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1040nr 2012 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. 1040nr 2012 Even though the rules do not apply to grantor trusts, partnerships, and S corporations directly, they do apply to the owners of these entities. 1040nr 2012 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. 1040nr 2012 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. 1040nr 2012 See Passive Activity Deductions, later. 1040nr 2012 Passive Activity Loss Generally, the passive activity loss for the tax year is not allowed. 1040nr 2012 However, there is a special allowance under which some or all of your passive activity loss may be allowed. 1040nr 2012 See Special $25,000 allowance , later. 1040nr 2012 Definition of passive activity loss. 1040nr 2012    Generally, your passive activity loss for the tax year is the excess of your passive activity deductions over your passive activity gross income. 1040nr 2012 See Passive Activity Income and Deductions , later. 1040nr 2012   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. 1040nr 2012 For details on net active income, see the Instructions for Form 8810. 1040nr 2012 For the definition of passive activity gross income, see Passive Activity Income , later. 1040nr 2012 For the definition of passive activity deductions, see Passive Activity Deductions , later. 1040nr 2012 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. 1040nr 2012 Allocation of disallowed passive activity loss among activities. 1040nr 2012   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. 1040nr 2012 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. 1040nr 2012 Use Worksheet 5 of Form 8582 to figure the ratable portion of the loss from each activity that is disallowed. 1040nr 2012 Loss from an activity. 1040nr 2012   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. 1040nr 2012   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. 1040nr 2012 See Significant Participation Passive Activities , later. 1040nr 2012 Example. 1040nr 2012 John Pine holds interests in three passive activities, A, B, and C. 1040nr 2012 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. 1040nr 2012 Therefore, a ratable portion of the losses from activities A and B is disallowed. 1040nr 2012 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. 1040nr 2012   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. 1040nr 2012 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. 1040nr 2012 Excluded deductions. 1040nr 2012    “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. 1040nr 2012 See Recharacterization of Passive Income , later. 1040nr 2012 Separately identified deductions. 1040nr 2012   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. 1040nr 2012   Use Form 8582, Worksheet 7, for any activity if you have passive activity deductions for that activity that must be separately identified. 1040nr 2012   Deductions that must be accounted for separately include (but are not limited to) the following deductions. 1040nr 2012 Deductions that arise in a rental real estate activity in tax years in which you actively participate in such activity. 1040nr 2012 See Active participation , later. 1040nr 2012 Deductions that arise in a rental real estate activity in tax years in which you do not actively participate in such activity. 1040nr 2012 See Active participation , later. 1040nr 2012 Losses from sales or exchanges of capital assets. 1040nr 2012 Section 1231 losses. 1040nr 2012 See Section 1231 Gains and Losses in Publication 544, Sales and Other Disposition of Assets, for more information. 1040nr 2012 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. 1040nr 2012 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. 1040nr 2012 For more information, see Regulations section 1. 1040nr 2012 469-1(f)(4). 1040nr 2012 Passive Activity Credit Generally, the passive activity credit for the tax year is disallowed. 1040nr 2012 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. 1040nr 2012 Credits that are included in figuring the general business credit are subject to the passive activity rules. 1040nr 2012 See the Instructions for Form 8582-CR for more information. 1040nr 2012 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). 1040nr 2012 You also must apply the limit on passive activity credits separately to your credits from a passive activity held through a PTP. 1040nr 2012 You can offset deductions from passive activities of a PTP only against income or gain from passive activities of the same PTP. 1040nr 2012 Likewise, you can offset credits from passive activities of a PTP only against the tax on the net passive income from the same PTP. 1040nr 2012 This separate treatment rule also applies to a regulated investment company holding an interest in a PTP for the items attributable to that interest. 1040nr 2012 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. 1040nr 2012 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. 1040nr 2012 These rules do not apply to C corporations. 1040nr 2012 For information, see the Instructions for Schedule F (Form 1040), Profit or Loss From Farming. 1040nr 2012 Passive Activities There are two kinds of passive activities. 1040nr 2012 Trade or business activities in which you do not materially participate during the year. 1040nr 2012 Rental activities, even if you do materially participate in them, unless you are a real estate professional. 1040nr 2012 Material participation in a trade or business is discussed later, under Activities That Are Not Passive Activities . 1040nr 2012 Treatment of former passive activities. 1040nr 2012   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. 1040nr 2012 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. 1040nr 2012 Treat any remaining prior year unallowed loss like you treat any other passive loss. 1040nr 2012   In addition, any prior year unallowed passive activity credits from a former passive activity offset the allocable part of your current year tax liability. 1040nr 2012 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. 1040nr 2012 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). 1040nr 2012 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). 1040nr 2012 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. 1040nr 2012 You generally report trade or business activities on Schedule C, C-EZ, F, or in Part II or III of Schedule E. 1040nr 2012 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. 1040nr 2012 See Real Estate Professional under Activities That Are Not Passive Activities, later. 1040nr 2012 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. 1040nr 2012 It does not matter whether the use is under a lease, a service contract, or some other arrangement. 1040nr 2012 Exceptions. 1040nr 2012   Your activity is not a rental activity if any of the following apply. 1040nr 2012 The average period of customer use of the property is 7 days or less. 1040nr 2012 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. 1040nr 2012 If the activity involves renting more than one class of property, multiply the average period of customer use of each class by a fraction. 1040nr 2012 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. 1040nr 2012 The activity's average period of customer use will equal the sum of the amounts for each class. 1040nr 2012 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. 1040nr 2012 Significant personal services include only services performed by individuals. 1040nr 2012 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. 1040nr 2012 Significant personal services do not include the following. 1040nr 2012 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. 1040nr 2012 You provide extraordinary personal services in making the rental property available for customer use. 1040nr 2012 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. 1040nr 2012 The rental is incidental to a nonrental activity. 1040nr 2012 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. 1040nr 2012 The unadjusted basis of property is its cost not reduced by depreciation or any other basis adjustment. 1040nr 2012 The rental of property is incidental to a trade or business activity if all of the following apply. 1040nr 2012 You own an interest in the trade or business activity during the year. 1040nr 2012 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. 1040nr 2012 Your gross rental income from the property is less than 2% of the smaller of its unadjusted basis or fair market value. 1040nr 2012 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. 1040nr 2012 You customarily make the rental property available during defined business hours for nonexclusive use by various customers. 1040nr 2012 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. 1040nr 2012    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. 1040nr 2012 Special $25,000 allowance. 1040nr 2012   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. 1040nr 2012 This special allowance is an exception to the general rule disallowing the passive activity loss. 1040nr 2012 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. 1040nr 2012   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. 1040nr 2012 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. 1040nr 2012   The maximum special allowance is reduced if your modified adjusted gross income exceeds certain amounts. 1040nr 2012 See Phaseout rule , later. 1040nr 2012 Example. 1040nr 2012 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. 1040nr 2012 She can use $15,000 of her $26,000 loss to offset her $15,000 passive income from the partnership. 1040nr 2012 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). 1040nr 2012 Commercial revitalization deduction (CRD). 1040nr 2012   The special allowance must first be applied to losses from rental real estate activities figured without the CRD. 1040nr 2012 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. 1040nr 2012 You cannot claim a CRD for a building placed in service after December 31, 2009. 1040nr 2012 Active participation. 1040nr 2012   Active participation is not the same as material participation (defined later). 1040nr 2012 Active participation is a less stringent standard than material participation. 1040nr 2012 For example, you may be treated as actively participating if you make management decisions in a significant and bona fide sense. 1040nr 2012 Management decisions that count as active participation include approving new tenants, deciding on rental terms, approving expenditures, and similar decisions. 1040nr 2012   Only individuals can actively participate in rental real estate activities. 1040nr 2012 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. 1040nr 2012   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. 1040nr 2012 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. 1040nr 2012   The choice is irrevocable and cannot be made later than the due date for the estate's first income tax return (including any extensions). 1040nr 2012   Limited partners are not treated as actively participating in a partnership's rental real estate activities. 1040nr 2012   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. 1040nr 2012   Active participation is not required to take the low-income housing credit, the rehabilitation investment credit, or CRD from rental real estate activities. 1040nr 2012 Example. 1040nr 2012 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. 1040nr 2012 He advertised and rented the house to the current tenant himself. 1040nr 2012 He also collected the rents and did the repairs or hired someone to do them. 1040nr 2012 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. 1040nr 2012 Phaseout rule. 1040nr 2012   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). 1040nr 2012 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. 1040nr 2012    Modified adjusted gross income for this purpose is your adjusted gross income figured without the following. 1040nr 2012 Taxable social security and tier 1 railroad retirement benefits. 1040nr 2012 Deductible contributions to individual retirement accounts (IRAs) and section 501(c)(18) pension plans. 1040nr 2012 The exclusion from income of interest from qualified U. 1040nr 2012 S. 1040nr 2012 savings bonds used to pay qualified higher education expenses. 1040nr 2012 The exclusion from income of amounts received from an employer's adoption assistance program. 1040nr 2012 Passive activity income or loss included on Form 8582. 1040nr 2012 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). 1040nr 2012 Any overall loss from a publicly traded partnership (see Publicly Traded Partnerships (PTPs) in the instructions for Form 8582). 1040nr 2012 The deduction for the employer-equivalent portion of self-employment tax. 1040nr 2012 The deduction for domestic production activities. 1040nr 2012 The deduction allowed for interest on student loans. 1040nr 2012 The deduction for qualified tuition and related expenses. 1040nr 2012 Example. 1040nr 2012 During 2013, John was unmarried and was not a real estate professional. 1040nr 2012 For 2013, he had $120,000 in salary and a $31,000 loss from his rental real estate activities in which he actively participated. 1040nr 2012 His modified adjusted gross income is $120,000. 1040nr 2012 When he files his 2013 return, he can deduct only $15,000 of his passive activity loss. 1040nr 2012 He must carry over the remaining $16,000 passive activity loss to 2014. 1040nr 2012 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. 1040nr 2012   A higher phaseout range applies to rehabilitation investment credits from rental real estate activities. 1040nr 2012 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). 1040nr 2012   There is no phaseout of the $25,000 special allowance for low-income housing credits or for the CRD. 1040nr 2012 Ordering rules. 1040nr 2012   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. 1040nr 2012 The portion of passive activity losses not attributable to the CRD. 1040nr 2012 The portion of passive activity losses attributable to the CRD. 1040nr 2012 The portion of passive activity credits attributable to credits other than the rehabilitation and low-income housing credits. 1040nr 2012 The portion of passive activity credits attributable to the rehabilitation credit. 1040nr 2012 The portion of passive activity credits attributable to the low-income housing credit. 1040nr 2012 Activities That Are Not Passive Activities The following are not passive activities. 1040nr 2012 Trade or business activities in which you materially participated for the tax year. 1040nr 2012 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). 1040nr 2012 It does not matter whether you materially participated in the activity for the tax year. 1040nr 2012 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. 1040nr 2012  See Temporary Regulations section 1. 1040nr 2012 469-1T(e)(4)(ii). 1040nr 2012 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. 1040nr 2012 An activity of trading personal property for the account of those who own interests in the activity. 1040nr 2012 See Temporary Regulations section 1. 1040nr 2012 469-1T(e)(6). 1040nr 2012 Rental real estate activities in which you materially participated as a real estate professional. 1040nr 2012 See Real Estate Professional , later. 1040nr 2012 You should not enter income and losses from these activities on Form 8582. 1040nr 2012 Instead, enter them on the forms or schedules you would normally use. 1040nr 2012 Material Participation A trade or business activity is not a passive activity if you materially participated in the activity. 1040nr 2012 Material participation tests. 1040nr 2012    You materially participated in a trade or business activity for a tax year if you satisfy any of the following tests. 1040nr 2012 You participated in the activity for more than 500 hours. 1040nr 2012 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. 1040nr 2012 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. 1040nr 2012 The activity is a significant participation activity, and you participated in all significant participation activities for more than 500 hours. 1040nr 2012 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. 1040nr 2012 See Significant Participation Passive Activities , under Recharacterization of Passive Income, later. 1040nr 2012 You materially participated in the activity for any 5 (whether or not consecutive) of the 10 immediately preceding tax years. 1040nr 2012 The activity is a personal service activity in which you materially participated for any 3 (whether or not consecutive) preceding tax years. 1040nr 2012 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. 1040nr 2012 Based on all the facts and circumstances, you participated in the activity on a regular, continuous, and substantial basis during the year. 1040nr 2012   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. 1040nr 2012 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). 1040nr 2012 Participation. 1040nr 2012   In general, any work you do in connection with an activity in which you own an interest is treated as participation in the activity. 1040nr 2012 Work not usually performed by owners. 1040nr 2012   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. 1040nr 2012 The work is not work that is customarily done by the owner of that type of activity. 1040nr 2012 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. 1040nr 2012 Participation as an investor. 1040nr 2012   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. 1040nr 2012 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. 1040nr 2012 Spouse's participation. 1040nr 2012   Your participation in an activity includes your spouse's participation. 1040nr 2012 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. 1040nr 2012 Proof of participation. 1040nr 2012 You can use any reasonable method to prove your participation in an activity for the year. 1040nr 2012 You do not have to keep contemporaneous daily time reports, logs, or similar documents if you can establish your participation in some other way. 1040nr 2012 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. 1040nr 2012 Limited partners. 1040nr 2012   If you owned an activity as a limited partner, you generally are not treated as materially participating in the activity. 1040nr 2012 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. 1040nr 2012   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). 1040nr 2012 Retired or disabled farmer and surviving spouse of a farmer. 1040nr 2012   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. 1040nr 2012 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. 1040nr 2012 Corporations. 1040nr 2012   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. 1040nr 2012   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. 1040nr 2012 See Special exception for qualified corporations under Activities Covered by the At-Risk Rules, later. 1040nr 2012 Real Estate Professional Generally, rental activities are passive activities even if you materially participated in them. 1040nr 2012 However, if you qualified as a real estate professional, rental real estate activities in which you materially participated are not passive activities. 1040nr 2012 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. 1040nr 2012 See the Instructions for Schedule E (Form 1040), Supplemental Income and Loss, for information about making this choice. 1040nr 2012 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). 1040nr 2012 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. 1040nr 2012 Qualifications. 1040nr 2012   You qualified as a real estate professional for the year if you met both of the following requirements. 1040nr 2012 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. 1040nr 2012 You performed more than 750 hours of services during the tax year in real property trades or businesses in which you materially participated. 1040nr 2012   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. 1040nr 2012 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. 1040nr 2012   If you file a joint return, do not count your spouse's personal services to determine whether you met the preceding requirements. 1040nr 2012 However, you can count your spouse's participation in an activity in determining if you materially participated. 1040nr 2012 Real property trades or businesses. 1040nr 2012   A real property trade or business is a trade or business that does any of the following with real property. 1040nr 2012 Develops or redevelops it. 1040nr 2012 Constructs or reconstructs it. 1040nr 2012 Acquires it. 1040nr 2012 Converts it. 1040nr 2012 Rents or leases it. 1040nr 2012 Operates or manages it. 1040nr 2012 Brokers it. 1040nr 2012 Closely held corporations. 1040nr 2012   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. 1040nr 2012 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. 1040nr 2012 Self-charged interest. 1040nr 2012   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. 1040nr 2012   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. 1040nr 2012 This includes both loans you made to the partnership or S corporation and loans the partnership or S corporation made to you. 1040nr 2012   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. 1040nr 2012    Exception. 1040nr 2012 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. 1040nr 2012 469-7(g) to avoid the application of these rules. 1040nr 2012 For more details on the self-charged interest rules, see Regulations section 1. 1040nr 2012 469-7. 1040nr 2012 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. 1040nr 2012 Passive activity income does not include the following items. 1040nr 2012 Income from an activity that is not a passive activity. 1040nr 2012 These activities are discussed under Activities That Are Not Passive Activities , earlier. 1040nr 2012 Portfolio income. 1040nr 2012 This includes interest, dividends, annuities, and royalties not derived in the ordinary course of a trade or business. 1040nr 2012 It includes gain or loss from the disposition of property that produces these types of income or that is held for investment. 1040nr 2012 The exclusion for portfolio income does not apply to self-charged interest treated as passive activity income. 1040nr 2012 For more information on self-charged interest, see Self-charged interest , earlier. 1040nr 2012 Personal service income. 1040nr 2012 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. 1040nr 2012 Income from positive section 481 adjustments allocated to activities other than passive activities. 1040nr 2012 (Section 481 adjustments are adjustments that must be made due to changes in your accounting method. 1040nr 2012 ) Income or gain from investments of working capital. 1040nr 2012 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. 1040nr 2012 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. 1040nr 2012 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. 1040nr 2012 Any other income that must be treated as nonpassive income. 1040nr 2012 See Recharacterization of Passive Income , later. 1040nr 2012 Overall gain from any interest in a publicly traded partnership. 1040nr 2012 See Publicly Traded Partnerships (PTPs) in the instructions for Form 8582. 1040nr 2012 State, local, and foreign income tax refunds. 1040nr 2012 Income from a covenant not to compete. 1040nr 2012 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. 1040nr 2012 Alaska Permanent Fund dividends. 1040nr 2012 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. 1040nr 2012 See chapter 4 of Publication 535, Business Expenses, for information about the rules for allocating interest. 1040nr 2012 Disposition of property interests. 1040nr 2012   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. 1040nr 2012 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. 1040nr 2012 An exception to this general rule may apply if you previously used the property in a different activity. 1040nr 2012 Exception for more than one use in the preceding 12 months. 1040nr 2012   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. 1040nr 2012 Any gain allocated to a passive activity is passive activity income. 1040nr 2012   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. 1040nr 2012 Exception for substantially appreciated property. 1040nr 2012   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. 1040nr 2012 You used the property in a passive activity for 20% of the time you held your interest in the property. 1040nr 2012 You used the property in a passive activity for the entire 24-month period before its disposition. 1040nr 2012 If neither condition applies, the gain is not passive activity income. 1040nr 2012 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. 1040nr 2012   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. 1040nr 2012 Also, treat the date you agree to transfer your interest for a fixed or determinable amount as the disposition date. 1040nr 2012   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. 1040nr 2012 Disposition of property converted to inventory. 1040nr 2012   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. 1040nr 2012 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. 1040nr 2012 This rule applies only if you meet all of the following conditions. 1040nr 2012 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). 1040nr 2012 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. 1040nr 2012 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. 1040nr 2012 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. 1040nr 2012 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. 1040nr 2012 See Coordination with other limitations on deductions that apply before the passive activity rules , later. 1040nr 2012 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. 1040nr 2012 Exceptions. 1040nr 2012   Passive activity deductions do not include the following items. 1040nr 2012 Deductions for expenses (other than interest expense) that are clearly and directly allocable to portfolio income. 1040nr 2012 Qualified home mortgage interest, capitalized interest expenses, and other interest expenses (other than self-charged interest) properly allocable to passive activities. 1040nr 2012 For more information on self-charged interest, see Self-charged interest under Passive Activity Income and Deductions, earlier. 1040nr 2012 Losses from dispositions of property that produce portfolio income or property held for investment. 1040nr 2012 State, local, and foreign income taxes. 1040nr 2012 Miscellaneous itemized deductions that may be disallowed because of the 2%-of-adjusted-gross-income limit. 1040nr 2012 Charitable contribution deductions. 1040nr 2012 Net operating loss deductions. 1040nr 2012 Percentage depletion carryovers for oil and gas wells. 1040nr 2012 Capital loss carrybacks and carryovers. 1040nr 2012 Items of deduction from a passive activity that are disallowed under the limits on deductions that apply before the passive activity rules. 1040nr 2012 See Coordination with other limitations on deductions that apply before the passive activity rules , later. 1040nr 2012 Deductions and losses that would have been allowed for tax years beginning before 1987 but for basis or at-risk limits. 1040nr 2012 Net negative section 481 adjustments allocated to activities other than passive activities. 1040nr 2012 (Section 481 adjustments are adjustments required due to changes in accounting methods. 1040nr 2012 ) Casualty and theft losses, unless losses similar in cause and severity recur regularly in the activity. 1040nr 2012 The deduction for the employer-equivalent portion of self-employment tax. 1040nr 2012 Coordination with other limitations on deductions that apply before the passive activity rules. 1040nr 2012   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. 1040nr 2012 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. 1040nr 2012 Proration of deductions disallowed under basis limitations. 1040nr 2012   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. 1040nr 2012 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. 1040nr 2012   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. 1040nr 2012 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. 1040nr 2012 Proration of deductions disallowed under at-risk limitation. 1040nr 2012   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. 1040nr 2012 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. 1040nr 2012 Coordination of basis and at-risk limitations. 1040nr 2012   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. 1040nr 2012 Separately identified items of deduction and loss. 1040nr 2012   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. 1040nr 2012   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. 1040nr 2012 See Grouping Your Activities , later. 1040nr 2012 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). 1040nr 2012 See Section 1231 Gains and Losses in Publication 544 for more information. 1040nr 2012 Are attributable to pre-enactment interests in activities. 1040nr 2012 See Regulations section 1. 1040nr 2012 469-11T(c). 1040nr 2012 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. 1040nr 2012 Grouping is important for a number of reasons. 1040nr 2012 If you group two activities into one larger activity, you need only show material participation in the activity as a whole. 1040nr 2012 But if the two activities are separate, you must show material participation in each one. 1040nr 2012 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. 1040nr 2012 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. 1040nr 2012 Grouping can also be important in determining whether you meet the 10% ownership requirement for actively participating in a rental real estate activity. 1040nr 2012 Appropriate Economic Units Generally, to determine if activities form an appropriate economic unit, you must consider all the relevant facts and circumstances. 1040nr 2012 You can use any reasonable method of applying the relevant facts and circumstances in grouping activities. 1040nr 2012 The following factors have the greatest weight in determining whether activities form an appropriate economic unit. 1040nr 2012 All of the factors do not have to apply to treat more than one activity as a single activity. 1040nr 2012 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. 1040nr 2012 Example 1. 1040nr 2012 John Jackson owns a bakery and a movie theater at a shopping mall in Baltimore and a bakery and movie theater in Philadelphia. 1040nr 2012 Based on all the relevant facts and circumstances, there may be more than one reasonable method for grouping John's activities. 1040nr 2012 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. 1040nr 2012 Example 2. 1040nr 2012 Betty is a partner in ABC partnership, which sells nonfood items to grocery stores. 1040nr 2012 Betty is also a partner in DEF (a trucking business). 1040nr 2012 ABC and DEF are under common control. 1040nr 2012 The main part of DEF's business is transporting goods for ABC. 1040nr 2012 DEF is the only trucking business in which Betty is involved. 1040nr 2012 Based on the rules of this section, Betty treats ABC's wholesale activity and DEF's trucking activity as a single activity. 1040nr 2012 Consistency and disclosure requirement. 1040nr 2012   Generally, when you group activities into appropriate economic units, you may not regroup those activities in a later tax year. 1040nr 2012 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. 1040nr 2012   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. 1040nr 2012   See Disclosure Requirement , later. 1040nr 2012 Regrouping by the IRS. 1040nr 2012   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. 1040nr 2012 Rental activities. 1040nr 2012   In general, you cannot group a rental activity with a trade or business activity. 1040nr 2012 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. 1040nr 2012 Example. 1040nr 2012 Herbert and Wilma are married and file a joint return. 1040nr 2012 Healthy Food, an S corporation, is a grocery store business. 1040nr 2012 Herbert is Healthy Food's only shareholder. 1040nr 2012 Plum Tower, an S corporation, owns and rents out the building. 1040nr 2012 Wilma is Plum Tower's only shareholder. 1040nr 2012 Plum Tower rents part of its building to Healthy Food. 1040nr 2012 Plum Tower's grocery store rental business and Healthy Food's grocery business are not insubstantial in relation to each other. 1040nr 2012 Herbert and Wilma file a joint return, so they are treated as one taxpayer for purposes of the passive activity rules. 1040nr 2012 The same owner (Herbert and Wilma) owns both Healthy Food and Plum Tower with the same ownership interest (100% in each). 1040nr 2012 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. 1040nr 2012 Grouping of real and personal property rentals. 1040nr 2012   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. 1040nr 2012 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. 1040nr 2012 Certain activities may not be grouped. 1040nr 2012   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. 1040nr 2012 Holding, producing, or distributing motion picture films or video tapes. 1040nr 2012 Farming. 1040nr 2012 Leasing any section 1245 property (as defined in section 1245(a)(3) of the Internal Revenue Code). 1040nr 2012 For a list of section 1245 property, see Section 1245 property under Activities Covered by the At-Risk Rules , later. 1040nr 2012 Exploring for, or exploiting, oil and gas resources. 1040nr 2012 Exploring for, or exploiting, geothermal deposits. 1040nr 2012   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. 1040nr 2012 Limited entrepreneur. 1040nr 2012   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. 1040nr 2012 Activities conducted through another entity. 1040nr 2012   A personal service corporation, closely held corporation, partnership, or S corporation must group its activities using the rules discussed in this section. 1040nr 2012 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. 1040nr 2012    You may not treat activities grouped together by the entity as separate activities. 1040nr 2012 Personal service and closely held corporations. 1040nr 2012   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. 1040nr 2012 See Material Participation , earlier, and Significant Participation Passive Activities , later. 1040nr 2012 Publicly traded partnership (PTP). 1040nr 2012   You may not group activities conducted through a PTP with any other activity, including an activity conducted through another PTP. 1040nr 2012 Partial dispositions. 1040nr 2012   If you dispose of substantially all of an activity during your tax year, you may treat the part disposed of as a separate activity. 1040nr 2012 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. 1040nr 2012 Disclosure Requirement For tax years beginning after January 24, 2010, the following disclosure requirements for groupings apply. 1040nr 2012 You are required to report certain changes to your groupings that occur during the tax year to the IRS. 1040nr 2012 If you fail to report these changes, each trade or business activity or rental activity will be treated as a separate activity. 1040nr 2012 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. 1040nr 2012 If the IRS discovered the failure to disclose, you must have reasonable cause for not making the required disclosure. 1040nr 2012 New grouping. 1040nr 2012   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. 1040nr 2012 The statement must provide the names, addresses, and employer identification numbers (EINs), if applicable, for the activities being grouped as a single activity. 1040nr 2012 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. 1040nr 2012 Addition to an existing grouping. 1040nr 2012   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. 1040nr 2012 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. 1040nr 2012 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. 1040nr 2012 Regrouping. 1040nr 2012   You must file a written statement with your original income tax return for the tax year in which you regroup the activities. 1040nr 2012 The statement must provide the names, addresses, and EINs, if applicable, for the activities that are being regrouped. 1040nr 2012 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. 1040nr 2012 In addition, the statement must contain an explanation of the material change in the facts and circumstances that made the original grouping clearly inappropriate. 1040nr 2012 Groupings by partnerships and S corporations. 1040nr 2012   Partnerships and S corporations are not subject to the rules for new grouping, addition to an existing grouping, or regrouping. 1040nr 2012 Instead, they must comply with the disclosure instructions for grouping activities provided in their Form 1065, U. 1040nr 2012 S. 1040nr 2012 Return of Partnership Income, or Form 1120S, U. 1040nr 2012 S. 1040nr 2012 Income Tax Return for an S Corporation, whichever is applicable. 1040nr 2012   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. 1040nr 2012   A partner or shareholder may not treat activities grouped together by the entity as separate activities. 1040nr 2012 Recharacterization of Passive Income Net income from the following passive activities may have to be recharacterized and excluded from passive activity income. 1040nr 2012 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. 1040nr 2012 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. 1040nr 2012 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). 1040nr 2012 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. 1040nr 2012 Instead, enter income or losses on the form and schedules you normally use. 1040nr 2012 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. 1040nr 2012 Limit on recharacterized passive income. 1040nr 2012   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. 1040nr 2012 Investment income and investment expense. 1040nr 2012   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. 1040nr 2012 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. 1040nr 2012 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. 1040nr 2012 Corporations. 1040nr 2012   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. 1040nr 2012 The corporation is not treated as materially participating in the activity for the year. 1040nr 2012 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. 1040nr 2012 Worksheet A. 1040nr 2012   Complete Worksheet A. 1040nr 2012 Significant Participation Passive Activities , below, if you have income or losses from any significant participation activity. 1040nr 2012 Begin by entering the name of each activity in the left column. 1040nr 2012 Column (a). 1040nr 2012   Enter the number of hours you participated in each activity and total the column. 1040nr 2012   If the total is more than 500, do not complete Worksheet A or B. 1040nr 2012 None of the activities are passive activities because you satisfy test 4 for material participation. 1040nr 2012 (See Material participation tests , earlier. 1040nr 2012 ) Report all the income and losses from these activities on the forms and schedules you normally use. 1040nr 2012 Do not include the income and losses on Form 8582. 1040nr 2012 Column (b). 1040nr 2012   Enter the net loss, if any, from the activity. 1040nr 2012 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). 1040nr 2012 Enter -0- here if the prior year unallowed loss is the same as the current year net income. 1040nr 2012 Column (c). 1040nr 2012   Enter net income (if any) from the activity. 1040nr 2012 Net income means the excess of the current year's net income from the activity over any prior year unallowed losses from the activity. 1040nr 2012 Column (d). 1040nr 2012   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). 1040nr 2012 If column (d) is a net loss, skip Worksheet B, Significant Participation Activities With Net Income. 1040nr 2012 Include the income and losses in Worksheet 3 of Form 8582 (or Worksheet 2 in the Form 88
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Page Last Reviewed or Updated: 28-Feb-2014

The 1040nr 2012

1040nr 2012 28. 1040nr 2012   Miscellaneous Deductions Table of Contents What's New Introduction Useful Items - You may want to see: Deductions Subject to the 2% LimitUnreimbursed Employee Expenses (Line 21) Tax Preparation Fees (Line 22) Other Expenses (Line 23) Deductions Not Subject to the 2% LimitList of Deductions Nondeductible ExpensesList of Nondeductible Expenses What's New Standard mileage rate. 1040nr 2012  The 2013 rate for business use of a vehicle is 56½ cents per mile. 1040nr 2012 Introduction This chapter explains which expenses you can claim as miscellaneous itemized deductions on Schedule A (Form 1040). 1040nr 2012 You must reduce the total of most miscellaneous itemized deductions by 2% of your adjusted gross income. 1040nr 2012 This chapter covers the following topics. 1040nr 2012 Deductions subject to the 2% limit. 1040nr 2012 Deductions not subject to the 2% limit. 1040nr 2012 Expenses you cannot deduct. 1040nr 2012 You must keep records to verify your deductions. 1040nr 2012 You should keep receipts, canceled checks, substitute checks, financial account statements, and other documentary evidence. 1040nr 2012 For more information on recordkeeping, get Publication 552, Record- keeping for Individuals. 1040nr 2012 Useful Items - You may want to see: Publication 463 Travel, Entertainment, Gift, and Car Expenses 525 Taxable and Nontaxable Income 529 Miscellaneous Deductions 535 Business Expenses 587 Business Use of Your Home (Including Use by Daycare Providers) 946 How To Depreciate Property Form (and Instructions) Schedule A (Form 1040) Itemized Deductions 2106 Employee Business Expenses 2106-EZ Unreimbursed Employee Business Expenses Deductions Subject to the 2% Limit You can deduct certain expenses as miscellaneous itemized deductions on Schedule A (Form 1040). 1040nr 2012 You can claim the amount of expenses that is more than 2% of your adjusted gross income. 1040nr 2012 You figure your deduction on Schedule A by subtracting 2% of your adjusted gross income from the total amount of these expenses. 1040nr 2012 Your adjusted gross income is the amount on Form 1040, line 38. 1040nr 2012 Generally, you apply the 2% limit after you apply any other deduction limit. 1040nr 2012 For example, you apply the 50% (or 80%) limit on business-related meals and entertainment (discussed in chapter 26) before you apply the 2% limit. 1040nr 2012 Deductions subject to the 2% limit are discussed in the three categories in which you report them on Schedule A (Form 1040). 1040nr 2012 Unreimbursed employee expenses (line 21). 1040nr 2012 Tax preparation fees (line 22). 1040nr 2012 Other expenses (line 23). 1040nr 2012 Unreimbursed Employee Expenses (Line 21) Generally, you can deduct on Schedule A (Form 1040), line 21, unreimbursed employee expenses that are: Paid or incurred during your tax year, For carrying on your trade or business of being an employee, and Ordinary and necessary. 1040nr 2012 An expense is ordinary if it is common and accepted in your trade, business, or profession. 1040nr 2012 An expense is necessary if it is appropriate and helpful to your business. 1040nr 2012 An expense does not have to be required to be considered necessary. 1040nr 2012 Examples of unreimbursed employee expenses are listed next. 1040nr 2012 The list is followed by discussions of additional unreimbursed employee expenses. 1040nr 2012 Business bad debt of an employee. 1040nr 2012 Education that is work related. 1040nr 2012 (See chapter 27. 1040nr 2012 ) Legal fees related to your job. 1040nr 2012 Licenses and regulatory fees. 1040nr 2012 Malpractice insurance premiums. 1040nr 2012 Medical examinations required by an employer. 1040nr 2012 Occupational taxes. 1040nr 2012 Passport for a business trip. 1040nr 2012 Subscriptions to professional journals and trade magazines related to your work. 1040nr 2012 Travel, transportation, entertainment, and gifts related to your work. 1040nr 2012 (See chapter 26. 1040nr 2012 ) Business Liability Insurance You can deduct insurance premiums you paid for protection against personal liability for wrongful acts on the job. 1040nr 2012 Damages for Breach of Employment Contract If you break an employment contract, you can deduct damages you pay your former employer that are attributable to the pay you received from that employer. 1040nr 2012 Depreciation on Computers You can claim a depreciation deduction for a computer that you use in your work as an employee if its use is: For the convenience of your employer, and Required as a condition of your employment. 1040nr 2012 For more information about the rules and exceptions to the rules affecting the allowable deductions for a home computer, see Publication 529. 1040nr 2012 Dues to Chambers of Commerce and Professional Societies You may be able to deduct dues paid to professional organizations (such as bar associations and medical associations) and to chambers of commerce and similar organizations, if membership helps you carry out the duties of your job. 1040nr 2012 Similar organizations include: Boards of trade, Business leagues, Civic or public service organizations, Real estate boards, and Trade associations. 1040nr 2012 Lobbying and political activities. 1040nr 2012   You may not be able to deduct that part of your dues that is for certain lobbying and political activities. 1040nr 2012 See Dues used for lobbying under Nondeductible Expenses, later. 1040nr 2012 Educator Expenses If you were an eligible educator in 2013, you can deduct up to $250 of qualified expenses you paid in 2013 as an adjustment to gross income on Form 1040, line 23, rather than as a miscellaneous itemized deduction. 1040nr 2012 If you file Form 1040A, you can deduct these expenses on line 16. 1040nr 2012 If you and your spouse are filing jointly and both of you were eligible educators, the maximum deduction is $500. 1040nr 2012 However, neither spouse can deduct more than $250 of his or her qualified expenses. 1040nr 2012 Home Office If you use a part of your home regularly and exclusively for business purposes, you may be able to deduct a part of the operating expenses and depreciation of your home. 1040nr 2012 You can claim this deduction for the business use of a part of your home only if you use that part of your home regularly and exclusively: As your principal place of business for any trade or business, As a place to meet or deal with your patients, clients, or customers in the normal course of your trade or business, or In the case of a separate structure not attached to your home, in connection with your trade or business. 1040nr 2012 The regular and exclusive business use must be for the convenience of your employer and not just appropriate and helpful in your job. 1040nr 2012 See Publication 587 for more detailed information and a worksheet. 1040nr 2012 Job Search Expenses You can deduct certain expenses you have in looking for a new job in your present occupation, even if you do not get a new job. 1040nr 2012 You cannot deduct these expenses if: You are looking for a job in a new occupation, There was a substantial break between the ending of your last job and your looking for a new one, or You are looking for a job for the first time. 1040nr 2012 Employment and outplacement agency fees. 1040nr 2012   You can deduct employment and outplacement agency fees you pay in looking for a new job in your present occupation. 1040nr 2012 Employer pays you back. 1040nr 2012   If, in a later year, your employer pays you back for employment agency fees, you must include the amount you receive in your gross income up to the amount of your tax benefit in the earlier year. 1040nr 2012 (See Recoveries in chapter 12. 1040nr 2012 ) Employer pays the employment agency. 1040nr 2012   If your employer pays the fees directly to the employment agency and you are not responsible for them, you do not include them in your gross income. 1040nr 2012 Résumé. 1040nr 2012   You can deduct amounts you spend for preparing and mailing copies of a résumé to prospective employers if you are looking for a new job in your present occupation. 1040nr 2012 Travel and transportation expenses. 1040nr 2012   If you travel to an area and, while there, you look for a new job in your present occupation, you may be able to deduct travel expenses to and from the area. 1040nr 2012 You can deduct the travel expenses if the trip is primarily to look for a new job. 1040nr 2012 The amount of time you spend on personal activity compared to the amount of time you spend in looking for work is important in determining whether the trip is primarily personal or is primarily to look for a new job. 1040nr 2012   Even if you cannot deduct the travel expenses to and from an area, you can deduct the expenses of looking for a new job in your present occupation while in the area. 1040nr 2012   You can choose to use the standard mileage rate to figure your car expenses. 1040nr 2012 The 2013 rate for business use of a vehicle is 56½ cents per mile. 1040nr 2012 See chapter 26 for more information. 1040nr 2012 Licenses and Regulatory Fees You can deduct the amount you pay each year to state or local governments for licenses and regulatory fees for your trade, business, or profession. 1040nr 2012 Occupational Taxes You can deduct an occupational tax charged at a flat rate by a locality for the privilege of working or conducting a business in the locality. 1040nr 2012 If you are an employee, you can claim occupational taxes only as a miscellaneous deduction subject to the 2% limit; you cannot claim them as a deduction for taxes elsewhere on your return. 1040nr 2012 Repayment of Income Aid Payment An “income aid payment” is one that is received under an employer's plan to aid employees who lose their jobs because of lack of work. 1040nr 2012 If you repay a lump-sum income aid payment that you received and included in income in an earlier year, you can deduct the repayment. 1040nr 2012 Research Expenses of a College Professor If you are a college professor, you can deduct research expenses, including travel expenses, for teaching, lecturing, or writing and publishing on subjects that relate directly to your teaching duties. 1040nr 2012 You must have undertaken the research as a means of carrying out the duties expected of a professor and without expectation of profit apart from salary. 1040nr 2012 However, you cannot deduct the cost of travel as a form of education. 1040nr 2012 Tools Used in Your Work Generally, you can deduct amounts you spend for tools used in your work if the tools wear out and are thrown away within 1 year from the date of purchase. 1040nr 2012 You can depreciate the cost of tools that have a useful life substantially beyond the tax year. 1040nr 2012 For more information about depreciation, see Publication 946. 1040nr 2012 Union Dues and Expenses You can deduct dues and initiation fees you pay for union membership. 1040nr 2012 You can also deduct assessments for benefit payments to unemployed union members. 1040nr 2012 However, you cannot deduct the part of the assessments or contributions that provides funds for the payment of sick, accident, or death benefits. 1040nr 2012 Also, you cannot deduct contributions to a pension fund, even if the union requires you to make the contributions. 1040nr 2012 You may not be able to deduct amounts you pay to the union that are related to certain lobbying and political activities. 1040nr 2012 See Lobbying Expenses under Nondeductible Expenses, later. 1040nr 2012 Work Clothes and Uniforms You can deduct the cost and upkeep of work clothes if the following two requirements are met. 1040nr 2012 You must wear them as a condition of your employment. 1040nr 2012 The clothes are not suitable for everyday wear. 1040nr 2012 It is not enough that you wear distinctive clothing. 1040nr 2012 The clothing must be specifically required by your employer. 1040nr 2012 Nor is it enough that you do not, in fact, wear your work clothes away from work. 1040nr 2012 The clothing must not be suitable for taking the place of your regular clothing. 1040nr 2012 Examples of workers who may be able to deduct the cost and upkeep of work clothes are: delivery workers, firefighters, health care workers, law enforcement officers, letter carriers, professional athletes, and transportation workers (air, rail, bus, etc. 1040nr 2012 ). 1040nr 2012 Musicians and entertainers can deduct the cost of theatrical clothing and accessories that are not suitable for everyday wear. 1040nr 2012 However, work clothing consisting of white cap, white shirt or white jacket, white bib overalls, and standard work shoes, which a painter is required by his union to wear on the job, is not distinctive in character or in the nature of a uniform. 1040nr 2012 Similarly, the costs of buying and maintaining blue work clothes worn by a welder at the request of a foreman are not deductible. 1040nr 2012 Protective clothing. 1040nr 2012   You can deduct the cost of protective clothing required in your work, such as safety shoes or boots, safety glasses, hard hats, and work gloves. 1040nr 2012   Examples of workers who may be required to wear safety items are: carpenters, cement workers, chemical workers, electricians, fishing boat crew members, machinists, oil field workers, pipe fitters, steamfitters, and truck drivers. 1040nr 2012 Military uniforms. 1040nr 2012   You generally cannot deduct the cost of your uniforms if you are on full-time active duty in the armed forces. 1040nr 2012 However, if you are an armed forces reservist, you can deduct the unreimbursed cost of your uniform if military regulations restrict you from wearing it except while on duty as a reservist. 1040nr 2012 In figuring the deduction, you must reduce the cost by any nontaxable allowance you receive for these expenses. 1040nr 2012   If local military rules do not allow you to wear fatigue uniforms when you are off duty, you can deduct the amount by which the cost of buying and keeping up these uniforms is more than the uniform allowance you receive. 1040nr 2012   You can deduct the cost of your uniforms if you are a civilian faculty or staff member of a military school. 1040nr 2012 Tax Preparation Fees (Line 22) You can usually deduct tax preparation fees in the year you pay them. 1040nr 2012 Thus, on your 2013 return, you can deduct fees paid in 2013 for preparing your 2012 return. 1040nr 2012 These fees include the cost of tax preparation software programs and tax publications. 1040nr 2012 They also include any fee you paid for electronic filing of your return. 1040nr 2012 Other Expenses (Line 23) You can deduct certain other expenses as miscellaneous itemized deductions subject to the 2% limit. 1040nr 2012 On Schedule A (Form 1040), line 23, you can deduct expenses that you pay: To produce or collect income that must be included in your gross income, To manage, conserve, or maintain property held for producing such income, or To determine, contest, pay, or claim a refund of any tax. 1040nr 2012 You can deduct expenses you pay for the purposes in (1) and (2) above only if they are reasonably and closely related to these purposes. 1040nr 2012 Some of these other expenses are explained in the following discussions. 1040nr 2012 If the expenses you pay produce income that is only partially taxable, see Tax-Exempt Income Expenses , later, under Nondeductible Expenses. 1040nr 2012 Appraisal Fees You can deduct appraisal fees if you pay them to figure a casualty loss or the fair market value of donated property. 1040nr 2012 Casualty and Theft Losses You can deduct a casualty or theft loss as a miscellaneous itemized deduction subject to the 2% limit if you used the damaged or stolen property in performing services as an employee. 1040nr 2012 First report the loss in Section B of Form 4684, Casualties and Thefts. 1040nr 2012 You may also have to include the loss on Form 4797, Sales of Business Property, if you are otherwise required to file that form. 1040nr 2012 To figure your deduction, add all casualty or theft losses from this type of property included on Form 4684, lines 32 and 38b, or Form 4797, line 18a. 1040nr 2012 For other casualty and theft losses, see chapter 25. 1040nr 2012 Clerical Help and Office Rent You can deduct office expenses, such as rent and clerical help, that you have in connection with your investments and collecting the taxable income on them. 1040nr 2012 Credit or Debit Card Convenience Fees You can deduct the convenience fee charged by the card processor for paying your income tax (including estimated tax payments) by credit or debit card. 1040nr 2012 The fees are deductible in the year paid. 1040nr 2012 Depreciation on Home Computer You can deduct depreciation on your home computer if you use it to produce income (for example, to manage your investments that produce taxable income). 1040nr 2012 You generally must depreciate the computer using the straight line method over the Alternative Depreciation System (ADS) recovery period. 1040nr 2012 But if you work as an employee and also use the computer in that work, see Publication 946. 1040nr 2012 Excess Deductions of an Estate If an estate's total deductions in its last tax year are more than its gross income for that year, the beneficiaries succeeding to the estate's property can deduct the excess. 1040nr 2012 Do not include deductions for the estate's personal exemption and charitable contributions when figuring the estate's total deductions. 1040nr 2012 The beneficiaries can claim the deduction only for the tax year in which, or with which, the estate terminates, whether the year of termination is a normal year or a short tax year. 1040nr 2012 For more information, see Termination of Estate in Publication 559, Survivors, Executors, and Administrators. 1040nr 2012 Fees to Collect Interest and Dividends You can deduct fees you pay to a broker, bank, trustee, or similar agent to collect your taxable bond interest or dividends on shares of stock. 1040nr 2012 But you cannot deduct a fee you pay to a broker to buy investment property, such as stocks or bonds. 1040nr 2012 You must add the fee to the cost of the property. 1040nr 2012 You cannot deduct the fee you pay to a broker to sell securities. 1040nr 2012 You can use the fee only to figure gain or loss from the sale. 1040nr 2012 See the Instructions for Form 8949 for information on how to report the fee. 1040nr 2012 Hobby Expenses You can generally deduct hobby expenses, but only up to the amount of hobby income. 1040nr 2012 A hobby is not a business because it is not carried on to make a profit. 1040nr 2012 See Activity not for profit in chapter 12 under Other Income. 1040nr 2012 Indirect Deductions of Pass-Through Entities Pass-through entities include partnerships, S corporations, and mutual funds that are not publicly offered. 1040nr 2012 Deductions of pass-through entities are passed through to the partners or shareholders. 1040nr 2012 The partners or shareholders can deduct their share of passed-through deductions for investment expenses as miscellaneous itemized deductions subject to the 2% limit. 1040nr 2012 Example. 1040nr 2012 You are a member of an investment club that is formed solely to invest in securities. 1040nr 2012 The club is treated as a partnership. 1040nr 2012 The partnership's income is solely from taxable dividends, interest, and gains from sales of securities. 1040nr 2012 In this case, you can deduct your share of the partnership's operating expenses as miscellaneous itemized deductions subject to the 2% limit. 1040nr 2012 However, if the investment club partnership has investments that also produce nontaxable income, you cannot deduct your share of the partnership's expenses that produce the nontaxable income. 1040nr 2012 Publicly offered mutual funds. 1040nr 2012   Publicly offered mutual funds do not pass deductions for investment expenses through to shareholders. 1040nr 2012 A mutual fund is “publicly offered” if it is: Continuously offered pursuant to a public offering, Regularly traded on an established securities market, or Held by or for at least 500 persons at all times during the tax year. 1040nr 2012   A publicly offered mutual fund will send you a Form 1099-DIV, Dividends and Distributions, or a substitute form, showing the net amount of dividend income (gross dividends minus investment expenses). 1040nr 2012 This net figure is the amount you report on your return as income. 1040nr 2012 You cannot further deduct investment expenses related to publicly offered mutual funds because they are already included as part of the net income amount. 1040nr 2012 Information returns. 1040nr 2012   You should receive information returns from pass-through entities. 1040nr 2012 Partnerships and S corporations. 1040nr 2012   These entities issue Schedule K-1, which lists the items and amounts you must report and identifies the tax return schedules and lines to use. 1040nr 2012 Nonpublicly offered mutual funds. 1040nr 2012   These funds will send you a Form 1099-DIV, Dividends and Distributions, or a substitute form, showing your share of gross income and investment expenses. 1040nr 2012 You can claim the expenses only as a miscellaneous itemized deduction subject to the 2% limit. 1040nr 2012 Investment Fees and Expenses You can deduct investment fees, custodial fees, trust administration fees, and other expenses you paid for managing your investments that produce taxable income. 1040nr 2012 Legal Expenses You can usually deduct legal expenses that you incur in attempting to produce or collect taxable income or that you pay in connection with the determination, collection, or refund of any tax. 1040nr 2012 You can also deduct legal expenses that are: Related to either doing or keeping your job, such as those you paid to defend yourself against criminal charges arising out of your trade or business, For tax advice related to a divorce, if the bill specifies how much is for tax advice and it is determined in a reasonable way, or To collect taxable alimony. 1040nr 2012 You can deduct expenses of resolving tax issues relating to profit or loss from business (Schedule C or C-EZ), rentals or royalties (Schedule E), or farm income and expenses (Schedule F), on the appropriate schedule. 1040nr 2012 You deduct expenses of resolving nonbusiness tax issues on Schedule A (Form 1040). 1040nr 2012 See Tax Preparation Fees , earlier. 1040nr 2012 Loss on Deposits For information on whether, and if so, how, you may deduct a loss on your deposit in a qualified financial institution, see Loss on Deposits in chapter 25. 1040nr 2012 Repayments of Income If you had to repay an amount that you included in income in an earlier year, you may be able to deduct the amount you repaid. 1040nr 2012 If the amount you had to repay was ordinary income of $3,000 or less, the deduction is subject to the 2% limit. 1040nr 2012 If it was more than $3,000, see Repayments Under Claim of Right under Deductions Not Subject to the 2% Limit, later. 1040nr 2012 Repayments of Social Security Benefits For information on how to deduct your repayments of certain social security benefits, see Repayments More Than Gross Benefits in chapter 11. 1040nr 2012 Safe Deposit Box Rent You can deduct safe deposit box rent if you use the box to store taxable income-producing stocks, bonds, or investment-related papers and documents. 1040nr 2012 You cannot deduct the rent if you use the box only for jewelry, other personal items, or tax-exempt securities. 1040nr 2012 Service Charges on Dividend Reinvestment Plans You can deduct service charges you pay as a subscriber in a dividend reinvestment plan. 1040nr 2012 These service charges include payments for: Holding shares acquired through a plan, Collecting and reinvesting cash dividends, and Keeping individual records and providing detailed statements of accounts. 1040nr 2012 Trustee's Administrative Fees for IRA Trustee's administrative fees that are billed separately and paid by you in connection with your individual retirement arrangement (IRA) are deductible (if they are ordinary and necessary) as a miscellaneous itemized deduction subject to the 2% limit. 1040nr 2012 For more information about IRAs, see chapter 17. 1040nr 2012 Deductions Not Subject to the 2% Limit You can deduct the items listed below as miscellaneous itemized deductions. 1040nr 2012 They are not subject to the 2% limit. 1040nr 2012 Report these items on Schedule A (Form 1040), line 28. 1040nr 2012 List of Deductions Each of the following items is discussed in detail after the list (except where indicated). 1040nr 2012 Amortizable premium on taxable bonds. 1040nr 2012 Casualty and theft losses from income- producing property. 1040nr 2012 Federal estate tax on income in respect of a decedent. 1040nr 2012 Gambling losses up to the amount of gambling winnings. 1040nr 2012 Impairment-related work expenses of persons with disabilities. 1040nr 2012 Loss from other activities from Schedule K-1 (Form 1065-B), box 2. 1040nr 2012 Losses from Ponzi-type investment schemes. 1040nr 2012 See Losses from Ponzi-type investment schemes under Theft in chapter 25. 1040nr 2012 Repayments of more than $3,000 under a claim of right. 1040nr 2012 Unrecovered investment in an annuity. 1040nr 2012 Amortizable Premium on Taxable Bonds In general, if the amount you pay for a bond is greater than its stated principal amount, the excess is bond premium. 1040nr 2012 You can elect to amortize the premium on taxable bonds. 1040nr 2012 The amortization of the premium is generally an offset to interest income on the bond rather than a separate deduction item. 1040nr 2012 Part of the premium on some bonds may be a miscellaneous deduction not subject to the 2% limit. 1040nr 2012 For more information, see Amortizable Premium on Taxable Bonds in Publication 529, and Bond Premium Amortization in chapter 3 of Publication 550, Investment Income and Expenses. 1040nr 2012 Casualty and Theft Losses of Income-Producing Property You can deduct a casualty or theft loss as a miscellaneous itemized deduction not subject to the 2% limit if the damaged or stolen property was income-producing property (property held for investment, such as stocks, notes, bonds, gold, silver, vacant lots, and works of art). 1040nr 2012 First, report the loss in Form 4684, Section B. 1040nr 2012 You may also have to include the loss on Form 4797, Sales of Business Property if you are otherwise required to file that form. 1040nr 2012 To figure your deduction, add all casualty or theft losses from this type of property included on Form 4684, lines 32 and 38b, or Form 4797, line 18a. 1040nr 2012 For more information on casualty and theft losses, see chapter 25. 1040nr 2012 Federal Estate Tax on Income in Respect of a Decedent You can deduct the federal estate tax attributable to income in respect of a decedent that you as a beneficiary include in your gross income. 1040nr 2012 Income in respect of the decedent is gross income that the decedent would have received had death not occurred and that was not properly includible in the decedent's final income tax return. 1040nr 2012 See Publication 559 for more information. 1040nr 2012 Gambling Losses Up to the Amount of Gambling Winnings You must report the full amount of your gambling winnings for the year on Form 1040, line 21. 1040nr 2012 You deduct your gambling losses for the year on Schedule A (Form 1040), line 28. 1040nr 2012 You cannot deduct gambling losses that are more than your winnings. 1040nr 2012 You cannot reduce your gambling winnings by your gambling losses and report the difference. 1040nr 2012 You must report the full amount of your winnings as income and claim your losses (up to the amount of winnings) as an itemized deduction. 1040nr 2012 Therefore, your records should show your winnings separately from your losses. 1040nr 2012 Diary of winnings and losses. 1040nr 2012 You must keep an accurate diary or similar record of your losses and winnings. 1040nr 2012 Your diary should contain at least the following information. 1040nr 2012 The date and type of your specific wager or wagering activity. 1040nr 2012 The name and address or location of the gambling establishment. 1040nr 2012 The names of other persons present with you at the gambling establishment. 1040nr 2012 The amount(s) you won or lost. 1040nr 2012 See Publication 529 for more information. 1040nr 2012 Impairment-Related Work Expenses If you have a physical or mental disability that limits your being employed, or substantially limits one or more of your major life activities, such as performing manual tasks, walking, speaking, breathing, learning, and working, you can deduct your impairment-related work expenses. 1040nr 2012 Impairment-related work expenses are ordinary and necessary business expenses for attendant care services at your place of work and for other expenses in connection with your place of work that are necessary for you to be able to work. 1040nr 2012 Self-employed. 1040nr 2012   If you are self-employed, enter your impairment-related work expenses on the appropriate form (Schedule C, C-EZ, E, or F) used to report your business income and expenses. 1040nr 2012 Loss From Other Activities From Schedule K-1 (Form 1065-B), Box 2 If the amount reported in Schedule K-1 (Form 1065-B), box 2, is a loss, report it on Schedule A (Form 1040), line 28. 1040nr 2012 It is not subject to the passive activity limitations. 1040nr 2012 Repayments Under Claim of Right If you had to repay more than $3,000 that you included in your income in an earlier year because at the time you thought you had an unrestricted right to it, you may be able to deduct the amount you repaid or take a credit against your tax. 1040nr 2012 See Repayments in chapter 12 for more information. 1040nr 2012 Unrecovered Investment in Annuity A retiree who contributed to the cost of an annuity can exclude from income a part of each payment received as a tax-free return of the retiree's investment. 1040nr 2012 If the retiree dies before the entire investment is recovered tax free, any unrecovered investment can be deducted on the retiree's final income tax return. 1040nr 2012 See chapter 10 for more information about the tax treatment of pensions and annuities. 1040nr 2012 Nondeductible Expenses Examples of nondeductible expenses are listed next. 1040nr 2012 The list is followed by discussions of additional nondeductible expenses. 1040nr 2012 List of Nondeductible Expenses Broker's commissions that you paid in connection with your IRA or other investment property. 1040nr 2012 Burial or funeral expenses, including the cost of a cemetery lot. 1040nr 2012 Capital expenses. 1040nr 2012 Fees and licenses, such as car licenses, marriage licenses, and dog tags. 1040nr 2012 Hobby losses, but see Hobby Expenses , earlier. 1040nr 2012 Home repairs, insurance, and rent. 1040nr 2012 Illegal bribes and kickbacks. 1040nr 2012 See Bribes and kickbacks in chapter 11 of Publication 535. 1040nr 2012 Losses from the sale of your home, furniture, personal car, etc. 1040nr 2012 Personal disability insurance premiums. 1040nr 2012 Personal, living, or family expenses. 1040nr 2012 The value of wages never received or lost vacation time. 1040nr 2012 Adoption Expenses You cannot deduct the expenses of adopting a child, but you may be able to take a credit for those expenses. 1040nr 2012 See chapter 37. 1040nr 2012 Campaign Expenses You cannot deduct campaign expenses of a candidate for any office, even if the candidate is running for reelection to the office. 1040nr 2012 These include qualification and registration fees for primary elections. 1040nr 2012 Legal fees. 1040nr 2012   You cannot deduct legal fees paid to defend charges that arise from participation in a political campaign. 1040nr 2012 Check-Writing Fees on Personal Account If you have a personal checking account, you cannot deduct fees charged by the bank for the privilege of writing checks, even if the account pays interest. 1040nr 2012 Club Dues Generally, you cannot deduct the cost of membership in any club organized for business, pleasure, recreation, or other social purpose. 1040nr 2012 This includes business, social, athletic, luncheon, sporting, airline, hotel, golf, and country clubs. 1040nr 2012 You cannot deduct dues paid to an organization if one of its main purposes is to: Conduct entertainment activities for members or their guests, or Provide members or their guests with access to entertainment facilities. 1040nr 2012 Dues paid to airline, hotel, and luncheon clubs are not deductible. 1040nr 2012 Commuting Expenses You cannot deduct commuting expenses (the cost of transportation between your home and your main or regular place of work). 1040nr 2012 If you haul tools, instruments, or other items, in your car to and from work, you can deduct only the additional cost of hauling the items such as the rent on a trailer to carry the items. 1040nr 2012 Fines or Penalties You cannot deduct fines or penalties you pay to a governmental unit for violating a law. 1040nr 2012 This includes an amount paid in settlement of your actual or potential liability for a fine or penalty (civil or criminal). 1040nr 2012 Fines or penalties include parking tickets, tax penalties, and penalties deducted from teachers' paychecks after an illegal strike. 1040nr 2012 Health Spa Expenses You cannot deduct health spa expenses, even if there is a job requirement to stay in excellent physical condition, such as might be required of a law enforcement officer. 1040nr 2012 Home Security System You cannot deduct the cost of a home security system as a miscellaneous deduction. 1040nr 2012 However, you may be able to claim a deduction for a home security system as a business expense if you have a home office. 1040nr 2012 See Home Office under Unreimbursed Employee Expenses, earlier, and Security System under Deducting Expenses in Publication 587. 1040nr 2012 Investment-Related Seminars You cannot deduct any expenses for attending a convention, seminar, or similar meeting for investment purposes. 1040nr 2012 Life Insurance Premiums You cannot deduct premiums you pay on your life insurance. 1040nr 2012 You may be able to deduct, as alimony, premiums you pay on life insurance policies assigned to your former spouse. 1040nr 2012 See chapter 18 for information on alimony. 1040nr 2012 Lobbying Expenses You generally cannot deduct amounts paid or incurred for lobbying expenses. 1040nr 2012 These include expenses to: Influence legislation, Participate or intervene in any political campaign for, or against, any candidate for public office, Attempt to influence the general public, or segments of the public, about elections, legislative matters, or referendums, or Communicate directly with covered executive branch officials in any attempt to influence the official actions or positions of those officials. 1040nr 2012 Lobbying expenses also include any amounts paid or incurred for research, preparation, planning, or coordination of any of these activities. 1040nr 2012 Dues used for lobbying. 1040nr 2012   If a tax-exempt organization notifies you that part of the dues or other amounts you pay to the organization are used to pay nondeductible lobbying expenses, you cannot deduct that part. 1040nr 2012 See Lobbying Expenses in Publication 529 for information on exceptions. 1040nr 2012 Lost or Mislaid Cash or Property You cannot deduct a loss based on the mere disappearance of money or property. 1040nr 2012 However, an accidental loss or disappearance of property can qualify as a casualty if it results from an identifiable event that is sudden, unexpected, or unusual. 1040nr 2012 See chapter 25. 1040nr 2012 Example. 1040nr 2012 A car door is accidentally slammed on your hand, breaking the setting of your diamond ring. 1040nr 2012 The diamond falls from the ring and is never found. 1040nr 2012 The loss of the diamond is a casualty. 1040nr 2012 Lunches with Co-workers You cannot deduct the expenses of lunches with co-workers, except while traveling away from home on business. 1040nr 2012 See chapter 26 for information on deductible expenses while traveling away from home. 1040nr 2012 Meals While Working Late You cannot deduct the cost of meals while working late. 1040nr 2012 However, you may be able to claim a deduction if the cost of meals is a deductible entertainment expense, or if you are traveling away from home. 1040nr 2012 See chapter 26 for information on deductible entertainment expenses and expenses while traveling away from home. 1040nr 2012 Personal Legal Expenses You cannot deduct personal legal expenses such as those for the following. 1040nr 2012 Custody of children. 1040nr 2012 Breach of promise to marry suit. 1040nr 2012 Civil or criminal charges resulting from a personal relationship. 1040nr 2012 Damages for personal injury, except for certain unlawful discrimination and whistleblower claims. 1040nr 2012 Preparation of a title (or defense or perfection of a title). 1040nr 2012 Preparation of a will. 1040nr 2012 Property claims or property settlement in a divorce. 1040nr 2012 You cannot deduct these expenses even if a result of the legal proceeding is the loss of income-producing property. 1040nr 2012 Political Contributions You cannot deduct contributions made to a political candidate, a campaign committee, or a newsletter fund. 1040nr 2012 Advertisements in convention bulletins and admissions to dinners or programs that benefit a political party or political candidate are not deductible. 1040nr 2012 Professional Accreditation Fees You cannot deduct professional accreditation fees such as the following. 1040nr 2012 Accounting certificate fees paid for the initial right to practice accounting. 1040nr 2012 Bar exam fees and incidental expenses in securing initial admission to the bar. 1040nr 2012 Medical and dental license fees paid to get initial licensing. 1040nr 2012 Professional Reputation You cannot deduct expenses of radio and TV appearances to increase your personal prestige or establish your professional reputation. 1040nr 2012 Relief Fund Contributions You cannot deduct contributions paid to a private plan that pays benefits to any covered employee who cannot work because of any injury or illness not related to the job. 1040nr 2012 Residential Telephone Service You cannot deduct any charge (including taxes) for basic local telephone service for the first telephone line to your residence, even if it is used in a trade or business. 1040nr 2012 Stockholders' Meetings You cannot deduct transportation and other expenses you pay to attend stockholders' meetings of companies in which you own stock but have no other interest. 1040nr 2012 You cannot deduct these expenses even if you are attending the meeting to get information that would be useful in making further investments. 1040nr 2012 Tax-Exempt Income Expenses You cannot deduct expenses to produce tax-exempt income. 1040nr 2012 You cannot deduct interest on a debt incurred or continued to buy or carry  tax-exempt securities. 1040nr 2012 If you have expenses to produce both taxable and tax-exempt income, but you cannot identify the expenses that produce each type of income, you must divide the expenses based on the amount of each type of income to determine the amount that you can deduct. 1040nr 2012 Example. 1040nr 2012 During the year, you received taxable interest of $4,800 and tax-exempt interest of $1,200. 1040nr 2012 In earning this income, you had total expenses of $500 during the year. 1040nr 2012 You cannot identify the amount of each expense item that is for each income item. 1040nr 2012 Therefore, 80% ($4,800/$6,000) of the expense is for the taxable interest and 20% ($1,200/$6,000) is for the tax-exempt interest. 1040nr 2012 You can deduct, subject to the 2% limit, expenses of $400 (80% of $500). 1040nr 2012 Travel Expenses for Another Individual You generally cannot deduct travel expenses you pay or incur for a spouse, dependent, or other individual who accompanies you (or your employee) on business or personal travel unless the spouse, dependent, or other individual is an employee of the taxpayer, the travel is for a bona fide business purpose, and such expenses would otherwise be deductible by the spouse, dependent, or other individual. 1040nr 2012 See chapter 26 for more information on deductible travel expenses. 1040nr 2012 Voluntary Unemployment Benefit Fund Contributions You cannot deduct voluntary unemployment benefit fund contributions you make to a union fund or a private fund. 1040nr 2012 However, you can deduct contributions as taxes if state law requires you to make them to a state unemployment fund that covers you for the loss of wages from unemployment caused by business conditions. 1040nr 2012 Wristwatches You cannot deduct the cost of a wristwatch, even if there is a job requirement that you know the correct time to properly perform your duties. 1040nr 2012 Prev  Up  Next   Home   More Online Publications