Filing Your Taxes Online is Fast, Easy and Secure.
Start now and receive your tax refund in as little as 7 days.

1. Get Answers

Your online questions are customized to your unique tax situation.

2. Maximize your Refund

Find tax credits for everything from school tuition to buying a hybri

3. E-File for FREE

E-file free with direct deposit to get your refund in as few as 7 days.

Filing your taxes with paper mail can be difficult and it could take weeks for your refund to arrive. IRS e-file is easy, fast and secure. There is no paperwork going to the IRS so tax refunds can be processed in as little as 7 days with direct deposit. As you prepare your taxes online, you can see your tax refund in real time.

FREE audit support and representation from an enrolled agent – NEW and only from H&R Block

Tax Planning Us 1040

Amend 2011 Federal Tax ReturnCheap Tax Software2011 Tax Software DownloadHow To Do An Amended Tax ReturnLate TaxFiling 2010 Taxes Late Online FreeFiling Back Tax ReturnsHow Do I Ammend A Tax ReturnFree 2006 Tax SoftwareFree Tax Filing For Low Income FamiliesAmend Tax Return Online FreeFile State Taxes Online Free2005 Tax Forms1040 Tax FormTaxes For 2011Free Tax FilingFile Amended Tax Return FreeHow To E File State Taxes For FreeState Tax HelpFree 2008 Tax SoftwareFile 2011 Taxes Online Turbotax1040ez Tax Form 2011File 2009 Taxes Online Free2012 State Taxes Online Free2011 Form 1040Back Tax2010 Income TaxFile Taxes Online Free StateFree E File State Tax ReturnTurbotax 2007 FreeDo State Taxes For FreeWww Irs Gov ComHow To Amend 1040State Tax Forms Free1040 Tax FormsFiling Income Tax ReturnFile 2012 Taxes Online FreeH&rblock Com1040ez Forms 20132007 Income Tax Online

Tax Planning Us 1040

Tax planning us 1040 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. Tax planning us 1040 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. Tax planning us 1040 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. Tax planning us 1040 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. Tax planning us 1040 However, a joint undertaking merely to share expenses is not a partnership. Tax planning us 1040 For example, co-ownership of property maintained and rented or leased is not a partnership unless the co-owners provide services to the tenants. Tax planning us 1040 The rules you must use to determine whether an organization is classified as a partnership changed for organizations formed after 1996. Tax planning us 1040 Organizations formed after 1996. Tax planning us 1040   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. Tax planning us 1040 An organization formed under a federal or state law that refers to it as incorporated or as a corporation, body corporate, or body politic. Tax planning us 1040 An organization formed under a state law that refers to it as a joint-stock company or joint-stock association. Tax planning us 1040 An insurance company. Tax planning us 1040 Certain banks. Tax planning us 1040 An organization wholly owned by a state, local, or foreign government. Tax planning us 1040 An organization specifically required to be taxed as a corporation by the Internal Revenue Code (for example, certain publicly traded partnerships). Tax planning us 1040 Certain foreign organizations identified in section 301. Tax planning us 1040 7701-2(b)(8) of the regulations. Tax planning us 1040 A tax-exempt organization. Tax planning us 1040 A real estate investment trust. Tax planning us 1040 An organization classified as a trust under section 301. Tax planning us 1040 7701-4 of the regulations or otherwise subject to special treatment under the Internal Revenue Code. Tax planning us 1040 Any other organization that elects to be classified as a corporation by filing Form 8832. Tax planning us 1040 For more information, see the instructions for Form 8832. Tax planning us 1040 Limited liability company. Tax planning us 1040   A limited liability company (LLC) is an entity formed under state law by filing articles of organization as an LLC. Tax planning us 1040 Unlike a partnership, none of the members of an LLC are personally liable for its debts. Tax planning us 1040 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. Tax planning us 1040 7701-3. Tax planning us 1040 See Form 8832 and section 301. Tax planning us 1040 7701-3 of the regulations for more details. Tax planning us 1040 A domestic LLC with at least two members that does not file Form 8832 is classified as a partnership for federal income tax purposes. Tax planning us 1040 Organizations formed before 1997. Tax planning us 1040   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. Tax planning us 1040 Community property. Tax planning us 1040    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. Tax planning us 1040 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. Tax planning us 1040 A change in reporting position will be treated for federal tax purposes as a conversion of the entity. Tax planning us 1040   A qualified entity is a business entity that meets all the following requirements. Tax planning us 1040 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. Tax planning us 1040 No person other than one or both spouses would be considered an owner for federal tax purposes. Tax planning us 1040 The business entity is not treated as a corporation. Tax planning us 1040   For more information about community property, see Publication 555, Community Property. Tax planning us 1040 Publication 555 discusses the community property laws of Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. Tax planning us 1040 Family Partnership Members of a family can be partners. Tax planning us 1040 However, family members (or any other person) will be recognized as partners only if one of the following requirements is met. Tax planning us 1040 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. Tax planning us 1040 If capital is not a material income-producing factor, they joined together in good faith to conduct a business. Tax planning us 1040 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. Tax planning us 1040 Capital is material. Tax planning us 1040   Capital is a material income-producing factor if a substantial part of the gross income of the business comes from the use of capital. Tax planning us 1040 Capital is ordinarily an income-producing factor if the operation of the business requires substantial inventories or investments in plants, machinery, or equipment. Tax planning us 1040 Capital is not material. Tax planning us 1040   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. Tax planning us 1040 Capital interest. Tax planning us 1040   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. Tax planning us 1040 The owner withdraws from the partnership. Tax planning us 1040 The partnership liquidates. Tax planning us 1040   The mere right to share in earnings and profits is not a capital interest in the partnership. Tax planning us 1040 Gift of capital interest. Tax planning us 1040   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. Tax planning us 1040 It must be figured by reducing the partnership income by reasonable compensation for services the donor renders to the partnership. Tax planning us 1040 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. Tax planning us 1040 Purchase. Tax planning us 1040   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. Tax planning us 1040 The fair market value of the purchased interest is considered donated capital. Tax planning us 1040 For this purpose, members of a family include only spouses, ancestors, and lineal descendants (or a trust for the primary benefit of those persons). Tax planning us 1040 Example. Tax planning us 1040 A father sold 50% of his business to his son. Tax planning us 1040 The resulting partnership had a profit of $60,000. Tax planning us 1040 Capital is a material income-producing factor. Tax planning us 1040 The father performed services worth $24,000, which is reasonable compensation, and the son performed no services. Tax planning us 1040 The $24,000 must be allocated to the father as compensation. Tax planning us 1040 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. Tax planning us 1040 The son's share of partnership profit cannot be more than $18,000. Tax planning us 1040 Business owned and operated by spouses. Tax planning us 1040   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. Tax planning us 1040 If so, they should report income or loss from the business on Form 1065. Tax planning us 1040 They should not report the income on a Schedule C (Form 1040) in the name of one spouse as a sole proprietor. Tax planning us 1040 However, the spouses can elect not to treat the joint venture as a partnership by making a Qualified Joint Venture Election. Tax planning us 1040 Qualified Joint Venture Election. Tax planning us 1040   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. Tax planning us 1040 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. Tax planning us 1040   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. Tax planning us 1040 All items of income, gain, deduction, loss, and credit are divided between the spouses based on their respective interests in the venture. Tax planning us 1040 Each spouse takes into account his or her respective share of these items as a sole proprietor. Tax planning us 1040 Each spouse would account for his or her respective share on the appropriate form, such as Schedule C (Form 1040). Tax planning us 1040 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. Tax planning us 1040 e. Tax planning us 1040 , based on their respective interests in the venture). Tax planning us 1040   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. Tax planning us 1040 Each spouse should include his or her respective share of self-employment income on a separate Schedule SE (Form 1040), Self-Employment Tax. Tax planning us 1040   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. Tax planning us 1040 However, this may not be true if either spouse exceeds the social security tax limitation. Tax planning us 1040   For more information on qualified joint ventures, go to IRS. Tax planning us 1040 gov, enter “Election for Qualified Joint Ventures” in the search box and select the link reading “Election for Husband and Wife Unincorporated Businesses. Tax planning us 1040 ” Partnership Agreement The partnership agreement includes the original agreement and any modifications. Tax planning us 1040 The modifications must be agreed to by all partners or adopted in any other manner provided by the partnership agreement. Tax planning us 1040 The agreement or modifications can be oral or written. Tax planning us 1040 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. Tax planning us 1040 This filing date does not include any extension of time. Tax planning us 1040 If the partnership agreement or any modification is silent on any matter, the provisions of local law are treated as part of the agreement. Tax planning us 1040 Terminating a Partnership A partnership terminates when one of the following events takes place. Tax planning us 1040 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. Tax planning us 1040 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. Tax planning us 1040 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. Tax planning us 1040 See section 1. Tax planning us 1040 708-1(b) of the regulations for more information on the termination of a partnership. Tax planning us 1040 For special rules that apply to a merger, consolidation, or division of a partnership, see sections 1. Tax planning us 1040 708-1(c) and 1. Tax planning us 1040 708-1(d) of the regulations. Tax planning us 1040 Date of termination. Tax planning us 1040   The partnership's tax year ends on the date of termination. Tax planning us 1040 For the event described in (1), above, the date of termination is the date the partnership completes the winding up of its affairs. Tax planning us 1040 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. Tax planning us 1040 Short period return. Tax planning us 1040   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. Tax planning us 1040 The return is due the 15th day of the fourth month following the date of termination. Tax planning us 1040 See Partnership Return (Form 1065), later, for information about filing Form 1065. Tax planning us 1040 Conversion of partnership into limited liability company (LLC). Tax planning us 1040   The conversion of a partnership into an LLC classified as a partnership for federal tax purposes does not terminate the partnership. Tax planning us 1040 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. Tax planning us 1040   However, the conversion may change some of the partners' bases in their partnership interests if the partnership has recourse liabilities that become nonrecourse liabilities. Tax planning us 1040 Because the partners share recourse and nonrecourse liabilities differently, their bases must be adjusted to reflect the new sharing ratios. Tax planning us 1040 If a decrease in a partner's share of liabilities exceeds the partner's basis, he or she must recognize gain on the excess. Tax planning us 1040 For more information, see Effect of Partnership Liabilities under Basis of Partner's Interest, later. Tax planning us 1040   The same rules apply if an LLC classified as a partnership is converted into a partnership. Tax planning us 1040 IRS e-file (Electronic Filing) Please click here for the text description of the image. Tax planning us 1040 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). Tax planning us 1040 Other partnerships generally have the option to file electronically. Tax planning us 1040 For details about IRS e-file, see the Form 1065 instructions. Tax planning us 1040 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. Tax planning us 1040 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. Tax planning us 1040 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. Tax planning us 1040 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. Tax planning us 1040 Investing partnership. Tax planning us 1040   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. Tax planning us 1040 They own the property as co-owners. Tax planning us 1040 They reserve the right separately to take or dispose of their shares of any property acquired or retained. Tax planning us 1040 They do not actively conduct business or irrevocably authorize some person acting in a representative capacity to purchase, sell, or exchange the investment property. Tax planning us 1040 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. Tax planning us 1040 Operating agreement partnership. Tax planning us 1040   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. Tax planning us 1040 They own the property as co-owners, either in fee or under lease or other form of contract granting exclusive operating rights. Tax planning us 1040 They reserve the right separately to take in kind or dispose of their shares of any property produced, extracted, or used. Tax planning us 1040 They do not jointly sell services or the property produced or extracted. Tax planning us 1040 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. Tax planning us 1040 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. Tax planning us 1040 Electing the exclusion. Tax planning us 1040   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. Tax planning us 1040 This filing date includes any extension of time. Tax planning us 1040 See Regulations section 1. Tax planning us 1040 761-2(b) for the procedures to follow. Tax planning us 1040 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. Tax planning us 1040 The partnership return must show the names and addresses of each partner and each partner's distributive share of taxable income. Tax planning us 1040 The return must be signed by a general partner. Tax planning us 1040 If a limited liability company is treated as a partnership, it must file Form 1065 and one of its members must sign the return. Tax planning us 1040 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. Tax planning us 1040 See the Instructions for Form 1065 for more information about who must file Form 1065. Tax planning us 1040 Partnership Distributions Partnership distributions include the following. Tax planning us 1040 A withdrawal by a partner in anticipation of the current year's earnings. Tax planning us 1040 A distribution of the current year's or prior years' earnings not needed for working capital. Tax planning us 1040 A complete or partial liquidation of a partner's interest. Tax planning us 1040 A distribution to all partners in a complete liquidation of the partnership. Tax planning us 1040 A partnership distribution is not taken into account in determining the partner's distributive share of partnership income or loss. Tax planning us 1040 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. Tax planning us 1040 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. Tax planning us 1040 Effect on partner's basis. Tax planning us 1040   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. Tax planning us 1040 See Adjusted Basis under Basis of Partner's Interest, later. Tax planning us 1040 Effect on partnership. Tax planning us 1040   A partnership generally does not recognize any gain or loss because of distributions it makes to partners. Tax planning us 1040 The partnership may be able to elect to adjust the basis of its undistributed property. Tax planning us 1040 Certain distributions treated as a sale or exchange. Tax planning us 1040   When a partnership distributes the following items, the distribution may be treated as a sale or exchange of property rather than a distribution. Tax planning us 1040 Unrealized receivables or substantially appreciated inventory items distributed in exchange for any part of the partner's interest in other partnership property, including money. Tax planning us 1040 Other property (including money) distributed in exchange for any part of a partner's interest in unrealized receivables or substantially appreciated inventory items. Tax planning us 1040   See Payments for Unrealized Receivables and Inventory Items under Disposition of Partner's Interest, later. Tax planning us 1040   This treatment does not apply to the following distributions. Tax planning us 1040 A distribution of property to the partner who contributed the property to the partnership. Tax planning us 1040 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. Tax planning us 1040 Substantially appreciated inventory items. Tax planning us 1040   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. Tax planning us 1040 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. Tax planning us 1040 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. Tax planning us 1040 Any gain recognized is generally treated as capital gain from the sale of the partnership interest on the date of the distribution. Tax planning us 1040 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. Tax planning us 1040 For exceptions to these rules, see Distribution of partner's debt and Net precontribution gain, later. Tax planning us 1040 Also, see Payments for Unrealized Receivables and Inventory Items under Disposition of Partner's Interest, later. Tax planning us 1040 Example. Tax planning us 1040 The adjusted basis of Jo's partnership interest is $14,000. Tax planning us 1040 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. Tax planning us 1040 Because the cash received does not exceed the basis of her partnership interest, Jo does not recognize any gain on the distribution. Tax planning us 1040 Any gain on the land will be recognized when she sells or otherwise disposes of it. Tax planning us 1040 The distribution decreases the adjusted basis of Jo's partnership interest to $4,000 [$14,000 − ($8,000 + $2,000)]. Tax planning us 1040 Marketable securities treated as money. Tax planning us 1040   Generally, a marketable security distributed to a partner is treated as money in determining whether gain is recognized on the distribution. Tax planning us 1040 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. Tax planning us 1040   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). Tax planning us 1040   For more information, including the definition of marketable securities, see section 731(c) of the Internal Revenue Code. Tax planning us 1040 Loss on distribution. Tax planning us 1040   A partner does not recognize loss on a partnership distribution unless all the following requirements are met. Tax planning us 1040 The adjusted basis of the partner's interest in the partnership exceeds the distribution. Tax planning us 1040 The partner's entire interest in the partnership is liquidated. Tax planning us 1040 The distribution is in money, unrealized receivables, or inventory items. Tax planning us 1040   There are exceptions to these general rules. Tax planning us 1040 See the following discussions. Tax planning us 1040 Also, see Liquidation at Partner's Retirement or Death under Disposition of Partner's Interest, later. Tax planning us 1040 Distribution of partner's debt. Tax planning us 1040   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). Tax planning us 1040   The partner is treated as having satisfied the debt for its fair market value. Tax planning us 1040 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. Tax planning us 1040   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. Tax planning us 1040 Net precontribution gain. Tax planning us 1040   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. Tax planning us 1040   The gain recognized is the lesser of the following amounts. Tax planning us 1040 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. Tax planning us 1040 The “net precontribution gain” of the partner. Tax planning us 1040 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. Tax planning us 1040 For information about the distribution of contributed property to another partner, see Contribution of Property , under Transactions Between Partnership and Partners, later. Tax planning us 1040   The character of the gain is determined by reference to the character of the net precontribution gain. Tax planning us 1040 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. Tax planning us 1040 For these rules, the term “money” includes marketable securities treated as money, as discussed earlier. Tax planning us 1040 Effect on basis. Tax planning us 1040   The adjusted basis of the partner's interest in the partnership is increased by any net precontribution gain recognized by the partner. Tax planning us 1040 Other than for purposes of determining the gain, the increase is treated as occurring immediately before the distribution. Tax planning us 1040 See Basis of Partner's Interest , later. Tax planning us 1040   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. Tax planning us 1040 Exceptions. Tax planning us 1040   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. Tax planning us 1040 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. Tax planning us 1040   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. Tax planning us 1040 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. Tax planning us 1040 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. Tax planning us 1040 Example 1. Tax planning us 1040 The adjusted basis of Emily's partnership interest is $30,000. Tax planning us 1040 She receives a distribution of property that has an adjusted basis of $20,000 to the partnership and $4,000 in cash. Tax planning us 1040 Her basis for the property is $20,000. Tax planning us 1040 Example 2. Tax planning us 1040 The adjusted basis of Steve's partnership interest is $10,000. Tax planning us 1040 He receives a distribution of $4,000 cash and property that has an adjusted basis to the partnership of $8,000. Tax planning us 1040 His basis for the distributed property is limited to $6,000 ($10,000 − $4,000, the cash he receives). Tax planning us 1040 Complete liquidation of partner's interest. Tax planning us 1040   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. Tax planning us 1040 Partner's holding period. Tax planning us 1040   A partner's holding period for property distributed to the partner includes the period the property was held by the partnership. Tax planning us 1040 If the property was contributed to the partnership by a partner, then the period it was held by that partner is also included. Tax planning us 1040 Basis divided among properties. Tax planning us 1040   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. Tax planning us 1040 For property distributed after August 5, 1997, allocate the basis using the following rules. Tax planning us 1040 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. Tax planning us 1040 If the total of these assigned bases exceeds the allocable basis, decrease the assigned bases by the amount of the excess. Tax planning us 1040 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. Tax planning us 1040 If the allocable basis exceeds the total of these assigned bases, increase the assigned bases by the amount of the excess. Tax planning us 1040 If the total of these assigned bases exceeds the allocable basis, decrease the assigned bases by the amount of the excess. Tax planning us 1040 Allocating a basis increase. Tax planning us 1040   Allocate any basis increase required in rule (2), above, first to properties with unrealized appreciation to the extent of the unrealized appreciation. Tax planning us 1040 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. Tax planning us 1040 Allocate any remaining basis increase among all the properties in proportion to their respective fair market values. Tax planning us 1040 Example. Tax planning us 1040 Eun's basis in her partnership interest is $55,000. Tax planning us 1040 In a distribution in liquidation of her entire interest, she receives properties A and B, neither of which is inventory or unrealized receivables. Tax planning us 1040 Property A has an adjusted basis to the partnership of $5,000 and a fair market value of $40,000. Tax planning us 1040 Property B has an adjusted basis to the partnership of $10,000 and a fair market value of $10,000. Tax planning us 1040 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). Tax planning us 1040 This leaves a $40,000 basis increase (the $55,000 allocable basis minus the $15,000 total of the assigned bases). Tax planning us 1040 She first allocates $35,000 to property A (its unrealized appreciation). Tax planning us 1040 The remaining $5,000 is allocated between the properties based on their fair market values. Tax planning us 1040 $4,000 ($40,000/$50,000) is allocated to property A and $1,000 ($10,000/$50,000) is allocated to property B. Tax planning us 1040 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). Tax planning us 1040 Allocating a basis decrease. Tax planning us 1040   Use the following rules to allocate any basis decrease required in rule (1) or rule (2), earlier. Tax planning us 1040 Allocate the basis decrease first to items with unrealized depreciation to the extent of the unrealized depreciation. Tax planning us 1040 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. Tax planning us 1040 Allocate any remaining basis decrease among all the items in proportion to their respective assigned basis amounts (as decreased in (1)). Tax planning us 1040 Example. Tax planning us 1040 Armando's basis in his partnership interest is $20,000. Tax planning us 1040 In a distribution in liquidation of his entire interest, he receives properties C and D, neither of which is inventory or unrealized receivables. Tax planning us 1040 Property C has an adjusted basis to the partnership of $15,000 and a fair market value of $15,000. Tax planning us 1040 Property D has an adjusted basis to the partnership of $15,000 and a fair market value of $5,000. Tax planning us 1040 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). Tax planning us 1040 This leaves a $10,000 basis decrease (the $30,000 total of the assigned bases minus the $20,000 allocable basis). Tax planning us 1040 He allocates the entire $10,000 to property D (its unrealized depreciation). Tax planning us 1040 Armando's basis in property C is $15,000 and his basis in property D is $5,000 ($15,000 − $10,000). Tax planning us 1040 Distributions before August 6, 1997. Tax planning us 1040   For property distributed before August 6, 1997, allocate the basis using the following rules. Tax planning us 1040 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. Tax planning us 1040 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. Tax planning us 1040 Allocate any remaining basis to other distributed properties in proportion to their adjusted bases to the partnership. Tax planning us 1040 Partner's interest more than partnership basis. Tax planning us 1040   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. Tax planning us 1040 Special adjustment to basis. Tax planning us 1040   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. Tax planning us 1040 To choose the special adjustment, the partner must have received the distribution within 2 years after acquiring the partnership interest. Tax planning us 1040 Also, the partnership must not have chosen the optional adjustment to basis when the partner acquired the partnership interest. Tax planning us 1040   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. Tax planning us 1040 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. Tax planning us 1040   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. Tax planning us 1040 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. Tax planning us 1040   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. Tax planning us 1040 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. Tax planning us 1040 Example. Tax planning us 1040 Chin Ho purchased a 25% interest in X partnership for $17,000 cash. Tax planning us 1040 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. Tax planning us 1040 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. Tax planning us 1040 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. Tax planning us 1040 The value of the inventory received was 25% of the value of all partnership inventory. Tax planning us 1040 (It is immaterial whether the inventory he received was on hand when he acquired his interest. Tax planning us 1040 ) 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. Tax planning us 1040 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). Tax planning us 1040 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. Tax planning us 1040 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). Tax planning us 1040 His basis in the inventory items is $4,000 ($3,500 partnership basis + $500 special adjustment). Tax planning us 1040 The remaining $11,500 is allocated to his new basis for the other property he received. Tax planning us 1040 Mandatory adjustment. Tax planning us 1040   A partner does not always have a choice of making this special adjustment to basis. Tax planning us 1040 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. Tax planning us 1040 The fair market value of all partnership property (other than money) was more than 110% of its adjusted basis to the partnership. Tax planning us 1040 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. Tax planning us 1040 The optional basis adjustment, if it had been chosen by the partnership, would have changed the partner's basis for the property actually distributed. Tax planning us 1040 Required statement. Tax planning us 1040   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. Tax planning us 1040 The statement must provide information necessary for the partner to compute the special basis adjustment. Tax planning us 1040 Marketable securities. Tax planning us 1040   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. Tax planning us 1040 See Marketable securities treated as money under Partner's Gain or Loss, earlier. Tax planning us 1040 The basis increase is allocated among the securities in proportion to their respective amounts of unrealized appreciation before the basis increase. Tax planning us 1040 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. Tax planning us 1040 These transactions include the following. Tax planning us 1040 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. Tax planning us 1040 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. Tax planning us 1040 Payments by accrual basis partnership to cash basis partner. Tax planning us 1040   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. Tax planning us 1040 However, this rule does not apply to guaranteed payments made to a partner, which are generally deductible when accrued. Tax planning us 1040 Guaranteed Payments Guaranteed payments are those made by a partnership to a partner that are determined without regard to the partnership's income. Tax planning us 1040 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. Tax planning us 1040 This treatment is for purposes of determining gross income and deductible business expenses only. Tax planning us 1040 For other tax purposes, guaranteed payments are treated as a partner's distributive share of ordinary income. Tax planning us 1040 Guaranteed payments are not subject to income tax withholding. Tax planning us 1040 The partnership generally deducts guaranteed payments on line 10 of Form 1065 as a business expense. Tax planning us 1040 They are also listed on Schedules K and K-1 of the partnership return. Tax planning us 1040 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. Tax planning us 1040 Guaranteed payments made to partners for organizing the partnership or syndicating interests in the partnership are capital expenses. Tax planning us 1040 Generally, organizational and syndication expenses are not deductible by the partnership. Tax planning us 1040 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). Tax planning us 1040 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. Tax planning us 1040 Minimum payment. Tax planning us 1040   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. Tax planning us 1040 Example. Tax planning us 1040 Under a partnership agreement, Divya is to receive 30% of the partnership income, but not less than $8,000. Tax planning us 1040 The partnership has net income of $20,000. Tax planning us 1040 Divya's share, without regard to the minimum guarantee, is $6,000 (30% × $20,000). Tax planning us 1040 The guaranteed payment that can be deducted by the partnership is $2,000 ($8,000 − $6,000). Tax planning us 1040 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. Tax planning us 1040 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. Tax planning us 1040 Self-employed health insurance premiums. Tax planning us 1040   Premiums for health insurance paid by a partnership on behalf of a partner, for services as a partner, are treated as guaranteed payments. Tax planning us 1040 The partnership can deduct the payments as a business expense, and the partner must include them in gross income. Tax planning us 1040 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. Tax planning us 1040   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. Tax planning us 1040 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. Tax planning us 1040 For more information on the self-employed health insurance deduction, see chapter 6 in Publication 535. Tax planning us 1040 Including payments in partner's income. Tax planning us 1040   Guaranteed payments are included in income in the partner's tax year in which the partnership's tax year ends. Tax planning us 1040 Example 1. Tax planning us 1040 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. Tax planning us 1040 Her distributive share of the partnership income is 10%. Tax planning us 1040 The partnership has $50,000 of ordinary income after deducting the guaranteed payment. Tax planning us 1040 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. Tax planning us 1040 Example 2. Tax planning us 1040 Lamont is a calendar year taxpayer who is a partner in a partnership. Tax planning us 1040 The partnership uses a fiscal year that ended January 31, 2013. Tax planning us 1040 Lamont received guaranteed payments from the partnership from February 1, 2012, until December 31, 2012. Tax planning us 1040 He must include these guaranteed payments in income for 2013 and report them on his 2013 income tax return. Tax planning us 1040 Payments resulting in loss. Tax planning us 1040   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. Tax planning us 1040 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. Tax planning us 1040 Sale or Exchange of Property Special rules apply to a sale or exchange of property between a partnership and certain persons. Tax planning us 1040 Losses. Tax planning us 1040   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%. Tax planning us 1040   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. Tax planning us 1040   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. Tax planning us 1040   If the purchaser later sells the property, only the gain realized that is greater than the loss not allowed will be taxable. Tax planning us 1040 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. Tax planning us 1040 Gains. Tax planning us 1040   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. Tax planning us 1040 More than 50% of the capital or profits interest in the partnership(s) is directly or indirectly owned by the same person(s). Tax planning us 1040 The property in the hands of the transferee immediately after the transfer is not a capital asset. Tax planning us 1040 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. Tax planning us 1040 More than 50% ownership. Tax planning us 1040   To determine if there is more than 50% ownership in partnership capital or profits, the following rules apply. Tax planning us 1040 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. Tax planning us 1040 An individual is considered to own the interest directly or indirectly owned by, or for, the individual's family. Tax planning us 1040 For this rule, “family” includes only brothers, sisters, half-brothers, half-sisters, spouses, ancestors, and lineal descendants. Tax planning us 1040 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. Tax planning us 1040 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. Tax planning us 1040 Example. Tax planning us 1040 Individuals A and B and Trust T are equal partners in Partnership ABT. Tax planning us 1040 A's husband, AH, is the sole beneficiary of Trust T. Tax planning us 1040 Trust T's partnership interest will be attributed to AH only for the purpose of further attributing the interest to A. Tax planning us 1040 As a result, A is a more-than-50% partner. Tax planning us 1040 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. Tax planning us 1040 More information. Tax planning us 1040   For more information on these special rules, see Sales and Exchanges Between Related Persons in chapter 2 of Publication 544. Tax planning us 1040 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. Tax planning us 1040 This applies whether a partnership is being formed or is already operating. Tax planning us 1040 The partnership's holding period for the property includes the partner's holding period. Tax planning us 1040 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. Tax planning us 1040 The exchange is not subject to the rules explained later under Disposition of Partner's Interest. Tax planning us 1040 Disguised sales. Tax planning us 1040   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. Tax planning us 1040 The distribution would not have been made but for the contribution. Tax planning us 1040 The partner's right to the distribution does not depend on the success of partnership operations. Tax planning us 1040   All facts and circumstances are considered in determining if the contribution and distribution are more properly characterized as a sale. Tax planning us 1040 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. Tax planning us 1040 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. Tax planning us 1040 Form 8275 required. Tax planning us 1040   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. Tax planning us 1040 For exceptions to this requirement, see section 1. Tax planning us 1040 707-3(c)(2) of the regulations. Tax planning us 1040   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. Tax planning us 1040   Form 8275 must include the following information. Tax planning us 1040 A caption identifying the statement as a disclosure under section 707 of the Internal Revenue Code. Tax planning us 1040 A description of the transferred property or money, including its value. Tax planning us 1040 A description of any relevant facts in determining if the transfers are properly viewed as a disguised sale. Tax planning us 1040 See section 1. Tax planning us 1040 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. Tax planning us 1040 Contribution to partnership treated as investment company. Tax planning us 1040   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. Tax planning us 1040   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. Tax planning us 1040 These items include money, stocks and other equity interests in a corporation, and interests in regulated investment companies and real estate investment trusts. Tax planning us 1040 For more information, see section 351(e)(1) of the Internal Revenue Code and the related regulations. Tax planning us 1040 Whether a partnership is treated as an investment company under this test is ordinarily determined immediately after the transfer of property. Tax planning us 1040   This rule applies to limited partnerships and general partnerships, regardless of whether they are privately formed or publicly syndicated. Tax planning us 1040 Contribution to foreign partnership. Tax planning us 1040   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. Tax planning us 1040 Immediately after the contribution, the partnership owned, directly or indirectly, at least a 10% interest in the foreign partnership. Tax planning us 1040 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. Tax planning us 1040   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. Tax planning us 1040 See the form instructions for more information. Tax planning us 1040 Basis of contributed property. Tax planning us 1040   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. Tax planning us 1040 Allocations to account for built-in gain or loss. Tax planning us 1040   The fair market value of property at the time it is contributed may be different from the partner's adjusted basis. Tax planning us 1040 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. Tax planning us 1040 This rule also applies to contributions of accounts payable and other accrued but unpaid items of a cash basis partner. Tax planning us 1040   The partnership can use different allocation methods for different items of contributed property. Tax planning us 1040 A single reasonable method must be consistently applied to each item, and the overall method or combination of methods must be reasonable. Tax planning us 1040 See section 1. Tax planning us 1040 704-3 of the regulations for allocation methods generally considered reasonable. Tax planning us 1040   If the partnership sells contributed property and recognizes gain or loss, built-in gain or loss is allocated to the contributing partner. Tax planning us 1040 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. Tax planning us 1040 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. Tax planning us 1040 Example. Tax planning us 1040 Areta and Sofia formed an equal partnership. Tax planning us 1040 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. Tax planning us 1040 The partnership's basis for depreciation is limited to the adjusted basis of the property in Sofia's hands, $4,000. Tax planning us 1040 In effect, Areta purchased an undivided one-half interest in the depreciable property with her contribution of $10,000. Tax planning us 1040 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. Tax planning us 1040 To simplify this example, the depreciation deductions are determined without regard to any first-year depreciation conventions. Tax planning us 1040 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. Tax planning us 1040 The entire $400 must be allocated to Areta. Tax planning us 1040 Distribution of contributed property to another partner. Tax planning us 1040   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. Tax planning us 1040   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. Tax planning us 1040 This amount is the difference between the property's basis and its fair market value at the time of contribution. Tax planning us 1040 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. Tax planning us 1040 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. Tax planning us 1040 Disposition of certain contributed property. Tax planning us 1040   The following rules determine the character of the partnership's gain or loss on a disposition of certain types of contributed property. Tax planning us 1040 Unrealized receivables. Tax planning us 1040 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. Tax planning us 1040 Unrealized receivables are defined later under Payments for Unrealized Receivables and Inventory Items. Tax planning us 1040 When reading the definition, substitute “partner” for “partnership. Tax planning us 1040 ” Inventory items. Tax planning us 1040 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. Tax planning us 1040 Inventory items are defined later in Payments for Unrealized Receivables and Inventory Items. Tax planning us 1040 Capital loss property. Tax planning us 1040 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. Tax planning us 1040 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. Tax planning us 1040 Substituted basis property. Tax planning us 1040 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. Tax planning us 1040 Contribution of Services A partner can acquire an interest in partnership capital or profits as compensation for services performed or to be performed. Tax planning us 1040 Capital interest. Tax planning us 1040   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. Tax planning us 1040 This determination generally is made at the time of receipt of the partnership interest. Tax planning us 1040 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. Tax planning us 1040 The capital interest transferred as compensation for services is subject to the rules for restricted property discussed in Publication 525 under Employee Compensation. Tax planning us 1040   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. Tax planning us 1040 Profits interest. Tax planning us 1040   A profits interest is a partnership interest other than a capital interest. Tax planning us 1040 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. Tax planning us 1040 However, this does not apply in the following situations. Tax planning us 1040 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. Tax planning us 1040 Within 2 years of receipt, the partner disposes of the profits interest. Tax planning us 1040 The profits interest is a limited partnership interest in a publicly traded partnership. Tax planning us 1040   A profits interest transferred as compensation for services is not subject to the rules for restricted property that apply to capital interests. Tax planning us 1040 Basis of Partner's Interest The basis of a partnership interest is the money plus the adjusted basis of any property the partner contributed. Tax planning us 1040 If the partner must recognize gain as a result of the contribution, this gain is included in the basis of his or her interest. Tax planning us 1040 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. Tax planning us 1040 Interest acquired by gift, etc. Tax planning us 1040   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. Tax planning us 1040 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). Tax planning us 1040 The basis of an interest in a partnership is increased or decreased by certain items. Tax planning us 1040 Increases. Tax planning us 1040   A partner's basis is increased by the following items. Tax planning us 1040 The partner's additional contributions to the partnership, including an increased share of, or assumption of, partnership liabilities. Tax planning us 1040 The partner's distributive share of taxable and nontaxable partnership income. Tax planning us 1040 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. Tax planning us 1040 Decreases. Tax planning us 1040   The partner's basis is decreased (but never below zero) by the following items. Tax planning us 1040 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. Tax planning us 1040 The partner's distributive share of the partnership losses (including capital losses). Tax planning us 1040 The partner's distributive share of nondeductible partnership expenses that are not capital expenditures. Tax planning us 1040 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. Tax planning us 1040 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. Tax planning us 1040 Partner's liabilities assumed by partnership. Tax planning us 1040   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. Tax planning us 1040 This partner must reduce his or her basis because the assumption of the liability is treated as a distribution of money to that partner. Tax planning us 1040 The other partners' assumption of the liability is treated as a contribution by them of money to the partnership. Tax planning us 1040 See Effect of Partnership Liabilities , later. Tax planning us 1040 Example 1. Tax planning us 1040 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. Tax planning us 1040 The partnership assumed payment of the mortgage. Tax planning us 1040 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. Tax planning us 1040 If, in Example 1, the contributed property had a $12,000 mortgage, the basis of Ivan's partnership interest would be zero. Tax planning us 1040 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. Tax planning us 1040 However, this gain would not increase the basis of his partnership interest. Tax planning us 1040 Book value of partner's interest. Tax planning us 1040   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. Tax planning us 1040 Example. Tax planning us 1040 Enzo contributes to his partnership property that has an adjusted basis of $400 and a fair market value of $1,000. Tax planning us 1040 His partner contributes $1,000 cash. Tax planning us 1040 While each partner has increased his capital account by $1,000, which will be re
Español

Tribal Governments

Official information and services from the U.S. government

The Tax Planning Us 1040

Tax planning us 1040 3. Tax planning us 1040   Farm Income Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Schedule F (Form 1040) Sales of Farm ProductsSchedule F. Tax planning us 1040 Form 4797. Tax planning us 1040 Sales Caused by Weather-Related Conditions Rents (Including Crop Shares)Crop Shares Agricultural Program PaymentsCommodity Credit Corporation (CCC) Loans Conservation Reserve Program (CRP) Crop Insurance and Crop Disaster Payments Feed Assistance and Payments Cost-Sharing Exclusion (Improvements) Payments Under the Farm Security and Rural Investment Act of 2002 and Under the Food, Conservation, and Energy Act of 2008 Tobacco Quota Buyout Program Payments Other Payments Payment to More Than One Person Income From CooperativesPatronage Dividends Per-Unit Retain Certificates Cancellation of DebtGeneral Rule Exceptions Exclusions Income From Other SourcesSod. Tax planning us 1040 Granting the right to remove deposits. Tax planning us 1040 Income Averaging for FarmersElected Farm Income (EFI) How To Figure the Tax Effect on Other Tax Determinations Tax for Certain Children Who Have Unearned Income Alternative Minimum Tax (AMT) Schedule J Introduction You may receive income from many sources. Tax planning us 1040 You must report the income from all the different sources on your tax return, unless it is excluded by law. Tax planning us 1040 Where you report the income on your tax return depends on its source. Tax planning us 1040 This chapter discusses farm income you report on Schedule F (Form 1040), Profit or Loss From Farming. Tax planning us 1040 For information on where to report other income, see the Instructions for Form 1040, U. Tax planning us 1040 S. Tax planning us 1040 Individual Income Tax Return. Tax planning us 1040 Accounting method. Tax planning us 1040   The rules discussed in this chapter assume you use the cash method of accounting. Tax planning us 1040 Under the cash method, you generally include an item of income in gross income in the year you receive it. Tax planning us 1040 See Cash Method in chapter 2. Tax planning us 1040   If you use an accrual method of accounting, different rules may apply to your situation. Tax planning us 1040 See Accrual Method in chapter 2. Tax planning us 1040 Topics - This chapter discusses: Schedule F Sales of farm products Rents (including crop shares) Agricultural program payments Income from cooperatives Cancellation of debt Income from other sources Income averaging for farmers Useful Items - You may want to see: Publication 525 Taxable and Nontaxable Income 550 Investment Income and Expenses 908 Bankruptcy Tax Guide 925 Passive Activity and At-Risk Rules 4681 Canceled Debts, Foreclosures, Repossessions, and Abandonments Form (and Instructions) 982 Reduction of Tax Attributes Due to Discharge of Indebtedness Sch E (Form 1040) Supplemental Income and Loss Sch J (Form 1040) Income Averaging for Farmers and Fishermen 1099-G Certain Government Payments 1099-PATR Taxable Distributions Received From Cooperatives 4797 Sales of Business Property 4835 Farm Rental Income and Expenses See chapter 16 for information about getting publications and forms. Tax planning us 1040 Schedule F (Form 1040) Individuals, trusts, and partnerships report farm income on Schedule F (Form 1040), Profit or Loss From Farming. Tax planning us 1040 Use this schedule to figure the net profit or loss from regular farming operations. Tax planning us 1040 Income from farming reported on Schedule F includes amounts you receive from cultivating, operating, or managing a farm for gain or profit, either as owner or tenant. Tax planning us 1040 This includes income from operating a stock, dairy, poultry, fish, fruit, or truck farm and income from operating a plantation, ranch, range, or orchard. Tax planning us 1040 It also includes income from the sale of crop shares if you materially participate in producing the crop. Tax planning us 1040 See Rents (Including Crop Shares) , later. Tax planning us 1040 Income received from operating a nursery, which specializes in growing ornamental plants, is considered to be income from farming. Tax planning us 1040 Income reported on Schedule F does not include gains or losses from sales or other dispositions of the following farm assets. Tax planning us 1040 Land. Tax planning us 1040 Depreciable farm equipment. Tax planning us 1040 Buildings and structures. Tax planning us 1040 Livestock held for draft, breeding, sport, or dairy purposes. Tax planning us 1040 Gains and losses from most dispositions of farm assets are discussed in chapters 8 and 9. Tax planning us 1040 Gains and losses from casualties, thefts, and condemnations are discussed in chapter 11. Tax planning us 1040 Sales of Farm Products Where to report. Tax planning us 1040    Table 3-1 shows where to report the sale of farm products on your tax return. Tax planning us 1040 Schedule F. Tax planning us 1040   Amounts received from the sales of products you raised on your farm for sale (or bought for resale), such as livestock, produce, or grains, are reported on Schedule F. Tax planning us 1040 This includes money and the fair market value of any property or services you receive. Tax planning us 1040 When you sell farm products bought for resale, your profit or loss is the difference between your selling price (money plus the fair market value of any property) and your basis in the item (usually the cost). Tax planning us 1040 See chapter 6 for information on the basis of assets. Tax planning us 1040 You generally report these amounts on Schedule F for the year you receive payment. Tax planning us 1040 Example. Tax planning us 1040 In 2012, you bought 20 feeder calves for $11,000 for resale. Tax planning us 1040 You sold them in 2013 for $21,000. Tax planning us 1040 You report the $21,000 sales price on Schedule F, line 1b, subtract your $11,000 basis on line 1d, and report the resulting $10,000 profit on line 1e. Tax planning us 1040 Form 4797. Tax planning us 1040   Sales of livestock held for draft, breeding, sport, or dairy purposes may result in ordinary or capital gains or losses, depending on the circumstances. Tax planning us 1040 In either case, you should always report these sales on Form 4797 instead of Schedule F. Tax planning us 1040 See Livestock under Ordinary or Capital Gain or Loss in chapter 8. Tax planning us 1040 Animals you do not hold primarily for sale are considered business assets of your farm. Tax planning us 1040 Table 3-1. Tax planning us 1040 Where To Report Sales of Farm Products Item Sold Schedule F Form 4797 Farm products raised for sale X   Farm products bought for resale X   Farm assets not held primarily for sale, such as livestock held for draft, breeding, sport, or dairy purposes (bought or raised)   X Sale by agent. Tax planning us 1040   If your agent sells your farm products, you have constructive receipt of the income when your agent receives payment and you must include the net proceeds from the sale in gross income for the year the agent receives payment. Tax planning us 1040 This applies even if your agent pays you in a later year. Tax planning us 1040 For a discussion on constructive receipt of income, see Cash Method under Accounting Methods in chapter 2. Tax planning us 1040 Sales Caused by Weather-Related Conditions If you sell or exchange more livestock, including poultry, than you normally would in a year because of a drought, flood, or other weather-related condition, you may be able to postpone reporting the gain from the additional animals until the next year. Tax planning us 1040 You must meet all the following conditions to qualify. Tax planning us 1040 Your principal trade or business is farming. Tax planning us 1040 You use the cash method of accounting. Tax planning us 1040 You can show that, under your usual business practices, you would not have sold or exchanged the additional animals this year except for the weather-related condition. Tax planning us 1040 The weather-related condition caused an area to be designated as eligible for assistance by the federal government. Tax planning us 1040 Sales or exchanges made before an area became eligible for federal assistance qualify if the weather-related condition that caused the sale or exchange also caused the area to be designated as eligible for federal assistance. Tax planning us 1040 The designation can be made by the President, the Department of Agriculture (or any of its agencies), or by other federal departments or agencies. Tax planning us 1040 A weather-related sale or exchange of livestock (other than poultry) held for draft, breeding, or dairy purposes may be an involuntary conversion. Tax planning us 1040 See Other Involuntary Conversions in chapter 11. Tax planning us 1040 Usual business practice. Tax planning us 1040   You must determine the number of animals you would have sold had you followed your usual business practice in the absence of the weather-related condition. Tax planning us 1040 Do this by considering all the facts and circumstances, but do not take into account your sales in any earlier year for which you postponed the gain. Tax planning us 1040 If you have not yet established a usual business practice, rely on the usual business practices of similarly situated farmers in your general region. Tax planning us 1040 Connection with affected area. Tax planning us 1040   The livestock does not have to be raised or sold in an area affected by a weather-related condition for the postponement to apply. Tax planning us 1040 However, the sale must occur solely because of a weather-related condition that affected the water, grazing, or other requirements of the livestock. Tax planning us 1040 This requirement generally will not be met if the costs of feed, water, or other requirements of the livestock affected by the weather-related condition are not substantial in relation to the total costs of holding the livestock. Tax planning us 1040 Classes of livestock. Tax planning us 1040   You must figure the amount to be postponed separately for each generic class of animals—for example, hogs, sheep, and cattle. Tax planning us 1040 Do not separate animals into classes based on age, sex, or breed. Tax planning us 1040 Amount to be postponed. Tax planning us 1040   Follow these steps to figure the amount of gain to be postponed for each class of animals. Tax planning us 1040 Divide the total income realized from the sale of all livestock in the class during the tax year by the total number of such livestock sold. Tax planning us 1040 For this purpose, do not treat any postponed gain from the previous year as income received from the sale of livestock. Tax planning us 1040 Multiply the result in (1) by the excess number of such livestock sold solely because of weather-related conditions. Tax planning us 1040 Example. Tax planning us 1040 You are a calendar year taxpayer and you normally sell 100 head of beef cattle a year. Tax planning us 1040 As a result of drought, you sold 135 head during 2012. Tax planning us 1040 You realized $70,200 from the sale. Tax planning us 1040 On August 9, 2012, as a result of drought, the affected area was declared a disaster area eligible for federal assistance. Tax planning us 1040 The income you can postpone until 2013 is $18,200 [($70,200 ÷ 135) × 35]. Tax planning us 1040 How to postpone gain. Tax planning us 1040   To postpone gain, attach a statement to your tax return for the year of the sale. Tax planning us 1040 The statement must include your name and address and give the following information for each class of livestock for which you are postponing gain. Tax planning us 1040 A statement that you are postponing gain under Internal Revenue Code (IRC) section 451(e). Tax planning us 1040 Evidence of the weather-related conditions that forced the early sale or exchange of the livestock and the date, if known, on which an area was designated as eligible for assistance by the federal government because of weather-related conditions. Tax planning us 1040 A statement explaining the relationship of the area affected by the weather-related condition to your early sale or exchange of the livestock. Tax planning us 1040 The number of animals sold in each of the 3 preceding years. Tax planning us 1040 The number of animals you would have sold in the tax year had you followed your normal business practice in the absence of weather-related conditions. Tax planning us 1040 The total number of animals sold and the number sold because of weather-related conditions during the tax year. Tax planning us 1040 A computation, as described above, of the income to be postponed for each class of livestock. Tax planning us 1040   Generally, you must file the statement and the return by the due date of the return, including extensions. Tax planning us 1040 However, for sales or exchanges treated as an involuntary conversion from weather-related sales of livestock in an area eligible for federal assistance (discussed in chapter 11), you can file this statement at any time during the replacement period. Tax planning us 1040 For other sales or exchanges, if you timely filed your return for the year without postponing gain, you can still postpone gain by filing an amended return within 6 months of the due date of the return (excluding extensions). Tax planning us 1040 Attach the statement to the amended return and write “Filed pursuant to section 301. Tax planning us 1040 9100-2” at the top of the amended return. Tax planning us 1040 File the amended return at the same address you filed the original return. Tax planning us 1040 Once you have filed the statement, you can cancel your postponement of gain only with the approval of the IRS. Tax planning us 1040 Rents (Including Crop Shares) The rent you receive for the use of your farmland is generally rental income, not farm income. Tax planning us 1040 However, if you materially participate in farming operations on the land, the rent is farm income. Tax planning us 1040 See Landlord Participation in Farming in chapter 12. Tax planning us 1040 Pasture income and rental. Tax planning us 1040   If you pasture someone else's livestock and take care of them for a fee, the income is from your farming business. Tax planning us 1040 You must enter it as Other income on Schedule F. Tax planning us 1040 If you simply rent your pasture for a flat cash amount without providing services, report the income as rent on Part I of Schedule E (Form 1040), Supplemental Income and Loss. Tax planning us 1040 Crop Shares You must include rent you receive in the form of crop shares in income in the year you convert the shares to money or the equivalent of money. Tax planning us 1040 It does not matter whether you use the cash method of accounting or an accrual method of accounting. Tax planning us 1040 If you materially participate in operating a farm from which you receive rent in the form of crop shares or livestock, the rental income is included in self-employment income. Tax planning us 1040 See Landlord Participation in Farming in chapter 12. Tax planning us 1040 Report the rental income on Schedule F. Tax planning us 1040 If you do not materially participate in operating the farm, report this income on Form 4835 and carry the net income or loss to Schedule E (Form 1040). Tax planning us 1040 The income is not included in self-employment income. Tax planning us 1040 Crop shares you use to feed livestock. Tax planning us 1040   Crop shares you receive as a landlord and feed to your livestock are considered converted to money when fed to the livestock. Tax planning us 1040 You must include the fair market value of the crop shares in income at that time. Tax planning us 1040 You are entitled to a business expense deduction for the livestock feed in the same amount and at the same time you include the fair market value of the crop share as rental income. Tax planning us 1040 Although these two transactions cancel each other for figuring adjusted gross income on Form 1040, they may be necessary to figure your self-employment tax. Tax planning us 1040 See  chapter 12. Tax planning us 1040 Crop shares you give to others (gift). Tax planning us 1040   Crop shares you receive as a landlord and give to others are considered converted to money when you make the gift. Tax planning us 1040 You must report the fair market value of the crop share as income, even though someone else receives payment for the crop share. Tax planning us 1040 Example. Tax planning us 1040 A tenant farmed part of your land under a crop-share arrangement. Tax planning us 1040 The tenant harvested and delivered the crop in your name to an elevator company. Tax planning us 1040 Before selling any of the crop, you instructed the elevator company to cancel your warehouse receipt and make out new warehouse receipts in equal amounts of the crop in the names of your children. Tax planning us 1040 They sell their crop shares in the following year and the elevator company makes payments directly to your children. Tax planning us 1040 In this situation, you are considered to have received rental income and then made a gift of that income. Tax planning us 1040 You must include the fair market value of the crop shares in your income for the tax year you gave the crop shares to your children. Tax planning us 1040 Crop share loss. Tax planning us 1040   If you are involved in a rental or crop-share lease arrangement, any loss from these activities may be subject to the limits under the passive loss rules. Tax planning us 1040 See Publication 925 for information on these rules. Tax planning us 1040 Agricultural Program Payments You must include in income most government payments, such as those for approved conservation practices, direct payments, and counter-cyclical payments, whether you receive them in cash, materials, services, or commodity certificates. Tax planning us 1040 However, you can exclude from income some payments you receive under certain cost-sharing conservation programs. Tax planning us 1040 See Cost-Sharing Exclusion (Improvements) , later. Tax planning us 1040 Report the agricultural program payment on the appropriate line of Schedule F, Part I. Tax planning us 1040 Report the full amount even if you return a government check for cancellation, refund any of the payment you receive, or the government collects all or part of the payment from you by reducing the amount of some other payment or Commodity Credit Corporation (CCC) loan. Tax planning us 1040 However, you can deduct the amount you refund or return or that reduces some other payment or loan to you. Tax planning us 1040 Claim the deduction on Schedule F for the year of repayment or reduction. Tax planning us 1040 Commodity Credit Corporation (CCC) Loans Generally, you do not report loans you receive as income. Tax planning us 1040 However, if you pledge part or all of your production to secure a CCC loan, you can treat the loan as if it were a sale of the crop and report the loan proceeds as income in the year you receive them. Tax planning us 1040 You do not need approval from the IRS to adopt this method of reporting CCC loans. Tax planning us 1040 Once you report a CCC loan as income for the year received, you generally must report all CCC loans in that year and later years in the same way. Tax planning us 1040 However, you can obtain for your tax year an automatic consent to change your method of accounting for loans received from the CCC, from including the loan amount in gross income for the tax year in which the loan is received to treating the loan amount as a loan. Tax planning us 1040 For more information, see Part I of the Instructions for Form 3115 and Revenue Procedure 2008-52. Tax planning us 1040 Revenue Procedure 2008-52, 2008-36 I. Tax planning us 1040 R. Tax planning us 1040 B. Tax planning us 1040 587, is available at  www. Tax planning us 1040 irs. Tax planning us 1040 gov/irb/2008-36_IRB/ar09. Tax planning us 1040 html. Tax planning us 1040 You can request income tax withholding from CCC loan payments you receive. Tax planning us 1040 Use Form W-4V, Voluntary Withholding Request. Tax planning us 1040 See chapter 16 for information about ordering the form. Tax planning us 1040 To elect to report a CCC loan as income, include the loan proceeds as income on Schedule F, line 7a, for the year you receive it. Tax planning us 1040 Attach a statement to your return showing the details of the loan. Tax planning us 1040 You must file the statement and the return by the due date of the return, including extensions. Tax planning us 1040 If you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). Tax planning us 1040 Attach the statement to the amended return and write “Filed pursuant to section 301. Tax planning us 1040 9100-2” at the top of the return. Tax planning us 1040 File the amended return at the same address you filed the original return. Tax planning us 1040 When you make this election, the amount you report as income becomes your basis in the commodity. Tax planning us 1040 See chapter 6 for information on the basis of assets. Tax planning us 1040 If you later repay the loan, redeem the pledged commodity, and sell it, you report as income at the time of sale the sale proceeds minus your basis in the commodity. Tax planning us 1040 If the sale proceeds are less than your basis in the commodity, you can report the difference as a loss on Schedule F. Tax planning us 1040 If you forfeit the pledged crops to the CCC in full payment of the loan, the forfeiture is treated for tax purposes as a sale of the crops. Tax planning us 1040 If you did not report the loan proceeds as income for the year you received them, you must include them in your income for the year of the forfeiture. Tax planning us 1040 Form 1099-A. Tax planning us 1040   If you forfeit pledged crops to the CCC in full payment of a loan, you may receive a Form 1099-A, Acquisition or Abandonment of Secured Property. Tax planning us 1040 “CCC” should be shown in box 6. Tax planning us 1040 The amount of any CCC loan outstanding when you forfeited your commodity should also be indicated on the form. Tax planning us 1040 Market Gain Under the CCC nonrecourse marketing assistance loan program, your repayment amount for a loan secured by your pledge of an eligible commodity is generally based on the lower of the loan rate or the prevailing world market price for the commodity on the date of repayment. Tax planning us 1040 If you repay the loan when the world price is lower, the difference between that repayment amount and the original loan amount is market gain. Tax planning us 1040 Whether you use cash or CCC certificates to repay the loan, you will receive a Form 1099-G showing the market gain you realized. Tax planning us 1040 Market gain should be reported as follows. Tax planning us 1040 If you elected to include the CCC loan in income in the year you received it, do not include the market gain in income. Tax planning us 1040 However, adjust the basis of the commodity for the amount of the market gain. Tax planning us 1040 If you did not include the CCC loan in income in the year received, include the market gain in your income. Tax planning us 1040 The following examples show how to report market gain. Tax planning us 1040 Example 1. Tax planning us 1040 Mike Green is a cotton farmer. Tax planning us 1040 He uses the cash method of accounting and files his tax return on a calendar year basis. Tax planning us 1040 He has deducted all expenses incurred in producing the cotton and has a zero basis in the commodity. Tax planning us 1040 In 2012, Mike pledged 1,000 pounds of cotton as collateral for a CCC loan of $2,000 (a loan rate of $2. Tax planning us 1040 00 per pound). Tax planning us 1040 In 2013, he repaid the loan and redeemed the cotton for $1,500 when the world price was $1. Tax planning us 1040 50 per pound (lower than the loan amount). Tax planning us 1040 Later in 2013, he sold the cotton for $2,500. Tax planning us 1040 The market gain on the redemption was $. Tax planning us 1040 50 ($2. Tax planning us 1040 00 – $1. Tax planning us 1040 50) per pound. Tax planning us 1040 Mike realized total market gain of $500 ($. Tax planning us 1040 50 x 1,000 pounds). Tax planning us 1040 How he reports this market gain and figures his gain or loss from the sale of the cotton depends on whether he included CCC loans in income in 2012. Tax planning us 1040 Included CCC loan. Tax planning us 1040   Mike reported the $2,000 CCC loan as income for 2012 on Schedule F, line 1b, so he is treated as if he sold the cotton for $2,000 when he pledged it and repurchased the cotton for $1,500 when he redeemed it. Tax planning us 1040 The $500 market gain is not recognized on the redemption. Tax planning us 1040 He reports it for 2013 as an agricultural program payment on Schedule F, line 4a, but does not include it as a taxable amount on line 4b. Tax planning us 1040   Mike's basis in the cotton after he redeemed it was $1,500, which is the redemption (repurchase) price paid for the cotton. Tax planning us 1040 His gain from the sale is $1,000 ($2,500 – $1,500). Tax planning us 1040 He reports the $1,000 gain as income for 2013 on Schedule F, line 1b. Tax planning us 1040 Excluded CCC loan. Tax planning us 1040   Mike has income of $500 from market gain in 2013. Tax planning us 1040 He reports it on Schedule F, lines 4a and 4b. Tax planning us 1040 His basis in the cotton is zero, so his gain from its sale is $2,500. Tax planning us 1040 He reports the $2,500 gain as income for 2013 on Schedule F, line 1b. Tax planning us 1040 Example 2. Tax planning us 1040 The facts are the same as in Example 1 except that, instead of selling the cotton for $2,500 after redeeming it, Mike entered into an option-to-purchase contract with a cotton buyer before redeeming the cotton. Tax planning us 1040 Under that contract, Mike authorized the cotton buyer to pay the CCC loan on Mike's behalf. Tax planning us 1040 In 2013, the cotton buyer repaid the loan for $1,500 and immediately exercised his option, buying the cotton for $1,500. Tax planning us 1040 How Mike reports the $500 market gain on the redemption of the cotton and figures his gain or loss from its sale depends on whether he included CCC loans in income in 2012. Tax planning us 1040 Included CCC loan. Tax planning us 1040   As in Example 1, Mike is treated as though he sold the cotton for $2,000 when he pledged it and repurchased the cotton for $1,500 when the cotton buyer redeemed it for him. Tax planning us 1040 The $500 market gain is not recognized on the redemption. Tax planning us 1040 Mike reports it for 2013 as an agricultural program payment on Schedule F, line 4a, but does not include it as a taxable amount on line 4b. Tax planning us 1040   Also, as in Example 1, Mike's basis in the cotton when the cotton buyer redeemed it for him was $1,500. Tax planning us 1040 Mike has no gain or loss on its sale to the cotton buyer for that amount. Tax planning us 1040 Excluded CCC loan. Tax planning us 1040   As in Example 1, Mike has income of $500 from market gain in 2013. Tax planning us 1040 He reports it on Schedule F, lines 4a and 4b. Tax planning us 1040 His basis in the cotton is zero, so his gain from its sale is $1,500. Tax planning us 1040 He reports the $1,500 gain as income for 2013 on Schedule F, line 1b. Tax planning us 1040 Conservation Reserve Program (CRP) Under the Conservation Reserve Program (CRP), if you own or operate highly erodible or other specified cropland, you may enter into a long-term contract with the USDA, agreeing to convert to a less intensive use of that cropland. Tax planning us 1040 You must include the annual rental payments and any one-time incentive payment you receive under the program on Schedule F, lines 4a and 4b. Tax planning us 1040 Cost-share payments you receive may qualify for the cost-sharing exclusion. Tax planning us 1040 See Cost-Sharing Exclusion (Improvements) , later. Tax planning us 1040 CRP payments are reported to you on Form 1099-G. Tax planning us 1040 Individuals who are receiving Social Security retirement or disability benefits may exclude CRP payments when calculating self-employment tax. Tax planning us 1040 See the instructions for Schedule SE (Form 1040). Tax planning us 1040 Crop Insurance and Crop Disaster Payments You must include in income any crop insurance proceeds you receive as the result of physical crop damage or reduction of crop revenue, or both. Tax planning us 1040 You generally include them in the year you receive them. Tax planning us 1040 Treat as crop insurance proceeds the crop disaster payments you receive from the federal government as the result of destruction or damage to crops, or the inability to plant crops, because of drought, flood, or any other natural disaster. Tax planning us 1040 You can request income tax withholding from crop disaster payments you receive from the federal government. Tax planning us 1040 Use Form W-4V, Voluntary Withholding Request. Tax planning us 1040 See chapter 16 for information about ordering the form. Tax planning us 1040 Election to postpone reporting until the following year. Tax planning us 1040   You can postpone reporting some or all crop insurance proceeds as income until the year following the year the physical damage occurred if you meet all the following conditions. Tax planning us 1040 You use the cash method of accounting. Tax planning us 1040 You receive the crop insurance proceeds in the same tax year the crops are damaged. Tax planning us 1040 You can show that under your normal business practice you would have included income from the damaged crops in any tax year following the year the damage occurred. Tax planning us 1040   Deferral is not permitted for proceeds received from revenue insurance policies. Tax planning us 1040   To postpone reporting some or all crop insurance proceeds received in 2013, report the amount you received on Schedule F, line 6a, but do not include it as a taxable amount on line 6b. Tax planning us 1040 Check the box on line 8c and attach a statement to your tax return. Tax planning us 1040 The statement must include your name and address and contain the following information. Tax planning us 1040 A statement that you are making an election under IRC section 451(d) and Regulations section 1. Tax planning us 1040 451-6. Tax planning us 1040 The specific crop or crops physically destroyed or damaged. Tax planning us 1040 A statement that under your normal business practice you would have included income from some or all of the destroyed or damaged crops in gross income for a tax year following the year the crops were destroyed or damaged. Tax planning us 1040 The cause of the physical destruction or damage and the date or dates it occurred. Tax planning us 1040 The total payments you received from insurance carriers, itemized for each specific crop, and the date you received each payment. Tax planning us 1040 The name of each insurance carrier from whom you received payments. Tax planning us 1040   One election covers all crops representing a single trade or business. Tax planning us 1040 If you have more than one farming business, make a separate election for each one. Tax planning us 1040 For example, if you operate two separate farms on which you grow different crops and you keep separate books for each farm, you should make two separate elections to postpone reporting insurance proceeds you receive for crops grown on each of your farms. Tax planning us 1040   An election is binding for the year unless the IRS approves your request to change it. Tax planning us 1040 To request IRS approval to change your election, write to the IRS at the following address giving your name, address, identification number, the year you made the election, and your reasons for wanting to change it. Tax planning us 1040 Ogden Submission Processing Center P. Tax planning us 1040 O. Tax planning us 1040 Box 9941 Ogden, UT 84409 Feed Assistance and Payments The Disaster Assistance Act of 1988 authorizes programs to provide feed assistance, reimbursement payments, and other benefits to qualifying livestock producers if the Secretary of Agriculture determines that, because of a natural disaster, a livestock emergency exists. Tax planning us 1040 These programs include partial reimbursement for the cost of purchased feed and for certain transportation expenses. Tax planning us 1040 They also include the donation or sale at a below-market price of feed owned by the Commodity Credit Corporation. Tax planning us 1040 Include in income: The market value of donated feed, The difference between the market value and the price you paid for feed you buy at below-market prices, and Any cost reimbursement you receive. Tax planning us 1040 You must include these benefits in income in the year you receive them. Tax planning us 1040 You cannot postpone reporting them under the rules explained earlier for weather-related sales of livestock or crop insurance proceeds. Tax planning us 1040 Report the benefits on Schedule F, Part I, as agricultural program payments. Tax planning us 1040 You can usually take a current deduction for the same amount as a feed expense. Tax planning us 1040 Cost-Sharing Exclusion (Improvements) You can exclude from your income part or all of a payment you receive under certain federal or state cost-sharing conservation, reclamation, and restoration programs. Tax planning us 1040 A payment is any economic benefit you get as a result of an improvement. Tax planning us 1040 However, this exclusion applies only to that part of a payment that meets all three of the following tests. Tax planning us 1040 It was for a capital expense. Tax planning us 1040 You cannot exclude any part of a payment for an expense you can deduct in the year you pay or incur it. Tax planning us 1040 You must include the payment for a deductible expense in income, and you can take any offsetting deduction. Tax planning us 1040 See chapter 5 for information on deducting soil and water conservation expenses. Tax planning us 1040 It does not substantially increase your annual income from the property for which it is made. Tax planning us 1040 An increase in annual income is substantial if it is more than the greater of the following amounts. Tax planning us 1040 10% of the average annual income derived from the affected property before receiving the improvement. Tax planning us 1040 $2. Tax planning us 1040 50 times the number of affected acres. Tax planning us 1040 The Secretary of Agriculture certified that the payment was primarily made for conserving soil and water resources, protecting or restoring the environment, improving forests, or providing a habitat for wildlife. Tax planning us 1040 Qualifying programs. Tax planning us 1040   If the three tests listed above are met, you can exclude part or all of the payments from the following programs. Tax planning us 1040 The rural clean water program authorized by the Federal Water Pollution Control Act. Tax planning us 1040 The rural abandoned mine program authorized by the Surface Mining Control and Reclamation Act of 1977. Tax planning us 1040 The water bank program authorized by the Water Bank Act. Tax planning us 1040 The emergency conservation measures program authorized by title IV of the Agricultural Credit Act of 1978. Tax planning us 1040 The agricultural conservation program authorized by the Soil Conservation and Domestic Allotment Act. Tax planning us 1040 The great plains conservation program authorized by the Soil Conservation and Domestic Policy Act. Tax planning us 1040 The resource conservation and development program authorized by the Bankhead-Jones Farm Tenant Act and by the Soil Conservation and Domestic Allotment Act. Tax planning us 1040 Certain small watershed programs, listed later. Tax planning us 1040 Any program of a state, possession of the United States, a political subdivision of any of these, or of the District of Columbia under which payments are made to individuals primarily for conserving soil, protecting or restoring the environment, improving forests, or providing a habitat for wildlife. Tax planning us 1040 Several state programs have been approved. Tax planning us 1040 For information about the status of those programs, contact the state offices of the Farm Service Agency (FSA) and the Natural Resources and Conservation Service (NRCS). Tax planning us 1040 Small watershed programs. Tax planning us 1040   If the three tests listed earlier are met, you can exclude part or all of the payments you receive under the following programs for improvements made in connection with a watershed. Tax planning us 1040 The programs under the Watershed Protection and Flood Prevention Act. Tax planning us 1040 The flood prevention projects under the Flood Control Act of 1944. Tax planning us 1040 The Emergency Watershed Protection Program under the Flood Control Act of 1950. Tax planning us 1040 Certain programs under the Colorado River Basin Salinity Control Act. Tax planning us 1040 The Wetlands Reserve Program authorized by the Food Security Act of 1985, the Federal Agriculture Improvement and Reform Act of 1996 and the Farm Security and Rural Investment Act of 2002. Tax planning us 1040 The Environmental Quality Incentives Program (EQIP) authorized by the Federal Agriculture Improvement and Reform Act of 1996. Tax planning us 1040 The Wildlife Habitat Incentives Program (WHIP) authorized by the Federal Agriculture Improvement and Reform Act of 1996. Tax planning us 1040 The Soil and Water Conservation Assistance Program authorized by the Agricultural Risk Protection Act of 2000. Tax planning us 1040 The Agricultural Management Assistance Program authorized by the Agricultural Risk Protection Act of 2000. Tax planning us 1040 The Conservation Reserve Program authorized by the Food Security Act of 1985 and the Federal Agriculture Improvement and Reform Act of 1996. Tax planning us 1040 The Forest Land Enhancement Program authorized under the Farm Security and Rural Investment Act of 2002. Tax planning us 1040 The Conservation Security Program authorized by the Food Security Act of 1985. Tax planning us 1040 The Forest Health Protection Program (FHPP) authorized by the Cooperative Forestry Assistance Act of 1978. Tax planning us 1040 Income realized. Tax planning us 1040   The gross income you realize upon getting an improvement under these cost-sharing programs is the value of the improvement reduced by the sum of the excludable portion and your share of the cost of the improvement (if any). Tax planning us 1040 Value of the improvement. Tax planning us 1040   You determine the value of the improvement by multiplying its fair market value (defined in chapter 6) by a fraction. Tax planning us 1040 The numerator of the fraction is the total cost of the improvement (all amounts paid either by you or by the government for the improvement) reduced by the sum of the following items. Tax planning us 1040 Any government payments under a program not listed earlier. Tax planning us 1040 Any part of a government payment under a program listed earlier that the Secretary of Agriculture has not certified as primarily for conservation. Tax planning us 1040 Any government payment to you for rent or for your services. Tax planning us 1040 The denominator of the fraction is the total cost of the improvement. Tax planning us 1040 Excludable portion. Tax planning us 1040   The excludable portion is the present fair market value of the right to receive annual income from the affected acreage of the greater of the following amounts. Tax planning us 1040 10% of the prior average annual income from the affected acreage. Tax planning us 1040 The prior average annual income is the average of the gross receipts from the affected acreage for the last 3 tax years before the tax year in which you started to install the improvement. Tax planning us 1040 $2. Tax planning us 1040 50 times the number of affected acres. Tax planning us 1040 The calculation of present fair market value of the right to receive annual income is too complex to discuss in this publication. Tax planning us 1040 You may need to consult your tax advisor for assistance. Tax planning us 1040 Example. Tax planning us 1040 One hundred acres of your land was reclaimed under a rural abandoned mine program contract with the Natural Resources Conservation Service of the USDA. Tax planning us 1040 The total cost of the improvement was $500,000. Tax planning us 1040 The USDA paid $490,000. Tax planning us 1040 You paid $10,000. Tax planning us 1040 The value of the cost-sharing improvement is $15,000. Tax planning us 1040 The present fair market value of the right to receive the annual income described in (1) above is $1,380, and the present fair market value of the right to receive the annual income described in (2) is $1,550. Tax planning us 1040 The excludable portion is the greater amount, $1,550. Tax planning us 1040 You figure the amount to include in gross income as follows: Value of cost-sharing improvement $15,000 Minus: Your share $10,000     Excludable portion 1,550 11,550 Amount included in income $ 3,450 Effects of the exclusion. Tax planning us 1040   When you figure the basis of property you acquire or improve using cost-sharing payments excluded from income, subtract the excluded payments from your capital costs. Tax planning us 1040 Any payment excluded from income is not part of your basis. Tax planning us 1040 In the example above, the increase in basis is $500,000 – $490,000 + $3,450 = $13,450. Tax planning us 1040   In addition, you cannot take depreciation, amortization, or depletion deductions for the part of the cost of the property for which you receive cost-sharing payments you exclude from income. Tax planning us 1040 How to report the exclusion. Tax planning us 1040   Attach a statement to your tax return (or amended return) for the tax year you receive the last government payment for the improvement. Tax planning us 1040 The statement must include the following information. Tax planning us 1040 The dollar amount of the cost funded by the government payment. Tax planning us 1040 The value of the improvement. Tax planning us 1040 The amount you are excluding. Tax planning us 1040   Report the total cost-sharing payments you receive on Schedule F, line 4a, and the taxable amount on line 4b. Tax planning us 1040 Recapture. Tax planning us 1040   If you dispose of the property within 20 years after you received the excluded payments, you must treat as ordinary income part or all of the cost-sharing payments you excluded. Tax planning us 1040 In the above example, if the 100 acres were sold within 20 years of the exclusion for a gain of $2,000, $1,550 of that amount would be included in ordinary income. Tax planning us 1040 You must report the recapture on Form 4797. Tax planning us 1040 See Section 1255 property under Other Gains in chapter 9. Tax planning us 1040 Electing not to exclude payments. Tax planning us 1040   You can elect not to exclude all or part of any payments you receive under these programs. Tax planning us 1040 If you make this election for all of these payments, none of the above restrictions and rules apply. Tax planning us 1040 You must make this election by the due date, including extensions, for filing your return. Tax planning us 1040 In the example above, an election not to exclude payments results in $5,000 included in income and a $15,000 increase in basis. Tax planning us 1040 If you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). Tax planning us 1040 Write “Filed pursuant to section 301. Tax planning us 1040 9100-2” at the top of the amended return and file it at the same address you filed the original return. Tax planning us 1040 Payments Under the Farm Security and Rural Investment Act of 2002 and Under the Food, Conservation, and Energy Act of 2008 The Farm Security and Rural Investment Act of 2002 created two new types of payments—direct and counter-cyclical payments. Tax planning us 1040 You must include these payments on Schedule F, lines 4a and 4b. Tax planning us 1040 The Food, Conservation, and Energy Act of 2008 provides for direct and counter-cyclical payments (DCP) as well as Average Crop Revenue Election (ACRE) payments. Tax planning us 1040 You must include these payments on Schedule F, lines 6a and 6b. Tax planning us 1040 The American Taxpayer Relief Act of 2012, enacted on January 2, 2013, amends the Food, Conservation, and Energy Act of 2008 and provided a one-year extension for these payments. Tax planning us 1040 Tobacco Quota Buyout Program Payments The Fair and Equitable Tobacco Reform Act of 2004, title VI of the American Jobs Creation Act of 2004, terminated the tobacco marketing quota program and the tobacco price support program. Tax planning us 1040 As a result, the USDA offered to enter into contracts with eligible tobacco quota holders and growers to provide compensation for the lost value of the quotas and related price support. Tax planning us 1040 If you are an eligible tobacco quota holder, your contract entitles you to receive total payments of $7 per pound of quota in 10 equal annual payments in fiscal years 2005 through 2014. Tax planning us 1040 If you are an eligible tobacco grower, your contract entitles you to receive total payments of up to $3 per pound of quota in 10 equal annual payments in fiscal years 2005 through 2014. Tax planning us 1040 Tobacco Quota Holders Contract payments you receive are considered proceeds from a sale of your tobacco quota as of the date on which you and the USDA enter into the contract. Tax planning us 1040 Your taxable gain or loss is the total amount received for your quota reduced by any amount treated as interest (discussed below), over your adjusted basis. Tax planning us 1040 The gain or loss is capital or ordinary depending on how you used the quota. Tax planning us 1040 See Capital or ordinary gain or loss , later. Tax planning us 1040 Report the entire gain on your income tax return for the tax year that includes the date you entered into the contract if you elect not to use the installment method. Tax planning us 1040 Adjusted basis. Tax planning us 1040   The adjusted basis of your quota is determined differently depending on how you obtained the quota. Tax planning us 1040 The basis of a quota derived from an original grant by the federal government is zero. Tax planning us 1040 The basis of a purchased quota is the purchase price. Tax planning us 1040 The basis of a quota received as a gift is generally the same as the donor's basis. Tax planning us 1040 However, under certain circumstances, the basis is increased by the amount of gift taxes paid. Tax planning us 1040 If the basis is greater than the fair market value of the quota at the time of the gift, the basis for determining loss is the fair market value. Tax planning us 1040 The basis of an inherited quota is generally the fair market value of the quota at the time of the decedent's death. Tax planning us 1040 Reduction of basis. Tax planning us 1040   You are required to reduce the basis of your tobacco quota by the following amounts. Tax planning us 1040 Deductions you took for amortization, depletion, or depreciation. Tax planning us 1040 Amounts you previously deducted as a loss because of a reduction in the number of pounds of tobacco allowable under the quota. Tax planning us 1040 The entire cost of a purchased quota you deducted in an earlier year (which reduces your basis to zero). Tax planning us 1040 Amount treated as interest. Tax planning us 1040   You must reduce your tobacco quota buyout program payment by the amount treated as interest. Tax planning us 1040 The interest is reportable as ordinary income. Tax planning us 1040 If payments total $3,000 or less, your total quota buyout program payment does not include any amount treated as interest and you are not required to reduce the total payment you receive. Tax planning us 1040   In all other cases, a portion of each payment may be treated as interest for federal tax purposes. Tax planning us 1040 You may be required to reduce your total quota buyout program payment before you calculate your gain or loss. Tax planning us 1040 For more information, see Notice 2005-57, 2005-32 I. Tax planning us 1040 R. Tax planning us 1040 B. Tax planning us 1040 267, available at www. Tax planning us 1040 irs. Tax planning us 1040 gov/irb/2005-32_IRB/ar13. Tax planning us 1040 html. Tax planning us 1040 Installment method. Tax planning us 1040   You may use the installment method to report a gain if you receive at least one payment after the close of your tax year. Tax planning us 1040 Under the installment method, a portion of the gain is taken into account in each year in which a payment is received. Tax planning us 1040 See chapter 10 for more information. Tax planning us 1040 Capital or ordinary gain or loss. Tax planning us 1040   Whether your gain or loss is ordinary or capital depends on how you used the quota. Tax planning us 1040 Quota used in the trade or business of farming. Tax planning us 1040   If you used the quota in the trade or business of farming and you held it for more than one year, you report the transaction as a section 1231 transaction on Form 4797. Tax planning us 1040 See Section 1231 transactions in the Instructions for Form 4797 for detailed information on reporting section 1231 transactions. Tax planning us 1040 Quota held for investment. Tax planning us 1040   If you held the quota for investment purposes, any gain or loss is capital gain or loss. Tax planning us 1040 The same result also applies if you held the quota for the production of income, though not connected with a trade or business. Tax planning us 1040 Gain treated as ordinary income. Tax planning us 1040   If you previously deducted any of the following items, some or all of the capital gain must be recharacterized and reported as ordinary income. Tax planning us 1040 Any resulting capital gain is taxed as ordinary income up to the amount previously deducted. Tax planning us 1040 The cost of acquiring a quota. Tax planning us 1040 Amounts for amortization, depletion, or depreciation. Tax planning us 1040 Amounts to reflect a reduction in the quota pounds. Tax planning us 1040   You should include the ordinary income on your return for the tax year even if you use the installment method to report the remainder of the gain. Tax planning us 1040 Self-employment income. Tax planning us 1040   The tobacco quota buyout payments are not self-employment income. Tax planning us 1040 Income averaging for farmers. Tax planning us 1040   The gain or loss resulting from the quota payments does not qualify for income averaging. Tax planning us 1040 A tobacco quota is considered an interest in land. Tax planning us 1040 Income averaging is not available for gain or loss arising from the sale or other disposition of land. Tax planning us 1040 Involuntary conversion. Tax planning us 1040   The buyout of the tobacco quota is not an involuntary conversion. Tax planning us 1040 Form 1099-S. Tax planning us 1040   A tobacco quota is considered an interest in land, so the USDA will generally report the total amount you receive under a contract on Form 1099-S, Proceeds From Real Estate Transactions, if the amount is $600 or more. Tax planning us 1040 The USDA will generally report any portion of a payment treated as interest of $600 or more to you on Form 1099-INT, Interest Income, for the year in which the payment is made. Tax planning us 1040 Like-kind exchange of quota. Tax planning us 1040   You may postpone reporting the gain or loss from tobacco quota buyout payments by entering into a like-kind exchange if you comply with the requirements of section 1031 and the regulations thereunder. Tax planning us 1040 See Notice 2005-57 for more information. Tax planning us 1040 Tobacco Growers Contract payments you receive are determined by reference to the amount of quota under which you produced (or planted) quota tobacco during the 2002, 2003, and 2004 tobacco marketing years and are prorated based on the number of years that you produced (or planted) quota tobacco during those years. Tax planning us 1040 Taxation of payments to tobacco growers. Tax planning us 1040   Payments to growers replace ordinary income that would have been earned had the tobacco marketing quota and price support programs continued. Tax planning us 1040 Individuals will generally report the payments as an Agricultural program payment on Schedule F. Tax planning us 1040 If you are a landowner who does not materially participate in the operation or management of the farm and are receiving the grower payment because your farm rental income is based on the tobacco grown by a tenant, the grower payment should be reported on Form 4835. Tax planning us 1040 Self-employment income. Tax planning us 1040   Payments to growers generally represent self-employment income. Tax planning us 1040 If the grower is an individual carrying on a trade or business and deriving income (other than farm rental income properly reported on Form 4835) from that trade or business, the payments are net earnings from self-employment. Tax planning us 1040 Income averaging for farmers. Tax planning us 1040   Payments to growers who are individuals qualify for farm income averaging. Tax planning us 1040 Form 1099-G. Tax planning us 1040   If the amount received in a taxable year is $600 or more, the amount will generally be reported by the USDA on a Form 1099-G. Tax planning us 1040 Other Payments You must include most other government program payments in income. Tax planning us 1040 Fertilizer and Lime Include in income the value of fertilizer or lime you receive under a government program. Tax planning us 1040 How to claim the offsetting deduction is explained under Fertilizer and Lime in chapter 4. Tax planning us 1040 Improvements If government payments are based on improvements, such as a pollution control facility, you must include them in income. Tax planning us 1040 You must also capitalize the full cost of the improvement. Tax planning us 1040 Since you have included the payments in income, they do not reduce your basis. Tax planning us 1040 However, see Cost-Sharing Exclusion (Improvements) , earlier, for additional information. Tax planning us 1040 National Tobacco Growers' Settlement Trust Fund Payments If you are a producer, landowner, or tobacco quota owner who receives money from the National Tobacco Growers' Settlement Trust Fund, you must report those payments as income. Tax planning us 1040 You should receive a Form 1099-MISC, Miscellaneous Income, that shows the payment amount. Tax planning us 1040 If you produce a tobacco crop, report the payments as income from farming on your Schedule F. Tax planning us 1040 If you are a landowner or tobacco quota owner who leases tobacco-related property but you do not produce the crop, report the payments as farm rental income on Form 4835. Tax planning us 1040 Payment to More Than One Person The USDA reports program payments to the IRS. Tax planning us 1040 It reports a program payment intended for more than one person as having been paid to the person whose identification number is on record for that payment (payee of record). Tax planning us 1040 If you, as the payee of record, receive a program payment belonging to someone else, such as your landlord, the amount belonging to the other person is a nominee distribution. Tax planning us 1040 You should file Form 1099-G to report the identity of the actual recipient to the IRS. Tax planning us 1040 You should also give this information to the recipient. Tax planning us 1040 You can avoid the inconvenience of unnecessary inquiries about the identity of the recipient if you file this form. Tax planning us 1040 Report the total amount reported to you as the payee of record on Schedule F, line 4a or 6a. Tax planning us 1040 However, do not report as a taxable amount on line 4b or 6b any amount belonging to someone else. Tax planning us 1040 See chapter 16 for information about ordering Form 1099-G. Tax planning us 1040 Income From Cooperatives If you buy farm supplies through a cooperative, you may receive income from the cooperative in the form of patronage dividends (refunds). Tax planning us 1040 If you sell your farm products through a cooperative, you may receive either patronage dividends or a per-unit retain certificate, explained later, from the cooperative. Tax planning us 1040 Form 1099-PATR. Tax planning us 1040   The cooperative will report the income to you on Form 1099-PATR or a similar form and send a copy to the IRS. Tax planning us 1040 Form 1099-PATR may also show an alternative minimum tax adjustment that you must include on Form 6251, Alternative Minimum Tax—Individuals, if you are required to file the form. Tax planning us 1040 For information on the alternative minimum tax, see the Instructions for Form 6251. Tax planning us 1040 Patronage Dividends You generally report patronage dividends as income on Schedule F, lines 3a and 3b, for the tax year you receive them. Tax planning us 1040 They include the following items. Tax planning us 1040 Money paid as a patronage dividend, including cash advances received (for example, from a marketing cooperative). Tax planning us 1040 The stated dollar value of qualified written notices of allocation. Tax planning us 1040 The fair market value of other property. Tax planning us 1040 Do not report as income on line 3b any patronage dividends you receive from expenditures that were not deductible, such as buying personal or family items, capital assets, or depreciable property. Tax planning us 1040 You must reduce the cost or other basis of these items by the amount of such patronage dividends received. Tax planning us 1040 Personal items include fuel purchased for personal use, basic local telephone service, and personal long distance calls. Tax planning us 1040 If you cannot determine what the dividend is for, report it as income on lines 3a and 3b. Tax planning us 1040 Qualified written notice of allocation. Tax planning us 1040   If you receive a qualified written notice of allocation as part of a patronage dividend, you must generally include its stated dollar value in your income on Schedule F, lines 3a and 3b, in the year you receive it. Tax planning us 1040 A written notice of allocation is qualified if at least 20% of the patronage dividend is paid in money or by qualified check and either of the following conditions is met. Tax planning us 1040 The notice must be redeemable in cash for at least 90 days after it is issued, and you must have received a written notice of your right of redemption at the same time as the written notice of allocation. Tax planning us 1040 You must have agreed to include the stated dollar value in income in the year you receive the notice by doing one of the following. Tax planning us 1040 Signing and giving a written agreement to the cooperative. Tax planning us 1040 Getting or keeping membership in the cooperative after it adopted a bylaw providing that membership constitutes agreement. Tax planning us 1040 The cooperative must notify you in writing of this bylaw and give you a copy. Tax planning us 1040 Endorsing and cashing a qualified check paid as part of the same patronage dividend. Tax planning us 1040 You must cash the check by the 90th day after the close of the payment period for the cooperative's tax year for which the patronage dividend was paid. Tax planning us 1040 Qualified check. Tax planning us 1040   A qualified check is any instrument that is redeemable in money and meets both of the following requirements. Tax planning us 1040 It is part of a patronage dividend that also includes a qualified written notice of allocation for which you met condition 2(c), above. Tax planning us 1040 It is imprinted with a statement that endorsing and cashing it constitutes the payee's consent to include in income the stated dollar value of any written notices of allocation paid as part of the same patronage dividend. Tax planning us 1040 Loss on redemption. Tax planning us 1040   You can deduct on Schedule F, Part II, any loss incurred on the redemption of a qualified written notice of allocation you received in the ordinary course of your farming business. Tax planning us 1040 The loss is the difference between the stated dollar amount of the qualified written notice you included in income and the amount you received when you redeemed it. Tax planning us 1040 Nonqualified notice of allocation. Tax planning us 1040   Do not include the stated dollar value of any nonqualified notice of allocation in income when you receive it. Tax planning us 1040 Your basis in the notice is zero. Tax planning us 1040 You must include in income for the tax year of disposition any amount you receive from its sale, redemption, or other disposition. Tax planning us 1040 Report that amount, up to the stated dollar value of the notice, on Schedule F, lines 3a and 3b. Tax planning us 1040 However, do not include that amount in your income if the notice resulted from buying or selling capital assets or depreciable property or from buying personal items, as explained in the following discussions. Tax planning us 1040   If the amount you receive is more than the stated dollar value of the notice, report the excess as the type of income it represents. Tax planning us 1040 For example, if it represents interest income, report it on your return as interest. Tax planning us 1040 Buying or selling capital assets or depreciable property. Tax planning us 1040   Do not include in income patronage dividends from buying capital assets or depreciable property used in your business. Tax planning us 1040 You must, however, reduce the basis of these assets by the dividends. Tax planning us 1040 This reduction is taken into account as of the first day of the tax year in which the dividends are received. Tax planning us 1040 If the dividends are more than your unrecovered basis, reduce the unrecovered basis to zero and include the difference on Schedule F, line 3a, for the tax year you receive them. Tax planning us 1040   This rule and the exceptions explained below also apply to amounts you receive from the sale, redemption, or other disposition of a nonqualified notice of allocation that resulted from buying or selling capital assets or depreciable property. Tax planning us 1040 Example. Tax planning us 1040 On July 1, 2012, Mr. Tax planning us 1040 Brown, a patron of a cooperative association, bought a machine for his dairy farm business from the association for $2,900. Tax planning us 1040 The machine has a life of 7 years under MACRS (as provided in the Table of Class Lives and Recovery Periods in Appendix B of Publication 946, Depreciation and Amortization). Tax planning us 1040 Mr. Tax planning us 1040 Brown files his return on a calendar year basis. Tax planning us 1040 For 2012, he claimed a depreciation deduction of $311, using the 10. Tax planning us 1040 71% depreciation rate from the 150% declining balance, half-year convention table (shown in Table A-14 in Appendix A of Publication 946). Tax planning us 1040 On July 2, 2013, the cooperative association paid Mr. Tax planning us 1040 Brown a $300 cash patronage dividend for buying the machine. Tax planning us 1040 Mr. Tax planning us 1040 Brown adjusts the basis of the machine and figures his depreciation deduction for 2013 (and later years) as follows. Tax planning us 1040 Cost of machine on July 1, 2012 $2,900 Minus: 2012 depreciation $311     2013 cash dividend 300 611 Adjusted basis for  depreciation for 2013: $2,289 Depreciation rate: 1 ÷ 6½ (remaining recovery period as of 1/1/2012) = 15. Tax planning us 1040 38% × 1. Tax planning us 1040 5 = 23. Tax planning us 1040 07% Depreciation deduction for 2013 ($2,289 × 23. Tax planning us 1040 07%) $528 Exceptions. Tax planning us 1040   If the dividends are for buying or selling capital assets or depreciable property you did not own at any time during the year you received the dividends, you must include them on Schedule F, lines 3a and 3b, unless one of the following rules applies. Tax planning us 1040 If the dividends relate to a capital asset you held for more than 1 year for which a loss was or would have been deductible, treat them as gain from the sale or exchange of a capital asset held for more than 1 year. Tax planning us 1040 If the dividends relate to a capital asset for which a loss was not or would not have been deductible, do not report them as income (ordinary or capital gain). Tax planning us 1040   If the dividends are for selling capital assets or depreciable property during the year you received the dividends, treat them as an additional amount received on the sale. Tax planning us 1040 Personal purchases. Tax planning us 1040   Because you cannot deduct the cost of personal, living, or family items, such as supplies, equipment, or services not related to the production of farm income, you can omit from the taxable amount of patronage dividends on Schedule F, line 3b, any dividends from buying those items (and you must reduce the cost or other basis of those items by the amount of the dividends). Tax planning us 1040 This rule also applies to amounts you receive from the sale, redemption, or other disposition of a nonqualified written notice of allocation resulting from these purchases. Tax planning us 1040 Per-Unit Retain Certificates A per-unit retain certificate is any written notice that shows the stated dollar amount of a per-unit retain allocation made to you by the cooperative. Tax planning us 1040 A per-unit retain allocation is an amount paid to patrons for products sold for them that is fixed without regard to the net earnings of the cooperative. Tax planning us 1040 These allocations can be paid in money, other property, or qualified certificates. Tax planning us 1040 Per-unit retain certificates issued by a cooperative generally receive the same tax treatment as patronage dividends, discussed earlier. Tax planning us 1040 Qualified certificates. Tax planning us 1040   Qualified per-unit retain certificates are those issued to patrons who have agreed to include the stated dollar amount of these certificates in income in the year of receipt. Tax planning us 1040 The agreement may be made in writing or by getting or keeping membership in a cooperative whose bylaws or charter states that membership constitutes agreement. Tax planning us 1040 If you receive qualified per-unit retain certificates, include the stated dollar amount of the certificates in income on Schedule F, lines 3a and 3b, for the tax year you receive them. Tax planning us 1040 Nonqualified certificates. Tax planning us 1040   Do not include the stated dollar value of a nonqualified per-unit retain certificate in income when you receive it. Tax planning us 1040 Your basis in the certificate is zero. Tax planning us 1040 You must include in income any amount you receive from its sale, redemption, or other disposition. Tax planning us 1040 Report the amount you receive from the disposition as ordinary income on Schedule F, lines 3a and 3b, for the tax year of disposition. Tax planning us 1040 Cancellation of Debt This section explains the general rule for including canceled debt in income and the exceptions to the general rule. Tax planning us 1040 For more information on canceled debt, see Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments. Tax planning us 1040 General Rule Generally, if your debt is canceled or forgiven, other than as a gift or bequest to you, you must include the canceled amount in gross income for tax purposes. Tax planning us 1040 Discharge of qualified farm indebtedness (defined below) is one of the exceptions to the general rule. Tax planning us 1040 It is excluded from taxable income (see Exclusions , later). Tax planning us 1040 Report the canceled amount on Schedule F, line 8, if you incurred the debt in your farming business. Tax planning us 1040 If the debt is a nonbusiness debt, report the canceled amount as other income on Form 1040, line 21. Tax planning us 1040 Election to defer income from discharge of indebtedness. Tax planning us 1040   You can elect to defer income from a discharge of business indebtedness that occurred after 2008 and before 2011. Tax planning us 1040 Generally, if the election is made, the deferred income is included in gross income ratably over a 5-year period beginning in 2014 (for calendar year taxpayers) and the exclusions listed below do not apply. Tax planning us 1040 See IRC section 108(i) and Publication 4681 for details. Tax planning us 1040 Form 1099-C. Tax planning us 1040   If a federal agency, financial institution, credit union, finance company, or credit card company cancels or forgives your debt of $600 or more, you will receive a Form 1099-C, Cancellation of Debt. Tax planning us 1040 The amount of debt canceled is shown in box 2. Tax planning us 1040 Exceptions The following discussion covers some exceptions to the general rule for canceled debt. Tax planning us 1040 These exceptions apply before the exclusions discussed below. Tax planning us 1040 Price reduced after purchase. Tax planning us 1040   If your purchase of property was financed by the seller and the seller reduces the amount of the debt at a time when you are not insolvent and the reduction does not occur in a chapter 11 bankruptcy case, the amount of the debt reduction will be treated as a reduction in the purchase price of the property. Tax planning us 1040 Reduce your basis in the property by the amount of the reduction in the debt. Tax planning us 1040 The rules that apply to bankruptcy and insolvency are explained below under Exclusions . Tax planning us 1040 Deductible debt. Tax planning us 1040   You do not realize income from a canceled debt to the extent the payment of the debt would have been a deductible expense. Tax planning us 1040 This exception applies before the price reduction exception discussed above and the bankruptcy and insolvency exclusions discussed next. Tax planning us 1040 Example. Tax planning us 1040 You get accounting services for your farm on credit. Tax planning us 1040 Later, you have trouble paying your farm debts, but you are not bankrupt or insolvent. Tax planning us 1040 Your accountant forgives part of the amount you owe for the accounting services. Tax planning us 1040 How you treat the canceled debt depends on your method of accounting. Tax planning us 1040 Cash method — You do not include the canceled debt in income because payment of the debt would have been deductible as a business expense. Tax planning us 1040 Accrual method — You include the canceled debt in income because the expense was deductible when you incurred the debt. Tax planning us 1040 Exclusions Do not include canceled debt in income in the following situations. Tax planning us 1040 The cancellation takes place in a bankruptcy case under title 11 of the U. Tax planning us 1040 S. Tax planning us 1040 Code. Tax planning us 1040 The cancellation takes place when you are insolvent. Tax planning us 1040 The canceled debt is a qualified farm debt. Tax planning us 1040 The canceled debt is a qualified real property business debt (in the case of a taxpayer other than a C corporation). Tax planning us 1040 See Publication 334, Tax Guide for Small Business, chapter 5. Tax planning us 1040 The canceled debt is qualified principal residence indebtedness which is discharged after 2006 and before 2014. Tax planning us 1040 The exclusions do not apply in the following situations: If a canceled debt is excluded from income because it takes place in a bankruptcy case, the exclusions in situations (2), (3), (4), and (5) do not apply. Tax planning us 1040 If a canceled debt is excluded from income because it takes place when you are insolvent, the exclusions in situations (3) and (4) do not apply to the extent you are insolvent. Tax planning us 1040 If a canceled debt is excluded from income because it is qualified principal residence indebtedness, the exclusion in situation (2) does not apply unless you elect to apply situation (2) instead of the exclusion for qualified principal residence indebtedness. Tax planning us 1040 See Form 982 , later, for information on how to claim an exclusion for a canceled debt. Tax planning us 1040 Debt. Tax planning us 1040   For this discussion, debt includes any debt for which you are liable or that attaches to property you hold. Tax planning us 1040 Bankruptcy and Insolvency You can exclude a canceled debt from income if you are bankrupt or to the extent you are insolvent. Tax planning us 1040 Bankruptcy. Tax planning us 1040   A bankruptcy case is a case under title 11 of the U. Tax planning us 1040 S. Tax planning us 1040 Code if you are under the jurisdiction of the court and the cancellation of the debt is granted by the court or is the result of a plan approved by the court. Tax planning us 1040   Do not include debt canceled in a bankruptcy case in your income in the year it is canceled. Tax planning us 1040 Instead, you must use the amount canceled to reduce your tax attributes, explained below under Reduction of tax attributes . Tax planning us 1040 Insolvency. Tax planning us 1040   You are insolvent to the extent your liabilities are more than the fair market value of your assets immediately before the cancellation of debt. Tax planning us 1040   You can exclude canceled debt from gross income up to the amount by which you are insolvent. Tax planning us 1040 If the canceled debt is more than this amount and the debt qualifies, you can apply the rules for qualified farm debt or qualified real property business debt to the difference. Tax planning us 1040 Otherwise, you include the difference in gross income. Tax planning us 1040 Use the amount excluded because of insolvency to reduce any tax attributes, as explained below under Reduction of tax attributes . Tax planning us 1040 You must reduce the tax attributes under the insolvency rules before applying the rules for qualified farm debt or for qualified real property business debt. Tax planning us 1040 Example. Tax planning us 1040 You had a $15,000 debt that was not qualified principal residence debt canceled outside of bankruptcy. Tax planning us 1040 Immediately before the cancellation, your liabilities totaled $80,000 and your assets totaled $75,000. Tax planning us 1040 Since your liabilities were more than your assets, you were insolvent to the extent of $5,000 ($80,000 − $75,000). Tax planning us 1040 You can exclude this amount from income. Tax planning us 1040 The remaining canceled debt ($10,000) may be subject to the qualified farm debt or qualified real property business debt rules. Tax planning us 1040 If not, you must include it in income. Tax planning us 1040 Reduction of tax attributes. Tax planning us 1040   If you exclude canceled debt from income in a bankruptcy case or during insolvency, you must use the excluded debt to reduce certain tax attributes. Tax planning us 1040 Order of reduction. Tax planning us 1040   You must use the excluded canceled debt to reduce the following tax attributes in the order listed unless you elect to reduce the basis of depreciable property first, as explained later. Tax planning us 1040 Net operating loss (NOL). Tax planning us 1040 Reduce any NOL for the tax year of the debt cancellation, and then any NOL carryover to that year. Tax planning us 1040 Reduce the NOL or NOL carryover one dollar for each dollar of excluded canceled debt. Tax planning us 1040 General business credit carryover. Tax planning us 1040 Reduce the credit carryover to or from the tax year of the debt cancellation. Tax planning us 1040 Reduce the carryover 331/3 cents for each dollar of excluded canceled debt. Tax planning us 1040 Minimum tax credit. Tax planning us 1040 Reduce the minimum tax credit available at the beginning of the tax year following the tax year of the debt cancellation. Tax planning us 1040 Reduce the credit 331/3 cents for each dollar of excluded canceled debt. Tax planning us 1040 Capital loss. Tax planning us 1040 Reduce any net capital loss for the tax year of the debt cancellation, and then any capital loss carryover to that year. Tax planning us 1040 Reduce the capital loss or loss carryover one dollar for each dollar of excluded canceled debt. Tax planning us 1040 Basis. Tax planning us 1040 Reduce the basis of the property you hold at the beginning of the tax year following the tax year of the debt cancellation in the following order. Tax planning us 1040 Real property (except inventory) used in your trade or business or held for investment that secured the canceled debt. Tax planning us 1040 Personal property (except inventory and accounts and notes receivable) used in your trade or business or held for investment that secured the canceled debt. Tax planning us 1040 Other property (except inventory and accounts and notes receivable) used in your trade or business or held for investment. Tax planning us 1040 Inventory and accounts and notes receivable. Tax planning us 1040 Other property. Tax planning us 1040 Reduce the basis one dollar for each dollar of excluded canceled debt. Tax planning us 1040 However, the reduction cannot be more than the total basis of property and the amount of money you hold immediately after the debt cancellation minus your total liabilities immediately after the cancellation. Tax planning us 1040 For allocation rules that apply to basis reductions for multiple canceled debts, see Regulations section 1. Tax planning us 1040 1017-1(b)(2). Tax planning us 1040 Also see Electing to reduce the basis of depreciable property