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1040 S

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1040 S

1040 s 13. 1040 s   Payment of Taxes Table of Contents How To Make Deposits When To Make Deposits Amount of DepositsSafe Harbor Rule Generally, semimonthly deposits of excise taxes are required. 1040 s A semimonthly period is the first 15 days of a month (the first semimonthly period) or the 16th through the last day of a month (the second semimonthly period). 1040 s However, no deposit is required for the situations listed below; the taxes are payable with Form 720. 1040 s The net liability for taxes listed in Part I (Form 720) does not exceed $2,500 for the quarter. 1040 s The gas guzzler tax is being paid on a one-time filing. 1040 s The liability is for taxes listed in Part II (Form 720), except for the floor stocks tax which generally requires a single deposit. 1040 s How To Make Deposits Electronic deposit requirement. 1040 s   You must use electronic funds transfer to make excise tax deposits. 1040 s Generally, electronic funds transfers are made using the Electronic Federal Tax Payment System (EFTPS). 1040 s If you do not want to use EFTPS, you can arrange for your tax professional, financial institution, payroll service, or other trusted third party to make deposits on your behalf. 1040 s Also, you may arrange for your financial institution to initiate a same-day wire payment on your behalf. 1040 s   EFTPS is a free service provided by the Department of Treasury. 1040 s Services provided by your tax professional, financial institution, payroll service, or other third party may have a fee. 1040 s To get more information about EFTPS or to enroll in EFTPS, visit www. 1040 s eftps. 1040 s gov or call 1-800-555-4477. 1040 s Additional information about EFTPS is also available in Publication 966, Electronic Federal Tax Payment System: A Guide to Getting Started. 1040 s    Depositing on time. 1040 s For EFTPS deposits to be on time, you must initiate the transaction at least 1 day before the date the deposit is due (before 8:00 p. 1040 s m. 1040 s Eastern time). 1040 s You will automatically be enrolled in EFTPS when you apply for an EIN. 1040 s You will receive a separate mailing containing instructions for activating your EFTPS enrollment after you receive your EIN. 1040 s When To Make Deposits There are two methods for determining deposits: the regular method and the alternative method. 1040 s The regular method applies to all taxes in Part I of Form 720 except for communications and air transportation taxes if deposits are based on amounts billed or tickets sold, rather than on amounts actually collected. 1040 s See Alternative method below. 1040 s If you are depositing more than one tax under a method, combine all the taxes under the method and make one deposit for the semimonthly period. 1040 s Regular method. 1040 s   The deposit of tax for a semimonthly period is due by the 14th day following that period. 1040 s Generally, this is the 29th day of a month for the first semimonthly period and the 14th day of the following month for the second semimonthly period. 1040 s If the 14th or the 29th day falls on a Saturday, Sunday, or legal holiday, you must make the deposit by the immediately preceding day that is not a Saturday, Sunday, or legal holiday. 1040 s Alternative method (IRS Nos. 1040 s 22, 26, 27, and 28). 1040 s   Deposits of communications and air transportation taxes may be based on taxes included in amounts billed or tickets sold during a semimonthly period instead of on taxes actually collected during the period. 1040 s Under the alternative method, the tax included in amounts billed or tickets sold during a semimonthly period is considered collected during the first 7 days of the second following semimonthly period. 1040 s The deposit of tax is due by the 3rd banking day after the 7th day of that period. 1040 s   For an example of the alternative method, see the Instructions for Form 720. 1040 s To use the alternative method, you must keep a separate account of the tax included in amounts billed or tickets sold during the month and report on Form 720 the tax included in amounts billed or tickets sold and not the amount of tax that is actually collected. 1040 s For example, amounts billed in December, January, and February are considered collected during January, February, and March and are reported on Form 720 as the tax for the 1st quarter of the calendar year. 1040 s The separate account for each month must reflect: All items of tax included in amounts billed or tickets sold during the month, and Other items of adjustment relating to tax for prior months (within the statute of limitations on credits or refunds). 1040 s The separate account for any month cannot include an adjustment resulting from a refusal to pay or inability to collect unless the refusal has been reported to the IRS. 1040 s See Uncollected Tax Report in chapter 4. 1040 s The net amount of tax that is considered collected during the semimonthly period must be either: The net amount of tax reflected in the separate account for the corresponding semimonthly period of the preceding month, or One-half of the net amount of tax reflected in the separate account for the preceding month. 1040 s Special rule for deposits of taxes in September. 1040 s   See the Instructions for Form 720 for a special rule on deposits made in September. 1040 s Amount of Deposits Deposits for a semimonthly period generally must be at least 95% of the net tax liability for that period unless the safe harbor rule (discussed later) applies. 1040 s Generally, you do not have to make a deposit for a period in which you incurred no tax liability. 1040 s Net tax liability. 1040 s   Your net tax liability is your tax liability for the period minus any claims on Schedule C (Form 720) for the period. 1040 s You may figure your net tax liability for a semimonthly period by dividing your net liability incurred during the calendar month by two. 1040 s If you use this method, you must use it for all semimonthly periods in the calendar quarter. 1040 s Do not reduce your liability by any amounts from Form 720X. 1040 s Safe Harbor Rule The safe harbor rule applies separately to deposits under the regular method and the alternative method. 1040 s Persons who filed Form 720 for the look-back quarter (the 2nd calendar quarter preceding the current quarter) are considered to meet the semimonthly deposit requirement if the deposit for each semimonthly period in the current quarter is at least 1/6 (16. 1040 s 67%) of the net tax liability reported for the look-back quarter. 1040 s For the semimonthly period for which the additional deposit is required, the additional deposit must be at least 11/90 12. 1040 s 23%), 10/90 (11. 1040 s 12%) for non-EFTPS, of the net tax liability reported for the look-back quarter. 1040 s Also, the total deposit for that semimonthly period must be at least 1/6 (16. 1040 s 67%) of the net tax liability reported for the look-back quarter. 1040 s Exceptions. 1040 s   The safe harbor rule does not apply to: The 1st and 2nd quarters beginning on or after the effective date of an increase in the rate of tax unless the deposit of taxes for each semimonthly period in the calendar quarter is at least 1/6 (16. 1040 s 67%) of the tax liability you would have had for the look-back quarter if the increased rate of tax had been in effect for that look-back quarter, Any quarter if liability includes any tax not in effect throughout the look-back quarter, or For deposits under the alternative method, any quarter if liability includes any tax not in effect throughout the look-back quarter and the month preceding the look-back quarter. 1040 s Requirements to be met. 1040 s   For the safe harbor rule to apply, you must: Make each deposit timely at an authorized financial institution, and Pay any underpayment for the current quarter by the due date of the return. 1040 s    The IRS may withdraw the right to make deposits of tax using the safe harbor rule from any person not complying with these rules. 1040 s Tax rate increases. 1040 s   You must modify the safe harbor rule if there has been an increase in the rate of tax. 1040 s You must figure your tax liability in the look-back quarter as if the increased rate had been in effect. 1040 s To qualify for the safe harbor rule, your deposits cannot be less than 1/6 of the refigured tax liability. 1040 s Prev  Up  Next   Home   More Online Publications
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The 1040 S

1040 s 2. 1040 s   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. 1040 s 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. 1040 s S. 1040 s or foreign source income. 1040 s 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. 1040 s S. 1040 s Virgin Islands (USVI). 1040 s Generally, the same rules that apply for determining U. 1040 s S. 1040 s source income also apply for determining possession source income. 1040 s However, there are some important exceptions to these rules. 1040 s Both the general rules and the exceptions are discussed in this chapter. 1040 s U. 1040 s S. 1040 s income rule. 1040 s   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. 1040 s Table 2-1 shows the general rules for determining whether income is from sources within the United States. 1040 s Table 2-1. 1040 s General Rules for Determining U. 1040 s S. 1040 s 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. 1040 s 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. 1040 s For more information, see Regulations section 1. 1040 s 863-1(b). 1040 s 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. 1040 s Generally, the same rules shown in Table 2-1 are used to determine if you have possession source income. 1040 s 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. 1040 s It also includes income earned by sole proprietors and general partners from providing personal services in the course of their trade or business. 1040 s Services performed wholly within a relevant possession. 1040 s   Generally, all pay you receive for services performed in a relevant possession is considered to be from sources within that possession. 1040 s However, there is an exception for income earned as a member of the U. 1040 s S. 1040 s Armed Forces or a civilian spouse. 1040 s U. 1040 s S. 1040 s Armed Forces. 1040 s   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. 1040 s 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. 1040 s Civilian spouse of active duty member of the U. 1040 s S. 1040 s Armed Forces. 1040 s   If you are a bona fide resident of a U. 1040 s S. 1040 s 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. 1040 s 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. 1040 s S. 1040 s possessions is considered to be the United States and, specifically, your state of residence or the District of Columbia. 1040 s Services performed partly inside and partly outside a relevant possession. 1040 s   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. 1040 s Compensation (other than certain fringe benefits) is sourced on a time basis. 1040 s Certain fringe benefits (such as housing and education) are sourced on a geographical basis. 1040 s   Or, you may be permitted to use an alternative basis to determine the source of compensation. 1040 s See Alternative basis , later. 1040 s   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. 1040 s In many cases, the facts and circumstances will call for an apportionment on a time basis as explained next. 1040 s Time basis. 1040 s   Use a time basis to figure your compensation for labor or personal services from the relevant possession (other than the fringe benefits discussed later). 1040 s 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. 1040 s The time period for which the income is made does not have to be a year. 1040 s 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. 1040 s Example. 1040 s 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. 1040 s Your Puerto Rico source income is $60,000, figured as follows. 1040 s       180 days 240 days × $80,000 = $60,000                 Multi-year compensation. 1040 s   The source of multi-year compensation is generally determined on a time basis over the period to which the compensation is attributable. 1040 s 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. 1040 s You determine the period to which the income is attributable based on the facts and circumstances of your case. 1040 s For more information on multi-year compensation, see Treasury Decision (T. 1040 s D. 1040 s ) 9212 and Regulations section 1. 1040 s 861-4, 2005-35 I. 1040 s R. 1040 s B. 1040 s 429, available at www. 1040 s irs. 1040 s gov/irb/2005-35_IRB/ar14. 1040 s html. 1040 s Certain fringe benefits sourced on a geographical basis. 1040 s   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. 1040 s Housing. 1040 s Education. 1040 s Local transportation. 1040 s Tax reimbursement. 1040 s Hazardous or hardship duty pay. 1040 s Moving expense reimbursement. 1040 s For information on determining the source of the fringe benefits listed above, see Regulations section 1. 1040 s 861-4. 1040 s Alternative basis. 1040 s   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. 1040 s 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. 1040 s De minimis exception. 1040 s   There is an exception to the rule for determining the source of income earned in a possession. 1040 s Generally, you will not have income from a possession if during a tax year you: Are a U. 1040 s S. 1040 s 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. 1040 s This exception began with income earned during your 2008 tax year. 1040 s Pensions. 1040 s   Generally, pension income has two components: contributions to the pension plan and the earnings accrued from investing those contributions. 1040 s The contribution portion is sourced according to where services were performed that earned the pension. 1040 s The investment earnings portion is sourced according to the location of the pension trust. 1040 s Example. 1040 s You are a U. 1040 s S. 1040 s citizen who worked in Puerto Rico for a U. 1040 s S. 1040 s company. 1040 s All services were performed in Puerto Rico. 1040 s Upon retirement you remained in Puerto Rico and began receiving your pension from the U. 1040 s S. 1040 s pension trust of your employer. 1040 s Distributions from the U. 1040 s S. 1040 s pension trust must be allocated between (1) contributions, which are Puerto Rico source income, and (2) investment earnings, which are U. 1040 s S. 1040 s source income. 1040 s Investment Income This category includes such income as interest, dividends, rents, and royalties. 1040 s Interest income. 1040 s   The source of interest income is generally determined by the residence of the payer. 1040 s 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. 1040 s   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. 1040 s See Regulations section 1. 1040 s 937-2(i) for more information. 1040 s Dividends. 1040 s   Generally, dividends paid by a corporation created or organized in a relevant possession will be considered income from sources within that possession. 1040 s 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. 1040 s For more information, see Regulations section 1. 1040 s 937-2(g). 1040 s Rental income. 1040 s   Rents from property located in a relevant possession are treated as income from sources within that possession. 1040 s Royalties. 1040 s   Royalties from natural resources located in a relevant possession are considered income from sources within that possession. 1040 s   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. 1040 s Sales or Other Dispositions of Property The source rules for sales or other dispositions of property are varied. 1040 s The most common situations are discussed below. 1040 s Real property. 1040 s   Real property includes land and buildings, and generally anything built on, growing on, or attached to land. 1040 s The location of the property generally determines the source of income from the sale. 1040 s 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. 1040 s If, however, the home you sold was located in the United States, the gain is U. 1040 s S. 1040 s source income. 1040 s Personal property. 1040 s   The term “personal property” refers to property (such as machinery, equipment, or furniture) that is not real property. 1040 s Generally, gain (or loss) from the sale or other disposition is sourced according to the seller's tax home. 1040 s 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. 1040 s   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. 1040 s The rules applying to sales of inventory are discussed below. 1040 s For information on sales of the other types of property mentioned, see Internal Revenue Code section 865. 1040 s Inventory. 1040 s   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. 1040 s The source of income from the sale of inventory depends on whether the inventory was purchased or produced. 1040 s Purchased. 1040 s   Income from the sale of inventory that you purchased is sourced where you sell the property. 1040 s Generally, this is where title to the property passes to the buyer. 1040 s Produced. 1040 s   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. 1040 s For information on making the allocation, see Regulations section 1. 1040 s 863-3(f). 1040 s 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. 1040 s S. 1040 s citizen or resident alien prior to becoming a bona fide resident of a possession. 1040 s You are subject to these special rules if you meet both of the following conditions. 1040 s For the tax year for which the source of the gain must be determined, you are a bona fide resident of the relevant possession. 1040 s 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). 1040 s 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. 1040 s Accordingly, bona fide residents of American Samoa and Puerto Rico, for example, may not exclude the gain on their U. 1040 s S. 1040 s tax return. 1040 s (See chapter 3 for additional filing information. 1040 s ) 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. 1040 s These rules apply to dispositions after April 11, 2005. 1040 s For details, see Regulations section 1. 1040 s 937-2(f)(1) and Examples 1 and 2 of section 1. 1040 s 937-2(k). 1040 s Example 1. 1040 s In 2007, Cheryl Jones, a U. 1040 s S. 1040 s citizen, lived in the United States and paid $1,000 for 100 shares of stock in the Rose Corporation, a U. 1040 s S. 1040 s corporation listed on the New York Stock Exchange. 1040 s On March 1, 2010, she moved to Puerto Rico and changed her tax home to Puerto Rico on the same date. 1040 s 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. 1040 s On March 1, 2010, the closing value of Cheryl's stock in the Rose Corporation was $2,000. 1040 s On January 5, 2013, while still a bona fide resident of Puerto Rico, Cheryl sold all her Rose Corporation stock for $7,000. 1040 s Under the earlier rules, none of Cheryl's $6,000 gain will be treated as income from sources within Puerto Rico. 1040 s The source rules discussed in the preceding paragraphs supplement, and may apply in conjunction with, an existing special rule. 1040 s This existing special rule applies if you are a U. 1040 s S. 1040 s 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. 1040 s S. 1040 s assets during the 10-year period beginning when you became a bona fide resident. 1040 s The gain is U. 1040 s S. 1040 s source income that generally is subject to U. 1040 s S. 1040 s tax if the property is either (1) located in the United States; (2) stock issued by a U. 1040 s S. 1040 s corporation or a debt obligation of a U. 1040 s S. 1040 s 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). 1040 s See chapter 3 for filing information. 1040 s Special election. 1040 s   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. 1040 s Make the election by reporting the gain attributable to the possession holding period on your income tax return for the year of disposition. 1040 s This election overrides both of the special rules discussed earlier. 1040 s   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. 1040 s Marketable securities. 1040 s   Marketable securities are those actively traded on an established financial market, such as stock in a publicly held corporation. 1040 s Under the special election, allocate the gain (or loss) by figuring the appreciation separately for your possession and U. 1040 s S. 1040 s holding periods. 1040 s   Your possession holding period begins on the first day you do not have a tax home outside the relevant possession. 1040 s 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. 1040 s This is your gain (or loss) that is treated as being from sources within the relevant possession. 1040 s 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. 1040 s Example 2. 1040 s Assume the same facts as in Example 1, except that Cheryl makes the special election to allocate the gain between her U. 1040 s S. 1040 s and possession holding periods. 1040 s Cheryl's possession holding period began March 1, 2010, the date her tax home changed to Puerto Rico. 1040 s 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). 1040 s 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. 1040 s Other personal property. 1040 s   For personal property other than marketable securities, use a time-based allocation. 1040 s Figure the gain (or loss) attributable to the possession holding period by multiplying your total gain (or loss) by the following fraction. 1040 s      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. 1040 s Example 3. 1040 s In addition to the stock in Rose Corporation, Cheryl acquired a 5% interest in the Alder Partnership on January 1, 2009. 1040 s On March 1, 2010, when she established bona fide residency in Puerto Rico, her partnership interest was not considered a marketable security. 1040 s 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. 1040 s She had owned the interest for a total of 1,720 days. 1040 s Cheryl's possession holding period (from March 1, 2010, through September 16, 2013) is 1,296 days. 1040 s The portion of her gain attributable to Puerto Rico is $75,349 ($100,000 x (1,296 Puerto Rico days ÷ 1,720 total days)). 1040 s 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. 1040 s 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. 1040 s 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. 1040 s These rules do not apply to amounts paid as salary or other compensation for services. 1040 s See Compensation for Labor or Personal Services, earlier in this chapter, for the source rules that apply. 1040 s 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. 1040 s These circumstances are listed below. 1040 s You have an office or other fixed place of business in the relevant possession to which the income can be attributed. 1040 s That office or place of business is a material factor in producing the income. 1040 s The income is produced in the ordinary course of the trade or business carried on through that office or other fixed place of business. 1040 s 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. 1040 s The three kinds of income from sources outside the relevant possession to which these rules apply are the following. 1040 s 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. 1040 s 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. 1040 s Dividends or interest from the active conduct of a banking, financing, or similar business in the relevant possession. 1040 s 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. 1040 s 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. 1040 s Example. 1040 s Marcy Jackson is a bona fide resident of American Samoa. 1040 s Her business, which she conducts from an office in American Samoa, is developing and selling specialized computer software. 1040 s 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. 1040 s 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. 1040 s 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. 1040 s 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. 1040 s Prev  Up  Next   Home   More Online Publications