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Www freefillableforms com Part Three -   Gains and Losses The four chapters in this part discuss investment gains and losses, including how to figure your basis in property. Www freefillableforms com A gain from selling or trading stocks, bonds, or other investment property may be taxed or it may be tax free, at least in part. Www freefillableforms com A loss may or may not be deductible. Www freefillableforms com These chapters also discuss gains from selling property you personally use — including the special rules for selling your home. Www freefillableforms com Nonbusiness casualty and theft losses are discussed in chapter 25 in Part Five. Www freefillableforms com Table of Contents 13. Www freefillableforms com   Basis of PropertyIntroduction Useful Items - You may want to see: Cost BasisReal Property Adjusted BasisIncreases to Basis Decreases to Basis Basis Other Than CostProperty Received for Services Taxable Exchanges Involuntary Conversions Nontaxable Exchanges Property Transferred From a Spouse Property Received as a Gift Inherited Property Property Changed From Personal to Business or Rental Use Stocks and Bonds 14. Www freefillableforms com   Sale of PropertyReminder Introduction Useful Items - You may want to see: Sales and TradesWhat Is a Sale or Trade? How To Figure Gain or Loss Nontaxable Trades Transfers Between Spouses Related Party Transactions Capital Gains and LossesCapital or Ordinary Gain or Loss Capital Assets and Noncapital Assets Holding Period Nonbusiness Bad Debts Wash Sales Rollover of Gain From Publicly Traded Securities 15. Www freefillableforms com   Selling Your HomeReminder Introduction Useful Items - You may want to see: Main Home Figuring Gain or LossSelling Price Amount Realized Adjusted Basis Amount of Gain or Loss Dispositions Other Than Sales Determining Basis Excluding the GainMaximum Exclusion Ownership and Use Tests Reduced Maximum Exclusion Business Use or Rental of Home Reporting the SaleSeller-financed mortgage. Www freefillableforms com More information. Www freefillableforms com Special SituationsException for sales to related persons. Www freefillableforms com Recapturing (Paying Back) a Federal Mortgage Subsidy 16. Www freefillableforms com   Reporting Gains and Losses What's New Introduction Useful Items - You may want to see: Reporting Capital Gains and Losses Exception 1. Www freefillableforms com Exception 2. Www freefillableforms com File Form 1099-B or Form 1099-S with the IRS. Www freefillableforms com Capital Losses Capital Gain Tax Rates Prev  Up  Next   Home   More Online Publications
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Self-Employed Individuals Tax Center

Who is Self-Employed?

Generally, you are self-employed if any of the following apply to you.

What are My Self-Employed Tax Obligations?

As a self-employed individual, generally you are required to file an annual return and pay estimated tax quarterly.

Self-employed individuals generally must pay self-employment tax (SE tax) as well as income tax. SE tax is a Social Security and Medicare tax primarily for individuals who work for themselves. It is similar to the Social Security and Medicare taxes withheld from the pay of most wage earners. In general, anytime the wording "self-employment tax" is used, it only refers to Social Security and Medicare taxes and not any other tax (like income tax).

Before you can determine if you are subject to self-employment tax and income tax, you must figure your net profit or net loss from your business. You do this by subtracting your business expenses from your business income. If your expenses are less than your income, the difference is net profit and becomes part of your income on page 1 of Form 1040. If your expenses are more than your income, the difference is a net loss. You usually can deduct your loss from gross income on page 1 of Form 1040. But in some situations your loss is limited. See Pub. 334, Tax Guide for Small Business (For Individuals Who Use Schedule C or C-EZ) for more information.

You have to file an income tax return if your net earnings from self-employment were $400 or more. If your net earnings from self-employment were less than $400, you still have to file an income tax return if you meet any other filing requirement listed in the Form 1040 instructions (PDF).

How Do I Make My Quarterly Payments?

Estimated tax is the method used to pay Social Security and Medicare taxes and income tax, because you do not have an employer withholding these taxes for you. Form 1040-ES, Estimated Tax for Individuals (PDF), is used to figure these taxes. Form 1040-ES contains a worksheet that is similar to Form 1040. You will need your prior year’s annual tax return in order to fill out Form 1040-ES.

Use the worksheet found in Form 1040-ES, Estimated Tax for Individuals to find out if you are required to file quarterly estimated tax.

Form 1040-ES also contains blank vouchers you can use when you mail your estimated tax payments or you may make your payments using the Electronic Federal Tax Payment System (EFTPS). If this is your first year being self-employed, you will need to estimate the amount of income you expect to earn for the year. If you estimated your earnings too high, simply complete another Form 1040-ES worksheet to refigure your estimated tax for the next quarter. If you estimated your earnings too low, again complete another Form 1040-ES worksheet to recalculate your estimated taxes for the next quarter.

See the Estimated Taxes page for more information. The Self-Employment Tax page has more information on Social Security and Medicare taxes.

How Do I File My Annual Return?

To file your annual tax return, you will need to use Schedule C (PDF) or Schedule C-EZ (PDF) to report your income or loss from a business you operated or a profession you practiced as a sole proprietor. Schedule C Instructions (PDF) may be helpful in filling out this form.

Small businesses and statutory employees with expenses of $5,000 or less may be able to file Schedule C-EZ instead of Schedule C. To find out if you can use Schedule C-EZ, see the instructions in the Schedule C-EZ form.

In order to report your Social Security and Medicare taxes, you must file Schedule SE (Form 1040), Self-Employment Tax (PDF). Use the income or loss calculated on Schedule C or Schedule C-EZ to calculate the amount of Social Security and Medicare taxes you should have paid during the year. The Instructions (PDF) for Schedule SE may be helpful in filing out the form.

Business Structures

When beginning a business, you must decide what form of business entity to establish. Your form of business determines which income tax return form you have to file. The most common forms of business are the sole proprietorship, partnership, corporation, and S corporation. A Limited Liability Company (LLC) is a relatively new business structure allowed by state statute. Visit the Business Structures page to learn more about each type of entity and what forms to file.

Home Office Deduction

If you use part of your home for business, you may be able to deduct expenses for the business use of your home. The home office deduction is available for homeowners and renters, and applies to all types of homes.

Husband and Wife Business - What is a Qualified Joint Venture?

Husband and Wife Business
The employment tax requirements for family employees may vary from those that apply to other employees. On this page we point out some issues to consider when operating a husband and wife business.

Election for Husband and Wife Unincorporated Businesses
For tax years beginning after December 31, 2006, the Small Business and Work Opportunity Tax Act of 2007 (Public Law 110-28) provides that a "qualified joint venture," whose only members are a husband and wife filing a joint return, can elect not to be treated as a partnership for Federal tax purposes.

Considering a Tax Professional

Tips for Choosing a Tax Return Preparer

Online Learning Tools

The Small Business Taxes: The Virtual Workshop is composed of nine interactive lessons designed to help new small business owners learn their tax rights and responsibilities. The IRS Video Portal contains video and audio presentations on topics of interest to small businesses, individuals and tax professionals.

Page Last Reviewed or Updated: 04-Mar-2014

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Www freefillableforms com 2. Www freefillableforms com   Possession Source Income Table of Contents Types of IncomeCompensation for Labor or Personal Services Investment Income Sales or Other Dispositions of Property Scholarships, Fellowships, Grants, Prizes, and Awards Effectively Connected Income In order to determine where to file your return and which form(s) you need to complete, you must determine the source of each item of income you received during the tax year. Www freefillableforms com Income you received from sources within, or that was effectively connected with the conduct of a trade or business within, the relevant possession must be identified separately from U. Www freefillableforms com S. Www freefillableforms com or foreign source income. Www freefillableforms com This chapter discusses the rules for determining if the source of your income is from: American Samoa, The Commonwealth of the Northern Mariana Islands (CNMI), The Commonwealth of Puerto Rico (Puerto Rico), Guam, or The U. Www freefillableforms com S. Www freefillableforms com Virgin Islands (USVI). Www freefillableforms com Generally, the same rules that apply for determining U. Www freefillableforms com S. Www freefillableforms com source income also apply for determining possession source income. Www freefillableforms com However, there are some important exceptions to these rules. Www freefillableforms com Both the general rules and the exceptions are discussed in this chapter. Www freefillableforms com U. Www freefillableforms com S. Www freefillableforms com income rule. Www freefillableforms com   This rule states that income is not possession source income if, under the rules of Internal Revenue Code sections 861–865, it is treated as income: From sources within the United States, or Effectively connected with the conduct of a trade or business within the United States. Www freefillableforms com Table 2-1 shows the general rules for determining whether income is from sources within the United States. Www freefillableforms com Table 2-1. Www freefillableforms com General Rules for Determining U. Www freefillableforms com S. Www freefillableforms com Source of Income Item of Income Factor Determining Source Salaries, wages, and other compensation for labor or personal services Where labor or services performed Pensions Contributions: Where services were performed that earned the pension Investment earnings: Where pension trust is located Interest Residence of payer Dividends Where corporation created or organized Rents Location of property Royalties:   Natural resources Location of property Patents, copyrights, etc. Www freefillableforms com Where property is used Sale of business inventory—purchased Where sold Sale of business inventory—produced Allocation if produced and sold in different locations Sale of real property Location of property Sale of personal property Seller's tax home (but see Special Rules for Gains From Dispositions of Certain Property , later, for exceptions) Sale of natural resources Allocation based on fair market value of product at export terminal. Www freefillableforms com For more information, see Regulations section 1. Www freefillableforms com 863-1(b). Www freefillableforms com Types of Income This section looks at the most common types of income received by individuals, and the rules for determining the source of the income. Www freefillableforms com Generally, the same rules shown in Table 2-1 are used to determine if you have possession source income. Www freefillableforms com Compensation for Labor or Personal Services Income from labor or personal services includes wages, salaries, commissions, fees, per diem allowances, employee allowances and bonuses, and fringe benefits. Www freefillableforms com It also includes income earned by sole proprietors and general partners from providing personal services in the course of their trade or business. Www freefillableforms com Services performed wholly within a relevant possession. Www freefillableforms com   Generally, all pay you receive for services performed in a relevant possession is considered to be from sources within that possession. Www freefillableforms com However, there is an exception for income earned as a member of the U. Www freefillableforms com S. Www freefillableforms com Armed Forces or a civilian spouse. Www freefillableforms com U. Www freefillableforms com S. Www freefillableforms com Armed Forces. Www freefillableforms com   If you are a bona fide resident of a relevant possession, your military service pay will be sourced in that possession even if you perform the services in the United States or another possession. Www freefillableforms com However, if you are not a bona fide resident of a possession, your military service pay will be income from the  United States even if you perform services in a possession. Www freefillableforms com Civilian spouse of active duty member of the U. Www freefillableforms com S. Www freefillableforms com Armed Forces. Www freefillableforms com   If you are a bona fide resident of a U. Www freefillableforms com S. Www freefillableforms com possession and choose to keep that possession as your tax residence under MSRRA when relocating with your servicemember spouse under military orders, the source of income for your labor or personal services is considered to be that possession. Www freefillableforms com Likewise, if your tax residence is in one of the 50 states or the District of Columbia before relocating and you choose to keep it as your tax residence, the source of income for services performed in any of the U. Www freefillableforms com S. Www freefillableforms com possessions is considered to be the United States and, specifically, your state of residence or the District of Columbia. Www freefillableforms com Services performed partly inside and partly outside a relevant possession. Www freefillableforms com   If you are an employee and receive compensation for labor or personal services performed both inside and outside the relevant possession, special rules apply in determining the source of the compensation. Www freefillableforms com Compensation (other than certain fringe benefits) is sourced on a time basis. Www freefillableforms com Certain fringe benefits (such as housing and education) are sourced on a geographical basis. Www freefillableforms com   Or, you may be permitted to use an alternative basis to determine the source of compensation. Www freefillableforms com See Alternative basis , later. Www freefillableforms com   If you are self-employed, determine the source of your income for labor or personal services from self-employment on the basis that most correctly reflects the proper source of that income under the facts and circumstances of your particular case. Www freefillableforms com In many cases, the facts and circumstances will call for an apportionment on a time basis as explained next. Www freefillableforms com Time basis. Www freefillableforms com   Use a time basis to figure your compensation for labor or personal services from the relevant possession (other than the fringe benefits discussed later). Www freefillableforms com Do this by multiplying your total compensation (other than the fringe benefits discussed later) by the following fraction:   Number of days you performed  services in the relevant  possession during the year     Total number of days you  performed services during the year           You can use a unit of time less than a day in the above fraction, if appropriate. Www freefillableforms com The time period for which the income is made does not have to be a year. Www freefillableforms com Instead, you can use another distinct, separate, and continuous time period if you can establish to the satisfaction of the IRS that this other period is more appropriate. Www freefillableforms com Example. Www freefillableforms com In 2013, you worked in your employer's office in the United States for 60 days and in the Puerto Rico office for 180 days, earning a total of $80,000 for the year. Www freefillableforms com Your Puerto Rico source income is $60,000, figured as follows. Www freefillableforms com       180 days 240 days × $80,000 = $60,000                 Multi-year compensation. Www freefillableforms com   The source of multi-year compensation is generally determined on a time basis over the period to which the compensation is attributable. Www freefillableforms com Multi-year compensation is compensation that is included in your income in 1 tax year but is attributable to a period that includes 2 or more tax years. Www freefillableforms com You determine the period to which the income is attributable based on the facts and circumstances of your case. Www freefillableforms com For more information on multi-year compensation, see Treasury Decision (T. Www freefillableforms com D. Www freefillableforms com ) 9212 and Regulations section 1. Www freefillableforms com 861-4, 2005-35 I. Www freefillableforms com R. Www freefillableforms com B. Www freefillableforms com 429, available at www. Www freefillableforms com irs. Www freefillableforms com gov/irb/2005-35_IRB/ar14. Www freefillableforms com html. Www freefillableforms com Certain fringe benefits sourced on a geographical basis. Www freefillableforms com   If you received any of the following fringe benefits as compensation for labor or services performed as an employee partly inside and partly outside a relevant possession, you must source that income on a geographical basis. Www freefillableforms com Housing. Www freefillableforms com Education. Www freefillableforms com Local transportation. Www freefillableforms com Tax reimbursement. Www freefillableforms com Hazardous or hardship duty pay. Www freefillableforms com Moving expense reimbursement. Www freefillableforms com For information on determining the source of the fringe benefits listed above, see Regulations section 1. Www freefillableforms com 861-4. Www freefillableforms com Alternative basis. Www freefillableforms com   You can determine the source of your compensation under an alternative basis if you establish to the satisfaction of the IRS that, under the facts and circumstances of your case, the alternative basis more properly determines the source of your income than the time or geographical basis. Www freefillableforms com If you use an alternative basis, you must keep (and have available for inspection) records to document why the alternative basis more properly determines the source of your income. Www freefillableforms com De minimis exception. Www freefillableforms com   There is an exception to the rule for determining the source of income earned in a possession. Www freefillableforms com Generally, you will not have income from a possession if during a tax year you: Are a U. Www freefillableforms com S. Www freefillableforms com citizen or resident, Are not a bona fide resident of that possession, Are not employed by or under contract with an individual, partnership, or corporation that is engaged in a trade or business in that possession, Temporarily perform services in that possession for 90 days or less, and Earned $3,000 or less from such services. Www freefillableforms com This exception began with income earned during your 2008 tax year. Www freefillableforms com Pensions. Www freefillableforms com   Generally, pension income has two components: contributions to the pension plan and the earnings accrued from investing those contributions. Www freefillableforms com The contribution portion is sourced according to where services were performed that earned the pension. Www freefillableforms com The investment earnings portion is sourced according to the location of the pension trust. Www freefillableforms com Example. Www freefillableforms com You are a U. Www freefillableforms com S. Www freefillableforms com citizen who worked in Puerto Rico for a U. Www freefillableforms com S. Www freefillableforms com company. Www freefillableforms com All services were performed in Puerto Rico. Www freefillableforms com Upon retirement you remained in Puerto Rico and began receiving your pension from the U. Www freefillableforms com S. Www freefillableforms com pension trust of your employer. Www freefillableforms com Distributions from the U. Www freefillableforms com S. Www freefillableforms com pension trust must be allocated between (1) contributions, which are Puerto Rico source income, and (2) investment earnings, which are U. Www freefillableforms com S. Www freefillableforms com source income. Www freefillableforms com Investment Income This category includes such income as interest, dividends, rents, and royalties. Www freefillableforms com Interest income. Www freefillableforms com   The source of interest income is generally determined by the residence of the payer. Www freefillableforms com Interest paid by corporations created or organized in a relevant possession (possession corporation) or by individuals who are bona fide residents of a relevant possession is considered income from sources within that possession. Www freefillableforms com   However, there is an exception to this rule if you are a bona fide resident of a relevant possession, receive interest from a corporation created or organized in that possession, and are a shareholder of that corporation who owns, directly or indirectly, at least 10% of the total voting stock of the corporation. Www freefillableforms com See Regulations section 1. Www freefillableforms com 937-2(i) for more information. Www freefillableforms com Dividends. Www freefillableforms com   Generally, dividends paid by a corporation created or organized in a relevant possession will be considered income from sources within that possession. Www freefillableforms com There are additional rules for bona fide residents of a relevant possession who receive dividend income from possession corporations, and who own, directly or indirectly, at least 10% of the voting stock of the corporation. Www freefillableforms com For more information, see Regulations section 1. Www freefillableforms com 937-2(g). Www freefillableforms com Rental income. Www freefillableforms com   Rents from property located in a relevant possession are treated as income from sources within that possession. Www freefillableforms com Royalties. Www freefillableforms com   Royalties from natural resources located in a relevant possession are considered income from sources within that possession. Www freefillableforms com   Also considered possession source income are royalties received for the use of, or for the privilege of using, in a relevant possession, patents, copyrights, secret processes and formulas, goodwill, trademarks, trade brands, franchises, and other like property. Www freefillableforms com Sales or Other Dispositions of Property The source rules for sales or other dispositions of property are varied. Www freefillableforms com The most common situations are discussed below. Www freefillableforms com Real property. Www freefillableforms com   Real property includes land and buildings, and generally anything built on, growing on, or attached to land. Www freefillableforms com The location of the property generally determines the source of income from the sale. Www freefillableforms com For example, if you are a bona fide resident of Guam and sell your home that is located in Guam, the gain on the sale is sourced in Guam. Www freefillableforms com If, however, the home you sold was located in the United States, the gain is U. Www freefillableforms com S. Www freefillableforms com source income. Www freefillableforms com Personal property. Www freefillableforms com   The term “personal property” refers to property (such as machinery, equipment, or furniture) that is not real property. Www freefillableforms com Generally, gain (or loss) from the sale or other disposition is sourced according to the seller's tax home. Www freefillableforms com If personal property is sold by a bona fide resident of a relevant possession, the gain (or loss) from the sale is treated as sourced within that possession. Www freefillableforms com   This rule does not apply to the sale of inventory, intangible property, depreciable personal property, or property sold through a foreign office or fixed place of business. Www freefillableforms com The rules applying to sales of inventory are discussed below. Www freefillableforms com For information on sales of the other types of property mentioned, see Internal Revenue Code section 865. Www freefillableforms com Inventory. Www freefillableforms com   Your inventory is personal property that is stock in trade or that is held primarily for sale to customers in the ordinary course of your trade or business. Www freefillableforms com The source of income from the sale of inventory depends on whether the inventory was purchased or produced. Www freefillableforms com Purchased. Www freefillableforms com   Income from the sale of inventory that you purchased is sourced where you sell the property. Www freefillableforms com Generally, this is where title to the property passes to the buyer. Www freefillableforms com Produced. Www freefillableforms com   Income from the sale of inventory that you produced in a relevant possession and sold outside that possession (or vice versa) is sourced based on an allocation. Www freefillableforms com For information on making the allocation, see Regulations section 1. Www freefillableforms com 863-3(f). Www freefillableforms com Special Rules for Gains From Dispositions of Certain Property There are special rules for gains from dispositions of certain investment property (for example, stocks, bonds, debt instruments, diamonds, and gold) owned by a U. Www freefillableforms com S. Www freefillableforms com citizen or resident alien prior to becoming a bona fide resident of a possession. Www freefillableforms com You are subject to these special rules if you meet both of the following conditions. Www freefillableforms com For the tax year for which the source of the gain must be determined, you are a bona fide resident of the relevant possession. Www freefillableforms com For any of the 10 years preceding that year, you were a citizen or resident alien of the United States (other than a bona fide resident of the relevant possession). Www freefillableforms com If you meet these conditions, gains from the disposition of this property will not be treated as income from sources within the relevant possession for purposes of the Internal Revenue Code. Www freefillableforms com Accordingly, bona fide residents of American Samoa and Puerto Rico, for example, may not exclude the gain on their U. Www freefillableforms com S. Www freefillableforms com tax return. Www freefillableforms com (See chapter 3 for additional filing information. Www freefillableforms com ) With respect to the CNMI, Guam, and the USVI, the gain from the disposition of this property will not meet the requirements for certain tax rules that may allow bona fide residents of those possessions to reduce or obtain a rebate of taxes on income from sources within the relevant possessions. Www freefillableforms com These rules apply to dispositions after April 11, 2005. Www freefillableforms com For details, see Regulations section 1. Www freefillableforms com 937-2(f)(1) and Examples 1 and 2 of section 1. Www freefillableforms com 937-2(k). Www freefillableforms com Example 1. Www freefillableforms com In 2007, Cheryl Jones, a U. Www freefillableforms com S. Www freefillableforms com citizen, lived in the United States and paid $1,000 for 100 shares of stock in the Rose Corporation, a U. Www freefillableforms com S. Www freefillableforms com corporation listed on the New York Stock Exchange. Www freefillableforms com On March 1, 2010, she moved to Puerto Rico and changed her tax home to Puerto Rico on the same date. Www freefillableforms com Cheryl satisfied the presence test in 2010 and, under the year-of-move exception, she was considered a bona fide resident of Puerto Rico for the rest of 2010. Www freefillableforms com On March 1, 2010, the closing value of Cheryl's stock in the Rose Corporation was $2,000. Www freefillableforms com On January 5, 2013, while still a bona fide resident of Puerto Rico, Cheryl sold all her Rose Corporation stock for $7,000. Www freefillableforms com Under the earlier rules, none of Cheryl's $6,000 gain will be treated as income from sources within Puerto Rico. Www freefillableforms com The source rules discussed in the preceding paragraphs supplement, and may apply in conjunction with, an existing special rule. Www freefillableforms com This existing special rule applies if you are a U. Www freefillableforms com S. Www freefillableforms com citizen or resident alien who becomes a bona fide resident of American Samoa, the CNMI, or Guam, and who has gain from the disposition of certain U. Www freefillableforms com S. Www freefillableforms com assets during the 10-year period beginning when you became a bona fide resident. Www freefillableforms com The gain is U. Www freefillableforms com S. Www freefillableforms com source income that generally is subject to U. Www freefillableforms com S. Www freefillableforms com tax if the property is either (1) located in the United States; (2) stock issued by a U. Www freefillableforms com S. Www freefillableforms com corporation or a debt obligation of a U. Www freefillableforms com S. Www freefillableforms com person or of the United States, a state (or political subdivision), or the District of Columbia; or (3) property that has a basis in whole or in part by reference to property described in (1) or (2). Www freefillableforms com See chapter 3 for filing information. Www freefillableforms com Special election. Www freefillableforms com   For dispositions after April 11, 2005, you can choose to treat the part of gain (or loss) attributable to the time you held the property while a bona fide resident of the relevant possession (the possession holding period) as gain (or loss) from sources within that possession. Www freefillableforms com Make the election by reporting the gain attributable to the possession holding period on your income tax return for the year of disposition. Www freefillableforms com This election overrides both of the special rules discussed earlier. Www freefillableforms com   There are two methods for figuring the gain for the possession holding period, one for marketable securities and another for other types of investment property. Www freefillableforms com Marketable securities. Www freefillableforms com   Marketable securities are those actively traded on an established financial market, such as stock in a publicly held corporation. Www freefillableforms com Under the special election, allocate the gain (or loss) by figuring the appreciation separately for your possession and U. Www freefillableforms com S. Www freefillableforms com holding periods. Www freefillableforms com   Your possession holding period begins on the first day you do not have a tax home outside the relevant possession. Www freefillableforms com The gain (or loss) attributable to the possession holding period is the difference in fair market value of the security at the close of the market on the first and last days of this holding period. Www freefillableforms com This is your gain (or loss) that is treated as being from sources within the relevant possession. Www freefillableforms com If you were a bona fide resident of the relevant possession for more than one continuous period, combine the gains (or losses) from each possession holding period. Www freefillableforms com Example 2. Www freefillableforms com Assume the same facts as in Example 1, except that Cheryl makes the special election to allocate the gain between her U. Www freefillableforms com S. Www freefillableforms com and possession holding periods. Www freefillableforms com Cheryl's possession holding period began March 1, 2010, the date her tax home changed to Puerto Rico. Www freefillableforms com Therefore, the portion of gain attributable to her possession holding period is $5,000 ($7,000 sale price – $2,000 closing value on first day of the possession holding period). Www freefillableforms com By reporting $5,000 of her $6,000 gain as Puerto Rico source income on her 2013 Puerto Rico tax return (and the remainder as non-Puerto Rico source income), Cheryl elects to treat that amount as Puerto Rico source income. Www freefillableforms com Other personal property. Www freefillableforms com   For personal property other than marketable securities, use a time-based allocation. Www freefillableforms com Figure the gain (or loss) attributable to the possession holding period by multiplying your total gain (or loss) by the following fraction. Www freefillableforms com      Number of days in the  possession holding period     Total number of days  in your holding period         The result is your gain (or loss) that is treated as being from sources within the relevant possession. Www freefillableforms com Example 3. Www freefillableforms com In addition to the stock in Rose Corporation, Cheryl acquired a 5% interest in the Alder Partnership on January 1, 2009. Www freefillableforms com On March 1, 2010, when she established bona fide residency in Puerto Rico, her partnership interest was not considered a marketable security. Www freefillableforms com On September 16, 2013, while still a bona fide resident of Puerto Rico, Cheryl sold her interest in Alder Partnership for a $100,000 gain. Www freefillableforms com She had owned the interest for a total of 1,720 days. Www freefillableforms com Cheryl's possession holding period (from March 1, 2010, through September 16, 2013) is 1,296 days. Www freefillableforms com The portion of her gain attributable to Puerto Rico is $75,349 ($100,000 x (1,296 Puerto Rico days ÷ 1,720 total days)). Www freefillableforms com By reporting $75,349 of her $100,000 gain as Puerto Rico source income on her 2013 Puerto Rico tax return (and the remainder as non-Puerto Rico source income), Cheryl elects to treat that amount as Puerto Rico source income. Www freefillableforms com Scholarships, Fellowships, Grants, Prizes, and Awards The source of these types of income is generally the residence of the payer, regardless of who actually disburses the funds. Www freefillableforms com Therefore, in order to be possession source income, the payer must be a resident of the relevant possession, such as an individual who is a bona fide resident or a corporation created or organized in that possession. Www freefillableforms com These rules do not apply to amounts paid as salary or other compensation for services. Www freefillableforms com See Compensation for Labor or Personal Services, earlier in this chapter, for the source rules that apply. Www freefillableforms com Effectively Connected Income In limited circumstances, some kinds of income from sources outside the relevant possession must be treated as effectively connected with a trade or business in that possession. Www freefillableforms com These circumstances are listed below. Www freefillableforms com You have an office or other fixed place of business in the relevant possession to which the income can be attributed. Www freefillableforms com That office or place of business is a material factor in producing the income. Www freefillableforms com The income is produced in the ordinary course of the trade or business carried on through that office or other fixed place of business. Www freefillableforms com An office or other fixed place of business is a material factor if it significantly contributes to, and is an essential economic element in, the earning of the income. Www freefillableforms com The three kinds of income from sources outside the relevant possession to which these rules apply are the following. Www freefillableforms com Rents and royalties for the use of, or for the privilege of using, intangible personal property located outside the relevant possession or from any interest in such property. Www freefillableforms com Included are rents or royalties for the use of, or for the privilege of using, outside the relevant possession, patents, copyrights, secret processes and formulas, goodwill, trademarks, trade brands, franchises, and similar properties if the rents or royalties are from the active conduct of a trade or business in the relevant possession. Www freefillableforms com Dividends or interest from the active conduct of a banking, financing, or similar business in the relevant possession. Www freefillableforms com Income, gain, or loss from the sale or exchange outside the relevant possession, through the office or other fixed place of business in the relevant possession, of: Stock in trade, Property that would be included in inventory if on hand at the end of the tax year, or Property held primarily for sale to customers in the ordinary course of business. Www freefillableforms com Item (3) will not apply if you sold the property for use, consumption, or disposition outside the relevant possession and an office or other fixed place of business in a foreign country was a material factor in the sale. Www freefillableforms com Example. Www freefillableforms com Marcy Jackson is a bona fide resident of American Samoa. Www freefillableforms com Her business, which she conducts from an office in American Samoa, is developing and selling specialized computer software. Www freefillableforms com A software purchaser will frequently pay Marcy an additional amount to install the software on the purchaser's operating system and to ensure that the software is functioning properly. Www freefillableforms com Marcy installs the software at the purchaser's place of business, which may be in American Samoa, in the United States, or in another country. Www freefillableforms com The income from selling the software is effectively connected with the conduct of Marcy's business in American Samoa, even though the product's destination may be outside the possession. Www freefillableforms com However, the compensation she receives for installing the software (personal services) outside of American Samoa is not effectively connected with the conduct of her business in the possession—the income is sourced where she performs the services. Www freefillableforms com Prev  Up  Next   Home   More Online Publications