domestic segment, and the tax on the use of international air travel facilities, discussed later. State income tax e file Transportation within Alaska or Hawaii. State income tax e file   The tax on transportation of persons by air applies to the entire fare paid in the case of flights between any of the Hawaiian Islands, and between any ports or stations in the Aleutian Islands or other ports or stations elsewhere in Alaska. State income tax e file The tax applies even though parts of the flights may be over international waters or over Canada, if no point on the direct line of transportation between the ports or stations is more than 225 miles from the United States (Hawaii or Alaska). State income tax e file Package tours. State income tax e file   The air transportation taxes apply to “complimentary” air transportation furnished solely to participants in package holiday tours. State income tax e file The amount paid for these package tours includes a charge for air transportation even though it may be advertised as “free. State income tax e file ” This rule also applies to the tax on the use of international air travel facilities, discussed later. State income tax e file Liability for tax. State income tax e file   The person paying for taxable transportation is liable for the tax and, ordinarily, the person receiving the payment collects the tax, files the returns, and pays the tax over to the government. State income tax e file However, if payment is made outside the United States for a prepaid order, exchange order, or similar order, the person furnishing the initial transportation provided for under that order must collect the tax. State income tax e file    A travel agency that is an independent broker and sells tours on aircraft that it charters must collect the transportation tax, file the returns, and pay the tax over to the government. State income tax e file However, a travel agency that sells tours as the agent of an airline must collect the tax and remit it to the airline for the filing of returns and for the payment of the tax over to the government. State income tax e file An independent third party that is not under the airline's supervision or control, but is acting on behalf of, and receiving compensation from, a passenger, is not required to collect the tax and pay it to the government. State income tax e file For more information on resellers of air transportation, see Revenue Ruling 2006-52. State income tax e file You can find Revenue Ruling 2006-52 on page 761 of I. State income tax e file R. State income tax e file B. State income tax e file 2006-43 at www. State income tax e file irs. State income tax e file gov/pub/irs-irbs/irb06-43. State income tax e file pdf. State income tax e file   The fact that the aircraft does not use public or commercial airports in taking off and landing has no effect on the tax. State income tax e file But see Certain helicopter uses, later. State income tax e file   For taxable transportation that begins and ends in the United States, the tax applies regardless of whether the payment is made in or outside the United States. State income tax e file   If the tax is not paid when payment for the transportation is made, the air carrier providing the initial segment of the transportation that begins or ends in the United States becomes liable for the tax. State income tax e file Exemptions. State income tax e file   The tax on transportation of persons by air does not apply in the following situations. State income tax e file See also Special Rules on Transportation Taxes, later. State income tax e file Military personnel on international trips. State income tax e file   When traveling in uniform at their own expense, United States military personnel on authorized leave are deemed to be traveling in uninterrupted international air transportation (defined earlier) even if the scheduled interval between arrival and departure at any station in the United States is actually more than 12 hours. State income tax e file However, such personnel must buy their tickets within 12 hours after landing at the first domestic airport and accept the first available accommodation of the type called for by their tickets. State income tax e file The trip must begin or end outside the United States and the 225-mile zone. State income tax e file Certain helicopter uses. State income tax e file   The tax does not apply to air transportation by helicopter if the helicopter is used for any of the following purposes. State income tax e file Transporting individuals, equipment, or supplies in the exploration for, or the development or removal of, hard minerals, oil, or gas. State income tax e file Planting, cultivating, cutting, transporting, or caring for trees (including logging operations). State income tax e file Providing emergency medical transportation. State income tax e file   However, during a use described in items (1) or (2), the tax applies if the helicopter takes off from, or lands at, a facility eligible for assistance under the Airport and Airway Development Act of 1970, or otherwise uses services provided under section 44509 or 44913(b) or subchapter I of chapter 471 of title 49, United States Code. State income tax e file For item (1), treat each flight segment as a separate flight. State income tax e file Fixed-wing aircraft uses. State income tax e file   The tax does not apply to air transportation by fixed-wing aircraft if the fixed-wing aircraft is used for any of the following purposes. State income tax e file Planting, cultivating, cutting, transporting, or caring for trees (including logging operations). State income tax e file Providing emergency medical transportation. State income tax e file The aircraft must be equipped for and exclusively dedicated on that flight to acute care emergency medical services. State income tax e file   However, during a use described in item (1), the tax applies if the fixed-wing aircraft takes off from, or lands at, a facility eligible for assistance under the Airport and Airway Development Act of 1970, or otherwise uses services provided under section 44509 or 44913(b) or subchapter I of chapter 471 of title 49, United States Code. State income tax e file Skydiving. State income tax e file   The tax does not apply to any air transportation exclusively for the purpose of skydiving. State income tax e file Seaplanes. State income tax e file   The tax does not apply to any air transportation by seaplane for any segment consisting of a takeoff from, and a landing on, water if the places where the takeoff and landing occur are not receiving financial assistance from the Airport and Airways Trust Fund. State income tax e file Bonus tickets. State income tax e file   The tax does not apply to free bonus tickets issued by an airline company to its customers who have satisfied all requirements to qualify for the bonus tickets. State income tax e file However, the tax applies to amounts paid by customers for advance bonus tickets when customers have traveled insufficient mileage to fully qualify for the free advance bonus tickets. State income tax e file International Air Travel Facilities A tax per person is imposed (whether in or outside the United States) for international flights that begin or end in the United States. State income tax e file However, for a domestic segment that begins or ends in Alaska or Hawaii, a reduced tax per person applies only to departures. State income tax e file This tax does not apply if all the transportation is subject to the percentage tax, discussed earlier. State income tax e file It also doesn't apply if the surtax on fuel used in a fractional ownership program aircraft (discussed earlier) is imposed. State income tax e file See the Instructions for Form 720 for the tax rates. State income tax e file Transportation of Property by Air A tax of 6. State income tax e file 25% is imposed on amounts paid (whether in or outside the United States) for transportation of property by air. State income tax e file The fact that the aircraft may not use public or commercial airports in taking off and landing has no effect on the tax. State income tax e file The tax applies only to amounts paid to a person engaged in the business of transporting property by air for hire. State income tax e file The tax applies only to transportation (including layover time and movement of aircraft in deadhead service) that begins and ends in the United States. State income tax e file Thus, the tax does not apply to transportation of property by air that begins or ends outside the United States. State income tax e file Exemptions. State income tax e file   The tax on transportation of property by air does not apply in the following situations. State income tax e file See also Special Rules on Transportation Taxes, later. State income tax e file Cropdusting and firefighting service. State income tax e file   The tax does not apply to amounts paid for cropdusting or aerial firefighting service. State income tax e file Exportation. State income tax e file    The tax does not apply to payments for transportation of property by air in the course of exportation (including to United States possessions) by continuous movement, as evidenced by the execution of Form 1363, Export Exemption Certificate. State income tax e file See Form 1363 for more information. State income tax e file Certain helicopter and fixed-wing air ambulance uses. State income tax e file   The tax does not apply to amounts paid for the use of helicopters in construction to set heating and air conditioning units on roofs of buildings, to dismantle tower cranes, and to aid in construction of power lines and ski lifts. State income tax e file   The tax also does not apply to air transportation by helicopter or fixed-wing aircraft for the purpose of providing emergency medical services. State income tax e file The fixed-wing aircraft must be equipped for and exclusively dedicated on that flight to acute care emergency medical services. State income tax e file Skydiving. State income tax e file   The tax does not apply to any air transportation exclusively for the purpose of skydiving. State income tax e file Excess baggage. State income tax e file    The tax does not apply to excess baggage accompanying a passenger on an aircraft operated on an established line. State income tax e file Surtax on fuel used in a fractional ownership program aircraft. State income tax e file   The tax does not apply if the surtax on fuel used in a fractional ownership program aircraft (discussed earlier) is imposed. State income tax e file Alaska and Hawaii. State income tax e file   For transportation of property to and from Alaska and Hawaii, the tax in general does not apply to the portion of the transportation that is entirely outside the continental United States (or the 225-mile zone if the aircraft departs from or arrives at an airport in the 225-mile zone). State income tax e file But the tax applies to flights between ports or stations in Alaska and the Aleutian Islands, as well as between ports or stations in Hawaii. State income tax e file The tax applies even though parts of the flights may be over international waters or over Canada, if no point on a line drawn from where the route of transportation leaves the United States (Alaska) to where it reenters the United States (Alaska) is more than 225 miles from the United States. State income tax e file Liability for tax. State income tax e file   The person paying for taxable transportation is liable for the tax and, ordinarily, the person engaged in the business of transporting property by air for hire receives the payment, collects the tax, files the returns, and pays the tax over to the government. State income tax e file   If tax is not paid when a payment is made outside the United States, the person furnishing the last segment of taxable transportation collects the tax from the person to whom the property is delivered in the United States. State income tax e file Special Rules on Transportation Taxes In certain circumstances, special rules apply to the taxes on transportation of persons and property by air. State income tax e file Aircraft used by affiliated corporations. State income tax e file   The taxes do not apply to payments received by one member of an affiliated group of corporations from another member for services furnished in connection with the use of an aircraft. State income tax e file However, the aircraft must be owned or leased by a member of the affiliated group and cannot be available for hire by a nonmember of the affiliated group. State income tax e file Determine whether an aircraft is available for hire by a nonmember of an affiliated group on a flight-by-flight basis. State income tax e file   For this rule, an affiliated group of corporations is any group of corporations connected with a common parent corporation through 80% or more of stock ownership. State income tax e file Small aircraft. State income tax e file   The taxes do not apply to transportation furnished by an aircraft having a maximum certificated takeoff weight of 6,000 pounds or less. State income tax e file However, the taxes do apply if the aircraft is operated on an established line. State income tax e file “Operated on an established line” means the aircraft operates with some degree of regularity between definite points. State income tax e file However, it does not include any time an aircraft is being operated on a flight that is solely for sightseeing. State income tax e file   Consider an aircraft to be operated on an established line if it is operated on a charter basis between two cities also served by that carrier on a regularly scheduled basis. State income tax e file   Also, the taxes apply if the aircraft is jet-powered, regardless of its maximum certificated takeoff weight or whether or not it is operated on an established line. State income tax e file Mixed load of persons and property. State income tax e file   If a single amount is paid for air transportation of persons and property, the payment must be allocated between the amount subject to the tax on transportation of persons and the amount subject to the tax on transportation of property. State income tax e file The allocation must be reasonable and supported by adequate records. State income tax e file Credits or refunds. State income tax e file   If tax is collected and paid over for air transportation that is not taxable air transportation, the collector may claim a credit or refund if it has repaid the tax to the person from whom the tax was collected or obtained the consent of that person to the allowance of the credit or refund. State income tax e file Alternatively, the person who paid the tax may claim a refund. State income tax e file For information on how to file for credits or refunds, see the Instructions for Form 720 or Form 8849. State income tax e file Prev  Up  Next   Home   More Online Publications