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State Return Tax Form 2013

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State Return Tax Form 2013

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

State return tax form 2013 Other Methods of Depreciation Table of Contents Topics - This chapter discusses: Useful Items - You may want to see: How To Figure the DeductionBasis Useful Life Salvage Value Methods To UseStraight Line Method Declining Balance Method Income Forecast Method How To Change Methods DispositionsSale or exchange. State return tax form 2013 Property not disposed of or abandoned. State return tax form 2013 Special rule for normal retirements from item accounts. State return tax form 2013 Abandoned property. State return tax form 2013 Single item accounts. State return tax form 2013 Multiple property account. State return tax form 2013 Topics - This chapter discusses: How to figure the deduction Methods to use How to change methods Dispositions Useful Items - You may want to see: Publication 544 Sales and Other Dispositions of Assets 551 Basis of Assets 583 Starting a Business and Keeping Records 946 How To Depreciate Property Form (and Instructions) 3115 Application for Change in Accounting Method 4562 Depreciation and Amortization Schedule C (Form 1040) Profit or Loss From Business If your property is being depreciated under ACRS, you must continue to use rules for depreciation that applied when you placed the property in service. State return tax form 2013 If your property qualified for MACRS, you must depreciate it under MACRS. State return tax form 2013 See Publication 946. State return tax form 2013 However, you cannot use MACRS for certain property because of special rules that exclude it from MACRS. State return tax form 2013 Also, you can elect to exclude certain property from being depreciated under MACRS. State return tax form 2013 Property that you cannot depreciate using MACRS includes: Intangible property, Property you can elect to exclude from MACRS that you properly depreciate under a method that is not based on a term of years, Certain public utility property, Any motion picture film or video tape, Any sound recording, and Certain real and personal property placed in service before 1987. State return tax form 2013 Intangible property. State return tax form 2013   You cannot depreciate intangible property under ACRS or MACRS. State return tax form 2013 You depreciate intangible property using any other reasonable method, usually, the straight line method. State return tax form 2013 Note. State return tax form 2013 The cost of certain intangible property that you acquire after August 10, 1993, must be amortized over a 15-year period. State return tax form 2013 For more information, see chapter 12 of Publication 535. State return tax form 2013 Public utility property. State return tax form 2013   The law excludes from MACRS any public utility property for which the taxpayer does not use a normalization method of accounting. State return tax form 2013 This type of property is subject to depreciation under a special rule. State return tax form 2013 Videocassettes. State return tax form 2013   If you are in the videocassette rental business, you can depreciate those videocassettes purchased for rental. State return tax form 2013 You can depreciate the cost less salvage value of those videocassettes that have a useful life over one year using either: The straight line method, or The income forecast method. State return tax form 2013 The straight line method, salvage value, and useful life are discussed later under Methods To Use. State return tax form 2013 You can deduct in the year of purchase as a business expense the cost of any cassette that has a useful life of one year or less. State return tax form 2013 How To Figure the Deduction Two other reasonable methods can be used to figure your deduction for property not covered under ACRS or MACRS. State return tax form 2013 These methods are straight line and declining balance. State return tax form 2013 To figure depreciation using these methods, you must generally determine three things about the property you intend to depreciate. State return tax form 2013 They are: The basis, The useful life, and The estimated salvage value at the end of its useful life. State return tax form 2013 The amount of the deduction in any year also depends on which method of depreciation you choose. State return tax form 2013 Basis To deduct the proper amount of depreciation each year, first determine your basis in the property you intend to depreciate. State return tax form 2013 The basis used for figuring depreciation is the same as the basis that would be used for figuring the gain on a sale. State return tax form 2013 Your original basis is usually the purchase price. State return tax form 2013 However, if you acquire property in some other way, such as inheriting it, getting it as a gift, or building it yourself, you have to figure your original basis in a different way. State return tax form 2013 Adjusted basis. State return tax form 2013   Events will often change the basis of property. State return tax form 2013 When this occurs, the changed basis is called the adjusted basis. State return tax form 2013 Some events, such as improvements you make, increase basis. State return tax form 2013 Events such as deducting casualty losses and depreciation decrease basis. State return tax form 2013 If basis is adjusted, the depreciation deduction may also have to be changed, depending on the reason for the adjustment and the method of depreciation you are using. State return tax form 2013   Publication 551 explains how to figure basis for property acquired in different ways. State return tax form 2013 It also discusses what items increase and decrease basis, how to figure adjusted basis, and how to allocate cost if you buy several pieces of property at one time. State return tax form 2013 Useful Life The useful life of a piece of property is an estimate of how long you can expect to use it in your trade or business, or to produce income. State return tax form 2013 It is the length of time over which you will make yearly depreciation deductions of your basis in the property. State return tax form 2013 It is how long it will continue to be useful to you, not how long the property will last. State return tax form 2013 Many things affect the useful life of property, such as: Frequency of use, Age when acquired, Your repair policy, and Environmental conditions. State return tax form 2013 The useful life can also be affected by technological improvements, progress in the arts, reasonably foreseeable economic changes, shifting of business centers, prohibitory laws, and other causes. State return tax form 2013 Consider all these factors before you arrive at a useful life for your property. State return tax form 2013 The useful life of the same type of property varies from user to user. State return tax form 2013 When you determine the useful life of your property, keep in mind your own experience with similar property. State return tax form 2013 You can use the general experience of the industry you are in until you are able to determine a useful life of your property from your own experience. State return tax form 2013 Change in useful life. State return tax form 2013   You base your estimate of useful life on certain facts. State return tax form 2013 If these facts change significantly, you can adjust your estimate of the remaining useful life. State return tax form 2013 However, you redetermine the estimated useful life only when the change is substantial and there is a clear reason for making the change. State return tax form 2013 Salvage Value It is important for you to accurately determine the correct salvage value of the property you want to depreciate. State return tax form 2013 You generally cannot depreciate property below a reasonable salvage value. State return tax form 2013 Determining salvage value. State return tax form 2013   Salvage value is the estimated value of property at the end of its useful life. State return tax form 2013 It is what you expect to get for the property if you sell it after you can no longer use it productively. State return tax form 2013 You must estimate the salvage value of a piece of property when you first acquire it. State return tax form 2013   Salvage value is affected both by how you use the property and how long you use it. State return tax form 2013 If it is your policy to dispose of property that is still in good operating condition, the salvage value can be relatively large. State return tax form 2013 However, if your policy is to use property until it is no longer usable, its salvage value can be its junk value. State return tax form 2013 Changing salvage value. State return tax form 2013   Once you determine the salvage value for property, you should not change it merely because prices have changed. State return tax form 2013 However, if you redetermine the useful life of property, as discussed earlier under Change in useful life, you can also redetermine the salvage value. State return tax form 2013 When you redetermine the salvage value, take into account the facts that exist at the time. State return tax form 2013 Net salvage. State return tax form 2013   Net salvage is the salvage value of property minus what it costs to remove it when you dispose of it. State return tax form 2013 You can choose either salvage value or net salvage when you figure depreciation. State return tax form 2013 You must consistently use the one you choose and the treatment of the costs of removal must be consistent with the practice adopted. State return tax form 2013 However, if the cost to remove the property is more than the estimated salvage value, then net salvage is zero. State return tax form 2013 Your salvage value can never be less than zero. State return tax form 2013 Ten percent rule. State return tax form 2013   If you acquire personal property that has a useful life of 3 years or more, you can use an amount for salvage value that is less than your actual estimate. State return tax form 2013 You can subtract from your estimate of salvage value an amount equal to 10% of your basis in the property. State return tax form 2013 If salvage value is less than 10% of basis, you can ignore salvage value when you figure depreciation. State return tax form 2013 Methods To Use Two methods of depreciation are the straight line and declining balance methods. State return tax form 2013 If ACRS or MACRS does not apply, you can use one of these methods. State return tax form 2013 The straight line and declining balance methods discussed in this section are not figured in the same way as straight line or declining balance methods under MACRS. State return tax form 2013 Straight Line Method Before 1981, you could use any reasonable method for every kind of depreciable property. State return tax form 2013 One of these methods was the straight line method. State return tax form 2013 This method was also used for intangible property. State return tax form 2013 It lets you deduct the same amount of depreciation each year. State return tax form 2013 To figure your deduction, determine the adjusted basis of your property, its salvage value, and its estimated useful life. State return tax form 2013 Subtract the salvage value, if any, from the adjusted basis. State return tax form 2013 The balance is the total amount of depreciation you can take over the useful life of the property. State return tax form 2013 Divide the balance by the number of years remaining in the useful life. State return tax form 2013 This gives you the amount of your yearly depreciation deduction. State return tax form 2013 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 return tax form 2013 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 return tax form 2013 Example. State return tax form 2013 In April 1994, Frank bought a franchise for $5,600. State return tax form 2013 It expires in 10 years. State return tax form 2013 This property is intangible property that cannot be depreciated under MACRS. State return tax form 2013 Frank depreciates the franchise under the straight line method, using a 10-year useful life and no salvage value. State return tax form 2013 He takes the $5,600 basis and divides that amount by 10 years ($5,600 ÷ 10 = $560, a full year's use). State return tax form 2013 He must prorate the $560 for his 9 months of use in 1994. State return tax form 2013 This gives him a deduction of $420 ($560 ÷ 9/12). State return tax form 2013 In 1995, Frank can deduct $560 for the full year. State return tax form 2013 Declining Balance Method The declining balance method allows you to recover a larger amount of the cost of the property in the early years of your use of the property. State return tax form 2013 The rate cannot be more than twice the straight line rate. State return tax form 2013 Rate of depreciation. State return tax form 2013   Under this method, you must determine your declining balance rate of depreciation. State return tax form 2013 The initial step is to: Divide the number 1 by the useful life of your property to get a straight line rate. State return tax form 2013 (For example, if property has a useful life of 5 years, its normal straight line rate of depreciation is ⅕, or 20%. State return tax form 2013 ) Multiply this straight line rate by a number that is more than 1 but not more than 2 to determine the declining balance rate. State return tax form 2013 Unless there is a change in the useful life during the time you depreciate the property, the rate of depreciation generally will not change. State return tax form 2013 Depreciation deductions. State return tax form 2013   After you determine the rate of depreciation, multiply the adjusted basis of the property by it. State return tax form 2013 This gives you the amount of your deduction. State return tax form 2013 For example, if your adjusted basis at the beginning of the first year is $10,000, and your declining balance rate is 20%, your depreciation deduction for the first year is $2,000 ($10,000 ÷ 20%). State return tax form 2013 To figure your depreciation deduction in the second year, you must first adjust the basis for the amount of depreciation you deducted in the first year. State return tax form 2013 Subtract the previous year's depreciation from your basis ($10,000 - $2,000 = $8,000). State return tax form 2013 Multiply this amount by the rate of depreciation ($8,000 ÷ 20% = $1,600). State return tax form 2013 Your depreciation deduction for the second year is $1,600. State return tax form 2013   As you can see from this example, your adjusted basis in the property gets smaller each year. State return tax form 2013 Also, under this method, deductions are larger in the earlier years and smaller in the later years. State return tax form 2013 You can make a change to the straight line method without consent. State return tax form 2013 Salvage value. State return tax form 2013   Do not subtract salvage value when you figure your yearly depreciation deductions under the declining balance method. State return tax form 2013 However, you cannot depreciate the property below its reasonable salvage value. State return tax form 2013 Determine salvage value using the rules discussed earlier, including the special 10% rule. State return tax form 2013 Example. State return tax form 2013 If your adjusted basis has been decreased to $1,000 and the rate of depreciation is 20%, your depreciation deduction should be $200. State return tax form 2013 But if your estimate of salvage value was $900, you can only deduct $100. State return tax form 2013 This is because $100 is the amount that would lower your adjusted basis to equal salvage value. State return tax form 2013 Income Forecast Method The income forecast method requires income projections for each videocassette or group of videocassettes. State return tax form 2013 You can group the videocassettes by title for making this projection. State return tax form 2013 You determine the depreciation by applying a fraction to the cost less salvage value of the cassette. State return tax form 2013 The numerator is the income from the videocassette for the tax year and the denominator is the total projected income for the cassette. State return tax form 2013 For more information on the income forecast method, see Revenue Ruling 60-358 in Cumulative Bulletin 1960, Volume 2, on page 68. State return tax form 2013 How To Change Methods In some cases, you may change your method of depreciation for property depreciated under a reasonable method. State return tax form 2013 If you change your method of depreciation, it is generally a change in your method of accounting. State return tax form 2013 You must get IRS consent before making the change. State return tax form 2013 However, you do not need permission for certain changes in your method of depreciation. State return tax form 2013 The rules discussed in this section do not apply to property depreciated under ACRS or MACRS. State return tax form 2013 For information on ACRS elections,see Revocation of election, in chapter 1 under Alternate ACRS Method. State return tax form 2013 Change to the straight line method. State return tax form 2013   You can change from the declining balance method to the straight line method at any time during the useful life of your property without IRS consent. State return tax form 2013 However, if you have a written agreement with the IRS that prohibits a change, you must first get IRS permission. State return tax form 2013 When the change is made, figure depreciation based on your adjusted basis in the property at that time. State return tax form 2013 Your adjusted basis takes into account all previous depreciation deductions. State return tax form 2013 Use the estimated remaining useful life of your property at the time of change and its estimated salvage value. State return tax form 2013   You can change from the declining balance method to straight line only on the original tax return for the year you first use the straight line method. State return tax form 2013 You cannot make the change on an amended return filed after the due date of the original return (including extensions). State return tax form 2013   When you make the change, attach a statement to your tax return showing: When you acquired the property, Its original cost or other original basis, The total amount claimed for depreciation and other allowances since you acquired it, Its salvage value and remaining useful life, and A description of the property and its use. State return tax form 2013   After you change to straight line, you cannot change back to the declining balance method or to any other method for a period of 10 years without written permission from the IRS. State return tax form 2013 Changes that require permission. State return tax form 2013   For most other changes in method of depreciation, you must get permission from the IRS. State return tax form 2013 To request a change in method of depreciation, file Form 3115. State return tax form 2013 File the application within the first 180 days of the tax year the change is to become effective. State return tax form 2013 In most cases, there is a user fee that must accompany Form 3115. State return tax form 2013 See the instructions for Form 3115 to determine if a fee is required. State return tax form 2013 Changes granted automatically. State return tax form 2013   The IRS automatically approves certain changes of a method of depreciation. State return tax form 2013 But, you must file Form 3115 for these automatic changes. State return tax form 2013   However, IRS can deny permission if Form 3115 is not filed on time. State return tax form 2013 For more information on automatic changes, see Revenue Procedure 74-11, 1974-1 C. State return tax form 2013 B. State return tax form 2013 420. State return tax form 2013 Changes for which approval is not automatic. State return tax form 2013   The automatic change procedures do not apply to: Property or an account where you made a change in depreciation within the last 10 tax years (unless the change was made under the Class Life System), Class Life Asset Depreciation Range System, and Public utility property. State return tax form 2013   You must request and receive permission for these changes. State return tax form 2013 To make the request, file Form 3115 during the first 180 days of the tax year for which you want the change to be effective. State return tax form 2013 Change from an improper method. State return tax form 2013   If the IRS disallows the method you are using, you do not need permission to change to a proper method. State return tax form 2013 You can adopt the straight line method, or any other method that would have been permitted if you had used it from the beginning. State return tax form 2013 If you file your tax return using an improper method, but later file an amended return, you can use a proper method on the amended return without getting IRS permission. State return tax form 2013 However, you must file the amended return before the filing date for the next tax year. State return tax form 2013 Dispositions Retirement is the permanent withdrawal of depreciable property from use in your trade or business or for the production of income. State return tax form 2013 You can do this by selling, exchanging, or abandoning the item of property. State return tax form 2013 You can also withdraw it from use without disposing of it. State return tax form 2013 For example, you could place it in a supplies or scrap account. State return tax form 2013 Retirements can be either normal or abnormal depending on all facts and circumstances. State return tax form 2013 The rules discussed next do not apply to MACRS and ACRS property. State return tax form 2013 Normal retirement. State return tax form 2013   A normal retirement is a permanent withdrawal of depreciable property from use if the following apply: The retirement is made within the useful life you estimated originally, and The property has reached a condition at which you customarily retire or would retire similar property from use. State return tax form 2013 A retirement is generally considered normal unless you can show that you retired the property because of a reason you did not consider when you originally estimated the useful life of the property. State return tax form 2013 Abnormal retirement. State return tax form 2013   A retirement can be abnormal if you withdraw the property early or under other circumstances. State return tax form 2013 For example, if the property is damaged by a fire or suddenly becomes obsolete and is now useless. State return tax form 2013 Gain or loss on retirement. State return tax form 2013   There are special rules for figuring the gain or loss on retirement of property. State return tax form 2013 The gain or loss will depend on several factors. State return tax form 2013 These include the type of withdrawal, if the withdrawal was from a single property or multiple property account, and if the retirement was normal or abnormal. State return tax form 2013 A single property account contains only one item of property. State return tax form 2013 A multiple property account is one in which several items have been combined with a single rate of depreciation assigned to the entire account. State return tax form 2013 Sale or exchange. State return tax form 2013   If property is retired by sale or exchange, you figure gain or loss by the usual rules that apply to sales or other dispositions of property. State return tax form 2013 See Publication 544. State return tax form 2013 Property not disposed of or abandoned. State return tax form 2013   If property is retired permanently, but not disposed of or physically abandoned, you do not recognize gain. State return tax form 2013 You are allowed a loss in such a case, but only if the retirement is: An abnormal retirement, A normal retirement from a single property account in which you determined the life of each item of property separately, or A normal retirement from a multiple property account in which the depreciation rate is based on the maximum expected life of the longest lived item of property and the loss occurs before the expiration of the full useful life. State return tax form 2013 However, you are not allowed a loss if the depreciation rate is based on the average useful life of the items of property in the account. State return tax form 2013   To figure your loss, subtract the estimated salvage or fair market value of the property at the date of retirement, whichever is more, from its adjusted basis. State return tax form 2013 Special rule for normal retirements from item accounts. State return tax form 2013   You can generally deduct losses upon retirement of a few depreciable items of property with similar useful lives, if: You account for each one in a separate account, and You use the average useful life to figure depreciation. State return tax form 2013 However, you cannot deduct losses if you use the average useful life to figure depreciation and they have a wide range of useful lives. State return tax form 2013   If you have a large number of depreciable property items and use average useful lives to figure depreciation, you cannot deduct the losses upon normal retirements from these accounts. State return tax form 2013 Abandoned property. State return tax form 2013   If you physically abandon property, you can deduct as a loss the adjusted basis of the property at the time of its abandonment. State return tax form 2013 However, your intent must be to discard the property so that you will not use it again or retrieve it for sale, exchange, or other disposition. State return tax form 2013 Basis of property retired. State return tax form 2013   The basis for figuring gain or loss on the retirement of property is its adjusted basis at the time of retirement, as determined in the following discussions. State return tax form 2013 Single item accounts. State return tax form 2013   If an item of property is accounted for in a single item account, the adjusted basis is the basis you would use to figure gain or loss for a sale or exchange of the property. State return tax form 2013 This is generally the cost or other basis of the item of property less depreciation. State return tax form 2013 See Publication 551. State return tax form 2013 Multiple property account. State return tax form 2013   For a normal retirement from a multiple property account, if you figured depreciation using the average expected useful life, the adjusted basis is the salvage value estimated for the item of property when it was originally acquired. State return tax form 2013 If you figured depreciation using the maximum expected useful life of the longest lived item of property in the account, you must use the depreciation method used for the multiple property account and a rate based on the maximum expected useful life of the item of property retired. State return tax form 2013   You make the adjustment for depreciation for an abnormal retirement from a multiple property account at the rate that would be proper if the item of property was depreciated in a single property account. State return tax form 2013 The method of depreciation used for the multiple property account is used. State return tax form 2013 You base the rate on either the average expected useful life or the maximum expected useful life of the retired item of property, depending on the method used to determine the depreciation rate for the multiple property account. State return tax form 2013 Prev  Up  Next   Home   More Online Publications