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2012 Income Tax Filing

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2012 Income Tax Filing

2012 income tax filing 3. 2012 income tax filing   Farm Income Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Schedule F (Form 1040) Sales of Farm ProductsSchedule F. 2012 income tax filing Form 4797. 2012 income tax filing Sales Caused by Weather-Related Conditions Rents (Including Crop Shares)Crop Shares Agricultural Program PaymentsCommodity Credit Corporation (CCC) Loans Conservation Reserve Program (CRP) Crop Insurance and Crop Disaster Payments Feed Assistance and Payments Cost-Sharing Exclusion (Improvements) Payments Under the Farm Security and Rural Investment Act of 2002 and Under the Food, Conservation, and Energy Act of 2008 Tobacco Quota Buyout Program Payments Other Payments Payment to More Than One Person Income From CooperativesPatronage Dividends Per-Unit Retain Certificates Cancellation of DebtGeneral Rule Exceptions Exclusions Income From Other SourcesSod. 2012 income tax filing Granting the right to remove deposits. 2012 income tax filing Income Averaging for FarmersElected Farm Income (EFI) How To Figure the Tax Effect on Other Tax Determinations Tax for Certain Children Who Have Unearned Income Alternative Minimum Tax (AMT) Schedule J Introduction You may receive income from many sources. 2012 income tax filing You must report the income from all the different sources on your tax return, unless it is excluded by law. 2012 income tax filing Where you report the income on your tax return depends on its source. 2012 income tax filing This chapter discusses farm income you report on Schedule F (Form 1040), Profit or Loss From Farming. 2012 income tax filing For information on where to report other income, see the Instructions for Form 1040, U. 2012 income tax filing S. 2012 income tax filing Individual Income Tax Return. 2012 income tax filing Accounting method. 2012 income tax filing   The rules discussed in this chapter assume you use the cash method of accounting. 2012 income tax filing Under the cash method, you generally include an item of income in gross income in the year you receive it. 2012 income tax filing See Cash Method in chapter 2. 2012 income tax filing   If you use an accrual method of accounting, different rules may apply to your situation. 2012 income tax filing See Accrual Method in chapter 2. 2012 income tax filing Topics - This chapter discusses: Schedule F Sales of farm products Rents (including crop shares) Agricultural program payments Income from cooperatives Cancellation of debt Income from other sources Income averaging for farmers Useful Items - You may want to see: Publication 525 Taxable and Nontaxable Income 550 Investment Income and Expenses 908 Bankruptcy Tax Guide 925 Passive Activity and At-Risk Rules 4681 Canceled Debts, Foreclosures, Repossessions, and Abandonments Form (and Instructions) 982 Reduction of Tax Attributes Due to Discharge of Indebtedness Sch E (Form 1040) Supplemental Income and Loss Sch J (Form 1040) Income Averaging for Farmers and Fishermen 1099-G Certain Government Payments 1099-PATR Taxable Distributions Received From Cooperatives 4797 Sales of Business Property 4835 Farm Rental Income and Expenses See chapter 16 for information about getting publications and forms. 2012 income tax filing Schedule F (Form 1040) Individuals, trusts, and partnerships report farm income on Schedule F (Form 1040), Profit or Loss From Farming. 2012 income tax filing Use this schedule to figure the net profit or loss from regular farming operations. 2012 income tax filing Income from farming reported on Schedule F includes amounts you receive from cultivating, operating, or managing a farm for gain or profit, either as owner or tenant. 2012 income tax filing This includes income from operating a stock, dairy, poultry, fish, fruit, or truck farm and income from operating a plantation, ranch, range, or orchard. 2012 income tax filing It also includes income from the sale of crop shares if you materially participate in producing the crop. 2012 income tax filing See Rents (Including Crop Shares) , later. 2012 income tax filing Income received from operating a nursery, which specializes in growing ornamental plants, is considered to be income from farming. 2012 income tax filing Income reported on Schedule F does not include gains or losses from sales or other dispositions of the following farm assets. 2012 income tax filing Land. 2012 income tax filing Depreciable farm equipment. 2012 income tax filing Buildings and structures. 2012 income tax filing Livestock held for draft, breeding, sport, or dairy purposes. 2012 income tax filing Gains and losses from most dispositions of farm assets are discussed in chapters 8 and 9. 2012 income tax filing Gains and losses from casualties, thefts, and condemnations are discussed in chapter 11. 2012 income tax filing Sales of Farm Products Where to report. 2012 income tax filing    Table 3-1 shows where to report the sale of farm products on your tax return. 2012 income tax filing Schedule F. 2012 income tax filing   Amounts received from the sales of products you raised on your farm for sale (or bought for resale), such as livestock, produce, or grains, are reported on Schedule F. 2012 income tax filing This includes money and the fair market value of any property or services you receive. 2012 income tax filing When you sell farm products bought for resale, your profit or loss is the difference between your selling price (money plus the fair market value of any property) and your basis in the item (usually the cost). 2012 income tax filing See chapter 6 for information on the basis of assets. 2012 income tax filing You generally report these amounts on Schedule F for the year you receive payment. 2012 income tax filing Example. 2012 income tax filing In 2012, you bought 20 feeder calves for $11,000 for resale. 2012 income tax filing You sold them in 2013 for $21,000. 2012 income tax filing You report the $21,000 sales price on Schedule F, line 1b, subtract your $11,000 basis on line 1d, and report the resulting $10,000 profit on line 1e. 2012 income tax filing Form 4797. 2012 income tax filing   Sales of livestock held for draft, breeding, sport, or dairy purposes may result in ordinary or capital gains or losses, depending on the circumstances. 2012 income tax filing In either case, you should always report these sales on Form 4797 instead of Schedule F. 2012 income tax filing See Livestock under Ordinary or Capital Gain or Loss in chapter 8. 2012 income tax filing Animals you do not hold primarily for sale are considered business assets of your farm. 2012 income tax filing Table 3-1. 2012 income tax filing Where To Report Sales of Farm Products Item Sold Schedule F Form 4797 Farm products raised for sale X   Farm products bought for resale X   Farm assets not held primarily for sale, such as livestock held for draft, breeding, sport, or dairy purposes (bought or raised)   X Sale by agent. 2012 income tax filing   If your agent sells your farm products, you have constructive receipt of the income when your agent receives payment and you must include the net proceeds from the sale in gross income for the year the agent receives payment. 2012 income tax filing This applies even if your agent pays you in a later year. 2012 income tax filing For a discussion on constructive receipt of income, see Cash Method under Accounting Methods in chapter 2. 2012 income tax filing Sales Caused by Weather-Related Conditions If you sell or exchange more livestock, including poultry, than you normally would in a year because of a drought, flood, or other weather-related condition, you may be able to postpone reporting the gain from the additional animals until the next year. 2012 income tax filing You must meet all the following conditions to qualify. 2012 income tax filing Your principal trade or business is farming. 2012 income tax filing You use the cash method of accounting. 2012 income tax filing You can show that, under your usual business practices, you would not have sold or exchanged the additional animals this year except for the weather-related condition. 2012 income tax filing The weather-related condition caused an area to be designated as eligible for assistance by the federal government. 2012 income tax filing Sales or exchanges made before an area became eligible for federal assistance qualify if the weather-related condition that caused the sale or exchange also caused the area to be designated as eligible for federal assistance. 2012 income tax filing The designation can be made by the President, the Department of Agriculture (or any of its agencies), or by other federal departments or agencies. 2012 income tax filing A weather-related sale or exchange of livestock (other than poultry) held for draft, breeding, or dairy purposes may be an involuntary conversion. 2012 income tax filing See Other Involuntary Conversions in chapter 11. 2012 income tax filing Usual business practice. 2012 income tax filing   You must determine the number of animals you would have sold had you followed your usual business practice in the absence of the weather-related condition. 2012 income tax filing Do this by considering all the facts and circumstances, but do not take into account your sales in any earlier year for which you postponed the gain. 2012 income tax filing If you have not yet established a usual business practice, rely on the usual business practices of similarly situated farmers in your general region. 2012 income tax filing Connection with affected area. 2012 income tax filing   The livestock does not have to be raised or sold in an area affected by a weather-related condition for the postponement to apply. 2012 income tax filing However, the sale must occur solely because of a weather-related condition that affected the water, grazing, or other requirements of the livestock. 2012 income tax filing This requirement generally will not be met if the costs of feed, water, or other requirements of the livestock affected by the weather-related condition are not substantial in relation to the total costs of holding the livestock. 2012 income tax filing Classes of livestock. 2012 income tax filing   You must figure the amount to be postponed separately for each generic class of animals—for example, hogs, sheep, and cattle. 2012 income tax filing Do not separate animals into classes based on age, sex, or breed. 2012 income tax filing Amount to be postponed. 2012 income tax filing   Follow these steps to figure the amount of gain to be postponed for each class of animals. 2012 income tax filing Divide the total income realized from the sale of all livestock in the class during the tax year by the total number of such livestock sold. 2012 income tax filing For this purpose, do not treat any postponed gain from the previous year as income received from the sale of livestock. 2012 income tax filing Multiply the result in (1) by the excess number of such livestock sold solely because of weather-related conditions. 2012 income tax filing Example. 2012 income tax filing You are a calendar year taxpayer and you normally sell 100 head of beef cattle a year. 2012 income tax filing As a result of drought, you sold 135 head during 2012. 2012 income tax filing You realized $70,200 from the sale. 2012 income tax filing On August 9, 2012, as a result of drought, the affected area was declared a disaster area eligible for federal assistance. 2012 income tax filing The income you can postpone until 2013 is $18,200 [($70,200 ÷ 135) × 35]. 2012 income tax filing How to postpone gain. 2012 income tax filing   To postpone gain, attach a statement to your tax return for the year of the sale. 2012 income tax filing The statement must include your name and address and give the following information for each class of livestock for which you are postponing gain. 2012 income tax filing A statement that you are postponing gain under Internal Revenue Code (IRC) section 451(e). 2012 income tax filing Evidence of the weather-related conditions that forced the early sale or exchange of the livestock and the date, if known, on which an area was designated as eligible for assistance by the federal government because of weather-related conditions. 2012 income tax filing A statement explaining the relationship of the area affected by the weather-related condition to your early sale or exchange of the livestock. 2012 income tax filing The number of animals sold in each of the 3 preceding years. 2012 income tax filing The number of animals you would have sold in the tax year had you followed your normal business practice in the absence of weather-related conditions. 2012 income tax filing The total number of animals sold and the number sold because of weather-related conditions during the tax year. 2012 income tax filing A computation, as described above, of the income to be postponed for each class of livestock. 2012 income tax filing   Generally, you must file the statement and the return by the due date of the return, including extensions. 2012 income tax filing However, for sales or exchanges treated as an involuntary conversion from weather-related sales of livestock in an area eligible for federal assistance (discussed in chapter 11), you can file this statement at any time during the replacement period. 2012 income tax filing For other sales or exchanges, if you timely filed your return for the year without postponing gain, you can still postpone gain by filing an amended return within 6 months of the due date of the return (excluding extensions). 2012 income tax filing Attach the statement to the amended return and write “Filed pursuant to section 301. 2012 income tax filing 9100-2” at the top of the amended return. 2012 income tax filing File the amended return at the same address you filed the original return. 2012 income tax filing Once you have filed the statement, you can cancel your postponement of gain only with the approval of the IRS. 2012 income tax filing Rents (Including Crop Shares) The rent you receive for the use of your farmland is generally rental income, not farm income. 2012 income tax filing However, if you materially participate in farming operations on the land, the rent is farm income. 2012 income tax filing See Landlord Participation in Farming in chapter 12. 2012 income tax filing Pasture income and rental. 2012 income tax filing   If you pasture someone else's livestock and take care of them for a fee, the income is from your farming business. 2012 income tax filing You must enter it as Other income on Schedule F. 2012 income tax filing If you simply rent your pasture for a flat cash amount without providing services, report the income as rent on Part I of Schedule E (Form 1040), Supplemental Income and Loss. 2012 income tax filing Crop Shares You must include rent you receive in the form of crop shares in income in the year you convert the shares to money or the equivalent of money. 2012 income tax filing It does not matter whether you use the cash method of accounting or an accrual method of accounting. 2012 income tax filing If you materially participate in operating a farm from which you receive rent in the form of crop shares or livestock, the rental income is included in self-employment income. 2012 income tax filing See Landlord Participation in Farming in chapter 12. 2012 income tax filing Report the rental income on Schedule F. 2012 income tax filing If you do not materially participate in operating the farm, report this income on Form 4835 and carry the net income or loss to Schedule E (Form 1040). 2012 income tax filing The income is not included in self-employment income. 2012 income tax filing Crop shares you use to feed livestock. 2012 income tax filing   Crop shares you receive as a landlord and feed to your livestock are considered converted to money when fed to the livestock. 2012 income tax filing You must include the fair market value of the crop shares in income at that time. 2012 income tax filing You are entitled to a business expense deduction for the livestock feed in the same amount and at the same time you include the fair market value of the crop share as rental income. 2012 income tax filing Although these two transactions cancel each other for figuring adjusted gross income on Form 1040, they may be necessary to figure your self-employment tax. 2012 income tax filing See  chapter 12. 2012 income tax filing Crop shares you give to others (gift). 2012 income tax filing   Crop shares you receive as a landlord and give to others are considered converted to money when you make the gift. 2012 income tax filing You must report the fair market value of the crop share as income, even though someone else receives payment for the crop share. 2012 income tax filing Example. 2012 income tax filing A tenant farmed part of your land under a crop-share arrangement. 2012 income tax filing The tenant harvested and delivered the crop in your name to an elevator company. 2012 income tax filing Before selling any of the crop, you instructed the elevator company to cancel your warehouse receipt and make out new warehouse receipts in equal amounts of the crop in the names of your children. 2012 income tax filing They sell their crop shares in the following year and the elevator company makes payments directly to your children. 2012 income tax filing In this situation, you are considered to have received rental income and then made a gift of that income. 2012 income tax filing You must include the fair market value of the crop shares in your income for the tax year you gave the crop shares to your children. 2012 income tax filing Crop share loss. 2012 income tax filing   If you are involved in a rental or crop-share lease arrangement, any loss from these activities may be subject to the limits under the passive loss rules. 2012 income tax filing See Publication 925 for information on these rules. 2012 income tax filing Agricultural Program Payments You must include in income most government payments, such as those for approved conservation practices, direct payments, and counter-cyclical payments, whether you receive them in cash, materials, services, or commodity certificates. 2012 income tax filing However, you can exclude from income some payments you receive under certain cost-sharing conservation programs. 2012 income tax filing See Cost-Sharing Exclusion (Improvements) , later. 2012 income tax filing Report the agricultural program payment on the appropriate line of Schedule F, Part I. 2012 income tax filing Report the full amount even if you return a government check for cancellation, refund any of the payment you receive, or the government collects all or part of the payment from you by reducing the amount of some other payment or Commodity Credit Corporation (CCC) loan. 2012 income tax filing However, you can deduct the amount you refund or return or that reduces some other payment or loan to you. 2012 income tax filing Claim the deduction on Schedule F for the year of repayment or reduction. 2012 income tax filing Commodity Credit Corporation (CCC) Loans Generally, you do not report loans you receive as income. 2012 income tax filing However, if you pledge part or all of your production to secure a CCC loan, you can treat the loan as if it were a sale of the crop and report the loan proceeds as income in the year you receive them. 2012 income tax filing You do not need approval from the IRS to adopt this method of reporting CCC loans. 2012 income tax filing Once you report a CCC loan as income for the year received, you generally must report all CCC loans in that year and later years in the same way. 2012 income tax filing However, you can obtain for your tax year an automatic consent to change your method of accounting for loans received from the CCC, from including the loan amount in gross income for the tax year in which the loan is received to treating the loan amount as a loan. 2012 income tax filing For more information, see Part I of the Instructions for Form 3115 and Revenue Procedure 2008-52. 2012 income tax filing Revenue Procedure 2008-52, 2008-36 I. 2012 income tax filing R. 2012 income tax filing B. 2012 income tax filing 587, is available at  www. 2012 income tax filing irs. 2012 income tax filing gov/irb/2008-36_IRB/ar09. 2012 income tax filing html. 2012 income tax filing You can request income tax withholding from CCC loan payments you receive. 2012 income tax filing Use Form W-4V, Voluntary Withholding Request. 2012 income tax filing See chapter 16 for information about ordering the form. 2012 income tax filing To elect to report a CCC loan as income, include the loan proceeds as income on Schedule F, line 7a, for the year you receive it. 2012 income tax filing Attach a statement to your return showing the details of the loan. 2012 income tax filing You must file the statement and the return by the due date of the return, including extensions. 2012 income tax filing If you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). 2012 income tax filing Attach the statement to the amended return and write “Filed pursuant to section 301. 2012 income tax filing 9100-2” at the top of the return. 2012 income tax filing File the amended return at the same address you filed the original return. 2012 income tax filing When you make this election, the amount you report as income becomes your basis in the commodity. 2012 income tax filing See chapter 6 for information on the basis of assets. 2012 income tax filing If you later repay the loan, redeem the pledged commodity, and sell it, you report as income at the time of sale the sale proceeds minus your basis in the commodity. 2012 income tax filing If the sale proceeds are less than your basis in the commodity, you can report the difference as a loss on Schedule F. 2012 income tax filing If you forfeit the pledged crops to the CCC in full payment of the loan, the forfeiture is treated for tax purposes as a sale of the crops. 2012 income tax filing If you did not report the loan proceeds as income for the year you received them, you must include them in your income for the year of the forfeiture. 2012 income tax filing Form 1099-A. 2012 income tax filing   If you forfeit pledged crops to the CCC in full payment of a loan, you may receive a Form 1099-A, Acquisition or Abandonment of Secured Property. 2012 income tax filing “CCC” should be shown in box 6. 2012 income tax filing The amount of any CCC loan outstanding when you forfeited your commodity should also be indicated on the form. 2012 income tax filing Market Gain Under the CCC nonrecourse marketing assistance loan program, your repayment amount for a loan secured by your pledge of an eligible commodity is generally based on the lower of the loan rate or the prevailing world market price for the commodity on the date of repayment. 2012 income tax filing If you repay the loan when the world price is lower, the difference between that repayment amount and the original loan amount is market gain. 2012 income tax filing Whether you use cash or CCC certificates to repay the loan, you will receive a Form 1099-G showing the market gain you realized. 2012 income tax filing Market gain should be reported as follows. 2012 income tax filing If you elected to include the CCC loan in income in the year you received it, do not include the market gain in income. 2012 income tax filing However, adjust the basis of the commodity for the amount of the market gain. 2012 income tax filing If you did not include the CCC loan in income in the year received, include the market gain in your income. 2012 income tax filing The following examples show how to report market gain. 2012 income tax filing Example 1. 2012 income tax filing Mike Green is a cotton farmer. 2012 income tax filing He uses the cash method of accounting and files his tax return on a calendar year basis. 2012 income tax filing He has deducted all expenses incurred in producing the cotton and has a zero basis in the commodity. 2012 income tax filing In 2012, Mike pledged 1,000 pounds of cotton as collateral for a CCC loan of $2,000 (a loan rate of $2. 2012 income tax filing 00 per pound). 2012 income tax filing In 2013, he repaid the loan and redeemed the cotton for $1,500 when the world price was $1. 2012 income tax filing 50 per pound (lower than the loan amount). 2012 income tax filing Later in 2013, he sold the cotton for $2,500. 2012 income tax filing The market gain on the redemption was $. 2012 income tax filing 50 ($2. 2012 income tax filing 00 – $1. 2012 income tax filing 50) per pound. 2012 income tax filing Mike realized total market gain of $500 ($. 2012 income tax filing 50 x 1,000 pounds). 2012 income tax filing How he reports this market gain and figures his gain or loss from the sale of the cotton depends on whether he included CCC loans in income in 2012. 2012 income tax filing Included CCC loan. 2012 income tax filing   Mike reported the $2,000 CCC loan as income for 2012 on Schedule F, line 1b, so he is treated as if he sold the cotton for $2,000 when he pledged it and repurchased the cotton for $1,500 when he redeemed it. 2012 income tax filing The $500 market gain is not recognized on the redemption. 2012 income tax filing He reports it for 2013 as an agricultural program payment on Schedule F, line 4a, but does not include it as a taxable amount on line 4b. 2012 income tax filing   Mike's basis in the cotton after he redeemed it was $1,500, which is the redemption (repurchase) price paid for the cotton. 2012 income tax filing His gain from the sale is $1,000 ($2,500 – $1,500). 2012 income tax filing He reports the $1,000 gain as income for 2013 on Schedule F, line 1b. 2012 income tax filing Excluded CCC loan. 2012 income tax filing   Mike has income of $500 from market gain in 2013. 2012 income tax filing He reports it on Schedule F, lines 4a and 4b. 2012 income tax filing His basis in the cotton is zero, so his gain from its sale is $2,500. 2012 income tax filing He reports the $2,500 gain as income for 2013 on Schedule F, line 1b. 2012 income tax filing Example 2. 2012 income tax filing The facts are the same as in Example 1 except that, instead of selling the cotton for $2,500 after redeeming it, Mike entered into an option-to-purchase contract with a cotton buyer before redeeming the cotton. 2012 income tax filing Under that contract, Mike authorized the cotton buyer to pay the CCC loan on Mike's behalf. 2012 income tax filing In 2013, the cotton buyer repaid the loan for $1,500 and immediately exercised his option, buying the cotton for $1,500. 2012 income tax filing How Mike reports the $500 market gain on the redemption of the cotton and figures his gain or loss from its sale depends on whether he included CCC loans in income in 2012. 2012 income tax filing Included CCC loan. 2012 income tax filing   As in Example 1, Mike is treated as though he sold the cotton for $2,000 when he pledged it and repurchased the cotton for $1,500 when the cotton buyer redeemed it for him. 2012 income tax filing The $500 market gain is not recognized on the redemption. 2012 income tax filing Mike reports it for 2013 as an agricultural program payment on Schedule F, line 4a, but does not include it as a taxable amount on line 4b. 2012 income tax filing   Also, as in Example 1, Mike's basis in the cotton when the cotton buyer redeemed it for him was $1,500. 2012 income tax filing Mike has no gain or loss on its sale to the cotton buyer for that amount. 2012 income tax filing Excluded CCC loan. 2012 income tax filing   As in Example 1, Mike has income of $500 from market gain in 2013. 2012 income tax filing He reports it on Schedule F, lines 4a and 4b. 2012 income tax filing His basis in the cotton is zero, so his gain from its sale is $1,500. 2012 income tax filing He reports the $1,500 gain as income for 2013 on Schedule F, line 1b. 2012 income tax filing Conservation Reserve Program (CRP) Under the Conservation Reserve Program (CRP), if you own or operate highly erodible or other specified cropland, you may enter into a long-term contract with the USDA, agreeing to convert to a less intensive use of that cropland. 2012 income tax filing You must include the annual rental payments and any one-time incentive payment you receive under the program on Schedule F, lines 4a and 4b. 2012 income tax filing Cost-share payments you receive may qualify for the cost-sharing exclusion. 2012 income tax filing See Cost-Sharing Exclusion (Improvements) , later. 2012 income tax filing CRP payments are reported to you on Form 1099-G. 2012 income tax filing Individuals who are receiving Social Security retirement or disability benefits may exclude CRP payments when calculating self-employment tax. 2012 income tax filing See the instructions for Schedule SE (Form 1040). 2012 income tax filing Crop Insurance and Crop Disaster Payments You must include in income any crop insurance proceeds you receive as the result of physical crop damage or reduction of crop revenue, or both. 2012 income tax filing You generally include them in the year you receive them. 2012 income tax filing Treat as crop insurance proceeds the crop disaster payments you receive from the federal government as the result of destruction or damage to crops, or the inability to plant crops, because of drought, flood, or any other natural disaster. 2012 income tax filing You can request income tax withholding from crop disaster payments you receive from the federal government. 2012 income tax filing Use Form W-4V, Voluntary Withholding Request. 2012 income tax filing See chapter 16 for information about ordering the form. 2012 income tax filing Election to postpone reporting until the following year. 2012 income tax filing   You can postpone reporting some or all crop insurance proceeds as income until the year following the year the physical damage occurred if you meet all the following conditions. 2012 income tax filing You use the cash method of accounting. 2012 income tax filing You receive the crop insurance proceeds in the same tax year the crops are damaged. 2012 income tax filing You can show that under your normal business practice you would have included income from the damaged crops in any tax year following the year the damage occurred. 2012 income tax filing   Deferral is not permitted for proceeds received from revenue insurance policies. 2012 income tax filing   To postpone reporting some or all crop insurance proceeds received in 2013, report the amount you received on Schedule F, line 6a, but do not include it as a taxable amount on line 6b. 2012 income tax filing Check the box on line 8c and attach a statement to your tax return. 2012 income tax filing The statement must include your name and address and contain the following information. 2012 income tax filing A statement that you are making an election under IRC section 451(d) and Regulations section 1. 2012 income tax filing 451-6. 2012 income tax filing The specific crop or crops physically destroyed or damaged. 2012 income tax filing A statement that under your normal business practice you would have included income from some or all of the destroyed or damaged crops in gross income for a tax year following the year the crops were destroyed or damaged. 2012 income tax filing The cause of the physical destruction or damage and the date or dates it occurred. 2012 income tax filing The total payments you received from insurance carriers, itemized for each specific crop, and the date you received each payment. 2012 income tax filing The name of each insurance carrier from whom you received payments. 2012 income tax filing   One election covers all crops representing a single trade or business. 2012 income tax filing If you have more than one farming business, make a separate election for each one. 2012 income tax filing For example, if you operate two separate farms on which you grow different crops and you keep separate books for each farm, you should make two separate elections to postpone reporting insurance proceeds you receive for crops grown on each of your farms. 2012 income tax filing   An election is binding for the year unless the IRS approves your request to change it. 2012 income tax filing To request IRS approval to change your election, write to the IRS at the following address giving your name, address, identification number, the year you made the election, and your reasons for wanting to change it. 2012 income tax filing Ogden Submission Processing Center P. 2012 income tax filing O. 2012 income tax filing Box 9941 Ogden, UT 84409 Feed Assistance and Payments The Disaster Assistance Act of 1988 authorizes programs to provide feed assistance, reimbursement payments, and other benefits to qualifying livestock producers if the Secretary of Agriculture determines that, because of a natural disaster, a livestock emergency exists. 2012 income tax filing These programs include partial reimbursement for the cost of purchased feed and for certain transportation expenses. 2012 income tax filing They also include the donation or sale at a below-market price of feed owned by the Commodity Credit Corporation. 2012 income tax filing Include in income: The market value of donated feed, The difference between the market value and the price you paid for feed you buy at below-market prices, and Any cost reimbursement you receive. 2012 income tax filing You must include these benefits in income in the year you receive them. 2012 income tax filing You cannot postpone reporting them under the rules explained earlier for weather-related sales of livestock or crop insurance proceeds. 2012 income tax filing Report the benefits on Schedule F, Part I, as agricultural program payments. 2012 income tax filing You can usually take a current deduction for the same amount as a feed expense. 2012 income tax filing Cost-Sharing Exclusion (Improvements) You can exclude from your income part or all of a payment you receive under certain federal or state cost-sharing conservation, reclamation, and restoration programs. 2012 income tax filing A payment is any economic benefit you get as a result of an improvement. 2012 income tax filing However, this exclusion applies only to that part of a payment that meets all three of the following tests. 2012 income tax filing It was for a capital expense. 2012 income tax filing You cannot exclude any part of a payment for an expense you can deduct in the year you pay or incur it. 2012 income tax filing You must include the payment for a deductible expense in income, and you can take any offsetting deduction. 2012 income tax filing See chapter 5 for information on deducting soil and water conservation expenses. 2012 income tax filing It does not substantially increase your annual income from the property for which it is made. 2012 income tax filing An increase in annual income is substantial if it is more than the greater of the following amounts. 2012 income tax filing 10% of the average annual income derived from the affected property before receiving the improvement. 2012 income tax filing $2. 2012 income tax filing 50 times the number of affected acres. 2012 income tax filing The Secretary of Agriculture certified that the payment was primarily made for conserving soil and water resources, protecting or restoring the environment, improving forests, or providing a habitat for wildlife. 2012 income tax filing Qualifying programs. 2012 income tax filing   If the three tests listed above are met, you can exclude part or all of the payments from the following programs. 2012 income tax filing The rural clean water program authorized by the Federal Water Pollution Control Act. 2012 income tax filing The rural abandoned mine program authorized by the Surface Mining Control and Reclamation Act of 1977. 2012 income tax filing The water bank program authorized by the Water Bank Act. 2012 income tax filing The emergency conservation measures program authorized by title IV of the Agricultural Credit Act of 1978. 2012 income tax filing The agricultural conservation program authorized by the Soil Conservation and Domestic Allotment Act. 2012 income tax filing The great plains conservation program authorized by the Soil Conservation and Domestic Policy Act. 2012 income tax filing The resource conservation and development program authorized by the Bankhead-Jones Farm Tenant Act and by the Soil Conservation and Domestic Allotment Act. 2012 income tax filing Certain small watershed programs, listed later. 2012 income tax filing Any program of a state, possession of the United States, a political subdivision of any of these, or of the District of Columbia under which payments are made to individuals primarily for conserving soil, protecting or restoring the environment, improving forests, or providing a habitat for wildlife. 2012 income tax filing Several state programs have been approved. 2012 income tax filing For information about the status of those programs, contact the state offices of the Farm Service Agency (FSA) and the Natural Resources and Conservation Service (NRCS). 2012 income tax filing Small watershed programs. 2012 income tax filing   If the three tests listed earlier are met, you can exclude part or all of the payments you receive under the following programs for improvements made in connection with a watershed. 2012 income tax filing The programs under the Watershed Protection and Flood Prevention Act. 2012 income tax filing The flood prevention projects under the Flood Control Act of 1944. 2012 income tax filing The Emergency Watershed Protection Program under the Flood Control Act of 1950. 2012 income tax filing Certain programs under the Colorado River Basin Salinity Control Act. 2012 income tax filing The Wetlands Reserve Program authorized by the Food Security Act of 1985, the Federal Agriculture Improvement and Reform Act of 1996 and the Farm Security and Rural Investment Act of 2002. 2012 income tax filing The Environmental Quality Incentives Program (EQIP) authorized by the Federal Agriculture Improvement and Reform Act of 1996. 2012 income tax filing The Wildlife Habitat Incentives Program (WHIP) authorized by the Federal Agriculture Improvement and Reform Act of 1996. 2012 income tax filing The Soil and Water Conservation Assistance Program authorized by the Agricultural Risk Protection Act of 2000. 2012 income tax filing The Agricultural Management Assistance Program authorized by the Agricultural Risk Protection Act of 2000. 2012 income tax filing The Conservation Reserve Program authorized by the Food Security Act of 1985 and the Federal Agriculture Improvement and Reform Act of 1996. 2012 income tax filing The Forest Land Enhancement Program authorized under the Farm Security and Rural Investment Act of 2002. 2012 income tax filing The Conservation Security Program authorized by the Food Security Act of 1985. 2012 income tax filing The Forest Health Protection Program (FHPP) authorized by the Cooperative Forestry Assistance Act of 1978. 2012 income tax filing Income realized. 2012 income tax filing   The gross income you realize upon getting an improvement under these cost-sharing programs is the value of the improvement reduced by the sum of the excludable portion and your share of the cost of the improvement (if any). 2012 income tax filing Value of the improvement. 2012 income tax filing   You determine the value of the improvement by multiplying its fair market value (defined in chapter 6) by a fraction. 2012 income tax filing The numerator of the fraction is the total cost of the improvement (all amounts paid either by you or by the government for the improvement) reduced by the sum of the following items. 2012 income tax filing Any government payments under a program not listed earlier. 2012 income tax filing Any part of a government payment under a program listed earlier that the Secretary of Agriculture has not certified as primarily for conservation. 2012 income tax filing Any government payment to you for rent or for your services. 2012 income tax filing The denominator of the fraction is the total cost of the improvement. 2012 income tax filing Excludable portion. 2012 income tax filing   The excludable portion is the present fair market value of the right to receive annual income from the affected acreage of the greater of the following amounts. 2012 income tax filing 10% of the prior average annual income from the affected acreage. 2012 income tax filing The prior average annual income is the average of the gross receipts from the affected acreage for the last 3 tax years before the tax year in which you started to install the improvement. 2012 income tax filing $2. 2012 income tax filing 50 times the number of affected acres. 2012 income tax filing The calculation of present fair market value of the right to receive annual income is too complex to discuss in this publication. 2012 income tax filing You may need to consult your tax advisor for assistance. 2012 income tax filing Example. 2012 income tax filing One hundred acres of your land was reclaimed under a rural abandoned mine program contract with the Natural Resources Conservation Service of the USDA. 2012 income tax filing The total cost of the improvement was $500,000. 2012 income tax filing The USDA paid $490,000. 2012 income tax filing You paid $10,000. 2012 income tax filing The value of the cost-sharing improvement is $15,000. 2012 income tax filing The present fair market value of the right to receive the annual income described in (1) above is $1,380, and the present fair market value of the right to receive the annual income described in (2) is $1,550. 2012 income tax filing The excludable portion is the greater amount, $1,550. 2012 income tax filing You figure the amount to include in gross income as follows: Value of cost-sharing improvement $15,000 Minus: Your share $10,000     Excludable portion 1,550 11,550 Amount included in income $ 3,450 Effects of the exclusion. 2012 income tax filing   When you figure the basis of property you acquire or improve using cost-sharing payments excluded from income, subtract the excluded payments from your capital costs. 2012 income tax filing Any payment excluded from income is not part of your basis. 2012 income tax filing In the example above, the increase in basis is $500,000 – $490,000 + $3,450 = $13,450. 2012 income tax filing   In addition, you cannot take depreciation, amortization, or depletion deductions for the part of the cost of the property for which you receive cost-sharing payments you exclude from income. 2012 income tax filing How to report the exclusion. 2012 income tax filing   Attach a statement to your tax return (or amended return) for the tax year you receive the last government payment for the improvement. 2012 income tax filing The statement must include the following information. 2012 income tax filing The dollar amount of the cost funded by the government payment. 2012 income tax filing The value of the improvement. 2012 income tax filing The amount you are excluding. 2012 income tax filing   Report the total cost-sharing payments you receive on Schedule F, line 4a, and the taxable amount on line 4b. 2012 income tax filing Recapture. 2012 income tax filing   If you dispose of the property within 20 years after you received the excluded payments, you must treat as ordinary income part or all of the cost-sharing payments you excluded. 2012 income tax filing In the above example, if the 100 acres were sold within 20 years of the exclusion for a gain of $2,000, $1,550 of that amount would be included in ordinary income. 2012 income tax filing You must report the recapture on Form 4797. 2012 income tax filing See Section 1255 property under Other Gains in chapter 9. 2012 income tax filing Electing not to exclude payments. 2012 income tax filing   You can elect not to exclude all or part of any payments you receive under these programs. 2012 income tax filing If you make this election for all of these payments, none of the above restrictions and rules apply. 2012 income tax filing You must make this election by the due date, including extensions, for filing your return. 2012 income tax filing In the example above, an election not to exclude payments results in $5,000 included in income and a $15,000 increase in basis. 2012 income tax filing If you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). 2012 income tax filing Write “Filed pursuant to section 301. 2012 income tax filing 9100-2” at the top of the amended return and file it at the same address you filed the original return. 2012 income tax filing Payments Under the Farm Security and Rural Investment Act of 2002 and Under the Food, Conservation, and Energy Act of 2008 The Farm Security and Rural Investment Act of 2002 created two new types of payments—direct and counter-cyclical payments. 2012 income tax filing You must include these payments on Schedule F, lines 4a and 4b. 2012 income tax filing The Food, Conservation, and Energy Act of 2008 provides for direct and counter-cyclical payments (DCP) as well as Average Crop Revenue Election (ACRE) payments. 2012 income tax filing You must include these payments on Schedule F, lines 6a and 6b. 2012 income tax filing The American Taxpayer Relief Act of 2012, enacted on January 2, 2013, amends the Food, Conservation, and Energy Act of 2008 and provided a one-year extension for these payments. 2012 income tax filing Tobacco Quota Buyout Program Payments The Fair and Equitable Tobacco Reform Act of 2004, title VI of the American Jobs Creation Act of 2004, terminated the tobacco marketing quota program and the tobacco price support program. 2012 income tax filing As a result, the USDA offered to enter into contracts with eligible tobacco quota holders and growers to provide compensation for the lost value of the quotas and related price support. 2012 income tax filing If you are an eligible tobacco quota holder, your contract entitles you to receive total payments of $7 per pound of quota in 10 equal annual payments in fiscal years 2005 through 2014. 2012 income tax filing If you are an eligible tobacco grower, your contract entitles you to receive total payments of up to $3 per pound of quota in 10 equal annual payments in fiscal years 2005 through 2014. 2012 income tax filing Tobacco Quota Holders Contract payments you receive are considered proceeds from a sale of your tobacco quota as of the date on which you and the USDA enter into the contract. 2012 income tax filing Your taxable gain or loss is the total amount received for your quota reduced by any amount treated as interest (discussed below), over your adjusted basis. 2012 income tax filing The gain or loss is capital or ordinary depending on how you used the quota. 2012 income tax filing See Capital or ordinary gain or loss , later. 2012 income tax filing Report the entire gain on your income tax return for the tax year that includes the date you entered into the contract if you elect not to use the installment method. 2012 income tax filing Adjusted basis. 2012 income tax filing   The adjusted basis of your quota is determined differently depending on how you obtained the quota. 2012 income tax filing The basis of a quota derived from an original grant by the federal government is zero. 2012 income tax filing The basis of a purchased quota is the purchase price. 2012 income tax filing The basis of a quota received as a gift is generally the same as the donor's basis. 2012 income tax filing However, under certain circumstances, the basis is increased by the amount of gift taxes paid. 2012 income tax filing If the basis is greater than the fair market value of the quota at the time of the gift, the basis for determining loss is the fair market value. 2012 income tax filing The basis of an inherited quota is generally the fair market value of the quota at the time of the decedent's death. 2012 income tax filing Reduction of basis. 2012 income tax filing   You are required to reduce the basis of your tobacco quota by the following amounts. 2012 income tax filing Deductions you took for amortization, depletion, or depreciation. 2012 income tax filing Amounts you previously deducted as a loss because of a reduction in the number of pounds of tobacco allowable under the quota. 2012 income tax filing The entire cost of a purchased quota you deducted in an earlier year (which reduces your basis to zero). 2012 income tax filing Amount treated as interest. 2012 income tax filing   You must reduce your tobacco quota buyout program payment by the amount treated as interest. 2012 income tax filing The interest is reportable as ordinary income. 2012 income tax filing If payments total $3,000 or less, your total quota buyout program payment does not include any amount treated as interest and you are not required to reduce the total payment you receive. 2012 income tax filing   In all other cases, a portion of each payment may be treated as interest for federal tax purposes. 2012 income tax filing You may be required to reduce your total quota buyout program payment before you calculate your gain or loss. 2012 income tax filing For more information, see Notice 2005-57, 2005-32 I. 2012 income tax filing R. 2012 income tax filing B. 2012 income tax filing 267, available at www. 2012 income tax filing irs. 2012 income tax filing gov/irb/2005-32_IRB/ar13. 2012 income tax filing html. 2012 income tax filing Installment method. 2012 income tax filing   You may use the installment method to report a gain if you receive at least one payment after the close of your tax year. 2012 income tax filing Under the installment method, a portion of the gain is taken into account in each year in which a payment is received. 2012 income tax filing See chapter 10 for more information. 2012 income tax filing Capital or ordinary gain or loss. 2012 income tax filing   Whether your gain or loss is ordinary or capital depends on how you used the quota. 2012 income tax filing Quota used in the trade or business of farming. 2012 income tax filing   If you used the quota in the trade or business of farming and you held it for more than one year, you report the transaction as a section 1231 transaction on Form 4797. 2012 income tax filing See Section 1231 transactions in the Instructions for Form 4797 for detailed information on reporting section 1231 transactions. 2012 income tax filing Quota held for investment. 2012 income tax filing   If you held the quota for investment purposes, any gain or loss is capital gain or loss. 2012 income tax filing The same result also applies if you held the quota for the production of income, though not connected with a trade or business. 2012 income tax filing Gain treated as ordinary income. 2012 income tax filing   If you previously deducted any of the following items, some or all of the capital gain must be recharacterized and reported as ordinary income. 2012 income tax filing Any resulting capital gain is taxed as ordinary income up to the amount previously deducted. 2012 income tax filing The cost of acquiring a quota. 2012 income tax filing Amounts for amortization, depletion, or depreciation. 2012 income tax filing Amounts to reflect a reduction in the quota pounds. 2012 income tax filing   You should include the ordinary income on your return for the tax year even if you use the installment method to report the remainder of the gain. 2012 income tax filing Self-employment income. 2012 income tax filing   The tobacco quota buyout payments are not self-employment income. 2012 income tax filing Income averaging for farmers. 2012 income tax filing   The gain or loss resulting from the quota payments does not qualify for income averaging. 2012 income tax filing A tobacco quota is considered an interest in land. 2012 income tax filing Income averaging is not available for gain or loss arising from the sale or other disposition of land. 2012 income tax filing Involuntary conversion. 2012 income tax filing   The buyout of the tobacco quota is not an involuntary conversion. 2012 income tax filing Form 1099-S. 2012 income tax filing   A tobacco quota is considered an interest in land, so the USDA will generally report the total amount you receive under a contract on Form 1099-S, Proceeds From Real Estate Transactions, if the amount is $600 or more. 2012 income tax filing The USDA will generally report any portion of a payment treated as interest of $600 or more to you on Form 1099-INT, Interest Income, for the year in which the payment is made. 2012 income tax filing Like-kind exchange of quota. 2012 income tax filing   You may postpone reporting the gain or loss from tobacco quota buyout payments by entering into a like-kind exchange if you comply with the requirements of section 1031 and the regulations thereunder. 2012 income tax filing See Notice 2005-57 for more information. 2012 income tax filing Tobacco Growers Contract payments you receive are determined by reference to the amount of quota under which you produced (or planted) quota tobacco during the 2002, 2003, and 2004 tobacco marketing years and are prorated based on the number of years that you produced (or planted) quota tobacco during those years. 2012 income tax filing Taxation of payments to tobacco growers. 2012 income tax filing   Payments to growers replace ordinary income that would have been earned had the tobacco marketing quota and price support programs continued. 2012 income tax filing Individuals will generally report the payments as an Agricultural program payment on Schedule F. 2012 income tax filing If you are a landowner who does not materially participate in the operation or management of the farm and are receiving the grower payment because your farm rental income is based on the tobacco grown by a tenant, the grower payment should be reported on Form 4835. 2012 income tax filing Self-employment income. 2012 income tax filing   Payments to growers generally represent self-employment income. 2012 income tax filing If the grower is an individual carrying on a trade or business and deriving income (other than farm rental income properly reported on Form 4835) from that trade or business, the payments are net earnings from self-employment. 2012 income tax filing Income averaging for farmers. 2012 income tax filing   Payments to growers who are individuals qualify for farm income averaging. 2012 income tax filing Form 1099-G. 2012 income tax filing   If the amount received in a taxable year is $600 or more, the amount will generally be reported by the USDA on a Form 1099-G. 2012 income tax filing Other Payments You must include most other government program payments in income. 2012 income tax filing Fertilizer and Lime Include in income the value of fertilizer or lime you receive under a government program. 2012 income tax filing How to claim the offsetting deduction is explained under Fertilizer and Lime in chapter 4. 2012 income tax filing Improvements If government payments are based on improvements, such as a pollution control facility, you must include them in income. 2012 income tax filing You must also capitalize the full cost of the improvement. 2012 income tax filing Since you have included the payments in income, they do not reduce your basis. 2012 income tax filing However, see Cost-Sharing Exclusion (Improvements) , earlier, for additional information. 2012 income tax filing National Tobacco Growers' Settlement Trust Fund Payments If you are a producer, landowner, or tobacco quota owner who receives money from the National Tobacco Growers' Settlement Trust Fund, you must report those payments as income. 2012 income tax filing You should receive a Form 1099-MISC, Miscellaneous Income, that shows the payment amount. 2012 income tax filing If you produce a tobacco crop, report the payments as income from farming on your Schedule F. 2012 income tax filing If you are a landowner or tobacco quota owner who leases tobacco-related property but you do not produce the crop, report the payments as farm rental income on Form 4835. 2012 income tax filing Payment to More Than One Person The USDA reports program payments to the IRS. 2012 income tax filing It reports a program payment intended for more than one person as having been paid to the person whose identification number is on record for that payment (payee of record). 2012 income tax filing If you, as the payee of record, receive a program payment belonging to someone else, such as your landlord, the amount belonging to the other person is a nominee distribution. 2012 income tax filing You should file Form 1099-G to report the identity of the actual recipient to the IRS. 2012 income tax filing You should also give this information to the recipient. 2012 income tax filing You can avoid the inconvenience of unnecessary inquiries about the identity of the recipient if you file this form. 2012 income tax filing Report the total amount reported to you as the payee of record on Schedule F, line 4a or 6a. 2012 income tax filing However, do not report as a taxable amount on line 4b or 6b any amount belonging to someone else. 2012 income tax filing See chapter 16 for information about ordering Form 1099-G. 2012 income tax filing Income From Cooperatives If you buy farm supplies through a cooperative, you may receive income from the cooperative in the form of patronage dividends (refunds). 2012 income tax filing If you sell your farm products through a cooperative, you may receive either patronage dividends or a per-unit retain certificate, explained later, from the cooperative. 2012 income tax filing Form 1099-PATR. 2012 income tax filing   The cooperative will report the income to you on Form 1099-PATR or a similar form and send a copy to the IRS. 2012 income tax filing Form 1099-PATR may also show an alternative minimum tax adjustment that you must include on Form 6251, Alternative Minimum Tax—Individuals, if you are required to file the form. 2012 income tax filing For information on the alternative minimum tax, see the Instructions for Form 6251. 2012 income tax filing Patronage Dividends You generally report patronage dividends as income on Schedule F, lines 3a and 3b, for the tax year you receive them. 2012 income tax filing They include the following items. 2012 income tax filing Money paid as a patronage dividend, including cash advances received (for example, from a marketing cooperative). 2012 income tax filing The stated dollar value of qualified written notices of allocation. 2012 income tax filing The fair market value of other property. 2012 income tax filing Do not report as income on line 3b any patronage dividends you receive from expenditures that were not deductible, such as buying personal or family items, capital assets, or depreciable property. 2012 income tax filing You must reduce the cost or other basis of these items by the amount of such patronage dividends received. 2012 income tax filing Personal items include fuel purchased for personal use, basic local telephone service, and personal long distance calls. 2012 income tax filing If you cannot determine what the dividend is for, report it as income on lines 3a and 3b. 2012 income tax filing Qualified written notice of allocation. 2012 income tax filing   If you receive a qualified written notice of allocation as part of a patronage dividend, you must generally include its stated dollar value in your income on Schedule F, lines 3a and 3b, in the year you receive it. 2012 income tax filing A written notice of allocation is qualified if at least 20% of the patronage dividend is paid in money or by qualified check and either of the following conditions is met. 2012 income tax filing The notice must be redeemable in cash for at least 90 days after it is issued, and you must have received a written notice of your right of redemption at the same time as the written notice of allocation. 2012 income tax filing You must have agreed to include the stated dollar value in income in the year you receive the notice by doing one of the following. 2012 income tax filing Signing and giving a written agreement to the cooperative. 2012 income tax filing Getting or keeping membership in the cooperative after it adopted a bylaw providing that membership constitutes agreement. 2012 income tax filing The cooperative must notify you in writing of this bylaw and give you a copy. 2012 income tax filing Endorsing and cashing a qualified check paid as part of the same patronage dividend. 2012 income tax filing You must cash the check by the 90th day after the close of the payment period for the cooperative's tax year for which the patronage dividend was paid. 2012 income tax filing Qualified check. 2012 income tax filing   A qualified check is any instrument that is redeemable in money and meets both of the following requirements. 2012 income tax filing It is part of a patronage dividend that also includes a qualified written notice of allocation for which you met condition 2(c), above. 2012 income tax filing It is imprinted with a statement that endorsing and cashing it constitutes the payee's consent to include in income the stated dollar value of any written notices of allocation paid as part of the same patronage dividend. 2012 income tax filing Loss on redemption. 2012 income tax filing   You can deduct on Schedule F, Part II, any loss incurred on the redemption of a qualified written notice of allocation you received in the ordinary course of your farming business. 2012 income tax filing The loss is the difference between the stated dollar amount of the qualified written notice you included in income and the amount you received when you redeemed it. 2012 income tax filing Nonqualified notice of allocation. 2012 income tax filing   Do not include the stated dollar value of any nonqualified notice of allocation in income when you receive it. 2012 income tax filing Your basis in the notice is zero. 2012 income tax filing You must include in income for the tax year of disposition any amount you receive from its sale, redemption, or other disposition. 2012 income tax filing Report that amount, up to the stated dollar value of the notice, on Schedule F, lines 3a and 3b. 2012 income tax filing However, do not include that amount in your income if the notice resulted from buying or selling capital assets or depreciable property or from buying personal items, as explained in the following discussions. 2012 income tax filing   If the amount you receive is more than the stated dollar value of the notice, report the excess as the type of income it represents. 2012 income tax filing For example, if it represents interest income, report it on your return as interest. 2012 income tax filing Buying or selling capital assets or depreciable property. 2012 income tax filing   Do not include in income patronage dividends from buying capital assets or depreciable property used in your business. 2012 income tax filing You must, however, reduce the basis of these assets by the dividends. 2012 income tax filing This reduction is taken into account as of the first day of the tax year in which the dividends are received. 2012 income tax filing If the dividends are more than your unrecovered basis, reduce the unrecovered basis to zero and include the difference on Schedule F, line 3a, for the tax year you receive them. 2012 income tax filing   This rule and the exceptions explained below also apply to amounts you receive from the sale, redemption, or other disposition of a nonqualified notice of allocation that resulted from buying or selling capital assets or depreciable property. 2012 income tax filing Example. 2012 income tax filing On July 1, 2012, Mr. 2012 income tax filing Brown, a patron of a cooperative association, bought a machine for his dairy farm business from the association for $2,900. 2012 income tax filing The machine has a life of 7 years under MACRS (as provided in the Table of Class Lives and Recovery Periods in Appendix B of Publication 946, Depreciation and Amortization). 2012 income tax filing Mr. 2012 income tax filing Brown files his return on a calendar year basis. 2012 income tax filing For 2012, he claimed a depreciation deduction of $311, using the 10. 2012 income tax filing 71% depreciation rate from the 150% declining balance, half-year convention table (shown in Table A-14 in Appendix A of Publication 946). 2012 income tax filing On July 2, 2013, the cooperative association paid Mr. 2012 income tax filing Brown a $300 cash patronage dividend for buying the machine. 2012 income tax filing Mr. 2012 income tax filing Brown adjusts the basis of the machine and figures his depreciation deduction for 2013 (and later years) as follows. 2012 income tax filing Cost of machine on July 1, 2012 $2,900 Minus: 2012 depreciation $311     2013 cash dividend 300 611 Adjusted basis for  depreciation for 2013: $2,289 Depreciation rate: 1 ÷ 6½ (remaining recovery period as of 1/1/2012) = 15. 2012 income tax filing 38% × 1. 2012 income tax filing 5 = 23. 2012 income tax filing 07% Depreciation deduction for 2013 ($2,289 × 23. 2012 income tax filing 07%) $528 Exceptions. 2012 income tax filing   If the dividends are for buying or selling capital assets or depreciable property you did not own at any time during the year you received the dividends, you must include them on Schedule F, lines 3a and 3b, unless one of the following rules applies. 2012 income tax filing If the dividends relate to a capital asset you held for more than 1 year for which a loss was or would have been deductible, treat them as gain from the sale or exchange of a capital asset held for more than 1 year. 2012 income tax filing If the dividends relate to a capital asset for which a loss was not or would not have been deductible, do not report them as income (ordinary or capital gain). 2012 income tax filing   If the dividends are for selling capital assets or depreciable property during the year you received the dividends, treat them as an additional amount received on the sale. 2012 income tax filing Personal purchases. 2012 income tax filing   Because you cannot deduct the cost of personal, living, or family items, such as supplies, equipment, or services not related to the production of farm income, you can omit from the taxable amount of patronage dividends on Schedule F, line 3b, any dividends from buying those items (and you must reduce the cost or other basis of those items by the amount of the dividends). 2012 income tax filing This rule also applies to amounts you receive from the sale, redemption, or other disposition of a nonqualified written notice of allocation resulting from these purchases. 2012 income tax filing Per-Unit Retain Certificates A per-unit retain certificate is any written notice that shows the stated dollar amount of a per-unit retain allocation made to you by the cooperative. 2012 income tax filing A per-unit retain allocation is an amount paid to patrons for products sold for them that is fixed without regard to the net earnings of the cooperative. 2012 income tax filing These allocations can be paid in money, other property, or qualified certificates. 2012 income tax filing Per-unit retain certificates issued by a cooperative generally receive the same tax treatment as patronage dividends, discussed earlier. 2012 income tax filing Qualified certificates. 2012 income tax filing   Qualified per-unit retain certificates are those issued to patrons who have agreed to include the stated dollar amount of these certificates in income in the year of receipt. 2012 income tax filing The agreement may be made in writing or by getting or keeping membership in a cooperative whose bylaws or charter states that membership constitutes agreement. 2012 income tax filing If you receive qualified per-unit retain certificates, include the stated dollar amount of the certificates in income on Schedule F, lines 3a and 3b, for the tax year you receive them. 2012 income tax filing Nonqualified certificates. 2012 income tax filing   Do not include the stated dollar value of a nonqualified per-unit retain certificate in income when you receive it. 2012 income tax filing Your basis in the certificate is zero. 2012 income tax filing You must include in income any amount you receive from its sale, redemption, or other disposition. 2012 income tax filing Report the amount you receive from the disposition as ordinary income on Schedule F, lines 3a and 3b, for the tax year of disposition. 2012 income tax filing Cancellation of Debt This section explains the general rule for including canceled debt in income and the exceptions to the general rule. 2012 income tax filing For more information on canceled debt, see Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments. 2012 income tax filing General Rule Generally, if your debt is canceled or forgiven, other than as a gift or bequest to you, you must include the canceled amount in gross income for tax purposes. 2012 income tax filing Discharge of qualified farm indebtedness (defined below) is one of the exceptions to the general rule. 2012 income tax filing It is excluded from taxable income (see Exclusions , later). 2012 income tax filing Report the canceled amount on Schedule F, line 8, if you incurred the debt in your farming business. 2012 income tax filing If the debt is a nonbusiness debt, report the canceled amount as other income on Form 1040, line 21. 2012 income tax filing Election to defer income from discharge of indebtedness. 2012 income tax filing   You can elect to defer income from a discharge of business indebtedness that occurred after 2008 and before 2011. 2012 income tax filing Generally, if the election is made, the deferred income is included in gross income ratably over a 5-year period beginning in 2014 (for calendar year taxpayers) and the exclusions listed below do not apply. 2012 income tax filing See IRC section 108(i) and Publication 4681 for details. 2012 income tax filing Form 1099-C. 2012 income tax filing   If a federal agency, financial institution, credit union, finance company, or credit card company cancels or forgives your debt of $600 or more, you will receive a Form 1099-C, Cancellation of Debt. 2012 income tax filing The amount of debt canceled is shown in box 2. 2012 income tax filing Exceptions The following discussion covers some exceptions to the general rule for canceled debt. 2012 income tax filing These exceptions apply before the exclusions discussed below. 2012 income tax filing Price reduced after purchase. 2012 income tax filing   If your purchase of property was financed by the seller and the seller reduces the amount of the debt at a time when you are not insolvent and the reduction does not occur in a chapter 11 bankruptcy case, the amount of the debt reduction will be treated as a reduction in the purchase price of the property. 2012 income tax filing Reduce your basis in the property by the amount of the reduction in the debt. 2012 income tax filing The rules that apply to bankruptcy and insolvency are explained below under Exclusions . 2012 income tax filing Deductible debt. 2012 income tax filing   You do not realize income from a canceled debt to the extent the payment of the debt would have been a deductible expense. 2012 income tax filing This exception applies before the price reduction exception discussed above and the bankruptcy and insolvency exclusions discussed next. 2012 income tax filing Example. 2012 income tax filing You get accounting services for your farm on credit. 2012 income tax filing Later, you have trouble paying your farm debts, but you are not bankrupt or insolvent. 2012 income tax filing Your accountant forgives part of the amount you owe for the accounting services. 2012 income tax filing How you treat the canceled debt depends on your method of accounting. 2012 income tax filing Cash method — You do not include the canceled debt in income because payment of the debt would have been deductible as a business expense. 2012 income tax filing Accrual method — You include the canceled debt in income because the expense was deductible when you incurred the debt. 2012 income tax filing Exclusions Do not include canceled debt in income in the following situations. 2012 income tax filing The cancellation takes place in a bankruptcy case under title 11 of the U. 2012 income tax filing S. 2012 income tax filing Code. 2012 income tax filing The cancellation takes place when you are insolvent. 2012 income tax filing The canceled debt is a qualified farm debt. 2012 income tax filing The canceled debt is a qualified real property business debt (in the case of a taxpayer other than a C corporation). 2012 income tax filing See Publication 334, Tax Guide for Small Business, chapter 5. 2012 income tax filing The canceled debt is qualified principal residence indebtedness which is discharged after 2006 and before 2014. 2012 income tax filing The exclusions do not apply in the following situations: If a canceled debt is excluded from income because it takes place in a bankruptcy case, the exclusions in situations (2), (3), (4), and (5) do not apply. 2012 income tax filing If a canceled debt is excluded from income because it takes place when you are insolvent, the exclusions in situations (3) and (4) do not apply to the extent you are insolvent. 2012 income tax filing If a canceled debt is excluded from income because it is qualified principal residence indebtedness, the exclusion in situation (2) does not apply unless you elect to apply situation (2) instead of the exclusion for qualified principal residence indebtedness. 2012 income tax filing See Form 982 , later, for information on how to claim an exclusion for a canceled debt. 2012 income tax filing Debt. 2012 income tax filing   For this discussion, debt includes any debt for which you are liable or that attaches to property you hold. 2012 income tax filing Bankruptcy and Insolvency You can exclude a canceled debt from income if you are bankrupt or to the extent you are insolvent. 2012 income tax filing Bankruptcy. 2012 income tax filing   A bankruptcy case is a case under title 11 of the U. 2012 income tax filing S. 2012 income tax filing Code if you are under the jurisdiction of the court and the cancellation of the debt is granted by the court or is the result of a plan approved by the court. 2012 income tax filing   Do not include debt canceled in a bankruptcy case in your income in the year it is canceled. 2012 income tax filing Instead, you must use the amount canceled to reduce your tax attributes, explained below under Reduction of tax attributes . 2012 income tax filing Insolvency. 2012 income tax filing   You are insolvent to the extent your liabilities are more than the fair market value of your assets immediately before the cancellation of debt. 2012 income tax filing   You can exclude canceled debt from gross income up to the amount by which you are insolvent. 2012 income tax filing If the canceled debt is more than this amount and the debt qualifies, you can apply the rules for qualified farm debt or qualified real property business debt to the difference. 2012 income tax filing Otherwise, you include the difference in gross income. 2012 income tax filing Use the amount excluded because of insolvency to reduce any tax attributes, as explained below under Reduction of tax attributes . 2012 income tax filing You must reduce the tax attributes under the insolvency rules before applying the rules for qualified farm debt or for qualified real property business debt. 2012 income tax filing Example. 2012 income tax filing You had a $15,000 debt that was not qualified principal residence debt canceled outside of bankruptcy. 2012 income tax filing Immediately before the cancellation, your liabilities totaled $80,000 and your assets totaled $75,000. 2012 income tax filing Since your liabilities were more than your assets, you were insolvent to the extent of $5,000 ($80,000 − $75,000). 2012 income tax filing You can exclude this amount from income. 2012 income tax filing The remaining canceled debt ($10,000) may be subject to the qualified farm debt or qualified real property business debt rules. 2012 income tax filing If not, you must include it in income. 2012 income tax filing Reduction of tax attributes. 2012 income tax filing   If you exclude canceled debt from income in a bankruptcy case or during insolvency, you must use the excluded debt to reduce certain tax attributes. 2012 income tax filing Order of reduction. 2012 income tax filing   You must use the excluded canceled debt to reduce the following tax attributes in the order listed unless you elect to reduce the basis of depreciable property first, as explained later. 2012 income tax filing Net operating loss (NOL). 2012 income tax filing Reduce any NOL for the tax year of the debt cancellation, and then any NOL carryover to that year. 2012 income tax filing Reduce the NOL or NOL carryover one dollar for each dollar of excluded canceled debt. 2012 income tax filing General business credit carryover. 2012 income tax filing Reduce the credit carryover to or from the tax year of the debt cancellation. 2012 income tax filing Reduce the carryover 331/3 cents for each dollar of excluded canceled debt. 2012 income tax filing Minimum tax credit. 2012 income tax filing Reduce the minimum tax credit available at the beginning of the tax year following the tax year of the debt cancellation. 2012 income tax filing Reduce the credit 331/3 cents for each dollar of excluded canceled debt. 2012 income tax filing Capital loss. 2012 income tax filing Reduce any net capital loss for the tax year of the debt cancellation, and then any capital loss carryover to that year. 2012 income tax filing Reduce the capital loss or loss carryover one dollar for each dollar of excluded canceled debt. 2012 income tax filing Basis. 2012 income tax filing Reduce the basis of the property you hold at the beginning of the tax year following the tax year of the debt cancellation in the following order. 2012 income tax filing Real property (except inventory) used in your trade or business or held for investment that secured the canceled debt. 2012 income tax filing Personal property (except inventory and accounts and notes receivable) used in your trade or business or held for investment that secured the canceled debt. 2012 income tax filing Other property (except inventory and accounts and notes receivable) used in your trade or business or held for investment. 2012 income tax filing Inventory and accounts and notes receivable. 2012 income tax filing Other property. 2012 income tax filing Reduce the basis one dollar for each dollar of excluded canceled debt. 2012 income tax filing However, the reduction cannot be more than the total basis of property and the amount of money you hold immediately after the debt cancellation minus your total liabilities immediately after the cancellation. 2012 income tax filing For allocation rules that apply to basis reductions for multiple canceled debts, see Regulations section 1. 2012 income tax filing 1017-1(b)(2). 2012 income tax filing Also see Electing to reduce the basis of depreciable property
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The 2012 Income Tax Filing

2012 income tax filing 6. 2012 income tax filing   How To Report Table of Contents Where To ReportGifts. 2012 income tax filing Statutory employees. 2012 income tax filing Vehicle Provided by Your Employer ReimbursementsAccountable Plans Nonaccountable Plans Rules for Independent Contractors and Clients How To Use Per Diem Rate TablesThe Two Substantiation Methods Transition Rules Completing Forms 2106 and 2106-EZInformation on use of cars. 2012 income tax filing Standard mileage rate. 2012 income tax filing Actual expenses. 2012 income tax filing Car rentals. 2012 income tax filing Hours of service limits. 2012 income tax filing Allocating your reimbursement. 2012 income tax filing 1. 2012 income tax filing Limit on meals and entertainment. 2012 income tax filing 2. 2012 income tax filing Limit on miscellaneous itemized deductions. 2012 income tax filing 3. 2012 income tax filing Limit on total itemized deductions. 2012 income tax filing Special Rules This chapter explains where and how to report the expenses discussed in this publication. 2012 income tax filing It discusses reimbursements and how to treat them under accountable and nonaccountable plans. 2012 income tax filing It also explains rules for independent contractors and clients, fee-basis officials, certain performing artists, Armed Forces reservists, and certain disabled employees. 2012 income tax filing The chapter ends with illustrations of how to report travel, entertainment, gift, and car expenses on Forms 2106 and 2106-EZ. 2012 income tax filing Where To Report This section provides general information on where to report the expenses discussed in this publication. 2012 income tax filing Self-employed. 2012 income tax filing   You must report your income and expenses on Schedule C (Form 1040) or Schedule C-EZ (Form 1040) if you are a sole proprietor, or on Schedule F (Form 1040) if you are a farmer. 2012 income tax filing You do not use Form 2106 or 2106-EZ. 2012 income tax filing    If you claim car or truck expenses, you must provide certain information on the use of your vehicle. 2012 income tax filing You provide this information on Schedule C (Form 1040), Schedule C-EZ (Form 1040), or Form 4562. 2012 income tax filing   If you file Schedule C (Form 1040): Report your travel expenses, except meals, on line 24a, Report your deductible meals (actual cost or standard meal allowance) and entertainment on line 24b, Report your gift expenses and transportation expenses, other than car expenses, on line 27a, and Report your car expenses on line 9. 2012 income tax filing Complete Part IV of the form unless you have to file Form 4562 for depreciation or amortization. 2012 income tax filing   If you file Schedule C-EZ (Form 1040), report the total of all business expenses on line 2. 2012 income tax filing You can only include 50% of your meals and entertainment in that total. 2012 income tax filing If you include car expenses, you must also complete Part III of the form. 2012 income tax filing    If you file Schedule F (Form 1040): Report your car expenses on line 10. 2012 income tax filing Attach Form 4562 and provide information on the use of your car in Part V of Form 4562. 2012 income tax filing Report all other business expenses discussed in this publication on line 32. 2012 income tax filing You can only include 50% of your meals and entertainment on that line. 2012 income tax filing See your form instructions for more information on how to complete your tax return. 2012 income tax filing Both self-employed and an employee. 2012 income tax filing   If you are both self-employed and an employee, you must keep separate records for each business activity. 2012 income tax filing Report your business expenses for self-employment on Schedule C (Form 1040), Schedule C-EZ (Form 1040), or Schedule F (Form 1040), as discussed earlier. 2012 income tax filing Report your business expenses for your work as an employee on Form 2106 or 2106-EZ, as discussed next. 2012 income tax filing Employees. 2012 income tax filing    If you are an employee, you generally must complete Form 2106 to deduct your travel, transportation, and entertainment expenses. 2012 income tax filing However, you can use the shorter Form 2106-EZ instead of Form 2106 if you meet all of the following conditions. 2012 income tax filing You are an employee deducting expenses attributable to your job. 2012 income tax filing You were not reimbursed by your employer for your expenses (amounts included in box 1 of your Form W-2 are not considered reimbursements). 2012 income tax filing If you claim car expenses, you use the standard mileage rate. 2012 income tax filing   For more information on how to report your expenses on Forms 2106 and 2106-EZ, see Completing Forms 2106 and 2106-EZ , later. 2012 income tax filing Gifts. 2012 income tax filing   If you did not receive any reimbursements (or the reimbursements were all included in box 1 of your Form W-2), the only business expense you are claiming is for gifts, and the Special Rules discussed later do not apply to you, do not complete Form 2106 or 2106-EZ. 2012 income tax filing Instead, claim the amount of your deductible gifts directly on line 21 of Schedule A (Form 1040). 2012 income tax filing Statutory employees. 2012 income tax filing    If you received a Form W-2 and the “Statutory employee” box in box 13 was checked, report your income and expenses related to that income on Schedule C (Form 1040) or Schedule C-EZ (Form 1040). 2012 income tax filing Do not complete Form 2106 or 2106-EZ. 2012 income tax filing   Statutory employees include full-time life insurance salespersons, certain agent or commission drivers, traveling salespersons, and certain homeworkers. 2012 income tax filing If you are entitled to a reimbursement from your employer but you do not claim it, you cannot claim a deduction for the expenses to which that unclaimed reimbursement applies. 2012 income tax filing Reimbursement for personal expenses. 2012 income tax filing    If your employer reimburses you for nondeductible personal expenses, such as for vacation trips, your employer must report the reimbursement as wage income in box 1 of your Form W-2. 2012 income tax filing You cannot deduct personal expenses. 2012 income tax filing Income-producing property. 2012 income tax filing   If you have travel or transportation expenses related to income-producing property, report your deductible expenses on the form appropriate for that activity. 2012 income tax filing   For example, if you have rental real estate income and expenses, report your expenses on Schedule E (Form 1040), Supplemental Income and Loss. 2012 income tax filing See Publication 527, Residential Rental Property, for more information on the rental of real estate. 2012 income tax filing If you have deductible investment-related transportation expenses, report them on Schedule A (Form 1040), line 23. 2012 income tax filing Vehicle Provided by Your Employer If your employer provides you with a car, you may be able to deduct the actual expenses of operating that car for business purposes. 2012 income tax filing The amount you can deduct depends on the amount that your employer included in your income and the business and personal miles you drove during the year. 2012 income tax filing You cannot use the standard mileage rate. 2012 income tax filing Value reported on Form W-2. 2012 income tax filing   Your employer can figure and report either the actual value of your personal use of the car or the value of the car as if you used it only for personal purposes (100% income inclusion). 2012 income tax filing Your employer must separately state the amount if 100% of the annual lease value was included in your income. 2012 income tax filing If you are unsure of the amount included on your Form W-2, ask your employer. 2012 income tax filing Full value included in your income. 2012 income tax filing   You can deduct the value of the business use of an employer-provided car if your employer reported 100% of the value of the car in your income. 2012 income tax filing On your 2013 Form W-2, the amount of the value will be included in box 1, Wages, tips, other compensation, and box 14. 2012 income tax filing    To claim your expenses, complete Form 2106, Part II, Sections A and C. 2012 income tax filing Enter your actual expenses on line 23 of Section C and include the entire value of the employer-provided car on line 25. 2012 income tax filing Complete the rest of the form. 2012 income tax filing Less than full value included in your income. 2012 income tax filing   If less than the full annual lease value of the car was included on your Form W-2, this means that your Form W-2 only includes the value of your personal use of the car. 2012 income tax filing Do not enter this value on your Form 2106 because it is not deductible. 2012 income tax filing   If you paid any actual costs (that your employer did not provide or reimburse you for) to operate the car, you can deduct the business portion of those costs. 2012 income tax filing Examples of costs that you may have are gas, oil, and repairs. 2012 income tax filing Complete Form 2106, Part II, Sections A and C. 2012 income tax filing Enter your actual costs on line 23 of Section C and leave line 25 blank. 2012 income tax filing Complete the rest of the form. 2012 income tax filing Reimbursements This section explains what to do when you receive an advance or are reimbursed for any of the employee business expenses discussed in this publication. 2012 income tax filing If you received an advance, allowance, or reimbursement for your expenses, how you report this amount and your expenses depends on whether your employer reimbursed you under an accountable plan or a nonaccountable plan. 2012 income tax filing This section explains the two types of plans, how per diem and car allowances simplify proving the amount of your expenses, and the tax treatment of your reimbursements and expenses. 2012 income tax filing It also covers rules for independent contractors. 2012 income tax filing No reimbursement. 2012 income tax filing   You are not reimbursed or given an allowance for your expenses if you are paid a salary or commission with the understanding that you will pay your own expenses. 2012 income tax filing In this situation, you have no reimbursement or allowance arrangement, and you do not have to read this section on reimbursements. 2012 income tax filing Instead, see Completing Forms 2106 and 2106-EZ , later, for information on completing your tax return. 2012 income tax filing Reimbursement, allowance, or advance. 2012 income tax filing   A reimbursement or other expense allowance arrangement is a system or plan that an employer uses to pay, substantiate, and recover the expenses, advances, reimbursements, and amounts charged to the employer for employee business expenses. 2012 income tax filing Arrangements include per diem and car allowances. 2012 income tax filing    A per diem allowance is a fixed amount of daily reimbursement your employer gives you for your lodging, meals, and incidental expenses when you are away from home on business. 2012 income tax filing (The term “ incidental expenses ” is defined in chapter 1 under Standard Meal Allowance. 2012 income tax filing ) A car allowance is an amount your employer gives you for the business use of your car. 2012 income tax filing   Your employer should tell you what method of reimbursement is used and what records you must provide. 2012 income tax filing Employers. 2012 income tax filing   If you are an employer and you reimburse employee business expenses, how you treat this reimbursement on your employee's Form W-2 depends in part on whether you have an accountable plan. 2012 income tax filing Reimbursements treated as paid under an accountable plan, as explained next, are not reported as pay. 2012 income tax filing Reimbursements treated as paid under nonaccountable plans , as explained later, are reported as pay. 2012 income tax filing See Publication 15 (Circular E), Employer's Tax Guide, for information on employee pay. 2012 income tax filing Accountable Plans To be an accountable plan, your employer's reimbursement or allowance arrangement must include all of the following rules: Your expenses must have a business connection — that is, you must have paid or incurred deductible expenses while performing services as an employee of your employer. 2012 income tax filing You must adequately account to your employer for these expenses within a reasonable period of time. 2012 income tax filing You must return any excess reimbursement or allowance within a reasonable period of time. 2012 income tax filing “ Adequate accounting ” and “ returning excess reimbursements ” are discussed later. 2012 income tax filing An excess reimbursement or allowance is any amount you are paid that is more than the business-related expenses that you adequately accounted for to your employer. 2012 income tax filing Reasonable period of time. 2012 income tax filing   The definition of reasonable period of time depends on the facts and circumstances of your situation. 2012 income tax filing However, regardless of the facts and circumstances of your situation, actions that take place within the times specified in the following list will be treated as taking place within a reasonable period of time. 2012 income tax filing You receive an advance within 30 days of the time you have an expense. 2012 income tax filing You adequately account for your expenses within 60 days after they were paid or incurred. 2012 income tax filing You return any excess reimbursement within 120 days after the expense was paid or incurred. 2012 income tax filing You are given a periodic statement (at least quarterly) that asks you to either return or adequately account for outstanding advances and you comply within 120 days of the statement. 2012 income tax filing Employee meets accountable plan rules. 2012 income tax filing   If you meet the three rules for accountable plans, your employer should not include any reimbursements in your income in box 1 of your Form W-2. 2012 income tax filing If your expenses equal your reimbursements, you do not complete Form 2106. 2012 income tax filing You have no deduction since your expenses and reimbursement are equal. 2012 income tax filing    If your employer included reimbursements in box 1 of your Form W-2 and you meet all the rules for accountable plans, ask your employer for a corrected Form W-2. 2012 income tax filing Accountable plan rules not met. 2012 income tax filing   Even though you are reimbursed under an accountable plan, some of your expenses may not meet all three rules. 2012 income tax filing All reimbursements that fail to meet all three rules for accountable plans are generally treated as having been reimbursed under a nonaccountable plan (discussed later). 2012 income tax filing Failure to return excess reimbursements. 2012 income tax filing   If you are reimbursed under an accountable plan, but you fail to return, within a reasonable time, any amounts in excess of the substantiated amounts, the amounts paid in excess of the substantiated expenses are treated as paid under a nonaccountable plan. 2012 income tax filing See Reasonable period of time , earlier, and Returning Excess Reimbursements , later. 2012 income tax filing Reimbursement of nondeductible expenses. 2012 income tax filing   You may be reimbursed under your employer's accountable plan for expenses related to that employer's business, some of which are deductible as employee business expenses and some of which are not deductible. 2012 income tax filing The reimbursements you receive for the nondeductible expenses do not meet rule (1) for accountable plans, and they are treated as paid under a nonaccountable plan. 2012 income tax filing Example. 2012 income tax filing Your employer's plan reimburses you for travel expenses while away from home on business and also for meals when you work late at the office, even though you are not away from home. 2012 income tax filing The part of the arrangement that reimburses you for the nondeductible meals when you work late at the office is treated as paid under a nonaccountable plan. 2012 income tax filing The employer makes the decision whether to reimburse employees under an accountable plan or a nonaccountable plan. 2012 income tax filing If you are an employee who receives payments under a nonaccountable plan, you cannot convert these amounts to payments under an accountable plan by voluntarily accounting to your employer for the expenses and voluntarily returning excess reimbursements to the employer. 2012 income tax filing Adequate Accounting One of the rules for an accountable plan is that you must adequately account to your employer for your expenses. 2012 income tax filing You adequately account by giving your employer a statement of expense, an account book, a diary, or a similar record in which you entered each expense at or near the time you had it, along with documentary evidence (such as receipts) of your travel, mileage, and other employee business expenses. 2012 income tax filing (See Table 5-1 in chapter 5 for details you need to enter in your record and documents you need to prove certain expenses. 2012 income tax filing ) A per diem or car allowance satisfies the adequate accounting requirement under certain conditions. 2012 income tax filing See Per Diem and Car Allowances , later. 2012 income tax filing You must account for all amounts you received from your employer during the year as advances, reimbursements, or allowances. 2012 income tax filing This includes amounts you charged to your employer by credit card or other method. 2012 income tax filing You must give your employer the same type of records and supporting information that you would have to give to the IRS if the IRS questioned a deduction on your return. 2012 income tax filing You must pay back the amount of any reimbursement or other expense allowance for which you do not adequately account or that is more than the amount for which you accounted. 2012 income tax filing Per Diem and Car Allowances If your employer reimburses you for your expenses using a per diem or a car allowance, you can generally use the allowance as proof for the amount of your expenses. 2012 income tax filing A per diem or car allowance satisfies the adequate accounting requirements for the amount of your expenses only if all the following conditions apply. 2012 income tax filing Your employer reasonably limits payments of your expenses to those that are ordinary and necessary in the conduct of the trade or business. 2012 income tax filing The allowance is similar in form to and not more than the federal rate (defined later). 2012 income tax filing You prove the time (dates), place, and business purpose of your expenses to your employer (as explained in Table 5-1 ) within a reasonable period of time. 2012 income tax filing You are not related to your employer (as defined next). 2012 income tax filing If you are related to your employer, you must be able to prove your expenses to the IRS even if you have already adequately accounted to your employer and returned any excess reimbursement. 2012 income tax filing If the IRS finds that an employer's travel allowance practices are not based on reasonably accurate estimates of travel costs (including recognition of cost differences in different areas for per diem amounts), you will not be considered to have accounted to your employer. 2012 income tax filing In this case, you must be able to prove your expenses to the IRS. 2012 income tax filing Related to employer. 2012 income tax filing   You are related to your employer if: Your employer is your brother or sister, half brother or half sister, spouse, ancestor, or lineal descendant, Your employer is a corporation in which you own, directly or indirectly, more than 10% in value of the outstanding stock, or Certain relationships (such as grantor, fiduciary, or beneficiary) exist between you, a trust, and your employer. 2012 income tax filing You may be considered to indirectly own stock, for purposes of (2), if you have an interest in a corporation, partnership, estate, or trust that owns the stock or if a member of your family or your partner owns the stock. 2012 income tax filing The federal rate. 2012 income tax filing   The federal rate can be figured using any one of the following methods. 2012 income tax filing For per diem amounts: The regular federal per diem rate. 2012 income tax filing The standard meal allowance. 2012 income tax filing The high-low rate. 2012 income tax filing For car expenses: The standard mileage rate. 2012 income tax filing A fixed and variable rate (FAVR). 2012 income tax filing    For per diem amounts, use the rate in effect for the area where you stop for sleep or rest. 2012 income tax filing Regular federal per diem rate. 2012 income tax filing   The regular federal per diem rate is the highest amount that the federal government will pay to its employees for lodging, meals, and incidental expenses (or meals and incidental expenses only) while they are traveling away from home in a particular area. 2012 income tax filing The rates are different for different locations. 2012 income tax filing Your employer should have these rates available. 2012 income tax filing You can also find federal per diem rates at www. 2012 income tax filing gsa. 2012 income tax filing gov/perdiem. 2012 income tax filing The standard meal allowance. 2012 income tax filing   The standard meal allowance (discussed in chapter 1) is the federal rate for meals and incidental expenses (M&IE). 2012 income tax filing The rate for most small localities in the United States is $46 a day. 2012 income tax filing Most major cities and many other localities qualify for higher rates. 2012 income tax filing You can find this information on the Internet at www. 2012 income tax filing gsa. 2012 income tax filing gov/perdiem. 2012 income tax filing   You receive an allowance only for meals and incidental expenses when your employer does one of the following. 2012 income tax filing Provides you with lodging (furnishes it in kind). 2012 income tax filing Reimburses you, based on your receipts, for the actual cost of your lodging. 2012 income tax filing Pays the hotel, motel, etc. 2012 income tax filing , directly for your lodging. 2012 income tax filing Does not have a reasonable belief that you had (or will have) lodging expenses, such as when you stay with friends or relatives or sleep in the cab of your truck. 2012 income tax filing Figures the allowance on a basis similar to that used in computing your compensation, such as number of hours worked or miles traveled. 2012 income tax filing High-low rate. 2012 income tax filing   This is a simplified method of computing the federal per diem rate for travel within the continental United States. 2012 income tax filing It eliminates the need to keep a current list of the per diem rates for each city. 2012 income tax filing   Under the high-low method, the per diem amount for travel during January through September of 2013 is $242 (including $65 for M&IE) for certain high-cost locations. 2012 income tax filing All other areas have a per diem amount of $163 (including $52 for M&IE). 2012 income tax filing For more information, see Notice 2012-63, which can be found on the Internet at www. 2012 income tax filing irs. 2012 income tax filing gov/irb/2012-42_IRB/ar12. 2012 income tax filing html. 2012 income tax filing    Effective October 1, 2013, the per diem rate for certain high-cost locations increased to $251 (including $65 for M&IE). 2012 income tax filing The rate for all other locations increased to $170 (including $52 for M&IE). 2012 income tax filing Employers who did not use the high-low method during the first 9 months of 2013 cannot begin to use it before 2014. 2012 income tax filing For more information, see Notice 2013-65, which can be found on the Internet at www. 2012 income tax filing irs. 2012 income tax filing gov/pub/irs-drop/n-13–65. 2012 income tax filing pdf and Revenue Procedure 2011-47 at www. 2012 income tax filing irs. 2012 income tax filing gov/irb/2011-42_IRB/ar12. 2012 income tax filing html. 2012 income tax filing Prorating the standard meal allowance on partial days of travel. 2012 income tax filing   The standard meal allowance is for a full 24-hour day of travel. 2012 income tax filing If you travel for part of a day, such as on the days you depart and return, you must prorate the full-day M&IE rate. 2012 income tax filing This rule also applies if your employer uses the regular federal per diem rate or the high-low rate. 2012 income tax filing   You can use either of the following methods to figure the federal M&IE for that day. 2012 income tax filing Method 1: For the day you depart, add 3/4 of the standard meal allowance amount for that day. 2012 income tax filing For the day you return, add 3/4 of the standard meal allowance amount for the preceding day. 2012 income tax filing Method 2: Prorate the standard meal allowance using any method you consistently apply in accordance with reasonable business practice. 2012 income tax filing For example, an employer can treat 2 full days of per diem (that includes M&IE) paid for travel away from home from 9 a. 2012 income tax filing m. 2012 income tax filing of one day to 5 p. 2012 income tax filing m. 2012 income tax filing of the next day as being no more than the federal rate. 2012 income tax filing This is true even though a federal employee would be limited to a reimbursement of M&IE for only 1½ days of the federal M&IE rate. 2012 income tax filing The standard mileage rate. 2012 income tax filing   This is a set rate per mile that you can use to compute your deductible car expenses. 2012 income tax filing For 2013, the standard mileage rate for the cost of operating your car for business use is 56½ cents per mile. 2012 income tax filing Fixed and variable rate (FAVR). 2012 income tax filing   This is an allowance your employer may use to reimburse your car expenses. 2012 income tax filing Under this method, your employer pays an allowance that includes a combination of payments covering fixed and variable costs, such as a cents-per-mile rate to cover your variable operating costs (such as gas, oil, etc. 2012 income tax filing ) plus a flat amount to cover your fixed costs (such as depreciation (or lease payments), insurance, etc. 2012 income tax filing ). 2012 income tax filing If your employer chooses to use this method, your employer will request the necessary records from you. 2012 income tax filing Reporting your expenses with a per diem or car allowance. 2012 income tax filing   If your reimbursement is in the form of an allowance received under an accountable plan, the following facts affect your reporting. 2012 income tax filing The federal rate. 2012 income tax filing Whether the allowance or your actual expenses were more than the federal rate. 2012 income tax filing The following discussions explain where to report your expenses depending upon how the amount of your allowance compares to the federal rate. 2012 income tax filing Allowance less than or equal to the federal rate. 2012 income tax filing   If your allowance is less than or equal to the federal rate, the allowance will not be included in box 1 of your Form W-2. 2012 income tax filing You do not need to report the related expenses or the allowance on your return if your expenses are equal to or less than the allowance. 2012 income tax filing   However, if your actual expenses are more than your allowance, you can complete Form 2106 and deduct the excess amount on Schedule A (Form 1040). 2012 income tax filing If you are using actual expenses, you must be able to prove to the IRS the total amount of your expenses and reimbursements for the entire year. 2012 income tax filing If you are using the standard meal allowance or the standard mileage rate, you do not have to prove that amount. 2012 income tax filing Example 1. 2012 income tax filing In April, Jeremy takes a 2-day business trip to Denver. 2012 income tax filing The federal rate for Denver is $215 per day. 2012 income tax filing As required by his employer's accountable plan, he accounts for the time (dates), place, and business purpose of the trip. 2012 income tax filing His employer reimburses him $215 a day ($430 total) for living expenses. 2012 income tax filing Jeremy's living expenses in Denver are not more than $215 a day. 2012 income tax filing Jeremy's employer does not include any of the reimbursement on his Form W-2 and Jeremy does not deduct the expenses on his return. 2012 income tax filing Example 2. 2012 income tax filing In June, Matt takes a 2-day business trip to Boston. 2012 income tax filing Matt's employer uses the high-low method to reimburse employees. 2012 income tax filing Since Boston is a high-cost area, Matt is given an advance of $242 a day ($484 total) for his lodging, meals, and incidental expenses. 2012 income tax filing Matt's actual expenses totaled $700. 2012 income tax filing Since Matt's $700 of expenses are more than his $484 advance, he includes the excess expenses when he itemizes his deductions. 2012 income tax filing Matt completes Form 2106 (showing all of his expenses and reimbursements). 2012 income tax filing He must also allocate his reimbursement between his meals and other expenses as discussed later under Completing Forms 2106 and 2106-EZ . 2012 income tax filing Example 3. 2012 income tax filing Nicole drives 10,000 miles in 2013 for business. 2012 income tax filing Under her employer's accountable plan, she accounts for the time (dates), place, and business purpose of each trip. 2012 income tax filing Her employer pays her a mileage allowance of 40 cents a mile. 2012 income tax filing Since Nicole's $5,650 expense computed under the standard mileage rate (10,000 miles x 56½ cents) is more than her $4,000 reimbursement (10,000 miles × 40 cents), she itemizes her deductions to claim the excess expense. 2012 income tax filing Nicole completes Form 2106 (showing all her expenses and reimbursements) and enters $1,650 ($5,650 − $4,000) as an itemized deduction. 2012 income tax filing Allowance more than the federal rate. 2012 income tax filing   If your allowance is more than the federal rate, your employer must include the allowance amount up to the federal rate in box 12 of your Form W-2. 2012 income tax filing This amount is not taxable. 2012 income tax filing However, the excess allowance will be included in box 1 of your Form W-2. 2012 income tax filing You must report this part of your allowance as if it were wage income. 2012 income tax filing   If your actual expenses are less than or equal to the federal rate, you do not complete Form 2106 or claim any of your expenses on your return. 2012 income tax filing   However, if your actual expenses are more than the federal rate, you can complete Form 2106 and deduct those excess expenses. 2012 income tax filing You must report on Form 2106 your reimbursements up to the federal rate (as shown in box 12 of your Form W-2) and all your expenses. 2012 income tax filing You should be able to prove these amounts to the IRS. 2012 income tax filing Example 1. 2012 income tax filing Laura lives and works in Austin. 2012 income tax filing In July her employer sent her to Albuquerque for 4 days on business. 2012 income tax filing Laura's employer paid the hotel directly for her lodging and reimbursed Laura $65 a day ($260 total) for meals and incidental expenses. 2012 income tax filing Laura's actual meal expenses were not more than the federal rate for Albuquerque, which is $56 per day. 2012 income tax filing Table 6-1. 2012 income tax filing Reporting Travel, Entertainment, Gift, and Car Expenses and Reimbursements IF the type of reimbursement (or  other expense allowance)  arrangement is under: THEN the employer reports on Form W-2: AND the employee reports on  Form 2106: * An accountable plan with: Actual expense reimbursement: Adequate accounting made and excess returned. 2012 income tax filing No amount. 2012 income tax filing No amount. 2012 income tax filing Actual expense reimbursement: Adequate accounting and return of excess both required but excess not returned. 2012 income tax filing The excess amount as wages in box 1. 2012 income tax filing No amount. 2012 income tax filing Per diem or mileage allowance up to the federal rate: Adequate accounting made and excess returned. 2012 income tax filing No amount. 2012 income tax filing All expenses and reimbursements only if excess expenses are claimed. 2012 income tax filing Otherwise, form is not filed. 2012 income tax filing Per diem or mileage allowance up to the federal rate: Adequate accounting and return of excess both required but excess not returned. 2012 income tax filing The excess amount as wages in box 1. 2012 income tax filing The amount up to the federal rate is reported only in box 12—it is not reported in box 1. 2012 income tax filing No amount. 2012 income tax filing Per diem or mileage allowance exceeds the federal rate: Adequate accounting up to the federal rate only and excess not returned. 2012 income tax filing The excess amount as wages in box 1. 2012 income tax filing The amount up to the federal rate is reported only in box 12—it is not reported in box 1. 2012 income tax filing All expenses (and reimbursements reported on Form W-2, box 12) only if expenses in excess of the federal rate are claimed. 2012 income tax filing Otherwise, form is not filed. 2012 income tax filing A nonaccountable plan with: Either adequate accounting or return of excess, or both, not required by plan. 2012 income tax filing The entire amount as wages in box 1. 2012 income tax filing All expenses. 2012 income tax filing No reimbursement plan: The entire amount as wages in box 1. 2012 income tax filing All expenses. 2012 income tax filing * You may be able to use Form 2106-EZ. 2012 income tax filing See Completing Forms 2106 and 2106-EZ . 2012 income tax filing Her employer included the $36 that was more than the federal rate (($65 − $56) × 4) in box 1 of Laura's Form W-2. 2012 income tax filing Her employer shows $224 ($56 a day × 4) in box 12 of her Form W-2. 2012 income tax filing This amount is not included in Laura's income. 2012 income tax filing Laura does not have to complete Form 2106; however, she must include the $36 in her gross income as wages (by reporting the total amount shown in box 1 of her Form W-2). 2012 income tax filing Example 2. 2012 income tax filing Joe also lives in Austin and works for the same employer as Laura. 2012 income tax filing In May the employer sent Joe to San Diego for 4 days and paid the hotel directly for Joe's hotel bill. 2012 income tax filing The employer reimbursed Joe $75 a day for his meals and incidental expenses. 2012 income tax filing The federal rate for San Diego is $71 a day. 2012 income tax filing Joe can prove that his actual meal expenses totaled $380. 2012 income tax filing His employer's accountable plan will not pay more than $75 a day for travel to San Diego, so Joe does not give his employer the records that prove that he actually spent $380. 2012 income tax filing However, he does account for the time, place, and business purpose of the trip. 2012 income tax filing This is Joe's only business trip this year. 2012 income tax filing Joe was reimbursed $300 ($75 × 4 days), which is $16 more than the federal rate of $284 ($71 × 4 days). 2012 income tax filing The employer includes the $16 as income on Joe's Form W-2 in box 1. 2012 income tax filing The employer also enters $284 in box 12 of Joe's Form W-2. 2012 income tax filing Joe completes Form 2106 to figure his deductible expenses. 2012 income tax filing He enters the total of his actual expenses for the year ($380) on Form 2106. 2012 income tax filing He also enters the reimbursements that were not included in his income ($284). 2012 income tax filing His total deductible expense, before the 50% limit, is $96. 2012 income tax filing After he figures the 50% limit on his unreimbursed meals and entertainment, he will include the balance, $48, as an itemized deduction. 2012 income tax filing Example 3. 2012 income tax filing Debbie drives 10,000 miles in 2013 for business. 2012 income tax filing Under her employer's accountable plan, she gets reimbursed 60 cents a mile, which is more than the standard mileage rate. 2012 income tax filing Her total reimbursement is $6,000. 2012 income tax filing Debbie's employer must include the reimbursement amount up to the standard mileage rate, $5,650 (10,000 × 56½ cents), in box 12 of her Form W-2. 2012 income tax filing That amount is not taxable. 2012 income tax filing Her employer must also include $350 ($6,000 − $5,650) in box 1 of her Form W-2. 2012 income tax filing This is the reimbursement that is more than the standard mileage rate. 2012 income tax filing If Debbie's expenses are equal to or less than the standard mileage rate, she would not complete Form 2106. 2012 income tax filing If her expenses are more than the standard mileage rate, she would complete Form 2106 and report her total expenses and reimbursement (shown in box 12 of her Form W-2). 2012 income tax filing She would then claim the excess expenses as an itemized deduction. 2012 income tax filing Returning Excess Reimbursements Under an accountable plan, you are required to return any excess reimbursement or other expense allowances for your business expenses to the person paying the reimbursement or allowance. 2012 income tax filing Excess reimbursement means any amount for which you did not adequately account within a reasonable period of time. 2012 income tax filing For example, if you received a travel advance and you did not spend all the money on business-related expenses or you do not have proof of all your expenses, you have an excess reimbursement. 2012 income tax filing “ Adequate accounting ” and “ reasonable period of time ” were discussed earlier in this chapter. 2012 income tax filing Travel advance. 2012 income tax filing   You receive a travel advance if your employer provides you with an expense allowance before you actually have the expense, and the allowance is reasonably expected to be no more than your expense. 2012 income tax filing Under an accountable plan, you are required to adequately account to your employer for this advance and to return any excess within a reasonable period of time. 2012 income tax filing   If you do not adequately account for or do not return any excess advance within a reasonable period of time, the amount you do not account for or return will be treated as having been paid under a nonaccountable plan (discussed later). 2012 income tax filing Unproved amounts. 2012 income tax filing   If you do not prove that you actually traveled on each day for which you received a per diem or car allowance (proving the elements described in Table 5-1 ), you must return this unproved amount of the travel advance within a reasonable period of time. 2012 income tax filing If you do not do this, the unproved amount will be considered paid under a nonaccountable plan (discussed later). 2012 income tax filing Per diem allowance more than federal rate. 2012 income tax filing   If your employer's accountable plan pays you an allowance that is higher than the federal rate, you do not have to return the difference between the two rates for the period you can prove business-related travel expenses. 2012 income tax filing However, the difference will be reported as wages on your Form W-2. 2012 income tax filing This excess amount is considered paid under a nonaccountable plan (discussed later). 2012 income tax filing Example. 2012 income tax filing Your employer sends you on a 5-day business trip to Phoenix in March 2013 and gives you a $400 ($80 × 5 days) advance to cover your meals and incidental expenses. 2012 income tax filing The federal per diem for meals and incidental expenses for Phoenix is $71. 2012 income tax filing Your trip lasts only 3 days. 2012 income tax filing Under your employer's accountable plan, you must return the $160 ($80 × 2 days) advance for the 2 days you did not travel. 2012 income tax filing For the 3 days you did travel you do not have to return the $27 difference between the allowance you received and the federal rate for Phoenix (($80 − $71) × 3 days). 2012 income tax filing However, the $27 will be reported on your Form W-2 as wages. 2012 income tax filing Nonaccountable Plans A nonaccountable plan is a reimbursement or expense allowance arrangement that does not meet one or more of the three rules listed earlier under Accountable Plans. 2012 income tax filing In addition, even if your employer has an accountable plan, the following payments will be treated as being paid under a nonaccountable plan: Excess reimbursements you fail to return to your employer, and Reimbursement of nondeductible expenses related to your employer's business. 2012 income tax filing See Reimbursement of nondeductible expenses , earlier, under Accountable Plans. 2012 income tax filing An arrangement that repays you for business expenses by reducing the amount reported as your wages, salary, or other pay will be treated as a nonaccountable plan. 2012 income tax filing This is because you are entitled to receive the full amount of your pay whether or not you have any business expenses. 2012 income tax filing If you are not sure if the reimbursement or expense allowance arrangement is an accountable or nonaccountable plan, ask your employer. 2012 income tax filing Reporting your expenses under a nonaccountable plan. 2012 income tax filing   Your employer will combine the amount of any reimbursement or other expense allowance paid to you under a nonaccountable plan with your wages, salary, or other pay. 2012 income tax filing Your employer will report the total in box 1 of your Form W-2. 2012 income tax filing    You must complete Form 2106 or 2106-EZ and itemize your deductions to deduct your expenses for travel, transportation, meals, or entertainment. 2012 income tax filing Your meal and entertainment expenses will be subject to the 50% limit discussed in chapter 2. 2012 income tax filing Also, your total expenses will be subject to the 2%-of-adjusted-gross-income limit that applies to most miscellaneous itemized deductions. 2012 income tax filing Example 1. 2012 income tax filing Kim's employer gives her $1,000 a month ($12,000 total for the year) for her business expenses. 2012 income tax filing Kim does not have to provide any proof of her expenses to her employer, and Kim can keep any funds that she does not spend. 2012 income tax filing Kim is being reimbursed under a nonaccountable plan. 2012 income tax filing Her employer will include the $12,000 on Kim's Form W-2 as if it were wages. 2012 income tax filing If Kim wants to deduct her business expenses, she must complete Form 2106 or 2106-EZ and itemize her deductions. 2012 income tax filing Example 2. 2012 income tax filing Kevin is paid $2,000 a month by his employer. 2012 income tax filing On days that he travels away from home on business, his employer designates $50 a day of his salary as paid to reimburse his travel expenses. 2012 income tax filing Because his employer would pay Kevin his monthly salary whether or not he was traveling away from home, the arrangement is a nonaccountable plan. 2012 income tax filing No part of the $50 a day designated by his employer is treated as paid under an accountable plan. 2012 income tax filing Rules for Independent Contractors and Clients This section provides rules for independent contractors who incur expenses on behalf of a client or customer. 2012 income tax filing The rules cover the reporting and substantiation of certain expenses discussed in this publication, and they affect both independent contractors and their clients or customers. 2012 income tax filing You are considered an independent contractor if you are self-employed and you perform services for a customer or client. 2012 income tax filing Accounting to Your Client If you received a reimbursement or an allowance for travel, entertainment, or gift expenses that you incurred on behalf of a client, you should provide an adequate accounting of these expenses to your client. 2012 income tax filing If you do not account to your client for these expenses, you must include any reimbursements or allowances in income. 2012 income tax filing You must keep adequate records of these expenses whether or not you account to your client for these expenses. 2012 income tax filing If you do not separately account for and seek reimbursement for meals and entertainment in connection with providing services for a client, you are subject to the 50% limit on those expenses. 2012 income tax filing See 50% Limit in chapter 2. 2012 income tax filing Adequate accounting. 2012 income tax filing   As a self-employed person, you adequately account by reporting your actual expenses. 2012 income tax filing You should follow the recordkeeping rules in chapter 5 . 2012 income tax filing How to report. 2012 income tax filing   For information on how to report expenses on your tax return, see Self-employed at the beginning of this chapter. 2012 income tax filing Required Records for Clients or Customers If you are a client or customer, you generally do not have to keep records to prove the reimbursements or allowances you give, in the course of your business, to an independent contractor for travel or gift expenses incurred on your behalf. 2012 income tax filing However, you must keep records if: You reimburse the contractor for entertainment expenses incurred on your behalf, and The contractor adequately accounts to you for these expenses. 2012 income tax filing Contractor adequately accounts. 2012 income tax filing   If the contractor adequately accounts to you for entertainment expenses, you (the client or customer) must keep records documenting each element of the expense, as explained in chapter 5 . 2012 income tax filing Use your records as proof for a deduction on your tax return. 2012 income tax filing If entertainment expenses are accounted for separately, you are subject to the 50% limit on entertainment. 2012 income tax filing If the contractor adequately accounts to you for reimbursed amounts, you do not have to report the amounts on an information return. 2012 income tax filing Contractor does not adequately account. 2012 income tax filing    If the contractor does not adequately account to you for allowances or reimbursements of entertainment expenses, you do not have to keep records of these items. 2012 income tax filing You are not subject to the 50% limit on entertainment in this case. 2012 income tax filing You can deduct the reimbursements or allowances as payment for services if they are ordinary and necessary business expenses. 2012 income tax filing However, you must file Form 1099-MISC to report amounts paid to the independent contractor if the total of the reimbursements and any other fees is $600 or more during the calendar year. 2012 income tax filing How To Use Per Diem Rate Tables This section contains information about the per diem rate substantiation methods available and the choice of rates you must make for the last 3 months of the year. 2012 income tax filing The Two Substantiation Methods High-low method. 2012 income tax filing   IRS notices list the localities that are treated under the high-low substantiation method as high-cost localities for all or part of the year. 2012 income tax filing Notice 2012–63, available at www. 2012 income tax filing irs. 2012 income tax filing gov/irb/2012–42_IRB/ar12. 2012 income tax filing html, lists the localities that are eligible for $242 ($65 meals and incidental expenses (M&IE)) per diem, effective October 1, 2012. 2012 income tax filing For travel on or after October 1, 2012, all other localities within CONUS are eligible for $163 ($52 M&IE) per diem under the high-low method. 2012 income tax filing   Notice 2013–65, available at www. 2012 income tax filing irs. 2012 income tax filing gov/pub/irs-drop/n-13–65. 2012 income tax filing pdf, lists the localities that are eligible for $251 ($65 M&IE) per diem, effective October 1, 2013. 2012 income tax filing For travel on or after October 1, 2013, the per diem for all other localities increased to $170 ($52 M&IE). 2012 income tax filing Regular federal per diem rate method. 2012 income tax filing   Regular federal per diem rates are published by the General Services Administration (GSA). 2012 income tax filing Both tables include the separate rate for meals and incidental expenses (M&IE) for each locality. 2012 income tax filing The rates listed for FY2013 at www. 2012 income tax filing gsa. 2012 income tax filing gov/perdiem are effective October 1, 2012 and those listed for FY2014 are effective October 1, 2013. 2012 income tax filing The standard rate for all locations within CONUS not specifically listed for FY2013 is $123 ($77 for lodging and $46 for M&IE). 2012 income tax filing For FY2014, this rate increased to $129 ($83 for lodging and $46 for M&IE). 2012 income tax filing Transition Rules The transition period covers the last 3 months of the calendar year, from the time that new rates are effective (generally October 1) through December 31. 2012 income tax filing During this period, you generally may change to the new rates or finish out the year with the rates you had been using. 2012 income tax filing High-low method. 2012 income tax filing   If you use the high-low substantiation method, when new rates become effective (generally October 1) you can either continue with the rates you used for the first part of the year or change to the new rates. 2012 income tax filing However, you must continue using the high-low method for the rest of the calendar year (through December 31). 2012 income tax filing If you are an employer, you must use the same rates for all employees reimbursed under the high-low method during that calendar year. 2012 income tax filing   The new rates and localities for the high-low method are included each year in a notice that is generally published in mid-to-late-September. 2012 income tax filing You can find the notice in the weekly Internal Revenue Bulletin (IRB) on the Internet at www. 2012 income tax filing irs. 2012 income tax filing gov/irb. 2012 income tax filing Federal per diem rate method. 2012 income tax filing   New CONUS per diem rates become effective on October 1 of each year and remain in effect through September 30 of the following year. 2012 income tax filing Employees being reimbursed under the per diem rate method during the first 9 months of a year (January 1–September 30) must continue under the same method through the end of that calendar year (December 31). 2012 income tax filing However, for travel by these employees from October 1 through December 31, you can choose to continue using the same per diem rates or use the new rates. 2012 income tax filing   The new federal CONUS per diem rates are published each year, generally early in September, on the Internet. 2012 income tax filing Go to www. 2012 income tax filing gsa. 2012 income tax filing gov/perdiem. 2012 income tax filing Per diem rates for localities listed for FY2014 may change at any time. 2012 income tax filing To be sure you have the most current rate, check www. 2012 income tax filing gsa. 2012 income tax filing gov/perdiem. 2012 income tax filing Completing Forms 2106 and 2106-EZ This section briefly describes how employees complete Forms 2106 and 2106-EZ. 2012 income tax filing Table 6-1 explains what the employer reports on Form W-2 and what the employee reports on Form 2106. 2012 income tax filing The instructions for the forms have more information on completing them. 2012 income tax filing If you are self-employed, do not file Form 2106 or 2106-EZ. 2012 income tax filing Report your expenses on Schedule C (Form 1040), Schedule C-EZ (Form 1040), or Schedule F (Form 1040). 2012 income tax filing See the instructions for the form that you must file. 2012 income tax filing Form 2106-EZ. 2012 income tax filing   You may be able to use the shorter Form 2106-EZ to claim your employee business expenses. 2012 income tax filing You can use this form if you meet all the following conditions. 2012 income tax filing You are an employee deducting ordinary and necessary expenses attributable to your job. 2012 income tax filing You were not reimbursed by your employer for your expenses (amounts included in box 1 of your Form W-2 are not considered reimbursements). 2012 income tax filing If you are claiming car expenses, you are using the standard mileage rate. 2012 income tax filing Car expenses. 2012 income tax filing   If you used a car to perform your job as an employee, you may be able to deduct certain car expenses. 2012 income tax filing These are generally figured on Form 2106, Part II, and then claimed on Form 2106, Part I, line 1, Column A. 2012 income tax filing Car expenses using the standard mileage rate can also be figured on Form 2106-EZ by completing Part II and Part I, line 1. 2012 income tax filing Information on use of cars. 2012 income tax filing   If you claim any deduction for the business use of a car, you must answer certain questions and provide information about the use of the car. 2012 income tax filing The information relates to the following items. 2012 income tax filing Date placed in service. 2012 income tax filing Mileage (total, business, commuting, and other personal mileage). 2012 income tax filing Percentage of business use. 2012 income tax filing After-work use. 2012 income tax filing Use of other vehicles. 2012 income tax filing Whether you have evidence to support the deduction. 2012 income tax filing Whether or not the evidence is written. 2012 income tax filing Employees must complete Form 2106, Part II, Section A, or Form 2106-EZ, Part II, to provide this information. 2012 income tax filing Standard mileage rate. 2012 income tax filing   If you claim a deduction based on the standard mileage rate instead of your actual expenses, you must complete Form 2106, Part II, Section B. 2012 income tax filing The amount on line 22 (Section B) is carried to Form 2106, Part I, line 1. 2012 income tax filing In addition, on Part 1, line 2, you can deduct parking fees and tolls that apply to the business use of the car. 2012 income tax filing If you file Form 2106-EZ, complete Part I, line 1, for the standard mileage rate and line 2 for parking fees and tolls. 2012 income tax filing See Standard Mileage Rate in chapter 4 for information on using this rate. 2012 income tax filing Actual expenses. 2012 income tax filing   If you claim a deduction based on actual car expenses, you cannot use Form 2106-EZ. 2012 income tax filing You must complete Form 2106, Part II, Section C. 2012 income tax filing In addition, unless you lease your car, you must complete Section D to show your depreciation deduction and any section 179 deduction you claim. 2012 income tax filing   If you are still using a car that is fully depreciated, continue to complete Section C. 2012 income tax filing Since you have no depreciation deduction, enter zero on line 28. 2012 income tax filing In this case, do not complete Section D. 2012 income tax filing Car rentals. 2012 income tax filing   If you claim car rental expenses on Form 2106, line 24a, you may have to reduce that expense by an inclusion amount as described in chapter 4. 2012 income tax filing If so, you can show your car expenses and any inclusion amount as follows. 2012 income tax filing Compute the inclusion amount without taking into account your business use percentage for the tax year. 2012 income tax filing Report the inclusion amount from (1) on Form 2106, Part II, line 24b. 2012 income tax filing Report on line 24c the net amount of car rental expenses (total car rental expenses minus the inclusion amount computed in (1)). 2012 income tax filing The net amount of car rental expenses will be adjusted on Form 2106, Part II, line 27, to reflect the percentage of business use for the tax year. 2012 income tax filing Transportation expenses. 2012 income tax filing   Show your transportation expenses that did not involve overnight travel on Form 2106, line 2, Column A, or on Form 2106-EZ, Part I, line 2. 2012 income tax filing Also include on this line business expenses you have for parking fees and tolls. 2012 income tax filing Do not include expenses of operating your car or expenses of commuting between your home and work. 2012 income tax filing Employee business expenses other than meals and entertainment. 2012 income tax filing   Show your other employee business expenses on Form 2106, lines 3 and 4, Column A, or Form 2106-EZ, lines 3 and 4. 2012 income tax filing Do not include expenses for meals and entertainment on those lines. 2012 income tax filing Line 4 is for expenses such as gifts, educational expenses (tuition and books), office-in-the-home expenses, and trade and professional publications. 2012 income tax filing    If line 4 expenses are the only ones you are claiming, you received no reimbursements (or the reimbursements were all included in box 1 of your Form W-2), and the Special Rules discussed later do not apply to you, do not complete Form 2106 or 2106-EZ. 2012 income tax filing Claim these amounts directly on Schedule A (Form 1040), line 21. 2012 income tax filing List the type and amount of each expense on the dotted lines and include the total on line 21. 2012 income tax filing Meal and entertainment expenses. 2012 income tax filing   Show the full amount of your expenses for business-related meals and entertainment on Form 2106, line 5, Column B. 2012 income tax filing Include meals while away from your tax home overnight and other business meals and entertainment. 2012 income tax filing Enter 50% of the line 8, Column B, meal and entertainment expenses on line 9, Column B. 2012 income tax filing   If you file Form 2106-EZ, enter the full amount of your meals and entertainment on the line to the left of line 5 and multiply the total by 50%. 2012 income tax filing Enter the result on line 5. 2012 income tax filing Hours of service limits. 2012 income tax filing   If you are subject to the Department of Transportation's “hours of service” limits (as explained earlier under Individuals subject to “hours of service” limits in chapter 2), use 80% instead of 50% for meals while away from your tax home. 2012 income tax filing Reimbursements. 2012 income tax filing   Enter on Form 2106, line 7 (you cannot use Form 2106-EZ) the amounts your employer (or third party) reimbursed you that were not reported to you in box 1 of your Form W-2. 2012 income tax filing This includes any amount reported under code L in box 12 of Form W-2. 2012 income tax filing Allocating your reimbursement. 2012 income tax filing   If you were reimbursed under an accountable plan and want to deduct excess expenses that were not reimbursed, you may have to allocate your reimbursement. 2012 income tax filing This is necessary when your employer pays your reimbursement in the following manner: Pays you a single amount that covers meals and/or entertainment, as well as other business expenses, and Does not clearly identify how much is for deductible meals and/or entertainment. 2012 income tax filing You must allocate that single payment so that you know how much to enter on Form 2106, line 7, Column A and Column B. 2012 income tax filing Example. 2012 income tax filing Rob's employer paid him an expense allowance of $12,000 this year under an accountable plan. 2012 income tax filing The $12,000 payment consisted of $5,000 for airfare and $7,000 for meals, entertainment, and car expenses. 2012 income tax filing The employer did not clearly show how much of the $7,000 was for the cost of deductible meals and entertainment. 2012 income tax filing Rob actually spent $14,000 during the year ($5,500 for airfare, $4,500 for meals and entertainment, and $4,000 for car expenses). 2012 income tax filing Since the airfare allowance was clearly identified, Rob knows that $5,000 of the payment goes in Column A, line 7, of Form 2106. 2012 income tax filing To allocate the remaining $7,000, Rob uses the worksheet from the Instructions for Form 2106. 2012 income tax filing His completed worksheet follows. 2012 income tax filing Reimbursement Allocation Worksheet (Keep for your records)   1. 2012 income tax filing Enter the total amount of reimbursements your employer gave you that were not reported to you in box 1 of Form W-2 $7,000   2. 2012 income tax filing Enter the total amount of your expenses for the periods covered by this reimbursement 8,500   3. 2012 income tax filing Of the amount on line 2, enter your total expense for meals and entertainment 4,500   4. 2012 income tax filing Divide line 3 by line 2. 2012 income tax filing Enter the result as a decimal (rounded to at least three places) . 2012 income tax filing 529   5. 2012 income tax filing Multiply line 1 by line 4. 2012 income tax filing Enter the result here and in Column B, line 7 3,703   6. 2012 income tax filing Subtract line 5 from line 1. 2012 income tax filing Enter the result here and in Column A, line 7 $3,297 On line 7 of Form 2106, Rob enters $8,297 ($5,000 airfare and $3,297 of the $7,000) in Column A and $3,703 (of the $7,000) in Column B. 2012 income tax filing After you complete the form. 2012 income tax filing   After you have completed your Form 2106 or 2106-EZ, follow the directions on that form to deduct your expenses on the appropriate line of your tax return. 2012 income tax filing For most taxpayers, this is line 21 of Schedule A (Form 1040). 2012 income tax filing However, if you are a government official paid on a fee basis, a performing artist, an Armed Forces reservist, or a disabled employee with impairment-related work expenses, see Special Rules , later. 2012 income tax filing Limits on employee business expenses. 2012 income tax filing   Your employee business expenses may be subject to either of the limits described next. 2012 income tax filing They are figured in the following order on the specified form. 2012 income tax filing 1. 2012 income tax filing Limit on meals and entertainment. 2012 income tax filing   Certain meal and entertainment expenses are subject to a 50% limit. 2012 income tax filing If you are an employee, you figure this limit on line 9 of Form 2106 or line 5 of Form 2106-EZ. 2012 income tax filing (See 50% Limit in chapter 2. 2012 income tax filing ) 2. 2012 income tax filing Limit on miscellaneous itemized deductions. 2012 income tax filing   If you are an employee, deduct your employee business expenses (as figured on Form 2106 or 2106-EZ) on line 21 of Schedule A (Form 1040). 2012 income tax filing Most miscellaneous itemized deductions, including employee business expenses, are subject to a 2%-of-adjusted-gross-income limit. 2012 income tax filing This limit is figured on line 26 of Schedule A (Form 1040). 2012 income tax filing 3. 2012 income tax filing Limit on total itemized deductions. 2012 income tax filing   If your adjusted gross income (line 38 of Form 1040) is more than $300,000 ($150,000 if you are married filing separately), the total of certain itemized deductions, including employee business expenses, may be limited. 2012 income tax filing See your form instructions for information on how to figure this limit. 2012 income tax filing Special Rules This section discusses special rules that apply only to Armed Forces reservists, government officials who are paid on a fee basis, performing artists, and disabled employees with impairment-related work expenses. 2012 income tax filing Armed Forces Reservists Traveling More Than 100 Miles From Home If you are a member of a reserve component of the Armed Forces of the United States and you travel more than 100 miles away from home in connection with your performance of services as a member of the reserves, you can deduct your travel expenses as an adjustment to gross income rather than as a miscellaneous itemized deduction. 2012 income tax filing The amount of expenses you can deduct as an adjustment to gross income is limited to the regular federal per diem rate (for lodging, meals, and incidental expenses) and the standard mileage rate (for car expenses) plus any parking fees, ferry fees, and tolls. 2012 income tax filing See Per Diem and Car Allowances , earlier, for more information. 2012 income tax filing Any expenses in excess of these amounts can be claimed only as a miscellaneous itemized deduction subject to the 2% limit. 2012 income tax filing Member of a reserve component. 2012 income tax filing   You are a member of a reserve component of the Armed Forces of the United States if you are in the Army, Navy, Marine Corps, Air Force, or Coast Guard Reserve; the Army National Guard of the United States; the Air National Guard of the United States; or the Reserve Corps of the Public Health Service. 2012 income tax filing How to report. 2012 income tax filing   If you have reserve-related travel that takes you more than 100 miles from home, you should first complete Form 2106 or Form 2106-EZ. 2012 income tax filing Then include your expenses for reserve travel over 100 miles from home, up to the federal rate, from Form 2106, line 10, or Form 2106-EZ, line 6, in the total on Form 1040, line 24. 2012 income tax filing Subtract this amount from the total on Form 2106, line 10, or Form 2106-EZ, line 6, and deduct the balance as an itemized deduction on Schedule A (Form 1040), line 21. 2012 income tax filing   You cannot deduct expenses of travel that does not take you more than 100 miles from home as an adjustment to gross income. 2012 income tax filing Instead, you must complete Form 2106 or 2106-EZ and deduct those expenses as an itemized deduction on Schedule A (Form 1040), line 21. 2012 income tax filing Officials Paid on a Fee Basis Certain fee-basis officials can claim their employee business expenses whether or not they itemize their other deductions on Schedule A (Form 1040). 2012 income tax filing Fee-basis officials are persons who are employed by a state or local government and who are paid in whole or in part on a fee basis. 2012 income tax filing They can deduct their business expenses in performing services in that job as an adjustment to gross income rather than as a miscellaneous itemized deduction. 2012 income tax filing If you are a fee-basis official, include your employee business expenses from Form 2106, line 10, or Form 2106-EZ, line 6, in the total on Form 1040, line 24. 2012 income tax filing Expenses of Certain Performing Artists If you are a performing artist, you may qualify to deduct your employee business expenses as an adjustment to gross income rather than as a miscellaneous itemized deduction. 2012 income tax filing To qualify, you must meet all of the following requirements. 2012 income tax filing During the tax year, you perform services in the performing arts as an employee for at least two employers. 2012 income tax filing You receive at least $200 each from any two of these employers. 2012 income tax filing Your related performing-arts business expenses are more than 10% of your gross income from the performance of those services. 2012 income tax filing Your adjusted gross income is not more than $16,000 before deducting these business expenses. 2012 income tax filing Special rules for married persons. 2012 income tax filing   If you are married, you must file a joint return unless you lived apart from your spouse at all times during the tax year. 2012 income tax filing If you file a joint return, you must figure requirements (1), (2), and (3) separately for both you and your spouse. 2012 income tax filing However, requirement (4) applies to your and your spouse's combined adjusted gross income. 2012 income tax filing Where to report. 2012 income tax filing   If you meet all of the above requirements, you should first complete Form 2106 or 2106-EZ. 2012 income tax filing Then you include your performing-arts-related expenses from Form 2106, line 10, or Form 2106-EZ, line 6, in the total on Form 1040, line 24. 2012 income tax filing   If you do not meet all of the above requirements, you do not qualify to deduct your expenses as an adjustment to gross income. 2012 income tax filing Instead, you must complete Form 2106 or 2106-EZ and deduct your employee business expenses as an itemized deduction on Schedule A (Form 1040), line 21. 2012 income tax filing Impairment-Related Work Expenses of Disabled Employees If you are an employee with a physical or mental disability, your impairment-related work expenses are not subject to the 2%-of-adjusted-gross-income limit that applies to most other employee business expenses. 2012 income tax filing After you complete Form 2106 or 2106-EZ, enter your impairment-related work expenses from Form 2106, line 10, or Form 2106-EZ, line 6, on Schedule A (Form 1040), line 28, and identify the type and amount of this expense on the dotted line next to line 28. 2012 income tax filing Enter your employee business expenses that are unrelated to your disability from Form 2106, line 10, or Form 2106-EZ, line 6, on Schedule A (Form 1040), line 21. 2012 income tax filing Impairment-related work expenses are your allowable expenses for attendant care at your workplace and other expenses in connection with your workplace that are necessary for you to be able to work. 2012 income tax filing You are disabled if you have: A physical or mental disability (for example, blindness or deafness) that functionally limits your being employed, or A physical or mental impairment (for example, a sight or hearing impairment) that substantially limits one or more of your major life activities, such as performing manual tasks, walking, speaking, breathing, learning, or working. 2012 income tax filing You can deduct impairment-related expenses as business expenses if they are: Necessary for you to do your work satisfactorily, For goods and services not required or used, other than incidentally, in your personal activities, and Not specifically covered under other income tax laws. 2012 income tax filing Example 1. 2012 income tax filing You are blind. 2012 income tax filing You must use a reader to do your work. 2012 income tax filing You use the reader both during your regular working hours at your place of work and outside your regular working hours away from your place of work. 2012 income tax filing The reader's services are only for your work. 2012 income tax filing You can deduct your expenses for the reader as business expenses. 2012 income tax filing Example 2. 2012 income tax filing You are deaf. 2012 income tax filing You must use a sign language interpreter during meetings while you are at work. 2012 income tax filing The interpreter's services are used only for your work. 2012 income tax filing You can deduct your expenses for the interpreter as business expenses. 2012 income tax filing Prev  Up  Next   Home   More Online Publications