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2012 1040 Ez Form

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2012 1040 Ez Form

2012 1040 ez form Publication 15-B - Introductory Material Table of Contents Future Developments What's New Reminders Introduction Future Developments For the latest information about developments related to Publication 15-B, such as legislation enacted after it was published, go to www. 2012 1040 ez form irs. 2012 1040 ez form gov/pub15b. 2012 1040 ez form What's New Cents-per-mile rule. 2012 1040 ez form  The business mileage rate for 2014 is 56 cents per mile. 2012 1040 ez form You may use this rate to reimburse an employee for business use of a personal vehicle, and under certain conditions, you may use the rate under the cents-per-mile rule to value the personal use of a vehicle you provide to an employee. 2012 1040 ez form See Cents-Per-Mile Rule in section 3. 2012 1040 ez form Qualified parking exclusion and commuter transportation benefit. 2012 1040 ez form . 2012 1040 ez form  For 2014, the monthly exclusion for qualified parking is $250 and the monthly exclusion for commuter highway vehicle transportation and transit passes is $130. 2012 1040 ez form See Qualified Transportation Benefits in section 2. 2012 1040 ez form Same-sex Marriage. 2012 1040 ez form  For federal tax purposes, individuals of the same sex are considered married if they were lawfully married in a state (or foreign country) whose laws authorize the marriage of two individuals of the same sex, even if the state (or foreign country) in which they now live does not recognize same-sex marriage. 2012 1040 ez form For more information, see Revenue Ruling 2013-17, 2013-38 I. 2012 1040 ez form R. 2012 1040 ez form B. 2012 1040 ez form 201, available at www. 2012 1040 ez form irs. 2012 1040 ez form gov/irb/2013-38_IRB/ar07. 2012 1040 ez form html. 2012 1040 ez form Notice 2013-61 provides special administrative procedures for employers to make claims for refund or adjustments of overpayments of social security and Medicare taxes with respect to certain same-sex spouse benefits before expiration of the period of limitations. 2012 1040 ez form Notice 2013-61, 2013-44 I. 2012 1040 ez form R. 2012 1040 ez form B. 2012 1040 ez form 432, is available at www. 2012 1040 ez form irs. 2012 1040 ez form gov/irb/2013-44_IRB/ar10. 2012 1040 ez form html. 2012 1040 ez form Recent changes to certain rules for cafeteria plans. 2012 1040 ez form  Notice 2013-71, 2013-47 I. 2012 1040 ez form R. 2012 1040 ez form B. 2012 1040 ez form 532, available at www. 2012 1040 ez form irs. 2012 1040 ez form gov/irb/2013-47_IRB/ar10. 2012 1040 ez form html, discusses recent changes to the “use-or-lose” rule for health flexible spending arrangements (FSAs) and clarifies the transitional rule for 2013-2014 non-calendar year salary reduction elections. 2012 1040 ez form See Notice 2013-71 for details on these changes. 2012 1040 ez form Reminders $2,500 limit on a health flexible spending arrangement (FSA). 2012 1040 ez form  For plan years beginning after December 31, 2012, a cafeteria plan may not allow an employee to request salary reduction contributions for a health FSA in excess of $2,500. 2012 1040 ez form For plan years beginning after December 31, 2013, the limit is unchanged at $2,500. 2012 1040 ez form For more information, see Cafeteria Plans in section 1. 2012 1040 ez form Additional Medicare Tax withholding. 2012 1040 ez form  In addition to withholding Medicare tax at 1. 2012 1040 ez form 45%, you must withhold a 0. 2012 1040 ez form 9% Additional Medicare Tax from wages you pay to an employee in excess of $200,000 in a calendar year. 2012 1040 ez form You are required to begin withholding Additional Medicare Tax in the pay period in which you pay wages in excess of $200,000 to an employee and continue to withhold it each pay period until the end of the calendar year. 2012 1040 ez form Additional Medicare Tax is only imposed on the employee. 2012 1040 ez form There is no employer share of Additional Medicare Tax. 2012 1040 ez form All wages that are subject to Medicare tax are subject to Additional Medicare Tax withholding if paid in excess of the $200,000 withholding threshold. 2012 1040 ez form Unless otherwise noted, references to Medicare tax include Additional Medicare Tax. 2012 1040 ez form For more information on what wages are subject to Medicare tax, see Table 2-1, later, and the chart, Special Rules for Various Types of Services and Payments, in section 15 of Publication 15, (Circular E), Employer's Tax Guide. 2012 1040 ez form For more information on Additional Medicare Tax, visit IRS. 2012 1040 ez form gov and enter “Additional Medicare Tax” in the search box. 2012 1040 ez form Photographs of missing children. 2012 1040 ez form  The IRS is a proud partner with the National Center for Missing and Exploited Children. 2012 1040 ez form Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. 2012 1040 ez form You can help bring these children home by looking at the photographs and calling 1-800-THE-LOST (1-800-843-5678) if you recognize a child. 2012 1040 ez form Introduction This publication supplements Publication 15 (Circular E), Employer's Tax Guide, and Publication 15-A, Employer's Supplemental Tax Guide. 2012 1040 ez form It contains information for employers on the employment tax treatment of fringe benefits. 2012 1040 ez form Comments and suggestions. 2012 1040 ez form   We welcome your comments about this publication and your suggestions for future editions. 2012 1040 ez form   You can write to us at the following address:  Internal Revenue Service Tax Forms and Publications Division 1111 Constitution Ave. 2012 1040 ez form NW, IR-6526 Washington, DC 20224   We respond to many letters by telephone. 2012 1040 ez form Therefore, it would be helpful if you would include your daytime phone number, including the area code, in your correspondence. 2012 1040 ez form   You can also send us comments from www. 2012 1040 ez form irs. 2012 1040 ez form gov/formspubs. 2012 1040 ez form Click on More Information and then click on Comment on Tax Forms and Publications. 2012 1040 ez form   Although we cannot respond individually to each comment received, we do appreciate your feedback and will consider your comments as we revise our tax products. 2012 1040 ez form Prev  Up  Next   Home   More Online Publications
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Forms and Schedules for Form 1040

Schedule A (Form 1040), Itemized Deductions
Use Schedule A (Form 1040) to figure your itemized deductions. In most cases, your federal income tax will be less if you take the larger of your itemized deductions or your standard deduction.

Schedule B (Form 1040), Interest and Ordinary Dividends
Use Schedule B to report your taxable interest or ordinary dividends.

Schedule C (Form 1040), Profit or Loss From Business
Use this schedule to report income or loss from a business you operated or a profession you practiced as a sole proprietor. An activity qualifies as a business if your primary purpose for engaging in the activity is for income or profit and you are involved in the activity with continuity and regularity.

Schedule C-EZ (Form 1040), Net Profit From Business
You can use Schedule C-EZ instead of Schedule C if you operated a business or practiced a profession as a sole proprietorship or qualified joint venture, or you were a statutory employee and you have met all the requirements listed in Schedule C-EZ, Part I.

Schedule D (Form 1040), Capital Gains and Losses
Use Schedule D (Form 1040) to report the sale or exchange of capital assets, gains from involuntary conversions of capital assets, capital gain distributions and nonbusiness bad debts.

Schedule E (Form 1040), Supplemental Income and Loss
Use Schedule E (Form 1040) to report income or loss from rental real estate, royalties, partnerships, S corporations, estates, trusts, and residual interests in REMICs.

Schedule EIC (Form 1040A or 1040), Earned Income Credit
After you have figured your earned income credit (EIC), use this schedule to give the IRS information about your qualifying child(ren).

Schedule F (Form 1040), Profit or Loss From Farming
Use Schedule F (Form 1040) to report farm income and expenses.

Schedule H (Form 1040), Household Employment Taxes
Use this schedule to report household employment taxes if you paid any one household employee cash wages of $1,800 or more during the calendar year, withheld federal income tax during the calendar year for any household employee, or paid total cash wages of $1,000 or more in any calendar quarter of the year or previous year to all household employees.

Schedule J (Form 1040), Income Averaging for Farmers and Fishermen
Use Schedule J (Form 1040) to elect to figure your income tax by averaging, over the previous 3 years (base years), all or part of your taxable income from your trade or business of farming or fishing.

Schedule R (Form 1040A or 1040), Credit for the Elderly or the Disabled
Use this schedule to figure the credit for the elderly or the disabled.

Schedule SE (Form 1040), Self-Employment Tax
Use this schedule to figure the tax due on net earnings from self-employment.

Form 1040-V, Payment Voucher for Form 1040
This form is a statement you send with your check or money order for any balance due on the “Amount you owe” line of your Form 1040, Form 1040A, or Form 1040EZ.

Form 1040X, Amended U.S. Individual Income Tax Return
Used by individual taxpayers to amend prior year tax returns.

Form 2106, Employee Business Expenses
Use this form if you are an employee deducting ordinary and necessary expenses for your job.

Form 2210, Underpayment of Estimated Tax by Individuals, Estates, and Trusts
Use this form to see if you owe a penalty for underpaying your estimated tax and, if you do, to figure the amount of the penalty.

Form 2441, Child and Dependent Care Expenses
If you paid someone to care for your child (under age 13) or other qualifying person so you (and your spouse if filing jointly) could work or look for work, you may be able to take the credit for child and dependent care expenses.

Form 2848, Power of Attorney and Declaration of Representative
Use Form 2848 to authorize an individual to represent you before the IRS. The individual you authorize must be a person eligible to practice before the IRS.

Form 3903, Moving Expenses
Use Form 3903 to figure your moving expense deduction for a move related to the start of work at a new principal place of work (workplace). If the new workplace is outside the United States or its possessions, you must be a U.S. citizen or resident alien to deduct your expenses.

Form 4562, Depreciation and Amortization
Use Form 4562 to claim your deduction for depreciation and amortization, make the election under section 179 to expense certain property, and provide information on the business/investment use of automobiles and other listed property.

Form 4868, Application for Automatic Extension of Time To File U.S. Individual Income Tax Return
A U.S. citizen or resident files this form to request an automatic extension of time to file a U.S. individual income tax return.

Form 4952, Investment Interest Expense Deduction
Use this form to figure the amount of investment interest expense you can deduct for the current year and the amount you can carry forward to future years.

Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts
Use Form 5329 to report additional taxes on IRAs, other qualified retirement plans, modified endowment contracts, Coverdell ESAs, QTPs, Archer MSAs, or HSAs.

Form 6251, Alternative Minimum Tax - Individuals
Use this form to figure the amount, if any, of your alternative minimum tax (AMT).

Form 8283, Noncash Charitable Contributions
Individuals, partnerships, and corporations file this form to report information about noncash charitable contributions when the amount of their deduction for all noncash gifts is more than $500.

Form 8582, Passive Activity Loss Limitations
Noncorporate taxpayers use this form to figure the amount of any passive activity loss (PAL) for the current tax year.

Form 8606, Nondeductible IRAs
Use this form to report nondeductible contributions you made to traditional IRAs; distributions from traditional, SEP, or SIMPLE IRAs, if you have ever made nondeductible contributions to traditional IRAs; conversions from traditional, SEP, or SIMPLE IRAs to Roth IRAs; and distributions from Roth IRAs

Schedule 8812 (Form 1040A or 1040), Child Tax Credit
Use Part I of this schedule to document that any child for whom you entered an ITIN and for whom you also checked the "if qualifying child for child tax credit" box, is a resident of the United States because the child meets the substantial presence test and is not otherwise treated as a nonresident alien. Use Parts II–IV of Schedule 8812 to figure the additional child tax credit.

Form 8822, Change of Address
Use this form to notify the Internal Revenue Service of a change to your home mailing address.

Form 8829, Expenses for Business Use of Your Home
Use this form to figure the allowable expenses for business use of your home on Schedule C (Form 1040) and any carryover to next year of amounts not deductible this year.

Form 8863, Education Credits (American Opportunity and Lifetime Learning Credits)
Use this form to figure and claim your education credits, which are based on qualified education expenses paid to an eligible postsecondary educational institution.

Form 8949, Sales and Other Dispositions of Capital Assets
Use this form to reconcile amounts that were reported to you and the IRS on Form 1099-B or 1099-S (or substitute statement) with the amounts you report on your return.

Form 9465, Installment Agreement Request
Use form to request a monthly installment plan if you cannot pay the full amount you owe shown on your tax return (or on a notice we sent you).

Page Last Reviewed or Updated: 20-Feb-2014

The 2012 1040 Ez Form

2012 1040 ez form Publication 541 - Main Content Table of Contents Forming a PartnershipOrganizations Classified as Partnerships Family Partnership Partnership Agreement Terminating a PartnershipIRS e-file (Electronic Filing) Exclusion From Partnership Rules Partnership Return (Form 1065) Partnership DistributionsSubstantially appreciated inventory items. 2012 1040 ez form Partner's Gain or Loss Partner's Basis for Distributed Property Transactions Between Partnership and PartnersGuaranteed Payments Sale or Exchange of Property Contribution of Property Contribution of Services Basis of Partner's InterestAdjusted Basis Effect of Partnership Liabilities Disposition of Partner's InterestSale, Exchange, or Other Transfer Payments for Unrealized Receivables and Inventory Items Liquidation at Partner's Retirement or Death Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA)Partnership Item. 2012 1040 ez form Small Partnerships and the Small Partnership Exception Small Partnership TEFRA Election Role of Tax Matters Partner (TMP) in TEFRA Proceedings Statute of Limitations and TEFRA Amended Returns and Administrative Adjustment Requests (AARs) How To Get Tax Help Forming a Partnership The following sections contain general information about partnerships. 2012 1040 ez form Organizations Classified as Partnerships An unincorporated organization with two or more members is generally classified as a partnership for federal tax purposes if its members carry on a trade, business, financial operation, or venture and divide its profits. 2012 1040 ez form However, a joint undertaking merely to share expenses is not a partnership. 2012 1040 ez form For example, co-ownership of property maintained and rented or leased is not a partnership unless the co-owners provide services to the tenants. 2012 1040 ez form The rules you must use to determine whether an organization is classified as a partnership changed for organizations formed after 1996. 2012 1040 ez form Organizations formed after 1996. 2012 1040 ez form   An organization formed after 1996 is classified as a partnership for federal tax purposes if it has two or more members and it is none of the following. 2012 1040 ez form An organization formed under a federal or state law that refers to it as incorporated or as a corporation, body corporate, or body politic. 2012 1040 ez form An organization formed under a state law that refers to it as a joint-stock company or joint-stock association. 2012 1040 ez form An insurance company. 2012 1040 ez form Certain banks. 2012 1040 ez form An organization wholly owned by a state, local, or foreign government. 2012 1040 ez form An organization specifically required to be taxed as a corporation by the Internal Revenue Code (for example, certain publicly traded partnerships). 2012 1040 ez form Certain foreign organizations identified in section 301. 2012 1040 ez form 7701-2(b)(8) of the regulations. 2012 1040 ez form A tax-exempt organization. 2012 1040 ez form A real estate investment trust. 2012 1040 ez form An organization classified as a trust under section 301. 2012 1040 ez form 7701-4 of the regulations or otherwise subject to special treatment under the Internal Revenue Code. 2012 1040 ez form Any other organization that elects to be classified as a corporation by filing Form 8832. 2012 1040 ez form For more information, see the instructions for Form 8832. 2012 1040 ez form Limited liability company. 2012 1040 ez form   A limited liability company (LLC) is an entity formed under state law by filing articles of organization as an LLC. 2012 1040 ez form Unlike a partnership, none of the members of an LLC are personally liable for its debts. 2012 1040 ez form An LLC may be classified for federal income tax purposes as either a partnership, a corporation, or an entity disregarded as an entity separate from its owner by applying the rules in Regulations section 301. 2012 1040 ez form 7701-3. 2012 1040 ez form See Form 8832 and section 301. 2012 1040 ez form 7701-3 of the regulations for more details. 2012 1040 ez form A domestic LLC with at least two members that does not file Form 8832 is classified as a partnership for federal income tax purposes. 2012 1040 ez form Organizations formed before 1997. 2012 1040 ez form   An organization formed before 1997 and classified as a partnership under the old rules will generally continue to be classified as a partnership as long as the organization has at least two members and does not elect to be classified as a corporation by filing Form 8832. 2012 1040 ez form Community property. 2012 1040 ez form    Spouses who own a qualified entity (defined later) can choose to classify the entity as a partnership for federal tax purposes by filing the appropriate partnership tax returns. 2012 1040 ez form They can choose to classify the entity as a sole proprietorship by filing a Schedule C (Form 1040) listing one spouse as the sole proprietor. 2012 1040 ez form A change in reporting position will be treated for federal tax purposes as a conversion of the entity. 2012 1040 ez form   A qualified entity is a business entity that meets all the following requirements. 2012 1040 ez form The business entity is wholly owned by spouses as community property under the laws of a state, a foreign country, or a possession of the United States. 2012 1040 ez form No person other than one or both spouses would be considered an owner for federal tax purposes. 2012 1040 ez form The business entity is not treated as a corporation. 2012 1040 ez form   For more information about community property, see Publication 555, Community Property. 2012 1040 ez form Publication 555 discusses the community property laws of Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. 2012 1040 ez form Family Partnership Members of a family can be partners. 2012 1040 ez form However, family members (or any other person) will be recognized as partners only if one of the following requirements is met. 2012 1040 ez form If capital is a material income-producing factor, they acquired their capital interest in a bona fide transaction (even if by gift or purchase from another family member), actually own the partnership interest, and actually control the interest. 2012 1040 ez form If capital is not a material income-producing factor, they joined together in good faith to conduct a business. 2012 1040 ez form They agreed that contributions of each entitle them to a share in the profits, and some capital or service has been (or is) provided by each partner. 2012 1040 ez form Capital is material. 2012 1040 ez form   Capital is a material income-producing factor if a substantial part of the gross income of the business comes from the use of capital. 2012 1040 ez form Capital is ordinarily an income-producing factor if the operation of the business requires substantial inventories or investments in plants, machinery, or equipment. 2012 1040 ez form Capital is not material. 2012 1040 ez form   In general, capital is not a material income-producing factor if the income of the business consists principally of fees, commissions, or other compensation for personal services performed by members or employees of the partnership. 2012 1040 ez form Capital interest. 2012 1040 ez form   A capital interest in a partnership is an interest in its assets that is distributable to the owner of the interest in either of the following situations. 2012 1040 ez form The owner withdraws from the partnership. 2012 1040 ez form The partnership liquidates. 2012 1040 ez form   The mere right to share in earnings and profits is not a capital interest in the partnership. 2012 1040 ez form Gift of capital interest. 2012 1040 ez form   If a family member (or any other person) receives a gift of a capital interest in a partnership in which capital is a material income-producing factor, the donee's distributive share of partnership income is subject to both of the following restrictions. 2012 1040 ez form It must be figured by reducing the partnership income by reasonable compensation for services the donor renders to the partnership. 2012 1040 ez form The donee's distributive share of partnership income attributable to donated capital must not be proportionately greater than the donor's distributive share attributable to the donor's capital. 2012 1040 ez form Purchase. 2012 1040 ez form   For purposes of determining a partner's distributive share, an interest purchased by one family member from another family member is considered a gift from the seller. 2012 1040 ez form The fair market value of the purchased interest is considered donated capital. 2012 1040 ez form For this purpose, members of a family include only spouses, ancestors, and lineal descendants (or a trust for the primary benefit of those persons). 2012 1040 ez form Example. 2012 1040 ez form A father sold 50% of his business to his son. 2012 1040 ez form The resulting partnership had a profit of $60,000. 2012 1040 ez form Capital is a material income-producing factor. 2012 1040 ez form The father performed services worth $24,000, which is reasonable compensation, and the son performed no services. 2012 1040 ez form The $24,000 must be allocated to the father as compensation. 2012 1040 ez form Of the remaining $36,000 of profit due to capital, at least 50%, or $18,000, must be allocated to the father since he owns a 50% capital interest. 2012 1040 ez form The son's share of partnership profit cannot be more than $18,000. 2012 1040 ez form Business owned and operated by spouses. 2012 1040 ez form   If spouses carry on a business together and share in the profits and losses, they may be partners whether or not they have a formal partnership agreement. 2012 1040 ez form If so, they should report income or loss from the business on Form 1065. 2012 1040 ez form They should not report the income on a Schedule C (Form 1040) in the name of one spouse as a sole proprietor. 2012 1040 ez form However, the spouses can elect not to treat the joint venture as a partnership by making a Qualified Joint Venture Election. 2012 1040 ez form Qualified Joint Venture Election. 2012 1040 ez form   A "qualified joint venture," whose only members are spouses filing a joint return, can elect not to be treated as a partnership for federal tax purposes. 2012 1040 ez form A qualified joint venture conducts a trade or business where: the only members of the joint venture are spouses filing jointly; both spouses elect not to be treated as a partnership; both spouses materially participate in the trade or business (see Passive Activity Limitations in the Instructions for Form 1065 for a definition of material participation); and the business is co-owned by both spouses and is not held in the name of a state law entity such as a partnership or LLC. 2012 1040 ez form   Under this election, a qualified joint venture conducted by spouses who file a joint return is not treated as a partnership for federal tax purposes and therefore does not have a Form 1065 filing requirement. 2012 1040 ez form All items of income, gain, deduction, loss, and credit are divided between the spouses based on their respective interests in the venture. 2012 1040 ez form Each spouse takes into account his or her respective share of these items as a sole proprietor. 2012 1040 ez form Each spouse would account for his or her respective share on the appropriate form, such as Schedule C (Form 1040). 2012 1040 ez form For purposes of determining net earnings from self-employment, each spouse's share of income or loss from a qualified joint venture is taken into account just as it is for federal income tax purposes (i. 2012 1040 ez form e. 2012 1040 ez form , based on their respective interests in the venture). 2012 1040 ez form   If the spouses do not make the election to treat their respective interests in the joint venture as sole proprietorships, each spouse should carry his or her share of the partnership income or loss from Schedule K-1 (Form 1065) to their joint or separate Form(s) 1040. 2012 1040 ez form Each spouse should include his or her respective share of self-employment income on a separate Schedule SE (Form 1040), Self-Employment Tax. 2012 1040 ez form   This generally does not increase the total tax on the return, but it does give each spouse credit for social security earnings on which retirement benefits are based. 2012 1040 ez form However, this may not be true if either spouse exceeds the social security tax limitation. 2012 1040 ez form   For more information on qualified joint ventures, go to IRS. 2012 1040 ez form gov, enter “Election for Qualified Joint Ventures” in the search box and select the link reading “Election for Husband and Wife Unincorporated Businesses. 2012 1040 ez form ” Partnership Agreement The partnership agreement includes the original agreement and any modifications. 2012 1040 ez form The modifications must be agreed to by all partners or adopted in any other manner provided by the partnership agreement. 2012 1040 ez form The agreement or modifications can be oral or written. 2012 1040 ez form Partners can modify the partnership agreement for a particular tax year after the close of the year but not later than the date for filing the partnership return for that year. 2012 1040 ez form This filing date does not include any extension of time. 2012 1040 ez form If the partnership agreement or any modification is silent on any matter, the provisions of local law are treated as part of the agreement. 2012 1040 ez form Terminating a Partnership A partnership terminates when one of the following events takes place. 2012 1040 ez form All its operations are discontinued and no part of any business, financial operation, or venture is continued by any of its partners in a partnership. 2012 1040 ez form At least 50% of the total interest in partnership capital and profits is sold or exchanged within a 12-month period, including a sale or exchange to another partner. 2012 1040 ez form Unlike other partnerships, an electing large partnership does not terminate on the sale or exchange of 50% or more of the partnership interests within a 12-month period. 2012 1040 ez form See section 1. 2012 1040 ez form 708-1(b) of the regulations for more information on the termination of a partnership. 2012 1040 ez form For special rules that apply to a merger, consolidation, or division of a partnership, see sections 1. 2012 1040 ez form 708-1(c) and 1. 2012 1040 ez form 708-1(d) of the regulations. 2012 1040 ez form Date of termination. 2012 1040 ez form   The partnership's tax year ends on the date of termination. 2012 1040 ez form For the event described in (1), above, the date of termination is the date the partnership completes the winding up of its affairs. 2012 1040 ez form For the event described in (2), above, the date of termination is the date of the sale or exchange of a partnership interest that, by itself or together with other sales or exchanges in the preceding 12 months, transfers an interest of 50% or more in both capital and profits. 2012 1040 ez form Short period return. 2012 1040 ez form   If a partnership is terminated before the end of what would otherwise be its tax year, Form 1065 must be filed for the short period, which is the period from the beginning of the tax year through the date of termination. 2012 1040 ez form The return is due the 15th day of the fourth month following the date of termination. 2012 1040 ez form See Partnership Return (Form 1065), later, for information about filing Form 1065. 2012 1040 ez form Conversion of partnership into limited liability company (LLC). 2012 1040 ez form   The conversion of a partnership into an LLC classified as a partnership for federal tax purposes does not terminate the partnership. 2012 1040 ez form The conversion is not a sale, exchange, or liquidation of any partnership interest; the partnership's tax year does not close; and the LLC can continue to use the partnership's taxpayer identification number. 2012 1040 ez form   However, the conversion may change some of the partners' bases in their partnership interests if the partnership has recourse liabilities that become nonrecourse liabilities. 2012 1040 ez form Because the partners share recourse and nonrecourse liabilities differently, their bases must be adjusted to reflect the new sharing ratios. 2012 1040 ez form If a decrease in a partner's share of liabilities exceeds the partner's basis, he or she must recognize gain on the excess. 2012 1040 ez form For more information, see Effect of Partnership Liabilities under Basis of Partner's Interest, later. 2012 1040 ez form   The same rules apply if an LLC classified as a partnership is converted into a partnership. 2012 1040 ez form IRS e-file (Electronic Filing) Please click here for the text description of the image. 2012 1040 ez form e-file Certain partnerships with more than 100 partners are required to file Form 1065, Schedules K-1, and related forms and schedules electronically (e-file). 2012 1040 ez form Other partnerships generally have the option to file electronically. 2012 1040 ez form For details about IRS e-file, see the Form 1065 instructions. 2012 1040 ez form Exclusion From Partnership Rules Certain partnerships that do not actively conduct a business can choose to be completely or partially excluded from being treated as partnerships for federal income tax purposes. 2012 1040 ez form All the partners must agree to make the choice, and the partners must be able to compute their own taxable income without computing the partnership's income. 2012 1040 ez form However, the partners are not exempt from the rule that limits a partner's distributive share of partnership loss to the adjusted basis of the partner's partnership interest. 2012 1040 ez form Nor are they exempt from the requirement of a business purpose for adopting a tax year for the partnership that differs from its required tax year. 2012 1040 ez form Investing partnership. 2012 1040 ez form   An investing partnership can be excluded if the participants in the joint purchase, retention, sale, or exchange of investment property meet all the following requirements. 2012 1040 ez form They own the property as co-owners. 2012 1040 ez form They reserve the right separately to take or dispose of their shares of any property acquired or retained. 2012 1040 ez form They do not actively conduct business or irrevocably authorize some person acting in a representative capacity to purchase, sell, or exchange the investment property. 2012 1040 ez form Each separate participant can delegate authority to purchase, sell, or exchange his or her share of the investment property for the time being for his or her account, but not for a period of more than a year. 2012 1040 ez form Operating agreement partnership. 2012 1040 ez form   An operating agreement partnership group can be excluded if the participants in the joint production, extraction, or use of property meet all the following requirements. 2012 1040 ez form They own the property as co-owners, either in fee or under lease or other form of contract granting exclusive operating rights. 2012 1040 ez form They reserve the right separately to take in kind or dispose of their shares of any property produced, extracted, or used. 2012 1040 ez form They do not jointly sell services or the property produced or extracted. 2012 1040 ez form Each separate participant can delegate authority to sell his or her share of the property produced or extracted for the time being for his or her account, but not for a period of time in excess of the minimum needs of the industry, and in no event for more than one year. 2012 1040 ez form However, this exclusion does not apply to an unincorporated organization one of whose principal purposes is cycling, manufacturing, or processing for persons who are not members of the organization. 2012 1040 ez form Electing the exclusion. 2012 1040 ez form   An eligible organization that wishes to be excluded from the partnership rules must make the election not later than the time for filing the partnership return for the first tax year for which exclusion is desired. 2012 1040 ez form This filing date includes any extension of time. 2012 1040 ez form See Regulations section 1. 2012 1040 ez form 761-2(b) for the procedures to follow. 2012 1040 ez form Partnership Return (Form 1065) Every partnership that engages in a trade or business or has gross income must file an information return on Form 1065 showing its income, deductions, and other required information. 2012 1040 ez form The partnership return must show the names and addresses of each partner and each partner's distributive share of taxable income. 2012 1040 ez form The return must be signed by a general partner. 2012 1040 ez form If a limited liability company is treated as a partnership, it must file Form 1065 and one of its members must sign the return. 2012 1040 ez form A partnership is not considered to engage in a trade or business, and is not required to file a Form 1065, for any tax year in which it neither receives income nor pays or incurs any expenses treated as deductions or credits for federal income tax purposes. 2012 1040 ez form See the Instructions for Form 1065 for more information about who must file Form 1065. 2012 1040 ez form Partnership Distributions Partnership distributions include the following. 2012 1040 ez form A withdrawal by a partner in anticipation of the current year's earnings. 2012 1040 ez form A distribution of the current year's or prior years' earnings not needed for working capital. 2012 1040 ez form A complete or partial liquidation of a partner's interest. 2012 1040 ez form A distribution to all partners in a complete liquidation of the partnership. 2012 1040 ez form A partnership distribution is not taken into account in determining the partner's distributive share of partnership income or loss. 2012 1040 ez form If any gain or loss from the distribution is recognized by the partner, it must be reported on his or her return for the tax year in which the distribution is received. 2012 1040 ez form Money or property withdrawn by a partner in anticipation of the current year's earnings is treated as a distribution received on the last day of the partnership's tax year. 2012 1040 ez form Effect on partner's basis. 2012 1040 ez form   A partner's adjusted basis in his or her partnership interest is decreased (but not below zero) by the money and adjusted basis of property distributed to the partner. 2012 1040 ez form See Adjusted Basis under Basis of Partner's Interest, later. 2012 1040 ez form Effect on partnership. 2012 1040 ez form   A partnership generally does not recognize any gain or loss because of distributions it makes to partners. 2012 1040 ez form The partnership may be able to elect to adjust the basis of its undistributed property. 2012 1040 ez form Certain distributions treated as a sale or exchange. 2012 1040 ez form   When a partnership distributes the following items, the distribution may be treated as a sale or exchange of property rather than a distribution. 2012 1040 ez form Unrealized receivables or substantially appreciated inventory items distributed in exchange for any part of the partner's interest in other partnership property, including money. 2012 1040 ez form Other property (including money) distributed in exchange for any part of a partner's interest in unrealized receivables or substantially appreciated inventory items. 2012 1040 ez form   See Payments for Unrealized Receivables and Inventory Items under Disposition of Partner's Interest, later. 2012 1040 ez form   This treatment does not apply to the following distributions. 2012 1040 ez form A distribution of property to the partner who contributed the property to the partnership. 2012 1040 ez form Payments made to a retiring partner or successor in interest of a deceased partner that are the partner's distributive share of partnership income or guaranteed payments. 2012 1040 ez form Substantially appreciated inventory items. 2012 1040 ez form   Inventory items of the partnership are considered to have appreciated substantially in value if, at the time of the distribution, their total fair market value is more than 120% of the partnership's adjusted basis for the property. 2012 1040 ez form However, if a principal purpose for acquiring inventory property is to avoid ordinary income treatment by reducing the appreciation to less than 120%, that property is excluded. 2012 1040 ez form Partner's Gain or Loss A partner generally recognizes gain on a partnership distribution only to the extent any money (and marketable securities treated as money) included in the distribution exceeds the adjusted basis of the partner's interest in the partnership. 2012 1040 ez form Any gain recognized is generally treated as capital gain from the sale of the partnership interest on the date of the distribution. 2012 1040 ez form If partnership property (other than marketable securities treated as money) is distributed to a partner, he or she generally does not recognize any gain until the sale or other disposition of the property. 2012 1040 ez form For exceptions to these rules, see Distribution of partner's debt and Net precontribution gain, later. 2012 1040 ez form Also, see Payments for Unrealized Receivables and Inventory Items under Disposition of Partner's Interest, later. 2012 1040 ez form Example. 2012 1040 ez form The adjusted basis of Jo's partnership interest is $14,000. 2012 1040 ez form She receives a distribution of $8,000 cash and land that has an adjusted basis of $2,000 and a fair market value of $3,000. 2012 1040 ez form Because the cash received does not exceed the basis of her partnership interest, Jo does not recognize any gain on the distribution. 2012 1040 ez form Any gain on the land will be recognized when she sells or otherwise disposes of it. 2012 1040 ez form The distribution decreases the adjusted basis of Jo's partnership interest to $4,000 [$14,000 − ($8,000 + $2,000)]. 2012 1040 ez form Marketable securities treated as money. 2012 1040 ez form   Generally, a marketable security distributed to a partner is treated as money in determining whether gain is recognized on the distribution. 2012 1040 ez form This treatment, however, does not generally apply if that partner contributed the security to the partnership or an investment partnership made the distribution to an eligible partner. 2012 1040 ez form   The amount treated as money is the security's fair market value when distributed, reduced (but not below zero) by the excess (if any) of: The partner's distributive share of the gain that would be recognized had the partnership sold all its marketable securities at their fair market value immediately before the transaction resulting in the distribution, over The partner's distributive share of the gain that would be recognized had the partnership sold all such securities it still held after the distribution at the fair market value in (1). 2012 1040 ez form   For more information, including the definition of marketable securities, see section 731(c) of the Internal Revenue Code. 2012 1040 ez form Loss on distribution. 2012 1040 ez form   A partner does not recognize loss on a partnership distribution unless all the following requirements are met. 2012 1040 ez form The adjusted basis of the partner's interest in the partnership exceeds the distribution. 2012 1040 ez form The partner's entire interest in the partnership is liquidated. 2012 1040 ez form The distribution is in money, unrealized receivables, or inventory items. 2012 1040 ez form   There are exceptions to these general rules. 2012 1040 ez form See the following discussions. 2012 1040 ez form Also, see Liquidation at Partner's Retirement or Death under Disposition of Partner's Interest, later. 2012 1040 ez form Distribution of partner's debt. 2012 1040 ez form   If a partnership acquires a partner's debt and extinguishes the debt by distributing it to the partner, the partner will recognize capital gain or loss to the extent the fair market value of the debt differs from the basis of the debt (determined under the rules discussed in Partner's Basis for Distributed Property, later). 2012 1040 ez form   The partner is treated as having satisfied the debt for its fair market value. 2012 1040 ez form If the issue price (adjusted for any premium or discount) of the debt exceeds its fair market value when distributed, the partner may have to include the excess amount in income as canceled debt. 2012 1040 ez form   Similarly, a deduction may be available to a corporate partner if the fair market value of the debt at the time of distribution exceeds its adjusted issue price. 2012 1040 ez form Net precontribution gain. 2012 1040 ez form   A partner generally must recognize gain on the distribution of property (other than money) if the partner contributed appreciated property to the partnership during the 7-year period before the distribution. 2012 1040 ez form   The gain recognized is the lesser of the following amounts. 2012 1040 ez form The excess of: The fair market value of the property received in the distribution, over The adjusted basis of the partner's interest in the partnership immediately before the distribution, reduced (but not below zero) by any money received in the distribution. 2012 1040 ez form The “net precontribution gain” of the partner. 2012 1040 ez form This is the net gain the partner would recognize if all the property contributed by the partner within 7 years of the distribution, and held by the partnership immediately before the distribution, were distributed to another partner, other than a partner who owns more than 50% of the partnership. 2012 1040 ez form For information about the distribution of contributed property to another partner, see Contribution of Property , under Transactions Between Partnership and Partners, later. 2012 1040 ez form   The character of the gain is determined by reference to the character of the net precontribution gain. 2012 1040 ez form This gain is in addition to any gain the partner must recognize if the money distributed is more than his or her basis in the partnership. 2012 1040 ez form For these rules, the term “money” includes marketable securities treated as money, as discussed earlier. 2012 1040 ez form Effect on basis. 2012 1040 ez form   The adjusted basis of the partner's interest in the partnership is increased by any net precontribution gain recognized by the partner. 2012 1040 ez form Other than for purposes of determining the gain, the increase is treated as occurring immediately before the distribution. 2012 1040 ez form See Basis of Partner's Interest , later. 2012 1040 ez form   The partnership must adjust its basis in any property the partner contributed within 7 years of the distribution to reflect any gain that partner recognizes under this rule. 2012 1040 ez form Exceptions. 2012 1040 ez form   Any part of a distribution that is property the partner previously contributed to the partnership is not taken into account in determining the amount of the excess distribution or the partner's net precontribution gain. 2012 1040 ez form For this purpose, the partner's previously contributed property does not include a contributed interest in an entity to the extent its value is due to property contributed to the entity after the interest was contributed to the partnership. 2012 1040 ez form   Recognition of gain under this rule also does not apply to a distribution of unrealized receivables or substantially appreciated inventory items if the distribution is treated as a sale or exchange, as discussed earlier. 2012 1040 ez form Partner's Basis for Distributed Property Unless there is a complete liquidation of a partner's interest, the basis of property (other than money) distributed to the partner by a partnership is its adjusted basis to the partnership immediately before the distribution. 2012 1040 ez form However, the basis of the property to the partner cannot be more than the adjusted basis of his or her interest in the partnership reduced by any money received in the same transaction. 2012 1040 ez form Example 1. 2012 1040 ez form The adjusted basis of Emily's partnership interest is $30,000. 2012 1040 ez form She receives a distribution of property that has an adjusted basis of $20,000 to the partnership and $4,000 in cash. 2012 1040 ez form Her basis for the property is $20,000. 2012 1040 ez form Example 2. 2012 1040 ez form The adjusted basis of Steve's partnership interest is $10,000. 2012 1040 ez form He receives a distribution of $4,000 cash and property that has an adjusted basis to the partnership of $8,000. 2012 1040 ez form His basis for the distributed property is limited to $6,000 ($10,000 − $4,000, the cash he receives). 2012 1040 ez form Complete liquidation of partner's interest. 2012 1040 ez form   The basis of property received in complete liquidation of a partner's interest is the adjusted basis of the partner's interest in the partnership reduced by any money distributed to the partner in the same transaction. 2012 1040 ez form Partner's holding period. 2012 1040 ez form   A partner's holding period for property distributed to the partner includes the period the property was held by the partnership. 2012 1040 ez form If the property was contributed to the partnership by a partner, then the period it was held by that partner is also included. 2012 1040 ez form Basis divided among properties. 2012 1040 ez form   If the basis of property received is the adjusted basis of the partner's interest in the partnership (reduced by money received in the same transaction), it must be divided among the properties distributed to the partner. 2012 1040 ez form For property distributed after August 5, 1997, allocate the basis using the following rules. 2012 1040 ez form Allocate the basis first to unrealized receivables and inventory items included in the distribution by assigning a basis to each item equal to the partnership's adjusted basis in the item immediately before the distribution. 2012 1040 ez form If the total of these assigned bases exceeds the allocable basis, decrease the assigned bases by the amount of the excess. 2012 1040 ez form Allocate any remaining basis to properties other than unrealized receivables and inventory items by assigning a basis to each property equal to the partnership's adjusted basis in the property immediately before the distribution. 2012 1040 ez form If the allocable basis exceeds the total of these assigned bases, increase the assigned bases by the amount of the excess. 2012 1040 ez form If the total of these assigned bases exceeds the allocable basis, decrease the assigned bases by the amount of the excess. 2012 1040 ez form Allocating a basis increase. 2012 1040 ez form   Allocate any basis increase required in rule (2), above, first to properties with unrealized appreciation to the extent of the unrealized appreciation. 2012 1040 ez form If the basis increase is less than the total unrealized appreciation, allocate it among those properties in proportion to their respective amounts of unrealized appreciation. 2012 1040 ez form Allocate any remaining basis increase among all the properties in proportion to their respective fair market values. 2012 1040 ez form Example. 2012 1040 ez form Eun's basis in her partnership interest is $55,000. 2012 1040 ez form In a distribution in liquidation of her entire interest, she receives properties A and B, neither of which is inventory or unrealized receivables. 2012 1040 ez form Property A has an adjusted basis to the partnership of $5,000 and a fair market value of $40,000. 2012 1040 ez form Property B has an adjusted basis to the partnership of $10,000 and a fair market value of $10,000. 2012 1040 ez form To figure her basis in each property, Eun first assigns bases of $5,000 to property A and $10,000 to property B (their adjusted bases to the partnership). 2012 1040 ez form This leaves a $40,000 basis increase (the $55,000 allocable basis minus the $15,000 total of the assigned bases). 2012 1040 ez form She first allocates $35,000 to property A (its unrealized appreciation). 2012 1040 ez form The remaining $5,000 is allocated between the properties based on their fair market values. 2012 1040 ez form $4,000 ($40,000/$50,000) is allocated to property A and $1,000 ($10,000/$50,000) is allocated to property B. 2012 1040 ez form Eun's basis in property A is $44,000 ($5,000 + $35,000 + $4,000) and her basis in property B is $11,000 ($10,000 + $1,000). 2012 1040 ez form Allocating a basis decrease. 2012 1040 ez form   Use the following rules to allocate any basis decrease required in rule (1) or rule (2), earlier. 2012 1040 ez form Allocate the basis decrease first to items with unrealized depreciation to the extent of the unrealized depreciation. 2012 1040 ez form If the basis decrease is less than the total unrealized depreciation, allocate it among those items in proportion to their respective amounts of unrealized depreciation. 2012 1040 ez form Allocate any remaining basis decrease among all the items in proportion to their respective assigned basis amounts (as decreased in (1)). 2012 1040 ez form Example. 2012 1040 ez form Armando's basis in his partnership interest is $20,000. 2012 1040 ez form In a distribution in liquidation of his entire interest, he receives properties C and D, neither of which is inventory or unrealized receivables. 2012 1040 ez form Property C has an adjusted basis to the partnership of $15,000 and a fair market value of $15,000. 2012 1040 ez form Property D has an adjusted basis to the partnership of $15,000 and a fair market value of $5,000. 2012 1040 ez form To figure his basis in each property, Armando first assigns bases of $15,000 to property C and $15,000 to property D (their adjusted bases to the partnership). 2012 1040 ez form This leaves a $10,000 basis decrease (the $30,000 total of the assigned bases minus the $20,000 allocable basis). 2012 1040 ez form He allocates the entire $10,000 to property D (its unrealized depreciation). 2012 1040 ez form Armando's basis in property C is $15,000 and his basis in property D is $5,000 ($15,000 − $10,000). 2012 1040 ez form Distributions before August 6, 1997. 2012 1040 ez form   For property distributed before August 6, 1997, allocate the basis using the following rules. 2012 1040 ez form Allocate the basis first to unrealized receivables and inventory items included in the distribution to the extent of the partnership's adjusted basis in those items. 2012 1040 ez form If the partnership's adjusted basis in those items exceeded the allocable basis, allocate the basis among the items in proportion to their adjusted bases to the partnership. 2012 1040 ez form Allocate any remaining basis to other distributed properties in proportion to their adjusted bases to the partnership. 2012 1040 ez form Partner's interest more than partnership basis. 2012 1040 ez form   If the basis of a partner's interest to be divided in a complete liquidation of the partner's interest is more than the partnership's adjusted basis for the unrealized receivables and inventory items distributed, and if no other property is distributed to which the partner can apply the remaining basis, the partner has a capital loss to the extent of the remaining basis of the partnership interest. 2012 1040 ez form Special adjustment to basis. 2012 1040 ez form   A partner who acquired any part of his or her partnership interest in a sale or exchange or upon the death of another partner may be able to choose a special basis adjustment for property distributed by the partnership. 2012 1040 ez form To choose the special adjustment, the partner must have received the distribution within 2 years after acquiring the partnership interest. 2012 1040 ez form Also, the partnership must not have chosen the optional adjustment to basis when the partner acquired the partnership interest. 2012 1040 ez form   If a partner chooses this special basis adjustment, the partner's basis for the property distributed is the same as it would have been if the partnership had chosen the optional adjustment to basis. 2012 1040 ez form However, this assigned basis is not reduced by any depletion or depreciation that would have been allowed or allowable if the partnership had previously chosen the optional adjustment. 2012 1040 ez form   The choice must be made with the partner's tax return for the year of the distribution if the distribution includes any property subject to depreciation, depletion, or amortization. 2012 1040 ez form If the choice does not have to be made for the distribution year, it must be made with the return for the first year in which the basis of the distributed property is pertinent in determining the partner's income tax. 2012 1040 ez form   A partner choosing this special basis adjustment must attach a statement to his or her tax return that the partner chooses under section 732(d) of the Internal Revenue Code to adjust the basis of property received in a distribution. 2012 1040 ez form The statement must show the computation of the special basis adjustment for the property distributed and list the properties to which the adjustment has been allocated. 2012 1040 ez form Example. 2012 1040 ez form Chin Ho purchased a 25% interest in X partnership for $17,000 cash. 2012 1040 ez form At the time of the purchase, the partnership owned inventory having a basis to the partnership of $14,000 and a fair market value of $16,000. 2012 1040 ez form Thus, $4,000 of the $17,000 he paid was attributable to his share of inventory with a basis to the partnership of $3,500. 2012 1040 ez form Within 2 years after acquiring his interest, Chin Ho withdrew from the partnership and for his entire interest received cash of $1,500, inventory with a basis to the partnership of $3,500, and other property with a basis of $6,000. 2012 1040 ez form The value of the inventory received was 25% of the value of all partnership inventory. 2012 1040 ez form (It is immaterial whether the inventory he received was on hand when he acquired his interest. 2012 1040 ez form ) Since the partnership from which Chin Ho withdrew did not make the optional adjustment to basis, he chose to adjust the basis of the inventory received. 2012 1040 ez form His share of the partnership's basis for the inventory is increased by $500 (25% of the $2,000 difference between the $16,000 fair market value of the inventory and its $14,000 basis to the partnership at the time he acquired his interest). 2012 1040 ez form The adjustment applies only for purposes of determining his new basis in the inventory, and not for purposes of partnership gain or loss on disposition. 2012 1040 ez form The total to be allocated among the properties Chin Ho received in the distribution is $15,500 ($17,000 basis of his interest − $1,500 cash received). 2012 1040 ez form His basis in the inventory items is $4,000 ($3,500 partnership basis + $500 special adjustment). 2012 1040 ez form The remaining $11,500 is allocated to his new basis for the other property he received. 2012 1040 ez form Mandatory adjustment. 2012 1040 ez form   A partner does not always have a choice of making this special adjustment to basis. 2012 1040 ez form The special adjustment to basis must be made for a distribution of property (whether or not within 2 years after the partnership interest was acquired) if all the following conditions existed when the partner received the partnership interest. 2012 1040 ez form The fair market value of all partnership property (other than money) was more than 110% of its adjusted basis to the partnership. 2012 1040 ez form If there had been a liquidation of the partner's interest immediately after it was acquired, an allocation of the basis of that interest under the general rules (discussed earlier under Basis divided among properties) would have decreased the basis of property that could not be depreciated, depleted, or amortized and increased the basis of property that could be. 2012 1040 ez form The optional basis adjustment, if it had been chosen by the partnership, would have changed the partner's basis for the property actually distributed. 2012 1040 ez form Required statement. 2012 1040 ez form   Generally, if a partner chooses a special basis adjustment and notifies the partnership, or if the partnership makes a distribution for which the special basis adjustment is mandatory, the partnership must provide a statement to the partner. 2012 1040 ez form The statement must provide information necessary for the partner to compute the special basis adjustment. 2012 1040 ez form Marketable securities. 2012 1040 ez form   A partner's basis in marketable securities received in a partnership distribution, as determined in the preceding discussions, is increased by any gain recognized by treating the securities as money. 2012 1040 ez form See Marketable securities treated as money under Partner's Gain or Loss, earlier. 2012 1040 ez form The basis increase is allocated among the securities in proportion to their respective amounts of unrealized appreciation before the basis increase. 2012 1040 ez form Transactions Between Partnership and Partners For certain transactions between a partner and his or her partnership, the partner is treated as not being a member of the partnership. 2012 1040 ez form These transactions include the following. 2012 1040 ez form Performing services for, or transferring property to, a partnership if: There is a related allocation and distribution to a partner, and The entire transaction, when viewed together, is properly characterized as occurring between the partnership and a partner not acting in the capacity of a partner. 2012 1040 ez form Transferring money or other property to a partnership if: There is a related transfer of money or other property by the partnership to the contributing partner or another partner, and The transfers together are properly characterized as a sale or exchange of property. 2012 1040 ez form Payments by accrual basis partnership to cash basis partner. 2012 1040 ez form   A partnership that uses an accrual method of accounting cannot deduct any business expense owed to a cash basis partner until the amount is paid. 2012 1040 ez form However, this rule does not apply to guaranteed payments made to a partner, which are generally deductible when accrued. 2012 1040 ez form Guaranteed Payments Guaranteed payments are those made by a partnership to a partner that are determined without regard to the partnership's income. 2012 1040 ez form A partnership treats guaranteed payments for services, or for the use of capital, as if they were made to a person who is not a partner. 2012 1040 ez form This treatment is for purposes of determining gross income and deductible business expenses only. 2012 1040 ez form For other tax purposes, guaranteed payments are treated as a partner's distributive share of ordinary income. 2012 1040 ez form Guaranteed payments are not subject to income tax withholding. 2012 1040 ez form The partnership generally deducts guaranteed payments on line 10 of Form 1065 as a business expense. 2012 1040 ez form They are also listed on Schedules K and K-1 of the partnership return. 2012 1040 ez form The individual partner reports guaranteed payments on Schedule E (Form 1040) as ordinary income, along with his or her distributive share of the partnership's other ordinary income. 2012 1040 ez form Guaranteed payments made to partners for organizing the partnership or syndicating interests in the partnership are capital expenses. 2012 1040 ez form Generally, organizational and syndication expenses are not deductible by the partnership. 2012 1040 ez form However, a partnership can elect to deduct a portion of its organizational expenses and amortize the remaining expenses (see Business start-up and organizational costs in the Instructions for Form 1065). 2012 1040 ez form Organizational expenses (if the election is not made) and syndication expenses paid to partners must be reported on the partners' Schedule K-1 as guaranteed payments. 2012 1040 ez form Minimum payment. 2012 1040 ez form   If a partner is to receive a minimum payment from the partnership, the guaranteed payment is the amount by which the minimum payment is more than the partner's distributive share of the partnership income before taking into account the guaranteed payment. 2012 1040 ez form Example. 2012 1040 ez form Under a partnership agreement, Divya is to receive 30% of the partnership income, but not less than $8,000. 2012 1040 ez form The partnership has net income of $20,000. 2012 1040 ez form Divya's share, without regard to the minimum guarantee, is $6,000 (30% × $20,000). 2012 1040 ez form The guaranteed payment that can be deducted by the partnership is $2,000 ($8,000 − $6,000). 2012 1040 ez form Divya's income from the partnership is $8,000, and the remaining $12,000 of partnership income will be reported by the other partners in proportion to their shares under the partnership agreement. 2012 1040 ez form If the partnership net income had been $30,000, there would have been no guaranteed payment since her share, without regard to the guarantee, would have been greater than the guarantee. 2012 1040 ez form Self-employed health insurance premiums. 2012 1040 ez form   Premiums for health insurance paid by a partnership on behalf of a partner, for services as a partner, are treated as guaranteed payments. 2012 1040 ez form The partnership can deduct the payments as a business expense, and the partner must include them in gross income. 2012 1040 ez form However, if the partnership accounts for insurance paid for a partner as a reduction in distributions to the partner, the partnership cannot deduct the premiums. 2012 1040 ez form   A partner who qualifies can deduct 100% of the health insurance premiums paid by the partnership on his or her behalf as an adjustment to income. 2012 1040 ez form The partner cannot deduct the premiums for any calendar month, or part of a month, in which the partner is eligible to participate in any subsidized health plan maintained by any employer of the partner, the partner's spouse, the partner's dependents, or any children under age 27 who are not dependents. 2012 1040 ez form For more information on the self-employed health insurance deduction, see chapter 6 in Publication 535. 2012 1040 ez form Including payments in partner's income. 2012 1040 ez form   Guaranteed payments are included in income in the partner's tax year in which the partnership's tax year ends. 2012 1040 ez form Example 1. 2012 1040 ez form Under the terms of a partnership agreement, Erica is entitled to a fixed annual payment of $10,000 without regard to the income of the partnership. 2012 1040 ez form Her distributive share of the partnership income is 10%. 2012 1040 ez form The partnership has $50,000 of ordinary income after deducting the guaranteed payment. 2012 1040 ez form She must include ordinary income of $15,000 ($10,000 guaranteed payment + $5,000 ($50,000 × 10%) distributive share) on her individual income tax return for her tax year in which the partnership's tax year ends. 2012 1040 ez form Example 2. 2012 1040 ez form Lamont is a calendar year taxpayer who is a partner in a partnership. 2012 1040 ez form The partnership uses a fiscal year that ended January 31, 2013. 2012 1040 ez form Lamont received guaranteed payments from the partnership from February 1, 2012, until December 31, 2012. 2012 1040 ez form He must include these guaranteed payments in income for 2013 and report them on his 2013 income tax return. 2012 1040 ez form Payments resulting in loss. 2012 1040 ez form   If guaranteed payments to a partner result in a partnership loss in which the partner shares, the partner must report the full amount of the guaranteed payments as ordinary income. 2012 1040 ez form The partner separately takes into account his or her distributive share of the partnership loss, to the extent of the adjusted basis of the partner's partnership interest. 2012 1040 ez form Sale or Exchange of Property Special rules apply to a sale or exchange of property between a partnership and certain persons. 2012 1040 ez form Losses. 2012 1040 ez form   Losses will not be allowed from a sale or exchange of property (other than an interest in the partnership) directly or indirectly between a partnership and a person whose direct or indirect interest in the capital or profits of the partnership is more than 50%. 2012 1040 ez form   If the sale or exchange is between two partnerships in which the same persons directly or indirectly own more than 50% of the capital or profits interests in each partnership, no deduction of a loss is allowed. 2012 1040 ez form   The basis of each partner's interest in the partnership is decreased (but not below zero) by the partner's share of the disallowed loss. 2012 1040 ez form   If the purchaser later sells the property, only the gain realized that is greater than the loss not allowed will be taxable. 2012 1040 ez form If any gain from the sale of the property is not recognized because of this rule, the basis of each partner's interest in the partnership is increased by the partner's share of that gain. 2012 1040 ez form Gains. 2012 1040 ez form   Gains are treated as ordinary income in a sale or exchange of property directly or indirectly between a person and a partnership, or between two partnerships, if both of the following tests are met. 2012 1040 ez form More than 50% of the capital or profits interest in the partnership(s) is directly or indirectly owned by the same person(s). 2012 1040 ez form The property in the hands of the transferee immediately after the transfer is not a capital asset. 2012 1040 ez form Property that is not a capital asset includes accounts receivable, inventory, stock-in-trade, and depreciable or real property used in a trade or business. 2012 1040 ez form More than 50% ownership. 2012 1040 ez form   To determine if there is more than 50% ownership in partnership capital or profits, the following rules apply. 2012 1040 ez form An interest directly or indirectly owned by, or for, a corporation, partnership, estate, or trust is considered to be owned proportionately by, or for, its shareholders, partners, or beneficiaries. 2012 1040 ez form An individual is considered to own the interest directly or indirectly owned by, or for, the individual's family. 2012 1040 ez form For this rule, “family” includes only brothers, sisters, half-brothers, half-sisters, spouses, ancestors, and lineal descendants. 2012 1040 ez form If a person is considered to own an interest using rule (1), that person (the “constructive owner”) is treated as if actually owning that interest when rules (1) and (2) are applied. 2012 1040 ez form However, if a person is considered to own an interest using rule (2), that person is not treated as actually owning that interest in reapplying rule (2) to make another person the constructive owner. 2012 1040 ez form Example. 2012 1040 ez form Individuals A and B and Trust T are equal partners in Partnership ABT. 2012 1040 ez form A's husband, AH, is the sole beneficiary of Trust T. 2012 1040 ez form Trust T's partnership interest will be attributed to AH only for the purpose of further attributing the interest to A. 2012 1040 ez form As a result, A is a more-than-50% partner. 2012 1040 ez form This means that any deduction for losses on transactions between her and ABT will not be allowed, and gain from property that in the hands of the transferee is not a capital asset is treated as ordinary, rather than capital, gain. 2012 1040 ez form More information. 2012 1040 ez form   For more information on these special rules, see Sales and Exchanges Between Related Persons in chapter 2 of Publication 544. 2012 1040 ez form Contribution of Property Usually, neither the partner nor the partnership recognizes a gain or loss when property is contributed to the partnership in exchange for a partnership interest. 2012 1040 ez form This applies whether a partnership is being formed or is already operating. 2012 1040 ez form The partnership's holding period for the property includes the partner's holding period. 2012 1040 ez form The contribution of limited partnership interests in one partnership for limited partnership interests in another partnership qualifies as a tax-free contribution of property to the second partnership if the transaction is made for business purposes. 2012 1040 ez form The exchange is not subject to the rules explained later under Disposition of Partner's Interest. 2012 1040 ez form Disguised sales. 2012 1040 ez form   A contribution of money or other property to the partnership followed by a distribution of different property from the partnership to the partner is treated not as a contribution and distribution, but as a sale of property, if both of the following tests are met. 2012 1040 ez form The distribution would not have been made but for the contribution. 2012 1040 ez form The partner's right to the distribution does not depend on the success of partnership operations. 2012 1040 ez form   All facts and circumstances are considered in determining if the contribution and distribution are more properly characterized as a sale. 2012 1040 ez form However, if the contribution and distribution occur within 2 years of each other, the transfers are presumed to be a sale unless the facts clearly indicate that the transfers are not a sale. 2012 1040 ez form If the contribution and distribution occur more than 2 years apart, the transfers are presumed not to be a sale unless the facts clearly indicate that the transfers are a sale. 2012 1040 ez form Form 8275 required. 2012 1040 ez form   A partner must attach Form 8275, Disclosure Statement, (or other statement) to his or her return if the partner contributes property to a partnership and, within 2 years (before or after the contribution), the partnership transfers money or other consideration to the partner. 2012 1040 ez form For exceptions to this requirement, see section 1. 2012 1040 ez form 707-3(c)(2) of the regulations. 2012 1040 ez form   A partnership must attach Form 8275 (or other statement) to its return if it distributes property to a partner, and, within 2 years (before or after the distribution), the partner transfers money or other consideration to the partnership. 2012 1040 ez form   Form 8275 must include the following information. 2012 1040 ez form A caption identifying the statement as a disclosure under section 707 of the Internal Revenue Code. 2012 1040 ez form A description of the transferred property or money, including its value. 2012 1040 ez form A description of any relevant facts in determining if the transfers are properly viewed as a disguised sale. 2012 1040 ez form See section 1. 2012 1040 ez form 707-3(b)(2) of the regulations for a description of the facts and circumstances considered in determining if the transfers are a disguised sale. 2012 1040 ez form Contribution to partnership treated as investment company. 2012 1040 ez form   Gain is recognized when property is contributed (in exchange for an interest in the partnership) to a partnership that would be treated as an investment company if it were incorporated. 2012 1040 ez form   A partnership is generally treated as an investment company if over 80% of the value of its assets is held for investment and consists of certain readily marketable items. 2012 1040 ez form These items include money, stocks and other equity interests in a corporation, and interests in regulated investment companies and real estate investment trusts. 2012 1040 ez form For more information, see section 351(e)(1) of the Internal Revenue Code and the related regulations. 2012 1040 ez form Whether a partnership is treated as an investment company under this test is ordinarily determined immediately after the transfer of property. 2012 1040 ez form   This rule applies to limited partnerships and general partnerships, regardless of whether they are privately formed or publicly syndicated. 2012 1040 ez form Contribution to foreign partnership. 2012 1040 ez form   A domestic partnership that contributed property after August 5, 1997, to a foreign partnership in exchange for a partnership interest may have to file Form 8865 if either of the following apply. 2012 1040 ez form Immediately after the contribution, the partnership owned, directly or indirectly, at least a 10% interest in the foreign partnership. 2012 1040 ez form The fair market value of the property contributed to the foreign partnership, when added to other contributions of property made to the partnership during the preceding 12-month period, is greater than $100,000. 2012 1040 ez form   The partnership may also have to file Form 8865, even if no contributions are made during the tax year, if it owns a 10% or more interest in a foreign partnership at any time during the year. 2012 1040 ez form See the form instructions for more information. 2012 1040 ez form Basis of contributed property. 2012 1040 ez form   If a partner contributes property to a partnership, the partnership's basis for determining depreciation, depletion, gain, or loss for the property is the same as the partner's adjusted basis for the property when it was contributed, increased by any gain recognized by the partner at the time of contribution. 2012 1040 ez form Allocations to account for built-in gain or loss. 2012 1040 ez form   The fair market value of property at the time it is contributed may be different from the partner's adjusted basis. 2012 1040 ez form The partnership must allocate among the partners any income, deduction, gain, or loss on the property in a manner that will account for the difference. 2012 1040 ez form This rule also applies to contributions of accounts payable and other accrued but unpaid items of a cash basis partner. 2012 1040 ez form   The partnership can use different allocation methods for different items of contributed property. 2012 1040 ez form A single reasonable method must be consistently applied to each item, and the overall method or combination of methods must be reasonable. 2012 1040 ez form See section 1. 2012 1040 ez form 704-3 of the regulations for allocation methods generally considered reasonable. 2012 1040 ez form   If the partnership sells contributed property and recognizes gain or loss, built-in gain or loss is allocated to the contributing partner. 2012 1040 ez form If contributed property is subject to depreciation or other cost recovery, the allocation of deductions for these items takes into account built-in gain or loss on the property. 2012 1040 ez form However, the total depreciation, depletion, gain, or loss allocated to partners cannot be more than the depreciation or depletion allowable to the partnership or the gain or loss realized by the partnership. 2012 1040 ez form Example. 2012 1040 ez form Areta and Sofia formed an equal partnership. 2012 1040 ez form Areta contributed $10,000 in cash to the partnership and Sofia contributed depreciable property with a fair market value of $10,000 and an adjusted basis of $4,000. 2012 1040 ez form The partnership's basis for depreciation is limited to the adjusted basis of the property in Sofia's hands, $4,000. 2012 1040 ez form In effect, Areta purchased an undivided one-half interest in the depreciable property with her contribution of $10,000. 2012 1040 ez form Assuming that the depreciation rate is 10% a year under the General Depreciation System (GDS), she would have been entitled to a depreciation deduction of $500 per year, based on her interest in the partnership, if the adjusted basis of the property equaled its fair market value when contributed. 2012 1040 ez form To simplify this example, the depreciation deductions are determined without regard to any first-year depreciation conventions. 2012 1040 ez form However, since the partnership is allowed only $400 per year of depreciation (10% of $4,000), no more than $400 can be allocated between the partners. 2012 1040 ez form The entire $400 must be allocated to Areta. 2012 1040 ez form Distribution of contributed property to another partner. 2012 1040 ez form   If a partner contributes property to a partnership and the partnership distributes the property to another partner within 7 years of the contribution, the contributing partner must recognize gain or loss on the distribution. 2012 1040 ez form   The recognized gain or loss is the amount the contributing partner would have recognized if the property had been sold for its fair market value when it was distributed. 2012 1040 ez form This amount is the difference between the property's basis and its fair market value at the time of contribution. 2012 1040 ez form The character of the gain or loss will be the same as the character of the gain or loss that would have resulted if the partnership had sold the property to the distributee partner. 2012 1040 ez form Appropriate adjustments must be made to the adjusted basis of the contributing partner's partnership interest and to the adjusted basis of the property distributed to reflect the recognized gain or loss. 2012 1040 ez form Disposition of certain contributed property. 2012 1040 ez form   The following rules determine the character of the partnership's gain or loss on a disposition of certain types of contributed property. 2012 1040 ez form Unrealized receivables. 2012 1040 ez form If the property was an unrealized receivable in the hands of the contributing partner, any gain or loss on its disposition by the partnership is ordinary income or loss. 2012 1040 ez form Unrealized receivables are defined later under Payments for Unrealized Receivables and Inventory Items. 2012 1040 ez form When reading the definition, substitute “partner” for “partnership. 2012 1040 ez form ” Inventory items. 2012 1040 ez form If the property was an inventory item in the hands of the contributing partner, any gain or loss on its disposition by the partnership within 5 years after the contribution is ordinary income or loss. 2012 1040 ez form Inventory items are defined later in Payments for Unrealized Receivables and Inventory Items. 2012 1040 ez form Capital loss property. 2012 1040 ez form If the property was a capital asset in the contributing partner's hands, any loss on its disposition by the partnership within 5 years after the contribution is a capital loss. 2012 1040 ez form The capital loss is limited to the amount by which the partner's adjusted basis for the property exceeded the property's fair market value immediately before the contribution. 2012 1040 ez form Substituted basis property. 2012 1040 ez form If the disposition of any of the property listed in (1), (2), or (3) is a nonrecognition transaction, these rules apply when the recipient of the property disposes of any substituted basis property (other than certain corporate stock) resulting from the transaction. 2012 1040 ez form Contribution of Services A partner can acquire an interest in partnership capital or profits as compensation for services performed or to be performed. 2012 1040 ez form Capital interest. 2012 1040 ez form   A capital interest is an interest that would give the holder a share of the proceeds if the partnership's assets were sold at fair market value and the proceeds were distributed in a complete liquidation of the partnership. 2012 1040 ez form This determination generally is made at the time of receipt of the partnership interest. 2012 1040 ez form The fair market value of such an interest received by a partner as compensation for services must generally be included in the partner's gross income in the first tax year in which the partner can transfer the interest or the interest is not subject to a substantial risk of forfeiture. 2012 1040 ez form The capital interest transferred as compensation for services is subject to the rules for restricted property discussed in Publication 525 under Employee Compensation. 2012 1040 ez form   The fair market value of an interest in partnership capital transferred to a partner as payment for services to the partnership is a guaranteed payment, discussed earlier. 2012 1040 ez form Profits interest. 2012 1040 ez form   A profits interest is a partnership interest other than a capital interest. 2012 1040 ez form If a person receives a profits interest for providing services to, or for the benefit of, a partnership in a partner capacity or in anticipation of being a partner, the receipt of such an interest is not a taxable event for the partner or the partnership. 2012 1040 ez form However, this does not apply in the following situations. 2012 1040 ez form The profits interest relates to a substantially certain and predictable stream of income from partnership assets, such as income from high-quality debt securities or a high-quality net lease. 2012 1040 ez form Within 2 years of receipt, the partner disposes of the profits interest. 2012 1040 ez form The profits interest is a limited partnership interest in a publicly traded partnership. 2012 1040 ez form   A profits interest transferred as compensation for services is not subject to the rules for restricted property that apply to capital interests. 2012 1040 ez form Basis of Partner's Interest The basis of a partnership interest is the money plus the adjusted basis of any property the partner contributed. 2012 1040 ez form If the partner must recognize gain as a result of the contribution, this gain is included in the basis of his or her interest. 2012 1040 ez form Any increase in a partner's individual liabilities because of an assumption of partnership liabilities is considered a contribution of money to the partnership by the partner. 2012 1040 ez form Interest acquired by gift, etc. 2012 1040 ez form   If a partner acquires an interest in a partnership by gift, inheritance, or under any circumstance other than by a contribution of money or property to the partnership, the partner's basis must be determined using the basis rules described in Publication 551. 2012 1040 ez form Adjusted Basis There is a worksheet for adjusting the basis of a partner's interest in the partnership in the Partner's Instructions for Schedule K-1 (Form 1065). 2012 1040 ez form The basis of an interest in a partnership is increased or decreased by certain items. 2012 1040 ez form Increases. 2012 1040 ez form   A partner's basis is increased by the following items. 2012 1040 ez form The partner's additional contributions to the partnership, including an increased share of, or assumption of, partnership liabilities. 2012 1040 ez form The partner's distributive share of taxable and nontaxable partnership income. 2012 1040 ez form The partner's distributive share of the excess of the deductions for depletion over the basis of the depletable property, unless the property is oil or gas wells whose basis has been allocated to partners. 2012 1040 ez form Decreases. 2012 1040 ez form   The partner's basis is decreased (but never below zero) by the following items. 2012 1040 ez form The money (including a decreased share of partnership liabilities or an assumption of the partner's individual liabilities by the partnership) and adjusted basis of property distributed to the partner by the partnership. 2012 1040 ez form The partner's distributive share of the partnership losses (including capital losses). 2012 1040 ez form The partner's distributive share of nondeductible partnership expenses that are not capital expenditures. 2012 1040 ez form This includes the partner's share of any section 179 expenses, even if the partner cannot deduct the entire amount on his or her individual income tax return. 2012 1040 ez form The partner's deduction for depletion for any partnership oil and gas wells, up to the proportionate share of the adjusted basis of the wells allocated to the partner. 2012 1040 ez form Partner's liabilities assumed by partnership. 2012 1040 ez form   If contributed property is subject to a debt or if a partner's liabilities are assumed by the partnership, the basis of that partner's interest is reduced (but not below zero) by the liability assumed by the other partners. 2012 1040 ez form This partner must reduce his or her basis because the assumption of the liability is treated as a distribution of money to that partner. 2012 1040 ez form The other partners' assumption of the liability is treated as a contribution by them of money to the partnership. 2012 1040 ez form See Effect of Partnership Liabilities , later. 2012 1040 ez form Example 1. 2012 1040 ez form Ivan acquired a 20% interest in a partnership by contributing property that had an adjusted basis to him of $8,000 and a $4,000 mortgage. 2012 1040 ez form The partnership assumed payment of the mortgage. 2012 1040 ez form The basis of Ivan's interest is: Adjusted basis of contributed property $8,000 Minus: Part of mortgage assumed by other partners (80% × $4,000) 3,200 Basis of Ivan's partnership interest $4,800 Example 2. 2012 1040 ez form If, in Example 1, the contributed property had a $12,000 mortgage, the basis of Ivan's partnership interest would be zero. 2012 1040 ez form The $1,600 difference between the mortgage assumed by the other partners, $9,600 (80% × $12,000), and his basis of $8,000 would be treated as capital gain from the sale or exchange of a partnership interest. 2012 1040 ez form However, this gain would not increase the basis of his partnership interest. 2012 1040 ez form Book value of partner's interest. 2012 1040 ez form   The adjusted basis of a partner's interest is determined without considering any amount shown in the partnership books as a capital, equity, or similar account. 2012 1040 ez form Example. 2012 1040 ez form Enzo contributes to his partnership property that has an adjusted basis of $400 and a fair market value of $1,000. 2012 1040 ez form His partner contributes $1,000 cash. 2012 1040 ez form While each partner has increased his capital account by $1,000, which will be re