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1040ez Tax Form

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1040ez Tax Form

1040ez tax form Publication 925 - Main Content Table of Contents Passive Activity LimitsWho Must Use These Rules? Passive Activity Loss Passive Activity Credit Publicly Traded Partnership Excess Farm Loss Passive Activities Activities That Are Not Passive Activities Passive Activity Income and Deductions Grouping Your Activities Recharacterization of Passive Income Dispositions How To Report Your Passive Activity Loss Comprehensive ExampleGeneral Information At-Risk LimitsWho Is Affected? Activities Covered by the At-Risk Rules At-Risk Amounts Amounts Not At Risk Reductions of Amounts At Risk Recapture Rule How To Get Tax HelpLow Income Taxpayer Clinics Passive Activity Limits Who Must Use These Rules? The passive activity rules apply to: Individuals, Estates, Trusts (other than grantor trusts), Personal service corporations, and Closely held corporations. 1040ez tax form Even though the rules do not apply to grantor trusts, partnerships, and S corporations directly, they do apply to the owners of these entities. 1040ez tax form For information about personal service corporations and closely held corporations, including definitions and how the passive activity rules apply to these corporations, see Form 8810 and its instructions. 1040ez tax form Before applying the passive activity limits, you must first determine the amount of the deductions disallowed under the basis, excess farm loss, or at-risk rules. 1040ez tax form See Passive Activity Deductions, later. 1040ez tax form Passive Activity Loss Generally, the passive activity loss for the tax year is not allowed. 1040ez tax form However, there is a special allowance under which some or all of your passive activity loss may be allowed. 1040ez tax form See Special $25,000 allowance , later. 1040ez tax form Definition of passive activity loss. 1040ez tax form    Generally, your passive activity loss for the tax year is the excess of your passive activity deductions over your passive activity gross income. 1040ez tax form See Passive Activity Income and Deductions , later. 1040ez tax form   For a closely held corporation, the passive activity loss is the excess of passive activity deductions over the sum of passive activity gross income and net active income. 1040ez tax form For details on net active income, see the Instructions for Form 8810. 1040ez tax form For the definition of passive activity gross income, see Passive Activity Income , later. 1040ez tax form For the definition of passive activity deductions, see Passive Activity Deductions , later. 1040ez tax form Identification of Disallowed Passive Activity Deductions If all or a part of your passive activity loss is disallowed for the tax year, you may need to allocate the disallowed passive activity loss among different passive activities and among different deductions within a passive activity. 1040ez tax form Allocation of disallowed passive activity loss among activities. 1040ez tax form   If all or any part of your passive activity loss is disallowed for the tax year, a ratable portion of the loss (if any) from each of your passive activities is disallowed. 1040ez tax form The ratable portion of a loss from an activity is computed by multiplying the passive activity loss that is disallowed for the tax year by the fraction obtained by dividing: The loss from the activity for the tax year; by The sum of the losses for the tax year from all activities having losses for the tax year. 1040ez tax form Use Worksheet 5 of Form 8582 to figure the ratable portion of the loss from each activity that is disallowed. 1040ez tax form Loss from an activity. 1040ez tax form   The term “loss from an activity” means: The amount by which the passive activity deductions (defined later) from the activity for the tax year exceed the passive activity gross income (defined later) from the activity for the tax year; reduced by Any part of such amount that is allowed under the Special $25,000 Allowance , later. 1040ez tax form   If your passive activity gross income from significant participation passive activities (defined later) for the tax year is more than your passive activity deductions from those activities for the tax year, those activities shall be treated, solely for purposes of figuring your loss from the activity, as a single activity that does not have a loss for such taxable year. 1040ez tax form See Significant Participation Passive Activities , later. 1040ez tax form Example. 1040ez tax form John Pine holds interests in three passive activities, A, B, and C. 1040ez tax form The gross income and deductions from these activities for the taxable year are as follows:   A B C Total Gross income $7,000 $4,000 $12,000 $23,000 Deductions (16,000) (20,000) (8,000) (44,000)           Net income (loss) ($9,000) ($16,000) $4,000 ($21,000)   John Pine’s $21,000 passive activity loss for the taxable year is disallowed. 1040ez tax form Therefore, a ratable portion of the losses from activities A and B is disallowed. 1040ez tax form He figures the disallowed portion of each loss as follows: A: $21,000 x $9,000/$25,000 $7,560 B: $21,000 x $16,000/$25,000 13,440     Total $21,000 Allocation within loss activities. 1040ez tax form   If all or any part of your loss from an activity is disallowed under Allocation of disallowed passive activity loss among activities for the tax year, a ratable portion of each of your passive activity deductions (defined later), other than an excluded deduction (defined below) from such activity is disallowed. 1040ez tax form The ratable portion of a passive activity deduction is the amount of the disallowed portion of the loss from the activity for the tax year multiplied by the fraction obtained by dividing: The amount of such deduction; by The sum of all of your passive activity deductions (other than excluded deductions) from that activity from the tax year. 1040ez tax form Excluded deductions. 1040ez tax form    “Excluded deduction” means any passive activity deduction that is taken into account in computing your net income from an item of property for a taxable year in which an amount of the taxpayer's gross income from such item of property is treated as not from a passive activity. 1040ez tax form See Recharacterization of Passive Income , later. 1040ez tax form Separately identified deductions. 1040ez tax form   In identifying the deductions from an activity that are disallowed, you do not need to account separately for a deduction unless such deduction may, if separately taken into account, result in an income tax liability for any tax year different from that which would result were such deduction not taken into account separately. 1040ez tax form   Use Form 8582, Worksheet 7, for any activity if you have passive activity deductions for that activity that must be separately identified. 1040ez tax form   Deductions that must be accounted for separately include (but are not limited to) the following deductions. 1040ez tax form Deductions that arise in a rental real estate activity in tax years in which you actively participate in such activity. 1040ez tax form See Active participation , later. 1040ez tax form Deductions that arise in a rental real estate activity in tax years in which you do not actively participate in such activity. 1040ez tax form See Active participation , later. 1040ez tax form Losses from sales or exchanges of capital assets. 1040ez tax form Section 1231 losses. 1040ez tax form See Section 1231 Gains and Losses in Publication 544, Sales and Other Disposition of Assets, for more information. 1040ez tax form Carryover of Disallowed Deductions In the case of an activity with respect to which any deductions or credits are disallowed for a taxable year (the loss activity), the disallowed deductions are allocated among your activities for the next tax year in a manner that reasonably reflects the extent to which each activity continues the loss activity. 1040ez tax form The disallowed deductions or credits allocated to an activity under the preceding sentence are treated as deductions or credits from the activity for the next tax year. 1040ez tax form For more information, see Regulations section 1. 1040ez tax form 469-1(f)(4). 1040ez tax form Passive Activity Credit Generally, the passive activity credit for the tax year is disallowed. 1040ez tax form The passive activity credit is the amount by which the sum of all your credits subject to the passive activity rules exceed your regular tax liability allocable to all passive activities for the tax year. 1040ez tax form Credits that are included in figuring the general business credit are subject to the passive activity rules. 1040ez tax form See the Instructions for Form 8582-CR for more information. 1040ez tax form Publicly Traded Partnership You must apply the rules in this part separately to your income or loss from a passive activity held through a publicly traded partnership (PTP). 1040ez tax form You also must apply the limit on passive activity credits separately to your credits from a passive activity held through a PTP. 1040ez tax form You can offset deductions from passive activities of a PTP only against income or gain from passive activities of the same PTP. 1040ez tax form Likewise, you can offset credits from passive activities of a PTP only against the tax on the net passive income from the same PTP. 1040ez tax form This separate treatment rule also applies to a regulated investment company holding an interest in a PTP for the items attributable to that interest. 1040ez tax form For more information on how to apply the passive activity loss rules to PTPs, and on how to apply the limit on passive activity credits to PTPs, see Publicly Traded Partnerships (PTPs) in the Instructions for Forms 8582 and 8582-CR, respectively. 1040ez tax form Excess Farm Loss If you receive an applicable subsidy for any tax year and you have an excess farm loss for the tax year, special rules apply. 1040ez tax form These rules do not apply to C corporations. 1040ez tax form For information, see the Instructions for Schedule F (Form 1040), Profit or Loss From Farming. 1040ez tax form Passive Activities There are two kinds of passive activities. 1040ez tax form Trade or business activities in which you do not materially participate during the year. 1040ez tax form Rental activities, even if you do materially participate in them, unless you are a real estate professional. 1040ez tax form Material participation in a trade or business is discussed later, under Activities That Are Not Passive Activities . 1040ez tax form Treatment of former passive activities. 1040ez tax form   A former passive activity is an activity that was a passive activity in any earlier tax year, but is not a passive activity in the current tax year. 1040ez tax form You can deduct a prior year's unallowed loss from the activity up to the amount of your current year net income from the activity. 1040ez tax form Treat any remaining prior year unallowed loss like you treat any other passive loss. 1040ez tax form   In addition, any prior year unallowed passive activity credits from a former passive activity offset the allocable part of your current year tax liability. 1040ez tax form The allocable part of your current year tax liability is that part of this year's tax liability that is allocable to the current year net income from the former passive activity. 1040ez tax form You figure this after you reduce your net income from the activity by any prior year unallowed loss from that activity (but not below zero). 1040ez tax form Trade or Business Activities A trade or business activity is an activity that: Involves the conduct of a trade or business (that is, deductions would be allowable under section 162 of the Internal Revenue Code if other limitations, such as the passive activity rules, did not apply), Is conducted in anticipation of starting a trade or business, or Involves research or experimental expenditures that are deductible under Internal Revenue Code section 174 (or that would be deductible if you chose to deduct rather than capitalize them). 1040ez tax form A trade or business activity does not include a rental activity or the rental of property that is incidental to an activity of holding the property for investment. 1040ez tax form You generally report trade or business activities on Schedule C, C-EZ, F, or in Part II or III of Schedule E. 1040ez tax form Rental Activities A rental activity is a passive activity even if you materially participated in that activity, unless you materially participated as a real estate professional. 1040ez tax form See Real Estate Professional under Activities That Are Not Passive Activities, later. 1040ez tax form An activity is a rental activity if tangible property (real or personal) is used by customers or held for use by customers, and the gross income (or expected gross income) from the activity represents amounts paid (or to be paid) mainly for the use of the property. 1040ez tax form It does not matter whether the use is under a lease, a service contract, or some other arrangement. 1040ez tax form Exceptions. 1040ez tax form   Your activity is not a rental activity if any of the following apply. 1040ez tax form The average period of customer use of the property is 7 days or less. 1040ez tax form You figure the average period of customer use by dividing the total number of days in all rental periods by the number of rentals during the tax year. 1040ez tax form If the activity involves renting more than one class of property, multiply the average period of customer use of each class by a fraction. 1040ez tax form The numerator of the fraction is the gross rental income from that class of property and the denominator is the activity's total gross rental income. 1040ez tax form The activity's average period of customer use will equal the sum of the amounts for each class. 1040ez tax form The average period of customer use of the property, as figured in (1) above, is 30 days or less and you provide significant personal services with the rentals. 1040ez tax form Significant personal services include only services performed by individuals. 1040ez tax form To determine if personal services are significant, all relevant facts and circumstances are taken into consideration, including the frequency of the services, the type and amount of labor required to perform the services, and the value of the services relative to the amount charged for use of the property. 1040ez tax form Significant personal services do not include the following. 1040ez tax form Services needed to permit the lawful use of the property, Services to repair or improve property that would extend its useful life for a period substantially longer than the average rental, and Services that are similar to those commonly provided with long-term rentals of real estate, such as cleaning and maintenance of common areas or routine repairs. 1040ez tax form You provide extraordinary personal services in making the rental property available for customer use. 1040ez tax form Services are extraordinary personal services if they are performed by individuals and the customers' use of the property is incidental to their receipt of the services. 1040ez tax form The rental is incidental to a nonrental activity. 1040ez tax form The rental of property is incidental to an activity of holding property for investment if the main purpose of holding the property is to realize a gain from its appreciation and the gross rental income from the property is less than 2% of the smaller of the property's unadjusted basis or fair market value. 1040ez tax form The unadjusted basis of property is its cost not reduced by depreciation or any other basis adjustment. 1040ez tax form The rental of property is incidental to a trade or business activity if all of the following apply. 1040ez tax form You own an interest in the trade or business activity during the year. 1040ez tax form The rental property was used mainly in that trade or business activity during the current year, or during at least 2 of the 5 preceding tax years. 1040ez tax form Your gross rental income from the property is less than 2% of the smaller of its unadjusted basis or fair market value. 1040ez tax form Lodging provided to an employee or the employee's spouse or dependents is incidental to the activity or activities in which the employee performs services if the lodging is furnished for the employer's convenience. 1040ez tax form You customarily make the rental property available during defined business hours for nonexclusive use by various customers. 1040ez tax form You provide the property for use in a nonrental activity in your capacity as an owner of an interest in the partnership, S corporation, or joint venture conducting that activity. 1040ez tax form    If you meet any of the exceptions listed above, see the instructions for Form 8582 for information about how to report any income or loss from the activity. 1040ez tax form Special $25,000 allowance. 1040ez tax form   If you or your spouse actively participated in a passive rental real estate activity, the amount of the passive activity loss that is disallowed is decreased and you therefore can deduct up to $25,000 of loss from the activity from your nonpassive income. 1040ez tax form This special allowance is an exception to the general rule disallowing the passive activity loss. 1040ez tax form Similarly, you can offset credits from the activity against the tax on up to $25,000 of nonpassive income after taking into account any losses allowed under this exception. 1040ez tax form   If you are married, filing a separate return, and lived apart from your spouse for the entire tax year, your special allowance cannot be more than $12,500. 1040ez tax form If you lived with your spouse at any time during the year and are filing a separate return, you cannot use the special allowance to reduce your nonpassive income or tax on nonpassive income. 1040ez tax form   The maximum special allowance is reduced if your modified adjusted gross income exceeds certain amounts. 1040ez tax form See Phaseout rule , later. 1040ez tax form Example. 1040ez tax form Kate, a single taxpayer, has $70,000 in wages, $15,000 income from a limited partnership, a $26,000 loss from rental real estate activities in which she actively participated, and is not subject to the modified adjusted gross income phaseout rule. 1040ez tax form She can use $15,000 of her $26,000 loss to offset her $15,000 passive income from the partnership. 1040ez tax form She actively participated in her rental real estate activities, so she can use the remaining $11,000 rental real estate loss to offset $11,000 of her nonpassive income (wages). 1040ez tax form Commercial revitalization deduction (CRD). 1040ez tax form   The special allowance must first be applied to losses from rental real estate activities figured without the CRD. 1040ez tax form Any remaining part of the special allowance is available for the CRD from the rental real estate activities and is not subject to the active participation rules or the phaseout based on modified adjusted gross income. 1040ez tax form You cannot claim a CRD for a building placed in service after December 31, 2009. 1040ez tax form Active participation. 1040ez tax form   Active participation is not the same as material participation (defined later). 1040ez tax form Active participation is a less stringent standard than material participation. 1040ez tax form For example, you may be treated as actively participating if you make management decisions in a significant and bona fide sense. 1040ez tax form Management decisions that count as active participation include approving new tenants, deciding on rental terms, approving expenditures, and similar decisions. 1040ez tax form   Only individuals can actively participate in rental real estate activities. 1040ez tax form However, a decedent's estate is treated as actively participating for its tax years ending less than 2 years after the decedent's death, if the decedent would have satisfied the active participation requirement for the activity for the tax year the decedent died. 1040ez tax form   A decedent's qualified revocable trust can also be treated as actively participating if both the trustee and the executor (if any) of the estate choose to treat the trust as part of the estate. 1040ez tax form The choice applies to tax years ending after the decedent's death and before: 2 years after the decedent's death if no estate tax return is required, or 6 months after the estate tax liability is finally determined if an estate tax return is required. 1040ez tax form   The choice is irrevocable and cannot be made later than the due date for the estate's first income tax return (including any extensions). 1040ez tax form   Limited partners are not treated as actively participating in a partnership's rental real estate activities. 1040ez tax form   You are not treated as actively participating in a rental real estate activity unless your interest in the activity (including your spouse's interest) was at least 10% (by value) of all interests in the activity throughout the year. 1040ez tax form   Active participation is not required to take the low-income housing credit, the rehabilitation investment credit, or CRD from rental real estate activities. 1040ez tax form Example. 1040ez tax form Mike, a single taxpayer, had the following income and loss during the tax year: Salary $42,300 Dividends 300 Interest 1,400 Rental loss (4,000) The rental loss came from a house Mike owned. 1040ez tax form He advertised and rented the house to the current tenant himself. 1040ez tax form He also collected the rents and did the repairs or hired someone to do them. 1040ez tax form Even though the rental loss is a loss from a passive activity, Mike can use the entire $4,000 loss to offset his other income because he actively participated. 1040ez tax form Phaseout rule. 1040ez tax form   The maximum special allowance of $25,000 ($12,500 for married individuals filing separate returns and living apart at all times during the year) is reduced by 50% of the amount of your modified adjusted gross income that is more than $100,000 ($50,000 if you are married filing separately). 1040ez tax form If your modified adjusted gross income is $150,000 or more ($75,000 or more if you are married filing separately), you generally cannot use the special allowance. 1040ez tax form    Modified adjusted gross income for this purpose is your adjusted gross income figured without the following. 1040ez tax form Taxable social security and tier 1 railroad retirement benefits. 1040ez tax form Deductible contributions to individual retirement accounts (IRAs) and section 501(c)(18) pension plans. 1040ez tax form The exclusion from income of interest from qualified U. 1040ez tax form S. 1040ez tax form savings bonds used to pay qualified higher education expenses. 1040ez tax form The exclusion from income of amounts received from an employer's adoption assistance program. 1040ez tax form Passive activity income or loss included on Form 8582. 1040ez tax form Any rental real estate loss allowed because you materially participated in the rental activity as a Real Estate Professional (as discussed later, under Activities That Are Not Passive Activities). 1040ez tax form Any overall loss from a publicly traded partnership (see Publicly Traded Partnerships (PTPs) in the instructions for Form 8582). 1040ez tax form The deduction for the employer-equivalent portion of self-employment tax. 1040ez tax form The deduction for domestic production activities. 1040ez tax form The deduction allowed for interest on student loans. 1040ez tax form The deduction for qualified tuition and related expenses. 1040ez tax form Example. 1040ez tax form During 2013, John was unmarried and was not a real estate professional. 1040ez tax form For 2013, he had $120,000 in salary and a $31,000 loss from his rental real estate activities in which he actively participated. 1040ez tax form His modified adjusted gross income is $120,000. 1040ez tax form When he files his 2013 return, he can deduct only $15,000 of his passive activity loss. 1040ez tax form He must carry over the remaining $16,000 passive activity loss to 2014. 1040ez tax form He figures his deduction and carryover as follows: Adjusted gross income, modified as required $120,000       Minus amount not subject to phaseout 100,000 Amount subject to phaseout rule $20,000 Multiply by 50% × 50% Required reduction to special allowance $10,000 Maximum special allowance $25,000 Minus required reduction (see above) 10,000 Adjusted special allowance $15,000 Passive loss from rental real estate $31,000 Deduction allowable/Adjusted  special allowance (see above) 15,000       Amount that must be carried forward $16,000 Exceptions to the phaseout rules. 1040ez tax form   A higher phaseout range applies to rehabilitation investment credits from rental real estate activities. 1040ez tax form For those credits, the phaseout of the $25,000 special allowance starts when your modified adjusted gross income exceeds $200,000 ($100,000 if you are a married individual filing a separate return and living apart at all times during the year). 1040ez tax form   There is no phaseout of the $25,000 special allowance for low-income housing credits or for the CRD. 1040ez tax form Ordering rules. 1040ez tax form   If you have more than one of the exceptions to the phaseout rules in the same tax year, you must apply the $25,000 phaseout against your passive activity losses and credits in the following order. 1040ez tax form The portion of passive activity losses not attributable to the CRD. 1040ez tax form The portion of passive activity losses attributable to the CRD. 1040ez tax form The portion of passive activity credits attributable to credits other than the rehabilitation and low-income housing credits. 1040ez tax form The portion of passive activity credits attributable to the rehabilitation credit. 1040ez tax form The portion of passive activity credits attributable to the low-income housing credit. 1040ez tax form Activities That Are Not Passive Activities The following are not passive activities. 1040ez tax form Trade or business activities in which you materially participated for the tax year. 1040ez tax form A working interest in an oil or gas well which you hold directly or through an entity that does not limit your liability (such as a general partner interest in a partnership). 1040ez tax form It does not matter whether you materially participated in the activity for the tax year. 1040ez tax form However, if your liability was limited for part of the year (for example, you converted your general partner interest to a limited partner interest during the year) and you had a net loss from the well for the year, some of your income and deductions from the working interest may be treated as passive activity gross income and passive activity deductions. 1040ez tax form  See Temporary Regulations section 1. 1040ez tax form 469-1T(e)(4)(ii). 1040ez tax form The rental of a dwelling unit that you also used for personal purposes during the year for more than the greater of 14 days or 10% of the number of days during the year that the home was rented at a fair rental. 1040ez tax form An activity of trading personal property for the account of those who own interests in the activity. 1040ez tax form See Temporary Regulations section 1. 1040ez tax form 469-1T(e)(6). 1040ez tax form Rental real estate activities in which you materially participated as a real estate professional. 1040ez tax form See Real Estate Professional , later. 1040ez tax form You should not enter income and losses from these activities on Form 8582. 1040ez tax form Instead, enter them on the forms or schedules you would normally use. 1040ez tax form Material Participation A trade or business activity is not a passive activity if you materially participated in the activity. 1040ez tax form Material participation tests. 1040ez tax form    You materially participated in a trade or business activity for a tax year if you satisfy any of the following tests. 1040ez tax form You participated in the activity for more than 500 hours. 1040ez tax form Your participation was substantially all the participation in the activity of all individuals for the tax year, including the participation of individuals who did not own any interest in the activity. 1040ez tax form You participated in the activity for more than 100 hours during the tax year, and you participated at least as much as any other individual (including individuals who did not own any interest in the activity) for the year. 1040ez tax form The activity is a significant participation activity, and you participated in all significant participation activities for more than 500 hours. 1040ez tax form A significant participation activity is any trade or business activity in which you participated for more than 100 hours during the year and in which you did not materially participate under any of the material participation tests, other than this test. 1040ez tax form See Significant Participation Passive Activities , under Recharacterization of Passive Income, later. 1040ez tax form You materially participated in the activity for any 5 (whether or not consecutive) of the 10 immediately preceding tax years. 1040ez tax form The activity is a personal service activity in which you materially participated for any 3 (whether or not consecutive) preceding tax years. 1040ez tax form An activity is a personal service activity if it involves the performance of personal services in the fields of health (including veterinary services), law, engineering, architecture, accounting, actuarial science, performing arts, consulting, or any other trade or business in which capital is not a material income-producing factor. 1040ez tax form Based on all the facts and circumstances, you participated in the activity on a regular, continuous, and substantial basis during the year. 1040ez tax form   You did not materially participate in the activity under test (7) if you participated in the activity for 100 hours or less during the year. 1040ez tax form Your participation in managing the activity does not count in determining whether you materially participated under this test if: Any person other than you received compensation for managing the activity, or Any individual spent more hours during the tax year managing the activity than you did (regardless of whether the individual was compensated for the management services). 1040ez tax form Participation. 1040ez tax form   In general, any work you do in connection with an activity in which you own an interest is treated as participation in the activity. 1040ez tax form Work not usually performed by owners. 1040ez tax form   You do not treat the work you do in connection with an activity as participation in the activity if both of the following are true. 1040ez tax form The work is not work that is customarily done by the owner of that type of activity. 1040ez tax form One of your main reasons for doing the work is to avoid the disallowance of any loss or credit from the activity under the passive activity rules. 1040ez tax form Participation as an investor. 1040ez tax form   You do not treat the work you do in your capacity as an investor in an activity as participation unless you are directly involved in the day-to-day management or operations of the activity. 1040ez tax form Work you do as an investor includes: Studying and reviewing financial statements or reports on operations of the activity, Preparing or compiling summaries or analyses of the finances or operations of the activity for your own use, and Monitoring the finances or operations of the activity in a nonmanagerial capacity. 1040ez tax form Spouse's participation. 1040ez tax form   Your participation in an activity includes your spouse's participation. 1040ez tax form This applies even if your spouse did not own any interest in the activity and you and your spouse do not file a joint return for the year. 1040ez tax form Proof of participation. 1040ez tax form You can use any reasonable method to prove your participation in an activity for the year. 1040ez tax form You do not have to keep contemporaneous daily time reports, logs, or similar documents if you can establish your participation in some other way. 1040ez tax form For example, you can show the services you performed and the approximate number of hours spent by using an appointment book, calendar, or narrative summary. 1040ez tax form Limited partners. 1040ez tax form   If you owned an activity as a limited partner, you generally are not treated as materially participating in the activity. 1040ez tax form However, you are treated as materially participating in the activity if you met test (1), (5), or (6) under Material participation tests , discussed earlier, for the tax year. 1040ez tax form   You are not treated as a limited partner, however, if you also were a general partner in the partnership at all times during the partnership's tax year ending with or within your tax year (or, if shorter, during that part of the partnership's tax year in which you directly or indirectly owned your limited partner interest). 1040ez tax form Retired or disabled farmer and surviving spouse of a farmer. 1040ez tax form   If you are a retired or disabled farmer, you are treated as materially participating in a farming activity if you materially participated for 5 or more of the 8 years before your retirement or disability. 1040ez tax form Similarly, if you are a surviving spouse of a farmer, you are treated as materially participating in a farming activity if the real property used in the activity meets the estate tax rules for special valuation of farm property passed from a qualifying decedent, and you actively manage the farm. 1040ez tax form Corporations. 1040ez tax form   A closely held corporation or a personal service corporation is treated as materially participating in an activity only if one or more shareholders holding more than 50% by value of the outstanding stock of the corporation materially participate in the activity. 1040ez tax form   A closely held corporation can also satisfy the material participation standard by meeting the first two requirements for the qualifying business exception from the at-risk limits. 1040ez tax form See Special exception for qualified corporations under Activities Covered by the At-Risk Rules, later. 1040ez tax form Real Estate Professional Generally, rental activities are passive activities even if you materially participated in them. 1040ez tax form However, if you qualified as a real estate professional, rental real estate activities in which you materially participated are not passive activities. 1040ez tax form For this purpose, each interest you have in a rental real estate activity is a separate activity, unless you choose to treat all interests in rental real estate activities as one activity. 1040ez tax form See the Instructions for Schedule E (Form 1040), Supplemental Income and Loss, for information about making this choice. 1040ez tax form If you qualified as a real estate professional for 2013, report income or losses from rental real estate activities in which you materially participated as nonpassive income or losses, and complete line 43 of Schedule E (Form 1040). 1040ez tax form If you also have an unallowed loss from these activities from an earlier year when you did not qualify, see Treatment of former passive activities under Passive Activities, earlier. 1040ez tax form Qualifications. 1040ez tax form   You qualified as a real estate professional for the year if you met both of the following requirements. 1040ez tax form More than half of the personal services you performed in all trades or businesses during the tax year were performed in real property trades or businesses in which you materially participated. 1040ez tax form You performed more than 750 hours of services during the tax year in real property trades or businesses in which you materially participated. 1040ez tax form   Do not count personal services you performed as an employee in real property trades or businesses unless you were a 5% owner of your employer. 1040ez tax form You were a 5% owner if you owned (or are considered to have owned) more than 5% of your employer's outstanding stock, outstanding voting stock, or capital or profits interest. 1040ez tax form   If you file a joint return, do not count your spouse's personal services to determine whether you met the preceding requirements. 1040ez tax form However, you can count your spouse's participation in an activity in determining if you materially participated. 1040ez tax form Real property trades or businesses. 1040ez tax form   A real property trade or business is a trade or business that does any of the following with real property. 1040ez tax form Develops or redevelops it. 1040ez tax form Constructs or reconstructs it. 1040ez tax form Acquires it. 1040ez tax form Converts it. 1040ez tax form Rents or leases it. 1040ez tax form Operates or manages it. 1040ez tax form Brokers it. 1040ez tax form Closely held corporations. 1040ez tax form   A closely held corporation can qualify as a real estate professional if more than 50% of the gross receipts for its tax year came from real property trades or businesses in which it materially participated. 1040ez tax form Passive Activity Income and Deductions In figuring your net income or loss from a passive activity, take into account only passive activity income and passive activity deductions. 1040ez tax form Self-charged interest. 1040ez tax form   Certain self-charged interest income or deductions may be treated as passive activity gross income or passive activity deductions if the loan proceeds are used in a passive activity. 1040ez tax form   Generally, self-charged interest income and deductions result from loans between you and a partnership or S corporation in which you had a direct or indirect ownership interest. 1040ez tax form This includes both loans you made to the partnership or S corporation and loans the partnership or S corporation made to you. 1040ez tax form   It also includes loans from one partnership or S corporation to another partnership or S corporation if each owner in the borrowing entity has the same proportional ownership interest in the lending entity. 1040ez tax form    Exception. 1040ez tax form The self-charged interest rules do not apply to your interest in a partnership or S corporation if the entity made an election under Regulations section 1. 1040ez tax form 469-7(g) to avoid the application of these rules. 1040ez tax form For more details on the self-charged interest rules, see Regulations section 1. 1040ez tax form 469-7. 1040ez tax form Passive Activity Income Passive activity income includes all income from passive activities and generally includes gain from disposition of an interest in a passive activity or property used in a passive activity. 1040ez tax form Passive activity income does not include the following items. 1040ez tax form Income from an activity that is not a passive activity. 1040ez tax form These activities are discussed under Activities That Are Not Passive Activities , earlier. 1040ez tax form Portfolio income. 1040ez tax form This includes interest, dividends, annuities, and royalties not derived in the ordinary course of a trade or business. 1040ez tax form It includes gain or loss from the disposition of property that produces these types of income or that is held for investment. 1040ez tax form The exclusion for portfolio income does not apply to self-charged interest treated as passive activity income. 1040ez tax form For more information on self-charged interest, see Self-charged interest , earlier. 1040ez tax form Personal service income. 1040ez tax form This includes salaries, wages, commissions, self-employment income from trade or business activities in which you materially participated, deferred compensation, taxable social security and other retirement benefits, and payments from partnerships to partners for personal services. 1040ez tax form Income from positive section 481 adjustments allocated to activities other than passive activities. 1040ez tax form (Section 481 adjustments are adjustments that must be made due to changes in your accounting method. 1040ez tax form ) Income or gain from investments of working capital. 1040ez tax form Income from an oil or gas property if you treated any loss from a working interest in the property for any tax year beginning after 1986 as a nonpassive loss, as discussed in item (2) under Activities That Are Not Passive Activities , earlier. 1040ez tax form This also applies to income from other oil and gas property the basis of which is determined wholly or partly by the basis of the property in the preceding sentence. 1040ez tax form Any income from intangible property, such as a patent, copyright, or literary, musical, or artistic composition, if your personal efforts significantly contributed to the creation of the property. 1040ez tax form Any other income that must be treated as nonpassive income. 1040ez tax form See Recharacterization of Passive Income , later. 1040ez tax form Overall gain from any interest in a publicly traded partnership. 1040ez tax form See Publicly Traded Partnerships (PTPs) in the instructions for Form 8582. 1040ez tax form State, local, and foreign income tax refunds. 1040ez tax form Income from a covenant not to compete. 1040ez tax form Reimbursement of a casualty or theft loss included in gross income to recover all or part of a prior year loss deduction, if the loss deduction was not a passive activity deduction. 1040ez tax form Alaska Permanent Fund dividends. 1040ez tax form Cancellation of debt income, if at the time the debt is discharged the debt is not allocated to passive activities under the interest expense allocation rules. 1040ez tax form See chapter 4 of Publication 535, Business Expenses, for information about the rules for allocating interest. 1040ez tax form Disposition of property interests. 1040ez tax form   Gain on the disposition of an interest in property generally is passive activity income if, at the time of the disposition, the property was used in an activity that was a passive activity in the year of disposition. 1040ez tax form The gain generally is not passive activity income if, at the time of disposition, the property was used in an activity that was not a passive activity in the year of disposition. 1040ez tax form An exception to this general rule may apply if you previously used the property in a different activity. 1040ez tax form Exception for more than one use in the preceding 12 months. 1040ez tax form   If you used the property in more than one activity during the 12-month period before its disposition, you must allocate the gain between the activities on a basis that reasonably reflects the property's use during that period. 1040ez tax form Any gain allocated to a passive activity is passive activity income. 1040ez tax form   For this purpose, an allocation of the gain solely to the activity in which the property was mainly used during that period reasonably reflects the property's use if the fair market value of your interest in the property is not more than the lesser of: $10,000, or 10% of the total of the fair market value of your interest in the property and the fair market value of all other property used in that activity immediately before the disposition. 1040ez tax form Exception for substantially appreciated property. 1040ez tax form   The gain is passive activity income if the fair market value of the property at disposition was more than 120% of its adjusted basis and either of the following conditions applies. 1040ez tax form You used the property in a passive activity for 20% of the time you held your interest in the property. 1040ez tax form You used the property in a passive activity for the entire 24-month period before its disposition. 1040ez tax form If neither condition applies, the gain is not passive activity income. 1040ez tax form However, it is treated as portfolio income only if you held the property for investment for more than half of the time you held it in nonpassive activities. 1040ez tax form   For this purpose, treat property you held through a corporation (other than an S corporation) or other entity whose owners receive only portfolio income as property held in a nonpassive activity and as property held for investment. 1040ez tax form Also, treat the date you agree to transfer your interest for a fixed or determinable amount as the disposition date. 1040ez tax form   If you used the property in more than one activity during the 12-month period before its disposition, this exception applies only to the part of the gain allocated to a passive activity under the rules described in the preceding discussion. 1040ez tax form Disposition of property converted to inventory. 1040ez tax form   If you disposed of property that you had converted to inventory from its use in another activity (for example, you sold condominium units you previously held for use in a rental activity), a special rule may apply. 1040ez tax form Under this rule, you disregard the property's use as inventory and treat it as if it were still used in that other activity at the time of disposition. 1040ez tax form This rule applies only if you meet all of the following conditions. 1040ez tax form At the time of disposition, you held your interest in the property in a dealing activity (an activity that involves holding the property or similar property mainly for sale to customers in the ordinary course of a trade or business). 1040ez tax form Your other activities included a nondealing activity (an activity that does not involve holding similar property for sale to customers in the ordinary course of a trade or business) in which you used the property for more than 80% of the period you held it. 1040ez tax form You did not acquire or hold your interest in the property for the main purpose of selling it to customers in the ordinary course of a trade or business. 1040ez tax form Passive Activity Deductions Generally, a deduction is a passive activity deduction for a taxable year if and only if such deduction either: Arises in connection with the conduct of an activity that is a passive activity for the tax year; or Is treated as a deduction from an activity for the tax year because it was disallowed by the passive activity rules in the preceding year and carried forward to the tax year. 1040ez tax form For purposes of item (1), above, an item of deduction arises in the taxable year in which the item would be allowable as a deduction under the taxpayer's method of accounting if taxable income for all taxable years were determined without regard to the passive activity rules and without regard to the basis, excess farm loss, and at-risk limits. 1040ez tax form See Coordination with other limitations on deductions that apply before the passive activity rules , later. 1040ez tax form Passive activity deductions generally include losses from dispositions of property used in a passive activity at the time of the disposition and losses from a disposition of less than your entire interest in a passive activity. 1040ez tax form Exceptions. 1040ez tax form   Passive activity deductions do not include the following items. 1040ez tax form Deductions for expenses (other than interest expense) that are clearly and directly allocable to portfolio income. 1040ez tax form Qualified home mortgage interest, capitalized interest expenses, and other interest expenses (other than self-charged interest) properly allocable to passive activities. 1040ez tax form For more information on self-charged interest, see Self-charged interest under Passive Activity Income and Deductions, earlier. 1040ez tax form Losses from dispositions of property that produce portfolio income or property held for investment. 1040ez tax form State, local, and foreign income taxes. 1040ez tax form Miscellaneous itemized deductions that may be disallowed because of the 2%-of-adjusted-gross-income limit. 1040ez tax form Charitable contribution deductions. 1040ez tax form Net operating loss deductions. 1040ez tax form Percentage depletion carryovers for oil and gas wells. 1040ez tax form Capital loss carrybacks and carryovers. 1040ez tax form Items of deduction from a passive activity that are disallowed under the limits on deductions that apply before the passive activity rules. 1040ez tax form See Coordination with other limitations on deductions that apply before the passive activity rules , later. 1040ez tax form Deductions and losses that would have been allowed for tax years beginning before 1987 but for basis or at-risk limits. 1040ez tax form Net negative section 481 adjustments allocated to activities other than passive activities. 1040ez tax form (Section 481 adjustments are adjustments required due to changes in accounting methods. 1040ez tax form ) Casualty and theft losses, unless losses similar in cause and severity recur regularly in the activity. 1040ez tax form The deduction for the employer-equivalent portion of self-employment tax. 1040ez tax form Coordination with other limitations on deductions that apply before the passive activity rules. 1040ez tax form   An item of deduction from a passive activity that is disallowed for a tax year under the basis or at-risk limitations is not a passive activity deduction for the tax year. 1040ez tax form The following sections provide rules for figuring the extent to which items of deduction from a passive activity are disallowed for a tax year under the basis or at-risk limitations. 1040ez tax form Proration of deductions disallowed under basis limitations. 1040ez tax form   If any amount of your distributive share of a partnership's loss for the tax year is disallowed under the basis limitation, a ratable portion of your distributive share of each item of deduction or loss of the partnership is disallowed for the tax year. 1040ez tax form For this purpose, the ratable portion of an item of deduction or loss is the amount of such item multiplied by the fraction obtained by dividing: The amount of your distributive share of partnership loss that is disallowed for the taxable year; by The sum of your distributive shares of all items of deduction and loss of the partnership for the tax year. 1040ez tax form   If any amount of your pro rata share of an S corporation's loss for the tax year is disallowed under the basis limitation, a ratable portion of your pro rata share of each item of deduction or loss of the S corporation is disallowed for the tax year. 1040ez tax form For this purpose, the ratable portion of an item of deduction or loss is the amount of such item multiplied by the fraction obtained by dividing: The amount of your share of S corporation loss that is disallowed for the tax year; by The sum of your pro rata shares of all items of deduction and loss of the corporation for the tax year. 1040ez tax form Proration of deductions disallowed under at-risk limitation. 1040ez tax form   If any amount of your loss from an activity (as defined in Activities Covered by the At-Risk Rules , later) is disallowed under the at-risk rules for the tax year, a ratable portion of each item of deduction or loss from the activity is disallowed for the tax year. 1040ez tax form For this purpose, the ratable portion of an item of deduction or loss is the amount of such item multiplied by the fraction obtained by dividing: The amount of the loss from the activity that is disallowed for the tax year; by The sum of all deductions from the activity for the taxable year. 1040ez tax form Coordination of basis and at-risk limitations. 1040ez tax form   The portion of any item of deduction or loss that is disallowed for the tax year under the basis limitations is not taken into account for the taxable year in determining the loss from an activity (as defined in Activities Covered by the At-Risk Rules , later) for purposes of applying the at-risk rules. 1040ez tax form Separately identified items of deduction and loss. 1040ez tax form   In identifying the items of deduction and loss from an activity that are not disallowed under the basis and at-risk limitations (and that therefore may be treated as passive activity deductions), you need not account separately for any item of deduction or loss unless such item may, if separately taken into account, result in an income tax liability different from that which would result were such item of deduction or loss taken into account separately. 1040ez tax form   Items of deduction or loss that must be accounted for separately include (but are not limited to) items of deduction or loss that: Are attributable to separate activities. 1040ez tax form See Grouping Your Activities , later. 1040ez tax form Arise in a rental real estate activity in tax years in which you actively participate in such activity; Arise in a rental real estate activity in taxable years in which you do not actively participate in such activity; Arose in a taxable year beginning before 1987 and were not allowed for such taxable year under the basis or at-risk limitations; Are taken into account under section 613A(d) (relating to limitations on certain depletion deductions); Are taken into account under section 1211 (relating to the limitation on capital losses); Are taken into account under section 1231 (relating to property used in a trade or business and involuntary conversions). 1040ez tax form See Section 1231 Gains and Losses in Publication 544 for more information. 1040ez tax form Are attributable to pre-enactment interests in activities. 1040ez tax form See Regulations section 1. 1040ez tax form 469-11T(c). 1040ez tax form Grouping Your Activities You can treat one or more trade or business activities, or rental activities, as a single activity if those activities form an appropriate economic unit for measuring gain or loss under the passive activity rules. 1040ez tax form Grouping is important for a number of reasons. 1040ez tax form If you group two activities into one larger activity, you need only show material participation in the activity as a whole. 1040ez tax form But if the two activities are separate, you must show material participation in each one. 1040ez tax form On the other hand, if you group two activities into one larger activity and you dispose of one of the two, then you have disposed of only part of your entire interest in the activity. 1040ez tax form But if the two activities are separate and you dispose of one of them, then you have disposed of your entire interest in that activity. 1040ez tax form Grouping can also be important in determining whether you meet the 10% ownership requirement for actively participating in a rental real estate activity. 1040ez tax form Appropriate Economic Units Generally, to determine if activities form an appropriate economic unit, you must consider all the relevant facts and circumstances. 1040ez tax form You can use any reasonable method of applying the relevant facts and circumstances in grouping activities. 1040ez tax form The following factors have the greatest weight in determining whether activities form an appropriate economic unit. 1040ez tax form All of the factors do not have to apply to treat more than one activity as a single activity. 1040ez tax form The factors that you should consider are: The similarities and differences in the types of trades or businesses, The extent of common control, The extent of common ownership, The geographical location, and The interdependencies between or among activities, which may include the extent to which the activities: Buy or sell goods between or among themselves, Involve products or services that are generally provided together, Have the same customers, Have the same employees, or Use a single set of books and records to account for the activities. 1040ez tax form Example 1. 1040ez tax form John Jackson owns a bakery and a movie theater at a shopping mall in Baltimore and a bakery and movie theater in Philadelphia. 1040ez tax form Based on all the relevant facts and circumstances, there may be more than one reasonable method for grouping John's activities. 1040ez tax form For example, John may be able to group the movie theaters and the bakeries into: One activity, A movie theater activity and a bakery activity, A Baltimore activity and a Philadelphia activity, or Four separate activities. 1040ez tax form Example 2. 1040ez tax form Betty is a partner in ABC partnership, which sells nonfood items to grocery stores. 1040ez tax form Betty is also a partner in DEF (a trucking business). 1040ez tax form ABC and DEF are under common control. 1040ez tax form The main part of DEF's business is transporting goods for ABC. 1040ez tax form DEF is the only trucking business in which Betty is involved. 1040ez tax form Based on the rules of this section, Betty treats ABC's wholesale activity and DEF's trucking activity as a single activity. 1040ez tax form Consistency and disclosure requirement. 1040ez tax form   Generally, when you group activities into appropriate economic units, you may not regroup those activities in a later tax year. 1040ez tax form You must meet any disclosure requirements of the IRS when you first group your activities and when you add or dispose of any activities in your groupings. 1040ez tax form   However, if the original grouping is clearly inappropriate or there is a material change in the facts and circumstances that makes the original grouping clearly inappropriate, you must regroup the activities and comply with any disclosure requirements of the IRS. 1040ez tax form   See Disclosure Requirement , later. 1040ez tax form Regrouping by the IRS. 1040ez tax form   If any of the activities resulting from your grouping is not an appropriate economic unit and one of the primary purposes of your grouping (or failure to regroup) is to avoid the passive activity rules, the IRS may regroup your activities. 1040ez tax form Rental activities. 1040ez tax form   In general, you cannot group a rental activity with a trade or business activity. 1040ez tax form However, you can group them together if the activities form an appropriate economic unit and: The rental activity is insubstantial in relation to the trade or business activity, The trade or business activity is insubstantial in relation to the rental activity, or Each owner of the trade or business activity has the same ownership interest in the rental activity, in which case the part of the rental activity that involves the rental of items of property for use in the trade or business activity may be grouped with the trade or business activity. 1040ez tax form Example. 1040ez tax form Herbert and Wilma are married and file a joint return. 1040ez tax form Healthy Food, an S corporation, is a grocery store business. 1040ez tax form Herbert is Healthy Food's only shareholder. 1040ez tax form Plum Tower, an S corporation, owns and rents out the building. 1040ez tax form Wilma is Plum Tower's only shareholder. 1040ez tax form Plum Tower rents part of its building to Healthy Food. 1040ez tax form Plum Tower's grocery store rental business and Healthy Food's grocery business are not insubstantial in relation to each other. 1040ez tax form Herbert and Wilma file a joint return, so they are treated as one taxpayer for purposes of the passive activity rules. 1040ez tax form The same owner (Herbert and Wilma) owns both Healthy Food and Plum Tower with the same ownership interest (100% in each). 1040ez tax form If the grouping forms an appropriate economic unit, as discussed earlier, Herbert and Wilma can group Plum Tower's grocery store rental and Healthy Food's grocery business into a single trade or business activity. 1040ez tax form Grouping of real and personal property rentals. 1040ez tax form   In general, you cannot treat an activity involving the rental of real property and an activity involving the rental of personal property as a single activity. 1040ez tax form However, you can treat them as a single activity if you provide the personal property in connection with the real property or the real property in connection with the personal property. 1040ez tax form Certain activities may not be grouped. 1040ez tax form   In general, if you own an interest as a limited partner or a limited entrepreneur in one of the following activities, you may not group that activity with any other activity in another type of business. 1040ez tax form Holding, producing, or distributing motion picture films or video tapes. 1040ez tax form Farming. 1040ez tax form Leasing any section 1245 property (as defined in section 1245(a)(3) of the Internal Revenue Code). 1040ez tax form For a list of section 1245 property, see Section 1245 property under Activities Covered by the At-Risk Rules , later. 1040ez tax form Exploring for, or exploiting, oil and gas resources. 1040ez tax form Exploring for, or exploiting, geothermal deposits. 1040ez tax form   If you own an interest as a limited partner or a limited entrepreneur in an activity described in the list above, you may group that activity with another activity in the same type of business if the grouping forms an appropriate economic unit as discussed earlier. 1040ez tax form Limited entrepreneur. 1040ez tax form   A limited entrepreneur is a person who: Has an interest in an enterprise other than as a limited partner, and Does not actively participate in the management of the enterprise. 1040ez tax form Activities conducted through another entity. 1040ez tax form   A personal service corporation, closely held corporation, partnership, or S corporation must group its activities using the rules discussed in this section. 1040ez tax form Once the entity groups its activities, you, as the partner or shareholder of the entity, may group those activities (following the rules of this section): With each other, With activities conducted directly by you, or With activities conducted through other entities. 1040ez tax form    You may not treat activities grouped together by the entity as separate activities. 1040ez tax form Personal service and closely held corporations. 1040ez tax form   You may group an activity conducted through a personal service or closely held corporation with your other activities only to determine whether you materially or significantly participated in those other activities. 1040ez tax form See Material Participation , earlier, and Significant Participation Passive Activities , later. 1040ez tax form Publicly traded partnership (PTP). 1040ez tax form   You may not group activities conducted through a PTP with any other activity, including an activity conducted through another PTP. 1040ez tax form Partial dispositions. 1040ez tax form   If you dispose of substantially all of an activity during your tax year, you may treat the part disposed of as a separate activity. 1040ez tax form However, you can do this only if you can show with reasonable certainty: The amount of deductions and credits disallowed in prior years under the passive activity rules that is allocable to the part of the activity disposed of, and The amount of gross income and any other deductions and credits for the current tax year that is allocable to the part of the activity disposed of. 1040ez tax form Disclosure Requirement For tax years beginning after January 24, 2010, the following disclosure requirements for groupings apply. 1040ez tax form You are required to report certain changes to your groupings that occur during the tax year to the IRS. 1040ez tax form If you fail to report these changes, each trade or business activity or rental activity will be treated as a separate activity. 1040ez tax form You will be considered to have made a timely disclosure if you filed all affected income tax returns consistent with the claimed grouping and make the required disclosure on the income tax return for the year in which you first discovered the failure to disclose. 1040ez tax form If the IRS discovered the failure to disclose, you must have reasonable cause for not making the required disclosure. 1040ez tax form New grouping. 1040ez tax form   You must file a written statement with your original income tax return for the first tax year in which two or more activities are originally grouped into a single activity. 1040ez tax form The statement must provide the names, addresses, and employer identification numbers (EINs), if applicable, for the activities being grouped as a single activity. 1040ez tax form In addition, the statement must contain a declaration that the grouped activities make up an appropriate economic unit for the measurement of gain or loss under the passive activity rules. 1040ez tax form Addition to an existing grouping. 1040ez tax form   You must file a written statement with your original income tax return for the tax year in which you add a new activity to an existing group. 1040ez tax form The statement must provide the name, address, and EIN, if applicable, for the activity that is being added and for the activities in the existing group. 1040ez tax form In addition, the statement must contain a declaration that the activities make up an appropriate economic unit for the measurement of gain or loss under the passive activity rules. 1040ez tax form Regrouping. 1040ez tax form   You must file a written statement with your original income tax return for the tax year in which you regroup the activities. 1040ez tax form The statement must provide the names, addresses, and EINs, if applicable, for the activities that are being regrouped. 1040ez tax form If two or more activities are being regrouped into a single activity, the statement must contain a declaration that the regrouped activities make up an appropriate economic unit for the measurement of gain or loss under the passive activity rules. 1040ez tax form In addition, the statement must contain an explanation of the material change in the facts and circumstances that made the original grouping clearly inappropriate. 1040ez tax form Groupings by partnerships and S corporations. 1040ez tax form   Partnerships and S corporations are not subject to the rules for new grouping, addition to an existing grouping, or regrouping. 1040ez tax form Instead, they must comply with the disclosure instructions for grouping activities provided in their Form 1065, U. 1040ez tax form S. 1040ez tax form Return of Partnership Income, or Form 1120S, U. 1040ez tax form S. 1040ez tax form Income Tax Return for an S Corporation, whichever is applicable. 1040ez tax form   The partner or shareholder is not required to make a separate disclosure of the groupings disclosed by the entity unless the partner or shareholder: Groups together any of the activities that the entity does not group together, Groups the entity's activities with activities conducted directly by the partner or shareholder, or Groups an entity's activities with activities conducted through another entity. 1040ez tax form   A partner or shareholder may not treat activities grouped together by the entity as separate activities. 1040ez tax form Recharacterization of Passive Income Net income from the following passive activities may have to be recharacterized and excluded from passive activity income. 1040ez tax form Significant participation passive activities, Rental of property when less than 30% of the unadjusted basis of the property is subject to depreciation, Equity-financed lending activities, Rental of property incidental to development activities, Rental of property to nonpassive activities, and Licensing of intangible property by  pass-through entities. 1040ez tax form If you are engaged in or have an interest in one of these activities during the tax year (either directly or through a partnership or an S corporation), combine the income and losses from the activity to determine if you have a net loss or net income from that activity. 1040ez tax form If the result is a net loss, treat the income and losses the same as any other income or losses from that type of passive activity (trade or business activity or rental activity). 1040ez tax form If the result is net income, do not enter any of the income or losses from the activity or property on Form 8582 or its worksheets. 1040ez tax form Instead, enter income or losses on the form and schedules you normally use. 1040ez tax form However, see Significant Participation Passive Activities , later, if the activity is a significant participation passive activity and you also have a net loss from a different significant participation passive activity. 1040ez tax form Limit on recharacterized passive income. 1040ez tax form   The total amount that you treat as nonpassive income under the rules described later in this discussion for significant participation passive activities, rental of nondepreciable property, and equity-financed lending activities cannot exceed the greatest amount that you treat as nonpassive income under any one of these rules. 1040ez tax form Investment income and investment expense. 1040ez tax form   To figure your investment interest expense limitation on Form 4952, treat as investment income any net passive income recharacterized as nonpassive income from rental of nondepreciable property, equity-financed lending activity, or licensing of intangible property by a pass-through entity. 1040ez tax form Significant Participation Passive Activities A significant participation passive activity is any trade or business activity in which you participated for more than 100 hours during the tax year but did not materially participate. 1040ez tax form If your gross income from all significant participation passive activities is more than your deductions from those activities, a part of your net income from each significant participation passive activity is treated as nonpassive income. 1040ez tax form Corporations. 1040ez tax form   An activity of a personal service corporation or closely held corporation is a significant participation passive activity if both of the following statements are true. 1040ez tax form The corporation is not treated as materially participating in the activity for the year. 1040ez tax form One or more individuals, each of whom is treated as significantly participating in the activity, directly or indirectly hold (in total) more than 50% (by value) of the corporation's outstanding stock. 1040ez tax form Worksheet A. 1040ez tax form   Complete Worksheet A. 1040ez tax form Significant Participation Passive Activities , below, if you have income or losses from any significant participation activity. 1040ez tax form Begin by entering the name of each activity in the left column. 1040ez tax form Column (a). 1040ez tax form   Enter the number of hours you participated in each activity and total the column. 1040ez tax form   If the total is more than 500, do not complete Worksheet A or B. 1040ez tax form None of the activities are passive activities because you satisfy test 4 for material participation. 1040ez tax form (See Material participation tests , earlier. 1040ez tax form ) Report all the income and losses from these activities on the forms and schedules you normally use. 1040ez tax form Do not include the income and losses on Form 8582. 1040ez tax form Column (b). 1040ez tax form   Enter the net loss, if any, from the activity. 1040ez tax form Net loss from an activity means either: The activity's current year net loss (if any) plus prior year unallowed losses (if any), or The excess of prior year unallowed losses over the current year net income (if any). 1040ez tax form Enter -0- here if the prior year unallowed loss is the same as the current year net income. 1040ez tax form Column (c). 1040ez tax form   Enter net income (if any) from the activity. 1040ez tax form Net income means the excess of the current year's net income from the activity over any prior year unallowed losses from the activity. 1040ez tax form Column (d). 1040ez tax form   Combine amounts in the Totals row for columns (b) and (c) and enter the total net income or net loss in the Totals row of column (d). 1040ez tax form If column (d) is a net loss, skip Worksheet B, Significant Participation Activities With Net Income. 1040ez tax form Include the income and losses in Worksheet 3 of Form 8582 (or Worksheet 2 in the Form 88
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Understanding your CP11 Notice

We made changes to your return because we believe there’s a miscalculation. You owe money on your taxes as a result of these changes.

Looking for information for CP11A Notice or CP11M Notice?

Printable samples of this notice (PDF)

Tax publications you may find useful

How to get help

Calling the toll free number listed on the top right corner of your notice is the fastest way to get your questions answered.

You can also authorize someone (such as an accountant) to contact the IRS on your behalf using this Power of Attorney and Declaration of Representative (Form 2848).

Or you may qualify for help from a Low Income Taxpayer Clinic.
 


What you need to do

  • Read your notice carefully ― it will explain why you owe money on your taxes.
  • Pay the amount owed by the date on the notice's payment coupon.
  • Make payment arrangements if you can't pay the full amount you owe.
  • Contact us within 60 days of the date of your notice if you disagree with the change we made.
  • Correct the copy of your tax return that you kept for your records.

You may want to...


Answers to Common Questions

How can I find out what caused my tax return to change?
Please contact us at the number listed on your notice for specific information concerning your tax return.

What should I do if I disagree with the changes you made?
If you disagree, contact us at the toll free number listed on the top right corner of your notice.

If you contact us in writing within 60 days of the date of this notice, we'll reverse the change we made to your account. However, if you're unable to provide us additional information that justifies the reversal and we believe the reversal is in error, we'll forward your case for audit. This step gives you formal appeal rights, including the right to appeal our decision in court before you have to pay the additional tax. After we forward your case, the audit staff will contact you within five to six weeks to fully explain the audit process and your rights. If you don’t contact us within the 60-day period, you'll lose your right to appeal our decision before payment of tax.

If you don't contact us within 60 days, the change won’t be reversed and you must pay the additional tax. You may then file a claim for refund. You must submit the claim within three years of the date you filed the tax return, or within two years of the date of your last payment for this tax.

What happens if I can’t pay the full amount I owe?
You can arrange to make a payment plan with us if you can’t pay the full amount you owe.

Am I charged interest on the money I owe?
Not if you pay the full amount you owe by the date on the payment coupon. However interest accrues on the unpaid balance after that date.

Will I receive a penalty if I can't pay the full amount?
Yes, you will receive a late payment penalty. You can contact us at the number given on your notice if you're unable to pay the full amount shown in your specific notice because of circumstances beyond your control. Contact us by the due date of your payment and, depending on your situation, we may be able to remove the penalty.


Tips for next year

Consider filing your taxes electronically. Filing online can help you avoid mistakes and find credits and deductions that you may qualify for. In many cases you can file for free. Learn more about e-file.

Page Last Reviewed or Updated: 19-Feb-2014

The 1040ez Tax Form

1040ez tax form 4. 1040ez tax form   Transportation Table of Contents Parking fees. 1040ez tax form Advertising display on car. 1040ez tax form Car pools. 1040ez tax form Hauling tools or instruments. 1040ez tax form Union members' trips from a union hall. 1040ez tax form Car ExpensesStandard Mileage Rate Actual Car Expenses Leasing a Car Disposition of a Car This chapter discusses expenses you can deduct for business transportation when you are not traveling away from home as defined in chapter 1. 1040ez tax form These expenses include the cost of transportation by air, rail, bus, taxi, etc. 1040ez tax form , and the cost of driving and maintaining your car. 1040ez tax form Transportation expenses include the ordinary and necessary costs of all of the following. 1040ez tax form Getting from one workplace to another in the course of your business or profession when you are traveling within the city or general area that is your tax home. 1040ez tax form Tax home is defined in chapter 1. 1040ez tax form Visiting clients or customers. 1040ez tax form Going to a business meeting away from your regular workplace. 1040ez tax form Getting from your home to a temporary workplace when you have one or more regular places of work. 1040ez tax form These temporary workplaces can be either within the area of your tax home or outside that area. 1040ez tax form Transportation expenses do not include expenses you have while traveling away from home overnight. 1040ez tax form Those expenses are travel expenses discussed in chapter 1 . 1040ez tax form However, if you use your car while traveling away from home overnight, use the rules in this chapter to figure your car expense deduction. 1040ez tax form See Car Expenses , later. 1040ez tax form Daily transportation expenses you incur while traveling from home to one or more regular places of business are generally nondeductible commuting expenses. 1040ez tax form However, there may be exceptions to this general rule. 1040ez tax form You can deduct daily transportation expenses incurred going between your residence and a temporary work station outside the metropolitan area where you live. 1040ez tax form Also, daily transportation expenses can be deducted if: (1) you have one or more regular work locations away from your residence or (2) your residence is your principal place of business and you incur expenses going between the residence and another work location in the same trade or business, regardless of whether the work is temporary or permanent and regardless of the distance. 1040ez tax form Illustration of transportation expenses. 1040ez tax form    Figure B , earlier, illustrates the rules that apply for deducting transportation expenses when you have a regular or main job away from your home. 1040ez tax form You may want to refer to it when deciding whether you can deduct your transportation expenses. 1040ez tax form Temporary work location. 1040ez tax form   If you have one or more regular work locations away from your home and you commute to a temporary work location in the same trade or business, you can deduct the expenses of the daily round-trip transportation between your home and the temporary location, regardless of distance. 1040ez tax form   If your employment at a work location is realistically expected to last (and does in fact last) for 1 year or less, the employment is temporary unless there are facts and circumstances that would indicate otherwise. 1040ez tax form   If your employment at a work location is realistically expected to last for more than 1 year or if there is no realistic expectation that the employment will last for 1 year or less, the employment is not temporary, regardless of whether it actually lasts for more than 1 year. 1040ez tax form   If employment at a work location initially is realistically expected to last for 1 year or less, but at some later date the employment is realistically expected to last more than 1 year, that employment will be treated as temporary (unless there are facts and circumstances that would indicate otherwise) until your expectation changes. 1040ez tax form It will not be treated as temporary after the date you determine it will last more than 1 year. 1040ez tax form   If the temporary work location is beyond the general area of your regular place of work and you stay overnight, you are traveling away from home. 1040ez tax form You may have deductible travel expenses as discussed in chapter 1 . 1040ez tax form No regular place of work. 1040ez tax form   If you have no regular place of work but ordinarily work in the metropolitan area where you live, you can deduct daily transportation costs between home and a temporary work site outside that metropolitan area. 1040ez tax form   Generally, a metropolitan area includes the area within the city limits and the suburbs that are considered part of that metropolitan area. 1040ez tax form   You cannot deduct daily transportation costs between your home and temporary work sites within your metropolitan area. 1040ez tax form These are nondeductible commuting expenses. 1040ez tax form Two places of work. 1040ez tax form   If you work at two places in one day, whether or not for the same employer, you can deduct the expense of getting from one workplace to the other. 1040ez tax form However, if for some personal reason you do not go directly from one location to the other, you cannot deduct more than the amount it would have cost you to go directly from the first location to the second. 1040ez tax form   Transportation expenses you have in going between home and a part-time job on a day off from your main job are commuting expenses. 1040ez tax form You cannot deduct them. 1040ez tax form Armed Forces reservists. 1040ez tax form   A meeting of an Armed Forces reserve unit is a second place of business if the meeting is held on a day on which you work at your regular job. 1040ez tax form You can deduct the expense of getting from one workplace to the other as just discussed under Two places of work . 1040ez tax form   You usually cannot deduct the expense if the reserve meeting is held on a day on which you do not work at your regular job. 1040ez tax form In this case, your transportation generally is a nondeductible commuting expense. 1040ez tax form However, you can deduct your transportation expenses if the location of the meeting is temporary and you have one or more regular places of work. 1040ez tax form   If you ordinarily work in a particular metropolitan area but not at any specific location and the reserve meeting is held at a temporary location outside that metropolitan area, you can deduct your transportation expenses. 1040ez tax form   If you travel away from home overnight to attend a guard or reserve meeting, you can deduct your travel expenses. 1040ez tax form These expenses are discussed in chapter 1 . 1040ez tax form   If you travel more than 100 miles away from home in connection with your performance of services as a member of the reserves, you may be able to deduct some of your reserve-related travel costs as an adjustment to gross income rather than as an itemized deduction. 1040ez tax form For more information, see Armed Forces Reservists Traveling More Than 100 Miles From Home under Special Rules, in chapter 6. 1040ez tax form Commuting expenses. 1040ez tax form   You cannot deduct the costs of taking a bus, trolley, subway, or taxi, or of driving a car between your home and your main or regular place of work. 1040ez tax form These costs are personal commuting expenses. 1040ez tax form You cannot deduct commuting expenses no matter how far your home is from your regular place of work. 1040ez tax form You cannot deduct commuting expenses even if you work during the commuting trip. 1040ez tax form Example. 1040ez tax form You sometimes use your cell phone to make business calls while commuting to and from work. 1040ez tax form Sometimes business associates ride with you to and from work, and you have a business discussion in the car. 1040ez tax form These activities do not change the trip from personal to business. 1040ez tax form You cannot deduct your commuting expenses. 1040ez tax form Parking fees. 1040ez tax form    Fees you pay to park your car at your place of business are nondeductible commuting expenses. 1040ez tax form You can, however, deduct business-related parking fees when visiting a customer or client. 1040ez tax form Advertising display on car. 1040ez tax form   Putting display material that advertises your business on your car does not change the use of your car from personal use to business use. 1040ez tax form If you use this car for commuting or other personal uses, you still cannot deduct your expenses for those uses. 1040ez tax form Car pools. 1040ez tax form   You cannot deduct the cost of using your car in a nonprofit car pool. 1040ez tax form Do not include payments you receive from the passengers in your income. 1040ez tax form These payments are considered reimbursements of your expenses. 1040ez tax form However, if you operate a car pool for a profit, you must include payments from passengers in your income. 1040ez tax form You can then deduct your car expenses (using the rules in this publication). 1040ez tax form Hauling tools or instruments. 1040ez tax form   Hauling tools or instruments in your car while commuting to and from work does not make your car expenses deductible. 1040ez tax form However, you can deduct any additional costs you have for hauling tools or instruments (such as for renting a trailer you tow with your car). 1040ez tax form Union members' trips from a union hall. 1040ez tax form   If you get your work assignments at a union hall and then go to your place of work, the costs of getting from the union hall to your place of work are nondeductible commuting expenses. 1040ez tax form Although you need the union to get your work assignments, you are employed where you work, not where the union hall is located. 1040ez tax form Office in the home. 1040ez tax form   If you have an office in your home that qualifies as a principal place of business, you can deduct your daily transportation costs between your home and another work location in the same trade or business. 1040ez tax form (See Publication 587, Business Use of Your Home, for information on determining if your home office qualifies as a principal place of business. 1040ez tax form ) Examples of deductible transportation. 1040ez tax form   The following examples show when you can deduct transportation expenses based on the location of your work and your home. 1040ez tax form Example 1. 1040ez tax form You regularly work in an office in the city where you live. 1040ez tax form Your employer sends you to a 1-week training session at a different office in the same city. 1040ez tax form You travel directly from your home to the training location and return each day. 1040ez tax form You can deduct the cost of your daily round-trip transportation between your home and the training location. 1040ez tax form Example 2. 1040ez tax form Your principal place of business is in your home. 1040ez tax form You can deduct the cost of round-trip transportation between your qualifying home office and your client's or customer's place of business. 1040ez tax form Example 3. 1040ez tax form You have no regular office, and you do not have an office in your home. 1040ez tax form In this case, the location of your first business contact inside the metropolitan area is considered your office. 1040ez tax form Transportation expenses between your home and this first contact are nondeductible commuting expenses. 1040ez tax form Transportation expenses between your last business contact and your home are also nondeductible commuting expenses. 1040ez tax form While you cannot deduct the costs of these trips, you can deduct the costs of going from one client or customer to another. 1040ez tax form Car Expenses If you use your car for business purposes, you ordinarily can deduct car expenses. 1040ez tax form You generally can use one of the two following methods to figure your deductible expenses. 1040ez tax form Standard mileage rate. 1040ez tax form Actual car expenses. 1040ez tax form If you use actual expenses to figure your deduction for a car you lease, there are rules that affect the amount of your lease payments you can deduct. 1040ez tax form See Leasing a Car , later. 1040ez tax form In this publication, “car” includes a van, pickup, or panel truck. 1040ez tax form For the definition of “car” for depreciation purposes, see Car defined under Actual Car Expenses, later. 1040ez tax form Rural mail carriers. 1040ez tax form   If you are a rural mail carrier, you may be able to treat the qualified reimbursement you received as your allowable expense. 1040ez tax form Because the qualified reimbursement is treated as paid under an accountable plan, your employer should not include the reimbursement in your income. 1040ez tax form   If your vehicle expenses are more than the amount of your reimbursement, you can deduct the unreimbursed expenses as an itemized deduction on Schedule A (Form 1040). 1040ez tax form You must complete Form 2106 and attach it to your Form 1040, U. 1040ez tax form S. 1040ez tax form Individual Income Tax Return. 1040ez tax form   A “qualified reimbursement” is the reimbursement you receive that meets both of the following conditions. 1040ez tax form It is given as an equipment maintenance allowance (EMA) to employees of the U. 1040ez tax form S. 1040ez tax form Postal Service. 1040ez tax form It is at the rate contained in the 1991 collective bargaining agreement. 1040ez tax form Any later agreement cannot increase the qualified reimbursement amount by more than the rate of inflation. 1040ez tax form See your employer for information on your reimbursement. 1040ez tax form    If you are a rural mail carrier and received a qualified reimbursement, you cannot use the standard mileage rate. 1040ez tax form Standard Mileage Rate You may be able to use the standard mileage rate to figure the deductible costs of operating your car for business purposes. 1040ez tax form For 2013, the standard mileage rate for the cost of operating your car for business use is 56½ cents per mile. 1040ez tax form If you use the standard mileage rate for a year, you cannot deduct your actual car expenses for that year. 1040ez tax form You cannot deduct depreciation, lease payments, maintenance and repairs, gasoline (including gasoline taxes), oil, insurance, or vehicle registration fees. 1040ez tax form See Choosing the standard mileage rate and Standard mileage rate not allowed, later. 1040ez tax form You generally can use the standard mileage rate whether or not you are reimbursed and whether or not any reimbursement is more or less than the amount figured using the standard mileage rate. 1040ez tax form See chapter 6 for more information on reimbursements . 1040ez tax form Choosing the standard mileage rate. 1040ez tax form   If you want to use the standard mileage rate for a car you own, you must choose to use it in the first year the car is available for use in your business. 1040ez tax form Then, in later years, you can choose to use either the standard mileage rate or actual expenses. 1040ez tax form   If you want to use the standard mileage rate for a car you lease, you must use it for the entire lease period. 1040ez tax form For leases that began on or before December 31, 1997, the standard mileage rate must be used for the entire portion of the lease period (including renewals) that is after 1997. 1040ez tax form   You must make the choice to use the standard mileage rate by the due date (including extensions) of your return. 1040ez tax form You cannot revoke the choice. 1040ez tax form However, in later years, you can switch from the standard mileage rate to the actual expenses method. 1040ez tax form If you change to the actual expenses method in a later year, but before your car is fully depreciated, you have to estimate the remaining useful life of the car and use straight line depreciation. 1040ez tax form Example. 1040ez tax form Larry is an employee who occasionally uses his own car for business purposes. 1040ez tax form He purchased the car in 2011, but he did not claim any unreimbursed employee expenses on his 2011 tax return. 1040ez tax form Because Larry did not use the standard mileage rate the first year the car was available for business use, he cannot use the standard mileage rate in 2013 to claim unreimbursed employee business expenses. 1040ez tax form   For more information about depreciation included in the standard mileage rate, see Exception under Methods of depreciation, later. 1040ez tax form Standard mileage rate not allowed. 1040ez tax form   You cannot use the standard mileage rate if you: Use five or more cars at the same time (such as in fleet operations), Claimed a depreciation deduction for the car using any method other than straight line, for example, MACRS (as discussed later under Depreciation Deduction), Claimed a section 179 deduction (discussed later) on the car, Claimed the special depreciation allowance on the car, Claimed actual car expenses after 1997 for a car you leased, or Are a rural mail carrier who received a qualified reimbursement. 1040ez tax form (See Rural mail carriers , earlier. 1040ez tax form ) Note. 1040ez tax form You can elect to use the standard mileage rate if you used a car for hire (such as a taxi) unless the standard mileage rate is otherwise not allowed, as discussed above. 1040ez tax form Five or more cars. 1040ez tax form   If you own or lease five or more cars that are used for business at the same time, you cannot use the standard mileage rate for the business use of any car. 1040ez tax form However, you may be able to deduct your actual expenses for operating each of the cars in your business. 1040ez tax form See Actual Car Expenses , later, for information on how to figure your deduction. 1040ez tax form   You are not using five or more cars for business at the same time if you alternate using (use at different times) the cars for business. 1040ez tax form   The following examples illustrate the rules for when you can and cannot use the standard mileage rate for five or more cars. 1040ez tax form Example 1. 1040ez tax form Marcia, a salesperson, owns three cars and two vans that she alternates using for calling on her customers. 1040ez tax form She can use the standard mileage rate for the business mileage of the three cars and the two vans because she does not use them at the same time. 1040ez tax form Example 2. 1040ez tax form Tony and his employees use his four pickup trucks in his landscaping business. 1040ez tax form During the year, he traded in two of his old trucks for two newer ones. 1040ez tax form Tony can use the standard mileage rate for the business mileage of all six of the trucks he owned during the year. 1040ez tax form Example 3. 1040ez tax form Chris owns a repair shop and an insurance business. 1040ez tax form He and his employees use his two pickup trucks and van for the repair shop. 1040ez tax form Chris alternates using his two cars for the insurance business. 1040ez tax form No one else uses the cars for business purposes. 1040ez tax form Chris can use the standard mileage rate for the business use of the pickup trucks, van, and the cars because he never has more than four vehicles used for business at the same time. 1040ez tax form Example 4. 1040ez tax form Maureen owns a car and four vans that are used in her housecleaning business. 1040ez tax form Her employees use the vans, and she uses the car to travel to various customers. 1040ez tax form Maureen cannot use the standard mileage rate for the car or the vans. 1040ez tax form This is because all five vehicles are used in Maureen's business at the same time. 1040ez tax form She must use actual expenses for all vehicles. 1040ez tax form Interest. 1040ez tax form   If you are an employee, you cannot deduct any interest paid on a car loan. 1040ez tax form This applies even if you use the car 100% for business as an employee. 1040ez tax form   However, if you are self-employed and use your car in your business, you can deduct that part of the interest expense that represents your business use of the car. 1040ez tax form For example, if you use your car 60% for business, you can deduct 60% of the interest on Schedule C (Form 1040). 1040ez tax form You cannot deduct the part of the interest expense that represents your personal use of the car. 1040ez tax form    If you use a home equity loan to purchase your car, you may be able to deduct the interest. 1040ez tax form See Publication 936, Home Mortgage Interest Deduction, for more information. 1040ez tax form Personal property taxes. 1040ez tax form   If you itemize your deductions on Schedule A (Form 1040), you can deduct on line 7 state and local personal property taxes on motor vehicles. 1040ez tax form You can take this deduction even if you use the standard mileage rate or if you do not use the car for business. 1040ez tax form   If you are self-employed and use your car in your business, you can deduct the business part of state and local personal property taxes on motor vehicles on Schedule C (Form 1040), Schedule C-EZ (Form 1040), or Schedule F (Form 1040). 1040ez tax form If you itemize your deductions, you can include the remainder of your state and local personal property taxes on the car on Schedule A (Form 1040). 1040ez tax form Parking fees and tolls. 1040ez tax form   In addition to using the standard mileage rate, you can deduct any business-related parking fees and tolls. 1040ez tax form (Parking fees you pay to park your car at your place of work are nondeductible commuting expenses. 1040ez tax form ) Sale, trade-in, or other disposition. 1040ez tax form   If you sell, trade in, or otherwise dispose of your car, you may have a gain or loss on the transaction or an adjustment to the basis of your new car. 1040ez tax form See Disposition of a Car , later. 1040ez tax form Actual Car Expenses If you do not use the standard mileage rate, you may be able to deduct your actual car expenses. 1040ez tax form If you qualify to use both methods, you may want to figure your deduction both ways to see which gives you a larger deduction. 1040ez tax form Actual car expenses include: Depreciation Licenses Lease  payments Registration  fees Gas Insurance Repairs Oil Garage rent Tires Tolls Parking fees   If you have fully depreciated a car that you still use in your business, you can continue to claim your other actual car expenses. 1040ez tax form Continue to keep records, as explained later in chapter 5 . 1040ez tax form Business and personal use. 1040ez tax form   If you use your car for both business and personal purposes, you must divide your expenses between business and personal use. 1040ez tax form You can divide your expense based on the miles driven for each purpose. 1040ez tax form Example. 1040ez tax form You are a sales representative for a clothing firm and drive your car 20,000 miles during the year: 12,000 miles for business and 8,000 miles for personal use. 1040ez tax form You can claim only 60% (12,000 ÷ 20,000) of the cost of operating your car as a business expense. 1040ez tax form Employer-provided vehicle. 1040ez tax form   If you use a vehicle provided by your employer for business purposes, you can deduct your actual unreimbursed car expenses. 1040ez tax form You cannot use the standard mileage rate. 1040ez tax form See Vehicle Provided by Your Employer in chapter 6. 1040ez tax form Interest on car loans. 1040ez tax form   If you are an employee, you cannot deduct any interest paid on a car loan. 1040ez tax form This interest is treated as personal interest and is not deductible. 1040ez tax form If you are self-employed and use your car in that business, see Interest , earlier, under Standard Mileage Rate. 1040ez tax form Taxes paid on your car. 1040ez tax form   If you are an employee, you can deduct personal property taxes paid on your car if you itemize deductions. 1040ez tax form Enter the amount paid on line 7 of Schedule A (Form 1040). 1040ez tax form Sales taxes. 1040ez tax form   Generally, sales taxes on your car are part of your car's basis and are recovered through depreciation, discussed later. 1040ez tax form Fines and collateral. 1040ez tax form   You cannot deduct fines you pay or collateral you forfeit for traffic violations. 1040ez tax form Casualty and theft losses. 1040ez tax form   If your car is damaged, destroyed, or stolen, you may be able to deduct part of the loss not covered by insurance. 1040ez tax form See Publication 547, Casualties, Disasters, and Thefts, for information on deducting a loss on your car. 1040ez tax form Depreciation and section 179 deductions. 1040ez tax form   Generally, the cost of a car, plus sales tax and improvements, is a capital expense. 1040ez tax form Because the benefits last longer than 1 year, you generally cannot deduct a capital expense. 1040ez tax form However, you can recover this cost through the section 179 deduction (the deduction allowed by section 179 of the Internal Revenue Code), special depreciation allowance, and depreciation deductions. 1040ez tax form Depreciation allows you to recover the cost over more than 1 year by deducting part of it each year. 1040ez tax form The section 179 deduction , special depreciation allowance , and depreciation deductions are discussed later. 1040ez tax form   Generally, there are limits on these deductions. 1040ez tax form Special rules apply if you use your car 50% or less in your work or business. 1040ez tax form   You can claim a section 179 deduction and use a depreciation method other than straight line only if you do not use the standard mileage rate to figure your business-related car expenses in the year you first place a car in service. 1040ez tax form   If, in the year you first place a car in service, you claim either a section 179 deduction or use a depreciation method other than straight line for its estimated useful life, you cannot use the standard mileage rate on that car in any future year. 1040ez tax form Car defined. 1040ez tax form   For depreciation purposes, a car is any four-wheeled vehicle (including a truck or van) made primarily for use on public streets, roads, and highways. 1040ez tax form Its unloaded gross vehicle weight must not be more than 6,000 pounds. 1040ez tax form A car includes any part, component, or other item physically attached to it or usually included in the purchase price. 1040ez tax form   A car does not include: An ambulance, hearse, or combination ambulance-hearse used directly in a business, A vehicle used directly in the business of transporting persons or property for pay or hire, or A truck or van that is a qualified nonpersonal use vehicle. 1040ez tax form Qualified nonpersonal use vehicles. 1040ez tax form   These are vehicles that by their nature are not likely to be used more than a minimal amount for personal purposes. 1040ez tax form They include trucks and vans that have been specially modified so that they are not likely to be used more than a minimal amount for personal purposes, such as by installation of permanent shelving and painting the vehicle to display advertising or the company's name. 1040ez tax form Delivery trucks with seating only for the driver, or only for the driver plus a folding jump seat, are qualified nonpersonal use vehicles. 1040ez tax form More information. 1040ez tax form   See Depreciation Deduction , later, for more information on how to depreciate your vehicle. 1040ez tax form Section 179 Deduction The section 179 deduction allows you to treat a portion or all of the cost of a car as a current expense. 1040ez tax form If you choose to deduct all or part of the cost as a current expense, you must reduce your depreciable basis in the car by the amount of the section 179 deduction. 1040ez tax form There is a limit on the total section 179 deduction, special depreciation allowance, and depreciation deduction for cars, trucks, and vans that may reduce or eliminate any benefit from claiming the section 179 deduction. 1040ez tax form See Depreciation Limits, later. 1040ez tax form You can claim the section 179 deduction only in the year you place the car in service. 1040ez tax form For this purpose, a car is placed in service when it is ready and available for a specifically assigned use, whether in a trade or business, a tax-exempt activity, a personal activity, or for the production of income. 1040ez tax form Even if you are not using the property, it is in service when it is ready and available for its specifically assigned use. 1040ez tax form A car first used for personal purposes cannot qualify for the deduction in a later year when its use changes to business. 1040ez tax form Example. 1040ez tax form In 2012, you bought a new car and used it for personal purposes. 1040ez tax form In 2013, you began to use it for business. 1040ez tax form Changing its use to business use does not qualify the cost of your car for a section 179 deduction in 2013. 1040ez tax form However, you can claim a depreciation deduction for the business use of the car starting in 2013. 1040ez tax form See Depreciation Deduction , later. 1040ez tax form More than 50% business use requirement. 1040ez tax form   You must use the property more than 50% for business to claim any section 179 deduction. 1040ez tax form If you used the property more than 50% for business, multiply the cost of the property by the percentage of business use. 1040ez tax form The result is the cost of the property that can qualify for the section 179 deduction. 1040ez tax form Example. 1040ez tax form Peter purchased a car in April 2013 for $24,500 and used it 60% for business. 1040ez tax form Based on his business usage, the total cost of Peter's car that qualifies for the section 179 deduction is $14,700 ($24,500 cost × 60% business use). 1040ez tax form But see Limit on total section 179, special depreciation allowance, and depreciation deduction , discussed later. 1040ez tax form Limits. 1040ez tax form   There are limits on: The amount of the section 179 deduction, The section 179 deduction for sport utility and certain other vehicles, and The total amount of the section 179 deduction, special depreciation allowance, and depreciation deduction (discussed later ) you can claim for a qualified property. 1040ez tax form Limit on the amount of the section 179 deduction. 1040ez tax form   For 2013, the total amount you can choose to deduct under section 179 generally cannot be more than $500,000. 1040ez tax form   If the cost of your section 179 property placed in service in 2013 is over $2,000,000, you must reduce the $500,000 dollar limit (but not below zero) by the amount of cost over $2,000,000. 1040ez tax form If the cost of your section 179 property placed in service during 2013 is $2,500,000 or more, you cannot take a section 179 deduction. 1040ez tax form   The total amount you can deduct under section 179 each year after you apply the limits listed above cannot be more than the taxable income from the active conduct of any trade or business during the year. 1040ez tax form   If you are married and file a joint return, you and your spouse are treated as one taxpayer in determining any reduction to the dollar limit, regardless of which of you purchased the property or placed it in service. 1040ez tax form   If you and your spouse file separate returns, you are treated as one taxpayer for the dollar limit. 1040ez tax form You must allocate the dollar limit (after any reduction) between you. 1040ez tax form   For more information on the above section 179 deduction limits, see Publication 946. 1040ez tax form Limit for sport utility and certain other vehicles. 1040ez tax form   For sport utility and certain other vehicles placed in service in 2013, the portion of the vehicle's cost taken into account in figuring your section 179 deduction is limited to $25,000. 1040ez tax form This rule applies to any four-wheeled vehicle primarily designed or used to carry passengers over public streets, roads, or highways, that is not subject to any of the passenger automobile limits explained under Depreciation Limits , later, and that is rated at no more than 14,000 pounds gross vehicle weight. 1040ez tax form However, the $25,000 limit does not apply to any vehicle: Designed to have a seating capacity of more than nine persons behind the driver's seat, Equipped with a cargo area of at least 6 feet in interior length that is an open area or is designed for use as an open area but is enclosed by a cap and is not readily accessible directly from the passenger compartment, or That has an integral enclosure, fully enclosing the driver compartment and load carrying device, does not have seating rearward of the driver's seat, and has no body section protruding more than 30 inches ahead of the leading edge of the windshield. 1040ez tax form    Limit on total section 179, special depreciation allowance, and depreciation deduction. 1040ez tax form   Generally, the total amount of section 179, special depreciation allowance, and depreciation deduction you can claim for a car that is qualified property and that you placed in service in 2013 is $11,160. 1040ez tax form The limit is reduced if your business use of the car is less than 100%. 1040ez tax form See Depreciation Limits , later, for more information. 1040ez tax form Example. 1040ez tax form In the earlier example under More than 50% business use requirement, Peter had a car with a cost (for purposes of the section 179 deduction) of $14,700. 1040ez tax form However, based on Peter's business usage of his car, the total of his section 179, special depreciation allowance, and depreciation deductions is limited to $6,696 ($11,160 limit x 60% business use). 1040ez tax form Cost of car. 1040ez tax form   For purposes of the section 179 deduction, the cost of the car does not include any amount figured by reference to any other property held by you at any time. 1040ez tax form For example, if you buy (for cash and a trade-in) a new car to use in your business, your cost for purposes of the section 179 deduction does not include your adjusted basis in the car you trade in for the new car. 1040ez tax form Your cost includes only the cash you paid. 1040ez tax form Basis of car for depreciation. 1040ez tax form   The amount of the section 179 deduction reduces your basis in your car. 1040ez tax form If you choose the section 179 deduction, you must subtract the amount of the deduction from the cost of your car. 1040ez tax form The resulting amount is the basis in your car you use to figure your depreciation deduction. 1040ez tax form When to choose. 1040ez tax form   If you want to take the section 179 deduction, you must make the choice in the tax year you place the car in service for business or work. 1040ez tax form How to choose. 1040ez tax form    Employees use Form 2106 to make this choice and report the section 179 deduction. 1040ez tax form All others use Form 4562. 1040ez tax form   File the appropriate form with either of the following. 1040ez tax form Your original tax return filed for the year the property was placed in service (whether or not you file it timely). 1040ez tax form An amended return filed within the time prescribed by law. 1040ez tax form An election made on an amended return must specify the item of section 179 property to which the election applies and the part of the cost of each such item to be taken into account. 1040ez tax form The amended return must also include any resulting adjustments to taxable income. 1040ez tax form    You must keep records that show the specific identification of each piece of qualifying section 179 property. 1040ez tax form These records must show how you acquired the property, the person you acquired it from, and when you placed it in service. 1040ez tax form Revoking an election. 1040ez tax form   An election (or any specification made in the election) to take a section 179 deduction for 2013 can only be revoked with the Commissioner's approval. 1040ez tax form Recapture of section 179 deduction. 1040ez tax form   To be eligible to claim the section 179 deduction, you must use your car more than 50% for business or work in the year you acquired it. 1040ez tax form If your business use of the car is 50% or less in a later tax year during the recovery period, you have to recapture (include in income) in that later year any excess depreciation. 1040ez tax form Any section 179 deduction claimed on the car is included in calculating the excess depreciation. 1040ez tax form For information on this calculation, see Excess depreciation , later in this chapter under Car Used 50% or Less for Business. 1040ez tax form Dispositions. 1040ez tax form   If you dispose of a car on which you had claimed the section 179 deduction, the amount of that deduction is treated as a depreciation deduction for recapture purposes. 1040ez tax form You treat any gain on the disposition of the property as ordinary income up to the amount of the section 179 deduction and any allowable depreciation (unless you establish the amount actually allowed). 1040ez tax form For information on the disposition of a car, see Disposition of a Car , later. 1040ez tax form Special Depreciation Allowance You may be able to claim the special depreciation allowance for your car, truck, or van, if it is qualified property and was placed in service in 2013. 1040ez tax form The allowance is an additional depreciation deduction of 50% of the car's depreciable basis (after any section 179 deduction, but before figuring your regular depreciation deduction under MACRS). 1040ez tax form The special depreciation allowance applies only for the first year the car is placed in service. 1040ez tax form To qualify for the allowance more than 50% of the use of the car must be in a qualified business use (as defined under Depreciation Deduction, later). 1040ez tax form Combined depreciation. 1040ez tax form   Your combined section 179 deduction, special depreciation allowance, and regular MACRS depreciation deduction is limited to the maximum allowable depreciation deduction for cars of $11,160 ($3,160 if you elect not to claim the special depreciation allowance). 1040ez tax form For trucks and vans, the first-year limit remains at $11,360 ($3,360 if you elect not to claim the special depreciation allowance). 1040ez tax form See Depreciation Limits , later in this chapter. 1040ez tax form Qualified car. 1040ez tax form   To be a qualified car (including trucks and vans), the car must meet all of the following tests. 1040ez tax form You purchased the car new on or after January 1, 2008, but only if no binding written contract to acquire the car existed before January 1, 2008, You placed the car in service in your trade or business before January 1, 2014, You used the car more than 50% in a qualified business use. 1040ez tax form Election not to claim the special depreciation allowance. 1040ez tax form   You can elect not to claim the special depreciation allowance for your car, truck, or van, that is qualified property. 1040ez tax form If you make this election, it applies to all 5-year property placed in service during the year. 1040ez tax form   To make the election, attach a statement to your timely filed return (including extensions) indicating the class of property (5-year for cars) for which you are making the election and that you are electing not to claim the special depreciation allowance for qualified property acquired on or after January 1, 2008. 1040ez tax form    Unless you elect not to claim the special depreciation allowance, you must reduce the car's adjusted basis by the amount of the allowance, even if the allowance was not claimed. 1040ez tax form Depreciation Deduction If you use actual car expenses to figure your deduction for a car you own and use in your business, you can claim a depreciation deduction. 1040ez tax form This means you can deduct a certain amount each year as a recovery of your cost or other basis in your car. 1040ez tax form You generally need to know the following things about the car you intend to depreciate. 1040ez tax form Your basis in the car. 1040ez tax form The date you place the car in service. 1040ez tax form The method of depreciation and recovery period you will use. 1040ez tax form Basis. 1040ez tax form   Your basis in a car for figuring depreciation is generally its cost. 1040ez tax form This includes any amount you borrow or pay in cash, other property, or services. 1040ez tax form   Generally, you figure depreciation on your car, truck, or van using your unadjusted basis (see Unadjusted basis , later). 1040ez tax form However, in some situations you will use your adjusted basis (your basis reduced by depreciation allowed or allowable in earlier years). 1040ez tax form For one of these situations see Exception under Methods of depreciation, later. 1040ez tax form   If you change the use of a car from personal to business, your basis for depreciation is the lesser of the fair market value or your adjusted basis in the car on the date of conversion. 1040ez tax form Additional rules concerning basis are discussed later in this chapter under Unadjusted basis . 1040ez tax form Placed in service. 1040ez tax form   You generally place a car in service when it is available for use in your work or business, in an income-producing activity, or in a personal activity. 1040ez tax form Depreciation begins when the car is placed in service for use in your work or business or for the production of income. 1040ez tax form   For purposes of computing depreciation, if you first start using the car only for personal use and later convert it to business use, you place the car in service on the date of conversion. 1040ez tax form Car placed in service and disposed of in the same year. 1040ez tax form   If you place a car in service and dispose of it in the same tax year, you cannot claim any depreciation deduction for that car. 1040ez tax form Methods of depreciation. 1040ez tax form   Generally, you figure depreciation on cars using the Modified Accelerated Cost Recovery System (MACRS). 1040ez tax form MACRS is discussed later in this chapter. 1040ez tax form Exception. 1040ez tax form   If you used the standard mileage rate in the first year of business use and change to the actual expenses method in a later year, you cannot depreciate your car under the MACRS rules. 1040ez tax form You must use straight line depreciation over the estimated remaining useful life of the car. 1040ez tax form   To figure depreciation under the straight line method, you must reduce your basis in the car (but not below zero) by a set rate per mile for all miles for which you used the standard mileage rate. 1040ez tax form The rate per mile varies depending on the year(s) you used the standard mileage rate. 1040ez tax form For the rate(s) to use, see Depreciation adjustment when you used the standard mileage rate under Disposition of a Car, later. 1040ez tax form   This reduction of basis is in addition to those basis adjustments described later under Unadjusted basis . 1040ez tax form You must use your adjusted basis in your car to figure your depreciation deduction. 1040ez tax form For additional information on the straight line method of depreciation, see Publication 946. 1040ez tax form More-than-50%-use test. 1040ez tax form   Generally, you must use your car more than 50% for qualified business use (defined next) during the year to use MACRS. 1040ez tax form You must meet this more-than-50%-use test each year of the recovery period (6 years under MACRS) for your car. 1040ez tax form   If your business use is 50% or less, you must use the straight line method to depreciate your car. 1040ez tax form This is explained later under Car Used 50% or Less for Business . 1040ez tax form Qualified business use. 1040ez tax form   A qualified business use is any use in your trade or business. 1040ez tax form It does not include use for the production of income (investment use). 1040ez tax form However, you do combine your business and investment use to compute your depreciation deduction for the tax year. 1040ez tax form Use of your car by another person. 1040ez tax form   Do not treat any use of your car by another person as use in your trade or business unless that use meets one of the following conditions. 1040ez tax form It is directly connected with your business. 1040ez tax form It is properly reported by you as income to the other person (and, if you have to, you withhold tax on the income). 1040ez tax form It results in a payment of fair market rent. 1040ez tax form This includes any payment to you for the use of your car. 1040ez tax form Business use changes. 1040ez tax form   If you used your car more than 50% in qualified business use in the year you placed it in service, but 50% or less in a later year (including the year of disposition), you have to change to the straight line method of depreciation. 1040ez tax form See Qualified business use 50% or less in a later year under Car Used 50% or Less for Business, later. 1040ez tax form    Property does not cease to be used more than 50% in qualified business use by reason of a transfer at death. 1040ez tax form Use for more than one purpose. 1040ez tax form   If you use your car for more than one purpose during the tax year, you must allocate the use to the various purposes. 1040ez tax form You do this on the basis of mileage. 1040ez tax form Figure the percentage of qualified business use by dividing the number of miles you drive your car for business purposes during the year by the total number of miles you drive the car during the year for any purpose. 1040ez tax form Change from personal to business use. 1040ez tax form   If you change the use of a car from 100% personal use to business use during the tax year, you may not have mileage records for the time before the change to business use. 1040ez tax form In this case, you figure the percentage of business use for the year as follows. 1040ez tax form Determine the percentage of business use for the period following the change. 1040ez tax form Do this by dividing business miles by total miles driven during that period. 1040ez tax form Multiply the percentage in (1) by a fraction. 1040ez tax form The numerator (top number) is the number of months the car is used for business and the denominator (bottom number) is 12. 1040ez tax form Example. 1040ez tax form You use a car only for personal purposes during the first 6 months of the year. 1040ez tax form During the last 6 months of the year, you drive the car a total of 15,000 miles of which 12,000 miles are for business. 1040ez tax form This gives you a business use percentage of 80% (12,000 ÷ 15,000) for that period. 1040ez tax form Your business use for the year is 40% (80% × 6/12). 1040ez tax form Limits. 1040ez tax form   The amount you can claim for section 179, special depreciation allowance, and depreciation deductions may be limited. 1040ez tax form The maximum amount you can claim depends on the year in which you placed your car in service. 1040ez tax form You have to reduce the maximum amount if you did not use the car exclusively for business. 1040ez tax form See Depreciation Limits , later. 1040ez tax form Unadjusted basis. 1040ez tax form   You use your unadjusted basis (often referred to as your basis or your basis for depreciation) to figure your depreciation using the MACRS depreciation chart, explained later under Modified Accelerated Cost Recovery System (MACRS) . 1040ez tax form Your unadjusted basis for figuring depreciation is your original basis increased or decreased by certain amounts. 1040ez tax form   To figure your unadjusted basis, begin with your car's original basis, which generally is its cost. 1040ez tax form Cost includes sales taxes (see Sales taxes , earlier), destination charges, and dealer preparation. 1040ez tax form Increase your basis by any substantial improvements you make to your car, such as adding air conditioning or a new engine. 1040ez tax form Decrease your basis by any section 179 deduction, special depreciation allowance, gas guzzler tax, clean-fuel vehicle deduction (for vehicles placed in service before Jan. 1040ez tax form 1, 2006), and alternative motor vehicle credit. 1040ez tax form   See Form 8910 for information on the alternative motor vehicle credit. 1040ez tax form If your business use later falls to 50% or less, you may have to recapture (include in your income) any excess depreciation. 1040ez tax form See Car Used 50% or Less for Business, later, for more information. 1040ez tax form If you acquired the car by gift or inheritance, see Publication 551, Basis of Assets, for information on your basis in the car. 1040ez tax form Improvements. 1040ez tax form   A major improvement to a car is treated as a new item of 5-year recovery property. 1040ez tax form It is treated as placed in service in the year the improvement is made. 1040ez tax form It does not matter how old the car is when the improvement is added. 1040ez tax form Follow the same steps for depreciating the improvement as you would for depreciating the original cost of the car. 1040ez tax form However, you must treat the improvement and the car as a whole when applying the limits on the depreciation deductions. 1040ez tax form Your car's depreciation deduction for the year (plus any section 179 deduction, special depreciation allowance, and depreciation on any improvements) cannot be more than the depreciation limit that applies for that year. 1040ez tax form See Depreciation Limits , later. 1040ez tax form Car trade-in. 1040ez tax form   If you traded one car (the “old car”) for another car (the “new car”) in 2013, there are two ways you can treat the transaction. 1040ez tax form You can elect to treat the transaction as a tax-free disposition of the old car and the purchase of the new car. 1040ez tax form If you make this election, you treat the old car as disposed of at the time of the trade-in. 1040ez tax form The depreciable basis of the new car is the adjusted basis of the old car (figured as if 100% of the car's use had been for business purposes) plus any additional amount you paid for the new car. 1040ez tax form You then figure your depreciation deduction for the new car beginning with the date you placed it in service. 1040ez tax form You make this election by completing Form 2106, Part II, Section D. 1040ez tax form This method is explained later, beginning at Effect of trade-in on basis . 1040ez tax form If you do not make the election described in (1), you must figure depreciation separately for the remaining basis of the old car and for any additional amount you paid for the new car. 1040ez tax form You must apply two depreciation limits (see Depreciation Limits , later). 1040ez tax form The limit that applies to the remaining basis of the old car generally is the amount that would have been allowed had you not traded in the old car. 1040ez tax form The limit that applies to the additional amount you paid for the new car generally is the limit that applies for the tax year, reduced by the depreciation allowance for the remaining basis of the old car. 1040ez tax form You must use Form 4562 to compute your depreciation deduction. 1040ez tax form You cannot use Form 2106, Part II, Section D. 1040ez tax form This method is explained in Publication 946. 1040ez tax form   If you elect to use the method described in (1), you must do so on a timely filed tax return (including extensions). 1040ez tax form Otherwise, you must use the method described in (2). 1040ez tax form Effect of trade-in on basis. 1040ez tax form   The discussion that follows applies to trade-ins of cars in 2013, where the election was made to treat the transaction as a tax-free disposition of the old car and the purchase of the new car. 1040ez tax form For information on how to figure depreciation for cars involved in a like-kind exchange (trade-in) in 2013, for which the election was not made, see Publication 946 and Regulations section 1. 1040ez tax form 168(i)-6(d)(3). 1040ez tax form Traded car used only for business. 1040ez tax form   If you trade in a car you used only in your business for another car that will be used only in your business, your original basis in the new car is your adjusted basis in the old car, plus any additional amount you pay for the new car. 1040ez tax form Example. 1040ez tax form Paul trades in a car that has an adjusted basis of $5,000 for a new car. 1040ez tax form In addition, he pays cash of $20,000 for the new car. 1040ez tax form His original basis of the new car is $25,000 (his $5,000 adjusted basis in the old car plus the $20,000 cash paid). 1040ez tax form Paul's unadjusted basis is $25,000 unless he claims the section 179 deduction, special depreciation allowance, or has other increases or decreases to his original basis, discussed under Unadjusted basis , earlier. 1040ez tax form Traded car used partly in business. 1040ez tax form   If you trade in a car you used partly in your business for a new car you will use in your business, you must make a “trade-in” adjustment for the personal use of the old car. 1040ez tax form This adjustment has the effect of reducing your basis in your old car, but not below zero, for purposes of figuring your depreciation deduction for the new car. 1040ez tax form (This adjustment is not used, however, when you determine the gain or loss on the later disposition of the new car. 1040ez tax form See Publication 544, Sales and Other Dispositions of Assets, for information on how to report the disposition of your car. 1040ez tax form )   To figure the unadjusted basis of your new car for depreciation, first add to your adjusted basis in the old car any additional amount you pay for the new car. 1040ez tax form Then subtract from that total the excess, if any, of: The total of the amounts that would have been allowable as depreciation during the tax years before the trade if 100% of the use of the car had been business and investment use, over The total of the amounts actually allowed as depreciation during those years. 1040ez tax form For information about figuring depreciation, see Modified Accelerated Cost Recovery System (MACRS) , which follows Example 2, later. 1040ez tax form Modified Accelerated Cost Recovery System (MACRS). 1040ez tax form   The Modified Accelerated Cost Recovery System (MACRS) is the name given to the tax rules for getting back (recovering) through depreciation deductions the cost of property used in a trade or business or to produce income. 1040ez tax form   The maximum amount you can deduct is limited, depending on the year you placed your car in service. 1040ez tax form See Depreciation Limits , later. 1040ez tax form Recovery period. 1040ez tax form   Under MACRS, cars are classified as 5-year property. 1040ez tax form You actually depreciate the cost of a car, truck, or van over a period of 6 calendar years. 1040ez tax form This is because your car is generally treated as placed in service in the middle of the year, and you claim depreciation for one-half of both the first year and the sixth year. 1040ez tax form Depreciation deduction for certain Indian reservation property. 1040ez tax form   Shorter recovery periods are provided under MACRS for qualified Indian reservation property placed in service on Indian reservations after 1993 and before 2014. 1040ez tax form The recovery that applies for a business-use car is 3 years instead of 5 years. 1040ez tax form However, the depreciation limits, discussed later, will still apply. 1040ez tax form   For more information on the qualifications for this shorter recovery period and the percentages to use in figuring the depreciation deduction, see chapter 4 of Publication 946. 1040ez tax form Depreciation methods. 1040ez tax form   You can use one of the following methods to depreciate your car. 1040ez tax form The 200% declining balance method (200% DB) over a 5-year recovery period that switches to the straight line method when that method provides an equal or greater deduction. 1040ez tax form The 150% declining balance method (150% DB) over a 5-year recovery period that switches to the straight line method when that method provides an equal or greater deduction. 1040ez tax form The straight line method (SL) over a 5-year recovery period. 1040ez tax form    If you use Table 4-1 (discussed later under MACRS depreciation chart) to determine your depreciation rate for 2013, you do not need to determine in what year using the straight line method provides an equal or greater deduction. 1040ez tax form This is because the chart has the switch to the straight line method built into its rates. 1040ez tax form   Before choosing a method, you may wish to consider the following facts. 1040ez tax form Using the straight line method provides equal yearly deductions throughout the recovery period. 1040ez tax form Using the declining balance methods provides greater deductions during the earlier recovery years with the deductions generally getting smaller each year. 1040ez tax form MACRS depreciation chart. 1040ez tax form   A 2013 MACRS Depreciation Chart and instructions are included in this chapter as Table 4-1 . 1040ez tax form Using this table will make it easy for you to figure the 2013 depreciation deduction for your car. 1040ez tax form A similar chart appears in the Instructions for Form 2106. 1040ez tax form    You may have to use the tables in Publication 946 instead of using this MACRS Depreciation Chart. 1040ez tax form   You must use the Depreciation Tables in Publication 946 rather than the 2013 MACRS Depreciation Chart in this publication if any one of the following four conditions applies to you. 1040ez tax form You file your return on a fiscal year basis. 1040ez tax form You file your return for a short tax year (less than 12 months). 1040ez tax form During the year, all of the following conditions apply. 1040ez tax form You placed some property in service from January through September. 1040ez tax form You placed some property in service from October through December. 1040ez tax form Your basis in the property you placed in service from October through December (excluding nonresidential real property, residential rental property, and property placed in service and disposed of in the same year) was more than 40% of your total bases in all property you placed in service during the year. 1040ez tax form   You placed qualified property in service on an Indian reservation. 1040ez tax form Depreciation in future years. 1040ez tax form   If you use the percentages from the chart, you generally must continue to use them for the entire recovery period of your car. 1040ez tax form However, you cannot continue to use the chart if your basis in your car is adjusted because of a casualty. 1040ez tax form In that case, for the year of the adjustment and the remaining recovery period, figure the depreciation without the chart using your adjusted basis in the car at the end of the year of the adjustment and over the remaining recovery period. 1040ez tax form See Figuring the Deduction Without Using the Tables in chapter 4 of Publication 946. 1040ez tax form    In future years, do not use the chart in this edition of the publication. 1040ez tax form Instead, use the chart in the publication or the form instructions for those future years. 1040ez tax form Disposition of car during recovery period. 1040ez tax form   If you dispose of the car before the end of the recovery period, you are generally allowed a half year of depreciation in the year of disposition unless you purchased the car during the last quarter of a year. 1040ez tax form See Depreciation deduction for the year of disposition under Disposition of a Car, later, for information on how to figure the depreciation allowed in the year of disposition. 1040ez tax form How to use the 2013 chart. 1040ez tax form   To figure your depreciation deduction for 2013, find the percentage in the column of Table 4-1 based on the date that you first placed the car in service and the depreciation method that you are using. 1040ez tax form Multiply the unadjusted basis of your car (defined earlier) by that percentage to determine the amount of your depreciation deduction. 1040ez tax form If you prefer to figure your depreciation deduction without the help of the chart, see Publication 946. 1040ez tax form    Your deduction cannot be more than the maximum depreciation limit for cars. 1040ez tax form See Depreciation Limits, later. 1040ez tax form Example. 1040ez tax form Phil bought a used truck in February 2012 to use exclusively in his landscape business. 1040ez tax form He paid $9,200 for the truck with no trade-in. 1040ez tax form Phil did not claim any section 179 deduction, the truck did not qualify for the special depreciation allowance, and he chose to use the 200% DB method to get the largest depreciation deduction in the early years. 1040ez tax form Phil used the MACRS depreciation chart in 2012 to find his percentage. 1040ez tax form The unadjusted basis of his truck equals its cost because Phil used it exclusively for business. 1040ez tax form He multiplied the unadjusted basis of his truck, $9,200, by the percentage that applied, 20%, to figure his 2012 depreciation deduction of $1,840. 1040ez tax form In 2013, Phil used the truck for personal purposes when he repaired his father's cabin. 1040ez tax form His records show that the business use of his truck was 90% in 2013. 1040ez tax form Phil used Table 4-1 to find his percentage. 1040ez tax form Reading down the first column for the date placed in service and across to the 200% DB column, he locates his percentage, 32%. 1040ez tax form He multiplies the unadjusted basis of his truck, $8,280 ($9,200 cost × 90% business use), by 32% to figure his 2013 depreciation deduction of $2,650. 1040ez tax form Depreciation Limits There are limits on the amount you can deduct for depreciation of your car, truck, or van. 1040ez tax form The section 179 deduction and special depreciation allowance are treated as depreciation for purposes of the limits. 1040ez tax form The maximum amount you can deduct each year depends on the year you place the car in service. 1040ez tax form These limits are shown in the following tables. 1040ez tax form   Maximum Depreciation Deduction for Cars Date       4th & Placed 1st 2nd 3rd Later In Service Year Year Year Years 2012–2013 $11,1601 $5,100 $3,050 $1,875 2010–2011 11,0602 4,900 2,950 1,775 2008–2009 10,9603 4,800 2,850 1,775 2007 3,060 4,900 2,850 1,775 2006 2,960 4,800 2,850 1,775 2005 2,960 4,700 2,850 1,675 2004 10,6103 4,800 2,850 1,675 5/06/2003– 12/31/2003 10,7104 4,900 2,950 1,775 1/01/2003– 5/05/2003 7,6605 4,900 2,950 1,775 2001–2002 7,6605 4,900 2,950 1,775 2000 3,060 4,900 2,950 1,775 1$3,160 if the car is not qualified property or if you elect not to claim the special depreciation allowance. 1040ez tax form 2$3,060 if the car is not qualified property or if you elect not to claim the special depreciation allowance. 1040ez tax form 3$2,960 if the car is not qualified property or if you elect not to claim the special depreciation allowance. 1040ez tax form 4$7,660 if you acquired the car before 5/6/2003. 1040ez tax form $3,060 if the car is not qualified property or if you elect not to claim any special depreciation allowance. 1040ez tax form 5$3,060 if you acquired the car before 9/11/2001, the car is not qualified property, or you elect not to claim the special depreciation allowance. 1040ez tax form Trucks and vans. 1040ez tax form   For 2013, the maximum depreciation deductions for trucks and vans are generally higher than those for cars. 1040ez tax form A truck or van is a passenger automobile that is classified by the manufacturer as a truck or van and rated at 6,000 pounds gross vehicle weight or less. 1040ez tax form For trucks and vans placed in service before 2003, use the Maximum Depreciation Deduction for Cars table. 1040ez tax form Maximum Depreciation Deduction for Trucks and Vans Date       4th & Placed 1st 2nd 3rd Later In Service Year Year Year Years 2013 $11,3601 $5,400 $3,250 $1,975 2012 $11,3601 $5,300 $3,150 $1,875 2011 11,2601 5,200 3,150 1,875 2010 11,1601 5,100 3,050 1,875 2009 11,0601 4,900 2,950 1,775 2008 11,1601 5,100 3,050 1,875 2007 3,260 5,200 3,050 1,875 2005–2006 3,260 5,200 3,150 1,875 2004 10,9101 5,300 3,150 1,875 2003 11,0101,2 5,400 3,250 1,975 1If the special depreciation allowance does not apply or you make the election not to claim the special depreciation allowance, the first-year limit is $3,360 for 2012 and 2013, $3,260 for 2011, $3,160 for 2010, $3,060 for 2009, $3,160 for 2008, $3,260 for 2004, and $3,360 for 2003. 1040ez tax form 2If the truck or van was acquired before 5/06/2003, the truck or van is qualified property, and you claim the special depreciation allowance for the truck or van, the maximum deduction is $7,960. 1040ez tax form Car used less than full year. 1040ez tax form   The depreciation limits are not reduced if you use a car for less than a full year. 1040ez tax form This means that you do not reduce the limit when you either place a car in service or dispose of a car during the year. 1040ez tax form However, the depreciation limits are reduced if you do not use the car exclusively for business and investment purposes. 1040ez tax form See Reduction for personal use , next. 1040ez tax form Reduction for personal use. 1040ez tax form   The depreciation limits are reduced based on your percentage of personal use. 1040ez tax form If you use a car less than 100% in your business or work, you must determine the depreciation deduction limit by multiplying the limit amount by the percentage of business and investment use during the tax year. 1040ez tax form Section 179 deduction. 1040ez tax form   The section 179 deduction is treated as a depreciation deduction. 1040ez tax form If you place a car that is not a truck or van in service in 2013, use it only for business, and choose the section 179 deduction, the special depreciation allowance, and the depreciation deduction for that car for 2013 is limited to $11,160. 1040ez tax form Example. 1040ez tax form On September 4, 2013, Jack bought a used car for $10,000 and placed it in service. 1040ez tax form He used it 80% for his business, and he chooses to take a section 179 deduction for the car. 1040ez tax form The car is not qualified property for purposes of the special depreciation allowance. 1040ez tax form Before applying the limit, Jack figures his maximum section 179 deduction to be $8,000. 1040ez tax form This is the cost of his qualifying property (up to the maximum $500,000 amount) multiplied by his business use ($10,000 × 80%). 1040ez tax form Jack then figures that his section 179 deduction for 2013 is limited to $2,528 (80% of $3,160). 1040ez tax form He then figures his unadjusted basis of $5,472 (($10,000 × 80%) − $2,528) for determining his depreciation deduction. 1040ez tax form Jack has reached his maximum depreciation deduction for 2013. 1040ez tax form For 2014, Jack will use his unadjusted basis of $5,472 to figure his depreciation deduction. 1040ez tax form Deductions in years after the recovery period. 1040ez tax form   If the depreciation deductions for your car are reduced under the passenger automobile limits (discussed earlier), you will have unrecovered basis in your car at the end of the recovery period. 1040ez tax form If you continue to use your car for business, you can deduct that unrecovered basis (subject to depreciation limits) after the recovery period ends. 1040ez tax form Unrecovered basis. 1040ez tax form   This is your cost or other basis in the car reduced by any clean-fuel vehicle deduction (for vehicles placed in service before January 1, 2006), alternative motor vehicle credit, electric vehicle credit, gas guzzler tax, and depreciation (including any special depreciation allowance , discussed earlier, unless you elect not to claim it) and section 179 deductions that would have been allowable if you had used the car 100% for business and investment use. 1040ez tax form The recovery period. 1040ez tax form   For 5-year property, your recovery period is 6 calendar years. 1040ez tax form A part year's depreciation is allowed in the first calendar year, a full year's depreciation is allowed in each of the next 4 calendar years, and a part year's depreciation is allowed in the 6th calendar year. 1040ez tax form   Under MACRS, your recovery period is the same whether you use declining balance or straight line depreciation. 1040ez tax form You determine your unrecovered basis in the 7th year after you placed the car in service. 1040ez tax form How to treat unrecovered basis. 1040ez tax form   If you continue to use your car for business after the recovery period, you can claim a depreciation deduction in each succeeding tax year until you recover your basis in the car. 1040ez tax form The maximum amount you can deduct each year is determined by the date you placed the car in service and your business-use percentage. 1040ez tax form For example, no deduction is allowed for a year you use your car 100% for personal purposes. 1040ez tax form Example. 1040ez tax form In April 2007, Bob bought and placed in service a car he used exclusively in his business. 1040ez tax form The car cost $31,500. 1040ez tax form Bob did not claim a section 179 deduction or the special depreciation allowance for the car. 1040ez tax form He continued to use the car 100% in his business throughout the recovery period (2007 through 2012). 1040ez tax form For those years, Bob used the MACRS Depreciation Chart (200% declining balance method) and the Maximum Depreciation Deduction for Cars table, earlier, for the applicable tax year to compute his depreciation deductions during the recovery period. 1040ez tax form Bob's depreciation deductions were subject to the depreciation limits so he will have unrecovered basis at the end of the recovery period as shown in the following table. 1040ez tax form      MACRS     Deprec. 1040ez tax form Year % Amount Limit Allowed 2007 20. 1040ez tax form 00 $6,300 $3,060 $ 3,060 2008 32. 1040ez tax form 00 10,080 4,900 4,900 2009 19. 1040ez tax form 20 6,048 2,850 2,850 2010 11. 1040ez tax form 52 3,629 1,775 1,775 2011 11. 1040ez tax form 52 3,629 1,775 1,775 2012 5. 1040ez tax form 76 1,814 1,775 1,775 Total $31,500   16,135 For the correct limit, see Maximum Depreciation Deduction for Cars under “Depreciation Limits,” earlier, for the maximum amount of depreciation allowed each year. 1040ez tax form   At the end of 2012, Bob had an unrecovered basis in the car of $15,365 ($31,500 – $16,135). 1040ez tax form If Bob continued to use the car 100% for business in 2013 and later years, he can claim a depreciation deduction equal to the lesser of $1,775 or his remaining unrecovered basis. 1040ez tax form   If Bob's business use of the car was less than 100% during any year, his depreciation deduction would be less than the maximum amount allowable for that year. 1040ez tax form However, in determining his unrecovered basis in the car, he would still reduce his original basis by the maximum amount allowable as if the business use had been 100%. 1040ez tax form For example, if Bob had used his car 60% for business instead of 100%, his allowable depreciation deductions would have been $9,681 ($16,135 × 60%), but he still would have to reduce his basis by $16,135 to determine his unrecovered basis. 1040ez tax form Table 4-1. 1040ez tax form 2013 MACRS Depreciation Chart (Use to Figure Depreciation for 2013. 1040ez tax form ) If you claim actual expenses for your car, use the chart below to find the depreciation method and percentage to use for your 2013 return for cars placed in service in 2013. 1040ez tax form   First, using the left column, find the date you first placed the car in service in 2013. 1040ez tax form Then select the depreciation method and percentage from column (a), (b), or (c) following the rules explained in this chapter. 1040ez tax form For cars placed in service before 2013, you must use the same method you used on last year's return unless a decline in your business use requires you to change to the straight line method. 1040ez tax form Refer back to the MACRS Depreciation Chart for the year you placed the car in service. 1040ez tax form (See Car Used 50% or Less for Business . 1040ez tax form )  Multiply the unadjusted basis of your car by your business use percentage. 1040ez tax form Multiply the result by the percentage you found in the chart to find the amount of your depreciation deduction for 2013. 1040ez tax form (Also see Depreciation Limits . 1040ez tax form )   If you placed your car in service after September of any year and you placed other business property in service during the same year, you may have to use the Jan. 1040ez tax form 1—Sept. 1040ez tax form 30 percentage instead of the Oct. 1040ez tax form 1—Dec. 1040ez tax form 31 percentage for your car. 1040ez tax form               To find out if this applies to you, determine: 1) the basis of all business property you placed in service after September of that year and 2) the basis of all business property you placed in service during that entire year. 1040ez tax form If the basis of the property placed in service after September is not more than 40% of the basis of all property (certain property is excluded) placed in service for the entire year, use the percentage for Jan. 1040ez tax form 1—Sept. 1040ez tax form 30 for figuring depreciation for your car. 1040ez tax form See Which Convention Applies? in chapter 4 of Publication 946 for more details. 1040ez tax form               Example. 1040ez tax form You buy machinery (basis of $32,000) in May 2013 and a new van (basis of $20,000) in October 2013, both used 100% in your business. 1040ez tax form You