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Taxact 2012 Login Returning User

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Taxact 2012 Login Returning User

Taxact 2012 login returning user 5. Taxact 2012 login returning user   Additional Rules for Listed Property Table of Contents Introduction Useful Items - You may want to see: What Is Listed Property?Passenger Automobiles Other Property Used for Transportation Computers and Related Peripheral Equipment Can Employees Claim a Deduction? What Is the Business-Use Requirement?How To Allocate Use Qualified Business Use Recapture of Excess Depreciation Lessee's Inclusion Amount Do the Passenger Automobile Limits Apply?Maximum Depreciation Deduction Deductions After the Recovery Period Deductions For Passenger Automobiles Acquired in a Trade-in What Records Must Be Kept?Adequate Records How Is Listed Property Information Reported? Introduction This chapter discusses the deduction limits and other special rules that apply to certain listed property. Taxact 2012 login returning user Listed property includes cars and other property used for transportation, property used for entertainment, and certain computers. Taxact 2012 login returning user Deductions for listed property (other than certain leased property) are subject to the following special rules and limits. Taxact 2012 login returning user Deduction for employees. Taxact 2012 login returning user If your use of the property is not for your employer's convenience or is not required as a condition of your employment, you cannot deduct depreciation or rent expenses for your use of the property as an employee. Taxact 2012 login returning user Business-use requirement. Taxact 2012 login returning user If the property is not used predominantly (more than 50%) for qualified business use, you cannot claim the section 179 deduction or a special depreciation allowance. Taxact 2012 login returning user In addition, you must figure any depreciation deduction under the Modified Accelerated Cost Recovery System (MACRS) using the straight line method over the ADS recovery period. Taxact 2012 login returning user You may also have to recapture (include in income) any excess depreciation claimed in previous years. Taxact 2012 login returning user A similar inclusion amount applies to certain leased property. Taxact 2012 login returning user Passenger automobile limits and rules. Taxact 2012 login returning user Annual limits apply to depreciation deductions (including section 179 deductions and any special depreciation allowance) for certain passenger automobiles. Taxact 2012 login returning user You can continue to deduct depreciation for the unrecovered basis resulting from these limits after the end of the recovery period. Taxact 2012 login returning user This chapter defines listed property and explains the special rules and depreciation deduction limits that apply, including the special inclusion amount rule for leased property. Taxact 2012 login returning user It also discusses the recordkeeping rules for listed property and explains how to report information about the property on your tax return. Taxact 2012 login returning user Useful Items - You may want to see: Publication 463 Travel, Entertainment, Gift, and Car Expenses 535 Business Expenses 587 Business Use of Your Home (Including Use by Daycare Providers) Form (and Instructions) 2106 Employee Business Expenses 2106-EZ Unreimbursed Employee Business Expenses 4562 Depreciation and Amortization 4797 Sales of Business Property See chapter 6 for information about getting publications and forms. Taxact 2012 login returning user What Is Listed Property? Listed property is any of the following. Taxact 2012 login returning user Passenger automobiles (as defined later). Taxact 2012 login returning user Any other property used for transportation, unless it is an excepted vehicle. Taxact 2012 login returning user Property generally used for entertainment, recreation, or amusement (including photographic, phonographic, communication, and video-recording equipment). Taxact 2012 login returning user Computers and related peripheral equipment, unless used only at a regular business establishment and owned or leased by the person operating the establishment. Taxact 2012 login returning user A regular business establishment includes a portion of a dwelling unit that is used both regularly and exclusively for business as discussed in Publication 587. Taxact 2012 login returning user Improvements to listed property. Taxact 2012 login returning user   An improvement made to listed property that must be capitalized is treated as a new item of depreciable property. Taxact 2012 login returning user The recovery period and method of depreciation that apply to the listed property as a whole also apply to the improvement. Taxact 2012 login returning user For example, if you must depreciate the listed property using the straight line method, you also must depreciate the improvement using the straight line method. Taxact 2012 login returning user Passenger Automobiles A passenger automobile is any four-wheeled vehicle made primarily for use on public streets, roads, and highways and rated at 6,000 pounds or less of unloaded gross vehicle weight (6,000 pounds or less of gross vehicle weight for trucks and vans). Taxact 2012 login returning user It includes any part, component, or other item physically attached to the automobile at the time of purchase or usually included in the purchase price of an automobile. Taxact 2012 login returning user The following vehicles are not considered passenger automobiles for these purposes. Taxact 2012 login returning user An ambulance, hearse, or combination ambulance-hearse used directly in a trade or business. Taxact 2012 login returning user A vehicle used directly in the trade or business of transporting persons or property for pay or hire. Taxact 2012 login returning user A truck or van that is a qualified nonpersonal use vehicle. Taxact 2012 login returning user Qualified nonpersonal use vehicles. Taxact 2012 login returning user   Qualified nonpersonal use vehicles are vehicles that by their nature are not likely to be used more than a minimal amount for personal purposes. Taxact 2012 login returning user They include the trucks and vans listed as excepted vehicles under Other Property Used for Transportation , next. Taxact 2012 login returning user They also include trucks and vans that have been specially modified so that they are not likely to be used more than a minimal amount for personal purposes, such as by installation of permanent shelving and painting the vehicle to display advertising or the company's name. Taxact 2012 login returning user For a detailed discussion of passenger automobiles, including leased passenger automobiles, see  Publication 463. Taxact 2012 login returning user Other Property Used for Transportation Although vehicles used to transport persons or property for pay or hire and vehicles rated at more than the 6,000-pound threshold are not passenger automobiles, they are still “other property used for transportation” and are subject to the special rules for listed property. Taxact 2012 login returning user Other property used for transportation includes trucks, buses, boats, airplanes, motorcycles, and any other vehicles used to transport persons or goods. Taxact 2012 login returning user Excepted vehicles. Taxact 2012 login returning user   Other property used for transportation does not include the following qualified nonpersonal use vehicles (defined earlier under Passenger Automobiles ). Taxact 2012 login returning user Clearly marked police and fire vehicles. Taxact 2012 login returning user Unmarked vehicles used by law enforcement officers if the use is officially authorized. Taxact 2012 login returning user Ambulances used as such and hearses used as such. Taxact 2012 login returning user Any vehicle with a loaded gross vehicle weight of over 14,000 pounds that is designed to carry cargo. Taxact 2012 login returning user Bucket trucks (cherry pickers), cement mixers, dump trucks (including garbage trucks), flatbed trucks, and refrigerated trucks. Taxact 2012 login returning user Combines, cranes and derricks, and forklifts. Taxact 2012 login returning user Delivery trucks with seating only for the driver, or only for the driver plus a folding jump seat. Taxact 2012 login returning user Qualified moving vans. Taxact 2012 login returning user Qualified specialized utility repair trucks. Taxact 2012 login returning user School buses used in transporting students and employees of schools. Taxact 2012 login returning user Other buses with a capacity of at least 20 passengers that are used as passenger buses. Taxact 2012 login returning user Tractors and other special purpose farm vehicles. Taxact 2012 login returning user Clearly marked police and fire vehicle. Taxact 2012 login returning user   A clearly marked police or fire vehicle is a vehicle that meets all the following requirements. Taxact 2012 login returning user It is owned or leased by a governmental unit or an agency or instrumentality of a governmental unit. Taxact 2012 login returning user It is required to be used for commuting by a police officer or fire fighter who, when not on a regular shift, is on call at all times. Taxact 2012 login returning user It is prohibited from being used for personal use (other than commuting) outside the limit of the police officer's arrest powers or the fire fighter's obligation to respond to an emergency. Taxact 2012 login returning user It is clearly marked with painted insignia or words that make it readily apparent that it is a police or fire vehicle. Taxact 2012 login returning user A marking on a license plate is not a clear marking for these purposes. Taxact 2012 login returning user Qualified moving van. Taxact 2012 login returning user   A qualified moving van is any truck or van used by a professional moving company for moving household or business goods if the following requirements are met. Taxact 2012 login returning user No personal use of the van is allowed other than for travel to and from a move site or for minor personal use, such as a stop for lunch on the way from one move site to another. Taxact 2012 login returning user Personal use for travel to and from a move site happens no more than five times a month on average. Taxact 2012 login returning user Personal use is limited to situations in which it is more convenient to the employer, because of the location of the employee's residence in relation to the location of the move site, for the van not to be returned to the employer's business location. Taxact 2012 login returning user Qualified specialized utility repair truck. Taxact 2012 login returning user   A truck is a qualified specialized utility repair truck if it is not a van or pickup truck and all the following apply. Taxact 2012 login returning user The truck was specifically designed for and is used to carry heavy tools, testing equipment, or parts. Taxact 2012 login returning user Shelves, racks, or other permanent interior construction has been installed to carry and store the tools, equipment, or parts and would make it unlikely that the truck would be used, other than minimally, for personal purposes. Taxact 2012 login returning user The employer requires the employee to drive the truck home in order to be able to respond in emergency situations for purposes of restoring or maintaining electricity, gas, telephone, water, sewer, or steam utility services. Taxact 2012 login returning user Computers and Related Peripheral Equipment A computer is a programmable, electronically activated device capable of accepting information, applying prescribed processes to the information, and supplying the results of those processes with or without human intervention. Taxact 2012 login returning user It consists of a central processing unit with extensive storage, logic, arithmetic, and control capabilities. Taxact 2012 login returning user Related peripheral equipment is any auxiliary machine which is designed to be controlled by the central processing unit of a computer. Taxact 2012 login returning user The following are neither computers nor related peripheral equipment. Taxact 2012 login returning user Any equipment that is an integral part of other property that is not a computer. Taxact 2012 login returning user Typewriters, calculators, adding and accounting machines, copiers, duplicating equipment, and similar equipment. Taxact 2012 login returning user Equipment of a kind used primarily for the user's amusement or entertainment, such as video games. Taxact 2012 login returning user Can Employees Claim a Deduction? If you are an employee, you can claim a depreciation deduction for the use of your listed property (whether owned or rented) in performing services as an employee only if your use is a business use. Taxact 2012 login returning user The use of your property in performing services as an employee is a business use only if both the following requirements are met. Taxact 2012 login returning user The use is for your employer's convenience. Taxact 2012 login returning user The use is required as a condition of your employment. Taxact 2012 login returning user If these requirements are not met, you cannot deduct depreciation (including the section 179 deduction) or rent expenses for your use of the property as an employee. Taxact 2012 login returning user Employer's convenience. Taxact 2012 login returning user   Whether the use of listed property is for your employer's convenience must be determined from all the facts. Taxact 2012 login returning user The use is for your employer's convenience if it is for a substantial business reason of the employer. Taxact 2012 login returning user The use of listed property during your regular working hours to carry on your employer's business generally is for the employer's convenience. Taxact 2012 login returning user Condition of employment. Taxact 2012 login returning user   Whether the use of listed property is a condition of your employment depends on all the facts and circumstances. Taxact 2012 login returning user The use of property must be required for you to perform your duties properly. Taxact 2012 login returning user Your employer does not have to require explicitly that you use the property. Taxact 2012 login returning user However, a mere statement by the employer that the use of the property is a condition of your employment is not sufficient. Taxact 2012 login returning user Example 1. Taxact 2012 login returning user Virginia Sycamore is employed as a courier with We Deliver, which provides local courier services. Taxact 2012 login returning user She owns and uses a motorcycle to deliver packages to downtown offices. Taxact 2012 login returning user We Deliver explicitly requires all delivery persons to own a car or motorcycle for use in their employment. Taxact 2012 login returning user Virginia's use of the motorcycle is for the convenience of We Deliver and is required as a condition of employment. Taxact 2012 login returning user Example 2. Taxact 2012 login returning user Bill Nelson is an inspector for Uplift, a construction company with many sites in the local area. Taxact 2012 login returning user He must travel to these sites on a regular basis. Taxact 2012 login returning user Uplift does not furnish an automobile or explicitly require him to use his own automobile. Taxact 2012 login returning user However, it pays him for any costs he incurs in traveling to the various sites. Taxact 2012 login returning user The use of his own automobile or a rental automobile is for the convenience of Uplift and is required as a condition of employment. Taxact 2012 login returning user Example 3. Taxact 2012 login returning user Assume the same facts as in Example 2 except that Uplift furnishes a car to Bill, who chooses to use his own car and receive payment for using it. Taxact 2012 login returning user The use of his own car is neither for the convenience of Uplift nor required as a condition of employment. Taxact 2012 login returning user Example 4. Taxact 2012 login returning user Marilyn Lee is a pilot for Y Company, a small charter airline. Taxact 2012 login returning user Y requires pilots to obtain 80 hours of flight time annually in addition to flight time spent with the airline. Taxact 2012 login returning user Pilots usually can obtain these hours by flying with the Air Force Reserve or by flying part-time with another airline. Taxact 2012 login returning user Marilyn owns her own airplane. Taxact 2012 login returning user The use of her airplane to obtain the required flight hours is neither for the convenience of the employer nor required as a condition of employment. Taxact 2012 login returning user Example 5. Taxact 2012 login returning user David Rule is employed as an engineer with Zip, an engineering contracting firm. Taxact 2012 login returning user He occasionally takes work home at night rather than work late in the office. Taxact 2012 login returning user He owns and uses a home computer which is virtually identical to the office model. Taxact 2012 login returning user His use of the computer is neither for the convenience of his employer nor required as a condition of employment. Taxact 2012 login returning user What Is the Business-Use Requirement? You can claim the section 179 deduction and a special depreciation allowance for listed property and depreciate listed property using GDS and a declining balance method if the property meets the business-use requirement. Taxact 2012 login returning user To meet this requirement, listed property must be used predominantly (more than 50% of its total use) for qualified business use. Taxact 2012 login returning user If this requirement is not met, the following rules apply. Taxact 2012 login returning user Property not used predominantly for qualified business use during the year it is placed in service does not qualify for the section 179 deduction. Taxact 2012 login returning user Property not used predominantly for qualified business use during the year it is placed in service does not qualify for a special depreciation allowance. Taxact 2012 login returning user Any depreciation deduction under MACRS for property not used predominantly for qualified business use during any year must be figured using the straight line method over the ADS recovery period. Taxact 2012 login returning user This rule applies each year of the recovery period. Taxact 2012 login returning user Excess depreciation on property previously used predominantly for qualified business use must be recaptured (included in income) in the first year in which it is no longer used predominantly for qualified business use. Taxact 2012 login returning user A lessee must add an inclusion amount to income in the first year in which the leased property is not used predominantly for qualified business use. Taxact 2012 login returning user Being required to use the straight line method for an item of listed property not used predominantly for qualified business use is not the same as electing the straight line method. Taxact 2012 login returning user It does not mean that you have to use the straight line method for other property in the same class as the item of listed property. Taxact 2012 login returning user Exception for leased property. Taxact 2012 login returning user   The business-use requirement generally does not apply to any listed property leased or held for leasing by anyone regularly engaged in the business of leasing listed property. Taxact 2012 login returning user   You are considered regularly engaged in the business of leasing listed property only if you enter into contracts for the leasing of listed property with some frequency over a continuous period of time. Taxact 2012 login returning user This determination is made on the basis of the facts and circumstances in each case and takes into account the nature of your business in its entirety. Taxact 2012 login returning user Occasional or incidental leasing activity is insufficient. Taxact 2012 login returning user For example, if you lease only one passenger automobile during a tax year, you are not regularly engaged in the business of leasing automobiles. Taxact 2012 login returning user An employer who allows an employee to use the employer's property for personal purposes and charges the employee for the use is not regularly engaged in the business of leasing the property used by the employee. Taxact 2012 login returning user How To Allocate Use To determine whether the business-use requirement is met, you must allocate the use of any item of listed property used for more than one purpose during the year among its various uses. Taxact 2012 login returning user For passenger automobiles and other means of transportation, allocate the property's use on the basis of mileage. Taxact 2012 login returning user You determine the percentage of qualified business use by dividing the number of miles you drove the vehicle for business purposes during the year by the total number of miles you drove the vehicle for all purposes (including business miles) during the year. Taxact 2012 login returning user For other listed property, allocate the property's use on the basis of the most appropriate unit of time the property is actually used (rather than merely being available for use). Taxact 2012 login returning user For example, you can determine the percentage of business use of a computer by dividing the number of hours you used the computer for business purposes during the year by the total number of hours you used the computer for all purposes (including business use) during the year. Taxact 2012 login returning user Entertainment use. Taxact 2012 login returning user   Treat the use of listed property for entertainment, recreation, or amusement purposes as a business use only to the extent you can deduct expenses (other than interest and property tax expenses) due to its use as an ordinary and necessary business expense. Taxact 2012 login returning user Commuting use. Taxact 2012 login returning user   The use of an automobile for commuting is not business use, regardless of whether work is performed during the trip. Taxact 2012 login returning user For example, a business telephone call made on a car telephone while commuting to work does not change the character of the trip from commuting to business. Taxact 2012 login returning user This is also true for a business meeting held in a car while commuting to work. Taxact 2012 login returning user Similarly, a business call made on an otherwise personal trip does not change the character of a trip from personal to business. Taxact 2012 login returning user The fact that an automobile is used to display material that advertises the owner's or user's trade or business does not convert an otherwise personal use into business use. Taxact 2012 login returning user Use of your automobile by another person. Taxact 2012 login returning user   If someone else uses your automobile, do not treat that use as business use unless one of the following conditions applies. Taxact 2012 login returning user That use is directly connected with your business. Taxact 2012 login returning user You properly report the value of the use as income to the other person and withhold tax on the income where required. Taxact 2012 login returning user You are paid a fair market rent. Taxact 2012 login returning user Treat any payment to you for the use of the automobile as a rent payment for purposes of item (3). Taxact 2012 login returning user Employee deductions. Taxact 2012 login returning user   If you are an employee, do not treat your use of listed property as business use unless it is for your employer's convenience and is required as a condition of your employment. Taxact 2012 login returning user See Can Employees Claim a Deduction , earlier. Taxact 2012 login returning user Qualified Business Use Qualified business use of listed property is any use of the property in your trade or business. Taxact 2012 login returning user However, it does not include the following uses. Taxact 2012 login returning user The leasing of property to any 5% owner or related person (to the extent the property is used by a 5% owner or person related to the owner or lessee of the property). Taxact 2012 login returning user The use of property as pay for the services of a 5% owner or related person. Taxact 2012 login returning user The use of property as pay for services of any person (other than a 5% owner or related person), unless the value of the use is included in that person's gross income and income tax is withheld on that amount where required. Taxact 2012 login returning user Property does not stop being used predominantly for qualified business use because of a transfer at death. Taxact 2012 login returning user Exception for leasing or compensatory use of aircraft. Taxact 2012 login returning user   Treat the leasing of any aircraft by a 5% owner or related person, or the compensatory use of any aircraft, as a qualified business use if at least 25% of the total use of the aircraft during the year is for a qualified business use. Taxact 2012 login returning user 5% owner. Taxact 2012 login returning user   For a business entity that is not a corporation, a 5% owner is any person who owns more than 5% of the capital or profits interest in the business. Taxact 2012 login returning user   For a corporation, a 5% owner is any person who owns, or is considered to own, either of the following. Taxact 2012 login returning user More than 5% of the outstanding stock of the corporation. Taxact 2012 login returning user Stock possessing more than 5% of the total combined voting power of all stock in the corporation. Taxact 2012 login returning user Related persons. Taxact 2012 login returning user   For a description of related persons, see Related persons in the discussion on property owned or used in 1986 under What Method Can You Use To Depreciate Your Property in chapter 1 . Taxact 2012 login returning user For this purpose, however, treat as related persons only the relationships listed in items (1) through (10) of that discussion and substitute “50%” for “10%” each place it appears. Taxact 2012 login returning user Examples. Taxact 2012 login returning user   The following examples illustrate whether the use of business property is qualified business use. Taxact 2012 login returning user Example 1. Taxact 2012 login returning user John Maple is the sole proprietor of a plumbing contracting business. Taxact 2012 login returning user John employs his brother, Richard, in the business. Taxact 2012 login returning user As part of Richard's pay, he is allowed to use one of the company automobiles for personal use. Taxact 2012 login returning user The company includes the value of the personal use of the automobile in Richard's gross income and properly withholds tax on it. Taxact 2012 login returning user The use of the automobile is pay for the performance of services by a related person, so it is not a qualified business use. Taxact 2012 login returning user Example 2. Taxact 2012 login returning user John, in Example 1, allows unrelated employees to use company automobiles for personal purposes. Taxact 2012 login returning user He does not include the value of the personal use of the company automobiles as part of their compensation and he does not withhold tax on the value of the use of the automobiles. Taxact 2012 login returning user This use of company automobiles by employees is not a qualified business use. Taxact 2012 login returning user Example 3. Taxact 2012 login returning user James Company Inc. Taxact 2012 login returning user owns several automobiles that its employees use for business purposes. Taxact 2012 login returning user The employees also are allowed to take the automobiles home at night. Taxact 2012 login returning user The fair market value of each employee's use of an automobile for any personal purpose, such as commuting to and from work, is reported as income to the employee and James Company withholds tax on it. Taxact 2012 login returning user This use of company automobiles by employees, even for personal purposes, is a qualified business use for the company. Taxact 2012 login returning user Investment Use The use of property to produce income in a nonbusiness activity (investment use) is not a qualified business use. Taxact 2012 login returning user However, you can treat the investment use as business use to figure the depreciation deduction for the property in a given year. Taxact 2012 login returning user Example 1. Taxact 2012 login returning user Sarah Bradley uses a home computer 50% of the time to manage her investments. Taxact 2012 login returning user She also uses the computer 40% of the time in her part-time consumer research business. Taxact 2012 login returning user Sarah's home computer is listed property because it is not used at a regular business establishment. Taxact 2012 login returning user She does not use the computer predominantly for qualified business use. Taxact 2012 login returning user Therefore, she cannot elect a section 179 deduction or claim a special depreciation allowance for the computer. Taxact 2012 login returning user She must depreciate it using the straight line method over the ADS recovery period. Taxact 2012 login returning user Her combined business/investment use for determining her depreciation deduction is 90%. Taxact 2012 login returning user Example 2. Taxact 2012 login returning user If Sarah uses her computer 30% of the time to manage her investments and 60% of the time in her consumer research business, it is used predominantly for qualified business use. Taxact 2012 login returning user She can elect a section 179 deduction and, if she does not deduct all the computer's cost, she can claim a special depreciation allowance and depreciate the computer using the 200% declining balance method over the GDS recovery period. Taxact 2012 login returning user Her combined business/investment use for determining her depreciation deduction is 90%. Taxact 2012 login returning user Recapture of Excess Depreciation If you used listed property more than 50% in a qualified business use in the year you placed it in service, you must recapture (include in income) excess depreciation in the first year you use it 50% or less. Taxact 2012 login returning user You also increase the adjusted basis of your property by the same amount. Taxact 2012 login returning user Excess depreciation is: The depreciation allowable for the property (including any section 179 deduction and special depreciation allowance claimed) for years before the first year you do not use the property predominantly for qualified business use, minus The depreciation that would have been allowable for those years if you had not used the property predominantly for qualified business use in the year you placed it in service. Taxact 2012 login returning user To determine the amount in (2) above, you must refigure the depreciation using the straight line method and the ADS recovery period. Taxact 2012 login returning user Example. Taxact 2012 login returning user In June 2009, Ellen Rye purchased and placed in service a pickup truck that cost $18,000. Taxact 2012 login returning user She used it only for qualified business use for 2009 through 2012. Taxact 2012 login returning user Ellen claimed a section 179 deduction of $10,000 based on the purchase of the truck. Taxact 2012 login returning user She began depreciating it using the 200% DB method over a 5-year GDS recovery period. Taxact 2012 login returning user The pickup truck's gross vehicle weight was over 6,000 pounds, so it was not subject to the passenger automobile limits discussed later under Do the Passenger Automobile Limits Apply. Taxact 2012 login returning user During 2013, she used the truck 50% for business and 50% for personal purposes. Taxact 2012 login returning user She includes $4,018 excess depreciation in her gross income for 2013. Taxact 2012 login returning user The excess depreciation is determined as follows. Taxact 2012 login returning user Total section 179 deduction ($10,000) and depreciation claimed ($6,618) for 2009 through 2012. Taxact 2012 login returning user (Depreciation is from Table A-1. Taxact 2012 login returning user ) $16,618 Minus: Depreciation allowable (Table A-8):     2009 – 10% of $18,000 $1,800   2010 – 20% of $18,000 3,600   2011 – 20% of $18,000 3,600   2012 – 20% of $18,000 3,600 12,600 Excess depreciation $4,018 If Ellen's use of the truck does not change to 50% for business and 50% for personal purposes until 2015, there will be no excess depreciation. Taxact 2012 login returning user The total depreciation allowable using Table A-8 through 2015 will be $18,000, which equals the total of the section 179 deduction and depreciation she will have claimed. Taxact 2012 login returning user Where to figure and report recapture. Taxact 2012 login returning user   Use Form 4797, Part IV, to figure the recapture amount. Taxact 2012 login returning user Report the recapture amount as other income on the same form or schedule on which you took the depreciation deduction. Taxact 2012 login returning user For example, report the recapture amount as other income on Schedule C (Form 1040) if you took the depreciation deduction on Schedule C. Taxact 2012 login returning user If you took the depreciation deduction on Form 2106, report the recapture amount as other income on Form 1040, line 21. Taxact 2012 login returning user Lessee's Inclusion Amount If you use leased listed property other than a passenger automobile for business/investment use, you must include an amount in your income in the first year your qualified business-use percentage is 50% or less. Taxact 2012 login returning user Your qualified business-use percentage is the part of the property's total use that is qualified business use (defined earlier). Taxact 2012 login returning user For the inclusion amount rules for a leased passenger automobile, see Leasing a Car in chapter 4 of Publication 463. Taxact 2012 login returning user The inclusion amount is the sum of Amount A and Amount B, described next. Taxact 2012 login returning user However, see the special rules for the inclusion amount, later, if your lease begins in the last 9 months of your tax year or is for less than one year. Taxact 2012 login returning user Amount A. Taxact 2012 login returning user   Amount A is: The fair market value of the property, multiplied by The business/investment use for the first tax year the qualified business-use percentage is 50% or less, multiplied by The applicable percentage from Table A-19 in Appendix A . Taxact 2012 login returning user   The fair market value of the property is the value on the first day of the lease term. Taxact 2012 login returning user If the capitalized cost of an item of listed property is specified in the lease agreement, you must treat that amount as the fair market value. Taxact 2012 login returning user Amount B. Taxact 2012 login returning user   Amount B is: The fair market value of the property, multiplied by The average of the business/investment use for all tax years the property was leased that precede the first tax year the qualified business-use percentage is 50% or less, multiplied by The applicable percentage from Table A–20 in Appendix A . Taxact 2012 login returning user Maximum inclusion amount. Taxact 2012 login returning user   The inclusion amount cannot be more than the sum of the deductible amounts of rent for the tax year in which the lessee must include the amount in gross income. Taxact 2012 login returning user Inclusion amount worksheet. Taxact 2012 login returning user   The following worksheet is provided to help you figure the inclusion amount for leased listed property. Taxact 2012 login returning user Inclusion Amount Worksheet for Leased Listed Property 1. Taxact 2012 login returning user Fair market value   2. Taxact 2012 login returning user Business/investment use for first year business use is 50% or less   3. Taxact 2012 login returning user Multiply line 1 by line 2. Taxact 2012 login returning user   4. Taxact 2012 login returning user Rate (%) from Table A-19   5. Taxact 2012 login returning user Multiply line 3 by line 4. Taxact 2012 login returning user This is Amount A. Taxact 2012 login returning user   6. Taxact 2012 login returning user Fair market value   7. Taxact 2012 login returning user Average business/investment use for years property leased before the first year business use is 50% or less . Taxact 2012 login returning user . Taxact 2012 login returning user . Taxact 2012 login returning user . Taxact 2012 login returning user . Taxact 2012 login returning user . Taxact 2012 login returning user . Taxact 2012 login returning user . Taxact 2012 login returning user . Taxact 2012 login returning user . Taxact 2012 login returning user . Taxact 2012 login returning user . Taxact 2012 login returning user . Taxact 2012 login returning user   8. Taxact 2012 login returning user Multiply line 6 by line 7   9. Taxact 2012 login returning user Rate (%) from Table A-20   10. Taxact 2012 login returning user Multiply line 8 by line 9. Taxact 2012 login returning user This is Amount B. Taxact 2012 login returning user   11. Taxact 2012 login returning user Add line 5 and line 10. Taxact 2012 login returning user This is your inclusion amount. Taxact 2012 login returning user Enter here and as other income on the form or schedule on which you originally took the deduction (for example, Schedule C or F (Form 1040), Form 1040, Form 1120, etc. Taxact 2012 login returning user )         Example. Taxact 2012 login returning user On February 1, 2011, Larry House, a calendar year taxpayer, leased and placed in service a computer with a fair market value of $3,000. Taxact 2012 login returning user The lease is for a period of 5 years. Taxact 2012 login returning user Larry does not use the computer at a regular business establishment, so it is listed property. Taxact 2012 login returning user His business use of the property (all of which is qualified business use) is 80% in 2011, 60% in 2012, and 40% in 2013. Taxact 2012 login returning user He must add an inclusion amount to gross income for 2013, the first tax year his qualified business-use percentage is 50% or less. Taxact 2012 login returning user The computer has a 5-year recovery period under both GDS and ADS. Taxact 2012 login returning user 2013 is the third tax year of the lease, so the applicable percentage from Table A-19 is −19. Taxact 2012 login returning user 8%. Taxact 2012 login returning user The applicable percentage from Table A-20 is 22. Taxact 2012 login returning user 0%. Taxact 2012 login returning user Larry's deductible rent for the computer for 2013 is $800. Taxact 2012 login returning user Larry uses the Inclusion amount worksheet. Taxact 2012 login returning user to figure the amount he must include in income for 2013. Taxact 2012 login returning user His inclusion amount is $224, which is the sum of −$238 (Amount A) and $462 (Amount B). Taxact 2012 login returning user Inclusion Amount Worksheet for Leased Listed Property 1. Taxact 2012 login returning user Fair market value $3,000   2. Taxact 2012 login returning user Business/investment use for first year business use is 50% or less 40 % 3. Taxact 2012 login returning user Multiply line 1 by line 2. Taxact 2012 login returning user 1,200   4. Taxact 2012 login returning user Rate (%) from Table A-19 −19. Taxact 2012 login returning user 8 % 5. Taxact 2012 login returning user Multiply line 3 by line 4. Taxact 2012 login returning user This is Amount A. Taxact 2012 login returning user −238   6. Taxact 2012 login returning user Fair market value 3,000   7. Taxact 2012 login returning user Average business/investment use for years property leased before the first year business use is 50% or less 70 % 8. Taxact 2012 login returning user Multiply line 6 by line 7 2,100   9. Taxact 2012 login returning user Rate (%) from Table A-20 22. Taxact 2012 login returning user 0 % 10. Taxact 2012 login returning user Multiply line 8 by line 9. Taxact 2012 login returning user This is Amount B. Taxact 2012 login returning user 462   11. Taxact 2012 login returning user Add line 5 and line 10. Taxact 2012 login returning user This is your inclusion amount. Taxact 2012 login returning user Enter here and as other income on the form or schedule on which you originally took the deduction (for example, Schedule C or F (Form 1040), Form 1040, Form 1120, etc. Taxact 2012 login returning user ) $224           Lease beginning in the last 9 months of your tax year. Taxact 2012 login returning user    The inclusion amount is subject to a special rule if all the following apply. Taxact 2012 login returning user The lease term begins within 9 months before the close of your tax year. Taxact 2012 login returning user You do not use the property predominantly (more than 50%) for qualified business use during that part of the tax year. Taxact 2012 login returning user The lease term continues into your next tax year. Taxact 2012 login returning user Under this special rule, add the inclusion amount to income in the next tax year. Taxact 2012 login returning user Figure the inclusion amount by taking into account the average of the business/investment use for both tax years (line 2 of the Inclusion Amount Worksheet for Leased Listed Property) and the applicable percentage for the tax year the lease term begins. Taxact 2012 login returning user Skip lines 6 through 9 of the worksheet and enter zero on line 10. Taxact 2012 login returning user Example 1. Taxact 2012 login returning user On August 1, 2012, Julie Rule, a calendar year taxpayer, leased and placed in service an item of listed property. Taxact 2012 login returning user The property is 5-year property with a fair market value of $10,000. Taxact 2012 login returning user Her property has a recovery period of 5 years under ADS. Taxact 2012 login returning user The lease is for 5 years. Taxact 2012 login returning user Her business use of the property was 50% in 2012 and 90% in 2013. Taxact 2012 login returning user She paid rent of $3,600 for 2012, of which $3,240 is deductible. Taxact 2012 login returning user She must include $147 in income in 2013. Taxact 2012 login returning user The $147 is the sum of Amount A and Amount B. Taxact 2012 login returning user Amount A is $147 ($10,000 × 70% × 2. Taxact 2012 login returning user 1%), the product of the fair market value, the average business use for 2012 and 2013, and the applicable percentage for year one from Table A-19 . Taxact 2012 login returning user Amount B is zero. Taxact 2012 login returning user Lease for less than one year. Taxact 2012 login returning user   A special rule for the inclusion amount applies if the lease term is less than one year and you do not use the property predominantly (more than 50%) for qualified business use. Taxact 2012 login returning user The amount included in income is the inclusion amount (figured as described in the preceding discussions) multiplied by a fraction. Taxact 2012 login returning user The numerator of the fraction is the number of days in the lease term and the denominator is 365 (or 366 for leap years). Taxact 2012 login returning user   The lease term for listed property other than residential rental or nonresidential real property includes options to renew. Taxact 2012 login returning user If you have two or more successive leases that are part of the same transaction (or a series of related transactions) for the same or substantially similar property, treat them as one lease. Taxact 2012 login returning user Example 2. Taxact 2012 login returning user On October 1, 2012, John Joyce, a calendar year taxpayer, leased and placed in service an item of listed property that is 3-year property. Taxact 2012 login returning user This property had a fair market value of $15,000 and a recovery period of 5 years under ADS. Taxact 2012 login returning user The lease term was 6 months (ending on March 31, 2013), during which he used the property 45% in business. Taxact 2012 login returning user He must include $71 in income in 2013. Taxact 2012 login returning user The $71 is the sum of Amount A and Amount B. Taxact 2012 login returning user Amount A is $71 ($15,000 × 45% × 2. Taxact 2012 login returning user 1% × 183/365), the product of the fair market value, the average business use for both years, and the applicable percentage for year one from Table A-19 , prorated for the length of the lease. Taxact 2012 login returning user Amount B is zero. Taxact 2012 login returning user Where to report inclusion amount. Taxact 2012 login returning user   Report the inclusion amount figured as described in the preceding discussions as other income on the same form or schedule on which you took the deduction for your rental costs. Taxact 2012 login returning user For example, report the inclusion amount as other income on Schedule C (Form 1040) if you took the deduction on Schedule C. Taxact 2012 login returning user If you took the deduction for rental costs on Form 2106, report the inclusion amount as other income on Form 1040, line 21. Taxact 2012 login returning user Do the Passenger Automobile Limits Apply? The depreciation deduction, including the section 179 deduction and special depreciation allowance, you can claim for a passenger automobile (defined earlier) each year is limited. Taxact 2012 login returning user This section describes the maximum depreciation deduction amounts for 2013 and explains how to deduct, after the recovery period, the unrecovered basis of your property that results from applying the passenger automobile limit. Taxact 2012 login returning user Exception for leased cars. Taxact 2012 login returning user   The passenger automobile limits generally do not apply to passenger automobiles leased or held for leasing by anyone regularly engaged in the business of leasing passenger automobiles. Taxact 2012 login returning user For information on when you are considered regularly engaged in the business of leasing listed property, including passenger automobiles, see Exception for leased property , earlier, under What Is the Business-Use Requirement . Taxact 2012 login returning user Maximum Depreciation Deduction The passenger automobile limits are the maximum depreciation amounts you can deduct for a passenger automobile. Taxact 2012 login returning user They are based on the date you placed the automobile in service. Taxact 2012 login returning user Passenger Automobiles The maximum deduction amounts for most passenger automobiles are shown in the following table. Taxact 2012 login returning user Maximum Depreciation Deduction for Passenger Automobiles Date       4th & Placed 1st 2nd 3rd Later In Service Year Year Year Years 2013 $11,1601 $5,100 $3,050 $1,875 2012 11,1601 5,100 3,050 1,875 2011 11,0602 4,900 2,950 1,775 2010 11,0602  4,900 2,950 1,775 2009 10,9603 4,800 2,850 1,775 2008 10,9603  4,800 2,850 1,775 2007 3,060 4,900 2,850 1,775 2006 2,960 4,800 2,850 1,775 2005 2,960 4,700 2,850 1,675 2004 10,6104 4,800 2,850 1,675 5/06/2003– 12/31/2003 10,7105 4,900 2,950 1,775 1/01/2003– 5/05/2003 7,6606 4,900 2,950 1,775 1If you elected not to claim any special depreciation allowance or the vehicle is not qualified property, the maximum deduction is $3,160. Taxact 2012 login returning user 2If you elected not to claim any special depreciation allowance or the vehicle is not qualified property, the maximum deduction is $3,060. Taxact 2012 login returning user 3If you elected not to claim any special depreciation allowance for the vehicle or the vehicle is not qualified property, the maximum deduction is $2,960. Taxact 2012 login returning user 4If you elected not to claim any special depreciation allowance for the vehicle, the vehicle is not qualified property, or the vehicle is qualified Liberty Zone property, the maximum deduction is $2,960. Taxact 2012 login returning user 5If you acquired the vehicle before 5/06/03, the maximum deduction is $7,660. Taxact 2012 login returning user If you elected not to claim any special depreciation allowance for the vehicle, the vehicle is not qualified property, or the vehicle is qualified Liberty Zone property, the maximum deduction is $3,060. Taxact 2012 login returning user 6If you elected not to claim any special depreciation allowance for the vehicle, the vehicle is not qualified property, or the vehicle is qualified Liberty Zone property, the maximum deduction is $3,060. Taxact 2012 login returning user If your business/investment use of the automobile is less than 100%, you must reduce the maximum deduction amount by multiplying the maximum amount by the percentage of business/investment use determined on an annual basis during the tax year. Taxact 2012 login returning user If you have a short tax year, you must reduce the maximum deduction amount by multiplying the maximum amount by a fraction. Taxact 2012 login returning user The numerator of the fraction is the number of months and partial months in the short tax year and the denominator is 12. Taxact 2012 login returning user Example. Taxact 2012 login returning user On April 15, 2013, Virginia Hart bought and placed in service a new car for $14,500. Taxact 2012 login returning user She used the car only in her business. Taxact 2012 login returning user She files her tax return based on the calendar year. Taxact 2012 login returning user She does not elect a section 179 deduction and elected not to claim any special depreciation allowance for the car. Taxact 2012 login returning user Under MACRS, a car is 5-year property. Taxact 2012 login returning user Since she placed her car in service on April 15 and used it only for business, she uses the percentages in Table A-1 to figure her MACRS depreciation on the car. Taxact 2012 login returning user Virginia multiplies the $14,500 unadjusted basis of her car by 0. Taxact 2012 login returning user 20 to get her MACRS depreciation of $2,900 for 2013. Taxact 2012 login returning user This $2,900 is below the maximum depreciation deduction of $3,160 for passenger automobiles placed in service in 2013. Taxact 2012 login returning user She can deduct the full $2,900. Taxact 2012 login returning user Electric Vehicles The maximum depreciation deductions for passenger automobiles that are produced to run primarily on electricity are higher than those for other automobiles. Taxact 2012 login returning user The maximum deduction amounts for electric vehicles placed in service after August 5, 1997, and before January 1, 2007, are shown in the following table. Taxact 2012 login returning user Owners of electric vehicles placed in service after December 31, 2006, should use the table of maximum deduction amounts later for electric vehicles classified as passenger automobiles or use the table of maximum deduction amounts for trucks and vans later, for electric vehicles classified as trucks and vans. Taxact 2012 login returning user Maximum Depreciation Deduction For Electric Vehicles Date       4th & Placed 1st 2nd 3rd Later In Service Year Year Year Years 2006 $8,980 $14,400 $8,650 $5,225 2005 8,880 14,200 8,450 5,125 2004 31,8301 14,300 8,550 5,125 5/06/2003– 12/31/2003 32,0302 14,600 8,750 5,225 1/01/2003– 5/05/2003 22,8803 14,600 8,750 5,225 1If you elected not to claim any special depreciation allowance for the vehicle or the vehicle is not qualified property, or the vehicle is qualified Liberty Zone property, the maximum deduction is $8,880. Taxact 2012 login returning user 2If you acquired the vehicle before 5/06/03, the maximum deduction is $22,880. Taxact 2012 login returning user If you elected not to claim any special depreciation allowance for the vehicle, the vehicle is not qualified property, or the vehicle is qualified Liberty Zone property, the maximum deduction is $9,080. Taxact 2012 login returning user 3 If you elected not to claim any special depreciation allowance for the vehicle, the vehicle is not qualified property, or the vehicle is qualified Liberty Zone property, the maximum deduction is $9,080. Taxact 2012 login returning user Trucks and Vans The maximum depreciation deductions for trucks and vans placed in service after 2002 are higher than those for other passenger automobiles. Taxact 2012 login returning user The maximum deduction amounts for trucks and vans are shown in the following table. Taxact 2012 login returning user Maximum Depreciation Deduction For Trucks and Vans Date       4th & Placed 1st 2nd 3rd Later In Service Year Year Year Years 2013 $11,3601 $5,400 $3,250 $1,975 2012 11,3601 5,300 3,150 1,875 2011 11,2602 5,200 3,150 1,875 2010 11,1603 5,100 3,050 1,875 2009 11,0604 4,900 2,950 1,775 2008 11,1605 5,100 3,050 1,875 2007 3,260 5,200 3,050 1,875 2006 3,260 5,200 3,150 1,875 2005 3,260 5,200 3,150 1,875 2004 10,9106 5,300 3,150 1,875 5/06/2003– 12/31/2003 11,0107 5,400 3,250 1,975 1/01/2003– 5/05/2003 7,9608 5,400 3,250 1,975 1 If you elected not to claim any special depreciation allowance or the vehicle is not qualified property, the maximum deduction is $3,360. Taxact 2012 login returning user 2 If you elected not to claim any special depreciation allowance or the vehicle is not qualified property, the maximum deduction is $3,260. Taxact 2012 login returning user 3 If you elected not to claim any special depreciation allowance or the vehicle is not qualified property, the maximum deduction is $3,160. Taxact 2012 login returning user 4 If you elect not to claim any special depreciation allowance for the vehicle or the vehicle is not qualified property, the maximum deduction is $3,060. Taxact 2012 login returning user 5If you elected not to claim any special depreciation allowance for the vehicle or the vehicle is not qualified property, the maximum deduction is $3,160. Taxact 2012 login returning user 6If you elected not to claim any special depreciation allowance for the vehicle, the vehicle is not qualified property, or the vehicle is qualified Liberty Zone property, or the maximum deduction is $3,260. Taxact 2012 login returning user 7 If you acquired the vehicle before 5/06/03, the maximum deduction is $7,960. Taxact 2012 login returning user If you elected not to claim any special depreciation allowance for the vehicle, the vehicle is not qualified property, or the vehicle is qualified Liberty Zone property, the maximum deduction is $3,360. Taxact 2012 login returning user 8 If you elected not to claim any special depreciation allowance for the vehicle, the vehicle is not qualified property, or the vehicle is qualified Liberty Zone property, the maximum deduction is $3,360. Taxact 2012 login returning user Depreciation Worksheet for Passenger Automobiles You can use the following worksheet to figure your depreciation deduction using the percentage tables. Taxact 2012 login returning user Then use the information from this worksheet to prepare Form 4562. Taxact 2012 login returning user Depreciation Worksheet for Passenger Automobiles   Part I   1. Taxact 2012 login returning user MACRS system (GDS or ADS)     2. Taxact 2012 login returning user Property class     3. Taxact 2012 login returning user Date placed in service     4. Taxact 2012 login returning user Recovery period     5. Taxact 2012 login returning user Method and convention     6. Taxact 2012 login returning user Depreciation rate (from tables)     7. Taxact 2012 login returning user Maximum depreciation deduction for this year from the appropriate table       8. Taxact 2012 login returning user Business/investment-use percentage       9. Taxact 2012 login returning user Multiply line 7 by line 8. Taxact 2012 login returning user This is your adjusted maximum depreciation deduction       10. Taxact 2012 login returning user Section 179 deduction claimed this year (not more than line 9). Taxact 2012 login returning user Enter -0- if this is not the year you placed the car in service. Taxact 2012 login returning user         Note. Taxact 2012 login returning user  1) If line 10 is equal to line 9, stop here. Taxact 2012 login returning user Your combined section 179 and depreciation deduction (including your special depreciation allowance) is limited to the amount on line 9. Taxact 2012 login returning user  2) If line 10 is less than line 9, complete Part II. Taxact 2012 login returning user   Part II   11. Taxact 2012 login returning user Subtract line 10 from line 9. Taxact 2012 login returning user This is the limit on the amount you can deduct for depreciation (including any special depreciation allowance )       12. Taxact 2012 login returning user Cost or other basis (reduced by any alternative motor vehicle credit 1or credit for electric vehicles 2)       13. Taxact 2012 login returning user Multiply line 12 by line 8. Taxact 2012 login returning user This is your business/investment cost       14. Taxact 2012 login returning user Section 179 deduction claimed in the year you placed the car in service       15. Taxact 2012 login returning user Subtract line 14 from line 13. Taxact 2012 login returning user This is your tentative basis for depreciation       16. Taxact 2012 login returning user Multiply line 15 by . Taxact 2012 login returning user 50 if the 50% special depreciation allowance applies. Taxact 2012 login returning user This is your special depreciation allowance. Taxact 2012 login returning user Enter -0- if this is not the year you placed the car in service, the car is not qualified property, or you elected not to claim a special depreciation allowance       Note 1) If line 16 is equal to line 11, stop here. Taxact 2012 login returning user Your depreciation deduction (including your special depreciation allowance) is limited to the amount on line 11. Taxact 2012 login returning user  2) If line 16 is less than line 11, complete Part III. Taxact 2012 login returning user   Part III   17. Taxact 2012 login returning user Subtract line 16 from 11. Taxact 2012 login returning user This is the limit on the amount you can deduct for MACRS depreciation       18. Taxact 2012 login returning user Subtract line 16 from line 15. Taxact 2012 login returning user This is your basis for depreciation. Taxact 2012 login returning user       19. Taxact 2012 login returning user Multiply line 18 by line 6. Taxact 2012 login returning user This is your tentative MACRS depreciation deduction. Taxact 2012 login returning user       20. Taxact 2012 login returning user Enter the lesser of line 17 or line 19. Taxact 2012 login returning user This is your MACRS depreciation deduction. Taxact 2012 login returning user     1 When figuring the amount to enter on line 12, do not reduce your cost or other basis by any section 179 deduction you claimed for your car. Taxact 2012 login returning user 2 Reduce the basis by the lesser of $4,000 or 10% of the cost of the vehicle even if the credit is less than that amount. Taxact 2012 login returning user             Deductions After the Recovery Period If the depreciation deductions for your automobile are reduced under the passenger automobile limits, you will have unrecovered basis in your automobile at the end of the recovery period. Taxact 2012 login returning user If you continue to use the automobile for business, you can deduct that unrecovered basis after the recovery period ends. Taxact 2012 login returning user You can claim a depreciation deduction in each succeeding tax year until you recover your full basis in the car. Taxact 2012 login returning user The maximum amount you can deduct each year is determined by the date you placed the car in service and your business/investment-use percentage. Taxact 2012 login returning user See Maximum Depreciation Deduction , earlier. Taxact 2012 login returning user Unrecovered basis is the cost or other basis of the passenger automobile reduced by any clean-fuel vehicle deduction, electric vehicle credit, depreciation, and section 179 deductions that would have been allowable if you had used the car 100% for business and investment use and the passenger automobile limits had not applied. Taxact 2012 login returning user You cannot claim a depreciation deduction for listed property other than passenger automobiles after the recovery period ends. Taxact 2012 login returning user There is no unrecovered basis at the end of the recovery period because you are considered to have used this property 100% for business and investment purposes during all of the recovery period. Taxact 2012 login returning user Example. Taxact 2012 login returning user In May 2007, you bought and placed in service a car costing $31,500. Taxact 2012 login returning user The car was 5-year property under GDS (MACRS). Taxact 2012 login returning user You did not elect a section 179 deduction and elected not to claim any special depreciation allowance for the car. Taxact 2012 login returning user You used the car exclusively for business during the recovery period (2007 through 2012). Taxact 2012 login returning user You figured your depreciation as shown below. Taxact 2012 login returning user Year Percentage Amount Limit   Allowed 2007 20. Taxact 2012 login returning user 0% $6,300 $2,960   $2,960 2008 32. Taxact 2012 login returning user 0 10,080 4,800   4,800 2009 19. Taxact 2012 login returning user 2 6,048 2,850   2,850 2010 11. Taxact 2012 login returning user 52 3,629 1,675   1,675 2011 11. Taxact 2012 login returning user 52 3,629 1,675   1,675 2012 5. Taxact 2012 login returning user 76 1,814 1,675   1,675 Total   $15,635 At the end of 2012, you had an unrecovered basis of $15,865 ($31,500 − $15,635). Taxact 2012 login returning user If in 2013 and later years you continue to use the car 100% for business, you can deduct each year the lesser of $1,675 or your remaining unrecovered basis. Taxact 2012 login returning user If your business use of the car had been less than 100% during any year, your depreciation deduction would have been less than the maximum amount allowable for that year. Taxact 2012 login returning user However, in figuring your unrecovered basis in the car, you would still reduce your basis by the maximum amount allowable as if the business use had been 100%. Taxact 2012 login returning user For example, if you had used your car 60% for business instead of 100%, your allowable depreciation deductions would have been $9,519 ($15,865 × 60%), but you still would have to reduce your basis by $15,865 to determine your unrecovered basis. Taxact 2012 login returning user Deductions For Passenger Automobiles Acquired in a Trade-in If you acquire a passenger automobile in a trade-in, depreciate the carryover basis separately as if the trade-in did not occur. Taxact 2012 login returning user Depreciate the part of the new automobile's basis that exceeds its carryover basis (excess basis) as if it were newly placed in service property. Taxact 2012 login returning user This excess basis is the additional cash paid for the new automobile in the trade-in. Taxact 2012 login returning user The depreciation figured for the two components of the basis (carryover basis and excess basis) is subject to a single passenger automobile limit. Taxact 2012 login returning user Special rules apply in determining the passenger automobile limits. Taxact 2012 login returning user These rules and examples are discussed in section 1. Taxact 2012 login returning user 168(i)-6(d)(3) of the regulations. Taxact 2012 login returning user Instead of figuring depreciation for the carryover basis and the excess basis separately, you can elect to treat the old automobile as disposed of and both of the basis components for the new automobile as if placed in service at the time of the trade-in. Taxact 2012 login returning user For more information, including how to make this election, see Election out under Property Acquired in a Like-kind Exchange or Involuntary Conversion in chapter 4 and sections 1. Taxact 2012 login returning user 168(i)-6(i) and 1. Taxact 2012 login returning user 168(i)-6(j) of the regulations. Taxact 2012 login returning user What Records Must Be Kept? You cannot take any depreciation or section 179 deduction for the use of listed property unless you can prove your business/investment use with adequate records or with sufficient evidence to support your own statements. Taxact 2012 login returning user For listed property, you must keep records for as long as any recapture can still occur. Taxact 2012 login returning user Recapture can occur in any tax year of the recovery period. Taxact 2012 login returning user Adequate Records To meet the adequate records requirement, you must maintain an account book, diary, log, statement of expense, trip sheet, or similar record or other documentary evidence that, together with the receipt, is sufficient to establish each element of an expenditure or use. Taxact 2012 login returning user You do not have to record information in an account book, diary, or similar record if the information is already shown on the receipt. Taxact 2012 login returning user However, your records should back up your receipts in an orderly manner. Taxact 2012 login returning user Elements of expenditure or use. Taxact 2012 login returning user   Your records or other documentary evidence must support all the following. Taxact 2012 login returning user The amount of each separate expenditure, such as the cost of acquiring the item, maintenance and repair costs, capital improvement costs, lease payments, and any other expenses. Taxact 2012 login returning user The amount of each business and investment use (based on an appropriate measure, such as mileage for vehicles and time for other listed property), and the total use of the property for the tax year. Taxact 2012 login returning user The date of the expenditure or use. Taxact 2012 login returning user The business or investment purpose for the expenditure or use. Taxact 2012 login returning user   Written documents of your expenditure or use are generally better evidence than oral statements alone. Taxact 2012 login returning user You do not have to keep a daily log. Taxact 2012 login returning user However, some type of record containing the elements of an expenditure or the business or investment use of listed property made at or near the time of the expenditure or use and backed up by other documents is preferable to a statement you prepare later. Taxact 2012 login returning user Timeliness. Taxact 2012 login returning user   You must record the elements of an expenditure or use at the time you have full knowledge of the elements. Taxact 2012 login returning user An expense account statement made from an account book, diary, or similar record prepared or maintained at or near the time of the expenditure or use generally is considered a timely record if, in the regular course of business: The statement is given by an employee to the employer, or The statement is given by an independent contractor to the client or customer. Taxact 2012 login returning user   For example, a log maintained on a weekly basis, that accounts for use during the week, will be considered a record made at or near the time of use. Taxact 2012 login returning user Business purpose supported. Taxact 2012 login returning user   Generally, an adequate record of business purpose must be in the form of a written statement. Taxact 2012 login returning user However, the amount of detail necessary to establish a business purpose depends on the facts and circumstances of each case. Taxact 2012 login returning user A written explanation of the business purpose will not be required if the purpose can be determined from the surrounding facts and circumstances. Taxact 2012 login returning user For example, a salesperson visiting customers on an established sales route will not normally need a written explanation of the business purpose of his or her travel. Taxact 2012 login returning user Business use supported. Taxact 2012 login returning user   An adequate record contains enough information on each element of every business or investment use. Taxact 2012 login returning user The amount of detail required to support the use depends on the facts and circumstances. Taxact 2012 login returning user For example, a taxpayer who uses a truck for both business and personal purposes and whose only business use of the truck is to make customer deliveries on an established route can satisfy the requirement by recording the length of the route, including the total number of miles driven during the tax year and the date of each trip at or near the time of the trips. Taxact 2012 login returning user   Although you generally must prepare an adequate written record, you can prepare a record of the business use of listed property in a computer memory device that uses a logging program. Taxact 2012 login returning user Separate or combined expenditures or uses. Taxact 2012 login returning user   Each use by you normally is considered a separate use. Taxact 2012 login returning user However, you can combine repeated uses as a single item. Taxact 2012 login returning user   Record each expenditure as a separate item. Taxact 2012 login returning user Do not combine it with other expenditures. Taxact 2012 login returning user If you choose, however, you can combine amounts you spent for the use of listed property during a tax year, such as for gasoline or automobile repairs. Taxact 2012 login returning user If you combine these expenses, you do not need to support the business purpose of each expense. Taxact 2012 login returning user Instead, you can divide the expenses based on the total business use of the listed property. Taxact 2012 login returning user   You can account for uses that can be considered part of a single use, such as a round trip or uninterrupted business use, by a single record. Taxact 2012 login returning user For example, you can account for the use of a truck to make deliveries at several locations that begin and end at the business premises and can include a stop at the business in between deliveries by a single record of miles driven. Taxact 2012 login returning user You can account for the use of a passenger automobile by a salesperson for a business trip away from home over a period of time by a single record of miles traveled. Taxact 2012 login returning user Minimal personal use (such as a stop for lunch between two business stops) is not an interruption of business use. Taxact 2012 login returning user Confidential information. Taxact 2012 login returning user   If any of the information on the elements of an expenditure or use is confidential, you do not need to include it in the account book or similar record if you record it at or near the time of the expenditure or use. Taxact 2012 login returning user You must keep it elsewhere and make it available as support to the IRS director for your area on request. Taxact 2012 login returning user Substantial compliance. Taxact 2012 login returning user   If you have not fully supported a particular element of an expenditure or use, but have complied with the adequate records requirement for the expenditure or use to the satisfaction of the IRS director for your area, you can establish this element by any evidence the IRS director for your area deems adequate. Taxact 2012 login returning user   If you fail to establish to the satisfaction of the IRS director for your area that you have substantially complied with the adequate records requirement for an element of an expenditure or use, you must establish the element as follows. Taxact 2012 login returning user By your own oral or written statement containing detailed information as to the element. Taxact 2012 login returning user By other evidence sufficient to establish the element. Taxact 2012 login returning user   If the element is the cost or amount, time, place, or date of an expenditure or use, its supporting evidence must be direct evidence, such as oral testimony by witnesses or a written statement setting forth detailed information about the element or the documentary evidence. Taxact 2012 login returning user If the element is the business purpose of an expenditure, its supporting evidence can be circumstantial evidence. Taxact 2012 login returning user Sampling. Taxact 2012 login returning user   You can maintain an adequate record for part of a tax year and use that record to support your business and investment use of listed property for the entire tax year if it can be shown by other evidence that the periods for which you maintain an adequate record are representative of the use throughout the year. Taxact 2012 login returning user Example 1. Taxact 2012 login returning user Denise Williams, a sole proprietor and calendar year taxpayer, operates an interior decorating business out of her home. Taxact 2012 login returning user She uses her automobile for local business visits to the homes or offices of clients, for meetings with suppliers and subcontractors, and to pick up and deliver items to clients. Taxact 2012 login returning user There is no other business use of the automobile, but she and family members also use it for personal purposes. Taxact 2012 login returning user She maintains adequate records for the first 3 months of the year showing that 75% of the automobile use was for business. Taxact 2012 login returning user Subcontractor invoices and paid bills show that her business continued at approximately the same rate for the rest of the year. Taxact 2012 login returning user If there is no change in circumstances, such as the purchase of a second car for exclusive use in her business, the determination that her combined business/investment use of the automobile for the tax year is 75% rests on sufficient supporting evidence. Taxact 2012 login returning user Example 2. Taxact 2012 login returning user Assume the same facts as in Example 1, except that Denise maintains adequate records during the first week of every month showing that 75% of her use of the automobile is for business. Taxact 2012 login returning user Her business invoices show that her business continued at the same rate during the later weeks of each month so that her weekly records are representative of the automobile's business use throughout the month. Taxact 2012 login returning user The determination that her business/investment use of the automobile for the tax year is 75% rests on sufficient supporting evidence. Taxact 2012 login returning user Example 3. Taxact 2012 login returning user Bill Baker, a sole proprietor and calendar year taxpayer, is a salesman in a large metropolitan area for a company that manufactures household products. Taxact 2012 login returning user For the first 3 weeks of each month, he occasionally uses his own automobile for business travel within the metropolitan area. Taxact 2012 login returning user During these weeks, his business use of the automobile does not follow a consistent pattern. Taxact 2012 login returning user During the fourth week of each month, he delivers all business orders taken during the previous month. Taxact 2012 login returning user The business use of his automobile, as supported by adequate records, is 70% of its total use during that fourth week. Taxact 2012 login returning user The determination based on the record maintained during the fourth week of the month that his business/investment use of the automobile for the tax year is 70% does not rest on sufficient supporting evidence because his use during that week is not representative of use during other periods. Taxact 2012 login returning user Loss of records. Taxact 2012 login returning user   When you establish that failure to produce adequate records is due to loss of the records through circumstances beyond your control, such as through fire, flood, earthquake, or other casualty, you have the right to support a deduction by reasonable reconstruction of your expenditures and use. Taxact 2012 login returning user How Is Listed Property Information Reported? You must provide the information about your listed property requested in Part V of Form 4562, Section A, if you claim either of the following deductions. Taxact 2012 login returning user Any deduction for a vehicle. Taxact 2012 login returning user A depreciation deduction for any other listed property. Taxact 2012 login returning user If you claim any deduction for a vehicle, you also must provide the information requested in Section B. Taxact 2012 login returning user If you provide the vehicle for your employee's use, the employee must give you this information. Taxact 2012 login returning user If you provide any vehicle for use by an employee, you must first answer the questions in Section C to see if you meet an exception to completing Section B for that vehicle. Taxact 2012 login returning user Vehicles used by your employees. Taxact 2012 login returning user   You do not have to complete Section B, Part V, for vehicles used by your employees who are not more-than-5% owners or related persons if you meet at least one of the following requirements. Taxact 2012 login returning user You maintain a written policy statement that prohibits one of the following uses of the vehicles. Taxact 2012 login returning user All personal use including commuting. Taxact 2012 login returning user Personal use, other than commuting, by employees who are not officers, directors, or 1%-or-more owners. Taxact 2012 login returning user You treat all use of the vehicles by your employees as personal use. Taxact 2012 login returning user You provide more than five vehicles for use by your employees, and you keep in your records the information on their use given to you by the employees. Taxact 2012 login returning user For demonstrator automobiles provided to full-time salespersons, you maintain a written policy statement that limits the total mileage outside the salesperson's normal working hours and prohibits use of the automobile by anyone else, for vacation trips, or to store personal possessions. Taxact 2012 login returning user Exceptions. Taxact 2012 login returning user   If you file Form 2106, 2106-EZ, or Schedule C-EZ (Form 1040), and you are not required to file Form 4562, report information about listed property on that form and not on Form 4562. Taxact 2012 login returning user Also, if you file Schedule C (Form 1040) and are claiming the standard mileage rate or actual vehicle expenses (except depreciation) and you are not required to file Form 4562 for any other reason, report vehicle information in Part IV of Schedule C and not on Form 4562. Taxact 2012 login returning user Prev  Up  Next   Home   More Online Publications
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The Taxact 2012 Login Returning User

Taxact 2012 login returning user 10. Taxact 2012 login returning user   Business Bad Debts Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Definition of Business Bad DebtAccrual method. Taxact 2012 login returning user Cash method. Taxact 2012 login returning user Debt acquired from a decedent. Taxact 2012 login returning user Liquidation. Taxact 2012 login returning user Types of Business Bad Debts When a Debt Becomes Worthless How To Claim a Business Bad DebtSpecific Charge-Off Method Nonaccrual-Experience Method Recovery of a Bad DebtNet operating loss (NOL) carryover. Taxact 2012 login returning user Introduction You have a bad debt if you cannot collect money owed to you. Taxact 2012 login returning user A bad debt is either a business bad debt or a nonbusiness bad debt. Taxact 2012 login returning user This chapter discusses only business bad debts. Taxact 2012 login returning user Generally, a business bad debt is one that comes from operating your trade or business. Taxact 2012 login returning user You can deduct business bad debts on Schedule C (Form 1040) or your applicable business income tax return. Taxact 2012 login returning user All other bad debts are nonbusiness bad debts and are deductible only as short-term capital losses. Taxact 2012 login returning user For more information on nonbusiness bad debts, see Publication 550. Taxact 2012 login returning user Topics - This chapter discusses: Definition of business bad debt When a debt becomes worthless How to claim a business bad debt Recovery of a bad debt Useful Items - You may want to see: Publication 525 Taxable and Nontaxable Income 536 Net Operating Losses (NOLs) for Individuals, Estates, and Trusts 544 Sales and Other Dispositions of Assets 550 Investment Income and Expenses 556 Examination of Returns, Appeal Rights, and Claims for Refund Form (and Instructions) Schedule C (Form 1040) Profit or Loss From Business 1040X Amended U. Taxact 2012 login returning user S. Taxact 2012 login returning user Individual Income Tax Return 1045 Application for Tentative Refund 1139 Corporation Application for Tentative Refund 3115 Application for Change in Accounting Method See chapter 12 for information about getting publications and forms. Taxact 2012 login returning user Definition of Business Bad Debt A business bad debt is a loss from the worthlessness of a debt that was either: Created or acquired in your trade or business, or Closely related to your trade or business when it became partly or totally worthless. Taxact 2012 login returning user A debt is closely related to your trade or business if your primary motive for incurring the debt is business related. Taxact 2012 login returning user Bad debts of a corporation (other than an S corporation) are always business bad debts. Taxact 2012 login returning user Credit sales. Taxact 2012 login returning user   Business bad debts are mainly the result of credit sales to customers. Taxact 2012 login returning user Goods that have been sold, but not yet paid for, and services that have been performed, but not yet paid for, are recorded in your books as either accounts receivable or notes receivable. Taxact 2012 login returning user After a reasonable period of time, if you have tried to collect the amount due, but are unable to do so, the uncollectible part becomes a business bad debt. Taxact 2012 login returning user   Accounts or notes receivable valued at fair market value (FMV) when received are deductible only at that value, even though the FMV may be less than the face value. Taxact 2012 login returning user If you purchased an account receivable for less than its face value, and the receivable subsequently becomes worthless, the most you are allowed to deduct is the amount you paid to acquire it. Taxact 2012 login returning user    You can claim a business bad debt deduction only if the amount owed to you was previously included in gross income. Taxact 2012 login returning user This applies to amounts owed to you from all sources of taxable income, including sales, services, rents, and interest. Taxact 2012 login returning user Accrual method. Taxact 2012 login returning user   If you use the accrual method of accounting, you generally report income as you earn it. Taxact 2012 login returning user You can only claim a bad debt deduction for an uncollectible receivable if you have previously included the uncollectible amount in income. Taxact 2012 login returning user   If you qualify, you can use the nonaccrual-experience method of accounting discussed later. Taxact 2012 login returning user Under this method, you do not have to accrue income that, based on your experience, you do not expect to collect. Taxact 2012 login returning user Cash method. Taxact 2012 login returning user   If you use the cash method of accounting, you generally report income when you receive payment. Taxact 2012 login returning user You cannot claim a bad debt deduction for amounts owed to you because you never included those amounts in income. Taxact 2012 login returning user For example, a cash basis architect cannot claim a bad debt deduction if a client fails to pay the bill because the architect's fee was never included in income. Taxact 2012 login returning user Debts from a former business. Taxact 2012 login returning user   If you sell your business but retain its receivables, these debts are business debts because they arose out of your trade or business. Taxact 2012 login returning user If any of these receivables subsequently become worthless, the loss is still a business bad debt. Taxact 2012 login returning user Debt acquired from a decedent. Taxact 2012 login returning user   The character of a loss from debts of a business acquired from a decedent is determined in the same way as debts acquired on the purchase of a business. Taxact 2012 login returning user The executor of the decedent's estate treats any loss from the debts as a business bad debt if the debts were closely related to the decedent's trade or business when they became worthless. Taxact 2012 login returning user Otherwise, a loss from these debts becomes a nonbusiness bad debt for the decedent's estate. Taxact 2012 login returning user Liquidation. Taxact 2012 login returning user   If you liquidate your business and some of the accounts receivable that you retain become worthless, they become business bad debts. Taxact 2012 login returning user Types of Business Bad Debts Business bad debts may result from the following. Taxact 2012 login returning user Loans to clients and suppliers. Taxact 2012 login returning user   If you loan money to a client, supplier, employee, or distributor for a business reason and you are unable to collect the loan after attempting to do so, you have a business bad debt. Taxact 2012 login returning user Debts owed by political parties. Taxact 2012 login returning user   If a political party (or other organization that accepts contributions or spends money to influence elections) owes you money and the debt becomes worthless, you can claim a bad debt deduction only if all of the following requirements are met. Taxact 2012 login returning user You use the accrual method of accounting. Taxact 2012 login returning user The debt arose from the sale of goods or services in the ordinary course of your trade or business. Taxact 2012 login returning user More than 30% of your receivables accrued in the year of the sale were from sales to political parties. Taxact 2012 login returning user You made substantial and continuing efforts to collect on the debt. Taxact 2012 login returning user Loan or capital contribution. Taxact 2012 login returning user   You cannot claim a bad debt deduction for a loan you made to a corporation if, based on the facts and circumstances, the loan is actually a contribution to capital. Taxact 2012 login returning user Debts of an insolvent partner. Taxact 2012 login returning user   If your business partnership breaks up and one of your former partners becomes insolvent, you may have to pay more than your pro rata share of the partnership's debts. Taxact 2012 login returning user If you pay any part of the insolvent partner's share of the debts, you can claim a bad debt deduction for the amount you paid that is attributable to the insolvent partner's share. Taxact 2012 login returning user Business loan guarantee. Taxact 2012 login returning user   If you guarantee a debt that subsequently becomes worthless, the debt can qualify as a business bad debt if all the following requirements are met. Taxact 2012 login returning user You made the guarantee in the course of your trade or business. Taxact 2012 login returning user You have a legal duty to pay the debt. Taxact 2012 login returning user You made the guarantee before the debt became worthless. Taxact 2012 login returning user You meet this requirement if you reasonably expected you would not have to pay the debt without full reimbursement from the borrower. Taxact 2012 login returning user You received reasonable consideration for making the guarantee. Taxact 2012 login returning user You meet this requirement if you made the guarantee in accord with normal business practice or for a good faith business purpose. Taxact 2012 login returning user Example. Taxact 2012 login returning user Jane Zayne owns the Zayne Dress Company. Taxact 2012 login returning user She guaranteed payment of a $20,000 note for Elegant Fashions, a dress outlet. Taxact 2012 login returning user Elegant Fashions is one of Zayne's largest clients. Taxact 2012 login returning user Elegant Fashions later defaulted on the loan. Taxact 2012 login returning user As a result, Ms. Taxact 2012 login returning user Zayne paid the remaining balance of the loan in full to the bank. Taxact 2012 login returning user She can claim a business bad debt deduction only for the amount she paid, since her guarantee was made in the course of her trade or business for a good faith business purpose. Taxact 2012 login returning user She was motivated by the desire to retain one of her better clients and keep a sales outlet. Taxact 2012 login returning user Deductible in the year paid. Taxact 2012 login returning user   If you make a payment on a loan you guaranteed, you can deduct it in the year paid, unless you have rights against the borrower. Taxact 2012 login returning user Rights against a borrower. Taxact 2012 login returning user   When you make payment on a loan you guaranteed, you may have the right to take the place of the lender. Taxact 2012 login returning user The debt is then owed to you. Taxact 2012 login returning user If you have this right, or some other right to demand payment from the borrower, you cannot claim a bad debt deduction until these rights become partly or totally worthless. Taxact 2012 login returning user Joint debtor. Taxact 2012 login returning user   If two or more debtors jointly owe you money, your inability to collect from one does not enable you to deduct a proportionate amount as a bad debt. Taxact 2012 login returning user Sale of mortgaged property. Taxact 2012 login returning user   If mortgaged or pledged property is sold for less than the debt, the unpaid, uncollectible balance of the debt is a bad debt. Taxact 2012 login returning user When a Debt Becomes Worthless A debt becomes worthless when there is no longer any chance the amount owed will be paid. Taxact 2012 login returning user This may occur when the debt is due or prior to that date. Taxact 2012 login returning user To demonstrate worthlessness, you must only show that you have taken reasonable steps to collect the debt but were unable to do so. Taxact 2012 login returning user It is not necessary to go to court if you can show that a judgment from the court would be uncollectible. Taxact 2012 login returning user Bankruptcy of your debtor is generally good evidence of the worthlessness of at least a part of an unsecured and unpreferred debt. Taxact 2012 login returning user Property received for debt. Taxact 2012 login returning user   If you receive property in partial settlement of a debt, reduce the debt by the property's FMV, which becomes the property's basis. Taxact 2012 login returning user You can deduct the remaining debt as a bad debt if and when it becomes worthless. Taxact 2012 login returning user   If you later sell the property for more than its basis, any gain on the sale is due to the appreciation of the property. Taxact 2012 login returning user It is not a recovery of a bad debt. Taxact 2012 login returning user For information on the sale of an asset, see Publication 544. Taxact 2012 login returning user How To Claim a Business Bad Debt There are two methods to claim a business bad debt. Taxact 2012 login returning user The specific charge-off method. Taxact 2012 login returning user The nonaccrual-experience method. Taxact 2012 login returning user Generally, you must use the specific charge-off method. Taxact 2012 login returning user However, you may use the nonaccrual-experience method if you meet the requirements discussed later under Nonaccrual-Experience Method . Taxact 2012 login returning user Specific Charge-Off Method If you use the specific charge-off method, you can deduct specific business bad debts that become either partly or totally worthless during the tax year. Taxact 2012 login returning user However, with respect to partly worthless bad debts, your deduction is limited to the amount you charged off on your books during the year. Taxact 2012 login returning user Partly worthless debts. Taxact 2012 login returning user   You can deduct specific bad debts that become partly uncollectible during the tax year. Taxact 2012 login returning user Your tax deduction is limited to the amount you charge off on your books during the year. Taxact 2012 login returning user You do not have to charge off and deduct your partly worthless debts annually. Taxact 2012 login returning user You can delay the charge off until a later year. Taxact 2012 login returning user However, you cannot deduct any part of a debt after the year it becomes totally worthless. Taxact 2012 login returning user Significantly modified debt. Taxact 2012 login returning user   An exception to the charge-off rule exists for debt which has been significantly modified and on which the holder recognized gain. Taxact 2012 login returning user For more information, see Regulations section 1. Taxact 2012 login returning user 166-3(a)(3). Taxact 2012 login returning user Deduction disallowed. Taxact 2012 login returning user   Generally, you can claim a partial bad debt deduction only in the year you make the charge-off on your books. Taxact 2012 login returning user If, under audit, the IRS does not allow your deduction and the debt becomes partly worthless in a later tax year, you can deduct the amount you charged off in that year plus the disallowed amount charged off in the earlier year. Taxact 2012 login returning user The charge-off in the earlier year, unless reversed on your books, fulfills the charge-off requirement for the later year. Taxact 2012 login returning user Totally worthless debts. Taxact 2012 login returning user   If a debt becomes totally worthless in the current tax year, you can deduct the entire amount, less any amount deducted in an earlier tax year when the debt was only partly worthless. Taxact 2012 login returning user   You do not have to make an actual charge-off on your books to claim a bad debt deduction for a totally worthless debt. Taxact 2012 login returning user However, you may want to do so. Taxact 2012 login returning user If you do not and the IRS later rules the debt is only partly worthless, you will not be allowed a deduction for the debt in that tax year because a deduction of a partly worthless bad debt is limited to the amount actually charged off. Taxact 2012 login returning user See Partly worthless debts, earlier. Taxact 2012 login returning user Filing a claim for refund. Taxact 2012 login returning user   If you did not deduct a bad debt on your original return for the year it became worthless, you can file a claim for a credit or refund. Taxact 2012 login returning user If the bad debt was totally worthless, you must file the claim by the later of the following dates. Taxact 2012 login returning user 7 years from the date your original return was due (not including extensions). Taxact 2012 login returning user 2 years from the date you paid the tax. Taxact 2012 login returning user   If the claim is for a partly worthless bad debt, you must file the claim by the later of the following dates. Taxact 2012 login returning user 3 years from the date you filed your original return. Taxact 2012 login returning user 2 years from the date you paid the tax. Taxact 2012 login returning user You may have longer to file the claim if you were unable to manage your financial affairs due to a physical or mental impairment. Taxact 2012 login returning user Such an impairment requires proof of existence. Taxact 2012 login returning user   For details and more information about filing a claim, see Publication 556. Taxact 2012 login returning user Use one of the following forms to file a claim. Taxact 2012 login returning user For more information, see the instructions for the applicable form. Taxact 2012 login returning user Table 10-1. Taxact 2012 login returning user Forms Used To File a Claim IF you filed as a. Taxact 2012 login returning user . Taxact 2012 login returning user . Taxact 2012 login returning user THEN file. Taxact 2012 login returning user . Taxact 2012 login returning user . Taxact 2012 login returning user Sole proprietor or farmer Form 1040X Corporation Form 1120X S corporation Form 1120S and check box H(4) Partnership Form 1065X if filing on paper or  Form 1065 and check box G(5) if filing electronically Nonaccrual-Experience Method If you use an accrual method of accounting and qualify under the rules explained in this section, you can use the nonaccrual-experience method for bad debts. Taxact 2012 login returning user Under this method, you do not accrue service related income you expect to be uncollectible. Taxact 2012 login returning user Because the expected uncollectible amounts are not included in income, these amounts are not later deducted from income. Taxact 2012 login returning user Generally, you can use the nonaccrual-experience method for accounts receivable for services you performed only if: The services are provided in the fields of accounting, actuarial science, architecture, consulting, engineering, health, law, or the performing arts, or You meet the $5 million gross receipts test for all prior years. Taxact 2012 login returning user Service related income. Taxact 2012 login returning user   You can use the nonaccrual-experience method only for amounts earned by performing services. Taxact 2012 login returning user You cannot use this method for amounts owed to you from activities such as lending money, selling goods, or acquiring receivables or other rights to receive payment. Taxact 2012 login returning user Gross receipts test. Taxact 2012 login returning user   To find out if you meet the $5 million gross receipts test for all prior years, you must figure the average annual gross receipts for each prior year. Taxact 2012 login returning user If your average annual gross receipts for any year exceeds $5 million, you cannot use the non-accural experience method. Taxact 2012 login returning user   The average annual gross receipts for any year is the average of gross receipts from the year in question and the 2 previous years. Taxact 2012 login returning user For example, if you were figuring the average annual gross receipts for 2013, you would average your gross receipts for 2011, 2012, and 2013. Taxact 2012 login returning user Interest or penalty charged. Taxact 2012 login returning user   Generally, you cannot use the nonaccrual-experience method for amounts due on which you charge interest or a late payment penalty. Taxact 2012 login returning user However, do not treat a discount offered for early payment as the charging of interest or a penalty if both the following apply. Taxact 2012 login returning user You otherwise accrue the full amount due as gross income at the time you provide the services. Taxact 2012 login returning user You treat the discount allowed for early payment as an adjustment to gross income in the year of payment. Taxact 2012 login returning user Change in accounting method. Taxact 2012 login returning user   Generally, you must obtain consent to change to a nonaccrual-experience method (other than one of the safe harbor methods) or to change from one method to another. Taxact 2012 login returning user See Form 3115 and the Instructions for Form 3115 for more information. Taxact 2012 login returning user Recovery of a Bad Debt If you claim a deduction for a bad debt on your income tax return and later recover (collect) all or part of it, you may have to include all or part of the recovery in gross income. Taxact 2012 login returning user The amount you include is limited to the amount you actually deducted. Taxact 2012 login returning user However, you can exclude the amount deducted that did not reduce your tax. Taxact 2012 login returning user Report the recovery as “Other income” on the appropriate business form or schedule. Taxact 2012 login returning user See Recoveries in Publication 525 for more information. Taxact 2012 login returning user Net operating loss (NOL) carryover. Taxact 2012 login returning user   If a bad debt deduction increases an NOL carryover that has not expired before the beginning of the tax year in which the recovery takes place, you treat the deduction as having reduced your tax. Taxact 2012 login returning user A bad debt deduction that contributes to a NOL helps lower taxes in the year to which you carry the NOL. Taxact 2012 login returning user For more information about NOLs, see Publication 536. Taxact 2012 login returning user Also, see the Instructions for Form 1045, and the Instructions for Form 1139. 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