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1040nr online filing free 10. 1040nr online filing free   Installment Sales Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Installment Sale of a Farm Installment MethodWhen to elect out. 1040nr online filing free Revoking the election. 1040nr online filing free More information. 1040nr online filing free Figuring Installment Sale Income Payments Received or Considered Received ExampleSection 1231 gains. 1040nr online filing free Summary. 1040nr online filing free Introduction An installment sale is a sale of property where you receive at least one payment after the tax year of the sale. 1040nr online filing free If you realize a gain on an installment sale, you may be able to report part of your gain when you receive each payment. 1040nr online filing free This method of reporting gain is called the installment method. 1040nr online filing free You cannot use the installment method to report a loss. 1040nr online filing free You can choose to report all of your gain in the year of sale. 1040nr online filing free Installment obligation. 1040nr online filing free   The buyer's obligation to make future payments to you can be in the form of a deed of trust, note, land contract, mortgage, or other evidence of the buyer's debt to you. 1040nr online filing free Topics - This chapter discusses: The general rules that apply to using the installment method Installment sale of a farm Useful Items - You may want to see: Publication 523 Selling Your Home 535 Business Expenses 537 Installment Sales 538 Accounting Periods and Methods 544 Sales and Other Dispositions of Assets Form (and Instructions) 4797 Sales of Business Property 6252 Installment Sale Income See chapter 16 for information about getting publications and forms. 1040nr online filing free Installment Sale of a Farm The installment sale of a farm for one overall price under a single contract is not the sale of a single asset. 1040nr online filing free It generally includes the sale of real property and personal property reportable on the installment method. 1040nr online filing free It may also include the sale of property for which you must maintain an inventory, which cannot be reported on the installment method. 1040nr online filing free See Inventory , later. 1040nr online filing free The selling price must be allocated to determine the amount received for each class of asset. 1040nr online filing free The tax treatment of the gain or loss on the sale of each class of assets is determined by its classification as a capital asset, as property used in the business, or as property held for sale and by the length of time the asset was held. 1040nr online filing free (See chapter 8 for a discussion of capital assets and chapter 9 for a discussion of property used in the business. 1040nr online filing free ) Separate computations must be made to figure the gain or loss for each class of asset sold. 1040nr online filing free See Sale of a Farm in chapter 8. 1040nr online filing free If you report the sale of property on the installment method, any depreciation recapture under section 1245 or 1250 of the Internal Revenue Code is generally taxable as ordinary income in the year of sale. 1040nr online filing free See Depreciation recapture , later. 1040nr online filing free This applies even if no payments are received in that year. 1040nr online filing free Installment Method An installment sale is a sale of property where you receive at least one payment after the tax year of the sale. 1040nr online filing free A farmer who is not required to maintain an inventory can use the installment method to report gain from the sale of property used or produced in farming. 1040nr online filing free See Inventory , later, for information on the sale of farm property where inventory items are included in the assets sold. 1040nr online filing free If a sale qualifies as an installment sale, the gain must be reported under the installment method unless you elect out of using the installment method. 1040nr online filing free Electing out of the installment method. 1040nr online filing free   If you elect not to use the installment method, you generally report the entire gain in the year of sale, even though you do not receive all the sale proceeds in that year. 1040nr online filing free   To make this election, do not report your sale on Form 6252. 1040nr online filing free Instead, report it on Schedule D (Form 1040), Form 4797, or both. 1040nr online filing free When to elect out. 1040nr online filing free   Make this election by the due date, including extensions, for filing your tax return for the year the sale takes place. 1040nr online filing free   However, if you timely file your tax return for the year the sale takes place without making the election, you still can make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). 1040nr online filing free Write “Filed pursuant to section 301. 1040nr online filing free 9100-2” at the top of the amended return and file it where the original return was filed. 1040nr online filing free Revoking the election. 1040nr online filing free   Once made, the election can be revoked only with IRS approval. 1040nr online filing free A revocation is retroactive. 1040nr online filing free More information. 1040nr online filing free   See Electing Out of the Installment Method in Publication 537 for more information. 1040nr online filing free Inventory. 1040nr online filing free   The sale of farm inventory items cannot be reported on the installment method. 1040nr online filing free All gain or loss on their sale must be reported in the year of sale, even if you receive payment in later years. 1040nr online filing free   If inventory items are included in an installment sale, you may have an agreement stating which payments are for inventory and which are for the other assets being sold. 1040nr online filing free If you do not, each payment must be allocated between the inventory and the other assets sold. 1040nr online filing free Sale at a loss. 1040nr online filing free   If your sale results in a loss, you cannot use the installment method. 1040nr online filing free If the loss is on an installment sale of business assets, you can deduct it only in the tax year of sale. 1040nr online filing free Figuring Installment Sale Income Each payment on an installment sale usually consists of the following three parts. 1040nr online filing free Interest income. 1040nr online filing free Return of your adjusted basis in the property. 1040nr online filing free Gain on the sale. 1040nr online filing free In each year you receive a payment, you must include in income both the interest part and the part that is your gain on the sale. 1040nr online filing free You do not include in income the part that is the return of your basis in the property. 1040nr online filing free Basis is the amount of your investment in the property for installment sale purposes. 1040nr online filing free Interest income. 1040nr online filing free   You must report interest as ordinary income. 1040nr online filing free Interest is generally not included in a down payment. 1040nr online filing free However, you may have to treat part of each later payment as interest, even if it is not called interest in your agreement with the buyer. 1040nr online filing free Interest provided in the agreement is called stated interest. 1040nr online filing free If the agreement does not provide for enough stated interest, there may be unstated interest or original issue discount. 1040nr online filing free See Unstated interest , later. 1040nr online filing free    You must continue to report the interest income on payments you receive in subsequent years as interest income. 1040nr online filing free Adjusted basis and installment sale income (gain on sale). 1040nr online filing free   After you have determined how much of each payment to treat as interest, you treat the rest of each payment as if it were made up of two parts. 1040nr online filing free A tax-free return of your adjusted basis in the property, and Your gain (referred to as “installment sale income” on Form 6252). 1040nr online filing free Figuring adjusted basis for installment sale purposes. 1040nr online filing free   You can use Worksheet 10-1 to figure your adjusted basis in the property for installment sale purposes. 1040nr online filing free When you have completed the worksheet, you will also have determined the gross profit percentage necessary to figure your installment sale income (gain) for this year. 1040nr online filing free    Worksheet 10-1. 1040nr online filing free Figuring Adjusted Basis and Gross Profit Percentage 1. 1040nr online filing free Enter the selling price for the property   2. 1040nr online filing free Enter your adjusted basis for the property     3. 1040nr online filing free Enter your selling expenses     4. 1040nr online filing free Enter any depreciation recapture     5. 1040nr online filing free Add lines 2, 3, and 4. 1040nr online filing free  This is your adjusted basis  for installment sale purposes   6. 1040nr online filing free Subtract line 5 from line 1. 1040nr online filing free If zero or less, enter -0-. 1040nr online filing free  This is your gross profit     If the amount entered on line 6 is zero, Stop here. 1040nr online filing free You cannot use the installment method. 1040nr online filing free   7. 1040nr online filing free Enter the contract price for the property   8. 1040nr online filing free Divide line 6 by line 7. 1040nr online filing free This is your gross profit percentage   Selling price. 1040nr online filing free   The selling price is the total cost of the property to the buyer and includes the following. 1040nr online filing free Any money you are to receive. 1040nr online filing free The fair market value (FMV) of any property you are to receive (FMV is discussed at Property used as a payment under Payments Received or Considered Received ). 1040nr online filing free Any existing mortgage or other debt the buyer pays, assumes, or takes (a note, mortgage, or any other liability, such as a lien, accrued interest, or taxes you owe on the property). 1040nr online filing free Any of your selling expenses the buyer pays. 1040nr online filing free Do not include stated interest, unstated interest, any amount recomputed or recharacterized as interest, or original issue discount. 1040nr online filing free Adjusted basis for installment sale purposes. 1040nr online filing free   Your adjusted basis is the total of the following three items. 1040nr online filing free Adjusted basis. 1040nr online filing free Selling expenses. 1040nr online filing free Depreciation recapture. 1040nr online filing free Adjusted basis. 1040nr online filing free   Basis is your investment in the property for installment sale purposes. 1040nr online filing free The way you figure basis depends on how you acquire the property. 1040nr online filing free The basis of property you buy is generally its cost. 1040nr online filing free The basis of property you inherit, receive as a gift, build yourself, or receive in a tax-free exchange is figured differently. 1040nr online filing free   While you own property, various events may change your original basis. 1040nr online filing free Some events, such as adding rooms or making permanent improvements, increase basis. 1040nr online filing free Others, such as deductible casualty losses or depreciation previously allowed or allowable, decrease basis. 1040nr online filing free The result is adjusted basis. 1040nr online filing free See chapter 6 and Publication 551, Basis of Assets, for more information. 1040nr online filing free Selling expenses. 1040nr online filing free   Selling expenses relate to the sale of the property. 1040nr online filing free They include commissions, attorney fees, and any other expenses paid on the sale. 1040nr online filing free Selling expenses are added to the basis of the sold property. 1040nr online filing free Depreciation recapture. 1040nr online filing free   If the property you sold was depreciable property, you may need to recapture part of the gain on the sale as ordinary income. 1040nr online filing free See Depreciation Recapture in chapter 9 and Depreciation Recapture Income in Publication 537. 1040nr online filing free Gross profit. 1040nr online filing free   Gross profit is the total gain you report on the installment method. 1040nr online filing free   To figure your gross profit, subtract your adjusted basis for installment sale purposes from the selling price. 1040nr online filing free If the property you sold was your home, subtract from the gross profit any gain you can exclude. 1040nr online filing free Contract price. 1040nr online filing free   Contract price equals: The selling price, minus The mortgages, debts, and other liabilities assumed or taken by the buyer, plus The amount by which the mortgages, debts, and other liabilities assumed or taken by the buyer exceed your adjusted basis for installment sale purposes. 1040nr online filing free Gross profit percentage. 1040nr online filing free   A certain percentage of each payment (after subtracting interest) is reported as installment sale income. 1040nr online filing free This percentage is called the gross profit percentage and is figured by dividing your gross profit from the sale by the contract price. 1040nr online filing free   The gross profit percentage generally remains the same for each payment you receive. 1040nr online filing free However, see the example under Selling price reduced , later, for a situation where the gross profit percentage changes. 1040nr online filing free Amount to report as installment sale income. 1040nr online filing free   Multiply the payments you receive each year (less interest) by the gross profit percentage. 1040nr online filing free The result is your installment sales income for the tax year. 1040nr online filing free In certain circumstances, you may be treated as having received a payment, even though you received nothing directly. 1040nr online filing free A receipt of property or the assumption of a mortgage on the property sold may be treated as a payment. 1040nr online filing free For a detailed discussion, see Payments Received or Considered Received , later. 1040nr online filing free Selling price reduced. 1040nr online filing free   If the selling price is reduced at a later date, the gross profit on the sale also will change. 1040nr online filing free You then must refigure the gross profit percentage for the remaining payments. 1040nr online filing free Refigure your gross profit using Worksheet 10-2. 1040nr online filing free New Gross Profit Percentage — Selling Price Reduced. 1040nr online filing free You will spread any remaining gain over future installments. 1040nr online filing free    Worksheet 10-2. 1040nr online filing free New Gross Profit Percentage — Selling Price Reduced 1. 1040nr online filing free Enter the reduced selling  price for the property   2. 1040nr online filing free Enter your adjusted  basis for the  property     3. 1040nr online filing free Enter your selling  expenses     4. 1040nr online filing free Enter any depreciation  recapture     5. 1040nr online filing free Add lines 2, 3, and 4. 1040nr online filing free   6. 1040nr online filing free Subtract line 5 from line 1. 1040nr online filing free  This is your adjusted  gross profit   7. 1040nr online filing free Enter any installment sale  income reported in  prior year(s)   8. 1040nr online filing free Subtract line 7 from line 6   9. 1040nr online filing free Future installments     10. 1040nr online filing free Divide line 8 by line 9. 1040nr online filing free  This is your new  gross profit percentage*. 1040nr online filing free   * Apply this percentage to all future payments to determine how much of each of those payments is installment sale income. 1040nr online filing free Example. 1040nr online filing free In 2011, you sold land with a basis of $40,000 for $100,000. 1040nr online filing free Your gross profit was $60,000. 1040nr online filing free You received a $20,000 down payment and the buyer's note for $80,000. 1040nr online filing free The note provides for monthly payments of $1,953 each, figured at 8% interest, amortized over four years, beginning in January 2012. 1040nr online filing free Your gross profit percentage was 60%. 1040nr online filing free You received the down payment of $20,000 in 2011 and total payments of $23,436 in 2012, of which $17,675 was principal and $5,761 was interest according to the amortization schedule. 1040nr online filing free You reported a gain of $12,000 on the down payment received in 2011 and $10,605 ($17,675 X 60% (. 1040nr online filing free 60)) in 2012. 1040nr online filing free In January 2013, you and the buyer agreed to reduce the purchase price to $85,000 and payments during 2013, 2014, and 2015 are reduced to $1,483 a month amortized over the remaining three years. 1040nr online filing free The new gross profit percentage, 47. 1040nr online filing free 32%, is figured in Example — Worksheet 10-2. 1040nr online filing free Example — Worksheet 10-2. 1040nr online filing free New Gross Profit Percentage — Selling Price Reduced 1. 1040nr online filing free Enter the reduced selling  price for the property 85,000 2. 1040nr online filing free Enter your adjusted  basis for the  property 40,000   3. 1040nr online filing free Enter your selling  expenses -0-   4. 1040nr online filing free Enter any depreciation  recapture -0-   5. 1040nr online filing free Add lines 2, 3, and 4. 1040nr online filing free 40,000 6. 1040nr online filing free Subtract line 5 from line 1. 1040nr online filing free  This is your adjusted  gross profit 45,000 7. 1040nr online filing free Enter any installment sale  income reported in  prior year(s) 22,605 8. 1040nr online filing free Subtract line 7 from line 6 22,395 9. 1040nr online filing free Future installments   47,325 10. 1040nr online filing free Divide line 8 by line 9. 1040nr online filing free  This is your new  gross profit percentage*. 1040nr online filing free 47. 1040nr online filing free 32% * Apply this percentage to all future payments to determine how much of each of those payments is installment sale income. 1040nr online filing free You will report installment sale income of $6,878 (47. 1040nr online filing free 32% of $14,535) in 2013, $7,449 (47. 1040nr online filing free 32% of $15,742) in 2014, and $8,067 (47. 1040nr online filing free 32% of $17,048) in 2015. 1040nr online filing free Form 6252. 1040nr online filing free   Use Form 6252 to report an installment sale in the year it takes place and to report payments received, or considered received because of related party resales, in later years. 1040nr online filing free Attach it to your tax return for each year. 1040nr online filing free Disposition of Installment Obligation If you are using the installment method and you dispose of the installment obligation, generally you will have a gain or loss to report. 1040nr online filing free It is considered gain or loss on the sale of the property for which you received the installment obligation. 1040nr online filing free Cancellation. 1040nr online filing free   If an installment obligation is canceled or otherwise becomes unenforceable, it is treated as a disposition other than a sale or exchange. 1040nr online filing free Your gain or loss is the difference between your basis in the obligation and its fair market value (FMV) at the time you cancel it. 1040nr online filing free If the parties are related, the FMV of the obligation is considered to be no less than its full face value. 1040nr online filing free Transfer due to death. 1040nr online filing free   The transfer of an installment obligation (other than to a buyer) as a result of the death of the seller is not a disposition. 1040nr online filing free Any unreported gain from the installment obligation is not treated as gross income to the decedent. 1040nr online filing free No income is reported on the decedent's return due to the transfer. 1040nr online filing free Whoever receives the installment obligation as a result of the seller's death is taxed on the installment payments the same as the seller would have been had the seller lived to receive the payments. 1040nr online filing free   However, if the installment obligation is canceled, becomes unenforceable, or is transferred to the buyer because of the death of the holder of the obligation, it is a disposition. 1040nr online filing free The estate must figure its gain or loss on the disposition. 1040nr online filing free If the holder and the buyer were related, the FMV of the installment obligation is considered to be no less than its full face value. 1040nr online filing free More information. 1040nr online filing free   For more information on the disposition of an installment obligation, see Publication 537. 1040nr online filing free Sale of depreciable property. 1040nr online filing free   You generally cannot report gain from the sale of depreciable property to a related person on the installment method. 1040nr online filing free See Sale to a Related Person in Publication 537. 1040nr online filing free   You cannot use the installment method to report any depreciation recapture income up to the gain on the sale. 1040nr online filing free However, report any gain greater than the recapture income on the installment method. 1040nr online filing free   The recapture income reported in the year of sale is included in your installment sale basis to determine your gross profit on the installment sale. 1040nr online filing free   Figure your depreciation recapture income (including the section 179 deduction and the section 179A deduction recapture) in Part III of Form 4797. 1040nr online filing free Report the depreciation recapture income in Part II of Form 4797 as ordinary income in the year of sale. 1040nr online filing free    If you sell depreciable business property, prepare Form 4797 first in order to figure the amount to enter on line 12 of Part I, Form 6252. 1040nr online filing free See the Form 6252 instructions for details. 1040nr online filing free   For more information on the section 179 deduction, see Section 179 Expense Deduction in chapter 7. 1040nr online filing free For more information on depreciation recapture, see Depreciation Recapture in  chapter 9. 1040nr online filing free Payments Received or Considered Received You must figure your gain each year on the payments you receive, or are treated as receiving, from an installment sale. 1040nr online filing free In certain situations, you are considered to have received a payment, even though the buyer does not pay you directly. 1040nr online filing free These situations occur when the buyer assumes or pays any of your debts, such as a loan, or pays any of your expenses, such as a sales commission. 1040nr online filing free However, as discussed later, the buyer's assumption of your debt is treated as a recovery of basis, rather than as a payment, in many cases. 1040nr online filing free Buyer pays seller's expenses. 1040nr online filing free   If the buyer pays any of your expenses related to the sale of your property, it is considered a payment to you in the year of sale. 1040nr online filing free Include these expenses in the selling and contract prices when figuring the gross profit percentage. 1040nr online filing free Buyer assumes mortgage. 1040nr online filing free   If the buyer assumes or pays off your mortgage, or otherwise takes the property subject to the mortgage, the following rules apply. 1040nr online filing free Mortgage less than basis. 1040nr online filing free   If the buyer assumes a mortgage that is not more than your installment sale basis in the property, it is not considered a payment to you. 1040nr online filing free It is considered a recovery of your basis. 1040nr online filing free The contract price is the selling price minus the mortgage. 1040nr online filing free Example. 1040nr online filing free You sell property with an adjusted basis of $19,000. 1040nr online filing free You have selling expenses of $1,000. 1040nr online filing free The buyer assumes your existing mortgage of $15,000 and agrees to pay you $10,000 (a cash down payment of $2,000 and $2,000 (plus 8% interest) in each of the next 4 years). 1040nr online filing free The selling price is $25,000 ($15,000 + $10,000). 1040nr online filing free Your gross profit is $5,000 ($25,000 − $20,000 installment sale basis). 1040nr online filing free The contract price is $10,000 ($25,000 − $15,000 mortgage). 1040nr online filing free Your gross profit percentage is 50% ($5,000 ÷ $10,000). 1040nr online filing free You report half of each $2,000 payment received as gain from the sale. 1040nr online filing free You also report all interest you receive as ordinary income. 1040nr online filing free Mortgage more than basis. 1040nr online filing free   If the buyer assumes a mortgage that is more than your installment sale basis in the property, you recover your entire basis. 1040nr online filing free The part of the mortgage greater than your basis is treated as a payment received in the year of sale. 1040nr online filing free   To figure the contract price, subtract the mortgage from the selling price. 1040nr online filing free This is the total amount (other than interest) you will receive directly from the buyer. 1040nr online filing free Add to this amount the payment you are considered to have received (the difference between the mortgage and your installment sale basis). 1040nr online filing free The contract price is then the same as your gross profit from the sale. 1040nr online filing free    If the mortgage the buyer assumes is equal to or more than your installment sale basis, the gross profit percentage always will be 100%. 1040nr online filing free Example. 1040nr online filing free The selling price for your property is $9,000. 1040nr online filing free The buyer will pay you $1,000 annually (plus 8% interest) over the next 3 years and assume an existing mortgage of $6,000. 1040nr online filing free Your adjusted basis in the property is $4,400. 1040nr online filing free You have selling expenses of $600, for a total installment sale basis of $5,000. 1040nr online filing free The part of the mortgage that is more than your installment sale basis is $1,000 ($6,000 − $5,000). 1040nr online filing free This amount is included in the contract price and treated as a payment received in the year of sale. 1040nr online filing free The contract price is $4,000: Selling price $9,000 Minus: Mortgage (6,000) Amount actually received $3,000 Add difference:   Mortgage $6,000   Minus: Installment sale basis 5,000 1,000 Contract price $4,000   Your gross profit on the sale is also $4,000: Selling price $9,000 Minus: Installment sale basis (5,000) Gross profit $4,000   Your gross profit percentage is 100%. 1040nr online filing free Report 100% of each payment (less interest) as gain from the sale. 1040nr online filing free Treat the $1,000 difference between the mortgage and your installment sale basis as a payment and report 100% of it as gain in the year of sale. 1040nr online filing free Buyer assumes other debts. 1040nr online filing free   If the buyer assumes any other debts, such as a loan or back taxes, it may be considered a payment to you in the year of sale. 1040nr online filing free   If the buyer assumes the debt instead of paying it off, only part of it may have to be treated as a payment. 1040nr online filing free Compare the debt to your installment sale basis in the property being sold. 1040nr online filing free If the debt is less than your installment sale basis, none of it is treated as a payment. 1040nr online filing free If it is more, only the difference is treated as a payment. 1040nr online filing free If the buyer assumes more than one debt, any part of the total that is more than your installment sale basis is considered a payment. 1040nr online filing free These rules are the same as the rules discussed earlier under Buyer assumes mortgage . 1040nr online filing free However, they apply only to the following types of debt the buyer assumes. 1040nr online filing free Those acquired from ownership of the property you are selling, such as a mortgage, lien, overdue interest, or back taxes. 1040nr online filing free Those acquired in the ordinary course of your business, such as a balance due for inventory you purchased. 1040nr online filing free   If the buyer assumes any other type of debt, such as a personal loan or your legal fees relating to the sale, it is treated as if the buyer had paid off the debt at the time of the sale. 1040nr online filing free The value of the assumed debt is then considered a payment to you in the year of sale. 1040nr online filing free Property used as a payment. 1040nr online filing free   If you receive property rather than money from the buyer, it is still considered a payment in the year received. 1040nr online filing free However, see Trading property for like-kind property , later. 1040nr online filing free Generally, the amount of the payment is the property's FMV on the date you receive it. 1040nr online filing free Exception. 1040nr online filing free   If the property the buyer gives you is payable on demand or readily tradable (see examples later), the amount you should consider as payment in the year received is: The FMV of the property on the date you receive it if you use the cash method of accounting, The face amount of the obligation on the date you receive it if you use an accrual method of accounting, or The stated redemption price at maturity less any original issue discount (OID) or, if there is no OID, the stated redemption price at maturity appropriately discounted to reflect total unstated interest. 1040nr online filing free See Unstated interest , later. 1040nr online filing free Examples. 1040nr online filing free If you receive a note from the buyer as payment, and the note stipulates that you can demand payment from the buyer at any time, the note is payable on demand. 1040nr online filing free If you receive marketable securities from the buyer as payment, and you can sell the securities on an established securities market (such as the New York Stock Exchange) at any time, the securities are readily tradable. 1040nr online filing free In these examples, use the above rules to determine the amount you should consider as payment in the year received. 1040nr online filing free Debt not payable on demand. 1040nr online filing free   Any evidence of debt you receive from the buyer that is not payable on demand is not considered a payment. 1040nr online filing free This is true even if the debt is guaranteed by a third party, including a government agency. 1040nr online filing free Fair market value (FMV). 1040nr online filing free   This is the price at which property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having a reasonable knowledge of all the necessary facts. 1040nr online filing free Third-party note. 1040nr online filing free   If the property the buyer gives you is a third-party note (or other obligation of a third party), you are considered to have received a payment equal to the note's FMV. 1040nr online filing free Because the FMV of the note is itself a payment on your installment sale, any payments you later receive from the third party are not considered payments on the sale. 1040nr online filing free The excess of the note's face value over its FMV is interest. 1040nr online filing free Exclude this interest in determining the selling price of the property. 1040nr online filing free However, see Exception under Property used as a payment , earlier. 1040nr online filing free Example. 1040nr online filing free You sold real estate in an installment sale. 1040nr online filing free As part of the down payment, the buyer assigned to you a $50,000, 8% third-party note. 1040nr online filing free The FMV of the third-party note at the time of the sale was $30,000. 1040nr online filing free This amount, not $50,000, is a payment to you in the year of sale. 1040nr online filing free The third-party note had an FMV equal to 60% of its face value ($30,000 ÷ $50,000), so 60% of each principal payment you receive on this note is a nontaxable return of capital. 1040nr online filing free The remaining 40% is interest taxed as ordinary income. 1040nr online filing free Bond. 1040nr online filing free   A bond or other evidence of debt you receive from the buyer that is payable on demand or readily tradable in an established securities market is treated as a payment in the year you receive it. 1040nr online filing free For more information on the amount you should treat as a payment, see Exception under Property used as a payment , earlier. 1040nr online filing free   If you receive a government or corporate bond for a sale before October 22, 2004, and the bond has interest coupons attached or can be readily traded in an established securities market, you are considered to have received payment equal to the bond's FMV. 1040nr online filing free However, see Exception under Property used as a payment , earlier. 1040nr online filing free Buyer's note. 1040nr online filing free   The buyer's note (unless payable on demand) is not considered payment on the sale. 1040nr online filing free However, its full face value is included when figuring the selling price and the contract price. 1040nr online filing free Payments you receive on the note are used to figure your gain in the year received. 1040nr online filing free Sale to a related person. 1040nr online filing free   If you sell depreciable property to a related person and the sale is an installment sale, you may not be able to report the sale using the installment method. 1040nr online filing free For information on these rules, see the Instructions for Form 6252 and Sale to a Related Person in Publication 537. 1040nr online filing free Trading property for like-kind property. 1040nr online filing free   If you trade business or investment property solely for the same kind of property to be held as business or investment property, you can postpone reporting the gain. 1040nr online filing free See Like-Kind Exchanges in chapter 8 for a discussion of like-kind property. 1040nr online filing free   If, in addition to like-kind property, you receive an installment obligation in the exchange, the following rules apply to determine installment sale income each year. 1040nr online filing free The contract price is reduced by the FMV of the like-kind property received in the trade. 1040nr online filing free The gross profit is reduced by any gain on the trade that can be postponed. 1040nr online filing free Like-kind property received in the trade is not considered payment on the installment obligation. 1040nr online filing free Unstated interest. 1040nr online filing free   An installment sale contract may provide that each deferred payment on the sale will include interest or that there will be an interest payment in addition to the principal payment. 1040nr online filing free Interest provided in the contract is called stated interest. 1040nr online filing free   If an installment sale contract does not provide for adequate stated interest, part of the stated principal amount of the contract may be recharacterized as interest. 1040nr online filing free If Internal Revenue Code section 483 applies to the contract, this interest is called unstated interest. 1040nr online filing free   If Internal Revenue Code section 1274 applies to the contract, this interest is called original issue discount (OID). 1040nr online filing free   Generally, if a buyer gives a debt in consideration for personal use property, the unstated interest rules do not apply. 1040nr online filing free Therefore, the buyer cannot deduct the unstated interest. 1040nr online filing free The seller must report the unstated interest as income. 1040nr online filing free Personal-use property is any property in which substantially all of its use by the buyer is not in connection with a trade or business or an investment activity. 1040nr online filing free   If the debt is subject to the Internal Revenue Code section 483 rules and is also subject to the below-market loan rules, such as a gift loan, compensation-related loan or corporation-shareholder loan, then both parties are subject to the below-market loan rules rather than the unstated interest rules. 1040nr online filing free   Unstated interest reduces the stated selling price of the property and the buyer's basis in the property. 1040nr online filing free It increases the seller's interest income and the buyer's interest expense. 1040nr online filing free   In general, an installment sale contract provides for adequate stated interest if the stated interest rate (based on an appropriate compounding period) is at least equal to the applicable federal rate (AFR). 1040nr online filing free    The AFRs are published monthly in the Internal Revenue Bulletin (IRB). 1040nr online filing free You can get this information by contacting an IRS office. 1040nr online filing free IRBs are also available at IRS. 1040nr online filing free gov. 1040nr online filing free More information. 1040nr online filing free   For more information, see Unstated Interest and Original Issue Discount (OID) in Publication 537. 1040nr online filing free Example. 1040nr online filing free You sell property at a contract price of $6,000 and your gross profit is $1,500. 1040nr online filing free Your gross profit percentage is 25% ($1,500 ÷ $6,000). 1040nr online filing free After subtracting interest, you report 25% of each payment, including the down payment, as installment sale income from the sale for the tax year you receive the payment. 1040nr online filing free The remainder (balance) of each payment is the tax-free return of your adjusted basis. 1040nr online filing free Example On January 3, 2013, you sold your farm, including the home, farm land and buildings. 1040nr online filing free You received $50,000 down and the buyer's note for $200,000. 1040nr online filing free In addition, the buyer assumed an outstanding $50,000 mortgage on the farm land. 1040nr online filing free The total selling price was $300,000. 1040nr online filing free The note payments of $25,000 each, plus adequate interest, are due every July 1 and January 1, beginning in July 2013. 1040nr online filing free Your selling expenses were $15,000. 1040nr online filing free Adjusted basis and depreciation. 1040nr online filing free   The adjusted basis and depreciation claimed on each asset sold are as follows:   Depreciation Adjusted Asset Claimed Basis Home* -0- $33,743 Farm land -0- 73,610 Buildings $31,500 35,130 * Owned and used as main home for at least 2 of the 5 years prior to the sale Gain on each asset. 1040nr online filing free   The following schedule shows the assets included in the sale, each asset's selling price based on its respective value, the selling expense allocated to each asset, the adjusted basis of each asset, and the gain on each asset. 1040nr online filing free The selling expense for each asset is 5% of the selling price ($15,000 selling expense ÷ $300,000 selling price). 1040nr online filing free   Selling Selling Adjusted     Price Expense Basis Gain Home* $60,000 $3,000 $33,743 $23,257 Farm land  165,000  8,250  73,610  83,140 Buildings 75,000 3,750 35,130 36,120   $300,000 $15,000 $142,483 $142,517 * Owned and used as main home for at least 2 of the 5 years prior to the sale Depreciation recapture. 1040nr online filing free   The buildings are section 1250 property. 1040nr online filing free There is no depreciation recapture income for them because they were depreciated using the straight line method. 1040nr online filing free See chapter 9 for more information on depreciation recapture. 1040nr online filing free   Special rules may apply when you sell section 1250 assets depreciated under the straight line method. 1040nr online filing free See the Unrecaptured Section 1250 Gain Worksheet in the Instructions for Schedule D (Form 1040). 1040nr online filing free See chapter 3 of Publication 544, Sales and Other Dispositions of Assets, for more information on section 1250 assets. 1040nr online filing free Installment sale basis and gross profit. 1040nr online filing free   The following table shows each asset reported on the installment method, its selling price, installment sale basis, and gross profit. 1040nr online filing free     Installment     Selling Sale Gross   Price Basis Profit Farm land $165,000 $73,610 $83,140 Buildings 75,000 35,130 36,120   $240,000 $108,740 $119,260 Section 1231 gains. 1040nr online filing free   The gain on the farm land and buildings is reported as section 1231 gains. 1040nr online filing free See Section 1231 Gains and Losses in chapter 9. 1040nr online filing free Contract price and gross profit percentage. 1040nr online filing free   The contract price is $250,000 for the part of the sale reported on the installment method. 1040nr online filing free This is the selling price ($300,000) minus the mortgage assumed ($50,000). 1040nr online filing free   Gross profit percentage for the sale is 47. 1040nr online filing free 70% ($119,260 gross profit ÷ $250,000 contract price). 1040nr online filing free The gross profit percentage for each asset is figured as follows:   Percent Farm land ($83,140 ÷ $250,000) 33. 1040nr online filing free 256 Buildings ($36,120 ÷ $250,000) 14. 1040nr online filing free 448 Total 47. 1040nr online filing free 70 Figuring the gain to report on the installment method. 1040nr online filing free   One hundred percent (100%) of each payment is reported on the installment method. 1040nr online filing free The total amount received on the sale in 2013 is $75,000 ($50,000 down payment + $25,000 payment on July 1). 1040nr online filing free The installment sale part of the total payments received in 2013 is also $75,000. 1040nr online filing free Figure the gain to report for each asset by multiplying its gross profit percentage times $75,000. 1040nr online filing free   Income Farm land—33. 1040nr online filing free 256% × $75,000 $24,942 Buildings—14. 1040nr online filing free 448% × $75,000 10,836 Total installment income for 2013 $35,778 Reporting the sale. 1040nr online filing free   Report the installment sale on Form 6252. 1040nr online filing free Then report the amounts from Form 6252 on Form 4797 and Schedule D (Form 1040). 1040nr online filing free Attach a separate page to Form 6252 that shows the computations in the example. 1040nr online filing free If you sell depreciable business property, prepare Form 4797 first in order to figure the amount to enter on line 12 of Part I, Form 6252. 1040nr online filing free Section 1231 gains. 1040nr online filing free   The gains on the farm land and buildings are section 1231 gains. 1040nr online filing free They may be reported as either capital or ordinary gain depending on the net balance when combined with other section 1231 losses. 1040nr online filing free A net 1231 gain is capital gain and a net 1231 loss is an ordinary loss. 1040nr online filing free Installment income for years after 2013. 1040nr online filing free   You figure installment income for the years after 2013 by applying the same gross profit percentages to the payments you receive each year. 1040nr online filing free If you receive $50,000 during the year, the entire $50,000 is considered received on the installment sale (100% × $50,000). 1040nr online filing free You realize income as follows:   Income Farm land—33. 1040nr online filing free 256% × $50,000 $16,628 Buildings—14. 1040nr online filing free 448% × $50,000 7,224 Total installment income $23,852   In this example, no gain ever is recognized from the sale of your home. 1040nr online filing free You will combine your section 1231 gains from this sale with section 1231 gains and losses from other sales in each of the later years to determine whether to report them as ordinary or capital gains. 1040nr online filing free The interest received with each payment will be included in full as ordinary income. 1040nr online filing free Summary. 1040nr online filing free   The installment income (rounded to the nearest dollar) from the sale of the farm is reported as follows: Selling price $190,000 Minus: Installment basis (108,740) Gross profit $81,260     Gain reported in 2012 (year of sale) $35,778 Gain reported in 2013:   $50,000 × 47. 1040nr online filing free 70% 23,850 Gain reported in 2014:   $50,000 × 47. 1040nr online filing free 70% 23,850 Gain reported in 2015:   $50,000 × 47. 1040nr online filing free 70% 23,850 Gain reported in 2016:   $25,000 × 47. 1040nr online filing free 70% 11,925 Total gain reported $119,253 Prev  Up  Next   Home   More Online Publications
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Affordable Care Act Tax Provisions

Check out the new Affordable Care Act Tax Provisions Home Page

Información en Español: Disposiciones de La Ley del Cuidado de Salud de Bajo Precio
 

Update

The open enrollment period to purchase health insurance coverage for 2014 through the Health Insurance Marketplace runs from Oct. 1, 2013, through March 31, 2014. If you are seeking information about how to obtain health care coverage or financial assistance to purchase health care coverage for you and your family, visit the Health and Human Services website, HealthCare.gov.

Effect of Sequestration on Small Business Health Care Tax Credit

Pursuant to the requirements of the Balanced Budget and Emergency Deficit Control Act of 1985, as amended, refund payments issued to certain small tax-exempt employers claiming the refundable portion of the Small Business Health Care Tax Credit under Internal Revenue Code Section 45R, are subject to sequestration. This means that refund payments processed on or after Oct.1, 2013, and on or before Sept. 30, 2014, to a Section 45R applicant will be reduced by the fiscal year 2014 sequestration rate of 7.2 percent, irrespective of when the original or amended tax return was received by the IRS. The sequestration reduction rate will be applied unless and until a law is enacted that cancels or otherwise impacts the sequester, at which time the sequestration reduction rate is subject to change.

Affected taxpayers will be notified through correspondence that a portion of their requested payment was subject to the sequester reduction and the amount.

IRC §7216, Disclosure or Use of Information by Tax Return Preparers

Final Treasury Regulations on rules and consent requirements relating to the disclosure or use of tax return information by tax return preparers became effective Dec. 28, 2012. For additional information about how these apply to services and education related to the Affordable Care Act, please see our questions and answers

Medical Loss Ratio (MLR)

Beginning in 2011, insurance companies are required to spend a specified percentage of premium dollars on medical care and quality improvement activities, meeting a medical loss ratio (MLR) standard. Insurance companies that are not meeting the MLR standard will be required to provide rebates to their consumers beginning in 2012. For information on the federal tax consequences to an insurance company that pays a MLR rebate and an individual policyholder who receives a MLR rebate, as well as information on the federal tax consequences to employees if a MLR rebate stems from a group health insurance policy, see our frequently asked questions.

Reporting Employer Provided Health Coverage in Form W-2

The Affordable Care Act requires employers to report the cost of coverage under an employer-sponsored group health plan on an employee’s Form W-2, Wage and Tax Statement, in Box 12, using Code DD. Many employers are eligible for transition relief for tax-year 2012 and beyond, until the IRS issues final guidance for this reporting requirement.

The amount reported does not affect tax liability, as the value of the employer excludible contribution to health coverage continues to be excludible from an employee's income, and it is not taxable. This reporting is for informational purposes only, to show employees the value of their health care benefits.

More information about the reporting can be found on Form W-2 Reporting of Employer-Sponsored Health Coverage.

Net Investment Income Tax

A new Net Investment Income Tax went into effect on Jan. 1, 2013. The 3.8 percent Net Investment Income Tax applies to individuals, estates and trusts that have certain investment income above certain threshold amounts. On Nov. 26, 2013, the IRS and the Treasury Department issued final regulations, which provide guidance on the general application of the Net Investment Income Tax and the computation of Net Investment Income. In addition, on Nov. 26, 2013, the IRS and the Treasury Department issued proposed regulations on the computation of net investment income as it relates to certain specific types of property. Comments may be submitted electronically, by mail or hand delivered to the IRS. For additional information on the Net Investment Income Tax, see our questions and answers.

Additional Medicare Tax

A new Additional Medicare Tax went into effect on Jan. 1, 2013. The 0.9 percent Additional Medicare Tax applies to an individual’s wages, Railroad Retirement Tax Act compensation and self-employment income that exceeds a threshold amount based on the individual’s filing status. The threshold amounts are $250,000 for married taxpayers who file jointly, $125,000 for married taxpayers who file separately and $200,000 for all other taxpayers. An employer is responsible for withholding the Additional Medicare Tax from wages or compensation it pays to an employee in excess of $200,000 in a calendar year. On Nov. 26, 2013, the IRS and the Department of the Treasury issued final regulations which provide guidance for employers and individuals relating to the implementation of Additional Medicare Tax, including the requirement to withhold Additional Medicare Tax on certain wages and compensation, the requirement to report Additional Medicare Tax, and the employer process for adjusting underpayments and overpayments of Additional Medicare Tax. In addition, the regulations provide guidance on the employer and individual processes for filing a claim for refund for an overpayment of Additional Medicare Tax. For additional information on the Additional Medicare Tax, see our questions and answers.

Minimum Value

On April 26, 2012, the Department of the Treasury and IRS issued Notice 2012-31, which provides information and requested public comment on an approach to determining whether an eligible employer-sponsored health plan provides minimum value. Additionally, on April 30, 2013, the Treasury Department and the IRS issued proposed regulations relating to minimum value of eligible employer-sponsored plans and other rules regarding the premium tax credit. Starting in 2014, whether such a plan provides minimum value will be relevant to eligibility for the premium tax credit and application of the employer shared responsibility payment.

Information Reporting on Health Coverage by Employers

On March 5, 2014, the Department of the Treasury and IRS issued final regulations on employer health insurance coverage information reporting. The information reporting relates to health insurance coverage that is offered by certain employers, referred to as applicable large employers, and reporting is to be provided by each member of an applicable large employer. Additionally, on July 9, 2013, the Department of the Treasury and the IRS issued Notice 2013-45, announcing transition relief for 2014 from this annual information reporting. Learn more about this reporting requirement by reading the fact sheet issued by the U.S. Department of the Treasury.

Information Reporting on Health Coverage by Insurers

On March 5, 2014, the Department of the Treasury and IRS issued final regulations on minimum essential coverage information reporting. The information reporting is to be provided by health insurance issuers, certain sponsors of self-insured plans, government agencies and certain other parties that provide health coverage. Additionally, on July 9, 2013, the Department of the Treasury and the IRS issued Notice 2013-45 announcing transition relief for 2014 from this annual information reporting. Learn more about this reporting requirement by reading the fact sheet issued by the U.S. Department of the Treasury.

Disclosure of Return Information

On Aug. 13, 2013, the Department of the Treasury and the IRS issued final regulations with rules for disclosure of return information to the Department of Health and Human Services that will be used to carry out eligibility determinations for advance payments of the premium tax credit, Medicaid and other health insurance affordability programs. For additional information on the final regulations, see our questions and answers.

Small Business Health Care Tax Credit

This credit helps small businesses and small tax-exempt organizations afford the cost of covering their employees and is specifically targeted for those with low- and moderate-income workers. The credit is designed to encourage small employers to offer health insurance coverage for the first time or maintain coverage they already have. In general, the credit is available to small employers that pay at least half the cost of single coverage for their employees. On Aug. 23, 2013, the Department of Treasury and the IRS issued proposed regulations, which include information on the transition of eligibility for the credit and requiring the purchase of insurance coverage through an Affordable Insurance Exchange (also known as a Health Insurance Marketplace). Additionally, IRS Notice 2014-06 provides transition relief for employers in certain counties in Washington and Wisconsin with no SHOP coverage available. Learn more by browsing our page on the Small Business Health Care Tax Credit for Small Employers.

Application of the Affordable Care Act to Health Reimbursement Arrangements, Health Flexible Spending Arrangements and Certain Other Employer Healthcare Arrangements

The Affordable Care Act’s market reforms apply to group health plans. On Sept. 13, 2013, the IRS issued Notice 2013-54, which explains how the Affordable Care Act’s market reforms apply to certain types of group health plans, including health reimbursement arrangements (HRAs), health flexible spending arrangements (health FSAs) and certain other employer healthcare arrangements, including arrangements under which an employer reimburses an employee for some or all of the premium expenses incurred for an individual health insurance policy. The notice also provides guidance on employee assistance programs or EAPs and on section 125(f)(3), which prohibits the use of pre-tax employee contributions to cafeteria plans to purchase coverage on an Affordable Insurance Exchange (also known as a Health Insurance Marketplace). The notice applies for plan years beginning on and after Jan. 1, 2014, but taxpayers may apply the guidance provided in the notice for all prior periods.  

DOL has issued a notice in substantially identical form to Notice 2013-54, DOL Technical Release 2013-03, and HHS will shortly issue guidance to reflect that it concurs with Notice 2013-54. On Jan. 24, 2013, DOL and HHS issued FAQs that addressed the application of the Affordable Care Act to HRAs.

On Jan. 9, 2014, DOL and HHS issued FAQs that addressed, among other things, future rules relating to excepted benefits.

Health Flexible Spending Arrangements

Effective Jan. 1, 2011, the cost of an over-the-counter medicine or drug cannot be reimbursed from Flexible Spending Arrangements (FSAs) or health reimbursement arrangements unless a prescription is obtained. The change does not affect insulin, even if purchased without a prescription, or other health care expenses such as medical devices, eye glasses, contact lenses, co-pays and deductibles. This standard applies only to purchases made on or after Jan. 1, 2011. A similar rule went into effect on Jan. 1, 2011, for Health Savings Accounts (HSAs), and Archer Medical Savings Accounts (Archer MSAs). Employers and employees should take these changes into account as they make health benefit decisions. For more information, see news release IR-2010-95, Notice 2010-59, Revenue Ruling 2010-23 and our questions and answers. FSA and HRA participants can continue using debit cards to buy prescribed over-the-counter medicines, if requirements are met. For more information, see news release IR-2010-128 and Notice 2011-5. Additionally, Notice 2013-57 provides information about the definition of preventive care for purposes of high deductible health plans associated with HSAs. 

In addition, starting in 2013, there are new rules about the amount that can be contributed to an FSA. Notice 2012-40 provides information about these rules and flexibility for employers applying the new rules. On Oct. 31, 2013, the Department of the Treasury and IRS issued Notice 2013-71, which provides information on a new $500 carryover option for employer-sponsored healthcare flexible spending arrangements. Learn more by reading the news release issued by the U.S. Department of the Treasury.

Further, Notice 2013-54 provides guidance regarding the application of the Affordable Care Act’s market reforms to certain health FSAs.   

Medical Device Excise Tax

On Dec. 5, 2012, the IRS and the Department of the Treasury issued final regulations on the new 2.3-percent medical device excise tax (IRC §4191) that manufacturers and importers will pay on their sales of certain medical devices starting in 2013. On Dec. 5, 2012, the IRS and the Department of the Treasury also issued Notice 2012-77, which provides interim guidance on certain issues related to the medical device excise tax. Additional information is available on the Medical Device Excise Tax page and Medical Device Excise Tax FAQs on IRS.gov.

Changes to Itemized Deduction for Medical Expenses

Beginning Jan. 1, 2013, you can claim deductions for medical expenses not covered by your health insurance when they reach 10 percent of your adjusted gross income. This change affects your 2013 tax return that you will file in 2014. There is a temporary exemption from Jan. 1, 2013, to Dec. 31, 2016, for individuals age 65 and older and their spouses. For additional information, see our questions and answers.

Health Insurance Premium Tax Credit

Starting in 2014, individuals and families can take a new premium tax credit to help them afford health insurance coverage purchased through an Affordable Insurance Exchange (also known as a Health Insurance Marketplace). The premium tax credit is refundable so taxpayers who have little or no income tax liability can still benefit. The credit also can be paid in advance to a taxpayer’s insurance company to help cover the cost of premiums. On May 18, 2012, the Department of the Treasury and the IRS issued final regulations, which provide guidance for individuals who enroll in qualified health plans through Marketplaces and claim the premium tax credit, and for Marketplaces that make qualified health plans available to individuals and employers. On Jan. 30, 2013, the Department of the Treasury and IRS released final regulations on the premium tax credit affordability test for related individuals. On April 30, 2013, the Department of the Treasury and the IRS issued proposed regulations relating to minimum value of eligible employer-sponsored plans and other rules regarding the premium tax credit. Additionally, Notice 2013-41, issued on June 26, 2013, provides information for determining whether or when individuals are considered eligible for coverage under certain Medicaid, Medicare, CHIP, TRICARE, student health or state high-risk pool programs. This determination will affect whether the individual is eligible for the premium tax credit. On June 28, 2013, the Department of the Treasury and IRS issued proposed regulations on the new reporting requirements for Marketplaces. Notice 2014-23 was issued on March 26, 2014, and allows certain victims of domestic abuse to claim the premium tax credit while filing a return using the Married Filing Separately filing status for the 2014 calendar year. For more information on the credit, see our premium tax credit page and our questions and answers.

Individual Shared Responsibility Provision

Starting in 2014, the Individual Shared Responsibility provision calls for each individual to either have minimum essential coverage for each month, qualify for an exemption, or make a payment when filing his or her federal income tax return. On Aug. 27, 2013, the Department of the Treasury and the IRS issued final regulations on the Individual Shared Responsibility provision. On Jan. 23, 2014, the Department of the Treasury and the IRS issued proposed regulations addressing several issues that were identified in the preamble to the final regulations. In particular, the proposed regulations provide that certain limited-benefit Medicaid and TRICARE coverage is not minimum essential coverage. The proposed regulations also address the treatment of health reimbursement arrangements and wellness program incentives for purposes of determining the exemption for individuals who cannot afford employer-sponsored coverage. Comments are due April 28, 2014, and may be submitted electronically, by mail or hand delivered to the IRS. Additionally, because individuals may not be aware that these limited-benefit government health programs are not minimum essential coverage at the time of enrollment, Notice 2014-10, issued on Jan. 23, 2014, provides transition relief from the shared responsibility payment for months in 2014 in which individuals have certain Medicaid coverage or limited-benefit coverage under chapter 55 of title 10, U.S.C. For additional information on the Individual Shared Responsibility provision, the final regulations and Notice 2013-42, see our ISRP page and questions and answers. Additional information on exemptions and minimum essential coverage is available in final regulations issued by the U.S. Department of Health & Human Services. The open enrollment period to purchase health insurance coverage for 2014 through the Health Insurance Marketplace runs from Oct. 1, 2013, through March 31, 2014.

Health Coverage for Older Children

Health coverage for an employee's children under 27 years of age is now generally tax-free to the employee. This expanded health care tax benefit applies to various work place and retiree health plans. These changes immediately allow employers with cafeteria plans –– plans that allow employees to choose from a menu of tax-free benefit options and cash or taxable benefits –– to permit employees to begin making pre-tax contributions to pay for this expanded benefit. This also applies to self-employed individuals who qualify for the self-employed health insurance deduction on their federal income tax return. Learn more by reading our news release or this notice.

Excise Tax on Indoor Tanning Services

A 10-percent excise tax on indoor UV tanning services went into effect on July 1, 2010. Payments are made along with Form 720, Quarterly Federal Excise Tax Return. The tax doesn't apply to phototherapy services performed by a licensed medical professional on his or her premises. There's also an exception for certain physical fitness facilities that offer tanning as an incidental service to members without a separately identifiable fee. For more information on the tax and how it is administered, see the Indoor Tanning Services Tax Center.

Adoption Credit

For tax years 2010 and 2011, the Affordable Care Act raised the maximum adoption credit per child and the credit was refundable. For more information related to the adoption credit for tax years 2010 and 2011, see our news release, tax tip, questions and answers, flyer, Notice 2010-66, Revenue Procedure 2010-31, Revenue Procedure 2010-35 and Revenue Procedure 2011-52.

For tax year 2012, the credit has reverted to being nonrefundable, with a maximum amount (dollar limitation) of $12,650 per child. If you adopted a child in 2012, see Tax Topic 607 for more information. 

Transitional Reinsurance Program

The ACA requires all health insurance issuers and self-insured group health plans to make contributions under the transitional Reinsurance Program to support payments to individual market issuers that cover high-cost individuals. For information on the tax treatment of contributions made under the Reinsurance Program, see our frequently asked questions.

Medicare Shared Savings Program

The Affordable Care Act establishes a Medicare shared savings program (MSSP) which encourages Accountable Care Organizations (ACOs) to facilitate cooperation among providers to improve the quality of care provided to Medicare beneficiaries and reduce unnecessary costs. More information can be found in Notice 2011-20, which solicited written comments regarding what additional guidance, if any, is needed for tax-exempt organizations participating in the MSSP through an ACO. This guidance also addresses the participation of tax-exempt organizations in non-MSSP activities through ACOs. Additional information on the MSSP is available on the Department of Health and Human Services website.

The Centers for Medicare and Medicaid Services has released final regulations describing the rules for the Shared Savings Program and accountable care organizations. Fact Sheet 2011-11 confirms that Notice 2011-20 continues to reflect IRS expectations regarding the Shared Savings Program and ACOs, and provides additional information for charitable organizations that may wish to participate.

Qualified Therapeutic Discovery Project Program

This program was designed to provide tax credits and grants to small firms that show significant potential to produce new and cost-saving therapies, support U.S. jobs and increase U.S. competitiveness. Applicants were required to have their research projects certified as eligible for the credit or grant. IRS guidance describes the application process.

Submission of certification applications began June 21, 2010, and applications had to be postmarked no later than July 21, 2010, to be considered for the program. Applications that were postmarked by July 21, 2010, were reviewed by both the Department of Health and Human Services (HHS) and the IRS. All applicants were notified by letter dated October 29, 2010, advising whether or not the application for certification was approved. For those applications that were approved, the letter also provided the amount of the grant to be awarded or the tax credit the applicant was eligible to take.

The IRS published the names of the applicants whose projects were approved as required by law. Listings of results are available by state.

Learn more by reading the IRS news release, the news release issued by the U.S. Department of the Treasury, the page on the HHS website and our questions and answers.

Group Health Plan Requirements

The Affordable Care Act establishes a number of new requirements for group health plans. Interim guidance on changes to the nondiscrimination requirements for group health plans can be found in Notice 2011-1, which provides that employers will not be subject to penalties until after additional guidance is issued. Additionally, TD 9575 and REG-140038-10, issued by DOL, HHS and IRS, provide information on the summary of benefits and coverage and the uniform glossary. Notice 2012-59 provides guidance to group health plans on the waiting periods they may apply before coverage starts. On March 19, 2013, HHS, DOL and IRS issued proposed regulations on the ninety-day waiting period limitation.. 

More information on group health plan requirements is available on the websites of the Departments of Health and Human Services and Labor and in additional guidance.

Further, Notice 2013-54 provides guidance regarding the application of the Affordable Care Act’s market reforms to certain types of group health plans, including health reimbursement arrangements (HRAs), health flexible spending arrangements (health FSAs) and certain other employer healthcare arrangements, including arrangements under which an employer reimburses an employee for some or all of the premium expenses incurred for an individual health insurance policy. 

Annual Fee on Health Insurance Providers

The Affordable Care Act created an annual fee on certain health insurance providers beginning in 2014. On Nov. 26, 2013, the Treasury Department and IRS issued final regulations on this annual fee imposed on covered entities engaged in the business of providing health insurance for United States health risks.

For additional information visit our Affordable Care Act Provision 9010 - Health Insurance Providers Fee page

Tax-Exempt 501(c)(29) Qualified Nonprofit Health Insurance Issuers

The Affordable Care Act requires the Department of Health and Human Services (HHS) to establish the Consumer Operated and Oriented Plan program (CO-OP program). It also provides for tax exemption for recipients of CO-OP program grants and loans that meet additional requirements under section 501(c)(29). IRS Notice 2011-23 outlined the requirements for tax exemption under section 501(c)(29) and solicited written comments regarding these requirements as well as the application process. Revenue Procedure 2012-11, issued in conjunction with temporary regulations and a notice of proposed rulemaking, sets out the procedures for issuing determination letters and rulings on the exempt status of organizations applying for recognition of exemption under 501(c)(29).

An overview of the CO-OP program is available on the HHS website.

Medicare Part D Coverage Gap “donut hole” Rebate

The Affordable Care Act provides a one-time $250 rebate in 2010 to assist Medicare Part D recipients who have reached their Medicare drug plan’s coverage gap. This payment is not taxable. This payment is not made by the IRS. More information can be found at www.medicare.gov.

Additional Requirements for Tax-Exempt Hospitals

The Affordable Care Act added new requirements for charitable hospitals (see Notice 2010-39 and Notice 2011-52). On June 26, 2012, the IRS published proposed regulations that provide information on the requirements for charitable hospitals relating to financial assistance and emergency medical care policies, charges for emergency or medically necessary care provided to individuals eligible for financial assistance, and billing and collections. On April 5, 2013, the IRS published proposed regulations on the requirement that charitable hospitals conduct community health needs assessments (CHNAs) and adopt implementation strategies at least once every three years. These proposed regulations also discuss the related excise tax and reporting requirements for charitable hospitals and the consequences for failure to satisfy the section 501(r) requirements. On August 15, 2013, the IRS published temporary regulations and proposed regulations providing information on which form to use when making an excise tax payment for failure to meet the CHNA requirements and the due date for filing the form. Notice 2014-2 confirms that hospital organizations can rely on proposed regulations under section 501(r) of the Internal Revenue Code published on June 26, 2012 and April 5, 2013, pending the publication of final regulations or other applicable guidance. Notice 2014-3 contains a proposed revenue procedure that provides correction and disclosure procedures under which certain failures to meet the requirements of section 501(r) will be excused.

Annual Fee on Branded Prescription Pharmaceutical Manufacturers and Importers

The Affordable Care Act created an annual fee payable beginning in 2011 by certain manufacturers and importers of brand name pharmaceuticals. On Aug. 15, 2011, the IRS issued temporary regulations and a notice of proposed rulemaking on the branded prescription drug fee. The temporary regulations describe the rules related to the fee, including how it is computed and how it is paid. On Aug. 5, 2013, the IRS issued Notice 2013-51, which provides additional guidance on the branded prescription drug fee for the 2014 fee year. For information on the fee for the 2012 fee year and for the 2013 fee year, see Notice 2011-92 and Notice 2012-74.

For additional information, visit our Affordable Care Act Provision 9008 Branded Prescription Drug Fee page.

Modification of Section 833 Treatment of Certain Health Organizations

The Affordable Care Act amended section 833 of the Code, which provides special rules for the taxation of Blue Cross and Blue Shield organizations and certain other organizations that provide health insurance. IRS Notice 2010-79 provides transitional relief and interim guidance on the computation of an organization’s taxpayer’s Medical Loss Ratio (MLR) for purposes of section 833, the consequences of nonapplication and changes in accounting method. Notice 2011-04 provides additional information and the procedures for qualifying organizations to obtain automatic consent to change its method of accounting for unearned premiums. Notice 2012-37 extends the transitional relief and interim guidance provided in Notice 2010-79 for another year to any taxable year beginning in 2012 and the first taxable year beginning after Dec. 31, 2012. 

On January 6, 2014, the IRS issued final regulations that describe how the MLR for purposes of section 833 is computed.

Limitation on Deduction for Compensation Paid by Certain Health Insurance Providers (amended section 162(m))

The Affordable Care Act amended section 162(m) of the Code to limit the compensation deduction available to certain health insurance providers. The amendment goes into effect for taxable years beginning after Dec. 31, 2012, but may affect deferred compensation attributable to services performed in a taxable year beginning after Dec. 31, 2009. On April 1, 2013, the Treasury Department and IRS issued proposed regulations on this provision. 

Employer Shared Responsibility Payment

The Affordable Care Act establishes that certain employers must offer health coverage to their full-time employees or a shared responsibility payment may apply. On Feb. 10, 2014, the Department of the Treasury and the IRS issued final regulations on the Employer Shared Responsibility provisions. For additional information on the Employer Shared Responsibility provisions and the proposed regulations, see our questions and answers. On July 9, 2013, the Department of the Treasury and the IRS announced transition relief from the Employer Shared Responsibility provisions for 2014. For more information, please see Notice 2013-45. For additional transition relief generally applicable to 2015, see the preamble to the final regulations.  

Patient-Centered Outcomes Research Institute Fee

The Affordable Care Act imposes the Patient-Centered Outcomes Research Institute (PCORI). Funded by the Patient-Centered Outcomes Research Trust Fund, the institute will assist patients, clinicians, purchasers and policy-makers in making informed health decisions by advancing clinical effectiveness research. The trust fund will be funded in part by fees paid by issuers of certain health insurance policies and sponsors of certain self-insured health plans.

The IRS and the Department of the Treasury have issued final regulations on this fee. Additional information on the fee is available on the PCORI page and in our questions and answers and chart summaryForm 720, Quarterly Federal Excise Tax Return, was revised to provide for the reporting and payment of the PCORI fee.

Retiree Drug Subsidies

Under § 139A of the Internal Revenue Code, certain special subsidy payments for retiree drug coverage made under the Social Security Act  are not included in the gross income of plan sponsors. Plan sponsors receive these retiree drug subsidy payments based on the allowable retiree costs for certain qualified retiree prescription drug plans. For taxable years beginning on or after Jan. 1, 2013, new statutory rules affect the ability of plan sponsors to deduct costs that are reimbursed through these subsidies. See our questions and answers for more information.

For More Information

For tips, fact sheets, questions and answers, videos and more, see our Affordable Care Act of 2010: News Releases, Multimedia and Legal Guidance page.

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Page Last Reviewed or Updated: 26-Mar-2014

 

The 1040nr Online Filing Free

1040nr online filing free 5. 1040nr online filing free   Student Loan Cancellations and Repayment Assistance Table of Contents Introduction Student Loan CancellationQualifying Loans Student Loan Repayment Assistance Introduction Generally, if you are responsible for making loan payments, and the loan is canceled (forgiven), you must include the amount that was forgiven in your gross income for tax purposes. 1040nr online filing free However, if you fulfill certain requirements, two types of student loan assistance may be tax free. 1040nr online filing free The types of assistance discussed in this chapter are: Student loan cancellation, and Student loan repayment assistance. 1040nr online filing free Student Loan Cancellation If your student loan is canceled, you may not have to include any amount in income. 1040nr online filing free This section describes the requirements for tax-free treatment of canceled student loans. 1040nr online filing free Qualifying Loans To qualify for tax-free treatment, for the cancellation of your loan, your loan must have been made by a qualified lender to assist you in attending an eligible educational institution and contain a provision that all or part of the debt will be canceled if you work: For a certain period of time, In certain professions, and For any of a broad class of employers. 1040nr online filing free The cancellation of your loan will not qualify for tax-free treatment if it is cancelled because of services you performed for the educational institution that made the loan or other organization that provided the funds. 1040nr online filing free See Exception, later. 1040nr online filing free Eligible educational institution. 1040nr online filing free   This is an educational institution that maintains a regular faculty and curriculum and normally has a regularly enrolled body of students in attendance at the place where it carries on its educational activities. 1040nr online filing free Qualified lenders. 1040nr online filing free   These include the following. 1040nr online filing free The United States, or an instrumentality thereof. 1040nr online filing free A state, territory, or possession of the United States, or the District of Columbia, or any political subdivision thereof. 1040nr online filing free A public benefit corporation that is tax-exempt under section 501(c)(3); and that has assumed control of a state, county, or municipal hospital; and whose employees are considered public employees under state law. 1040nr online filing free An eligible educational institution, if the loan is made: As part of an agreement with an entity described in (1), (2), (3) under which the funds to make the loan were provided to the educational institution, or Under a program of the educational institution that is designed to encourage its students to serve in occupations with unmet needs or in areas with unmet needs where the services provided by the students (or former students) are for or under the direction of a governmental unit or a tax-exempt section 501(c)(3) organization. 1040nr online filing free   Occupations with unmet needs include medicine, nursing, teaching, and law. 1040nr online filing free Section 501(c)(3) organization. 1040nr online filing free   This is any corporation, community chest, fund, or foundation organized and operated exclusively for one or more of the following purposes. 1040nr online filing free Charitable. 1040nr online filing free Religious. 1040nr online filing free Educational. 1040nr online filing free Scientific. 1040nr online filing free Literary. 1040nr online filing free Testing for public safety. 1040nr online filing free Fostering national or international amateur sports competition (but only if none of its activities involve providing athletic facilities or equipment). 1040nr online filing free The prevention of cruelty to children or animals. 1040nr online filing free Exception. 1040nr online filing free   The cancellation of your loan does not qualify as tax-free student loan cancellation if your student loan was made by an educational institution and is canceled because of services you performed for the educational institution or other organization that provided the funds. 1040nr online filing free Refinanced Loan If you refinanced a student loan with another loan from an eligible educational institution or a tax-exempt organization, that loan may also be considered as made by a qualified lender. 1040nr online filing free The refinanced loan is considered made by a qualified lender if it is made under a program of the refinancing organization that is designed to encourage students to serve in occupations with unmet needs or in areas with unmet needs where the services required of the students are for or under the direction of a governmental unit or a tax-exempt section 501(c)(3) organization. 1040nr online filing free Student Loan Repayment Assistance Student loan repayments made to you are tax free if you received them for any of the following: The National Health Service Corps (NHSC) Loan Repayment Program (NHSC Loan Repayment Program). 1040nr online filing free A state education loan repayment program eligible for funds under the Public Health Service Act. 1040nr online filing free Any other state loan repayment or loan forgiveness program that is intended to provide for the increased availability of health services in under served or health professional shortage areas (as determined by such state). 1040nr online filing free You cannot deduct the interest you paid on a student loan to the extent payments were made through your participation in the above programs. 1040nr online filing free Prev  Up  Next   Home   More Online Publications