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1040ez Filing

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1040ez Filing

1040ez filing 4. 1040ez filing   Foreign Earned Income and Housing: Exclusion – Deduction Table of Contents Topics - This chapter discusses: Useful Items - You may want to see: Who Qualifies for the Exclusions and the Deduction? RequirementsTax Home in Foreign Country Bona Fide Residence Test Physical Presence Test Waiver of Time Requirements U. 1040ez filing S. 1040ez filing Travel Restrictions Foreign Earned Income Foreign Earned Income ExclusionLimit on Excludable Amount Choosing the Exclusion Foreign Housing Exclusion and DeductionHousing Amount Foreign Housing Exclusion Foreign Housing Deduction Married Couples Form 2555 and Form 2555-EZForm 2555-EZ Form 2555 Topics - This chapter discusses: Who qualifies for the foreign earned income exclusion, the foreign housing exclusion, and the foreign housing deduction, The requirements that must be met to claim either exclusion or the deduction, How to figure the foreign earned income exclusion, and How to figure the foreign housing exclusion and the foreign housing deduction. 1040ez filing Useful Items - You may want to see: Publication 519 U. 1040ez filing S. 1040ez filing Tax Guide for Aliens 570 Tax Guide for Individuals With Income from U. 1040ez filing S. 1040ez filing Possessions 596 Earned Income Credit (EIC) Form (and Instructions) 1040X Amended U. 1040ez filing S. 1040ez filing Individual Income Tax Return 2555 Foreign Earned Income 2555-EZ Foreign Earned Income Exclusion See chapter 7 for information about getting these publications and forms. 1040ez filing Who Qualifies for the Exclusions and the Deduction? If you meet certain requirements, you may qualify for the foreign earned income and foreign housing exclusions and the foreign housing deduction. 1040ez filing If you are a U. 1040ez filing S. 1040ez filing citizen or a resident alien of the United States and you live abroad, you are taxed on your worldwide income. 1040ez filing However, you may qualify to exclude from income up to $97,600 of your foreign earnings. 1040ez filing In addition, you can exclude or deduct certain foreign housing amounts. 1040ez filing See Foreign Earned Income Exclusion and Foreign Housing Exclusion and Deduction, later. 1040ez filing You also may be entitled to exclude from income the value of meals and lodging provided to you by your employer. 1040ez filing See Exclusion of Meals and Lodging, later. 1040ez filing Requirements To claim the foreign earned income exclusion, the foreign housing exclusion, or the foreign housing deduction, you must meet all three of the following requirements. 1040ez filing Your tax home must be in a foreign country. 1040ez filing You must have foreign earned income. 1040ez filing You must be one of the following. 1040ez filing A U. 1040ez filing S. 1040ez filing citizen who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year. 1040ez filing A U. 1040ez filing S. 1040ez filing resident alien who is a citizen or national of a country with which the United States has an income tax treaty in effect and who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year. 1040ez filing A U. 1040ez filing S. 1040ez filing citizen or a U. 1040ez filing S. 1040ez filing resident alien who is physically present in a foreign country or countries for at least 330 full days during any period of 12 consecutive months. 1040ez filing See Publication 519 to find out if you are a U. 1040ez filing S. 1040ez filing resident alien for tax purposes and whether you keep that alien status when you temporarily work abroad. 1040ez filing If you are a nonresident alien married to a U. 1040ez filing S. 1040ez filing citizen or resident alien, and both you and your spouse choose to treat you as a resident alien, you are a resident alien for tax purposes. 1040ez filing For information on making the choice, see the discussion in chapter 1 under Nonresident Alien Spouse Treated as a Resident . 1040ez filing Waiver of minimum time requirements. 1040ez filing   The minimum time requirements for bona fide residence and physical presence can be waived if you must leave a foreign country because of war, civil unrest, or similar adverse conditions in that country. 1040ez filing This is fully explained under Waiver of Time Requirements , later. 1040ez filing   See Figure 4-A and information in this chapter to determine if you are eligible to claim either exclusion or the deduction. 1040ez filing Tax Home in Foreign Country To qualify for the foreign earned income exclusion, the foreign housing exclusion, or the foreign housing deduction, your tax home must be in a foreign country throughout your period of bona fide residence or physical presence abroad. 1040ez filing Bona fide residence and physical presence are explained later. 1040ez filing Tax Home Your tax home is the general area of your main place of business, employment, or post of duty, regardless of where you maintain your family home. 1040ez filing Your tax home is the place where you are permanently or indefinitely engaged to work as an employee or self-employed individual. 1040ez filing Having a “tax home” in a given location does not necessarily mean that the given location is your residence or domicile for tax purposes. 1040ez filing If you do not have a regular or main place of business because of the nature of your work, your tax home may be the place where you regularly live. 1040ez filing If you have neither a regular or main place of business nor a place where you regularly live, you are considered an itinerant and your tax home is wherever you work. 1040ez filing You are not considered to have a tax home in a foreign country for any period in which your abode is in the United States. 1040ez filing However, your abode is not necessarily in the United States while you are temporarily in the United States. 1040ez filing Your abode is also not necessarily in the United States merely because you maintain a dwelling in the United States, whether or not your spouse or dependents use the dwelling. 1040ez filing “Abode” has been variously defined as one's home, habitation, residence, domicile, or place of dwelling. 1040ez filing It does not mean your principal place of business. 1040ez filing “Abode” has a domestic rather than a vocational meaning and does not mean the same as “tax home. 1040ez filing ” The location of your abode often will depend on where you maintain your economic, family, and personal ties. 1040ez filing Example 1. 1040ez filing You are employed on an offshore oil rig in the territorial waters of a foreign country and work a 28-day on/28-day off schedule. 1040ez filing You return to your family residence in the United States during your off periods. 1040ez filing You are considered to have an abode in the United States and do not satisfy the tax home test in the foreign country. 1040ez filing You cannot claim either of the exclusions or the housing deduction. 1040ez filing Example 2. 1040ez filing For several years, you were a marketing executive with a producer of machine tools in Toledo, Ohio. 1040ez filing In November of last year, your employer transferred you to London, England, for a minimum of 18 months to set up a sales operation for Europe. 1040ez filing Before you left, you distributed business cards showing your business and home addresses in London. 1040ez filing You kept ownership of your home in Toledo but rented it to another family. 1040ez filing You placed your car in storage. 1040ez filing In November of last year, you moved your spouse, children, furniture, and family pets to a home your employer rented for you in London. 1040ez filing Shortly after moving, you leased a car and you and your spouse got British driving licenses. 1040ez filing Your entire family got library cards for the local public library. 1040ez filing You and your spouse opened bank accounts with a London bank and secured consumer credit. 1040ez filing You joined a local business league and both you and your spouse became active in the neighborhood civic association and worked with a local charity. 1040ez filing Your abode is in London for the time you live there. 1040ez filing You satisfy the tax home test in the foreign country. 1040ez filing Please click here for the text description of the image. 1040ez filing Figure 4–A Can I Claim the Exclusion or Deduction? Temporary or Indefinite Assignment The location of your tax home often depends on whether your assignment is temporary or indefinite. 1040ez filing If you are temporarily absent from your tax home in the United States on business, you may be able to deduct your away-from-home expenses (for travel, meals, and lodging), but you would not qualify for the foreign earned income exclusion. 1040ez filing If your new work assignment is for an indefinite period, your new place of employment becomes your tax home and you would not be able to deduct any of the related expenses that you have in the general area of this new work assignment. 1040ez filing If your new tax home is in a foreign country and you meet the other requirements, your earnings may qualify for the foreign earned income exclusion. 1040ez filing If you expect your employment away from home in a single location to last, and it does last, for 1 year or less, it is temporary unless facts and circumstances indicate otherwise. 1040ez filing If you expect it to last for more than 1 year, it is indefinite. 1040ez filing If you expect it to last for 1 year or less, but at some later date you expect it to last longer than 1 year, it is temporary (in the absence of facts and circumstances indicating otherwise) until your expectation changes. 1040ez filing Once your expectation changes, it is indefinite. 1040ez filing Foreign Country To meet the bona fide residence test or the physical presence test, you must live in or be present in a foreign country. 1040ez filing A foreign country includes any territory under the sovereignty of a government other than that of the United States. 1040ez filing The term “foreign country” includes the country's airspace and territorial waters, but not international waters and the airspace above them. 1040ez filing It also includes the seabed and subsoil of those submarine areas adjacent to the country's territorial waters over which it has exclusive rights under international law to explore and exploit the natural resources. 1040ez filing The term “foreign country” does not include Antarctica or U. 1040ez filing S. 1040ez filing possessions such as Puerto Rico, Guam, the Commonwealth of the Northern Mariana Islands, the U. 1040ez filing S. 1040ez filing Virgin Islands, and Johnston Island. 1040ez filing For purposes of the foreign earned income exclusion, the foreign housing exclusion, and the foreign housing deduction, the terms “foreign,” “abroad,” and “overseas” refer to areas outside the United States and those areas listed or described in the previous sentence. 1040ez filing American Samoa, Guam, and the Commonwealth of the Northern Mariana Islands Residence or presence in a U. 1040ez filing S. 1040ez filing possession does not qualify you for the foreign earned income exclusion. 1040ez filing You may, however, qualify for an exclusion of your possession income on your U. 1040ez filing S. 1040ez filing return. 1040ez filing American Samoa. 1040ez filing   There is a possession exclusion available to individuals who are bona fide residents of American Samoa for the entire tax year. 1040ez filing Gross income from sources within American Samoa may be eligible for this exclusion. 1040ez filing Income that is effectively connected with the conduct of a trade or business within American Samoa also may be eligible for this exclusion. 1040ez filing Use Form 4563, Exclusion of Income for Bona Fide Residents of American Samoa, to figure the exclusion. 1040ez filing Guam and the Commonwealth of the Northern Mariana Islands. 1040ez filing   An exclusion will be available to residents of Guam and the Commonwealth of the Northern Mariana Islands if, and when, new implementation agreements take effect between the United States and those possessions. 1040ez filing   For more information, see Publication 570. 1040ez filing Puerto Rico and U. 1040ez filing S. 1040ez filing Virgin Islands Residents of Puerto Rico and the U. 1040ez filing S. 1040ez filing Virgin Islands cannot claim the foreign earned income exclusion or the foreign housing exclusion. 1040ez filing Puerto Rico. 1040ez filing   Generally, if you are a U. 1040ez filing S. 1040ez filing citizen who is a bona fide resident of Puerto Rico for the entire tax year, you are not subject to U. 1040ez filing S. 1040ez filing tax on income from Puerto Rican sources. 1040ez filing This does not include amounts paid for services performed as an employee of the United States. 1040ez filing However, you are subject to U. 1040ez filing S. 1040ez filing tax on your income from sources outside Puerto Rico. 1040ez filing In figuring your U. 1040ez filing S. 1040ez filing tax, you cannot deduct expenses allocable to income not subject to tax. 1040ez filing Bona Fide Residence Test You meet the bona fide residence test if you are a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year. 1040ez filing You can use the bona fide residence test to qualify for the exclusions and the deduction only if you are either: A U. 1040ez filing S. 1040ez filing citizen, or A U. 1040ez filing S. 1040ez filing resident alien who is a citizen or national of a country with which the United States has an income tax treaty in effect. 1040ez filing You do not automatically acquire bona fide resident status merely by living in a foreign country or countries for 1 year. 1040ez filing If you go to a foreign country to work on a particular job for a specified period of time, you ordinarily will not be regarded as a bona fide resident of that country even though you work there for 1 tax year or longer. 1040ez filing The length of your stay and the nature of your job are only two of the factors to be considered in determining whether you meet the bona fide residence test. 1040ez filing Bona fide residence. 1040ez filing   To meet the bona fide residence test, you must have established a bona fide residence in a foreign country. 1040ez filing   Your bona fide residence is not necessarily the same as your domicile. 1040ez filing Your domicile is your permanent home, the place to which you always return or intend to return. 1040ez filing Example. 1040ez filing You could have your domicile in Cleveland, Ohio, and a bona fide residence in Edinburgh, Scotland, if you intend to return eventually to Cleveland. 1040ez filing The fact that you go to Scotland does not automatically make Scotland your bona fide residence. 1040ez filing If you go there as a tourist, or on a short business trip, and return to the United States, you have not established bona fide residence in Scotland. 1040ez filing But if you go to Scotland to work for an indefinite or extended period and you set up permanent quarters there for yourself and your family, you probably have established a bona fide residence in a foreign country, even though you intend to return eventually to the United States. 1040ez filing You are clearly not a resident of Scotland in the first instance. 1040ez filing However, in the second, you are a resident because your stay in Scotland appears to be permanent. 1040ez filing If your residency is not as clearly defined as either of these illustrations, it may be more difficult to decide whether you have established a bona fide residence. 1040ez filing Determination. 1040ez filing   Questions of bona fide residence are determined according to each individual case, taking into account factors such as your intention, the purpose of your trip, and the nature and length of your stay abroad. 1040ez filing   To meet the bona fide residence test, you must show the Internal Revenue Service (IRS) that you have been a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year. 1040ez filing The IRS decides whether you are a bona fide resident of a foreign country largely on the basis of facts you report on Form 2555. 1040ez filing IRS cannot make this determination until you file Form 2555. 1040ez filing Statement to foreign authorities. 1040ez filing   You are not considered a bona fide resident of a foreign country if you make a statement to the authorities of that country that you are not a resident of that country, and the authorities: Hold that you are not subject to their income tax laws as a resident, or Have not made a final decision on your status. 1040ez filing Special agreements and treaties. 1040ez filing   An income tax exemption provided in a treaty or other international agreement will not in itself prevent you from being a bona fide resident of a foreign country. 1040ez filing Whether a treaty prevents you from becoming a bona fide resident of a foreign country is determined under all provisions of the treaty, including specific provisions relating to residence or privileges and immunities. 1040ez filing Example 1. 1040ez filing You are a U. 1040ez filing S. 1040ez filing citizen employed in the United Kingdom by a U. 1040ez filing S. 1040ez filing employer under contract with the U. 1040ez filing S. 1040ez filing Armed Forces. 1040ez filing You are not subject to the North Atlantic Treaty Status of Forces Agreement. 1040ez filing You may be a bona fide resident of the United Kingdom. 1040ez filing Example 2. 1040ez filing You are a U. 1040ez filing S. 1040ez filing citizen in the United Kingdom who qualifies as an “employee” of an armed service or as a member of a “civilian component” under the North Atlantic Treaty Status of Forces Agreement. 1040ez filing You are not a bona fide resident of the United Kingdom. 1040ez filing Example 3. 1040ez filing You are a U. 1040ez filing S. 1040ez filing citizen employed in Japan by a U. 1040ez filing S. 1040ez filing employer under contract with the U. 1040ez filing S. 1040ez filing Armed Forces. 1040ez filing You are subject to the agreement of the Treaty of Mutual Cooperation and Security between the United States and Japan. 1040ez filing Being subject to the agreement does not make you a bona fide resident of Japan. 1040ez filing Example 4. 1040ez filing You are a U. 1040ez filing S. 1040ez filing citizen employed as an “official” by the United Nations in Switzerland. 1040ez filing You are exempt from Swiss taxation on the salary or wages paid to you by the United Nations. 1040ez filing This does not prevent you from being a bona fide resident of Switzerland. 1040ez filing Effect of voting by absentee ballot. 1040ez filing   If you are a U. 1040ez filing S. 1040ez filing citizen living abroad, you can vote by absentee ballot in any election held in the United States without risking your status as a bona fide resident of a foreign country. 1040ez filing   However, if you give information to the local election officials about the nature and length of your stay abroad that does not match the information you give for the bona fide residence test, the information given in connection with absentee voting will be considered in determining your status, but will not necessarily be conclusive. 1040ez filing Uninterrupted period including entire tax year. 1040ez filing   To meet the bona fide residence test, you must reside in a foreign country or countries for an uninterrupted period that includes an entire tax year. 1040ez filing An entire tax year is from January 1 through December 31 for taxpayers who file their income tax returns on a calendar year basis. 1040ez filing   During the period of bona fide residence in a foreign country, you can leave the country for brief or temporary trips back to the United States or elsewhere for vacation or business. 1040ez filing To keep your status as a bona fide resident of a foreign country, you must have a clear intention of returning from such trips, without unreasonable delay, to your foreign residence or to a new bona fide residence in another foreign country. 1040ez filing Example 1. 1040ez filing You arrived with your family in Lisbon, Portugal, on November 1, 2011. 1040ez filing Your assignment is indefinite, and you intend to live there with your family until your company sends you to a new post. 1040ez filing You immediately established residence there. 1040ez filing You spent April of 2012 at a business conference in the United States. 1040ez filing Your family stayed in Lisbon. 1040ez filing Immediately following the conference, you returned to Lisbon and continued living there. 1040ez filing On January 1, 2013, you completed an uninterrupted period of residence for a full tax year (2012), and you meet the bona fide residence test. 1040ez filing Example 2. 1040ez filing Assume the same facts as in Example 1, except that you transferred back to the United States on December 13, 2012. 1040ez filing You would not meet the bona fide residence test because your bona fide residence in the foreign country, although it lasted more than a year, did not include a full tax year. 1040ez filing You may, however, qualify for the foreign earned income exclusion or the housing exclusion or deduction under the physical presence test (discussed later). 1040ez filing Bona fide resident for part of a year. 1040ez filing   Once you have established bona fide residence in a foreign country for an uninterrupted period that includes an entire tax year, you are a bona fide resident of that country for the period starting with the date you actually began the residence and ending with the date you abandon the foreign residence. 1040ez filing Your period of bona fide residence can include an entire tax year plus parts of 2 other tax years. 1040ez filing Example. 1040ez filing You were a bona fide resident of Singapore from March 1, 2011, through September 14, 2013. 1040ez filing On September 15, 2013, you returned to the United States. 1040ez filing Since you were a bona fide resident of a foreign country for all of 2012, you were also a bona fide resident of a foreign country from March 1, 2011, through the end of 2011 and from January 1, 2013, through September 14, 2013. 1040ez filing Reassignment. 1040ez filing   If you are assigned from one foreign post to another, you may or may not have a break in foreign residence between your assignments, depending on the circumstances. 1040ez filing Example 1. 1040ez filing You were a resident of Pakistan from October 1, 2012, through November 30, 2013. 1040ez filing On December 1, 2013, you and your family returned to the United States to wait for an assignment to another foreign country. 1040ez filing Your household goods also were returned to the United States. 1040ez filing Your foreign residence ended on November 30, 2013, and did not begin again until after you were assigned to another foreign country and physically entered that country. 1040ez filing Since you were not a bona fide resident of a foreign country for the entire tax year of 2012 or 2013 you do not meet the bona fide residence test in either year. 1040ez filing You may, however, qualify for the foreign earned income exclusion or the housing exclusion or deduction under the physical presence test, discussed later. 1040ez filing Example 2. 1040ez filing Assume the same facts as in Example 1, except that upon completion of your assignment in Pakistan you were given a new assignment to Turkey. 1040ez filing On December 1, 2013, you and your family returned to the United States for a month's vacation. 1040ez filing On January 2, 2014, you arrived in Turkey for your new assignment. 1040ez filing Because you did not interrupt your bona fide residence abroad, you meet the bona fide residence test. 1040ez filing Physical Presence Test You meet the physical presence test if you are physically present in a foreign country or countries 330 full days during a period of 12 consecutive months. 1040ez filing The 330 days do not have to be consecutive. 1040ez filing Any U. 1040ez filing S. 1040ez filing citizen or resident alien can use the physical presence test to qualify for the exclusions and the deduction. 1040ez filing The physical presence test is based only on how long you stay in a foreign country or countries. 1040ez filing This test does not depend on the kind of residence you establish, your intentions about returning, or the nature and purpose of your stay abroad. 1040ez filing 330 full days. 1040ez filing   Generally, to meet the physical presence test, you must be physically present in a foreign country or countries for at least 330 full days during a 12-month period. 1040ez filing You can count days you spent abroad for any reason. 1040ez filing You do not have to be in a foreign country only for employment purposes. 1040ez filing You can be on vacation. 1040ez filing   You do not meet the physical presence test if illness, family problems, a vacation, or your employer's orders cause you to be present for less than the required amount of time. 1040ez filing Exception. 1040ez filing   You can be physically present in a foreign country or countries for less than 330 full days and still meet the physical presence test if you are required to leave a country because of war or civil unrest. 1040ez filing See Waiver of Time Requirements, later. 1040ez filing Full day. 1040ez filing   A full day is a period of 24 consecutive hours, beginning at midnight. 1040ez filing Travel. 1040ez filing    When you leave the United States to go directly to a foreign country or when you return directly to the United States from a foreign country, the time you spend on or over international waters does not count toward the 330-day total. 1040ez filing Example. 1040ez filing You leave the United States for France by air on June 10. 1040ez filing You arrive in France at 9:00 a. 1040ez filing m. 1040ez filing on June 11. 1040ez filing Your first full day of physical presence in France is June 12. 1040ez filing Passing over foreign country. 1040ez filing   If, in traveling from the United States to a foreign country, you pass over a foreign country before midnight of the day you leave, the first day you can count toward the 330-day total is the day following the day you leave the United States. 1040ez filing Example. 1040ez filing You leave the United States by air at 9:30 a. 1040ez filing m. 1040ez filing on June 10 to travel to Kenya. 1040ez filing You pass over western Africa at 11:00 p. 1040ez filing m. 1040ez filing on June 10 and arrive in Kenya at 12:30 a. 1040ez filing m. 1040ez filing on June 11. 1040ez filing Your first full day in a foreign country is June 11. 1040ez filing Change of location. 1040ez filing   You can move about from one place to another in a foreign country or to another foreign country without losing full days. 1040ez filing If any part of your travel is not within any foreign country and takes less than 24 hours, you are considered to be in a foreign country during that part of travel. 1040ez filing Example 1. 1040ez filing You leave Ireland by air at 11:00 p. 1040ez filing m. 1040ez filing on July 6 and arrive in Sweden at 5:00 a. 1040ez filing m. 1040ez filing on July 7. 1040ez filing Your trip takes less than 24 hours and you lose no full days. 1040ez filing Example 2. 1040ez filing You leave Norway by ship at 10:00 p. 1040ez filing m. 1040ez filing on July 6 and arrive in Portugal at 6:00 a. 1040ez filing m. 1040ez filing on July 8. 1040ez filing Since your travel is not within a foreign country or countries and the trip takes more than 24 hours, you lose as full days July 6, 7, and 8. 1040ez filing If you remain in Portugal, your next full day in a foreign country is July 9. 1040ez filing In United States while in transit. 1040ez filing   If you are in transit between two points outside the United States and are physically present in the United States for less than 24 hours, you are not treated as present in the United States during the transit. 1040ez filing You are treated as traveling over areas not within any foreign country. 1040ez filing    Please click here for the text description of the image. 1040ez filing Figure 4-B How to figure the 12-month period. 1040ez filing   There are four rules you should know when figuring the 12-month period. 1040ez filing Your 12-month period can begin with any day of the month. 1040ez filing It ends the day before the same calendar day, 12 months later. 1040ez filing Your 12-month period must be made up of consecutive months. 1040ez filing Any 12-month period can be used if the 330 days in a foreign country fall within that period. 1040ez filing You do not have to begin your 12-month period with your first full day in a foreign country or end it with the day you leave. 1040ez filing You can choose the 12-month period that gives you the greatest exclusion. 1040ez filing In determining whether the 12-month period falls within a longer stay in the foreign country, 12-month periods can overlap one another. 1040ez filing Example 1. 1040ez filing You are a construction worker who works on and off in a foreign country over a 20-month period. 1040ez filing You might pick up the 330 full days in a 12-month period only during the middle months of the time you work in the foreign country because the first few and last few months of the 20-month period are broken up by long visits to the United States. 1040ez filing Example 2. 1040ez filing You work in New Zealand for a 20-month period from January 1, 2012, through August 31, 2013, except that you spend 28 days in February 2012 and 28 days in February 2013 on vacation in the United States. 1040ez filing You are present in New Zealand for at least 330 full days during each of the following two 12-month periods: January 1, 2012 – December 31, 2012 and September 1, 2012 – August 31, 2013. 1040ez filing By overlapping the 12-month periods in this way, you meet the physical presence test for the whole 20-month period. 1040ez filing See Figure 4-B, on the previous page. 1040ez filing Waiver of Time Requirements Both the bona fide residence test and the physical presence test contain minimum time requirements. 1040ez filing The minimum time requirements can be waived, however, if you must leave a foreign country because of war, civil unrest, or similar adverse conditions in that country. 1040ez filing You must be able to show that you reasonably could have expected to meet the minimum time requirements if not for the adverse conditions. 1040ez filing To qualify for the waiver, you must actually have your tax home in the foreign country and be a bona fide resident of, or be physically present in, the foreign country on or before the beginning date of the waiver. 1040ez filing Early in 2014, the IRS will publish in the Internal Revenue Bulletin a list of the only countries that qualify for the waiver for 2013 and the effective dates. 1040ez filing If you left one of the countries on or after the date listed for each country, you can meet the bona fide residence test or physical presence test for 2013 without meeting the minimum time requirement. 1040ez filing However, in figuring your exclusion, the number of your qualifying days of bona fide residence or physical presence includes only days of actual residence or presence within the country. 1040ez filing U. 1040ez filing S. 1040ez filing Travel Restrictions If you are present in a foreign country in violation of U. 1040ez filing S. 1040ez filing law, you will not be treated as a bona fide resident of a foreign country or as physically present in a foreign country while you are in violation of the law. 1040ez filing Income that you earn from sources within such a country for services performed during a period of violation does not qualify as foreign earned income. 1040ez filing Your housing expenses within that country (or outside that country for housing your spouse or dependents) while you are in violation of the law cannot be included in figuring your foreign housing amount. 1040ez filing For 2013, the only country to which travel restrictions applied was Cuba. 1040ez filing The restrictions applied for the entire year. 1040ez filing However, individuals working at the U. 1040ez filing S. 1040ez filing Naval Base at Guantanamo Bay in Cuba are not in violation of U. 1040ez filing S. 1040ez filing law. 1040ez filing Personal service income earned by individuals at the base is eligible for the foreign earned income exclusion provided the other requirements are met. 1040ez filing Foreign Earned Income To claim the foreign earned income exclusion, the foreign housing exclusion, or the foreign housing deduction, you must have foreign earned income. 1040ez filing Foreign earned income generally is income you receive for services you perform during a period in which you meet both of the following requirements. 1040ez filing Your tax home is in a foreign country. 1040ez filing You meet either the bona fide residence test or the physical presence test. 1040ez filing To determine whether your tax home is in a foreign country, see Tax Home in Foreign Country, earlier. 1040ez filing To determine whether you meet either the bona fide residence test or the physical presence test, see Bona Fide Residence Test and Physical Presence Test, earlier. 1040ez filing Foreign earned income does not include the following amounts. 1040ez filing The value of meals and lodging that you exclude from your income because the meals and lodging were furnished for the convenience of your employer. 1040ez filing Pension or annuity payments you receive, including social security benefits (see Pensions and annuities, later). 1040ez filing Pay you receive as an employee of the U. 1040ez filing S. 1040ez filing Government. 1040ez filing (See U. 1040ez filing S. 1040ez filing Government Employees, later. 1040ez filing ) Amounts you include in your income because of your employer's contributions to a nonexempt employee trust or to a nonqualified annuity contract. 1040ez filing Any unallowable moving expense deduction that you choose to recapture as explained under Moving Expense Attributable to Foreign Earnings in 2 Years in chapter 5. 1040ez filing Payments you receive after the end of the tax year following the tax year in which you performed the services that earned the income. 1040ez filing Earned income. 1040ez filing   This is pay for personal services performed, such as wages, salaries, or professional fees. 1040ez filing The list that follows classifies many types of income into three categories. 1040ez filing The column headed Variable Income lists income that may fall into either the earned income category, the unearned income category, or partly into both. 1040ez filing For more information on earned and unearned income, see Earned and Unearned Income, later. 1040ez filing Earned Income Unearned Income Variable Income Salaries and wages Dividends Business profits Commissions Interest Royalties Bonuses Capital gains Rents Professional fees Gambling winnings Scholarships and fellowships Tips Alimony     Social security benefits     Pensions     Annuities     In addition to the types of earned income listed, certain noncash income and allowances or reimbursements are considered earned income. 1040ez filing Noncash income. 1040ez filing   The fair market value of property or facilities provided to you by your employer in the form of lodging, meals, or use of a car is earned income. 1040ez filing Allowances or reimbursements. 1040ez filing   Earned income includes allowances or reimbursements you receive, such as the following amounts. 1040ez filing    Cost-of-living allowances. 1040ez filing Overseas differential. 1040ez filing Family allowance. 1040ez filing Reimbursement for education or education allowance. 1040ez filing Home leave allowance. 1040ez filing Quarters allowance. 1040ez filing Reimbursement for moving or moving allowance (unless excluded from income as discussed later in Reimbursement of employee expenses under Earned and Unearned Income). 1040ez filing Source of Earned Income The source of your earned income is the place where you perform the services for which you received the income. 1040ez filing Foreign earned income is income you receive for working in a foreign country. 1040ez filing Where or how you are paid has no effect on the source of the income. 1040ez filing For example, income you receive for work done in Austria is income from a foreign source even if the income is paid directly to your bank account in the United States and your employer is located in New York City. 1040ez filing Example. 1040ez filing You are a U. 1040ez filing S. 1040ez filing citizen, a bona fide resident of Canada, and working as a mining engineer. 1040ez filing Your salary is $76,800 per year. 1040ez filing You also receive a $6,000 cost-of-living allowance, and a $6,000 education allowance. 1040ez filing Your employment contract did not indicate that you were entitled to these allowances only while outside the United States. 1040ez filing Your total income is $88,800. 1040ez filing You work a 5-day week, Monday through Friday. 1040ez filing After subtracting your vacation, you have a total of 240 workdays in the year. 1040ez filing You worked in the United States during the year for 6 weeks (30 workdays). 1040ez filing The following shows how to figure the part of your income that is for work done in Canada during the year. 1040ez filing   Number of days worked in Canada during the year (210) × Total income ($88,800) = $77,700     Number of days of work during the year for which payment was made (240)   Your foreign source earned income is $77,700. 1040ez filing Earned and Unearned Income Earned income was defined earlier as pay for personal services performed. 1040ez filing Some types of income are not easily identified as earned or unearned income. 1040ez filing Some of these types of income are further explained here. 1040ez filing Income from a sole proprietorship or partnership. 1040ez filing   Income from a business in which capital investment is an important part of producing the income may be unearned income. 1040ez filing If you are a sole proprietor or partner and your personal services are also an important part of producing the income, the part of the income that represents the value of your personal services will be treated as earned income. 1040ez filing Capital a factor. 1040ez filing   If capital investment is an important part of producing income, no more than 30% of your share of the net profits of the business is earned income. 1040ez filing   If you have no net profits, the part of your gross profit that represents a reasonable allowance for personal services actually performed is considered earned income. 1040ez filing Because you do not have a net profit, the 30% limit does not apply. 1040ez filing Example 1. 1040ez filing You are a U. 1040ez filing S. 1040ez filing citizen and meet the bona fide residence test. 1040ez filing You invest in a partnership based in Cameroon that is engaged solely in selling merchandise outside the United States. 1040ez filing You perform no services for the partnership. 1040ez filing At the end of the tax year, your share of the net profits is $80,000. 1040ez filing The entire $80,000 is unearned income. 1040ez filing Example 2. 1040ez filing Assume that in Example 1 you spend time operating the business. 1040ez filing Your share of the net profits is $80,000; 30% of your share of the profits is $24,000. 1040ez filing If the value of your services for the year is $15,000, your earned income is limited to the value of your services, $15,000. 1040ez filing Capital not a factor. 1040ez filing   If capital is not an income-producing factor and personal services produce the business income, the 30% rule does not apply. 1040ez filing The entire amount of business income is earned income. 1040ez filing Example. 1040ez filing You and Lou Green are management consultants and operate as equal partners in performing services outside the United States. 1040ez filing Because capital is not an income- producing factor, all the income from the partnership is considered earned income. 1040ez filing Income from a corporation. 1040ez filing   The salary you receive from a corporation is earned income only if it represents a reasonable allowance as compensation for work you do for the corporation. 1040ez filing Any amount over what is considered a reasonable salary is unearned income. 1040ez filing Example 1. 1040ez filing You are a U. 1040ez filing S. 1040ez filing citizen and an officer and stockholder of a corporation in Honduras. 1040ez filing You perform no work or service of any kind for the corporation. 1040ez filing During the tax year you receive a $10,000 “salary” from the corporation. 1040ez filing The $10,000 clearly is not for personal services and is unearned income. 1040ez filing Example 2. 1040ez filing You are a U. 1040ez filing S. 1040ez filing citizen and work full time as secretary-treasurer of your corporation. 1040ez filing During the tax year you receive $100,000 as salary from the corporation. 1040ez filing If $80,000 is a reasonable allowance as pay for the work you did, then $80,000 is earned income. 1040ez filing Stock options. 1040ez filing   You may have earned income if you disposed of stock that you got by exercising a stock option granted to you under an employee stock purchase plan. 1040ez filing   If your gain on the disposition of stock you got by exercising an option is treated as capital gain, your gain is unearned income. 1040ez filing   However, if you disposed of the stock less than 2 years after you were granted the option or less than 1 year after you got the stock, part of the gain on the disposition may be earned income. 1040ez filing It is considered received in the year you disposed of the stock and earned in the year you performed the services for which you were granted the option. 1040ez filing Any part of the earned income that is due to work you did outside the United States is foreign earned income. 1040ez filing   See Publication 525, Taxable and Nontaxable Income, for a discussion of the treatment of stock options. 1040ez filing Pensions and annuities. 1040ez filing    For purposes of the foreign earned income exclusion, the foreign housing exclusion, and the foreign housing deduction, amounts received as pensions or annuities are unearned income. 1040ez filing Royalties. 1040ez filing   Royalties from the leasing of oil and mineral lands and patents generally are a form of rent or dividends and are unearned income. 1040ez filing   Royalties received by a writer are earned income if they are received: For the transfer of property rights of the writer in the writer's product, or Under a contract to write a book or series of articles. 1040ez filing Rental income. 1040ez filing   Generally, rental income is unearned income. 1040ez filing If you perform personal services in connection with the production of rent, up to 30% of your net rental income can be considered earned income. 1040ez filing Example. 1040ez filing Larry Smith, a U. 1040ez filing S. 1040ez filing citizen living in Australia, owns and operates a rooming house in Sydney. 1040ez filing If he is operating the rooming house as a business that requires capital and personal services, he can consider up to 30% of net rental income as earned income. 1040ez filing On the other hand, if he just owns the rooming house and performs no personal services connected with its operation, except perhaps making minor repairs and collecting rents, none of his net income from the house is considered earned income. 1040ez filing It is all unearned income. 1040ez filing Professional fees. 1040ez filing   If you are engaged in a professional occupation (such as a doctor or lawyer), all fees received in the performance of these services are earned income. 1040ez filing Income of an artist. 1040ez filing   Income you receive from the sale of paintings you created is earned income. 1040ez filing Scholarships and fellowships. 1040ez filing   Any portion of a scholarship or fellowship grant that is paid to you for teaching, research or other services is considered earned income if you must include it in your gross income. 1040ez filing If the payer of the grant is required to provide you with a Form W-2, Wage and Tax Statement, these amounts will be listed as wages. 1040ez filing    Certain scholarship and fellowship income may be exempt under other provisions. 1040ez filing See Publication 970, Tax Benefits for Education, chapter 1. 1040ez filing Use of employer's property or facilities. 1040ez filing   If you receive fringe benefits in the form of the right to use your employer's property or facilities, the fair market value of that right is earned income. 1040ez filing Fair market value is the price at which the property would change hands between a willing buyer and a willing seller, neither being required to buy or sell, and both having reasonable knowledge of all the necessary facts. 1040ez filing Example. 1040ez filing You are privately employed and live in Japan all year. 1040ez filing You are paid a salary of $6,000 a month. 1040ez filing You live rent-free in a house provided by your employer that has a fair rental value of $3,000 a month. 1040ez filing The house is not provided for your employer's convenience. 1040ez filing You report on the calendar-year, cash basis. 1040ez filing You received $72,000 salary from foreign sources plus $36,000 fair rental value of the house, or a total of $108,000 of earned income. 1040ez filing Reimbursement of employee expenses. 1040ez filing   If you are reimbursed under an accountable plan (defined below) for expenses you incur on your employer's behalf and you have adequately accounted to your employer for the expenses, do not include the reimbursement for those expenses in your earned income. 1040ez filing   The expenses for which you are reimbursed are not considered allocable (related) to your earned income. 1040ez filing If expenses and reimbursement are equal, there is nothing to allocate to excluded income. 1040ez filing If expenses are more than the reimbursement, the unreimbursed expenses are considered to have been incurred in producing earned income and must be divided between your excluded and included income in determining the amount of unreimbursed expenses you can deduct. 1040ez filing (See chapter 5. 1040ez filing ) If the reimbursement is more than the expenses, no expenses remain to be divided between excluded and included income and the excess reimbursement must be included in earned income. 1040ez filing   These rules do not apply to the following individuals. 1040ez filing Straight-commission salespersons. 1040ez filing Employees who have arrangements with their employers under which taxes are not withheld on a percentage of the commissions because the employers consider that percentage to be attributable to the employees' expenses. 1040ez filing Accountable plan. 1040ez filing   An accountable plan is a reimbursement or allowance arrangement that includes all three of the following rules. 1040ez filing The expenses covered under the plan must have a business connection. 1040ez filing The employee must adequately account to the employer for these expenses within a reasonable period of time. 1040ez filing The employee must return any excess reimbursement or allowance within a reasonable period of time. 1040ez filing Reimbursement of moving expenses. 1040ez filing   Reimbursement of moving expenses may be earned income. 1040ez filing You must include as earned income: Any reimbursements of, or payments for, nondeductible moving expenses, Reimbursements that are more than your deductible expenses and that you do not return to your employer, Any reimbursements made (or treated as made) under a nonaccountable plan (any plan that does not meet the rules listed above for an accountable plan), even if they are for deductible expenses, and Any reimbursement of moving expenses you deducted in an earlier year. 1040ez filing This section discusses reimbursements that must be included in earned income. 1040ez filing Publication 521, Moving Expenses, discusses additional rules that apply to moving expense deductions and reimbursements. 1040ez filing   The rules for determining when the reimbursement is considered earned or where the reimbursement is considered earned may differ somewhat from the general rules previously discussed. 1040ez filing   Although you receive the reimbursement in one tax year, it may be considered earned for services performed, or to be performed, in another tax year. 1040ez filing You must report the reimbursement as income on your return in the year you receive it, even if it is considered earned during a different year. 1040ez filing Move from U. 1040ez filing S. 1040ez filing to foreign country. 1040ez filing   If you move from the United States to a foreign country, your moving expense reimbursement is generally considered pay for future services to be performed at the new location. 1040ez filing The reimbursement is considered earned solely in the year of the move if you qualify for the exclusion for a period that includes at least 120 days during that tax year. 1040ez filing   If you are neither a bona fide resident of nor physically present in a foreign country or countries for a period that includes 120 days during the year of the move, a portion of the reimbursement is considered earned in the year of the move and a portion is considered earned in the year following the year of the move. 1040ez filing To figure the amount earned in the year of the move, multiply the reimbursement by a fraction. 1040ez filing The numerator (top number) is the number of days in your qualifying period that fall within the year of the move, and the denominator (bottom number) is the total number of days in the year of the move. 1040ez filing   The difference between the total reimbursement and the amount considered earned in the year of the move is the amount considered earned in the year following the year of the move. 1040ez filing The part earned in each year is figured as shown in the following example. 1040ez filing Example. 1040ez filing You are a U. 1040ez filing S. 1040ez filing citizen working in the United States. 1040ez filing You were told in October 2012 that you were being transferred to a foreign country. 1040ez filing You arrived in the foreign country on December 15, 2012, and you are a bona fide resident for the remainder of 2012 and all of 2013. 1040ez filing Your employer reimbursed you $2,000 in January 2013 for the part of the moving expense that you were not allowed to deduct. 1040ez filing Because you did not qualify for the exclusion under the bona fide residence test for at least 120 days in 2012 (the year of the move), the reimbursement is considered pay for services performed in the foreign country for both 2012 and 2013. 1040ez filing You figure the part of the reimbursement for services performed in the foreign country in 2012 by multiplying the total reimbursement by a fraction. 1040ez filing The fraction is the number of days during which you were a bona fide resident in 2012 (the year of the move) divided by 366. 1040ez filing The remaining part of the reimbursement is for services performed in the foreign country in 2013. 1040ez filing This computation is used only to determine when the reimbursement is considered earned. 1040ez filing You would include the amount of the reimbursement in income in 2013, the year you received it. 1040ez filing Move between foreign countries. 1040ez filing   If you move between foreign countries, any moving expense reimbursement that you must include in income will be considered earned in the year of the move if you qualify for the foreign earned income exclusion for a period that includes at least 120 days in the year of the move. 1040ez filing Move to U. 1040ez filing S. 1040ez filing   If you move to the United States, the moving expense reimbursement that you must include in income is generally considered to be U. 1040ez filing S. 1040ez filing source income. 1040ez filing   However, if under either an agreement between you and your employer or a statement of company policy that is reduced to writing before your move to the foreign country, your employer will reimburse you for your move back to the United States regardless of whether you continue to work for the employer, the includible reimbursement is considered compensation for past services performed in the foreign country. 1040ez filing The includible reimbursement is considered earned in the year of the move if you qualify for the foreign earned income exclusion for a period that includes at least 120 days during that year. 1040ez filing Otherwise, you treat the includible reimbursement as received for services performed in the foreign country in the year of the move and the year immediately before the year of the move. 1040ez filing   See the discussion under Move from U. 1040ez filing S. 1040ez filing to foreign country , earlier, to figure the amount of the includible reimbursement considered earned in the year of the move. 1040ez filing The amount earned in the year before the year of the move is the difference between the total includible reimbursement and the amount earned in the year of the move. 1040ez filing Example. 1040ez filing You are a U. 1040ez filing S. 1040ez filing citizen employed in a foreign country. 1040ez filing You retired from employment with your employer on March 31, 2013, and returned to the United States after having been a bona fide resident of the foreign country for several years. 1040ez filing A written agreement with your employer entered into before you went abroad provided that you would be reimbursed for your move back to the United States. 1040ez filing In April 2013, your former employer reimbursed you $4,000 for the part of the cost of your move back to the United States that you were not allowed to deduct. 1040ez filing Because you were not a bona fide resident of a foreign country or countries for a period that included at least 120 days in 2013 (the year of the move), the includible reimbursement is considered pay for services performed in the foreign country for both 2013 and 2012. 1040ez filing You figure the part of the moving expense reimbursement for services performed in the foreign country for 2013 by multiplying the total includible reimbursement by a fraction. 1040ez filing The fraction is the number of days of foreign residence during the year (90) divided by the number of days in the year (365). 1040ez filing The remaining part of the includible reimbursement is for services performed in the foreign country in 2012. 1040ez filing You report the amount of the includible reimbursement in 2013, the year you received it. 1040ez filing    In this example, if you met the physical presence test for a period that included at least 120 days in 2013, the moving expense reimbursement would be considered earned entirely in the year of the move. 1040ez filing Storage expense reimbursements. 1040ez filing   If you are reimbursed for storage expenses, the reimbursement is for services you perform during the period of time for which the storage expenses are incurred. 1040ez filing U. 1040ez filing S. 1040ez filing Government Employees For purposes of the foreign earned income exclusion, the foreign housing exclusion, and the foreign housing deduction, foreign earned income does not include any amounts paid by the United States or any of its agencies to its employees. 1040ez filing This includes amounts paid from both appropriated and nonappropriated funds. 1040ez filing The following organizations (and other organizations similarly organized and operated under United States Army, Navy, or Air Force regulations) are integral parts of the Armed Forces, agencies, or instrumentalities of the United States. 1040ez filing United States Armed Forces exchanges. 1040ez filing Commissioned and noncommissioned officers' messes. 1040ez filing Armed Forces motion picture services. 1040ez filing Kindergartens on foreign Armed Forces installations. 1040ez filing Amounts paid by the United States or its agencies to persons who are not their employees may qualify for exclusion or deduction. 1040ez filing If you are a U. 1040ez filing S. 1040ez filing Government employee paid by a U. 1040ez filing S. 1040ez filing agency that assigned you to a foreign government to perform specific services for which the agency is reimbursed by the foreign government, your pay is from the U. 1040ez filing S. 1040ez filing Government and does not qualify for exclusion or deduction. 1040ez filing If you have questions about whether you are an employee or an independent contractor, get Publication 15-A, Employer's Supplemental Tax Guide. 1040ez filing American Institute in Taiwan. 1040ez filing   Amounts paid by the American Institute in Taiwan are not foreign earned income for purposes of the foreign earned income exclusion, the foreign housing exclusion, or the foreign housing deduction. 1040ez filing If you are an employee of the American Institute in Taiwan, allowances you receive are exempt from U. 1040ez filing S. 1040ez filing tax up to the amount that equals tax-exempt allowances received by civilian employees of the U. 1040ez filing S. 1040ez filing Government. 1040ez filing Allowances. 1040ez filing   Cost-of-living and foreign-area allowances paid under certain acts of Congress to U. 1040ez filing S. 1040ez filing civilian officers and employees stationed in Alaska and Hawaii or elsewhere outside the 48 contiguous states and the District of Columbia can be excluded from gross income. 1040ez filing Post differentials are wages that must be included in gross income, regardless of the act of Congress under which they are paid. 1040ez filing More information. 1040ez filing   Publication 516, U. 1040ez filing S. 1040ez filing Government Civilian Employees Stationed Abroad, has more information for U. 1040ez filing S. 1040ez filing Government employees abroad. 1040ez filing Exclusion of Meals and Lodging You do not include in your income the value of meals and lodging provided to you and your family by your employer at no charge if the following conditions are met. 1040ez filing The meals are furnished: On the business premises of your employer, and For the convenience of your employer. 1040ez filing The lodging is furnished: On the business premises of your employer, For the convenience of your employer, and As a condition of your employment. 1040ez filing If these conditions are met, do not include the value of the meals or lodging in your income, even if a law or your employment contract says that they are provided as compensation. 1040ez filing Amounts you do not include in income because of these rules are not foreign earned income. 1040ez filing If you receive a Form W-2, excludable amounts should not be included in the total reported in box 1 as wages. 1040ez filing Family. 1040ez filing   Your family, for this purpose, includes only your spouse and your dependents. 1040ez filing Lodging. 1040ez filing   The value of lodging includes the cost of heat, electricity, gas, water, sewer service, and similar items needed to make the lodging fit to live in. 1040ez filing Business premises of employer. 1040ez filing   Generally, the business premises of your employer is wherever you work. 1040ez filing For example, if you work as a housekeeper, meals and lodging provided in your employer's home are provided on the business premises of your employer. 1040ez filing Similarly, meals provided to cowhands while herding cattle on land leased or owned by their employer are considered provided on the premises of their employer. 1040ez filing Convenience of employer. 1040ez filing   Whether meals or lodging are provided for your employer's convenience must be determined from all the facts and circumstances. 1040ez filing Meals furnished at no charge are considered provided for your employer's convenience if there is a good business reason for providing them, other than to give you more pay. 1040ez filing   On the other hand, if your employer provides meals to you or your family as a means of giving you more pay, and there is no other business reason for providing them, their value is extra income to you because they are not furnished for the convenience of your employer. 1040ez filing Condition of employment. 1040ez filing   Lodging is provided as a condition of employment if you must accept the lodging to properly carry out the duties of your job. 1040ez filing You must accept lodging to properly carry out your duties if, for example, you must be available for duty at all times or you could not perform your duties if the lodging was not furnished. 1040ez filing Foreign camps. 1040ez filing   If the lodging is in a camp located in a foreign country, the camp is considered part of your employer's business premises. 1040ez filing The camp must be: Provided for your employer's convenience because the place where you work is in a remote area where satisfactory housing is not available to you on the open market within a reasonable commuting distance, Located as close as reasonably possible in the area where you work, and Provided in a common area or enclave that is not available to the general public for lodging or accommodations and that normally houses at least ten employees. 1040ez filing Foreign Earned Income Exclusion If your tax home is in a foreign country and you meet the bona fide residence test or the physical presence test, you can choose to exclude from your income a limited amount of your foreign earned income. 1040ez filing Foreign earned income was defined earlier in this chapter. 1040ez filing You also can choose to exclude from your income a foreign housing amount. 1040ez filing This is explained later under Foreign Housing Exclusion. 1040ez filing If you choose to exclude a foreign housing amount, you must figure the foreign housing exclusion before you figure the foreign earned income exclusion. 1040ez filing Your foreign earned income exclusion is limited to your foreign earned income minus your foreign housing exclusion. 1040ez filing If you choose to exclude foreign earned income, you cannot deduct, exclude, or claim a credit for any item that can be allocated to or charged against the excluded amounts. 1040ez filing This includes any expenses, losses, and other normally deductible items allocable to the excluded income. 1040ez filing For more information about deductions and credits, see chapter 5 . 1040ez filing Limit on Excludable Amount You may be able to exclude up to $97,600 of your foreign earned income in 2013. 1040ez filing You cannot exclude more than the smaller of: $97,600, or Your foreign earned income (discussed earlier) for the tax year minus your foreign housing exclusion (discussed later). 1040ez filing If both you and your spouse work abroad and each of you meets either the bona fide residence test or the physical presence test, you can each choose the foreign earned income exclusion. 1040ez filing You do not both need to meet the same test. 1040ez filing Together, you and your spouse can exclude as much as $195,200. 1040ez filing Paid in year following work. 1040ez filing   Generally, you are considered to have earned income in the year in which you do the work for which you receive the income, even if you work in one year but are not paid until the following year. 1040ez filing If you report your income on a cash basis, you report the income on your return for the year you receive it. 1040ez filing If you work one year, but are not paid for that work until the next year, the amount you can exclude in the year you are paid is the amount you could have excluded in the year you did the work if you had been paid in that year. 1040ez filing For an exception to this general rule, see Year-end payroll period, later. 1040ez filing Example. 1040ez filing You were a bona fide resident of Brazil for all of 2012 and 2013. 1040ez filing You report your income on the cash basis. 1040ez filing In 2012, you were paid $84,200 for work you did in Brazil during that year. 1040ez filing You excluded all of the $84,200 from your income in 2012. 1040ez filing In 2013, you were paid $117,300 for your work in Brazil. 1040ez filing $18,800 was for work you did in 2012 and $98,500 was for work you did in 2013. 1040ez filing You can exclude $10,900 of the $18,800 from your income in 2013. 1040ez filing This is the $95,100 maximum exclusion in 2012 minus the $84,200 actually excluded that year. 1040ez filing You must include the remaining $7,900 in income in 2013 because you could not have excluded that income in 2012 if you had received it that year. 1040ez filing You can exclude $97,600 of the $98,500 you were paid for work you did in 2013 from your 2013 income. 1040ez filing Your total foreign earned income exclusion for 2013 is $108,500 ($10,900 for work you did in 2012 and $97,600 for work you did in 2013). 1040ez filing You would include in your 2013 income $8,800 ($7,900 for the work you did in 2012 and $900 for the work you did in 2013). 1040ez filing Year-end payroll period. 1040ez filing   There is an exception to the general rule that income is considered earned in the year you do the work for which you receive the income. 1040ez filing If you are a cash-basis taxpayer, any salary or wage payment you receive after the end of the year in which you do the work for which you receive the pay is considered earned entirely in the year you receive it if all four of the following apply. 1040ez filing The period for which the payment is made is a normal payroll period of your employer that regularly applies to you. 1040ez filing The payroll period includes the last day of your tax year (December 31 if you figure your taxes on a calendar-year basis). 1040ez filing The payroll period is not longer than 16 days. 1040ez filing The payday comes at the same time in relation to the payroll period that it would normally come and it comes before the end of the next payroll period. 1040ez filing Example. 1040ez filing You are paid twice a month. 1040ez filing For the normal payroll period that begins on the first of the month and ends on the fifteenth of the month, you are paid on the sixteenth day of the month. 1040ez filing For the normal payroll period that begins on the sixteenth of the month and ends on the last day of the month, you are paid on the first day of the following month. 1040ez filing Because all of the above conditions are met, the pay you received on January 1, 2013, is considered earned in 2013. 1040ez filing Income earned over more than 1 year. 1040ez filing   Regardless of when you actually receive income, you must apply it to the year in which you earned it in figuring your excludable amount for that year. 1040ez filing For example, a bonus may be based on work you did over several years. 1040ez filing You determine the amount of the bonus that is considered earned in a particular year in two steps. 1040ez filing Divide the bonus by the number of calendar months in the period when you did the work that resulted in the bonus. 1040ez filing Multiply the result of (1) by the number of months you did the work during the year. 1040ez filing This is the amount that is subject to the exclusion limit for that tax year. 1040ez filing Income received more than 1 year after it was earned. 1040ez filing   You cannot exclude income you receive after the end of the year following the year you do the work to earn it. 1040ez filing Example. 1040ez filing   You were a bona fide resident of Sweden for 2011, 2012, and 2013. 1040ez filing You report your income on the cash basis. 1040ez filing In 2011, you were paid $69,000 for work you did in Sweden that year and in 2012 you were paid $74,000 for that year's work in Sweden. 1040ez filing You excluded all the income on your 2011 and 2012 returns. 1040ez filing   In 2013, you were paid $92,000; $82,000 for your work in Sweden during 2013, and $10,000 for work you did in Sweden in 2011. 1040ez filing You cannot exclude any of the $10,000 for work done in 2011 because you received it after the end of the year following the year in which you earned it. 1040ez filing You must include the $10,000 in income. 1040ez filing You can exclude all of the $82,000 received for work you did in 2013. 1040ez filing Community income. 1040ez filing   The maximum exclusion applies separately to the earnings of spouses. 1040ez filing Ignore any community property laws when you figure your limit on the foreign earned income exclusion. 1040ez filing Part-year exclusion. 1040ez filing   If the period for which you qualify for the foreign earned income exclusion includes only part of the year, you must adjust the maximum limit based on the number of qualifying days in the year. 1040ez filing The number of qualifying days is the number of days in the year within the period on which you both: Have your tax home in a foreign country, and Meet either the bona fide residence test or the physical presence test. 1040ez filing   For this purpose, you can count as qualifying days all days within a period of 12 consecutive months once you are physically present and have your tax home in a foreign country for 330 full days. 1040ez filing To figure your maximum exclusion, multiply the maximum excludable amount for the year by the number of your qualifying days in the year, and then divide the result by the number of days in the year. 1040ez filing Example. 1040ez filing You report your income on the calendar-year basis and you qualified for the foreign earned income exclusion under the bona fide residence test for 75 days in 2013. 1040ez filing You can exclude a maximum of 75/365 of $97,600, or $20,055, of your foreign earned income for 2013. 1040ez filing If you qualify under the bona fide residence test for all of 2014, you can exclude your foreign earned income up to the 2014 limit. 1040ez filing Physical presence test. 1040ez filing   Under the physical presence test, a 12-month period can be any period of 12 consecutive months that includes 330 full days. 1040ez filing If you qualify for the foreign earned income exclusion under the physical presence test for part of a year, it is important to carefully choose the 12-month period that will allow the maximum exclusion for that year. 1040ez filing Example. 1040ez filing You are physically present and have your tax home in a foreign country for a 16-month period from June 1, 2012, through September 30, 2013, except for 16 days in December 2012 when you were on vacation in the United States. 1040ez filing You figure the maximum exclusion for 2012 as follows. 1040ez filing Beginning with June 1, 2012, count forward 330 full days. 1040ez filing Do not count the 16 days you spent in the United States. 1040ez filing The 330th day, May 12, 2013, is the last day of a 12-month period. 1040ez filing Count backward 12 months from May 11, 2013, to find the first day of this 12-month period, May 12, 2012. 1040ez filing This 12-month period runs from May 12, 2012, through May 11, 2013. 1040ez filing Count the total days during 2012 that fall within this 12-month period. 1040ez filing This is 234 days (May 12, 2012 – December 31, 2012). 1040ez filing Multiply $95,100 (the maximum exclusion for 2012) by the fraction 234/366 to find your maximum exclusion for 2012 ($60,802). 1040ez filing You figure the maximum exclusion for 2013 in the opposite manner. 1040ez filing Beginning with your last full day, September 30, 2013, count backward 330 full days. 1040ez filing Do not count the 16 days you spent in the United States. 1040ez filing That day, October 20, 2012, is the first day of a 12-month period. 1040ez filing Count forward 12 months from October 20, 2012, to find the last day of this 12-month period, October 19, 2013. 1040ez filing This 12-month period runs from October 20, 2012, through October 19, 2013. 1040ez filing Count the total days during 2013 that fall within this 12-month period. 1040ez filing This is 292 days (January 1, 2013 – October 19, 2013). 1040ez filing Multiply $97,600, the maximum limit, by the fraction 292/365 to find your maximum exclusion for 2013 ($78,080). 1040ez filing Choosing the Exclusion The foreign earned income exclusion is voluntary. 1040ez filing You can choose the exclusion by completing the appropriate parts of Form 2555. 1040ez filing When You Can Choose the Exclusion Your initial choice of the exclusion on Form 2555 or Form 2555-EZ generally must be made with one of the following returns. 1040ez filing A return filed by the due date (including any extensions). 1040ez filing A return amending a timely-filed return. 1040ez filing Amended returns generally must be filed by the later of 3 years after the filing date of the original return or 2 years after the tax is paid. 1040ez filing A return filed within 1 year from the original due date of the return (determined without regard to any extensions). 1040ez filing Filing after the above periods. 1040ez filing   You can choose the exclusion on a return filed after the periods described above if you owe no federal income tax after taking into account the exclusion. 1040ez filing If you owe federal income tax after taking into account the exclusion, you can choose the exclusion on a return filed after the periods described earlier if you file before the IRS discovers that you failed to choose the exclusion. 1040ez filing Whether or not you owe federal income tax after taking the exclusion into account, if you file your return after the periods described earlier, you must type or legibly print at the top of the first page of the Form 1040 “Filed pursuant to section 1. 1040ez filing 911-7(a)(2)(i)(D). 1040ez filing ” If you owe federal income tax after taking into account the foreign earned income exclusion and the IRS discovered that you failed to choose the exclusion, you may still be able to choose the exclusion. 1040ez filing You must request a private letter ruling under Income Tax Regulation 301. 1040ez filing 9100-3 and Revenue Procedure 2013-1, 2013-1 I. 1040ez filing R. 1040ez filing B. 1040ez filing 1, available at www. 1040ez filing irs. 1040ez filing gov/irb/2013-01_IRB/ar06. 1040ez filing html. 1040ez filing Effect of Choosing the Exclusion Once you choose to exclude your foreign earned income, that choice remains in effect for that year and all later years unless you revoke it. 1040ez filing Foreign tax credit or deduction. 1040ez filing  
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The 1040ez Filing

1040ez filing 4. 1040ez filing   Farm Business Expenses Table of Contents What's New for 2013 Introduction Topics - This chapter discusses: Useful Items - You may want to see: Deductible ExpensesReasonable allocation. 1040ez filing Prepaid Farm Supplies Prepaid Livestock Feed Labor Hired Repairs and Maintenance Interest Breeding Fees Fertilizer and Lime Taxes Insurance Rent and Leasing Depreciation Business Use of Your Home Truck and Car Expenses Travel Expenses Marketing Quota Penalties Tenant House Expenses Items Purchased for Resale Other Expenses Domestic Production Activities Deduction Capital ExpensesForestation and reforestation costs. 1040ez filing Nondeductible ExpensesPersonal, Living, and Family Expenses Other Nondeductible Items Losses From Operating a FarmAt-Risk Limits Passive Activity Limits Excess Farm Loss Limit Not-for-Profit FarmingUsing the presumption later. 1040ez filing Category 1. 1040ez filing Category 2. 1040ez filing Category 3. 1040ez filing What's New for 2013 Standard mileage rate. 1040ez filing  For 2013, the standard mileage rate for the cost of operating your car, van, pickup, or panel truck for each mile of business use is 56. 1040ez filing 5 cents. 1040ez filing See Truck and Car Expenses , later. 1040ez filing Simplified method for business use of home deduction. 1040ez filing  The IRS now provides a simplified method to determine your expenses for business use of your home. 1040ez filing For more information, see Schedule C (Form 1040), Part II, and its instructions. 1040ez filing Introduction You can generally deduct the current costs of operating your farm. 1040ez filing Current costs are expenses you do not have to capitalize or include in inventory costs. 1040ez filing However, your deduction for the cost of livestock feed and certain other supplies may be limited. 1040ez filing If you have an operating loss, you may not be able to deduct all of it. 1040ez filing Topics - This chapter discusses: Deductible expenses Domestic production activities deduction Capital expenses Nondeductible expenses Losses from operating a farm Not-for-profit farming Useful Items - You may want to see: Publication 463 Travel, Entertainment, Gift, and Car Expenses 535 Business Expenses 587 Business Use of Your Home 925 Passive Activity and At-Risk Rules 936 Home Mortgage Interest Deduction Form (and Instructions) Sch A (Form 1040) Itemized Deductions Sch F (Form 1040) Profit or Loss From Farming 1045 Application for Tentative Refund 5213 Election To Postpone Determination as To Whether the Presumption Applies That an Activity Is Engaged in for Profit 8903 Domestic Production Activities Deduction See chapter 16 for information about getting publications and forms. 1040ez filing Deductible Expenses The ordinary and necessary costs of operating a farm for profit are deductible business expenses. 1040ez filing “Ordinary” means what most farmers do and “necessary” means what is useful and helpful in farming. 1040ez filing Schedule F, Part II, lists some common farm expenses that are typically deductible. 1040ez filing This chapter discusses many of these expenses, as well as others not listed on Schedule F. 1040ez filing Reimbursed expenses. 1040ez filing   If the reimbursement is received in the same year that the expense is claimed, reduce the expense by the amount of the reimbursement. 1040ez filing If the reimbursement is received in a year after the expense is claimed, include the reimbursement amount in income. 1040ez filing See Refund or reimbursement under Income From Other Sources in chapter 3. 1040ez filing Personal and business expenses. 1040ez filing   Some expenses you pay during the tax year may be part personal and part business. 1040ez filing These may include expenses for gasoline, oil, fuel, water, rent, electricity, telephone, automobile upkeep, repairs, insurance, interest, and taxes. 1040ez filing   You must allocate these mixed expenses between their business and personal parts. 1040ez filing Generally, the personal part of these expenses is not deductible. 1040ez filing The business portion of the expenses is deductible on Schedule F. 1040ez filing Example. 1040ez filing You paid $1,500 for electricity during the tax year. 1040ez filing You used 1/3 of the electricity for personal purposes and 2/3 for farming. 1040ez filing Under these circumstances, you can deduct $1,000 (2/3 of $1,500) of your electricity expense as a farm business expense. 1040ez filing Reasonable allocation. 1040ez filing   It is not always easy to determine the business and nonbusiness parts of an expense. 1040ez filing There is no method of allocation that applies to all mixed expenses. 1040ez filing Any reasonable allocation is acceptable. 1040ez filing What is reasonable depends on the circumstances in each case. 1040ez filing Prepaid Farm Supplies Prepaid farm supplies include the following items if paid for during the year. 1040ez filing Feed, seed, fertilizer, and similar farm supplies not used or consumed during the year, but not including farm supplies that you would have consumed during the year if not for a fire, storm, flood, other casualty, disease, or drought. 1040ez filing Poultry (including egg-laying hens and baby chicks) bought for use (or for both use and resale) in your farm business. 1040ez filing However, include only the amount that would be deductible in the following year if you had capitalized the cost and deducted it ratably over the lesser of 12 months or the useful life of the poultry. 1040ez filing Poultry bought for resale and not resold during the year. 1040ez filing Deduction limit. 1040ez filing   If you use the cash method of accounting to report your income and expenses, your deduction for prepaid farm supplies in the year you pay for them may be limited to 50% of your other deductible farm expenses for the year (all Schedule F deductions except prepaid farm supplies). 1040ez filing This limit does not apply if you meet one of the exceptions described later. 1040ez filing See Chapter 2 for a discussion of the cash method of accounting. 1040ez filing   If the limit applies, you can deduct the excess cost of farm supplies other than poultry in the year you use or consume the supplies. 1040ez filing The excess cost of poultry bought for use (or for both use and resale) in your farm business is deductible in the year following the year you pay for it. 1040ez filing The excess cost of poultry bought for resale is deductible in the year you sell or otherwise dispose of that poultry. 1040ez filing Example. 1040ez filing You may not qualify for the exception described next. 1040ez filing During 2013, you bought fertilizer ($4,000), feed ($1,000), and seed ($500) for use on your farm in the following year. 1040ez filing Your total prepaid farm supplies expense for 2013 is $5,500. 1040ez filing Your other deductible farm expenses totaled $10,000 for 2013. 1040ez filing Therefore, your deduction for prepaid farm supplies cannot be more than $5,000 (50% of $10,000) for 2013. 1040ez filing The excess prepaid farm supplies expense of $500 ($5,500 − $5,000) is deductible in a later tax year when you use or consume the supplies. 1040ez filing Exceptions. 1040ez filing   This limit on the deduction for prepaid farm supplies expense does not apply if you are a farm-related taxpayer and either of the following apply. 1040ez filing Your prepaid farm supplies expense is more than 50% of your other deductible farm expenses because of a change in business operations caused by unusual circumstances. 1040ez filing Your total prepaid farm supplies expense for the preceding 3 tax years is less than 50% of your total other deductible farm expenses for those 3 tax years. 1040ez filing   You are a farm-related taxpayer if any of the following tests apply. 1040ez filing Your main home is on a farm. 1040ez filing Your principal business is farming. 1040ez filing A member of your family meets (1) or (2). 1040ez filing For this purpose, your family includes your brothers and sisters, half-brothers and half-sisters, spouse, parents, grandparents, children, grandchildren, and aunts and uncles and their children. 1040ez filing    Whether or not the deduction limit for prepaid farm supplies applies, your expenses for prepaid livestock feed may be subject to the rules for advance payment of livestock feed, discussed next. 1040ez filing Prepaid Livestock Feed If you report your income and expenses under the cash method of accounting, you cannot deduct in the year paid the cost of feed your livestock will consume in a later year unless you meet all the following tests. 1040ez filing The payment is for the purchase of feed rather than a deposit. 1040ez filing The prepayment has a business purpose and is not merely for tax avoidance. 1040ez filing Deducting the prepayment does not result in a material distortion of your income. 1040ez filing If you meet all three tests, you can deduct the prepaid feed, subject to the limit on prepaid farm supplies discussed earlier. 1040ez filing If you fail any of these tests, you can deduct the prepaid feed only in the year it is consumed. 1040ez filing This rule does not apply to the purchase of commodity futures contracts. 1040ez filing Payment for the purchase of feed. 1040ez filing   Whether a payment is for the purchase of feed or a deposit depends on the facts and circumstances in each case. 1040ez filing It is for the purchase of feed if you can show you made it under a binding commitment to accept delivery of a specific quantity of feed at a fixed price and you are not entitled, by contract or business custom, to a refund or repurchase. 1040ez filing   The following are some factors that show a payment is a deposit rather than for the purchase of feed. 1040ez filing The absence of specific quantity terms. 1040ez filing The right to a refund of any unapplied payment credit at the end of the contract. 1040ez filing The seller's treatment of the payment as a deposit. 1040ez filing The right to substitute other goods or products for those specified in the contract. 1040ez filing   A provision permitting substitution of ingredients to vary the particular feed mix to meet your livestock's current diet requirements will not suggest a deposit. 1040ez filing Further, a price adjustment to reflect market value at the date of delivery is not, by itself, proof of a deposit. 1040ez filing Business purpose. 1040ez filing   The prepayment has a business purpose only if you have a reasonable expectation of receiving some business benefit from prepaying the cost of livestock feed. 1040ez filing The following are some examples of business benefits. 1040ez filing Fixing maximum prices and securing an assured feed supply. 1040ez filing Securing preferential treatment in anticipation of a feed shortage. 1040ez filing   Other factors considered in determining the existence of a business purpose are whether the prepayment was a condition imposed by the seller and whether that condition was meaningful. 1040ez filing No material distortion of income. 1040ez filing   The following are some factors considered in determining whether deducting prepaid livestock feed materially distorts income. 1040ez filing Your customary business practice in conducting your livestock operations. 1040ez filing The expense in relation to past purchases. 1040ez filing The time of year you made the purchase. 1040ez filing The expense in relation to your income for the year. 1040ez filing Labor Hired You can deduct reasonable wages paid for regular farm labor, piecework, contract labor, and other forms of labor hired to perform your farming operations. 1040ez filing You can pay wages in cash or in noncash items such as inventory, capital assets, or assets used in your business. 1040ez filing The cost of boarding farm labor is a deductible labor cost. 1040ez filing Other deductible costs you incur for farm labor include health insurance, workers' compensation insurance, and other benefits. 1040ez filing If you must withhold social security, Medicare, and income taxes from your employees' cash wages, you can still deduct the full amount of wages before withholding. 1040ez filing See chapter 13 for more information on employment taxes. 1040ez filing Also, deduct the employer's share of the social security and Medicare taxes you must pay on your employees' wages as a farm business expense on Schedule F, line 29. 1040ez filing See Taxes , later. 1040ez filing Property for services. 1040ez filing   If you transfer property to an employee in payment for services, you can deduct as wages paid the fair market value of the property on the date of transfer. 1040ez filing If the employee pays you anything for the property, deduct as wages the fair market value of the property minus the payment by the employee for the property. 1040ez filing   Treat the wages deducted as an amount received for the property. 1040ez filing You may have a gain or loss to report if the property's adjusted basis on the date of transfer is different from its fair market value. 1040ez filing Any gain or loss has the same character the exchanged property had in your hands. 1040ez filing For more information, see chapter 8. 1040ez filing Child as an employee. 1040ez filing   You can deduct reasonable wages or other compensation you pay to your child for doing farmwork if a true employer-employee relationship exists between you and your child. 1040ez filing Include these wages in the child's income. 1040ez filing The child may have to file an income tax return. 1040ez filing These wages may also be subject to social security and Medicare taxes if your child is age 18 or older. 1040ez filing For more information, see Family Employees in chapter 13. 1040ez filing    A Form W-2, Wage and Tax Statement, should be issued to the child employee. 1040ez filing   The fact that your child spends the wages to buy clothes or other necessities you normally furnish does not prevent you from deducting your child's wages as a farm expense. 1040ez filing The amount of wages paid to the child could cause a loss of the dependency exemption depending on how the child uses the money. 1040ez filing Spouse as an employee. 1040ez filing   You can deduct reasonable wages or other compensation you pay to your spouse if a true employer-employee relationship exists between you and your spouse. 1040ez filing Wages you pay to your spouse are subject to social security and Medicare taxes. 1040ez filing For more information, see Family Employees in chapter 13. 1040ez filing Nondeductible Pay You cannot deduct wages paid for certain household work, construction work, and maintenance of your home. 1040ez filing However, those wages may be subject to the employment taxes discussed in chapter 13. 1040ez filing Household workers. 1040ez filing   Do not deduct amounts paid to persons engaged in household work, except to the extent their services are used in boarding or otherwise caring for farm laborers. 1040ez filing Construction labor. 1040ez filing   Do not deduct wages paid to hired help for the construction of new buildings or other improvements. 1040ez filing These wages are part of the cost of the building or other improvement. 1040ez filing You must capitalize them. 1040ez filing Maintaining your home. 1040ez filing   If your farm employee spends time maintaining or repairing your home, the wages and employment taxes you pay for that work are nondeductible personal expenses. 1040ez filing For example, assume you have a farm employee for the entire tax year and the employee spends 5% of the time maintaining your home. 1040ez filing The employee devotes the remaining time to work on your farm. 1040ez filing You cannot deduct 5% of the wages and employment taxes you pay for that employee. 1040ez filing Employment Credits Reduce your deduction for wages by the amount of any employment credits you claim such as the work opportunity credit for qualified tax-exempt organizations hiring qualified veterans (Form 5884-C). 1040ez filing Repairs and Maintenance You can deduct most expenses for the repair and maintenance of your farm property. 1040ez filing Common items of repair and maintenance are repainting, replacing shingles and supports on farm buildings, and periodic or routine maintenance of trucks, tractors, and other farm machinery. 1040ez filing However, repairs to, or overhauls of, depreciable property that substantially prolong the life of the property, increase its value, or adapt it to a different use are capital expenses. 1040ez filing For example, if you repair the barn roof, the cost is deductible. 1040ez filing But if you replace the roof, it is a capital expense. 1040ez filing For more information, see Capital Expenses , later. 1040ez filing Interest You can deduct as a farm business expense interest paid on farm mortgages and other obligations you incur in your farm business. 1040ez filing Cash method. 1040ez filing   If you use the cash method of accounting, you can generally deduct interest paid during the tax year. 1040ez filing You cannot deduct interest paid with funds received from the original lender through another loan, advance, or other arrangement similar to a loan. 1040ez filing You can, however, deduct the interest when you start making payments on the new loan. 1040ez filing For more information, see Cash Method in chapter 2. 1040ez filing Prepaid interest. 1040ez filing   Under the cash method, you generally cannot deduct any interest paid before the year it is due. 1040ez filing Interest paid in advance may be deducted only in the tax year in which it is due. 1040ez filing Accrual method. 1040ez filing   If you use an accrual method of accounting, you can deduct only interest that has accrued during the tax year. 1040ez filing However, you cannot deduct interest owed to a related person who uses the cash method until payment is made and the interest is includible in the gross income of that person. 1040ez filing For more information, see Accrual Method in chapter 2. 1040ez filing Allocation of interest. 1040ez filing   If you use the proceeds of a loan for more than one purpose, you must allocate the interest on that loan to each use. 1040ez filing Allocate the interest to the following categories. 1040ez filing Trade or business interest. 1040ez filing Passive activity interest. 1040ez filing Investment interest. 1040ez filing Portfolio interest. 1040ez filing Personal interest. 1040ez filing   You generally allocate interest on a loan the same way you allocate the loan proceeds. 1040ez filing You allocate loan proceeds by tracing disbursements to specific uses. 1040ez filing The easiest way to trace disbursements to specific uses is to keep the proceeds of a particular loan separate from any other funds. 1040ez filing Secured loan. 1040ez filing   The allocation of loan proceeds and the related interest is generally not affected by the use of property that secures the loan. 1040ez filing Example. 1040ez filing You secure a loan with property used in your farming business. 1040ez filing You use the loan proceeds to buy a car for personal use. 1040ez filing You must allocate interest expense on the loan to personal use (purchase of the car) even though the loan is secured by farm business property. 1040ez filing If the property that secures the loan is your home, you generally do not allocate the loan proceeds or the related interest. 1040ez filing The interest is usually deductible as qualified home mortgage interest, regardless of how the loan proceeds are used. 1040ez filing However, you can choose to treat the loan as not secured by your home. 1040ez filing For more information, see Publication 936. 1040ez filing Allocation period. 1040ez filing   The period for which a loan is allocated to a particular use begins on the date the proceeds are used and ends on the earlier of the following dates. 1040ez filing The date the loan is repaid. 1040ez filing The date the loan is reallocated to another use. 1040ez filing More information. 1040ez filing   For more information on interest, see chapter 4 in Publication 535. 1040ez filing Breeding Fees You can deduct breeding fees as a farm business expense. 1040ez filing However, if you use an accrual method of accounting, you must capitalize breeding fees and allocate them to the cost basis of the calf, foal, etc. 1040ez filing For more information on who must use an accrual method of accounting, see Accrual Method Required under Accounting Methods in chapter 2. 1040ez filing Fertilizer and Lime You can deduct in the year paid or incurred the cost of fertilizer, lime, and other materials applied to farmland to enrich, neutralize, or condition it if the benefits last a year or less. 1040ez filing You can also deduct the cost of applying these materials in the year you pay or incur it. 1040ez filing However, see Prepaid Farm Supplies , earlier, for a rule that may limit your deduction for these materials. 1040ez filing If the benefits of the fertilizer, lime, or other materials last substantially more than one year, you generally capitalize their cost and deduct a part each year the benefits last. 1040ez filing However, you can choose to deduct these expenses in the year paid or incurred. 1040ez filing If you make this choice, you will need IRS approval if you later decide to capitalize the cost of previously deducted items. 1040ez filing If you sell farmland on which fertilizer or lime has been applied and if the selling price of the land includes part or all of the cost of the fertilizer or lime, you report the sale amount attributable to the fertilizer or lime as ordinary income. 1040ez filing Farmland, for these purposes, is land used for producing crops, fruits, or other agricultural products or for sustaining livestock. 1040ez filing It does not include land you have never used previously for producing crops or sustaining livestock. 1040ez filing You cannot deduct initial land preparation costs. 1040ez filing (See Capital Expenses , later. 1040ez filing ) Include government payments you receive for lime or fertilizer in income. 1040ez filing See Fertilizer and Lime under Agricultural Program Payments in chapter 3. 1040ez filing Taxes You can deduct as a farm business expense the real estate and personal property taxes on farm business assets, such as farm equipment, animals, farmland, and farm buildings. 1040ez filing You also can deduct the social security and Medicare taxes you pay to match the amount withheld from the wages of farm employees and any federal unemployment tax you pay. 1040ez filing For information on employment taxes, see chapter 13. 1040ez filing Allocation of taxes. 1040ez filing   The taxes on the part of your farm you use as your home (including the furnishings and surrounding land not used for farming) are nonbusiness taxes. 1040ez filing You may be able to deduct these nonbusiness taxes as itemized deductions on Schedule A (Form 1040). 1040ez filing To determine the nonbusiness part, allocate the taxes between the farm assets and nonbusiness assets. 1040ez filing The allocation can be done from the assessed valuations. 1040ez filing If your tax statement does not show the assessed valuations, you can usually get them from the tax assessor. 1040ez filing State and local general sales taxes. 1040ez filing   State and local general sales taxes on nondepreciable farm business expense items are deductible as part of the cost of those items. 1040ez filing Include state and local general sales taxes imposed on the purchase of assets for use in your farm business as part of the cost you depreciate. 1040ez filing Also treat the taxes as part of your cost if they are imposed on the seller and passed on to you. 1040ez filing State and federal income taxes. 1040ez filing   Individuals cannot deduct state and federal income taxes as farm business expenses. 1040ez filing Individuals can deduct state and local income taxes only as an itemized deduction on Schedule A (Form 1040). 1040ez filing However, you cannot deduct federal income tax. 1040ez filing Highway use tax. 1040ez filing   You can deduct the federal use tax on highway motor vehicles paid on a truck or truck tractor used in your farm business. 1040ez filing For information on the tax itself, including information on vehicles subject to the tax, see the Instructions for Form 2290, Heavy Highway Vehicle Use Tax Return. 1040ez filing Self-employment tax deduction. 1040ez filing   You can deduct as an adjustment to income on Form 1040 one-half of your self-employment tax in figuring your adjusted gross income. 1040ez filing For more information, see chapter 12. 1040ez filing Insurance You generally can deduct the ordinary and necessary cost of insurance for your farm business as a business expense. 1040ez filing This includes premiums you pay for the following types of insurance. 1040ez filing Fire, storm, crop, theft, liability, and other insurance on farm business assets. 1040ez filing Health and accident insurance on your farm employees. 1040ez filing Workers' compensation insurance set by state law that covers any claims for job-related bodily injuries or diseases suffered by employees on your farm, regardless of fault. 1040ez filing Business interruption insurance. 1040ez filing State unemployment insurance on your farm employees (deductible as taxes if they are considered taxes under state law). 1040ez filing Insurance to secure a loan. 1040ez filing   If you take out a policy on your life or on the life of another person with a financial interest in your farm business to get or protect a business loan, you cannot deduct the premiums as a business expense. 1040ez filing In the event of death, the proceeds of the policy are not taxed as income even if they are used to liquidate the debt. 1040ez filing Advance premiums. 1040ez filing   Deduct advance payments of insurance premiums only in the year to which they apply, regardless of your accounting method. 1040ez filing Example. 1040ez filing On June 28, 2013, you paid a premium of $3,000 for fire insurance on your barn. 1040ez filing The policy will cover a period of 3 years beginning on July 1, 2013. 1040ez filing Only the cost for the 6 months in 2013 is deductible as an insurance expense on your 2013 calendar year tax return. 1040ez filing Deduct $500, which is the premium for 6 months of the 36-month premium period, or 6/36 of $3,000. 1040ez filing In both 2014 and 2015, deduct $1,000 (12/36 of $3,000). 1040ez filing Deduct the remaining $500 in 2016. 1040ez filing Had the policy been effective on January 1, 2013, the deductible expense would have been $1,000 for each of the years 2013, 2014, and 2015, based on one-third of the premium used each year. 1040ez filing Business interruption insurance. 1040ez filing   Use and occupancy and business interruption insurance premiums are deductible as a business expense. 1040ez filing This insurance pays for lost profits if your business is shut down due to a fire or other cause. 1040ez filing Report any proceeds in full on Schedule F, Part I. 1040ez filing Self-employed health insurance deduction. 1040ez filing   If you are self-employed, you can deduct as an adjustment to income on Form 1040 your payments for medical, dental, and qualified long-term care insurance coverage for yourself, your spouse, and your dependents when figuring your adjusted gross income on your Form 1040. 1040ez filing Effective March 30, 2010, the insurance can also cover any child of yours under age 27 at the end of 2013, even if the child was not your dependent. 1040ez filing Generally, this deduction cannot be more than the net profit from the business under which the plan was established. 1040ez filing   If you or your spouse is also an employee of another person, you cannot take the deduction for any month in which you are eligible to participate in a subsidized health plan maintained by your employer or your spouse's employer. 1040ez filing   Generally, use the Self-Employed Health Insurance Deduction Worksheet in the Instructions for Form 1040 to figure your deduction. 1040ez filing Include the remaining part of the insurance payment in your medical expenses on Schedule A (Form 1040) if you itemize your deductions. 1040ez filing   For more information, see Deductible Premiums in Publication 535, chapter 6. 1040ez filing Rent and Leasing If you lease property for use in your farm business, you can generally deduct the rent you pay on Schedule F. 1040ez filing However, you cannot deduct rent you pay in crop shares if you deduct the cost of raising the crops as farm expenses. 1040ez filing Advance payments. 1040ez filing   Deduct advance payments of rent only in the year to which they apply, regardless of your accounting method. 1040ez filing Farm home. 1040ez filing   If you rent a farm, do not deduct the part of the rental expense that represents the fair rental value of the farm home in which you live. 1040ez filing Lease or Purchase If you lease a farm building or equipment, you must determine whether or not the agreement must be treated as a conditional sales contract rather than a lease. 1040ez filing If the agreement is treated as a conditional sales contract, the payments under the agreement (so far as they do not represent interest or other charges) are payments for the purchase of the property. 1040ez filing Do not deduct these payments as rent, but capitalize the cost of the property and recover this cost through depreciation. 1040ez filing Conditional sales contract. 1040ez filing   Whether an agreement is a conditional sales contract depends on the intent of the parties. 1040ez filing Determine intent based on the provisions of the agreement and the facts and circumstances that exist when you make the agreement. 1040ez filing No single test, or special combination of tests, always applies. 1040ez filing However, in general, an agreement may be considered a conditional sales contract rather than a lease if any of the following is true. 1040ez filing The agreement applies part of each payment toward an equity interest you will receive. 1040ez filing You get title to the property after you make a stated amount of required payments. 1040ez filing The amount you must pay to use the property for a short time is a large part of the amount you would pay to get title to the property. 1040ez filing You pay much more than the current fair rental value of the property. 1040ez filing You have an option to buy the property at a nominal price compared to the value of the property when you may exercise the option. 1040ez filing Determine this value when you make the agreement. 1040ez filing You have an option to buy the property at a nominal price compared to the total amount you have to pay under the agreement. 1040ez filing The agreement designates part of the payments as interest, or part of the payments can be easily recognized as interest. 1040ez filing Example. 1040ez filing You lease new farm equipment from a dealer who both sells and leases. 1040ez filing The agreement includes an option to purchase the equipment for a specified price. 1040ez filing The lease payments and the specified option price equal the sales price of the equipment plus interest. 1040ez filing Under the agreement, you are responsible for maintenance, repairs, and the risk of loss. 1040ez filing For federal income tax purposes, the agreement is a conditional sales contract. 1040ez filing You cannot deduct any of the lease payments as rent. 1040ez filing You can deduct interest, repairs, insurance, depreciation, and other expenses related to the equipment. 1040ez filing Motor vehicle leases. 1040ez filing   Special rules apply to lease agreements that have a terminal rental adjustment clause. 1040ez filing In general, this is a clause that provides for a rental price adjustment based on the amount the lessor is able to sell the vehicle for at the end of the lease. 1040ez filing If your rental agreement contains a terminal rental adjustment clause, treat the agreement as a lease if the agreement otherwise qualifies as a lease. 1040ez filing For more information, see Internal Revenue Code (IRC) section 7701(h). 1040ez filing Leveraged leases. 1040ez filing   Special rules apply to leveraged leases of equipment (arrangements in which the equipment is financed by a nonrecourse loan from a third party). 1040ez filing For more information, see Publication 535, chapter 3, and Revenue Procedure 2001-28, which begins on page 1156 of Internal Revenue Bulletin 2001-19 at www. 1040ez filing irs. 1040ez filing gov/pub/irs-irbs/irb01-19. 1040ez filing pdf. 1040ez filing Depreciation If property you acquire to use in your farm business is expected to last more than one year, you generally cannot deduct the entire cost in the year you acquire it. 1040ez filing You must recover the cost over more than one year and deduct part of it each year on Schedule F as depreciation or amortization. 1040ez filing However, you can choose to deduct part or all of the cost of certain qualifying property, up to a limit, as a section 179 deduction in the year you place it in service. 1040ez filing Depreciation, amortization, and the section 179 deduction are discussed in chapter 7. 1040ez filing Business Use of Your Home You can deduct expenses for the business use of your home if you use part of your home exclusively and regularly: As the principal place of business for any trade or business in which you engage, As a place to meet or deal with patients, clients, or customers in the normal course of your trade or business, or In connection with your trade or business, if you are using a separate structure that is not attached to your home. 1040ez filing Your home office will qualify as your principal place of business for deducting expenses for its use if you meet both of the following requirements. 1040ez filing You use it exclusively and regularly for the administrative or management activities of your trade or business. 1040ez filing You have no other fixed location where you conduct substantial administrative or management activities of your trade or business. 1040ez filing If you use part of your home for business, you must divide the expenses of operating your home between personal and business use. 1040ez filing The IRS now provides a simplified method to determine your expenses for business use of your home. 1040ez filing For more information, see Schedule C (Form 1040), Part II, and its instructions. 1040ez filing Deduction limit. 1040ez filing   If your gross income from farming equals or exceeds your total farm expenses (including expenses for the business use of your home), you can deduct all your farm expenses. 1040ez filing But if your gross income from farming is less than your total farm expenses, your deduction for certain expenses for the use of your home in your farming business is limited. 1040ez filing   Your deduction for otherwise nondeductible expenses, such as utilities, insurance, and depreciation (with depreciation taken last), cannot be more than the gross income from farming minus the following expenses. 1040ez filing The business part of expenses you could deduct even if you did not use your home for business (such as deductible mortgage interest, real estate taxes, and casualty and theft losses). 1040ez filing Farm expenses other than expenses that relate to the use of your home. 1040ez filing If you are self-employed, do not include your deduction for half of your self-employment tax. 1040ez filing   Deductions over the current year's limit can be carried over to your next tax year. 1040ez filing They are subject to the deduction limit for the next tax year. 1040ez filing More information. 1040ez filing   See Publication 587 for more information on deducting expenses for the business use of your home. 1040ez filing Telephone expense. 1040ez filing   You cannot deduct the cost of basic local telephone service (including any taxes) for the first telephone line you have in your home, even if you have an office in your home. 1040ez filing However, charges for business long-distance phone calls on that line, as well as the cost of a second line into your home used exclusively for your farm business, are deductible business expenses. 1040ez filing Cell phone charges for calls relating to your farm business are deductible. 1040ez filing If the cell phone you use for your farm business is part of a family cell phone plan, you must allocate and deduct only the portion of the charges attributable to farm business calls. 1040ez filing Truck and Car Expenses You can deduct the actual cost of operating a truck or car in your farm business. 1040ez filing Only expenses for business use are deductible. 1040ez filing These include such items as gasoline, oil, repairs, license tags, insurance, and depreciation (subject to certain limits). 1040ez filing Standard mileage rate. 1040ez filing   Instead of using actual costs, under certain conditions you can use the standard mileage rate. 1040ez filing The standard mileage rate for each mile of business use is 56. 1040ez filing 5 cents in 2013. 1040ez filing You can use the standard mileage rate for a car or a light truck, such as a van, pickup, or panel truck, you own or lease. 1040ez filing   You cannot use the standard mileage rate if you operate five or more cars or light trucks at the same time. 1040ez filing You are not using five or more vehicles at the same time if you alternate using the vehicles (you use them at different times) for business. 1040ez filing Example. 1040ez filing Maureen owns a car and four pickup trucks that are used in her farm business. 1040ez filing Her farm employees use the trucks and she uses the car for business. 1040ez filing Maureen cannot use the standard mileage rate for the car or the trucks. 1040ez filing This is because all five vehicles are used in Maureen's farm business at the same time. 1040ez filing She must use actual expenses for all vehicles. 1040ez filing Business use percentage. 1040ez filing   You can claim 75% of the use of a car or light truck as business use without any records if you used the vehicle during most of the normal business day directly in connection with the business of farming. 1040ez filing You choose this method of substantiating business use the first year the vehicle is placed in service. 1040ez filing Once you make this choice, you may not change to another method later. 1040ez filing The following are uses directly connected with the business of farming. 1040ez filing Cultivating land. 1040ez filing Raising or harvesting any agricultural or horticultural commodity. 1040ez filing Raising, shearing, feeding, caring for, training, and managing animals. 1040ez filing Driving to the feed or supply store. 1040ez filing   If you keep records and they show that your business use was more than 75%, you may be able to claim more. 1040ez filing See Recordkeeping requirements under Travel Expenses , below. 1040ez filing More information. 1040ez filing   For more information on deductible truck and car expenses, see Publication 463, chapter 4. 1040ez filing If you pay your employees for the use of their truck or car in your farm business, see Reimbursements to employees under Travel Expenses next. 1040ez filing Travel Expenses You can deduct ordinary and necessary expenses you incur while traveling away from home for your farm business. 1040ez filing You cannot deduct lavish or extravagant expenses. 1040ez filing Usually, the location of your farm business is considered your home for tax purposes. 1040ez filing You are traveling away from home if: Your duties require you to be absent from your farm substantially longer than an ordinary work day, and You need to get sleep or rest to meet the demands of your work while away from home. 1040ez filing If you meet these requirements and can prove the time, place, and business purpose of your travel, you can deduct your ordinary and necessary travel expenses. 1040ez filing The following are some types of deductible travel expenses. 1040ez filing Air, rail, bus, and car transportation; Meals and lodging; Dry cleaning and laundry; Telephone and fax; Transportation between your hotel and your temporary work or business meeting location; and Tips for any of the above expenses. 1040ez filing Meals. 1040ez filing   You ordinarily can deduct only 50% of your business-related meals expenses. 1040ez filing You can deduct the cost of your meals while traveling on business only if your business trip is overnight or long enough to require you to stop for sleep or rest to properly perform your duties. 1040ez filing You cannot deduct any of the cost of meals if it is not necessary for you to rest, unless you meet the rules for business entertainment. 1040ez filing For information on entertainment expenses, see Publication 463, chapter 2. 1040ez filing   The expense of a meal includes amounts you spend for your food, beverages, taxes, and tips relating to the meal. 1040ez filing You can deduct either 50% of the actual cost or 50% of a standard meal allowance that covers your daily meal and incidental expenses. 1040ez filing    Recordkeeping requirements. 1040ez filing You must be able to prove your deductions for travel by adequate records or other evidence that will support your own statement. 1040ez filing Estimates or approximations do not qualify as proof of an expense. 1040ez filing   You should keep an account book or similar record, supported by adequate documentary evidence, such as receipts, that together support each element of an expense. 1040ez filing Generally, it is best to record the expense and get documentation of it at the time you pay it. 1040ez filing   If you choose to deduct a standard meal allowance rather than the actual expense, you do not have to keep records to prove amounts spent for meals and incidental items. 1040ez filing However, you must still keep records to prove the actual amount of other travel expenses, and the time, place, and business purpose of your travel. 1040ez filing More information. 1040ez filing   For detailed information on travel, recordkeeping, and the standard meal allowance, see Publication 463. 1040ez filing Reimbursements to employees. 1040ez filing   You generally can deduct reimbursements you pay to your employees for travel and transportation expenses they incur in the conduct of your business. 1040ez filing Employees may be reimbursed under an accountable or nonaccountable plan. 1040ez filing Under an accountable plan, the employee must provide evidence of expenses. 1040ez filing Under a nonaccountable plan, no evidence of expenses is required. 1040ez filing If you reimburse expenses under an accountable plan, deduct them as travel and transportation expenses. 1040ez filing If you reimburse expenses under a nonaccountable plan, you must report the reimbursements as wages on Form W-2 and deduct them as wages. 1040ez filing For more information, see Publication 535, chapter 11. 1040ez filing Marketing Quota Penalties You can deduct as Other expenses on Schedule F penalties you pay for marketing crops in excess of farm marketing quotas. 1040ez filing However, if you do not pay the penalty, but instead the purchaser of your crop deducts it from the payment to you, include in gross income only the amount you received. 1040ez filing Do not take a separate deduction for the penalty. 1040ez filing Tenant House Expenses You can deduct the costs of maintaining houses and their furnishings for tenants or hired help as farm business expenses. 1040ez filing These costs include repairs, utilities, insurance, and depreciation. 1040ez filing The value of a dwelling you furnish to a tenant under the usual tenant-farmer arrangement is not taxable income to the tenant. 1040ez filing Items Purchased for Resale If you use the cash method of accounting, you ordinarily deduct the cost of livestock and other items purchased for resale only in the year of sale. 1040ez filing You deduct this cost, including freight charges for transporting the livestock to the farm, on Schedule F, Part I. 1040ez filing However, see Chickens, seeds, and young plants , below. 1040ez filing Example. 1040ez filing You use the cash method of accounting. 1040ez filing In 2013, you buy 50 steers you will sell in 2014. 1040ez filing You cannot deduct the cost of the steers on your 2013 tax return. 1040ez filing You deduct their cost on your 2014 Schedule F, Part I. 1040ez filing Chickens, seeds, and young plants. 1040ez filing   If you are a cash method farmer, you can deduct the cost of hens and baby chicks bought for commercial egg production, or for raising and resale, as an expense on Schedule F, Part I, in the year paid if you do it consistently and it does not distort income. 1040ez filing You also can deduct the cost of seeds and young plants bought for further development and cultivation before sale as an expense on Schedule F, Part I, when paid if you do this consistently and you do not figure your income on the crop method. 1040ez filing However, see Prepaid Farm Supplies , earlier, for a rule that may limit your deduction for these items. 1040ez filing   If you deduct the cost of chickens, seeds, and young plants as an expense, report their entire selling price as income. 1040ez filing You cannot also deduct the cost from the selling price. 1040ez filing   You cannot deduct the cost of seeds and young plants for Christmas trees and timber as an expense. 1040ez filing Deduct the cost of these seeds and plants through depletion allowances. 1040ez filing For more information, see Depletion in chapter 7. 1040ez filing   The cost of chickens and plants used as food for your family is never deductible. 1040ez filing   Capitalize the cost of plants with a preproductive period of more than 2 years, unless you can elect out of the uniform capitalization rules. 1040ez filing These rules are discussed in chapter 6. 1040ez filing Example. 1040ez filing You use the cash method of accounting. 1040ez filing In 2013, you buy 500 baby chicks to raise for resale in 2014. 1040ez filing You also buy 50 bushels of winter wheat seed in 2013 that you sow in the fall. 1040ez filing Unless you previously adopted the method of deducting these costs in the year you sell the chickens or the harvested crops, you can deduct the cost of both the baby chicks and the seed wheat in 2013. 1040ez filing Election to use crop method. 1040ez filing   If you use the crop method, you can delay deducting the cost of seeds and young plants until you sell them. 1040ez filing You must get IRS approval to use the crop method. 1040ez filing If you follow this method, deduct the cost from the selling price to determine your profit on Schedule F, Part I. 1040ez filing For more information, see Crop method under Special Methods of Accounting in chapter 2. 1040ez filing Choosing a method. 1040ez filing   You can adopt either the crop method or the cash method for deducting the cost in the first year you buy egg-laying hens, pullets, chicks, or seeds and young plants. 1040ez filing   Although you must use the same method for egg-laying hens, pullets, and chicks, you can use a different method for seeds and young plants. 1040ez filing Once you use a particular method for any of these items, use it for those items until you get IRS approval to change your method. 1040ez filing For more information, see Change in Accounting Method in chapter 2. 1040ez filing Other Expenses The following list, while not all-inclusive, shows some expenses you can deduct as other farm expenses on Schedule F, Part II. 1040ez filing These expenses must be for business purposes and  (1) paid, if you use the cash method of accounting, or (2) incurred, if you use an accrual method of accounting. 1040ez filing Accounting fees. 1040ez filing Advertising. 1040ez filing Business travel and meals. 1040ez filing Commissions. 1040ez filing Consultant fees. 1040ez filing Crop scouting expenses. 1040ez filing Dues to cooperatives. 1040ez filing Educational expenses (to maintain and improve farming skills). 1040ez filing Farm-related attorney fees. 1040ez filing Farm magazines. 1040ez filing Ginning. 1040ez filing Insect sprays and dusts. 1040ez filing Litter and bedding. 1040ez filing Livestock fees. 1040ez filing Marketing fees. 1040ez filing Milk assessment. 1040ez filing Recordkeeping expenses. 1040ez filing Service charges. 1040ez filing Small tools expected to last one year or less. 1040ez filing Stamps and stationery. 1040ez filing Subscriptions to professional, technical, and trade journals that deal with farming. 1040ez filing Tying material and containers. 1040ez filing Loan expenses. 1040ez filing   You prorate and deduct loan expenses, such as legal fees and commissions, you pay to get a farm loan over the term of the loan. 1040ez filing Tax preparation fees. 1040ez filing   You can deduct as a farm business expense on Schedule F the cost of preparing that part of your tax return relating to your farm business. 1040ez filing You may be able to deduct the remaining cost on Schedule A (Form 1040) if you itemize your deductions. 1040ez filing   You also can deduct on Schedule F the amount you pay or incur in resolving tax issues relating to your farm business. 1040ez filing Domestic Production Activities Deduction Generally, you are allowed a deduction for income attributable to domestic production activities. 1040ez filing You can deduct 9% of the lesser of your qualified production activities income or your taxable income (adjusted gross income for individuals) for the tax year. 1040ez filing Your deduction is limited to 50% of the Form W-2 wages you paid for the tax year that are properly allocable to domestic production gross receipts. 1040ez filing For this purpose, Form W-2 wages do not include noncash wages paid for agricultural labor, such as compensation paid as commodities. 1040ez filing Also, excluded from Form W-2 wages are wages paid to your children under age 18 and nontaxable fringe benefits. 1040ez filing Income from cooperatives. 1040ez filing   If you receive a patronage dividend or qualified per-unit retain allocation from a cooperative which is engaged in the manufacturing, production, growth, or extraction in whole or in significant part of any agricultural or horticultural product or in the marketing of agricultural or horticultural products, your income from the cooperative can give rise to a domestic production activities deduction. 1040ez filing This deduction amount is reported on Form 1099-PATR, box 6. 1040ez filing In order for you to qualify for the deduction, the cooperative is required to send you a written notice designating your portion of the domestic production activities deduction. 1040ez filing More information. 1040ez filing   For more information on the domestic production activities deduction, see the Instructions for Form 8903. 1040ez filing Capital Expenses A capital expense is a payment, or a debt incurred, for the acquisition, improvement, or restoration of an asset that is expected to last more than one year. 1040ez filing You include the expense in the basis of the asset. 1040ez filing Uniform capitalization rules also require you to capitalize or include in inventory certain other expenses. 1040ez filing See chapters 2  and 6. 1040ez filing Capital expenses are generally not deductible, but they may be depreciable. 1040ez filing However, you can elect to deduct certain capital expenses, such as the following. 1040ez filing The cost of fertilizer, lime, etc. 1040ez filing (See Fertilizer and Lime under Deductible Expenses , earlier. 1040ez filing ) Soil and water conservation expenses. 1040ez filing (See chapter 5. 1040ez filing ) The cost of property that qualifies for a deduction under section 179. 1040ez filing (See chapter 7. 1040ez filing ) Business start-up costs. 1040ez filing (See Business start-up and organizational costs , later. 1040ez filing ) Forestation and reforestation costs. 1040ez filing (See Forestation and reforestation costs , later. 1040ez filing ) Generally, the costs of the following items, including the costs of material, hired labor, and installation, are capital expenses. 1040ez filing Land and buildings. 1040ez filing Additions, alterations, and improvements to buildings, etc. 1040ez filing Cars and trucks. 1040ez filing Equipment and machinery. 1040ez filing Fences. 1040ez filing Draft, breeding, sport, and dairy livestock. 1040ez filing Repairs to machinery, equipment, trucks, and cars that prolong their useful life, increase their value, or adapt them to different use. 1040ez filing Water wells, including drilling and equipping costs. 1040ez filing Land preparation costs, such as: Clearing land for farming, Leveling and conditioning land, Purchasing and planting trees, Building irrigation canals and ditches, Laying irrigation pipes, Installing drain tile, Modifying channels or streams, Constructing earthen, masonry, or concrete tanks, reservoirs, or dams, and Building roads. 1040ez filing Business start-up and organizational costs. 1040ez filing   You can elect to deduct up to $5,000 of business start-up costs and $5,000 of organizational costs paid or incurred after October 22, 2004. 1040ez filing The $5,000 deduction is reduced by the amount your total start-up or organizational costs exceed $50,000. 1040ez filing Any remaining costs must be amortized. 1040ez filing See chapter 7. 1040ez filing   You elect to deduct start-up or organizational costs by claiming the deduction on the income tax return filed by the due date (including extensions) for the tax year in which the active trade or business begins. 1040ez filing However, if you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). 1040ez filing Clearly indicate the election on your amended return and write “Filed pursuant to section 301. 1040ez filing 9100-2” at the top of the amended return. 1040ez filing File the amended return at the same address you filed the original return. 1040ez filing The election applies when figuring taxable income for the current tax year and all subsequent years. 1040ez filing   You can choose to forgo the election by clearly electing to capitalize your start-up or organizational costs on an income tax return filed by the due date (including extensions) for the tax year in which the active trade or business begins. 1040ez filing For more information about start-up and organizational costs, see chapter 7. 1040ez filing Crop production expenses. 1040ez filing   The uniform capitalization rules generally require you to capitalize expenses incurred in producing plants. 1040ez filing However, except for certain taxpayers required to use an accrual method of accounting, the capitalization rules do not apply to plants with a preproductive period of 2 years or less. 1040ez filing For more information, see Uniform Capitalization Rules in chapter 6. 1040ez filing Timber. 1040ez filing   Capitalize the cost of acquiring timber. 1040ez filing Do not include the cost of land in the cost of the timber. 1040ez filing You must generally capitalize direct costs incurred in reforestation. 1040ez filing However, you can elect to deduct some forestation and reforestation costs. 1040ez filing See Forestation and reforestation costs next. 1040ez filing Reforestation costs include the following. 1040ez filing Site preparation costs, such as: Girdling, Applying herbicide, Baiting rodents, and Clearing and controlling brush. 1040ez filing The cost of seed or seedlings. 1040ez filing Labor and tool expenses. 1040ez filing Depreciation on equipment used in planting or seeding. 1040ez filing Costs incurred in replanting to replace lost seedlings. 1040ez filing You can choose to capitalize certain indirect reforestation costs. 1040ez filing   These capitalized amounts are your basis for the timber. 1040ez filing Recover your basis when you sell the timber or take depletion allowances when you cut the timber. 1040ez filing See Depletion in chapter 7. 1040ez filing Forestation and reforestation costs. 1040ez filing   You can elect to deduct up to $10,000 ($5,000 if married filing separately; $0 for a trust) of qualifying reforestation costs paid or incurred after October 22, 2004, for each qualified timber property. 1040ez filing Any remaining costs can be amortized over an 84-month period. 1040ez filing See chapter 7. 1040ez filing If you make an election to deduct or amortize qualifying reforestation costs, you should create and maintain separate timber accounts for each qualified timber property. 1040ez filing The accounts should include all reforestation treatments and the dates they were applied. 1040ez filing Any qualified timber property that is subject to the deduction or amortization election cannot be included in any other timber account for which depletion is allowed. 1040ez filing The timber account should be maintained until the timber is disposed of. 1040ez filing For more information, see Notice 2006-47, 2006-20 I. 1040ez filing R. 1040ez filing B. 1040ez filing 892, available at  www. 1040ez filing irs. 1040ez filing gov/irb/2006-20_IRB/ar11. 1040ez filing html. 1040ez filing   You elect to deduct forestation and reforestation costs by claiming the deduction on the income tax return filed by the due date (including extensions) for the tax year in which the expenses were paid or incurred. 1040ez filing If you are filing Form T (Timber), Forest Activities Schedule, also complete Form T (Timber), Part IV. 1040ez filing If you are not filing Form T (Timber), attach a statement to your return with the following information. 1040ez filing The unique stand identification numbers. 1040ez filing The total number of acres reforested during the tax year. 1040ez filing The nature of the reforestation treatments. 1040ez filing The total amounts of the qualified reforestation expenditures eligible to be amortized or deducted. 1040ez filing   However, if you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). 1040ez filing Clearly indicate the election on your amended return and write “Filed pursuant to section 301. 1040ez filing 9100-2” at the top of the amended return. 1040ez filing File the amended return at the same address you filed the original return. 1040ez filing    For more information about forestation and reforestation costs, see chapter 7. 1040ez filing    For more information about timber, see Agriculture Handbook Number 731, Forest Landowners' Guide to the Federal Income Tax. 1040ez filing You can view this publication on the Internet at  www. 1040ez filing fs. 1040ez filing fed. 1040ez filing us/publications. 1040ez filing Christmas tree cultivation. 1040ez filing   If you are in the business of planting and cultivating Christmas trees to sell when they are more than 6 years old, capitalize expenses incurred for planting and stump culture and add them to the basis of the standing trees. 1040ez filing Recover these expenses as part of your adjusted basis when you sell the standing trees or as depletion allowances when you cut the trees. 1040ez filing For more information, see Timber Depletion under Depletion in chapter 7. 1040ez filing   You can deduct as business expenses the costs incurred for shearing and basal pruning of these trees. 1040ez filing Expenses incurred for silvicultural practices, such as weeding or cleaning, and noncommercial thinning are also deductible as business expenses. 1040ez filing   Capitalize the cost of land improvements, such as road grading, ditching, and fire breaks, that have a useful life beyond the tax year. 1040ez filing If the improvements do not have a determinable useful life, add their cost to the basis of the land. 1040ez filing The cost is recovered when you sell or otherwise dispose of it. 1040ez filing If the improvements have a determinable useful life, recover their cost through depreciation. 1040ez filing Capitalize the cost of equipment and other depreciable assets, such as culverts and fences, to the extent you do not use them in planting Christmas trees. 1040ez filing Recover these costs through depreciation. 1040ez filing Nondeductible Expenses You cannot deduct personal expenses and certain other items on your tax return even if they relate to your farm. 1040ez filing Personal, Living, and Family Expenses You cannot deduct certain personal, living, and family expenses as business expenses. 1040ez filing These include rent and insurance premiums paid on property used as your home, life insurance premiums on yourself or your family, the cost of maintaining cars, trucks, or horses for personal use, allowances to minor children, attorneys' fees and legal expenses incurred in personal matters, and household expenses. 1040ez filing Likewise, the cost of purchasing or raising produce or livestock consumed by you or your family is not deductible. 1040ez filing Other Nondeductible Items You cannot deduct the following items on your tax return. 1040ez filing Loss of growing plants, produce, and crops. 1040ez filing   Losses of plants, produce, and crops raised for sale are generally not deductible. 1040ez filing However, you may have a deductible loss on plants with a preproductive period of more than 2 years. 1040ez filing See chapter 11 for more information. 1040ez filing Repayment of loans. 1040ez filing   You cannot deduct the repayment of a loan. 1040ez filing However, if you use the proceeds of a loan for farm business expenses, you can deduct the interest on the loan. 1040ez filing See Interest , earlier. 1040ez filing Estate, inheritance, legacy, succession, and gift taxes. 1040ez filing   You cannot deduct estate, inheritance, legacy, succession, and gift taxes. 1040ez filing Loss of livestock. 1040ez filing   You cannot deduct as a loss the value of raised livestock that die if you deducted the cost of raising them as an expense. 1040ez filing Losses from sales or exchanges between related persons. 1040ez filing   You cannot deduct losses from sales or exchanges of property between you and certain related persons, including your spouse, brother, sister, ancestor, or lineal descendant. 1040ez filing For more information, see chapter 2 of Publication 544, Sales and Other Dispositions of Assets. 1040ez filing Cost of raising unharvested crops. 1040ez filing   You cannot deduct the cost of raising unharvested crops sold with land owned more than one year if you sell both at the same time and to the same person. 1040ez filing Add these costs to the basis of the land to determine the gain or loss on the sale. 1040ez filing For more information, see Section 1231 Gains and Losses in chapter 9. 1040ez filing Cost of unharvested crops bought with land. 1040ez filing   Capitalize the purchase price of land, including the cost allocable to unharvested crops. 1040ez filing You cannot deduct the cost of the crops at the time of purchase. 1040ez filing However, you can deduct this cost in figuring net profit or loss in the tax year you sell the crops. 1040ez filing Cost related to gifts. 1040ez filing   You cannot deduct costs related to your gifts of agricultural products or property held for sale in the ordinary course of your business. 1040ez filing The costs are not deductible in the year of the gift or any later year. 1040ez filing For example, you cannot deduct the cost of raising cattle or the cost of planting and raising unharvested wheat on parcels of land given as a gift to your children. 1040ez filing Club dues and membership fees. 1040ez filing   Generally, you cannot deduct amounts you pay or incur for membership in any club organized for business, pleasure, recreation, or any other social purpose. 1040ez filing This includes country clubs, golf and athletic clubs, hotel clubs, sporting clubs, airline clubs, and clubs operated to provide meals under circumstances generally considered to be conducive to business discussions. 1040ez filing Exception. 1040ez filing   The following organizations will not be treated as a club organized for business, pleasure, recreation, or other social purposes, unless one of its main purposes is to conduct entertainment activities for members or their guests or to provide members or their guests with access to entertainment facilities. 1040ez filing Boards of trade. 1040ez filing Business leagues. 1040ez filing Chambers of commerce. 1040ez filing Civic or public service organizations. 1040ez filing Professional associations. 1040ez filing Trade associations. 1040ez filing Real estate boards. 1040ez filing Fines and penalties. 1040ez filing   You cannot deduct fines and penalties, except penalties for exceeding marketing quotas, discussed earlier. 1040ez filing Losses From Operating a Farm If your deductible farm expenses are more than your farm income, you have a loss from the operation of your farm. 1040ez filing The amount of the loss you can deduct when figuring your taxable income may be limited. 1040ez filing To figure your deductible loss, you must apply the following limits. 1040ez filing The at-risk limits. 1040ez filing The passive activity limits. 1040ez filing The following discussions explain these limits. 1040ez filing If your deductible loss after applying these limits is more than your other income for the year, you may have a net operating loss. 1040ez filing See Publication 536, Net Operating Losses (NOLs) for Individuals, Estates, and Trusts. 1040ez filing If you do not carry on your farming activity to make a profit, your loss deduction may be limited by the not-for-profit rules. 1040ez filing See Not-for-Profit Farming, later. 1040ez filing At-Risk Limits The at-risk rules limit your deduction for losses from most business or income-producing activities, including farming. 1040ez filing These rules limit the losses you can deduct when figuring your taxable income. 1040ez filing The deductible loss from an activity is limited to the amount you have at risk in the activity. 1040ez filing You are at risk in any activity for: The money and adjusted basis of property you contribute to the activity, and Amounts you borrow for use in the activity if: You are personally liable for repayment, or You pledge property (other than property used in the activity) as security for the loan. 1040ez filing You are not at risk, however, for amounts you borrow for use in a farming activity from a person who has an interest in the activity (other than as a creditor) or a person related to someone (other than you) having such an interest. 1040ez filing For more information, see Publication 925. 1040ez filing Passive Activity Limits A passive activity is generally any activity involving the conduct of any trade or business in which you do not materially participate. 1040ez filing Generally, a rental activity is a passive activity. 1040ez filing If you have a passive activity, special rules limit the loss you can deduct in the tax year. 1040ez filing You generally can deduct losses from passive activities only up to income from passive activities. 1040ez filing Credits are similarly limited. 1040ez filing For more information, see Publication 925. 1040ez filing Excess Farm Loss Limit For tax years beginning after 2009, excess farm losses (defined below) are not deductible if you received certain applicable subsidies. 1040ez filing This limit applies to any farming businesses, other than a C corporation, that received a direct or counter-cyclical payment (or any payment in lieu of such payments) under title I of the Food, Conservation, and Energy Act of 2008, or from a Commodity Credit Corporation loan. 1040ez filing Your farming losses are limited to the greater of: $300,000 ($150,000 for a married person filing a separate return), or The total net farm income for the prior five tax years. 1040ez filing Farming losses from casualty losses or losses by reason of disease or drought are disregarded for purposes of figuring this limitation. 1040ez filing Also, the limitation on farm losses should be applied before the passive activity loss rules are applied. 1040ez filing For more details, see IRC section 461(j). 1040ez filing Excess farm loss. 1040ez filing   Generally, an excess farm loss is the amount of your farming loss that exceeds the amount of the limitation (as described above). 1040ez filing This loss can be determined by taking the excess of: The total deductions for the tax year from your farming businesses, over The total gross income or gain for the tax year from your farming businesses, plus the greater of: $300,000 ($150,000 for a married person filing a separate return), or The excess (if any) of the total gross income or gain from your farming businesses for the prior five tax years over the total deductions from your farming businesses for the prior five tax years. 1040ez filing   Excess farm losses that are disallowed can be carried forward to the next tax year and treated as a deduction from that year. 1040ez filing Not-for-Profit Farming If you operate a farm for profit, you can deduct all the ordinary and necessary expenses of carrying on the business of farming on Schedule F. 1040ez filing However, if you do not carry on your farming activity, or other activity you engage or invest in, to make a profit, you report the income from the activity on Form 1040, line 21, and you can deduct expenses of carrying on the activity only if you itemize your deductions on Schedule A (Form 1040). 1040ez filing Also, there is a limit on the deductions you can take. 1040ez filing You cannot use a loss from that activity to offset income from other activities. 1040ez filing Activities you do as a hobby, or mainly for sport or recreation, come under this limit. 1040ez filing An investment activity intended only to produce tax losses for the investors also comes under this limit. 1040ez filing The limit on not-for-profit losses applies to individuals, partnerships, estates, trusts, and S corporations. 1040ez filing It does not apply to corporations other than S corporations. 1040ez filing In determining whether you are carrying on your farming activity for profit, all the facts are taken into account. 1040ez filing No one factor alone is decisive. 1040ez filing Among the factors to consider are whether: You operate your farm in a businesslike manner; The time and effort you spend on farming indicate you intend to make it profitable; You depend on income from farming for your livelihood; Your losses are due to circumstances beyond your control or are normal in the start-up phase of farming; You change your methods of operation in an attempt to improve profitability; You, or your advisors, have the knowledge needed to carry on the farming activity as a successful business; You were successful in making a profit in similar activities in the past; You make a profit from farming in some years and the amount of profit you make; and You can expect to make a future profit from the appreciation of the assets used in the farming activity. 1040ez filing Presumption of profit. 1040ez filing   Your farming or other activity is presumed carried on for profit if it produced a profit in at least 3 of the last 5 tax years, including the current year. 1040ez filing Activities that consist primarily of breeding, training, showing, or racing horses are presumed carried on for profit if they produced a profit in at least 2 of the last 7 tax years, including the current year. 1040ez filing The activity must be substantially the same for each year within this period. 1040ez filing You have a profit when the gross income from an activity is more than the deductions for it. 1040ez filing   If a taxpayer dies before the end of the 5-year (or 7-year) period, the period ends on the date of the taxpayer's death. 1040ez filing   If your business or investment activity passes this 3- (or 2-) years-of-profit test, presume it is carried on for profit. 1040ez filing This means the limits discussed here do not apply. 1040ez filing You can take all your business deductions from the activity on Schedule F, even for the years that you have a loss. 1040ez filing You can rely on this presumption in every case, unless the IRS shows it is not valid. 1040ez filing   If you fail the 3- (or 2-) years-of-profit test, you still may be considered to operate your farm for profit by considering the factors listed earlier. 1040ez filing Using the presumption later. 1040ez filing   If you are starting out in farming and do not have 3 (or 2) years showing a profit, you may want to take advantage of this presumption later, after you have had the 5 (or 7) years of experience allowed by the test. 1040ez filing   You can choose to do this by filing Form 5213. 1040ez filing Filing this form postpones any determination that your farming activity is not carried on for profit until 5 (or 7) years have passed since you first started farming. 1040ez filing You must file Form 5213 within 3 years after the due date of your return for the year in which you first carried on the activity, or, if earlier, within 60 days after receiving a written notice from the IRS proposing to disallow deductions attributable to the activity. 1040ez filing   The benefit gained by making this choice is that the IRS will not immediately question whether your farming activity is engaged in for profit. 1040ez filing Accordingly, it will not limit your deductions. 1040ez filing Rather, you will gain time to earn a profit in 3 (or 2) out of the first 5 (or 7) years you carry on the farming activity. 1040ez filing If you show 3 (or 2) years of profit at the end of this period, your deductions are not limited under these rules. 1040ez filing If you do not have 3 (or 2) years of profit (and cannot otherwise show that you operated your farm for profit), the limit applies retroactively to any year in the 5-year (or 7-year) period with a loss. 1040ez filing   Filing Form 5213 automatically extends the period of limitations on any year