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Taxact 1040ez

Taxact 1040ez 2. Taxact 1040ez   Simplified Employee Pensions (SEPs) Table of Contents Topics - This chapter discusses: Useful Items - You may want to see: Setting Up a SEPWhen not to use Form 5305-SEP. Taxact 1040ez How Much Can I Contribute?Contribution Limits Deducting ContributionsDeduction Limit for Contributions for Participants Deduction Limit for Self-Employed Individuals Carryover of Excess SEP Contributions When To Deduct Contributions Where To Deduct Contributions Salary Reduction Simplified Employee Pensions (SARSEPs)SARSEP ADP test. Taxact 1040ez Deferral percentage. Taxact 1040ez Employee compensation. Taxact 1040ez Compensation of self-employed individuals. Taxact 1040ez Choice not to treat deferrals as compensation. Taxact 1040ez Limit on Elective Deferrals Tax Treatment of Deferrals Distributions (Withdrawals) Additional TaxesEffects on employee. Taxact 1040ez Reporting and Disclosure Requirements Topics - This chapter discusses: Setting up a SEP How much can I contribute Deducting contributions Salary reduction simplified employee pensions (SARSEPs) Distributions (withdrawals) Additional taxes Reporting and disclosure requirements Useful Items - You may want to see: Publication 590 Individual Retirement Arrangements (IRAs) 3998 Choosing A Retirement Solution for Your Small Business 4285 SEP Checklist 4286 SARSEP Checklist 4333 SEP Retirement Plans for Small Businesses 4336 SARSEP for Small Businesses 4407 SARSEP—Key Issues and Assistance Forms (and Instructions) W-2 Wage and Tax Statement 1040 U. Taxact 1040ez S. Taxact 1040ez Individual Income Tax Return 5305-SEP Simplified Employee Pension—Individual Retirement Accounts Contribution Agreement 5305A-SEP Salary Reduction Simplified Employee Pension—Individual Retirement Accounts Contribution Agreement 8880 Credit for Qualified Retirement Savings Contributions 8881 Credit for Small Employer Pension Plan Startup Costs A SEP is a written plan that allows you to make contributions toward your own retirement and your employees' retirement without getting involved in a more complex qualified plan. Taxact 1040ez Under a SEP, you make contributions to a traditional individual retirement arrangement (called a SEP-IRA) set up by or for each eligible employee. Taxact 1040ez A SEP-IRA is owned and controlled by the employee, and you make contributions to the financial institution where the SEP-IRA is maintained. Taxact 1040ez SEP-IRAs are set up for, at a minimum, each eligible employee (defined below). Taxact 1040ez A SEP-IRA may have to be set up for a leased employee (defined in chapter 1), but does not need to be set up for excludable employees (defined later). Taxact 1040ez Eligible employee. Taxact 1040ez   An eligible employee is an individual who meets all the following requirements. Taxact 1040ez Has reached age 21. Taxact 1040ez Has worked for you in at least 3 of the last 5 years. Taxact 1040ez Has received at least $550 in compensation from you in 2013. Taxact 1040ez This amount remains the same in 2014. Taxact 1040ez    You can use less restrictive participation requirements than those listed, but not more restrictive ones. Taxact 1040ez Excludable employees. Taxact 1040ez   The following employees can be excluded from coverage under a SEP. Taxact 1040ez Employees covered by a union agreement and whose retirement benefits were bargained for in good faith by the employees' union and you. Taxact 1040ez Nonresident alien employees who have received no U. Taxact 1040ez S. Taxact 1040ez source wages, salaries, or other personal services compensation from you. Taxact 1040ez For more information about nonresident aliens, see Publication 519, U. Taxact 1040ez S. Taxact 1040ez Tax Guide for Aliens. Taxact 1040ez Setting Up a SEP There are three basic steps in setting up a SEP. Taxact 1040ez You must execute a formal written agreement to provide benefits to all eligible employees. Taxact 1040ez You must give each eligible employee certain information about the SEP. Taxact 1040ez A SEP-IRA must be set up by or for each eligible employee. Taxact 1040ez Many financial institutions will help you set up a SEP. Taxact 1040ez Formal written agreement. Taxact 1040ez   You must execute a formal written agreement to provide benefits to all eligible employees under a SEP. Taxact 1040ez You can satisfy the written agreement requirement by adopting an IRS model SEP using Form 5305-SEP. Taxact 1040ez However, see When not to use Form 5305-SEP, below. Taxact 1040ez   If you adopt an IRS model SEP using Form 5305-SEP, no prior IRS approval or determination letter is required. Taxact 1040ez Keep the original form. Taxact 1040ez Do not file it with the IRS. Taxact 1040ez Also, using Form 5305-SEP will usually relieve you from filing annual retirement plan information returns with the IRS and the Department of Labor. Taxact 1040ez See the Form 5305-SEP instructions for details. Taxact 1040ez If you choose not to use Form 5305-SEP, you should seek professional advice in adopting a SEP. Taxact 1040ez When not to use Form 5305-SEP. Taxact 1040ez   You cannot use Form 5305-SEP if any of the following apply. Taxact 1040ez You currently maintain any other qualified retirement plan other than another SEP. Taxact 1040ez You have any eligible employees for whom IRAs have not been set up. Taxact 1040ez You use the services of leased employees, who are not your common-law employees (as described in chapter 1). Taxact 1040ez You are a member of any of the following unless all eligible employees of all the members of these groups, trades, or businesses participate under the SEP. Taxact 1040ez An affiliated service group described in section 414(m). Taxact 1040ez A controlled group of corporations described in section 414(b). Taxact 1040ez Trades or businesses under common control described in section 414(c). Taxact 1040ez You do not pay the cost of the SEP contributions. Taxact 1040ez Information you must give to employees. Taxact 1040ez   You must give each eligible employee a copy of Form 5305-SEP, its instructions, and the other information listed in the Form 5305-SEP instructions. Taxact 1040ez An IRS model SEP is not considered adopted until you give each employee this information. Taxact 1040ez Setting up the employee's SEP-IRA. Taxact 1040ez   A SEP-IRA must be set up by or for each eligible employee. Taxact 1040ez SEP-IRAs can be set up with banks, insurance companies, or other qualified financial institutions. Taxact 1040ez You send SEP contributions to the financial institution where the SEP-IRA is maintained. Taxact 1040ez Deadline for setting up a SEP. Taxact 1040ez   You can set up a SEP for any year as late as the due date (including extensions) of your income tax return for that year. Taxact 1040ez Credit for startup costs. Taxact 1040ez   You may be able to claim a tax credit for part of the ordinary and necessary costs of starting a SEP that first became effective in 2013. Taxact 1040ez For more information, see Credit for startup costs under Reminders, earlier. Taxact 1040ez How Much Can I Contribute? The SEP rules permit you to contribute a limited amount of money each year to each employee's SEP-IRA. Taxact 1040ez If you are self-employed, you can contribute to your own SEP-IRA. Taxact 1040ez Contributions must be in the form of money (cash, check, or money order). Taxact 1040ez You cannot contribute property. Taxact 1040ez However, participants may be able to transfer or roll over certain property from one retirement plan to another. Taxact 1040ez See Publication 590 for more information about rollovers. Taxact 1040ez You do not have to make contributions every year. Taxact 1040ez But if you make contributions, they must be based on a written allocation formula and must not discriminate in favor of highly compensated employees (defined in chapter 1). Taxact 1040ez When you contribute, you must contribute to the SEP-IRAs of all participants who actually performed personal services during the year for which the contributions are made, including employees who die or terminate employment before the contributions are made. Taxact 1040ez Contributions are deductible within limits, as discussed later, and generally are not taxable to the plan participants. Taxact 1040ez A SEP-IRA cannot be a Roth IRA. Taxact 1040ez Employer contributions to a SEP-IRA will not affect the amount an individual can contribute to a Roth or traditional IRA. Taxact 1040ez Unlike regular contributions to a traditional IRA, contributions under a SEP can be made to participants over age 70½. Taxact 1040ez If you are self-employed, you can also make contributions under the SEP for yourself even if you are over 70½. Taxact 1040ez Participants age 70½ or over must take required minimum distributions. Taxact 1040ez Time limit for making contributions. Taxact 1040ez   To deduct contributions for a year, you must make the contributions by the due date (including extensions) of your tax return for the year. Taxact 1040ez Contribution Limits Contributions you make for 2013 to a common-law employee's SEP-IRA cannot exceed the lesser of 25% of the employee's compensation or $51,000. Taxact 1040ez Compensation generally does not include your contributions to the SEP. Taxact 1040ez The SEP plan document will specify how the employer contribution is determined and how it will be allocated to participants. Taxact 1040ez Example. Taxact 1040ez Your employee, Mary Plant, earned $21,000 for 2013. Taxact 1040ez The maximum contribution you can make to her SEP-IRA is $5,250 (25% x $21,000). Taxact 1040ez Contributions for yourself. Taxact 1040ez   The annual limits on your contributions to a common-law employee's SEP-IRA also apply to contributions you make to your own SEP-IRA. Taxact 1040ez However, special rules apply when figuring your maximum deductible contribution. Taxact 1040ez See Deduction Limit for Self-Employed Individuals , later. Taxact 1040ez Annual compensation limit. Taxact 1040ez   You cannot consider the part of an employee's compensation over $255,000 when figuring your contribution limit for that employee. Taxact 1040ez However, $51,000 is the maximum contribution for an eligible employee. Taxact 1040ez These limits are $260,000 and $52,000, respectively, in 2014. Taxact 1040ez Example. Taxact 1040ez Your employee, Susan Green, earned $210,000 for 2013. Taxact 1040ez Because of the maximum contribution limit for 2013, you can only contribute $51,000 to her SEP-IRA. Taxact 1040ez More than one plan. Taxact 1040ez   If you contribute to a defined contribution plan (defined in chapter 4), annual additions to an account are limited to the lesser of $51,000 or 100% of the participant's compensation. Taxact 1040ez When you figure this limit, you must add your contributions to all defined contribution plans maintained by you. Taxact 1040ez Because a SEP is considered a defined contribution plan for this limit, your contributions to a SEP must be added to your contributions to other defined contribution plans you maintain. Taxact 1040ez Tax treatment of excess contributions. Taxact 1040ez   Excess contributions are your contributions to an employee's SEP-IRA (or to your own SEP-IRA) for 2013 that exceed the lesser of the following amounts. Taxact 1040ez 25% of the employee's compensation (or, for you, 20% of your net earnings from self-employment). Taxact 1040ez $51,000. Taxact 1040ez Excess contributions are included in the employee's income for the year and are treated as contributions by the employee to his or her SEP-IRA. Taxact 1040ez For more information on employee tax treatment of excess contributions, see chapter 1 in Publication 590. Taxact 1040ez Reporting on Form W-2. Taxact 1040ez   Do not include SEP contributions on your employee's Form W-2 unless contributions were made under a salary reduction arrangement (discussed later). Taxact 1040ez Deducting Contributions Generally, you can deduct the contributions you make each year to each employee's SEP-IRA. Taxact 1040ez If you are self-employed, you can deduct the contributions you make each year to your own SEP-IRA. Taxact 1040ez Deduction Limit for Contributions for Participants The most you can deduct for your contributions to you or your employee's SEP-IRA is the lesser of the following amounts. Taxact 1040ez Your contributions (including any excess contributions carryover). Taxact 1040ez 25% of the compensation (limited to $255,000 per participant) paid to the participants during 2013 from the business that has the plan, not to exceed $51,000 per participant. Taxact 1040ez In 2014, the amounts in (2) above are $260,000 and $52,000, respectively. Taxact 1040ez Deduction Limit for Self-Employed Individuals If you contribute to your own SEP-IRA, you must make a special computation to figure your maximum deduction for these contributions. Taxact 1040ez When figuring the deduction for contributions made to your own SEP-IRA, compensation is your net earnings from self-employment (defined in chapter 1), which takes into account both the following deductions. Taxact 1040ez The deduction for the deductible part of your self-employment tax. Taxact 1040ez The deduction for contributions to your own SEP-IRA. Taxact 1040ez The deduction for contributions to your own SEP-IRA and your net earnings depend on each other. Taxact 1040ez For this reason, you determine the deduction for contributions to your own SEP-IRA indirectly by reducing the contribution rate called for in your plan. Taxact 1040ez To do this, use the Rate Table for Self-Employed or the Rate Worksheet for Self-Employed, whichever is appropriate for your plan's contribution rate, in chapter 5. Taxact 1040ez Then figure your maximum deduction by using the Deduction Worksheet for Self-Employed in chapter 5. Taxact 1040ez Carryover of Excess SEP Contributions If you made SEP contributions that are more than the deduction limit (nondeductible contributions), you can carry over and deduct the difference in later years. Taxact 1040ez However, the carryover, when combined with the contribution for the later year, is subject to the deduction limit for that year. Taxact 1040ez If you also contributed to a defined benefit plan or defined contribution plan, see Carryover of Excess Contributions under Employer Deduction in chapter 4 for the carryover limit. Taxact 1040ez Excise tax. Taxact 1040ez   If you made nondeductible (excess) contributions to a SEP, you may be subject to a 10% excise tax. Taxact 1040ez For information about the excise tax, see Excise Tax for Nondeductible (Excess) Contributions under Employer Deduction in chapter 4. Taxact 1040ez When To Deduct Contributions When you can deduct contributions made for a year depends on the tax year on which the SEP is maintained. Taxact 1040ez If the SEP is maintained on a calendar year basis, you deduct the yearly contributions on your tax return for the year within which the calendar year ends. Taxact 1040ez If you file your tax return and maintain the SEP using a fiscal year or short tax year, you deduct contributions made for a year on your tax return for that year. Taxact 1040ez Example. Taxact 1040ez You are a fiscal year taxpayer whose tax year ends June 30. Taxact 1040ez You maintain a SEP on a calendar year basis. Taxact 1040ez You deduct SEP contributions made for calendar year 2013 on your tax return for your tax year ending June 30, 2014. Taxact 1040ez Where To Deduct Contributions Deduct the contributions you make for your common-law employees on your tax return. Taxact 1040ez For example, sole proprietors deduct them on Schedule C (Form 1040) or Schedule F (Form 1040), Profit or Loss From Farming; partnerships deduct them on Form 1065, U. Taxact 1040ez S. Taxact 1040ez Return of Partnership Income; and corporations deduct them on Form 1120, U. Taxact 1040ez S. Taxact 1040ez Corporation Income Tax Return, or Form 1120S, U. Taxact 1040ez S. Taxact 1040ez Income Tax Return for an S Corporation. Taxact 1040ez Sole proprietors and partners deduct contributions for themselves on line 28 of Form 1040. Taxact 1040ez (If you are a partner, contributions for yourself are shown on the Schedule K-1 (Form 1065), Partner's Share of Income, Deductions, Credits, etc. Taxact 1040ez , you receive from the partnership. Taxact 1040ez ) Remember that sole proprietors and partners can't deduct as a business expense contributions made to a SEP for themselves, only those made for their common-law employees. Taxact 1040ez Salary Reduction Simplified Employee Pensions (SARSEPs) A SARSEP is a SEP set up before 1997 that includes a salary reduction arrangement. Taxact 1040ez (See the Caution, next. Taxact 1040ez ) Under a SARSEP, your employees can choose to have you contribute part of their pay to their SEP-IRAs rather than receive it in cash. Taxact 1040ez This contribution is called an “elective deferral” because employees choose (elect) to set aside the money, and they defer the tax on the money until it is distributed to them. Taxact 1040ez You are not allowed to set up a SARSEP after 1996. Taxact 1040ez However, participants (including employees hired after 1996) in a SARSEP set up before 1997 can continue to have you contribute part of their pay to the plan. Taxact 1040ez If you are interested in setting up a retirement plan that includes a salary reduction arrangement, see chapter 3. Taxact 1040ez Who can have a SARSEP?   A SARSEP set up before 1997 is available to you and your eligible employees only if all the following requirements are met. Taxact 1040ez At least 50% of your employees eligible to participate choose to make elective deferrals. Taxact 1040ez You have 25 or fewer employees who were eligible to participate in the SEP at any time during the preceding year. Taxact 1040ez The elective deferrals of your highly compensated employees meet the SARSEP ADP test. Taxact 1040ez SARSEP ADP test. Taxact 1040ez   Under the SARSEP ADP test, the amount deferred each year by each eligible highly compensated employee as a percentage of pay (the deferral percentage) cannot be more than 125% of the average deferral percentage (ADP) of all non-highly compensated employees eligible to participate. Taxact 1040ez A highly compensated employee is defined in chapter 1. Taxact 1040ez Deferral percentage. Taxact 1040ez   The deferral percentage for an employee for a year is figured as follows. Taxact 1040ez   The elective employer contributions (excluding certain catch-up contributions)  paid to the SEP for the employee for the year     The employee's compensation (limited to $255,000 in 2013)   The instructions for Form 5305A-SEP have a worksheet you can use to determine whether the elective deferrals of your highly compensated employees meet the SARSEP ADP test. Taxact 1040ez Employee compensation. Taxact 1040ez   For figuring the deferral percentage, compensation is generally the amount you pay to the employee for the year. Taxact 1040ez Compensation includes the elective deferral and other amounts deferred in certain employee benefit plans. Taxact 1040ez See Compensation in chapter 1. Taxact 1040ez Elective deferrals under the SARSEP are included in figuring your employees' deferral percentage even though they are not included in the income of your employees for income tax purposes. Taxact 1040ez Compensation of self-employed individuals. Taxact 1040ez   If you are self-employed, compensation is your net earnings from self-employment as defined in chapter 1. Taxact 1040ez   Compensation does not include tax-free items (or deductions related to them) other than foreign earned income and housing cost amounts. Taxact 1040ez Choice not to treat deferrals as compensation. Taxact 1040ez   You can choose not to treat elective deferrals (and other amounts deferred in certain employee benefit plans) for a year as compensation under your SARSEP. Taxact 1040ez Limit on Elective Deferrals The most a participant can choose to defer for calendar year 2013 is the lesser of the following amounts. Taxact 1040ez 25% of the participant's compensation (limited to $255,000 of the participant's compensation). Taxact 1040ez $17,500. Taxact 1040ez The $17,500 limit applies to the total elective deferrals the employee makes for the year to a SEP and any of the following. Taxact 1040ez Cash or deferred arrangement (section 401(k) plan). Taxact 1040ez Salary reduction arrangement under a tax-sheltered annuity plan (section 403(b) plan). Taxact 1040ez SIMPLE IRA plan. Taxact 1040ez In 2014, the $255,000 limit increases to $260,000 and the $17,500 limit remains at $17,500. Taxact 1040ez Catch-up contributions. Taxact 1040ez   A SARSEP can permit participants who are age 50 or over at the end of the calendar year to also make catch-up contributions. Taxact 1040ez The catch-up contribution limit for 2013 is $5,500 and remains at $5,500 for 2014. Taxact 1040ez Elective deferrals are not treated as catch-up contributions for 2013 until they exceed the elective deferral limit (the lesser of 25% of compensation or $17,500), the SARSEP ADP test limit discussed earlier, or the plan limit (if any). Taxact 1040ez However, the catch-up contribution a participant can make for a year cannot exceed the lesser of the following amounts. Taxact 1040ez The catch-up contribution limit. Taxact 1040ez The excess of the participant's compensation over the elective deferrals that are not catch-up contributions. Taxact 1040ez   Catch-up contributions are not subject to the elective deferral limit (the lesser of 25% of compensation or $17,500 in 2013 and in 2014). Taxact 1040ez Overall limit on SEP contributions. Taxact 1040ez   If you also make nonelective contributions to a SEP-IRA, the total of the nonelective and elective contributions to that SEP-IRA cannot exceed the lesser of 25% of the employee's compensation or $51,000 for 2013 ($52,000 for 2014). Taxact 1040ez The same rule applies to contributions you make to your own SEP-IRA. Taxact 1040ez See Contribution Limits , earlier. Taxact 1040ez Figuring the elective deferral. Taxact 1040ez   For figuring the 25% limit on elective deferrals, compensation does not include SEP contributions, including elective deferrals or other amounts deferred in certain employee benefit plans. Taxact 1040ez Tax Treatment of Deferrals Elective deferrals that are not more than the limits discussed earlier under Limit on Elective Deferrals are excluded from your employees' wages subject to federal income tax in the year of deferral. Taxact 1040ez However, these deferrals are included in wages for social security, Medicare, and federal unemployment (FUTA) tax. Taxact 1040ez Excess deferrals. Taxact 1040ez   For 2013, excess deferrals are the elective deferrals for the year that are more than the $17,500 limit discussed earlier. Taxact 1040ez For a participant who is eligible to make catch-up contributions, excess deferrals are the elective deferrals that are more than $23,000. Taxact 1040ez The treatment of excess deferrals made under a SARSEP is similar to the treatment of excess deferrals made under a qualified plan. Taxact 1040ez See Treatment of Excess Deferrals under Elective Deferrals (401(k) Plans) in chapter 4. Taxact 1040ez Excess SEP contributions. Taxact 1040ez   Excess SEP contributions are elective deferrals of highly compensated employees that are more than the amount permitted under the SARSEP ADP test. Taxact 1040ez You must notify your highly compensated employees within 2½ months after the end of the plan year of their excess SEP contributions. Taxact 1040ez If you do not notify them within this time period, you must pay a 10% tax on the excess. Taxact 1040ez For an explanation of the notification requirements, see Rev. Taxact 1040ez Proc. Taxact 1040ez 91-44, 1991-2 C. Taxact 1040ez B. Taxact 1040ez 733. Taxact 1040ez If you adopted a SARSEP using Form 5305A-SEP, the notification requirements are explained in the instructions for that form. Taxact 1040ez Reporting on Form W-2. Taxact 1040ez   Do not include elective deferrals in the “Wages, tips, other compensation” box of Form W-2. Taxact 1040ez You must, however, include them in the “Social security wages” and “Medicare wages and tips” boxes. Taxact 1040ez You must also include them in box 12. Taxact 1040ez Mark the “Retirement plan” checkbox in box 13. Taxact 1040ez For more information, see the Form W-2 instructions. Taxact 1040ez Distributions (Withdrawals) As an employer, you cannot prohibit distributions from a SEP-IRA. Taxact 1040ez Also, you cannot make your contributions on the condition that any part of them must be kept in the account after you have made your contributions to the employee's accounts. Taxact 1040ez Distributions are subject to IRA rules. Taxact 1040ez Generally, you or your employee must begin to receive distributions from a SEP-IRA by April 1 of the first year after the calendar year in which you or your employee reaches age 70½. Taxact 1040ez For more information about IRA rules, including the tax treatment of distributions, rollovers, required distributions, and income tax withholding, see Publication 590. Taxact 1040ez Additional Taxes The tax advantages of using SEP-IRAs for retirement savings can be offset by additional taxes that may be imposed for all the following actions. Taxact 1040ez Making excess contributions. Taxact 1040ez Making early withdrawals. Taxact 1040ez Not making required withdrawals. Taxact 1040ez For information about these taxes, see chapter 1 in Publication 590. Taxact 1040ez Also, a SEP-IRA may be disqualified, or an excise tax may apply, if the account is involved in a prohibited transaction, discussed next. Taxact 1040ez Prohibited transaction. Taxact 1040ez   If an employee improperly uses his or her SEP-IRA, such as by borrowing money from it, the employee has engaged in a prohibited transaction. Taxact 1040ez In that case, the SEP-IRA will no longer qualify as an IRA. Taxact 1040ez For a list of prohibited transactions, see Prohibited Transactions in chapter 4. Taxact 1040ez Effects on employee. Taxact 1040ez   If a SEP-IRA is disqualified because of a prohibited transaction, the assets in the account will be treated as having been distributed to the employee on the first day of the year in which the transaction occurred. Taxact 1040ez The employee must include in income the fair market value of the assets (on the first day of the year) that is more than any cost basis in the account. Taxact 1040ez Also, the employee may have to pay the additional tax for making early withdrawals. Taxact 1040ez Reporting and Disclosure Requirements If you set up a SEP using Form 5305-SEP, you must give your eligible employees certain information about the SEP when you set it up. Taxact 1040ez See Setting Up a SEP , earlier. Taxact 1040ez Also, you must give your eligible employees a statement each year showing any contributions to their SEP-IRAs. Taxact 1040ez You must also give them notice of any excess contributions. Taxact 1040ez For details about other information you must give them, see the instructions for Form 5305-SEP or Form 5305A-SEP (for a salary reduction SEP). Taxact 1040ez Even if you did not use Form 5305-SEP or Form 5305A-SEP to set up your SEP, you must give your employees information similar to that described above. Taxact 1040ez For more information, see the instructions for either Form 5305-SEP or Form 5305A-SEP. Taxact 1040ez Prev  Up  Next   Home   More Online Publications
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Employer ID Numbers (EINs)

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An Employer Identification Number (EIN) is also known as a Federal Tax Identification Number, and is used to identify a business entity. Generally, businesses need an EIN. You may apply for an EIN in various ways, and now you may apply online. This is a free service offered by the Internal Revenue Service. You must check with your state to make sure you need a state number or charter.

Apply for an EIN Online

Check out our Interview-style online EIN application. No need to file a Form SS-4! We ask you the questions and you give us the answers. The application includes embedded help topics and hyperlinked keywords and definitions so separate instructions aren’t needed. After all validations are done you will get your EIN immediately upon completion. You can then download, save, and print your confirmation notice. It’s fast, free, and user-friendly!

Change of Ownership or Structure

Generally, businesses need a new EIN when their ownership or structure has changed. Refer to "Do You Need a New EIN?" to determine if this applies to your business.

Verify Your EIN

If you want to verify your EIN, see the Lost or Misplaced Your EIN page for instructions.

Daily Limitation of an Employer Identification Number

Effective May 21, 2012, to ensure fair and equitable treatment for all taxpayers, the Internal Revenue Service will limit Employer Identification Number (EIN) issuance to one per responsible party per day. This limitation is applicable to all requests for EINs whether online or by fax or mail. We apologize for any inconvenience this may cause.

Page Last Reviewed or Updated: 03-Jan-2014

The Taxact 1040ez

Taxact 1040ez 2. Taxact 1040ez   Ordinary or Capital Gain or Loss Table of Contents IntroductionSection 1231 transactions. Taxact 1040ez Topics - This chapter discusses: Useful Items - You may want to see: Capital Assets Noncapital AssetsCommodities derivative dealer. Taxact 1040ez Sales and Exchanges Between Related PersonsGain Is Ordinary Income Nondeductible Loss Other DispositionsSale of a Business Dispositions of Intangible Property Subdivision of Land Timber Precious Metals and Stones, Stamps, and Coins Coal and Iron Ore Conversion Transactions Introduction You must classify your gains and losses as either ordinary or capital (and your capital gains or losses as either short-term or long-term). Taxact 1040ez You must do this to figure your net capital gain or loss. Taxact 1040ez For individuals, a net capital gain may be taxed at a different tax rate than ordinary income. Taxact 1040ez See Capital Gains Tax Rates in chapter 4. Taxact 1040ez Your deduction for a net capital loss may be limited. Taxact 1040ez See Treatment of Capital Losses in chapter 4. Taxact 1040ez Capital gain or loss. Taxact 1040ez   Generally, you will have a capital gain or loss if you sell or exchange a capital asset. Taxact 1040ez You also may have a capital gain if your section 1231 transactions result in a net gain. Taxact 1040ez Section 1231 transactions. Taxact 1040ez   Section 1231 transactions are sales and exchanges of property held longer than 1 year and either used in a trade or business or held for the production of rents or royalties. Taxact 1040ez They also include certain involuntary conversions of business or investment property, including capital assets. Taxact 1040ez See Section 1231 Gains and Losses in chapter 3 for more information. Taxact 1040ez Topics - This chapter discusses: Capital assets Noncapital assets Sales and exchanges between  related persons Other dispositions Useful Items - You may want to see: Publication 550 Investment Income and Expenses Form (and Instructions) Schedule D (Form 1040) Capital Gains and Losses 4797 Sales of Business Property 8594 Asset Acquisition Statement Under Section 1060 8949 Sales and Other Dispositions of Capital Assets See chapter 5 for information about getting publications and forms. Taxact 1040ez Capital Assets Almost everything you own and use for personal purposes, pleasure, or investment is a capital asset. Taxact 1040ez For exceptions, see Noncapital Assets, later. Taxact 1040ez The following items are examples of capital assets. Taxact 1040ez Stocks and bonds. Taxact 1040ez A home owned and occupied by you and your family. Taxact 1040ez Timber grown on your home property or investment property, even if you make casual sales of the timber. Taxact 1040ez Household furnishings. Taxact 1040ez A car used for pleasure or commuting. Taxact 1040ez Coin or stamp collections. Taxact 1040ez Gems and jewelry. Taxact 1040ez Gold, silver, and other metals. Taxact 1040ez Personal-use property. Taxact 1040ez   Generally, property held for personal use is a capital asset. Taxact 1040ez Gain from a sale or exchange of that property is a capital gain. Taxact 1040ez Loss from the sale or exchange of that property is not deductible. Taxact 1040ez You can deduct a loss relating to personal-use property only if it results from a casualty or theft. Taxact 1040ez Investment property. Taxact 1040ez   Investment property (such as stocks and bonds) is a capital asset, and a gain or loss from its sale or exchange is a capital gain or loss. Taxact 1040ez This treatment does not apply to property used to produce rental income. Taxact 1040ez See Business assets, later, under Noncapital Assets. Taxact 1040ez Release of restriction on land. Taxact 1040ez   Amounts you receive for the release of a restrictive covenant in a deed to land are treated as proceeds from the sale of a capital asset. Taxact 1040ez Noncapital Assets A noncapital asset is property that is not a capital asset. Taxact 1040ez The following kinds of property are not capital assets. Taxact 1040ez Stock in trade, inventory, and other property you hold mainly for sale to customers in your trade or business. Taxact 1040ez Inventories are discussed in Publication 538, Accounting Periods and Methods. Taxact 1040ez But, see the Tip below. Taxact 1040ez Accounts or notes receivable acquired in the ordinary course of a trade or business for services rendered or from the sale of any properties described in (1), above. Taxact 1040ez Depreciable property used in your trade or business or as rental property (including section 197 intangibles defined later), even if the property is fully depreciated (or amortized). Taxact 1040ez Sales of this type of property are discussed in chapter 3. Taxact 1040ez Real property used in your trade or business or as rental property, even if the property is fully depreciated. Taxact 1040ez A copyright; a literary, musical, or artistic composition; a letter; a memorandum; or similar property (such as drafts of speeches, recordings, transcripts, manuscripts, drawings, or photographs): Created by your personal efforts, Prepared or produced for you (in the case of a letter, memorandum, or similar property), or Received from a person who created the property or for whom the property was prepared under circumstances (for example, by gift) entitling you to the basis of the person who created the property, or for whom it was prepared or produced. Taxact 1040ez But, see the Tip below. Taxact 1040ez U. Taxact 1040ez S. Taxact 1040ez Government publications you got from the government for free or for less than the normal sales price or that you acquired under circumstances entitling you to the basis of someone who got the publications for free or for less than the normal sales price. Taxact 1040ez Any commodities derivative financial instrument (discussed later) held by a commodities derivatives dealer unless it meets both of the following requirements. Taxact 1040ez It is established to the satisfaction of the IRS that the instrument has no connection to the activities of the dealer as a dealer. Taxact 1040ez The instrument is clearly identified in the dealer's records as meeting (a) by the end of the day on which it was acquired, originated, or entered into. Taxact 1040ez Any hedging transaction (defined later) that is clearly identified as a hedging transaction by the end of the day on which it was acquired, originated, or entered into. Taxact 1040ez Supplies of a type you regularly use or consume in the ordinary course of your trade or business. Taxact 1040ez You can elect to treat as capital assets certain self-created musical compositions or copyrights you sold or exchanged. Taxact 1040ez See chapter 4 of Publication 550 for details. Taxact 1040ez Property held mainly for sale to customers. Taxact 1040ez   Stock in trade, inventory, and other property you hold mainly for sale to customers in your trade or business are not capital assets. Taxact 1040ez Inventories are discussed in Publication 538. Taxact 1040ez Business assets. Taxact 1040ez   Real property and depreciable property used in your trade or business or as rental property (including section 197 intangibles defined later under Dispositions of Intangible Property) are not capital assets. Taxact 1040ez The sale or disposition of business property is discussed in chapter 3. Taxact 1040ez Letters and memoranda. Taxact 1040ez   Letters, memoranda, and similar property (such as drafts of speeches, recordings, transcripts, manuscripts, drawings, or photographs) are not treated as capital assets (as discussed earlier) if your personal efforts created them or if they were prepared or produced for you. Taxact 1040ez Nor is this property a capital asset if your basis in it is determined by reference to the person who created it or the person for whom it was prepared. Taxact 1040ez For this purpose, letters and memoranda addressed to you are considered prepared for you. Taxact 1040ez If letters or memoranda are prepared by persons under your administrative control, they are considered prepared for you whether or not you review them. Taxact 1040ez Commodities derivative financial instrument. Taxact 1040ez   A commodities derivative financial instrument is a commodities contract or other financial instrument for commodities (other than a share of corporate stock, a beneficial interest in a partnership or trust, a note, bond, debenture, or other evidence of indebtedness, or a section 1256 contract) the value or settlement price of which is calculated or determined by reference to a specified index (as defined in section 1221(b) of the Internal Revenue Code). Taxact 1040ez Commodities derivative dealer. Taxact 1040ez   A commodities derivative dealer is a person who regularly offers to enter into, assume, offset, assign, or terminate positions in commodities derivative financial instruments with customers in the ordinary course of a trade or business. Taxact 1040ez Hedging transaction. Taxact 1040ez   A hedging transaction is any transaction you enter into in the normal course of your trade or business primarily to manage any of the following. Taxact 1040ez Risk of price changes or currency fluctuations involving ordinary property you hold or will hold. Taxact 1040ez Risk of interest rate or price changes or currency fluctuations for borrowings you make or will make, or ordinary obligations you incur or will incur. Taxact 1040ez Sales and Exchanges Between Related Persons This section discusses the rules that may apply to the sale or exchange of property between related persons. Taxact 1040ez If these rules apply, gains may be treated as ordinary income and losses may not be deductible. Taxact 1040ez See Transfers to Spouse in chapter 1 for rules that apply to spouses. Taxact 1040ez Gain Is Ordinary Income If a gain is recognized on the sale or exchange of property to a related person, the gain may be ordinary income even if the property is a capital asset. Taxact 1040ez It is ordinary income if the sale or exchange is a depreciable property transaction or a controlled partnership transaction. Taxact 1040ez Depreciable property transaction. Taxact 1040ez   Gain on the sale or exchange of property, including a leasehold or a patent application, that is depreciable property in the hands of the person who receives it is ordinary income if the transaction is either directly or indirectly between any of the following pairs of entities. Taxact 1040ez A person and the person's controlled entity or entities. Taxact 1040ez A taxpayer and any trust in which the taxpayer (or his or her spouse) is a beneficiary unless the beneficiary's interest in the trust is a remote contingent interest; that is, the value of the interest computed actuarially is 5% or less of the value of the trust property. Taxact 1040ez An executor and a beneficiary of an estate unless the sale or exchange is in satisfaction of a pecuniary bequest (a bequest for a sum of money). Taxact 1040ez An employer (or any person related to the employer under rules (1), (2), or (3)) and a welfare benefit fund (within the meaning of section 419(e) of the Internal Revenue Code) that is controlled directly or indirectly by the employer (or any person related to the employer). Taxact 1040ez Controlled entity. Taxact 1040ez   A person's controlled entity is either of the following. Taxact 1040ez A corporation in which more than 50% of the value of all outstanding stock, or a partnership in which more than 50% of the capital interest or profits interest, is directly or indirectly owned by or for that person. Taxact 1040ez An entity whose relationship with that person is one of the following. Taxact 1040ez A corporation and a partnership if the same persons own more than 50% in value of the outstanding stock of the corporation and more than 50% of the capital interest or profits interest in the partnership. Taxact 1040ez Two corporations that are members of the same controlled group as defined in section 1563(a) of the Internal Revenue Code, except that “more than 50%” is substituted for “at least 80%” in that definition. Taxact 1040ez Two S corporations, if the same persons own more than 50% in value of the outstanding stock of each corporation. Taxact 1040ez Two corporations, one of which is an S corporation, if the same persons own more than 50% in value of the outstanding stock of each corporation. Taxact 1040ez Controlled partnership transaction. Taxact 1040ez   A gain recognized in a controlled partnership transaction may be ordinary income. Taxact 1040ez The gain is ordinary income if it results from the sale or exchange of property that, in the hands of the party who receives it, is a noncapital asset such as trade accounts receivable, inventory, stock in trade, or depreciable or real property used in a trade or business. Taxact 1040ez   A controlled partnership transaction is a transaction directly or indirectly between either of the following pairs of entities. Taxact 1040ez A partnership and a person who directly or indirectly owns more than 50% of the capital interest or profits interest in the partnership. Taxact 1040ez Two partnerships, if the same persons directly or indirectly own more than 50% of the capital interests or profits interests in both partnerships. Taxact 1040ez Determining ownership. Taxact 1040ez   In the transactions under Depreciable property transaction and Controlled partnership transaction, earlier, use the following rules to determine the ownership of stock or a partnership interest. Taxact 1040ez Stock or a partnership interest directly or indirectly owned by or for a corporation, partnership, estate, or trust is considered owned proportionately by or for its shareholders, partners, or beneficiaries. Taxact 1040ez (However, for a partnership interest owned by or for a C corporation, this applies only to shareholders who directly or indirectly own 5% or more in value of the stock of the corporation. Taxact 1040ez ) An individual is considered as owning the stock or partnership interest directly or indirectly owned by or for his or her family. Taxact 1040ez Family includes only brothers, sisters, half-brothers, half-sisters, spouse, ancestors, and lineal descendants. Taxact 1040ez For purposes of applying (1) or (2), above, stock or a partnership interest constructively owned by a person under (1) is treated as actually owned by that person. Taxact 1040ez But stock or a partnership interest constructively owned by an individual under (2) is not treated as owned by the individual for reapplying (2) to make another person the constructive owner of that stock or partnership interest. Taxact 1040ez Nondeductible Loss A loss on the sale or exchange of property between related persons is not deductible. Taxact 1040ez This applies to both direct and indirect transactions, but not to distributions of property from a corporation in a complete liquidation. Taxact 1040ez For the list of related persons, see Related persons next. Taxact 1040ez If a sale or exchange is between any of these related persons and involves the lump-sum sale of a number of blocks of stock or pieces of property, the gain or loss must be figured separately for each block of stock or piece of property. Taxact 1040ez The gain on each item is taxable. Taxact 1040ez The loss on any item is nondeductible. Taxact 1040ez Gains from the sales of any of these items may not be offset by losses on the sales of any of the other items. Taxact 1040ez Related persons. Taxact 1040ez   The following is a list of related persons. Taxact 1040ez Members of a family, including only brothers, sisters, half-brothers, half-sisters, spouse, ancestors (parents, grandparents, etc. Taxact 1040ez ), and lineal descendants (children, grandchildren, etc. Taxact 1040ez ). Taxact 1040ez An individual and a corporation if the individual directly or indirectly owns more than 50% in value of the outstanding stock of the corporation. Taxact 1040ez Two corporations that are members of the same controlled group as defined in section 267(f) of the Internal Revenue Code. Taxact 1040ez A trust fiduciary and a corporation if the trust or the grantor of the trust directly or indirectly owns more than 50% in value of the outstanding stock of the corporation. Taxact 1040ez A grantor and fiduciary, and the fiduciary and beneficiary, of any trust. Taxact 1040ez Fiduciaries of two different trusts, and the fiduciary and beneficiary of two different trusts, if the same person is the grantor of both trusts. Taxact 1040ez A tax-exempt educational or charitable organization and a person who directly or indirectly controls the organization, or a member of that person's family. Taxact 1040ez A corporation and a partnership if the same persons own more than 50% in value of the outstanding stock of the corporation and more than 50% of the capital interest or profits interest in the partnership. Taxact 1040ez Two S corporations if the same persons own more than 50% in value of the outstanding stock of each corporation. Taxact 1040ez Two corporations, one of which is an S corporation, if the same persons own more than 50% in value of the outstanding stock of each corporation. Taxact 1040ez An executor and a beneficiary of an estate unless the sale or exchange is in satisfaction of a pecuniary bequest. Taxact 1040ez Two partnerships if the same persons directly or indirectly own more than 50% of the capital interests or profits interests in both partnerships. Taxact 1040ez A person and a partnership if the person directly or indirectly owns more than 50% of the capital interest or profits interest in the partnership. Taxact 1040ez Partnership interests. Taxact 1040ez   The nondeductible loss rule does not apply to a sale or exchange of an interest in the partnership between the related persons described in (12) or (13) above. Taxact 1040ez Controlled groups. Taxact 1040ez   Losses on transactions between members of the same controlled group described in (3) earlier are deferred rather than denied. Taxact 1040ez   For more information, see section 267(f) of the Internal Revenue Code. Taxact 1040ez Ownership of stock or partnership interests. Taxact 1040ez   In determining whether an individual directly or indirectly owns any of the outstanding stock of a corporation or an interest in a partnership for a loss on a sale or exchange, the following rules apply. Taxact 1040ez Stock or a partnership interest directly or indirectly owned by or for a corporation, partnership, estate, or trust is considered owned proportionately by or for its shareholders, partners, or beneficiaries. Taxact 1040ez (However, for a partnership interest owned by or for a C corporation, this applies only to shareholders who directly or indirectly own 5% or more in value of the stock of the corporation. Taxact 1040ez ) An individual is considered as owning the stock or partnership interest directly or indirectly owned by or for his or her family. Taxact 1040ez Family includes only brothers, sisters, half-brothers, half-sisters, spouse, ancestors, and lineal descendants. Taxact 1040ez An individual owning (other than by applying (2)) any stock in a corporation is considered to own the stock directly or indirectly owned by or for his or her partner. Taxact 1040ez For purposes of applying (1), (2), or (3), stock or a partnership interest constructively owned by a person under (1) is treated as actually owned by that person. Taxact 1040ez But stock or a partnership interest constructively owned by an individual under (2) or (3) is not treated as owned by the individual for reapplying either (2) or (3) to make another person the constructive owner of that stock or partnership interest. Taxact 1040ez Indirect transactions. Taxact 1040ez   You cannot deduct your loss on the sale of stock through your broker if under a prearranged plan a related person or entity buys the same stock you had owned. Taxact 1040ez This does not apply to a cross-trade between related parties through an exchange that is purely coincidental and is not prearranged. Taxact 1040ez Property received from a related person. Taxact 1040ez   If, in a purchase or exchange, you received property from a related person who had a loss that was not allowable and you later sell or exchange the property at a gain, you recognize the gain only to the extent it is more than the loss previously disallowed to the related person. Taxact 1040ez This rule applies only to the original transferee. Taxact 1040ez Example 1. Taxact 1040ez Your brother sold stock to you for $7,600. Taxact 1040ez His cost basis was $10,000. Taxact 1040ez His loss of $2,400 was not deductible. Taxact 1040ez You later sell the same stock to an unrelated party for $10,500, realizing a gain of $2,900 ($10,500 − $7,600). Taxact 1040ez Your recognized gain is only $500, the gain that is more than the $2,400 loss not allowed to your brother. Taxact 1040ez Example 2. Taxact 1040ez Assume the same facts as in Example 1, except that you sell the stock for $6,900 instead of $10,500. Taxact 1040ez Your recognized loss is only $700 ($7,600 − $6,900). Taxact 1040ez You cannot deduct the loss not allowed to your brother. Taxact 1040ez Other Dispositions This section discusses rules for determining the treatment of gain or loss from various dispositions of property. Taxact 1040ez Sale of a Business The sale of a business usually is not a sale of one asset. Taxact 1040ez Instead, all the assets of the business are sold. Taxact 1040ez Generally, when this occurs, each asset is treated as being sold separately for determining the treatment of gain or loss. Taxact 1040ez A business usually has many assets. Taxact 1040ez When sold, these assets must be classified as capital assets, depreciable property used in the business, real property used in the business, or property held for sale to customers, such as inventory or stock in trade. Taxact 1040ez The gain or loss on each asset is figured separately. Taxact 1040ez The sale of capital assets results in capital gain or loss. Taxact 1040ez The sale of real property or depreciable property used in the business and held longer than 1 year results in gain or loss from a section 1231 transaction (discussed in chapter 3). Taxact 1040ez The sale of inventory results in ordinary income or loss. Taxact 1040ez Partnership interests. Taxact 1040ez   An interest in a partnership or joint venture is treated as a capital asset when sold. Taxact 1040ez The part of any gain or loss from unrealized receivables or inventory items will be treated as ordinary gain or loss. Taxact 1040ez For more information, see Disposition of Partner's Interest in Publication 541. Taxact 1040ez Corporation interests. Taxact 1040ez   Your interest in a corporation is represented by stock certificates. Taxact 1040ez When you sell these certificates, you usually realize capital gain or loss. Taxact 1040ez For information on the sale of stock, see chapter 4 in Publication 550. Taxact 1040ez Corporate liquidations. Taxact 1040ez   Corporate liquidations of property generally are treated as a sale or exchange. Taxact 1040ez Gain or loss generally is recognized by the corporation on a liquidating sale of its assets. Taxact 1040ez Gain or loss generally is recognized also on a liquidating distribution of assets as if the corporation sold the assets to the distributee at fair market value. Taxact 1040ez   In certain cases in which the distributee is a corporation in control of the distributing corporation, the distribution may not be taxable. Taxact 1040ez For more information, see section 332 of the Internal Revenue Code and the related regulations. Taxact 1040ez Allocation of consideration paid for a business. Taxact 1040ez   The sale of a trade or business for a lump sum is considered a sale of each individual asset rather than of a single asset. Taxact 1040ez Except for assets exchanged under any nontaxable exchange rules, both the buyer and seller of a business must use the residual method (explained later) to allocate the consideration to each business asset transferred. Taxact 1040ez This method determines gain or loss from the transfer of each asset and how much of the consideration is for goodwill and certain other intangible property. Taxact 1040ez It also determines the buyer's basis in the business assets. Taxact 1040ez Consideration. Taxact 1040ez   The buyer's consideration is the cost of the assets acquired. Taxact 1040ez The seller's consideration is the amount realized (money plus the fair market value of property received) from the sale of assets. Taxact 1040ez Residual method. Taxact 1040ez   The residual method must be used for any transfer of a group of assets that constitutes a trade or business and for which the buyer's basis is determined only by the amount paid for the assets. Taxact 1040ez This applies to both direct and indirect transfers, such as the sale of a business or the sale of a partnership interest in which the basis of the buyer's share of the partnership assets is adjusted for the amount paid under section 743(b) of the Internal Revenue Code. Taxact 1040ez Section 743(b) applies if a partnership has an election in effect under section 754 of the Internal Revenue Code. Taxact 1040ez   A group of assets constitutes a trade or business if either of the following applies. Taxact 1040ez Goodwill or going concern value could, under any circumstances, attach to them. Taxact 1040ez The use of the assets would constitute an active trade or business under section 355 of the Internal Revenue Code. Taxact 1040ez   The residual method provides for the consideration to be reduced first by the amount of Class I assets (defined below). Taxact 1040ez The consideration remaining after this reduction must be allocated among the various business assets in a certain order. Taxact 1040ez See Classes of assets next for the complete order. Taxact 1040ez Classes of assets. Taxact 1040ez   The following definitions are the classifications for deemed or actual asset acquisitions. Taxact 1040ez Allocate the consideration among the assets in the following order. Taxact 1040ez The amount allocated to an asset, other than a Class VII asset, cannot exceed its fair market value on the purchase date. Taxact 1040ez The amount you can allocate to an asset also is subject to any applicable limits under the Internal Revenue Code or general principles of tax law. Taxact 1040ez Class I assets are cash and general deposit accounts (including checking and savings accounts but excluding certificates of deposit). Taxact 1040ez Class II assets are certificates of deposit, U. Taxact 1040ez S. Taxact 1040ez Government securities, foreign currency, and actively traded personal property, including stock and securities. Taxact 1040ez Class III assets are accounts receivable, other debt instruments, and assets that you mark to market at least annually for federal income tax purposes. Taxact 1040ez However, see section 1. Taxact 1040ez 338-6(b)(2)(iii) of the regulations for exceptions that apply to debt instruments issued by persons related to a target corporation, contingent debt instruments, and debt instruments convertible into stock or other property. Taxact 1040ez Class IV assets are property of a kind that would properly be included in inventory if on hand at the end of the tax year or property held by the taxpayer primarily for sale to customers in the ordinary course of business. Taxact 1040ez Class V assets are all assets other than Class I, II, III, IV, VI, and VII assets. Taxact 1040ez    Note. Taxact 1040ez Furniture and fixtures, buildings, land, vehicles, and equipment, which constitute all or part of a trade or business are generally Class V assets. Taxact 1040ez Class VI assets are section 197 intangibles (other than goodwill and going concern value). Taxact 1040ez Class VII assets are goodwill and going concern value (whether the goodwill or going concern value qualifies as a section 197 intangible). Taxact 1040ez   If an asset described in one of the classifications described above can be included in more than one class, include it in the lower numbered class. Taxact 1040ez For example, if an asset is described in both Class II and Class IV, choose Class II. Taxact 1040ez Example. Taxact 1040ez The total paid in the sale of the assets of Company SKB is $21,000. Taxact 1040ez No cash or deposit accounts or similar accounts were sold. Taxact 1040ez The company's U. Taxact 1040ez S. Taxact 1040ez Government securities sold had a fair market value of $3,200. Taxact 1040ez The only other asset transferred (other than goodwill and going concern value) was inventory with a fair market value of $15,000. Taxact 1040ez Of the $21,000 paid for the assets of Company SKB, $3,200 is allocated to U. Taxact 1040ez S. Taxact 1040ez Government securities, $15,000 to inventory assets, and the remaining $2,800 to goodwill and going concern value. Taxact 1040ez Agreement. Taxact 1040ez   The buyer and seller may enter into a written agreement as to the allocation of any consideration or the fair market value of any of the assets. Taxact 1040ez This agreement is binding on both parties unless the IRS determines the amounts are not appropriate. Taxact 1040ez Reporting requirement. Taxact 1040ez   Both the buyer and seller involved in the sale of business assets must report to the IRS the allocation of the sales price among section 197 intangibles and the other business assets. Taxact 1040ez Use Form 8594, Asset Acquisition Statement Under Section 1060, to provide this information. Taxact 1040ez Generally, the buyer and seller should each attach Form 8594 to their federal income tax return for the year in which the sale occurred. Taxact 1040ez See the Instructions for Form 8594. Taxact 1040ez Dispositions of Intangible Property Intangible property is any personal property that has value but cannot be seen or touched. Taxact 1040ez It includes such items as patents, copyrights, and the goodwill value of a business. Taxact 1040ez Gain or loss on the sale or exchange of amortizable or depreciable intangible property held longer than 1 year (other than an amount recaptured as ordinary income) is a section 1231 gain or loss. Taxact 1040ez The treatment of section 1231 gain or loss and the recapture of amortization and depreciation as ordinary income are explained in chapter 3. Taxact 1040ez See chapter 8 of Publication 535, Business Expenses, for information on amortizable intangible property and chapter 1 of Publication 946, How To Depreciate Property, for information on intangible property that can and cannot be depreciated. Taxact 1040ez Gain or loss on dispositions of other intangible property is ordinary or capital depending on whether the property is a capital asset or a noncapital asset. Taxact 1040ez The following discussions explain special rules that apply to certain dispositions of intangible property. Taxact 1040ez Section 197 Intangibles Section 197 intangibles are certain intangible assets acquired after August 10, 1993 (after July 25, 1991, if chosen), and held in connection with the conduct of a trade or business or an activity entered into for profit whose costs are amortized over 15 years. Taxact 1040ez They include the following assets. Taxact 1040ez Goodwill. Taxact 1040ez Going concern value. Taxact 1040ez Workforce in place. Taxact 1040ez Business books and records, operating systems, and other information bases. Taxact 1040ez Patents, copyrights, formulas, processes, designs, patterns, know how, formats, and similar items. Taxact 1040ez Customer-based intangibles. Taxact 1040ez Supplier-based intangibles. Taxact 1040ez Licenses, permits, and other rights granted by a governmental unit. Taxact 1040ez Covenants not to compete entered into in connection with the acquisition of a business. Taxact 1040ez Franchises, trademarks, and trade names. Taxact 1040ez See chapter 8 of Publication 535 for a description of each intangible. Taxact 1040ez Dispositions. Taxact 1040ez   You cannot deduct a loss from the disposition or worthlessness of a section 197 intangible you acquired in the same transaction (or series of related transactions) as another section 197 intangible you still hold. Taxact 1040ez Instead, you must increase the adjusted basis of your retained section 197 intangible by the nondeductible loss. Taxact 1040ez If you retain more than one section 197 intangible, increase each intangible's adjusted basis. Taxact 1040ez Figure the increase by multiplying the nondeductible loss by a fraction, the numerator (top number) of which is the retained intangible's adjusted basis on the date of the loss and the denominator (bottom number) of which is the total adjusted basis of all retained intangibles on the date of the loss. Taxact 1040ez   In applying this rule, members of the same controlled group of corporations and commonly controlled businesses are treated as a single entity. Taxact 1040ez For example, a corporation cannot deduct a loss on the sale of a section 197 intangible if, after the sale, a member of the same controlled group retains other section 197 intangibles acquired in the same transaction as the intangible sold. Taxact 1040ez Covenant not to compete. Taxact 1040ez   A covenant not to compete (or similar arrangement) that is a section 197 intangible cannot be treated as disposed of or worthless before you have disposed of your entire interest in the trade or business for which the covenant was entered into. Taxact 1040ez Members of the same controlled group of corporations and commonly controlled businesses are treated as a single entity in determining whether a member has disposed of its entire interest in a trade or business. Taxact 1040ez Anti-churning rules. Taxact 1040ez   Anti-churning rules prevent a taxpayer from converting section 197 intangibles that do not qualify for amortization into property that would qualify for amortization. Taxact 1040ez However, these rules do not apply to part of the basis of property acquired by certain related persons if the transferor elects to do both the following. Taxact 1040ez Recognize gain on the transfer of the property. Taxact 1040ez Pay income tax on the gain at the highest tax rate. Taxact 1040ez   If the transferor is a partnership or S corporation, the partnership or S corporation (not the partners or shareholders) can make the election. Taxact 1040ez But each partner or shareholder must pay the tax on his or her share of gain. Taxact 1040ez   To make the election, you, as the transferor, must attach a statement containing certain information to your income tax return for the year of the transfer. Taxact 1040ez You must file the tax return by the due date (including extensions). Taxact 1040ez You must also notify the transferee of the election in writing by the due date of the return. Taxact 1040ez   If you timely filed your return without making the election, you can make the election by filing an amended return within 6 months after the due date of the return (excluding extensions). Taxact 1040ez Attach the statement to the amended return and write “Filed pursuant to section 301. Taxact 1040ez 9100-2” at the top of the statement. Taxact 1040ez File the amended return at the same address the original return was filed. Taxact 1040ez For more information about making the election, see Regulations section 1. Taxact 1040ez 197-2(h)(9). Taxact 1040ez For information about reporting the tax on your income tax return, see the Instructions for Form 4797. Taxact 1040ez Patents The transfer of a patent by an individual is treated as a sale or exchange of a capital asset held longer than 1 year. Taxact 1040ez This applies even if the payments for the patent are made periodically during the transferee's use or are contingent on the productivity, use, or disposition of the patent. Taxact 1040ez For information on the treatment of gain or loss on the transfer of capital assets, see chapter 4. Taxact 1040ez This treatment applies to your transfer of a patent if you meet all the following conditions. Taxact 1040ez You are the holder of the patent. Taxact 1040ez You transfer the patent other than by gift, inheritance, or devise. Taxact 1040ez You transfer all substantial rights to the patent or an undivided interest in all such rights. Taxact 1040ez You do not transfer the patent to a related person. Taxact 1040ez Holder. Taxact 1040ez   You are the holder of a patent if you are either of the following. Taxact 1040ez The individual whose effort created the patent property and who qualifies as the original and first inventor. Taxact 1040ez The individual who bought an interest in the patent from the inventor before the invention was tested and operated successfully under operating conditions and who is neither related to, nor the employer of, the inventor. Taxact 1040ez All substantial rights. Taxact 1040ez   All substantial rights to patent property are all rights that have value when they are transferred. Taxact 1040ez A security interest (such as a lien), or a reservation calling for forfeiture for nonperformance, is not treated as a substantial right for these rules and may be kept by you as the holder of the patent. Taxact 1040ez   All substantial rights to a patent are not transferred if any of the following apply to the transfer. Taxact 1040ez The rights are limited geographically within a country. Taxact 1040ez The rights are limited to a period less than the remaining life of the patent. Taxact 1040ez The rights are limited to fields of use within trades or industries and are less than all the rights that exist and have value at the time of the transfer. Taxact 1040ez The rights are less than all the claims or inventions covered by the patent that exist and have value at the time of the transfer. Taxact 1040ez Related persons. Taxact 1040ez   This tax treatment does not apply if the transfer is directly or indirectly between you and a related person as defined earlier in the list under Nondeductible Loss, with the following changes. Taxact 1040ez Members of your family include your spouse, ancestors, and lineal descendants, but not your brothers, sisters, half-brothers, or half-sisters. Taxact 1040ez Substitute “25% or more” ownership for “more than 50%. Taxact 1040ez ”   If you fit within the definition of a related person independent of family status, the brother-sister exception in (1), earlier, does not apply. Taxact 1040ez For example, a transfer between a brother and a sister as beneficiary and fiduciary of the same trust is a transfer between related persons. Taxact 1040ez The brother-sister exception does not apply because the trust relationship is independent of family status. Taxact 1040ez Franchise, Trademark, or Trade Name If you transfer or renew a franchise, trademark, or trade name for a price contingent on its productivity, use, or disposition, the amount you receive generally is treated as an amount realized from the sale of a noncapital asset. Taxact 1040ez A franchise includes an agreement that gives one of the parties the right to distribute, sell, or provide goods, services, or facilities within a specified area. Taxact 1040ez Significant power, right, or continuing interest. Taxact 1040ez   If you keep any significant power, right, or continuing interest in the subject matter of a franchise, trademark, or trade name that you transfer or renew, the amount you receive is ordinary royalty income rather than an amount realized from a sale or exchange. Taxact 1040ez   A significant power, right, or continuing interest in a franchise, trademark, or trade name includes, but is not limited to, the following rights in the transferred interest. Taxact 1040ez A right to disapprove any assignment of the interest, or any part of it. Taxact 1040ez A right to end the agreement at will. Taxact 1040ez A right to set standards of quality for products used or sold, or for services provided, and for the equipment and facilities used to promote such products or services. Taxact 1040ez A right to make the recipient sell or advertise only your products or services. Taxact 1040ez A right to make the recipient buy most supplies and equipment from you. Taxact 1040ez A right to receive payments based on the productivity, use, or disposition of the transferred item of interest if those payments are a substantial part of the transfer agreement. Taxact 1040ez Subdivision of Land If you own a tract of land and, to sell or exchange it, you subdivide it into individual lots or parcels, the gain normally is ordinary income. Taxact 1040ez However, you may receive capital gain treatment on at least part of the proceeds provided you meet certain requirements. Taxact 1040ez See section 1237 of the Internal Revenue Code. Taxact 1040ez Timber Standing timber held as investment property is a capital asset. Taxact 1040ez Gain or loss from its sale is reported as a capital gain or loss on Form 8949, and Schedule D (Form 1040), as applicable. Taxact 1040ez If you held the timber primarily for sale to customers, it is not a capital asset. Taxact 1040ez Gain or loss on its sale is ordinary business income or loss. Taxact 1040ez It is reported in the gross receipts or sales and cost of goods sold items of your return. Taxact 1040ez Farmers who cut timber on their land and sell it as logs, firewood, or pulpwood usually have no cost or other basis for that timber. Taxact 1040ez These sales constitute a very minor part of their farm businesses. Taxact 1040ez In these cases, amounts realized from such sales, and the expenses of cutting, hauling, etc. Taxact 1040ez , are ordinary farm income and expenses reported on Schedule F (Form 1040), Profit or Loss From Farming. Taxact 1040ez Different rules apply if you owned the timber longer than 1 year and elect to either: Treat timber cutting as a sale or exchange, or Enter into a cutting contract. Taxact 1040ez Timber is considered cut on the date when, in the ordinary course of business, the quantity of felled timber is first definitely determined. Taxact 1040ez This is true whether the timber is cut under contract or whether you cut it yourself. Taxact 1040ez Under the rules discussed below, disposition of the timber is treated as a section 1231 transaction. Taxact 1040ez See chapter 3. Taxact 1040ez Gain or loss is reported on Form 4797. Taxact 1040ez Christmas trees. Taxact 1040ez   Evergreen trees, such as Christmas trees, that are more than 6 years old when severed from their roots and sold for ornamental purposes are included in the term timber. Taxact 1040ez They qualify for both rules discussed below. Taxact 1040ez Election to treat cutting as a sale or exchange. Taxact 1040ez   Under the general rule, the cutting of timber results in no gain or loss. Taxact 1040ez It is not until a sale or exchange occurs that gain or loss is realized. Taxact 1040ez But if you owned or had a contractual right to cut timber, you can elect to treat the cutting of timber as a section 1231 transaction in the year the timber is cut. Taxact 1040ez Even though the cut timber is not actually sold or exchanged, you report your gain or loss on the cutting for the year the timber is cut. Taxact 1040ez Any later sale results in ordinary business income or loss. Taxact 1040ez See Example, later. Taxact 1040ez   To elect this treatment, you must: Own or hold a contractual right to cut the timber for a period of more than 1 year before it is cut, and Cut the timber for sale or for use in your trade or business. Taxact 1040ez Making the election. Taxact 1040ez   You make the election on your return for the year the cutting takes place by including in income the gain or loss on the cutting and including a computation of the gain or loss. Taxact 1040ez You do not have to make the election in the first year you cut timber. Taxact 1040ez You can make it in any year to which the election would apply. Taxact 1040ez If the timber is partnership property, the election is made on the partnership return. Taxact 1040ez This election cannot be made on an amended return. Taxact 1040ez   Once you have made the election, it remains in effect for all later years unless you cancel it. Taxact 1040ez   If you previously elected to treat the cutting of timber as a sale or exchange, you may revoke this election without the consent of the IRS. Taxact 1040ez The prior election (and revocation) is disregarded for purposes of making a subsequent election. Taxact 1040ez See Form T (Timber), Forest Activities Schedule, for more information. Taxact 1040ez Gain or loss. Taxact 1040ez   Your gain or loss on the cutting of standing timber is the difference between its adjusted basis for depletion and its fair market value on the first day of your tax year in which it is cut. Taxact 1040ez   Your adjusted basis for depletion of cut timber is based on the number of units (feet board measure, log scale, or other units) of timber cut during the tax year and considered to be sold or exchanged. Taxact 1040ez Your adjusted basis for depletion is also based on the depletion unit of timber in the account used for the cut timber, and should be figured in the same manner as shown in section 611 of the Internal Revenue Code and the related regulations. Taxact 1040ez   Timber depletion is discussed in chapter 9 of Publication 535. Taxact 1040ez Example. Taxact 1040ez In April 2013, you had owned 4,000 MBF (1,000 board feet) of standing timber longer than 1 year. Taxact 1040ez It had an adjusted basis for depletion of $40 per MBF. Taxact 1040ez You are a calendar year taxpayer. Taxact 1040ez On January 1, 2013, the timber had a fair market value (FMV) of $350 per MBF. Taxact 1040ez It was cut in April for sale. Taxact 1040ez On your 2013 tax return, you elect to treat the cutting of the timber as a sale or exchange. Taxact 1040ez You report the difference between the fair market value and your adjusted basis for depletion as a gain. Taxact 1040ez This amount is reported on Form 4797 along with your other section 1231 gains and losses to figure whether it is treated as capital gain or as ordinary gain. Taxact 1040ez You figure your gain as follows. Taxact 1040ez FMV of timber January 1, 2013 $1,400,000 Minus: Adjusted basis for depletion 160,000 Section 1231 gain $1,240,000 The fair market value becomes your basis in the cut timber and a later sale of the cut timber including any by-product or tree tops will result in ordinary business income or loss. Taxact 1040ez Outright sales of timber. Taxact 1040ez   Outright sales of timber by landowners qualify for capital gains treatment using rules similar to the rules for certain disposal of timber under a contract with retained economic interest (defined below). Taxact 1040ez However, for outright sales, the date of disposal is not deemed to be the date the timber is cut because the landowner can elect to treat the payment date as the date of disposal (see below). Taxact 1040ez Cutting contract. Taxact 1040ez   You must treat the disposal of standing timber under a cutting contract as a section 1231 transaction if all the following apply to you. Taxact 1040ez You are the owner of the timber. Taxact 1040ez You held the timber longer than 1 year before its disposal. Taxact 1040ez You kept an economic interest in the timber. Taxact 1040ez   You have kept an economic interest in standing timber if, under the cutting contract, the expected return on your investment is conditioned on the cutting of the timber. Taxact 1040ez   The difference between the amount realized from the disposal of the timber and its adjusted basis for depletion is treated as gain or loss on its sale. Taxact 1040ez Include this amount on Form 4797 along with your other section 1231 gains or losses to figure whether it is treated as capital or ordinary gain or loss. Taxact 1040ez Date of disposal. Taxact 1040ez   The date of disposal is the date the timber is cut. Taxact 1040ez However, for outright sales by landowners or if you receive payment under the contract before the timber is cut, you can elect to treat the date of payment as the date of disposal. Taxact 1040ez   This election applies only to figure the holding period of the timber. Taxact 1040ez It has no effect on the time for reporting gain or loss (generally when the timber is sold or exchanged). Taxact 1040ez   To make this election, attach a statement to the tax return filed by the due date (including extensions) for the year payment is received. Taxact 1040ez The statement must identify the advance payments subject to the election and the contract under which they were made. Taxact 1040ez   If you timely filed your return for the year you received payment without making the election, you still can make the election by filing an amended return within 6 months after the due date for that year's return (excluding extensions). Taxact 1040ez Attach the statement to the amended return and write “Filed pursuant to section 301. Taxact 1040ez 9100-2” at the top of the statement. Taxact 1040ez File the amended return at the same address the original return was filed. Taxact 1040ez Owner. Taxact 1040ez   The owner of timber is any person who owns an interest in it, including a sublessor and the holder of a contract to cut the timber. Taxact 1040ez You own an interest in timber if you have the right to cut it for sale on your own account or for use in your business. Taxact 1040ez Tree stumps. Taxact 1040ez   Tree stumps are a capital asset if they are on land held by an investor who is not in the timber or stump business as a buyer, seller, or processor. Taxact 1040ez Gain from the sale of stumps sold in one lot by such a holder is taxed as a capital gain. Taxact 1040ez However, tree stumps held by timber operators after the saleable standing timber was cut and removed from the land are considered by-products. Taxact 1040ez Gain from the sale of stumps in lots or tonnage by such operators is taxed as ordinary income. Taxact 1040ez   See Form T (Timber) and its separate instructions for more information about dispositions of timber. Taxact 1040ez Precious Metals and Stones, Stamps, and Coins Gold, silver, gems, stamps, coins, etc. Taxact 1040ez , are capital assets except when they are held for sale by a dealer. Taxact 1040ez Any gain or loss from their sale or exchange generally is a capital gain or loss. Taxact 1040ez If you are a dealer, the amount received from the sale is ordinary business income. Taxact 1040ez Coal and Iron Ore You must treat the disposal of coal (including lignite) or iron ore mined in the United States as a section 1231 transaction if both the following apply to you. Taxact 1040ez You owned the coal or iron ore longer than 1 year before its disposal. Taxact 1040ez You kept an economic interest in the coal or iron ore. Taxact 1040ez For this rule, the date the coal or iron ore is mined is considered the date of its disposal. Taxact 1040ez Your gain or loss is the difference between the amount realized from disposal of the coal or iron ore and the adjusted basis you use to figure cost depletion (increased by certain expenses not allowed as deductions for the tax year). Taxact 1040ez This amount is included on Form 4797 along with your other section 1231 gains and losses. Taxact 1040ez You are considered an owner if you own or sublet an economic interest in the coal or iron ore in place. Taxact 1040ez If you own only an option to buy the coal in place, you do not qualify as an owner. Taxact 1040ez In addition, this gain or loss treatment does not apply to income realized by an owner who is a co-adventurer, partner, or principal in the mining of coal or iron ore. Taxact 1040ez The expenses of making and administering the contract under which the coal or iron ore was disposed of and the expenses of preserving the economic interest kept under the contract are not allowed as deductions in figuring taxable income. Taxact 1040ez Rather, their total, along with the adjusted depletion basis, is deducted from the amount received to determine gain. Taxact 1040ez If the total of these expenses plus the adjusted depletion basis is more than the amount received, the result is a loss. Taxact 1040ez Special rule. Taxact 1040ez   The above treatment does not apply if you directly or indirectly dispose of the iron ore or coal to any of the following persons. Taxact 1040ez A related person whose relationship to you would result in the disallowance of a loss (see Nondeductible Loss under Sales and Exchanges Between Related Persons, earlier). Taxact 1040ez An individual, trust, estate, partnership, association, company, or corporation owned or controlled directly or indirectly by the same interests that own or control your business. Taxact 1040ez Conversion Transactions Recognized gain on the disposition or termination of any position held as part of certain conversion transactions is treated as ordinary income. Taxact 1040ez This applies if substantially all your expected return is attributable to the time value of your net investment (like interest on a loan) and the transaction is any of the following. Taxact 1040ez An applicable straddle (generally, any set of offsetting positions with respect to personal property, including stock). Taxact 1040ez A transaction in which you acquire property and, at or about the same time, you contract to sell the same or substantially identical property at a specified price. Taxact 1040ez Any other transaction that is marketed and sold as producing capital gain from a transaction in which substantially all of your expected return is due to the time value of your net investment. Taxact 1040ez For more information, see chapter 4 of Publication 550. Taxact 1040ez Prev  Up  Next   Home   More Online Publications