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1040a Form

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1040a Form

1040a form 2. 1040a form   Accounting Methods Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Accounting MethodsCash Method Accrual Method Farm Inventory Cash Versus Accrual Method Special Methods of Accounting Combination Method Changes in Methods of Accounting Introduction You must use an accounting method that clearly shows your income and expenses. 1040a form You must also figure your taxable income and file an income tax return for an annual accounting period called a tax year. 1040a form This chapter discusses accounting methods. 1040a form For information on accounting periods, see Publication 538, Accounting Periods and Methods, and the Instructions for Form 1128, Application To Adopt, Change, or Retain a Tax Year. 1040a form Topics - This chapter discusses: Cash method Accrual method Farm inventory Special methods of accounting Changes in methods of accounting Useful Items - You may want to see: Publication 538 Accounting Periods and Methods 535 Business Expenses Form (and Instructions) 1128 Application To Adopt, Change, or Retain a Tax Year 3115 Application for Change in Accounting Method See chapter 16 for information about getting publications and forms. 1040a form Accounting Methods An accounting method is a set of rules used to determine when and how your income and expenses are reported on your tax return. 1040a form Your accounting method includes not only your overall method of accounting, but also the accounting treatment you use for any material item. 1040a form A material item is one that affects the proper time for inclusion of income or allowance of a deduction. 1040a form An item considered material for financial statement purposes is generally also considered material for income tax purposes. 1040a form See Publication 538 for more information. 1040a form You generally choose an accounting method for your farm business when you file your first income tax return that includes a Schedule F (Form 1040), Profit or Loss From Farming. 1040a form If you later want to change your accounting method, you generally must get IRS approval. 1040a form How to obtain IRS approval is discussed later under Changes in Methods of Accounting . 1040a form Types of accounting methods. 1040a form   Generally, you can use any of the following accounting methods. 1040a form Each method is discussed in detail below. 1040a form Cash method. 1040a form Accrual method. 1040a form Special methods of accounting for certain items of income and expenses. 1040a form Combination (hybrid) method using elements of two or more of the above. 1040a form Business and other items. 1040a form   You can account for business and personal items using different accounting methods. 1040a form For example, you can figure your business income under an accrual method, even if you use the cash method to figure personal items. 1040a form Two or more businesses. 1040a form   If you operate two or more separate and distinct businesses, you can use a different accounting method for each business. 1040a form Generally, no business is separate and distinct unless a complete and separate set of books and records is maintained for each business. 1040a form Cash Method Most farmers use the cash method because they find it easier to keep records using the cash method. 1040a form However, certain farm corporations and partnerships and all tax shelters must use an accrual method of accounting. 1040a form See Accrual Method Required , later. 1040a form Income Under the cash method, include in your gross income all items of income you actually or constructively received during the tax year. 1040a form Items of income include money received as well as property or services received. 1040a form If you receive property or services, you must include the fair market value (FMV) of the property or services in income. 1040a form See chapter 3 for information on how to report farm income on your income tax return. 1040a form Constructive receipt. 1040a form   Income is constructively received when an amount is credited to your account or made available to you without restriction. 1040a form You do not need to have possession of the income for it to be treated as income for the tax year. 1040a form If you authorize someone to be your agent and receive income for you, you are considered to have received the income when your agent receives it. 1040a form Income is not constructively received if your receipt of the income is subject to substantial restrictions or limitations. 1040a form Direct payments and counter-cyclical payments. 1040a form   If you received direct payments or counter-cyclical payments under Subtitle A or C of the Farm Security and Rural Investment Act of 2002, you will not be considered to have constructively received a payment merely because you had the option to receive it in the year before it is required to be paid. 1040a form Delaying receipt of income. 1040a form   You cannot hold checks or postpone taking possession of similar property from one tax year to another to avoid paying tax on the income. 1040a form You must report the income in the year the money or property is received or made available to you without restriction. 1040a form Example. 1040a form Frances Jones, a farmer, was entitled to receive a $10,000 payment on a grain contract in December 2013. 1040a form She was told in December that her payment was available. 1040a form She requested not to be paid until January 2014. 1040a form However, she must still include this payment in her 2013 income because it was made available to her in 2013. 1040a form Debts paid by another person or canceled. 1040a form   If your debts are paid by another person or are canceled by your creditors, you may have to report part or all of this debt relief as income. 1040a form If you receive income in this way, you constructively receive the income when the debt is canceled or paid. 1040a form See Cancellation of Debt in chapter 3. 1040a form Deferred payment contract. 1040a form   If you sell an item under a deferred payment contract that calls for payment in a future year, there is no constructive receipt in the year of sale. 1040a form However, if the sales contract states that you have the right to the proceeds of the sale from the buyer at any time after delivery of the item, then you must include the sales price in income in the year of the sale, regardless of when you actually receive payment. 1040a form Example. 1040a form You are a farmer who uses the cash method and a calendar tax year. 1040a form You sell grain in December 2013 under a bona fide arm's-length contract that calls for payment in 2014. 1040a form You include the proceeds from the sale in your 2014 gross income since that is the year payment is received. 1040a form However, if the contract states that you have the right to the proceeds from the buyer at any time after the grain is delivered, you must include the sales price in your 2013 income, regardless of when you actually receive payment. 1040a form Repayment of income. 1040a form   If you include an amount in income and in a later year you have to repay all or part of it, then you can usually deduct the repayment in the year repaid. 1040a form If the repayment is more than $3,000, a special rule applies. 1040a form For details, see Repayments in chapter 11 of Publication 535, Business Expenses. 1040a form Expenses Under the cash method, generally you deduct expenses in the tax year you pay them. 1040a form This includes business expenses for which you contest liability. 1040a form However, you may not be able to deduct an expense paid in advance or you may be required to capitalize certain costs, as explained under Uniform Capitalization Rules in chapter 6. 1040a form See chapter 4 for information on how to deduct farm business expenses on your income tax return. 1040a form Prepayment. 1040a form   Generally, you cannot deduct expenses paid in advance. 1040a form This rule applies to any expense paid far enough in advance to, in effect, create an asset with a useful life extending substantially beyond the end of the current tax year. 1040a form Example. 1040a form On November 1, 2013, you signed and paid $3,600 for a 3-year (36-month) insurance contract for equipment. 1040a form In 2013, you are allowed to deduct only $200 (2/36 x $3,600) of the cost of the policy that is attributable to 2013. 1040a form In 2014, you'll be able to deduct $1,200 (12/36 x $3,600); in 2015, you'll be able to deduct $1,200 (12/36 x $3,600); and in 2016 you'll be able to deduct the remaining balance of $1,000. 1040a form An exception applies if the expense qualifies for the 12-month rule. 1040a form See Publication 538 for more information and examples. 1040a form See chapter 4 for special rules for prepaid farm supplies and prepaid livestock feed. 1040a form Accrual Method Under an accrual method of accounting, you generally report income in the year earned and deduct or capitalize expenses in the year incurred. 1040a form The purpose of an accrual method of accounting is to correctly match income and expenses. 1040a form Certain businesses engaged in farming must use an accrual method of accounting for its farm business and for sales and purchases of inventory items. 1040a form See Accrual Method Required and Farm Inventory , later. 1040a form Income Generally, you include an amount in income for the tax year in which all events that fix your right to receive the income have occurred, and you can determine the amount with reasonable accuracy. 1040a form Under this rule, include an amount in income on the earliest of the following dates. 1040a form When you receive payment. 1040a form When the income amount is due to you. 1040a form When you earn the income. 1040a form When title passes. 1040a form If you use an accrual method of accounting, complete Part III of Schedule F (Form 1040) to report your income. 1040a form Inventory. 1040a form   If you keep an inventory, generally you must use an accrual method of accounting to determine your gross income. 1040a form An inventory is necessary to clearly show income when the production, purchase, or sale of merchandise is an income-producing factor. 1040a form See Publication 538 for more information. 1040a form Also see Farm Inventory , later, for more information on items that must be included in inventory by farmers and inventory valuation methods for farmers. 1040a form Expenses Under an accrual method of accounting, you generally deduct or capitalize a business expense when both of the following apply. 1040a form The all-events test has been met. 1040a form This test is met when: All events have occurred that fix the fact that you have a liability, and The amount of the liability can be determined with reasonable accuracy. 1040a form Economic performance has occurred. 1040a form Economic performance. 1040a form   Generally, you cannot deduct or capitalize a business expense until economic performance occurs. 1040a form If your expense is for property or services provided to you, or for your use of property, economic performance occurs as the property or services are provided or as the property is used. 1040a form If your expense is for property or services you provide to others, economic performance occurs as you provide the property or services. 1040a form Example. 1040a form Jane, who is a farmer, uses a calendar tax year and an accrual method of accounting. 1040a form She entered into a contract with ABC Farm Consulting in 2012. 1040a form The contract stated that Jane pay ABC Farm Consulting $2,000 in December 2012. 1040a form It further stipulates that ABC Farm Consulting will develop a plan for integrating her farm with a larger farm operation based in a neighboring state by March 1, 2013. 1040a form Jane paid ABC Farm Consulting $2,000 in December 2012. 1040a form Integration of operations according to the plan began in May 2013 and they completed the integration in December 2013. 1040a form Economic performance for Jane's liability in the contract occurs as the services are provided. 1040a form Jane incurs the $2,000 cost in 2013. 1040a form An exception to the economic performance rule allows certain recurring items to be treated as incurred during a tax year even though economic performance has not occurred. 1040a form For more information, see Economic Performance in Publication 538. 1040a form Special rule for related persons. 1040a form   Business expenses and interest owed to a related person who uses the cash method of accounting are not deductible until you make the payment and the corresponding amount is includible in the related person's gross income. 1040a form Determine the relationship for this rule as of the end of the tax year for which the expense or interest would otherwise be deductible. 1040a form For more information, see Internal Revenue Code section 267. 1040a form Accrual Method Required Generally, the following businesses, if engaged in farming, must use an accrual method of accounting. 1040a form A corporation (other than a family corporation) that had gross receipts of more than $1,000,000 for any tax year beginning after 1975. 1040a form A family corporation that had gross receipts of more than $25,000,000 for any tax year beginning after 1985. 1040a form A partnership with a corporation as a partner, if that corporation meets the requirements of (1) or (2) above. 1040a form A tax shelter. 1040a form Note. 1040a form Items (1), (2), and (3) above do not apply to an S corporation or a business operating a nursery or sod farm, or the raising or harvesting of trees (other than fruit and nut trees). 1040a form Family corporation. 1040a form   A family corporation is generally a corporation that meets one of the following ownership requirements. 1040a form Members of the same family own at least 50% of the total combined voting power of all classes of stock entitled to vote and at least 50% of the total shares of all other classes of stock of the corporation. 1040a form Members of two families have owned, directly or indirectly, since October 4, 1976, at least 65% of the total combined voting power of all classes of voting stock and at least 65% of the total shares of all other classes of the corporation's stock. 1040a form Members of three families have owned, directly or indirectly, since October 4, 1976, at least 50% of the total combined voting power of all classes of voting stock and at least 50% of the total shares of all other classes of the corporation's stock. 1040a form For more information on family corporations, see Internal Revenue Code section 447. 1040a form Tax shelter. 1040a form   A tax shelter is a partnership, noncorporate enterprise, or S corporation that meets either of the following tests. 1040a form Its principal purpose is the avoidance or evasion of federal income tax. 1040a form It is a farming syndicate. 1040a form A farming syndicate is an entity that meets either of the following tests. 1040a form Interests in the activity have been offered for sale in an offering required to be registered with a federal or state agency with the authority to regulate the offering of securities for sale. 1040a form More than 35% of the losses during the tax year are allocable to limited partners or limited entrepreneurs. 1040a form   A “limited partner” is one whose personal liability for partnership debts is limited to the money or other property the partner contributed or is required to contribute to the partnership. 1040a form   A “limited entrepreneur” is one who has an interest in an enterprise other than as a limited partner and does not actively participate in the management of the enterprise. 1040a form Farm Inventory If you are required to keep an inventory, you should keep a complete record of your inventory as part of your farm records. 1040a form This record should show the actual count or measurement of the inventory. 1040a form It should also show all factors that enter into its valuation, including quality and weight, if applicable. 1040a form Hatchery business. 1040a form   If you are in the hatchery business, and use an accrual method of accounting, you must include in inventory eggs in the process of incubation. 1040a form Products held for sale. 1040a form   All harvested and purchased farm products held for sale or for feed or seed, such as grain, hay, silage, concentrates, cotton, tobacco, etc. 1040a form , must be included in inventory. 1040a form Supplies. 1040a form   Supplies acquired for sale or that become a physical part of items held for sale must be included in inventory. 1040a form Deduct the cost of supplies in the year used or consumed in operations. 1040a form Do not include incidental supplies in inventory as these are deductible in the year of purchase. 1040a form Livestock. 1040a form   Livestock held primarily for sale must be included in inventory. 1040a form Livestock held for draft, breeding, or dairy purposes can either be depreciated or included in inventory. 1040a form See also Unit-livestock-price method , later. 1040a form If you are in the business of breeding and raising chinchillas, mink, foxes, or other fur-bearing animals, these animals are livestock for inventory purposes. 1040a form Growing crops. 1040a form   Generally, growing crops are not required to be included in inventory. 1040a form However, if the crop has a preproductive period of more than 2 years, you may have to capitalize (or include in inventory) costs associated with the crop. 1040a form See Uniform capitalization rules below. 1040a form Also see Uniform Capitalization Rules in  chapter 6. 1040a form Items to include in inventory. 1040a form   Your inventory should include all items held for sale, or for use as feed, seed, etc. 1040a form , whether raised or purchased, that are unsold at the end of the year. 1040a form Uniform capitalization rules. 1040a form   The following applies if you are required to use an accrual method of accounting. 1040a form The uniform capitalization rules apply to all costs of raising a plant, even if the preproductive period of raising a plant is 2 years or less. 1040a form The costs of animals are subject to the uniform capitalization rules. 1040a form Inventory valuation methods. 1040a form   The following methods, described below, are those generally available for valuing inventory. 1040a form The method you use must conform to generally accepted accounting principles for similar businesses and must clearly reflect income. 1040a form Cost. 1040a form Lower of cost or market. 1040a form Farm-price method. 1040a form Unit-livestock-price method. 1040a form Cost and lower of cost or market methods. 1040a form   See Publication 538 for information on these valuation methods. 1040a form If you value your livestock inventory at cost or the lower of cost or market, you do not need IRS approval to change to the unit-livestock-price method. 1040a form However, if you value your livestock inventory using the farm-price method, then you must obtain permission from the IRS to change to the unit-livestock-price method. 1040a form Farm-price method. 1040a form   Under this method, each item, whether raised or purchased, is valued at its market price less the direct cost of disposition. 1040a form Market price is the current price at the nearest market in the quantities you usually sell. 1040a form Cost of disposition includes broker's commissions, freight, hauling to market, and other marketing costs. 1040a form If you use this method, you must use it for your entire inventory, except that livestock can be inventoried under the unit-livestock-price method. 1040a form Unit-livestock-price method. 1040a form   This method recognizes the difficulty of establishing the exact costs of producing and raising each animal. 1040a form You group or classify livestock according to type and age and use a standard unit price for each animal within a class or group. 1040a form The unit price you assign should reasonably approximate the normal costs incurred in producing the animals in such classes. 1040a form Unit prices and classifications are subject to approval by the IRS on examination of your return. 1040a form You must annually reevaluate your unit livestock prices and adjust the prices upward or downward to reflect increases or decreases in the costs of raising livestock. 1040a form IRS approval is not required for these adjustments. 1040a form Any other changes in unit prices or classifications do require IRS approval. 1040a form   If you use this method, include all raised livestock in inventory, regardless of whether they are held for sale or for draft, breeding, sport, or dairy purposes. 1040a form This method accounts only for the increase in cost of raising an animal to maturity. 1040a form It does not provide for any decrease in the animal's market value after it reaches maturity. 1040a form Also, if you raise cattle, you are not required to inventory hay you grow to feed your herd. 1040a form   Do not include sold or lost animals in the year-end inventory. 1040a form If your records do not show which animals were sold or lost, treat the first animals acquired as sold or lost. 1040a form The animals on hand at the end of the year are considered those most recently acquired. 1040a form   You must include in inventory all livestock purchased primarily for sale. 1040a form You can choose either to include in inventory or depreciate livestock purchased for draft, breeding, sport or dairy purposes. 1040a form However, you must be consistent from year to year, regardless of the method you have chosen. 1040a form You cannot change your method without obtaining approval from the IRS. 1040a form   You must include in inventory animals purchased after maturity or capitalize them at their purchase price. 1040a form If the animals are not mature at purchase, increase the cost at the end of each tax year according to the established unit price. 1040a form However, in the year of purchase, do not increase the cost of any animal purchased during the last 6 months of the year. 1040a form This “no increase” rule does not apply to tax shelters which must make an adjustment for any animal purchased during the year. 1040a form It also does not apply to taxpayers that must make an adjustment to reasonably reflect the particular period in the year in which animals are purchased, if necessary to avoid significant distortions in income. 1040a form Uniform capitalization rules. 1040a form   A farmer can determine costs required to be allocated under the uniform capitalization rules by using the farm-price or unit-livestock-price inventory method. 1040a form This applies to any plant or animal, even if the farmer does not hold or treat the plant or animal as inventory property. 1040a form Cash Versus Accrual Method The following examples compare the cash and accrual methods of accounting. 1040a form Example 1. 1040a form You are a farmer who uses an accrual method of accounting. 1040a form You keep your books on the calendar year basis. 1040a form You sell grain in December 2013 but you are not paid until January 2014. 1040a form Because the accrual method was used and 2013 was the tax year in which the grain was sold, you must both include the sales proceeds and deduct the costs incurred in producing the grain on your 2013 tax return. 1040a form Example 2. 1040a form Assume the same facts as in Example 1 except that you use the cash method and there was no constructive receipt of the sales proceeds in 2013. 1040a form Under this method, you include the sales proceeds in income for 2014, the year you receive payment. 1040a form Deduct the costs of producing the grain in the year you pay for them. 1040a form Special Methods of Accounting There are special methods of accounting for certain items of income and expense. 1040a form Crop method. 1040a form   If you do not harvest and dispose of your crop in the same tax year that you plant it, you can, with IRS approval, use the crop method of accounting. 1040a form You cannot use the crop method for any tax return, including your first tax return, unless you receive approval from the IRS. 1040a form Under this method, you deduct the entire cost of producing the crop, including the expense of seed or young plants, in the year you realize income from the crop. 1040a form    See chapter 4 for details on deducting the costs of operating a farm. 1040a form Also see Regulations section 1. 1040a form 162-12. 1040a form Other special methods. 1040a form   Other special methods of accounting apply to the following items. 1040a form Amortization, see chapter 7. 1040a form Casualties, see chapter 11. 1040a form Condemnations, see chapter 11. 1040a form Depletion, see chapter 7. 1040a form Depreciation, see chapter 7. 1040a form Farm business expenses, see chapter 4. 1040a form Farm income, see chapter 3. 1040a form Installment sales, see chapter 10. 1040a form Soil and water conservation expenses, see chapter 5. 1040a form Thefts, see chapter 11. 1040a form Combination Method Generally, you can use any combination of cash, accrual, and special methods of accounting if the combination clearly shows your income and expenses and you use it consistently. 1040a form However, the following restrictions apply. 1040a form If you use the cash method for figuring your income, you must use the cash method for reporting your expenses. 1040a form If you use an accrual method for reporting your expenses, you must use an accrual method for figuring your income. 1040a form Changes in Methods of Accounting A change in your method of accounting includes a change in: Your overall method, such as from the cash method to an accrual method, and Your treatment of any material item, such as a change in your method of valuing inventory (for example, a change from the farm-price method to the unit-livestock-price method, discussed earlier). 1040a form Generally, once you have set up your accounting method, you must receive approval from the IRS before you can change to another method of accounting. 1040a form You may also have to pay a fee. 1040a form To obtain approval, you must generally file Form 3115. 1040a form There are instances when you can obtain automatic consent to change certain methods of accounting. 1040a form See the List of Automatic Accounting Method Changes located in the Instructions for Form 3115. 1040a form For more information on changes in methods of accounting, see Form 3115 and the Instructions for Form 3115. 1040a form Also see Publication 538. 1040a form Prev  Up  Next   Home   More Online Publications
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The 1040a Form

1040a form 4. 1040a form   How Income of Aliens Is Taxed Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Resident Aliens Nonresident AliensTrade or Business in the United States Effectively Connected Income The 30% Tax Income From Real Property Transportation Tax Interrupted Period of Residence Expatriation TaxExpatriation Before June 4, 2004 Expatriation After June 3, 2004, and Before June 17, 2008 Expatriation After June 16, 2008 Introduction Resident and nonresident aliens are taxed in different ways. 1040a form Resident aliens are generally taxed in the same way as U. 1040a form S. 1040a form citizens. 1040a form Nonresident aliens are taxed based on the source of their income and whether or not their income is effectively connected with a U. 1040a form S. 1040a form trade or business. 1040a form The following discussions will help you determine if income you receive during the tax year is effectively connected with a U. 1040a form S. 1040a form trade or business and how it is taxed. 1040a form Topics - This chapter discusses: Income that is effectively connected with a U. 1040a form S. 1040a form trade or business. 1040a form Income that is not effectively connected with a U. 1040a form S. 1040a form trade or business. 1040a form Interrupted period of residence. 1040a form Expatriation tax. 1040a form Useful Items - You may want to see: Publication 544 Sales and Other Dispositions of Assets 1212 List of Original Issue Discount Instruments Form (and Instructions) 6251 Alternative Minimum Tax—Individuals Schedule D (Form 1040) Capital Gains and Losses See chapter 12 for information about getting these publications and forms. 1040a form Resident Aliens Resident aliens are generally taxed in the same way as U. 1040a form S. 1040a form citizens. 1040a form This means that their worldwide income is subject to U. 1040a form S. 1040a form tax and must be reported on their U. 1040a form S. 1040a form tax return. 1040a form Income of resident aliens is subject to the graduated tax rates that apply to U. 1040a form S. 1040a form citizens. 1040a form Resident aliens use the Tax Table or Tax Computation Worksheets located in the Form 1040 instructions, which apply to U. 1040a form S. 1040a form citizens. 1040a form Nonresident Aliens A nonresident alien's income that is subject to U. 1040a form S. 1040a form income tax must be divided into two categories: Income that is effectively connected with a trade or business in the United States, and Income that is not effectively connected with a trade or business in the United States (discussed under The 30% Tax, later). 1040a form The difference between these two categories is that effectively connected income, after allowable deductions, is taxed at graduated rates. 1040a form These are the same rates that apply to U. 1040a form S. 1040a form citizens and residents. 1040a form Income that is not effectively connected is taxed at a flat 30% (or lower treaty) rate. 1040a form If you were formerly a U. 1040a form S. 1040a form citizen or resident alien, these rules may not apply. 1040a form See Expatriation Tax, later, in this chapter. 1040a form Trade or Business in the United States Generally, you must be engaged in a trade or business during the tax year to be able to treat income received in that year as effectively connected with that trade or business. 1040a form Whether you are engaged in a trade or business in the United States depends on the nature of your activities. 1040a form The discussions that follow will help you determine whether you are engaged in a trade or business in the United States. 1040a form Personal Services If you perform personal services in the United States at any time during the tax year, you usually are considered engaged in a trade or business in the United States. 1040a form Certain compensation paid to a nonresident alien by a foreign employer is not included in gross income. 1040a form For more information, see Services Performed for Foreign Employer in chapter 3. 1040a form Other Trade or Business Activities Other examples of being engaged in a trade or business in the United States follow. 1040a form Students and trainees. 1040a form   You are considered engaged in a trade or business in the United States if you are temporarily present in the United States as a nonimmigrant under an “F,” “J,” “M,” or “Q” visa. 1040a form A nonresident alien temporarily present in the United States under a “J” visa includes a nonresident alien individual admitted to the United States as an exchange visitor under the Mutual Educational and Cultural Exchange Act of 1961. 1040a form The taxable part of any scholarship or fellowship grant that is U. 1040a form S. 1040a form source income is treated as effectively connected with a trade or business in the United States. 1040a form Business operations. 1040a form   If you own and operate a business in the United States selling services, products, or merchandise, you are, with certain exceptions, engaged in a trade or business in the United States. 1040a form Partnerships. 1040a form   If you are a member of a partnership that at any time during the tax year is engaged in a trade or business in the United States, you are considered to be engaged in a trade or business in the United States. 1040a form Beneficiary of an estate or trust. 1040a form   If you are the beneficiary of an estate or trust that is engaged in a trade or business in the United States, you are treated as being engaged in the same trade or business. 1040a form Trading in stocks, securities, and commodities. 1040a form   If your only U. 1040a form S. 1040a form business activity is trading in stocks, securities, or commodities (including hedging transactions) through a U. 1040a form S. 1040a form resident broker or other agent, you are not engaged in a trade or business in the United States. 1040a form   For transactions in stocks or securities, this applies to any nonresident alien, including a dealer or broker in stocks and securities. 1040a form   For transactions in commodities, this applies to commodities that are usually traded on an organized commodity exchange and to transactions that are usually carried out at such an exchange. 1040a form   This discussion does not apply if you have a U. 1040a form S. 1040a form office or other fixed place of business at any time during the tax year through which, or by the direction of which, you carry out your transactions in stocks, securities, or commodities. 1040a form Trading for a nonresident alien's own account. 1040a form   You are not engaged in a trade or business in the United States if trading for your own account in stocks, securities, or commodities is your only U. 1040a form S. 1040a form business activity. 1040a form This applies even if the trading takes place while you are present in the United States or is done by your employee or your broker or other agent. 1040a form   This does not apply to trading for your own account if you are a dealer in stocks, securities, or commodities. 1040a form This does not necessarily mean, however, that as a dealer you are considered to be engaged in a trade or business in the United States. 1040a form Determine that based on the facts and circumstances in each case or under the rules given above in Trading in stocks, securities, and commodities . 1040a form Effectively Connected Income If you are engaged in a U. 1040a form S. 1040a form trade or business, all income, gain, or loss for the tax year that you get from sources within the United States (other than certain investment income) is treated as effectively connected income. 1040a form This applies whether or not there is any connection between the income and the trade or business being carried on in the United States during the tax year. 1040a form Two tests, described next under Investment Income, determine whether certain items of investment income (such as interest, dividends, and royalties) are treated as effectively connected with that business. 1040a form In limited circumstances, some kinds of foreign source income may be treated as effectively connected with a trade or business in the United States. 1040a form For a discussion of these rules, see Foreign Income , later. 1040a form Investment Income Investment income from U. 1040a form S. 1040a form sources that may or may not be treated as effectively connected with a U. 1040a form S. 1040a form trade or business generally falls into the following three categories. 1040a form Fixed or determinable income (interest, dividends, rents, royalties, premiums, annuities, etc. 1040a form ). 1040a form Gains (some of which are considered capital gains) from the sale or exchange of the following types of property. 1040a form Timber, coal, or domestic iron ore with a retained economic interest. 1040a form Patents, copyrights, and similar property on which you receive contingent payments after October 4, 1966. 1040a form Patents transferred before October 5, 1966. 1040a form Original issue discount obligations. 1040a form Capital gains (and losses). 1040a form Use the two tests, described next, to determine whether an item of U. 1040a form S. 1040a form source income falling in one of the three categories above and received during the tax year is effectively connected with your U. 1040a form S. 1040a form trade or business. 1040a form If the tests indicate that the item of income is effectively connected, you must include it with your other effectively connected income. 1040a form If the item of income is not effectively connected, include it with all other income discussed under The 30% Tax later, in this chapter. 1040a form Asset-use test. 1040a form   This test usually applies to income that is not directly produced by trade or business activities. 1040a form Under this test, if an item of income is from assets (property) used in, or held for use in, the trade or business in the United States, it is considered effectively connected. 1040a form   An asset is used in, or held for use in, the trade or business in the United States if the asset is: Held for the principal purpose of promoting the conduct of a trade or business in the United States, Acquired and held in the ordinary course of the trade or business conducted in the United States (for example, an account receivable or note receivable arising from that trade or business), or Otherwise held to meet the present needs of the trade or business in the United States and not its anticipated future needs. 1040a form Generally, stock of a corporation is not treated as an asset used in, or held for use in, a trade or business in the United States. 1040a form Business-activities test. 1040a form   This test usually applies when income, gain, or loss comes directly from the active conduct of the trade or business. 1040a form The business-activities test is most important when: Dividends or interest are received by a dealer in stocks or securities, Royalties are received in the trade or business of licensing patents or similar property, or Service fees are earned by a servicing business. 1040a form Under this test, if the conduct of the U. 1040a form S. 1040a form trade or business was a material factor in producing the income, the income is considered effectively connected. 1040a form Personal Service Income You usually are engaged in a U. 1040a form S. 1040a form trade or business when you perform personal services in the United States. 1040a form Personal service income you receive in a tax year in which you are engaged in a U. 1040a form S. 1040a form trade or business is effectively connected with a U. 1040a form S. 1040a form trade or business. 1040a form Income received in a year other than the year you performed the services is also effectively connected if it would have been effectively connected if received in the year you performed the services. 1040a form Personal service income includes wages, salaries, commissions, fees, per diem allowances, and employee allowances and bonuses. 1040a form The income may be paid to you in the form of cash, services, or property. 1040a form If you are engaged in a U. 1040a form S. 1040a form trade or business only because you perform personal services in the United States during the tax year, income and gains from assets, and gains and losses from the sale or exchange of capital assets are generally not effectively connected with your trade or business. 1040a form However, if there is a direct economic relationship between your holding of the asset and your trade or business of performing personal services, the income, gain, or loss is effectively connected. 1040a form Pensions. 1040a form   If you were a nonresident alien engaged in a U. 1040a form S. 1040a form trade or business after 1986 because you performed personal services in the United States, and you later receive a pension or retirement pay attributable to these services, such payments are effectively connected income in each year you receive them. 1040a form This is true whether or not you are engaged in a U. 1040a form S. 1040a form trade or business in the year you receive the retirement pay. 1040a form Transportation Income Transportation income (defined in chapter 2) is effectively connected if you meet both of the following conditions. 1040a form You had a fixed place of business in the United States involved in earning the income. 1040a form At least 90% of your U. 1040a form S. 1040a form source transportation income is attributable to regularly scheduled transportation. 1040a form “Fixed place of business” generally means a place, site, structure, or other similar facility through which you engage in a trade or business. 1040a form “Regularly scheduled transportation” means that a ship or aircraft follows a published schedule with repeated sailings or flights at regular intervals between the same points for voyages or flights that begin or end in the United States. 1040a form This definition applies to both scheduled and chartered air transportation. 1040a form If you do not meet the two conditions above, the income is not effectively connected and is taxed at a 4% rate. 1040a form See Transportation Tax, later, in this chapter. 1040a form Business Profits and Losses and Sales Transactions All profits or losses from U. 1040a form S. 1040a form sources that are from the operation of a business in the United States are effectively connected with a trade or business in the United States. 1040a form For example, profit from the sale in the United States of inventory property purchased either in this country or in a foreign country is effectively connected trade or business income. 1040a form A share of U. 1040a form S. 1040a form source profits or losses of a partnership that is engaged in a trade or business in the United States is also effectively connected with a trade or business in the United States. 1040a form Real Property Gain or Loss Gains and losses from the sale or exchange of U. 1040a form S. 1040a form real property interests (whether or not they are capital assets) are taxed as if you are engaged in a trade or business in the United States. 1040a form You must treat the gain or loss as effectively connected with that trade or business. 1040a form U. 1040a form S. 1040a form real property interest. 1040a form   This is any interest in real property located in the United States or the U. 1040a form S. 1040a form Virgin Islands or any interest (other than as a creditor) in a domestic corporation that is a U. 1040a form S. 1040a form real property holding corporation. 1040a form Real property includes the following. 1040a form Land and unsevered natural products of the land, such as growing crops and timber, and mines, wells, and other natural deposits. 1040a form Improvements on land, including buildings, other permanent structures, and their structural components. 1040a form Personal property associated with the use of real property, such as equipment used in farming, mining, forestry, or construction or property used in lodging facilities or rented office space, unless the personal property is: Disposed of more than one year before or after the disposition of the real property, or Separately sold to persons unrelated either to the seller or to the buyer of the real property. 1040a form U. 1040a form S. 1040a form real property holding corporation. 1040a form   A corporation is a U. 1040a form S. 1040a form real property holding corporation if the fair market value of the corporation's U. 1040a form S. 1040a form real property interests are at least 50% of the total fair market value of: The corporation's U. 1040a form S. 1040a form real property interests, plus The corporation's interests in real property located outside the United States, plus The corporation's other assets that are used in, or held for use in, a trade or business. 1040a form   Gain or loss on the sale of the stock in any domestic corporation is taxed as if you are engaged in a U. 1040a form S. 1040a form trade or business unless you establish that the corporation is not a U. 1040a form S. 1040a form real property holding corporation. 1040a form   A U. 1040a form S. 1040a form real property interest does not include a class of stock of a corporation that is regularly traded on an established securities market, unless you hold more than 5% of the fair market value of that class of stock. 1040a form An interest in a foreign corporation owning U. 1040a form S. 1040a form real property generally is not a U. 1040a form S. 1040a form real property interest unless the corporation chooses to be treated as a domestic corporation. 1040a form Qualified investment entities. 1040a form   Special rules apply to qualified investment entities (QIEs). 1040a form A QIE is any real estate investment trust (REIT) or any regulated investment company (RIC) that is a U. 1040a form S. 1040a form real property holding corporation. 1040a form    Generally, any distribution from a QIE to a shareholder that is attributable to gain from the sale or exchange of a U. 1040a form S. 1040a form real property interest is treated as a U. 1040a form S. 1040a form real property gain by the shareholder receiving the distribution. 1040a form A distribution by a QIE on stock regularly traded on an established securities market in the United States is not treated as gain from the sale or exchange of a U. 1040a form S. 1040a form real property interest if you did not own more than 5% of that stock at any time during the 1-year period ending on the date of the distribution. 1040a form A distribution that you do not treat as gain from the sale or exchange of a U. 1040a form S. 1040a form real property interest is included in your gross income as a regular dividend. 1040a form Note. 1040a form Beginning January 1, 2014 (unless extended by legislation), a RIC that is a U. 1040a form S. 1040a form real property holding corporation will only be treated as a QIE for certain distributions from the RIC that are directly or indirectly attributable to distributions received by the RIC from a REIT. 1040a form Domestically controlled QIE. 1040a form   The sale of an interest in a domestically controlled QIE is not the sale of a U. 1040a form S. 1040a form real property interest. 1040a form The entity is domestically controlled if at all times during the testing period less than 50% in value of its stock was held, directly or indirectly, by foreign persons. 1040a form The testing period is the shorter of (a) the 5-year period ending on the date of disposition, or (b) the period during which the entity was in existence. 1040a form Wash sale. 1040a form    If you dispose of an interest in a domestically controlled QIE in an applicable wash sale transaction, special rules apply. 1040a form An applicable wash sale transaction is one in which you: Dispose of an interest in the domestically controlled QIE during the 30-day period before the ex-dividend date of a distribution that you would (but for the disposition) have treated as gain from the sale or exchange of a U. 1040a form S. 1040a form real property interest, and Acquire, or enter into a contract or option to acquire, a substantially identical interest in that entity during the 61-day period that began on the first day of the 30-day period. 1040a form If this occurs, you are treated as having gain from the sale or exchange of a U. 1040a form S. 1040a form real property interest in an amount equal to the distribution made after June 15, 2006, that would have been treated as such gain. 1040a form This also applies to any substitute dividend payment. 1040a form   A transaction is not treated as an applicable wash sale transaction if: You actually receive the distribution from the domestically controlled QIE related to the interest disposed of, or acquired, in the transaction, or You dispose of any class of stock in a QIE that is regularly traded on an established securities market in the United States but only if you did not own more than 5% of that class of stock at any time during the 1-year period ending on the date of the distribution. 1040a form Alternative minimum tax. 1040a form   There may be a minimum tax on your net gain from the disposition of U. 1040a form S. 1040a form real property interests. 1040a form Figure the amount of this tax, if any, on Form 6251. 1040a form Withholding of tax. 1040a form   If you dispose of a U. 1040a form S. 1040a form real property interest, the buyer may have to withhold tax. 1040a form See the discussion of Tax Withheld on Real Property Sales in chapter 8. 1040a form Foreign Income You must treat three kinds of foreign source income as effectively connected with a trade or business in the United States if: You have an office or other fixed place of business in the United States to which the income can be attributed, That office or place of business is a material factor in producing the income, and The income is produced in the ordinary course of the trade or business carried on through that office or other fixed place of business. 1040a form 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. 1040a form The three kinds of foreign source income are listed below. 1040a form Rents and royalties for the use of, or for the privilege of using, intangible personal property located outside the United States or from any interest in such property. 1040a form Included are rents or royalties for the use, or for the privilege of using, outside the United States, 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 United States. 1040a form Dividends, interest, or amounts received for the provision of a guarantee of indebtedness issued after September 27, 2010, from the active conduct of a banking, financing, or similar business in the United States. 1040a form A substitute dividend or interest payment received under a securities lending transaction or a sale-repurchase transaction is treated the same as the amounts received on the transferred security. 1040a form Income, gain, or loss from the sale outside the United States, through the U. 1040a form S. 1040a form office or other fixed place of business, 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. 1040a form Item (3) will not apply if you sold the property for use, consumption, or disposition outside the United States and an office or other fixed place of business in a foreign country was a material factor in the sale. 1040a form Any foreign source income that is equivalent to any item of income described above is treated as effectively connected with a U. 1040a form S. 1040a form trade or business. 1040a form For example, foreign source interest and dividend equivalents are treated as U. 1040a form S. 1040a form effectively connected income if the income is derived by a foreign person in the active conduct of a banking, financing, or similar business within the United States. 1040a form Tax on Effectively Connected Income Income you receive during the tax year that is effectively connected with your trade or business in the United States is, after allowable deductions, taxed at the rates that apply to U. 1040a form S. 1040a form citizens and residents. 1040a form Generally, you can receive effectively connected income only if you are a nonresident alien engaged in trade or business in the United States during the tax year. 1040a form However, income you receive from the sale or exchange of property, the performance of services, or any other transaction in another tax year is treated as effectively connected in that year if it would have been effectively connected in the year the transaction took place or you performed the services. 1040a form Example. 1040a form Ted Richards, a nonresident alien, entered the United States in August 2012, to perform personal services in the U. 1040a form S. 1040a form office of his overseas employer. 1040a form He worked in the U. 1040a form S. 1040a form office until December 25, 2012, but did not leave this country until January 11, 2013. 1040a form On January 8, 2013, he received his final paycheck for services performed in the United States during 2012. 1040a form All of Ted's income during his stay here is U. 1040a form S. 1040a form source income. 1040a form During 2012, Ted was engaged in the trade or business of performing personal services in the United States. 1040a form Therefore, all amounts paid to him in 2012 for services performed in the United States during 2012 are effectively connected with that trade or business during 2012. 1040a form The salary payment Ted received in January 2013 is U. 1040a form S. 1040a form source income to him in 2013. 1040a form It is effectively connected with a trade or business in the United States because he was engaged in a trade or business in the United States during 2012 when he performed the services that earned the income. 1040a form Real property income. 1040a form   You may be able to choose to treat all income from real property as effectively connected. 1040a form See Income From Real Property , later, in this chapter. 1040a form The 30% Tax Tax at a 30% (or lower treaty) rate applies to certain items of income or gains from U. 1040a form S. 1040a form sources but only if the items are not effectively connected with your U. 1040a form S. 1040a form trade or business. 1040a form Fixed or Determinable Income The 30% (or lower treaty) rate applies to the gross amount of U. 1040a form S. 1040a form source fixed or determinable annual or periodic gains, profits, or income. 1040a form Income is fixed when it is paid in amounts known ahead of time. 1040a form Income is determinable whenever there is a basis for figuring the amount to be paid. 1040a form Income can be periodic if it is paid from time to time. 1040a form It does not have to be paid annually or at regular intervals. 1040a form Income can be determinable or periodic even if the length of time during which the payments are made is increased or decreased. 1040a form Items specifically included as fixed or determinable income are interest (other than original issue discount), dividends, dividend equivalent payments (defined in chapter 2), rents, premiums, annuities, salaries, wages, and other compensation. 1040a form A substitute dividend or interest payment received under a securities lending transaction or a sale-repurchase transaction is treated the same as the amounts received on the transferred security. 1040a form Other items of income, such as royalties, also may be subject to the 30% tax. 1040a form Some fixed or determinable income may be exempt from U. 1040a form S. 1040a form tax. 1040a form See chapter 3 if you are not sure whether the income is taxable. 1040a form Original issue discount (OID). 1040a form   If you sold, exchanged, or received a payment on a bond or other debt instrument that was issued at a discount after March 31, 1972, all or part of the original issue discount (OID) (other than portfolio interest) may be subject to the 30% tax. 1040a form The amount of OID is the difference between the stated redemption price at maturity and the issue price of the debt instrument. 1040a form The 30% tax applies in the following circumstances. 1040a form You received a payment on a debt instrument. 1040a form In this case, the amount of OID subject to tax is the OID that accrued while you held the debt instrument minus the OID previously taken into account. 1040a form But the tax on the OID cannot be more than the payment minus the tax on the interest payment on the debt instrument. 1040a form You sold or exchanged the debt instrument. 1040a form The amount of OID subject to tax is the OID that accrued while you held the debt instrument minus the amount already taxed in (1) above. 1040a form   Report on your return the amount of OID shown on Form 1042-S, Foreign Person's U. 1040a form S. 1040a form Source Income Subject to Withholding, if you bought the debt instrument at original issue. 1040a form However, you must recompute your proper share of OID shown on Form 1042-S if any of the following apply. 1040a form You bought the debt instrument at a premium or paid an acquisition premium. 1040a form The debt instrument is a stripped bond or a stripped coupon (including zero coupon instruments backed by U. 1040a form S. 1040a form Treasury securities). 1040a form The debt instrument is a contingent payment or inflation-indexed debt instrument. 1040a form For the definition of premium and acquisition premium and instructions on how to recompute OID, get Publication 1212. 1040a form   If you held a bond or other debt instrument that was issued at a discount before April 1, 1972, contact the IRS for further information. 1040a form See chapter 12. 1040a form Gambling Winnings In general, nonresident aliens are subject to the 30% tax on the gross proceeds from gambling won in the United States if that income is not effectively connected with a U. 1040a form S. 1040a form trade or business and is not exempted by treaty. 1040a form However, no tax is imposed on nonbusiness gambling income a nonresident alien wins playing blackjack, baccarat, craps, roulette, or big-6 wheel in the United States. 1040a form Nonresident aliens are taxed at graduated rates on net gambling income won in the United States that is effectively connected with a U. 1040a form S. 1040a form trade or business. 1040a form Social Security Benefits A nonresident alien must include 85% of any U. 1040a form S. 1040a form social security benefit (and the social security equivalent part of a tier 1 railroad retirement benefit) in U. 1040a form S. 1040a form source fixed or determinable annual or periodic income. 1040a form Social security benefits include monthly retirement, survivor, and disability benefits. 1040a form This income is exempt under some tax treaties. 1040a form See Table 1 in Publication 901, U. 1040a form S. 1040a form Tax Treaties, for a list of tax treaties that exempt U. 1040a form S. 1040a form social security benefits from U. 1040a form S. 1040a form tax. 1040a form Sales or Exchanges of Capital Assets These rules apply only to those capital gains and losses from sources in the United States that are not effectively connected with a trade or business in the United States. 1040a form They apply even if you are engaged in a trade or business in the United States. 1040a form These rules do not apply to the sale or exchange of a U. 1040a form S. 1040a form real property interest or to the sale of any property that is effectively connected with a trade or business in the United States. 1040a form See Real Property Gain or Loss , earlier, under Effectively Connected Income. 1040a form A capital asset is everything you own except: Inventory. 1040a form Business accounts or notes receivable. 1040a form Depreciable property used in a trade or business. 1040a form Real property used in a trade or business. 1040a form Supplies regularly used in a trade or business. 1040a form Certain copyrights, literary or musical or artistic compositions, letters or memoranda, or similar property. 1040a form Certain U. 1040a form S. 1040a form government publications. 1040a form Certain commodities derivative financial instruments held by a commodities derivatives dealer. 1040a form Hedging transactions. 1040a form A capital gain is a gain on the sale or exchange of a capital asset. 1040a form A capital loss is a loss on the sale or exchange of a capital asset. 1040a form If the sale is in foreign currency, for the purpose of determining gain, the cost and selling price of the property should be expressed in U. 1040a form S. 1040a form currency at the rate of exchange prevailing as of the date of the purchase and date of the sale, respectively. 1040a form You may want to read Publication 544. 1040a form However, use Publication 544 only to determine what is a sale or exchange of a capital asset, or what is treated as such. 1040a form Specific tax treatment that applies to U. 1040a form S. 1040a form citizens or residents generally does not apply to you. 1040a form The following gains are subject to the 30% (or lower treaty) rate without regard to the 183-day rule, discussed later. 1040a form Gains on the disposal of timber, coal, or domestic iron ore with a retained economic interest. 1040a form Gains on contingent payments received from the sale or exchange of patents, copyrights, and similar property after October 4, 1966. 1040a form Gains on certain transfers of all substantial rights to, or an undivided interest in, patents if the transfers were made before October 5, 1966. 1040a form Gains on the sale or exchange of original issue discount obligations. 1040a form Gains in (1) are not subject to the 30% (or lower treaty) rate if you choose to treat the gains as effectively connected with a U. 1040a form S. 1040a form trade or business. 1040a form See Income From Real Property , later. 1040a form 183-day rule. 1040a form   If you were in the United States for 183 days or more during the tax year, your net gain from sales or exchanges of capital assets is taxed at a 30% (or lower treaty) rate. 1040a form For purposes of the 30% (or lower treaty) rate, net gain is the excess of your capital gains from U. 1040a form S. 1040a form sources over your capital losses from U. 1040a form S. 1040a form sources. 1040a form This rule applies even if any of the transactions occurred while you were not in the United States. 1040a form   To determine your net gain, consider the amount of your gains and losses that would be recognized and taken into account only if, and to the extent that, they would be recognized and taken into account if you were in a U. 1040a form S. 1040a form trade or business during the year and the gains and losses were effectively connected with that trade or business during the tax year. 1040a form   In arriving at your net gain, do not take the following into consideration. 1040a form The four types of gains listed earlier. 1040a form The deduction for a capital loss carryover. 1040a form Capital losses in excess of capital gains. 1040a form Exclusion for gain from the sale or exchange of qualified small business stock (section 1202 exclusion). 1040a form Losses from the sale or exchange of property held for personal use. 1040a form However, losses resulting from casualties or thefts may be deductible on Schedule A (Form 1040NR). 1040a form See Itemized Deductions in chapter 5. 1040a form   If you are not engaged in a trade or business in the United States and have not established a tax year for a prior period, your tax year will be the calendar year for purposes of the 183-day rule. 1040a form Also, you must file your tax return on a calendar-year basis. 1040a form   If you were in the United States for less than 183 days during the tax year, capital gains (other than gains listed earlier) are tax exempt unless they are effectively connected with a trade or business in the United States during your tax year. 1040a form Reporting. 1040a form   Report your gains and losses from the sales or exchanges of capital assets that are not effectively connected with a trade or business in the United States on page 4 of Form 1040NR. 1040a form Report gains and losses from sales or exchanges of capital assets (including real property) that are effectively connected with a trade or business in the United States on a separate Schedule D (Form 1040), Form 4797, or both. 1040a form Attach them to Form 1040NR. 1040a form Income From Real Property If you have income from real property located in the United States that you own or have an interest in and hold for the production of income, you can choose to treat all income from that property as income effectively connected with a trade or business in the United States. 1040a form The choice applies to all income from real property located in the United States and held for the production of income and to all income from any interest in such property. 1040a form This includes income from rents, royalties from mines, oil or gas wells, or other natural resources. 1040a form It also includes gains from the sale or exchange of timber, coal, or domestic iron ore with a retained economic interest. 1040a form You can make this choice only for real property income that is not otherwise effectively connected with your U. 1040a form S. 1040a form trade or business. 1040a form If you make the choice, you can claim deductions attributable to the real property income and only your net income from real property is taxed. 1040a form This choice does not treat a nonresident alien, who is not otherwise engaged in a U. 1040a form S. 1040a form trade or business, as being engaged in a trade or business in the United States during the year. 1040a form Example. 1040a form You are a nonresident alien and are not engaged in a U. 1040a form S. 1040a form trade or business. 1040a form You own a single-family house in the United States that you rent out. 1040a form Your rental income for the year is $10,000. 1040a form This is your only U. 1040a form S. 1040a form source income. 1040a form As discussed earlier under The 30% Tax, the rental income is subject to a tax at a 30% (or lower treaty) rate. 1040a form You received a Form 1042-S showing that your tenants properly withheld this tax from the rental income. 1040a form You do not have to file a U. 1040a form S. 1040a form tax return (Form 1040NR) because your U. 1040a form S. 1040a form tax liability is satisfied by the withholding of tax. 1040a form If you make the choice discussed earlier, you can offset the $10,000 income by certain rental expenses. 1040a form (See Publication 527, Residential Rental Property, for information on rental expenses. 1040a form ) Any resulting net income is taxed at graduated rates. 1040a form If you make this choice, report the rental income and expenses on Schedule E (Form 1040) and attach the schedule to Form 1040NR. 1040a form For the first year you make the choice, also attach the statement discussed next. 1040a form Making the choice. 1040a form   Make the initial choice by attaching a statement to your return, or amended return, for the year of the choice. 1040a form Include the following in your statement. 1040a form That you are making the choice. 1040a form Whether the choice is under Internal Revenue Code section 871(d) (explained earlier) or a tax treaty. 1040a form A complete list of all your real property, or any interest in real property, located in the United States. 1040a form Give the legal identification of U. 1040a form S. 1040a form timber, coal, or iron ore in which you have an interest. 1040a form The extent of your ownership in the property. 1040a form The location of the property. 1040a form A description of any major improvements to the property. 1040a form The dates you owned the property. 1040a form Your income from the property. 1040a form Details of any previous choices and revocations of the real property income choice. 1040a form   This choice stays in effect for all later tax years unless you revoke it. 1040a form Revoking the choice. 1040a form   You can revoke the choice without IRS approval by filing Form 1040X, Amended U. 1040a form S. 1040a form Individual Income Tax Return, for the year you made the choice and for later tax years. 1040a form You must file Form 1040X within 3 years from the date your return was filed or 2 years from the time the tax was paid, whichever is later. 1040a form If this time period has expired for the year of choice, you cannot revoke the choice for that year. 1040a form However, you may revoke the choice for later tax years only if you have IRS approval. 1040a form For information on how to get IRS approval, see Regulation section 1. 1040a form 871-10(d)(2). 1040a form Transportation Tax A 4% tax rate applies to transportation income that is not effectively connected because it does not meet the two conditions listed earlier under Transportation Income . 1040a form If you receive transportation income subject to the 4% tax, you should figure the tax and show it on line 57 of Form 1040NR. 1040a form Attach a statement to your return that includes the following information (if applicable). 1040a form Your name, taxpayer identification number, and tax year. 1040a form A description of the types of services performed (whether on or off board). 1040a form Names of vessels or registration numbers of aircraft on which you performed the services. 1040a form Amount of U. 1040a form S. 1040a form source transportation income derived from each type of service for each vessel or aircraft for the calendar year. 1040a form Total amount of U. 1040a form S. 1040a form source transportation income derived from all types of services for the calendar year. 1040a form This 4% tax applies to your U. 1040a form S. 1040a form source gross transportation income. 1040a form This only includes transportation income that is treated as derived from sources in the United States if the transportation begins or ends in the United States. 1040a form For transportation income from personal services, the transportation must be between the United States and a U. 1040a form S. 1040a form possession. 1040a form For personal services of a nonresident alien, this only applies to income derived from, or in connection with, an aircraft. 1040a form Interrupted Period of Residence You are subject to tax under a special rule if you interrupt your period of U. 1040a form S. 1040a form residence with a period of nonresidence. 1040a form The special rule applies if you meet all of the following conditions. 1040a form You were a U. 1040a form S. 1040a form resident for a period that includes at least 3 consecutive calendar years. 1040a form You were a U. 1040a form S. 1040a form resident for at least 183 days in each of those years. 1040a form You ceased to be treated as a U. 1040a form S. 1040a form resident. 1040a form You then again became a U. 1040a form S. 1040a form resident before the end of the third calendar year after the end of the period described in (1) above. 1040a form Under this special rule, you are subject to tax on your U. 1040a form S. 1040a form source gross income and gains on a net basis at the graduated rates applicable to individuals (with allowable deductions) for the period you were a nonresident alien, unless you would be subject to a higher tax under the 30% tax (discussed earlier) on income not connected with a U. 1040a form S. 1040a form trade or business. 1040a form For information on how to figure the special tax, see How To Figure the Expatriation Tax (If You Expatriated Before June 17, 2008) under Expatriation Tax , below. 1040a form Example. 1040a form John Willow, a citizen of New Zealand, entered the United States on April 1, 2008, as a lawful permanent resident. 1040a form On August 1, 2010, John ceased to be a lawful permanent resident and returned to New Zealand. 1040a form During his period of residence, he was present in the United States for at least 183 days in each of three consecutive years (2008, 2009, and 2010). 1040a form He returned to the United States on October 5, 2013, as a lawful permanent resident. 1040a form He became a resident before the close of the third calendar year (2013) beginning after the end of his first period of residence (August 1, 2010). 1040a form Therefore, he is subject to tax under the special rule for the period of nonresidence (August 2, 2010, through October 4, 2013) if it is more than the tax that would normally apply to him as a nonresident alien. 1040a form Reporting requirements. 1040a form   If you are subject to this tax for any year in the period you were a nonresident alien, you must file Form 1040NR for that year. 1040a form The return is due by the due date (including extensions) for filing your U. 1040a form S. 1040a form income tax return for the year that you again become a U. 1040a form S. 1040a form resident. 1040a form If you already filed returns for that period, you must file amended returns. 1040a form You must attach a statement to your return that identifies the source of all of your U. 1040a form S. 1040a form and foreign gross income and the items of income subject to this special rule. 1040a form Expatriation Tax The expatriation tax provisions apply to U. 1040a form S. 1040a form citizens who have renounced their citizenship and long-term residents who have ended their residency. 1040a form The rules that apply are based on the dates of expatriation, which are described in the following sections. 1040a form Expatriation Before June 4, 2004. 1040a form Expatriation After June 3, 2004, and Before June 17, 2008. 1040a form Expatriation After June 16, 2008. 1040a form Long-term resident defined. 1040a form   You are a long-term resident if you were a lawful permanent resident of the United States in at least 8 of the last 15 tax years ending with the year your residency ends. 1040a form In determining if you meet the 8-year requirement, do not count any year that you are treated as a resident of a foreign country under a tax treaty and do not waive treaty benefits. 1040a form Expatriation Before June 4, 2004 If you expatriated before June 4, 2004, the expatriation rules apply if one of the principal purposes of the action is the avoidance of U. 1040a form S. 1040a form taxes. 1040a form Unless you received a ruling from the IRS that you did not expatriate to avoid U. 1040a form S. 1040a form taxes, you are presumed to have tax avoidance as a principal purpose if: Your average annual net income tax for the last 5 tax years ending before the date of your action to relinquish your citizenship or terminate your residency was more than $100,000, or Your net worth on the date of your action was $500,000 or more. 1040a form The amounts above are adjusted for inflation if your expatriation action is after 1997 (see Table 4-1). 1040a form Table 4-1. 1040a form Inflation-Adjusted Amounts for Expatriation Actions Before June 4, 2004 IF you expatriated during . 1040a form . 1040a form . 1040a form   THEN the rules outlined on this page apply if . 1040a form . 1040a form . 1040a form     Your 5-year average annual net income tax was more than . 1040a form . 1040a form . 1040a form OR Your net worth equaled or exceeded . 1040a form . 1040a form . 1040a form 1999   110,000   552,000 2000   112,000   562,000 2001   116,000   580,000 2002   120,000   599,000 2003   122,000   608,000 2004 (before June 4)*   124,000   622,000 *If you expatriated after June 3, 2004, see Expatriation After June 3, 2004, and Before June 17, 2008 or Expatriation After June 16, 2008. 1040a form Reporting requirements. 1040a form   If you lost your U. 1040a form S. 1040a form citizenship, you should have filed Form 8854 with a consular office or a federal court at the time of loss of citizenship. 1040a form If you ended your long-term residency, you should have filed Form 8854 with the Internal Revenue Service when you filed your dual-status tax return for the year your residency ended. 1040a form   Your U. 1040a form S. 1040a form residency is considered to have ended when you ceased to be a lawful permanent resident or you began to be treated as a resident of another country under a tax treaty and do not waive treaty benefits. 1040a form Penalties. 1040a form   If you failed to file Form 8854, you may have to pay a penalty equal to the greater of 5% of the expatriation tax or $1,000. 1040a form The penalty will be assessed for each year of the 10-year period beginning on the date of expatriation during which your failure to file continues. 1040a form The penalty will not be imposed if you can show that the failure is due to reasonable cause and not willful neglect. 1040a form Expatriation tax. 1040a form   The expatriation tax applies to the 10-year period following the date of expatriation or termination of residency. 1040a form It is figured in the same way as for those expatriating after June 3, 2004, and before June 17, 2008. 1040a form See How To Figure the Expatriation Tax (If You Expatriated Before June 17, 2008) in the next section. 1040a form Expatriation After June 3, 2004, and Before June 17, 2008 If you expatriated after June 3, 2004, and before June 17, 2008, the expatriation rules apply to you if any of the following statements apply. 1040a form Your average annual net income tax for the 5 tax years ending before the date of expatriation or termination of residency is more than: $124,000 if you expatriated or terminated residency in 2004. 1040a form $127,000 if you expatriated or terminated residency in 2005. 1040a form $131,000 if you expatriated or terminated residency in 2006. 1040a form $136,000 if you expatriated or terminated residency in 2007. 1040a form $139,000 if you expatriated or terminated residency in 2008. 1040a form Your net worth is $2 million or more on the date of your expatriation or termination of residency. 1040a form You fail to certify on Form 8854 that you have complied with all U. 1040a form S. 1040a form federal tax obligations for the 5 tax years preceding the date of your expatriation or termination of residency. 1040a form Exception for dual-citizens and certain minors. 1040a form   Certain dual-citizens and certain minors (defined next) are not subject to the expatriation tax even if they meet (1) or (2) earlier. 1040a form However, they still must provide the certification required in (3). 1040a form Certain dual-citizens. 1040a form   You may qualify for the exception described above if all of the following apply. 1040a form You became at birth a U. 1040a form S. 1040a form citizen and a citizen of another country and you continue to be a citizen of that other country. 1040a form You were never a resident alien of the United States (as defined in chapter 1). 1040a form You never held a U. 1040a form S. 1040a form passport. 1040a form You were present in the United States for no more than 30 days during any calendar year that is 1 of the 10 calendar years preceding your loss of U. 1040a form S. 1040a form citizenship. 1040a form Certain minors. 1040a form   You may qualify for the exception described above if you meet all of the following requirements. 1040a form You became a U. 1040a form S. 1040a form citizen at birth. 1040a form Neither of your parents was a U. 1040a form S. 1040a form citizen at the time of your birth. 1040a form You expatriated before you were 18½. 1040a form You were present in the United States for not more than 30 days during any calendar year that is 1 of the 10 calendar years preceding your expatriation. 1040a form Tax consequences of presence in the United States. 1040a form   The following rules apply if you do not meet the exception above for dual-citizens and certain minors and the expatriation rules would otherwise apply to you. 1040a form   The expatriation tax does not apply to any tax year during the 10-year period if you are physically present in the United States for more than 30 days during the calendar year ending in that year. 1040a form Instead, you are treated as a U. 1040a form S. 1040a form citizen or resident and taxed on your worldwide income for that tax year. 1040a form You must file Form 1040, 1040A, or 1040EZ and figure your tax as prescribed in the instructions for those forms. 1040a form   When counting the number of days of presence during a calendar year, count any day you were physically present in the United States at any time during the day. 1040a form However, do not count any days (up to a limit of 30 days) on which you performed personal services in the United States for an employer who is not related to you if either of the following apply. 1040a form You have ties with other countries. 1040a form You have ties with other countries if: You became (within a reasonable period after your expatriation or termination of residency) a citizen or resident of the country in which you, your spouse, or either of your parents were born, and You became fully liable for income tax in that country. 1040a form You were physically present in the United States for 30 days or less during each year in the 10-year period ending on the date of expatriation or termination of residency. 1040a form Do not count any day you were an exempt individual or were unable to leave the United States because of a medical condition that arose while you were in the United States. 1040a form See Exempt individual and Medical condition in chapter 1 under Substantial Presence Test, but disregard the information about Form 8843. 1040a form Related employer. 1040a form   If your employer in the United States is any of the following, then your employer is related to you. 1040a form You must count any days you performed services in the United States for that employer as days of presence in the United States. 1040a form Members of your family. 1040a form This includes only your brothers and sisters, half-brothers and half-sisters, spouse, ancestors (parents, grandparents, etc. 1040a form ), and lineal descendants (children, grandchildren, etc. 1040a form ). 1040a form A partnership in which you directly or indirectly own more than 50% of the capital interest or the profits interest. 1040a form A corporation in which you directly or indirectly own more than 50% in value of the outstanding stock. 1040a form (See Publication 550, chapter 4, Constructive ownership of stock, for how to determine whether you directly or indirectly own outstanding stock. 1040a form ) A tax-exempt charitable or educational organization that is directly or indirectly controlled, in any manner or by any method, by you or by a member of your family, whether or not this control is legally enforceable. 1040a form Date of tax expatriation. 1040a form   For purposes of U. 1040a form S. 1040a form tax rules, the date of your expatriation or termination of residency is the later of the dates on which you perform the following actions. 1040a form You notify either the Department of State or the Department of Homeland Security (whichever is appropriate) of your expatriating act or termination of residency. 1040a form You file Form 8854 in accordance with the form instructions. 1040a form Annual return. 1040a form   If the expatriation tax applies to you, you must file Form 8854 each year during the 10-year period following the date of expatriation. 1040a form You must file this form even if you owe no U. 1040a form S. 1040a form tax. 1040a form Penalty. 1040a form   If you fail to file Form 8854 for any tax year, fail to include all information required to be shown on the form, or include incorrect information, you may have to pay a penalty of $10,000. 1040a form You will not have to pay a penalty if you show that the failure is due to reasonable cause and not to willful neglect. 1040a form How To Figure the Expatriation Tax (If You Expatriated Before June 17, 2008) If the expatriation tax applies to you, you are generally subject to tax on your U. 1040a form S. 1040a form source gross income and gains on a net basis at the graduated rates applicable to individuals (with allowable deductions) unless you would be subject to a higher tax under the 30% tax (discussed earlier) on income not connected with a U. 1040a form S. 1040a form trade or business. 1040a form For this purpose, U. 1040a form S. 1040a form source gross income (defined in chapter 2) includes gains from the sale or exchange of: Property (other than stock or debt obligations) located in the United States, Stock issued by a U. 1040a form S. 1040a form domestic corporation, and Debt obligations of U. 1040a form S. 1040a form persons or of the United States, a state or political subdivision thereof, or the District of Columbia. 1040a form U. 1040a form S. 1040a form source income also includes any income or gain derived from stock in certain controlled foreign corporations if you owned, or were considered to own, at any time during the 2-year period ending on the date of expatriation, more than 50% of: The total combined voting power of all classes of that corporation's stock, or The total value of the stock. 1040a form The income or gain is considered U. 1040a form S. 1040a form source income only to the extent of your share of earnings and profits earned or accumulated before the date of expatriation and during the periods you met the ownership requirements discussed above. 1040a form Any exchange of property is treated as a sale of the property at its fair market value on the date of the exchange and any gain is treated as U. 1040a form S. 1040a form source gross income in the tax year of the exchange unless you enter into a gain recognition agreement under Notice 97-19. 1040a form Other information. 1040a form   For more information on the expatriation tax provisions, including exceptions to the tax and special U. 1040a form S. 1040a form source rules, see section 877 of the Internal Revenue Code. 1040a form Expatriation Tax Return If you expatriated or terminated your U. 1040a form S. 1040a form residency, or you are subject to the expatriation tax, you must file Form 8854, Initial and Annual Expatriation Statement. 1040a form Attach it to Form 1040NR if you are required to file that form. 1040a form If you are present in the United States following your expatriation and are subject to tax as a U. 1040a form S. 1040a form citizen or resident, file Form 8854 with Form 1040. 1040a form Expatriation After June 16, 2008 If you expatriated after June 16, 2008, the expatriation rules apply to you if you meet any of the following conditions. 1040a form Your average annual net income tax for the 5 years ending before the date of expatriation or termination of residency is more than: $139,000 if you expatriated or terminated residency in 2008. 1040a form $145,000 if you expatriated or terminated residency in 2009 or 2010. 1040a form $147,000 if you expatriated or terminated residency in 2011. 1040a form $151,000 if you expatriated or terminated residency in 2012. 1040a form $155,000 if you expatriated or terminated residency in 2013. 1040a form Your net worth is $2 million or more on the date of your expatriation or termination of residency. 1040a form You fail to certify on Form 8854 that you have complied with all U. 1040a form S. 1040a form federal tax obligations for the 5 years preceding the date of your expatriation or termination of residency. 1040a form Exception for dual-citizens and certain minors. 1040a form   Certain dual-citizens and certain minors (defined next) are not subject to the expatriation tax even if they meet (1) or (2) above. 1040a form However, they still must provide the certification required in (3) above. 1040a form Certain dual-citizens. 1040a form   You may qualify for the exception described above if both of the following apply. 1040a form You became at birth a U. 1040a form S. 1040a form citizen and a citizen of another country and you continue to be a citizen of, and are taxed as a resident of, that other country. 1040a form You have been a resident of the United States for not more than 10 years during the 15-year tax period ending with the tax year during which the expatriation occurs. 1040a form For the purpose of determining U. 1040a form S. 1040a form residency, use the substantial presence test described in chapter 1. 1040a form Certain minors. 1040a form   You may qualify for the exception described earlier if you meet both of the following requirements. 1040a form You expatriated before you were 18½. 1040a form You have been a resident of the United States for not more than 10 tax years before the expatriation occurs. 1040a form For the purpose of determining U. 1040a form S. 1040a form residency, use the substantial presence test described in chapter 1. 1040a form Expatriation date. 1040a form   Your expatriation date is the date you relinquish U. 1040a form S. 1040a form citizenship (in the case of a former citizen) or terminate your long-term residency (in the case of a former U. 1040a form S. 1040a form resident). 1040a form Former U. 1040a form S. 1040a form citizen. 1040a form   You are considered to have relinquished your U. 1040a form S. 1040a form citizenship on the earliest of the following dates. 1040a form The date you renounced U. 1040a form S. 1040a form citizenship before a diplomatic or consular officer of the United States (provided that the voluntary renouncement was later confirmed by the issuance of a certificate of loss of nationality). 1040a form The date you furnished to the State Department a signed statement of voluntary relinquishment of U. 1040a form S. 1040a form nationality confirming the performance of an expatriating act (provided that the voluntary relinquishment was later confirmed by the issuance of a certificate of loss of nationality). 1040a form The date the State Department issued a certificate of loss of nationality. 1040a form The date that a U. 1040a form S. 1040a form court canceled your certificate of naturalization. 1040a form Former long-term resident. 1040a form   You are considered to have terminated your long-term residency on the earliest of the following dates. 1040a form The date you voluntarily relinquished your lawful permanent resident status by filing Department of Homeland Security Form I-407 with a U. 1040a form S. 1040a form consular or immigration officer, and the Department of Homeland Security determined that you have, in fact, abandoned your lawful permanent resident status. 1040a form The date you became subject to a final administrative order for your removal from the United States under the Immigration and Nationality Act and you actually left the United States as a result of that order. 1040a form If you were a dual resident of the United States and a country with which the United States has an income tax treaty, the date you began to be treated as a resident of that country and you determined that, for purposes of the treaty, you are a resident of the treaty country and notify the IRS of that treatment on Forms 8833 and 8854. 1040a form See Effect of Tax Treaties in chapter 1 for more information about dual residents. 1040a form How To Figure the Expatriation Tax (If You Expatriate After June 16, 2008) In the year you expatriate, you are subject to income tax on the net unrealized gain (or loss) in your property as if the property had been sold for its fair market value on the day before your expatriation date (“mark-to-market tax”). 1040a form This applies to most types of property interests you held on the date of relinquishment of citizenship or termination of residency. 1040a form But see Exceptions , later. 1040a form Gains arising from deemed sales must be taken into account for the tax year of the deemed sale without regard to other U. 1040a form S. 1040a form internal revenue laws. 1040a form Losses from deemed sales must be taken into account to the extent otherwise provided under U. 1040a form S. 1040a form internal revenue laws. 1040a form However, Internal Revenue Code section 1091 (relating to the disallowance of losses on wash sales of stock and securities) does not apply. 1040a form The net gain that you otherwise must include in your income is reduced (but not below zero) by: $600,000 if you expatriated or terminated residency before January 1, 2009. 1040a form $626,000 if you expatriated or terminated residency in 2009. 1040a form $627,000 if you expatriated or terminated residency in 2010. 1040a form $636,000 if you expatriated or terminated residency in 2011. 1040a form $651,000 if you expatriated or terminated residency in 2012. 1040a form $668,000 if you expatriated or terminated residency in 2013. 1040a form Exceptions. 1040a form   The mark-to-market tax does not apply to the following. 1040a form Eligible deferred compensation items. 1040a form Ineligible deferred compensation items. 1040a form Interests in nongrantor trusts. 1040a form Specified tax deferred accounts. 1040a form Instead, items (1) and (3) may be subject to withholding at source. 1040a form In the case of item (2), you are treated as receiving the present value of your accrued benefit as of the day before the expatriation date. 1040a form In the case of item (4), you are treated as receiving a distribution of your entire interest in the account on the day before your expatriation date. 1040a form See paragraphs (d), (e), and (f) of section 877A for more information. 1040a form Expatriation Tax Return If you expatriated or terminated your U. 1040a form S. 1040a form residency, or you are subject to the expatriation rules (as discussed earlier in the first paragraph under Expatriation After June 16, 2008), you must file Form 8854. 1040a form Attach it to Form 1040 or Form 1040NR if you are required to file either of those forms. 1040a form Deferral of payment of mark-to-market tax. 1040a form   You can make an irrevocable election to defer payment of the mark-to-market tax imposed on the deemed sale of property. 1040a form If you make this election, the following rules apply. 1040a form You can make the election on a property-by-property basis. 1040a form The deferred tax attributable to a particular property is due on the return for the tax year in which you dispose of the property. 1040a form Interest is charged for the period the tax is deferred. 1040a form The due date for the payment of the deferred tax cannot be extended beyond the earlier of the following dates. 1040a form The due date of the return required for the year of death. 1040a form The time that the security provided for the property fails to be adequate. 1040a form See item (6) below. 1040a form You make the election on Form 8854. 1040a form You must provide adequate security (such as a bond). 1040a form You must make an irrevocable waiver of any right under any treaty of the United States which would preclude assessment or collection of the mark-to-market tax. 1040a form   For more information about the deferral of payment, see the Instructions for Form 8854. 1040a form Prev  Up  Next   Home   More Online Publications