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Amended Return Form 1040x

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Amended Return Form 1040x

Amended return form 1040x Accelerated Cost Recovery System (ACRS) Table of Contents Topics - This chapter discusses: Useful Items - You may want to see: ACRS Defined What Can and Cannot Be Depreciated Under ACRSRecovery Property Nonrecovery Property How To Figure the DeductionUnadjusted Basis Classes of Recovery Property Recovery Periods Alternate ACRS Method (Modified Straight Line Method) ACRS Deduction in Short Tax Year DispositionsEarly dispositions of ACRS property other than 15-, 18-, or 19-year real property. Amended return form 1040x Dispositions — mass asset accounts. Amended return form 1040x Early dispositions — 15-year real property. Amended return form 1040x Early dispositions — 18- and 19-year real property. Amended return form 1040x Depreciation Recapture Topics - This chapter discusses: The definition of ACRS What can and cannot be depreciated under ACRS How to figure the deduction Dispositions Useful Items - You may want to see: Publication 544 Sales and Other Dispositions of Assets 551 Basis of Assets 583 Starting a Business and Keeping Records Form (and Instructions) 3115 Application for Change in Accounting Method 4562 Depreciation and Amortization The Accelerated Cost Recovery System (ACRS) applies to property first used before 1987. Amended return form 1040x It is the name given to tax rules for getting back (recovering) through depreciation deductions the cost of property used in a trade or business or to produce income. Amended return form 1040x These rules are mandatory and generally apply to tangible property placed in service after 1980 and before 1987. Amended return form 1040x If you placed property in service during this period, you must continue to figure your depreciation under ACRS. Amended return form 1040x If you used listed property placed in service after June 18, 1984, less than 50% for business in 1995, see Predominant Use Test in chapter 3. Amended return form 1040x Listed property includes cars, other means of transportation, and certain computers. Amended return form 1040x Any additions or improvements placed in service after 1986, including any components of a building (such as plumbing, wiring, storm windows, etc. Amended return form 1040x ), are depreciated using MACRS, discussed in chapter 3 of Publication 946. Amended return form 1040x It does not matter that the underlying property is depreciated under ACRS or one of the other methods. Amended return form 1040x ACRS Defined ACRS consists of accelerated depreciation methods and an alternate ACRS method that could have been elected. Amended return form 1040x The alternate ACRS method used a recovery percentage based on a modified straight line method. Amended return form 1040x The law prescribes fixed percentages to be uses for each class of property. Amended return form 1040x Property depreciable under ACRS is called recovery property. Amended return form 1040x The recovery class of property determines the recovery period. Amended return form 1040x Generally, the class life of property places it in a 3-year, 5-year, 10-year, 15-year, 18-year, or 19-year recovery class. Amended return form 1040x Under ACRS, the prescribed percentages are used to recover the unadjusted basis of recovery property. Amended return form 1040x To figure a depreciation deduction, you multiply the prescribed percentage for the recovery class by the unadjusted basis of the recovery property. Amended return form 1040x You must continue to figure your depreciation under ACRS for property placed in service after 1980 and before 1987. Amended return form 1040x For property you placed in service after 1986, you must use MACRS, discussed in chapter 3 of Publication 946. Amended return form 1040x What Can and Cannot Be Depreciated Under ACRS ACRS applies to most depreciable tangible property placed in service after 1980 and before 1987. Amended return form 1040x It includes new or used and real or personal property. Amended return form 1040x The property must be for use in a trade or business or for the production of income. Amended return form 1040x Property you acquired before 1981 or after 1986 is not ACRS recovery property. Amended return form 1040x For information on depreciating property acquired before 1981, see chapter 2. Amended return form 1040x For information on depreciating property acquired after 1986, see chapter 3 of Publication 946. Amended return form 1040x Recovery Property Recovery property under ACRS is tangible depreciable property placed in service after 1980 and before 1987. Amended return form 1040x It generally includes new or used property that you acquired after 1980 and before 1987 for use in your trade or business or for the production of income. Amended return form 1040x Nonrecovery Property You cannot use ACRS for property you placed in service before 1981 or after 1986. Amended return form 1040x Nonrecovery property also includes: Intangible property, Property you elected to exclude from ACRS that is properly depreciated under a method of depreciation that is not based on a term of years, Certain public utility property, and Certain property acquired and excluded from ACRS because of the antichurning rules. Amended return form 1040x Intangible property. Amended return form 1040x   Intangible property is not depreciated under ACRS. Amended return form 1040x Property depreciated under methods not expressed in a term of years. Amended return form 1040x   Certain property depreciated under a method not expressed in a term of years is not depreciated under ACRS. Amended return form 1040x This included any property: If you made an irrevocable election to exclude such property, and In the first year that you could have claimed depreciation, you properly used the unit-of-production method or any method of depreciation not expressed in a term of years (not including the retirement-replacement-betterment method). Amended return form 1040x Public utility property. Amended return form 1040x   Public utility property for which the taxpayer does not use a normalization method of accounting is excluded from ACRS and is subject to depreciation under a special rule. Amended return form 1040x Additions or improvements to ACRS property after 1986. Amended return form 1040x   Any additions or improvements placed in service after 1986, including any components of a building (plumbing, wiring, storm windows, etc. Amended return form 1040x ) are depreciated using MACRS, discussed in chapter 3 of Publication 946. Amended return form 1040x It does not matter that the underlying property is depreciated under ACRS or one of the other methods. Amended return form 1040x How To Figure the Deduction After you determine that your property can be depreciated under ACRS, you are ready to figure your deduction. Amended return form 1040x Because the conventions are built into the percentage table rates, you only need to know the following: The unadjusted basis of your recovery property, The classes of recovery property, The recovery periods, and Whether to use the prescribed percentages based on accelerated methods or percentages based on using the alternate ACRS method. Amended return form 1040x Unadjusted Basis To figure your ACRS deduction, you multiply the unadjusted basis in your recovery property by its applicable percentage for the year. Amended return form 1040x Unadjusted basis is the same amount you would use to figure gain on a sale, but it is figured without taking into account any depreciation taken in earlier years. Amended return form 1040x However, reduce your original basis by the amount of amortization taken on the property and by any section 179 deduction claimed as discussed in chapter 2 of Publication 946. Amended return form 1040x If you buy property, your unadjusted basis is usually its cost minus any amortized amount and minus any section 179 deduction elected. Amended return form 1040x If you acquire property in some other way, such as by inheriting it, getting it as a gift, or building it yourself, you figure your unadjusted basis under other rules. Amended return form 1040x See Publication 551. Amended return form 1040x Classes of Recovery Property All recovery property under ACRS is in one of the following classes. Amended return form 1040x The class for your property was determined when you began to depreciate it. Amended return form 1040x 3-Year Property 3-year property includes automobiles, light-duty trucks (actual unloaded weight less than 13,000 pounds), and tractor units for use over-the-road. Amended return form 1040x Race horses over 2 years old when placed in service are 3-year property. Amended return form 1040x Any other horses over 12 years old when you placed them in service are also included in the 3-year property class. Amended return form 1040x The ACRS percentages for 3-year recovery property are: Recovery Period Percentage 1st year 25% 2nd year 38% 3rd year 37% If you used the percentages above to depreciate your 3-year recovery property, your property, except for certain passenger automobiles, is fully depreciated. Amended return form 1040x You cannot claim depreciation for this property after 1988. Amended return form 1040x 5-Year Property 5-year property includes computers, copiers, and equipment, such as office furniture and fixtures. Amended return form 1040x It also includes single purpose agricultural or horticultural structures and petroleum storage facilities (other than buildings and their structural components). Amended return form 1040x The ACRS percentages for 5-year recovery property are: Recovery period Percentage 1st year 15% 2nd year 22% 3rd through 5th year 21% If you used the percentages above to depreciate your 5-year recovery property, it is fully depreciated. Amended return form 1040x You cannot claim depreciation for this property after 1990. Amended return form 1040x 10-Year Property 10-year property includes certain real property such as theme-park structures and certain public utility property. Amended return form 1040x Manufactured homes (including mobile homes) and railroad tank cars are also 10-year property. Amended return form 1040x You do not treat a building, and its structural components, as 10-year property by reason of a change in use after you placed the property in service. Amended return form 1040x For example, a building (15-year real property) that was placed in service in 1981 and was converted to a theme-park structure in 1986 remains 15-year real property. Amended return form 1040x The ACRS percentages for 10-year recovery property are: Recovery Period Percentage 1st year 8% 2nd year 14% 3rd year 12% 4th through 6th year 10% 7th through 10th year 9% If you used the percentages above, you cannot claim depreciation for this property after 1995. Amended return form 1040x Example. Amended return form 1040x On April 21, 1986, you bought and placed in service a new mobile home for $26,000 to be used as rental property. Amended return form 1040x You paid $10,000 cash and signed a note for $16,000 giving you an unadjusted basis of $26,000. Amended return form 1040x On June 8, 1986, you bought and placed in service a used mobile home for use as rental property at a total cost of $11,500. Amended return form 1040x The total unadjusted basis of your 10-year recovery property placed in service in 1986 was $37,500 ($26,000 + $11,500). Amended return form 1040x Your ACRS deduction was $3,000 (8% × $37,500). Amended return form 1040x In 1987, your ACRS deduction was $5,250 (14% × $37,500). Amended return form 1040x In 1988, your ACRS deduction was $4,500 (12% × $37,500). Amended return form 1040x In 1989, 1990, and 1991, your ACRS deduction was $3,750 (10% × $37,500). Amended return form 1040x In 1992, 1993, 1994, and 1995 your deduction for each year is $3,375 (9% × $37,500). Amended return form 1040x 15-Year Real Property 15-year real property is real property that is recovery property placed in service before March 16, 1984. Amended return form 1040x It includes all real property, such as buildings, other than that designated as 5-year or 10-year property. Amended return form 1040x Unlike the 3-, 5-, or 10-year classes of property, the percentages for 15-year real property depend on when you placed the property in service during your tax year. Amended return form 1040x You could group 15-year real property by month and year placed in service. Amended return form 1040x In Table 1, at the end of this publication in the Appendix, find the month in your tax year that you placed the property in service in your trade or business or for the production of income. Amended return form 1040x You use the percentages listed under that month for each year of the recovery period to determine your depreciation deduction each year. Amended return form 1040x Example. Amended return form 1040x On March 5, 1984, you placed an apartment building in service in your business. Amended return form 1040x It is 15-year real property. Amended return form 1040x After subtracting the value of the land, your unadjusted basis in the building is $250,000. Amended return form 1040x You use the calendar year as your tax year. Amended return form 1040x March is the third month of your tax year. Amended return form 1040x Your ACRS deduction for 1984 was $25,000 (10% × $250,000). Amended return form 1040x For 1985, the percentage for the third month of the second year of the recovery period is 11%. Amended return form 1040x Your deduction was $27,500 (11% × $250,000). Amended return form 1040x For the third, fourth, and fifth years of the recovery period (1986, 1987, and 1988), the percentages are 9%, 8%, and 7%. Amended return form 1040x For 1989 through 1992, the percentage for the third month is 6%. Amended return form 1040x Your deduction each year is $15,000 (6% × $250,000). Amended return form 1040x For 1993, 1994, and 1995, the percentage for the third month is 5%. Amended return form 1040x Your depreciation deduction is $12,500 (5% × $250,000) for 1993, 1994, and 1995. Amended return form 1040x Low-Income Housing Low-income housing that was assigned a 15-year recovery period under ACRS includes the following types of property: Federally assisted housing projects where the mortgage is insured under section 221(d)(3) or 236 of the National Housing Act, or housing financed or assisted by direct loan or tax abatement under similar provisions of state or local laws. Amended return form 1040x Low-income rental housing for which a depreciation deduction for rehabilitation expenditures is allowed. Amended return form 1040x Low-income rental housing held for occupancy by families or individuals eligible to receive subsidies under section 8 of the United States Housing Act of 1937, as amended, or under the provisions of state or local laws that authorize similar subsidies for low-income families. Amended return form 1040x Housing financed or assisted by direct loan or insured under Title V of the Housing Act of 1949. Amended return form 1040x The ACRS percentages for low-income housing real property, like the regular 15-year real property percentages, depend on when you placed the property in service. Amended return form 1040x Find the month in your tax year in Table 2 or 3 at the end of this publication in the Appendix that you first placed the property in service as rental housing. Amended return form 1040x Use the percentages listed under that month for each year of the recovery period. Amended return form 1040x Table 2 shows percentages for low-income housing placed in service before May 9, 1985. Amended return form 1040x Table 3 shows percentages for low-income housing placed in service after May 8, 1985, and before 1987. Amended return form 1040x Example. Amended return form 1040x In May 1986, you acquired and placed in service a house that qualified as low-income rental housing under item 3) of the above listing. Amended return form 1040x You use the calendar year as your tax year. Amended return form 1040x You use Table C–3 because the property was placed in service after May 8, 1985. Amended return form 1040x Your unadjusted basis for the property, not including the land, was $59,000. Amended return form 1040x Your deduction for 1986 through 2001 is shown in the following table. Amended return form 1040x Year Rate Deduction 1986 8. Amended return form 1040x 9% $5,251 1987 12. Amended return form 1040x 1% 7,139 1988 10. Amended return form 1040x 5% 6,195 1989 9. Amended return form 1040x 1% 5,369 1990 7. Amended return form 1040x 9% 4,661 1991 6. Amended return form 1040x 9% 4,071 1992 5. Amended return form 1040x 9% 3,481 1993 5. Amended return form 1040x 2% 3,068 1994 4. Amended return form 1040x 6% 2,714 1995 4. Amended return form 1040x 6% 2,714 1996 4. Amended return form 1040x 6% 2,714 1997 4. Amended return form 1040x 6% 2,714 1998 4. Amended return form 1040x 6% 2,714 1999 4. Amended return form 1040x 5% 2,655 2000 4. Amended return form 1040x 5% 2,655 2001 1. Amended return form 1040x 5% 885 18-Year Real Property 18-year real property is real property that is recovery property placed in service after March 15, 1984, and before May 9, 1985. Amended return form 1040x It includes real property, such as buildings, other than that designated as 5-year, 10-year, 15-year real property, or low-income housing. Amended return form 1040x The ACRS percentages for 18-year real property depend on when you placed the property in service in your trade or business or for the production of income during your tax year. Amended return form 1040x There are also tables for 18-year real property in the Appendix. Amended return form 1040x Table 4 shows the percentages for 18-year real property you placed in service after June 22, 1984, and before May 9, 1985. Amended return form 1040x Table 5 is for 18-year real property placed in service after March 15, 1984, and before June 23, 1984. Amended return form 1040x Find the month in your tax year that you placed the property in service in a trade or business or for the production of income. Amended return form 1040x Use the percentages listed under that month for each year of the recovery period. Amended return form 1040x Example. Amended return form 1040x On April 28, 1985, you bought and placed in service a rental house. Amended return form 1040x The house, not including the land, cost $95,000. Amended return form 1040x This is your unadjusted basis for the house. Amended return form 1040x You use the calendar year as your tax year. Amended return form 1040x Because the house was placed in service after June 22, 1984, and before May 9, 1985, it is 18-year real property. Amended return form 1040x You use Table 4 to figure your deduction for the house. Amended return form 1040x April is the fourth month of your tax year. Amended return form 1040x Your deduction for 1985 through 2003 is shown in the following table. Amended return form 1040x Year Rate Deduction 1985 7. Amended return form 1040x 0% $6,650 1986 9. Amended return form 1040x 0% 8,550 1987 8. Amended return form 1040x 0% 7,600 1988 7. Amended return form 1040x 0% 6,650 1989 7. Amended return form 1040x 0% 6,650 1990 6. Amended return form 1040x 0% 5,700 1991 5. Amended return form 1040x 0% 4,750 1992 5. Amended return form 1040x 0% 4,750 1993 5. Amended return form 1040x 0% 4,750 1994 5. Amended return form 1040x 0% 4,750 1995 5. Amended return form 1040x 0% 4,750 1996 5. Amended return form 1040x 0% 4,750 1997 5. Amended return form 1040x 0% 4,750 1998 4. Amended return form 1040x 0% 3,800 1999 4. Amended return form 1040x 0% 3,800 2000 4. Amended return form 1040x 0% 3,800 2001 4. Amended return form 1040x 0% 3,800 2002 4. Amended return form 1040x 0% 3,800 2003 1. Amended return form 1040x 0% 950 19-Year Real Property 19-year real property is real property that is recovery property placed in service after May 8, 1985, and before 1987. Amended return form 1040x It includes all real property, other than that designated as 5-year, 10-year, 15-year, or 18-year real property, or low-income housing. Amended return form 1040x The ACRS percentages for 19-year real property depend on when you placed the property in service in a trade or business or for the production of income during your tax year. Amended return form 1040x Table 6 shows the percentages for 19-year real property. Amended return form 1040x You find the month in your tax year that you placed the property in service. Amended return form 1040x You use the percentages listed under that month for each year of the recovery period. Amended return form 1040x Recovery Periods Each item of recovery property is assigned to a class of property. Amended return form 1040x The classes of recovery property establish the recovery periods over which the unadjusted basis of items in a class is recovered. Amended return form 1040x The classes of property are: 3-Year property 5-Year property 10-Year property 15-Year real property Low-income housing 18-Year real property 19-Year real property Alternate ACRS Method (Modified Straight Line Method) ACRS provides an alternate ACRS method that could be elected. Amended return form 1040x This alternate ACRS method uses a recovery percentage based on a modified straight line method. Amended return form 1040x This alternate ACRS method generally uses percentages other than those from the tables. Amended return form 1040x If you elected the alternate ACRS method, you determine the recovery period by using the following schedule. Amended return form 1040x This schedule is for other than 18- and 19-year real property and low-income housing: In the case of: You could have elected a recovery period of: 3-year property 3, 5, or 12 years 5-year property 5, 12, or 25 years 15-year real property 15, 35, or 45 years Percentages. Amended return form 1040x   The straight-line percentages for the alternate ACRS method are: Recovery Period Percentage 5 years 20. Amended return form 1040x 00% 10 years 10. Amended return form 1040x 00% 12 years 8. Amended return form 1040x 333% 15 years 6. Amended return form 1040x 667% 25 years 4. Amended return form 1040x 00% 35 years 2. Amended return form 1040x 857%   You apply the percentage to the unadjusted basis(defined earlier) of the property to figure your ACRS deduction. Amended return form 1040x There are tables for 18- and 19-year real property later in this publication in the Appendix. Amended return form 1040x For 15-year real property, see 15-year real property, later. Amended return form 1040x 3-, 5-, and 10-year property. Amended return form 1040x   If you elected to use an alternate recovery percentage, you have to use the same recovery percentage for all property in that class that you placed in service in that tax year. Amended return form 1040x This applies throughout the recovery period you selected. Amended return form 1040x Half-year convention. Amended return form 1040x   If you elected the alternate method, only a half-year of depreciation was deducted for the year you placed the property in service. Amended return form 1040x This applied regardless of when in the tax year you placed the property in service. Amended return form 1040x For each of the remaining years in the recovery period, you take a full year's deduction. Amended return form 1040x If you hold the property for the entire recovery period, a half-year of depreciation is allowable for the year following the end of the recovery period. Amended return form 1040x Example. Amended return form 1040x You operate a small upholstery business. Amended return form 1040x On March 19, 1986, you bought and placed in service a $13,000 light-duty panel truck to be used in your business and a $500 electric saw. Amended return form 1040x You elected to use the alternate ACRS method. Amended return form 1040x You did not elect to take a section 179 deduction. Amended return form 1040x You decided to recover the cost of the truck, which is 3-year recovery property, over 5 years. Amended return form 1040x The saw is 5-year property, but you decided to recover its cost over 12 years. Amended return form 1040x For 1986, your ACRS deduction reflected the half-year convention. Amended return form 1040x In the first year, you deducted half of the amount determined for a full year. Amended return form 1040x Your ACRS deduction for 1986 is as follows: Light-duty truck   5 years straight line = 20% 20% ÷ $13,000 = $2,600 Half-year convention -½ of $2,600= $1,300. Amended return form 1040x 00     Electric saw   12 years straight line = 8. Amended return form 1040x 333% 8. Amended return form 1040x 333% ÷ $500 = $41. Amended return form 1040x 67 Half-year convention -½ of $41. Amended return form 1040x 67= 20. Amended return form 1040x 84 Total ACRS deduction for 1986 $1,320. Amended return form 1040x 84       You take a full year of depreciation for both the truck and the saw for the years 1987 through 1990. Amended return form 1040x Your ACRS deduction for each of those years is as follows: Light-duty truck   5 years straight line = 20% 20% ÷ $13,000 = $2,600     Electric saw     12 years straight line = 8. Amended return form 1040x 333% 8. Amended return form 1040x 333% ÷ $500 = $41. Amended return form 1040x 67 Total annual ACRS deduction for 1987 through 1990 $2,641. Amended return form 1040x 67       In 1991, you take a half-year of depreciation for the truck and a full year of depreciation for the saw. Amended return form 1040x Your ACRS deduction for 1991 is as follows: Light-duty truck   5 years straight line = 20% 20% ÷ $13,000 = $2,600 Half-year convention -½ of $2,600= $1,300. Amended return form 1040x 00     Electric saw   12 years straight line = 8. Amended return form 1040x 333% 8. Amended return form 1040x 333% ÷ $500 = $41. Amended return form 1040x 67 Total ACRS deduction for 1991 $1,341. Amended return form 1040x 67       The truck is fully depreciated after 1991. Amended return form 1040x You take a full year of depreciation for the saw for the years 1992 through 1997. Amended return form 1040x Your ACRS deduction for each of those years is as follows: Electric saw     12 years straight line = 8. Amended return form 1040x 333% 8. Amended return form 1040x 333% ÷ $500 = $41. Amended return form 1040x 67 Total annual ACRS deduction for 1992 through 1997 $41. Amended return form 1040x 67       You take a half-year of depreciation for the saw for 1998. Amended return form 1040x Your ACRS deduction for 1998 is as follows: Electric saw   12 years straight line = 8. Amended return form 1040x 333% 8. Amended return form 1040x 333% ÷ $500 = $41. Amended return form 1040x 67 Half-year convention -½ of $41. Amended return form 1040x 67= 20. Amended return form 1040x 84 Total ACRS deduction for 1998 $20. Amended return form 1040x 84       The saw is fully depreciated after 1998. Amended return form 1040x 15-year real property. Amended return form 1040x   Under ACRS, you could also elect to use the alternate ACRS method for 15-year real property. Amended return form 1040x The alternate ACRS method allows you to depreciate your 15-year real property using the straight line ACRS method over the alternate recovery periods of 15, 35, or 45 years. Amended return form 1040x If you selected a 15-year recovery period, you use the percentage (6. Amended return form 1040x 667%) from the schedule above. Amended return form 1040x You prorate this percentage for the number of months the property was in service in the first year. Amended return form 1040x If you selected a 35- or 45-year recovery period, you use either Table 11 or 15. Amended return form 1040x Alternate periods for 18-year real property. Amended return form 1040x   For 18-year real property, the alternate recovery periods are 18, 35, or 45 years. Amended return form 1040x The percentages for 18-year real property under the alternate method are in Tables 7, 8, 10, 11, 14, and 15 in the Appendix. Amended return form 1040x There are two tables for each alternate recovery period. Amended return form 1040x One table shows the percentage for property placed in service after June 22, 1984. Amended return form 1040x The other table has the percentages for property placed in service after March 15, 1984, and before June 23, 1984. Amended return form 1040x Alternate periods for 19-year real property. Amended return form 1040x   For 19-year real property, the alternate recovery periods are 19, 35, or 45 years. Amended return form 1040x If you selected a 19-year recovery period, use Table 9 to determine your deduction. Amended return form 1040x If you select a 35- or 45-year recovery period, use either Table 13 or 14. Amended return form 1040x Example. Amended return form 1040x You placed in service an apartment building on August 3, 1986. Amended return form 1040x The building is 19-year real property. Amended return form 1040x The sales contract allocated $300,000 to the building and $100,000 to the land. Amended return form 1040x You use the calendar year as your tax year. Amended return form 1040x You chose the alternate ACRS method over a recovery period of 35 years. Amended return form 1040x For 1986, you figure your ACRS deduction usingTable 13. Amended return form 1040x August is the eighth month of your tax year. Amended return form 1040x The percentage from Table 13 for the eighth month is 1. Amended return form 1040x 1%. Amended return form 1040x Your deduction was $3,300 ($300,000 ÷ 1. Amended return form 1040x 1%). Amended return form 1040x The deduction rate from ACRS Table 13 for years 2 through 20 is 2. Amended return form 1040x 9% so that your deduction in 1987 through 2005 is $8,700 ($300,000 ÷ 2. Amended return form 1040x 9%). Amended return form 1040x Alternate periods for low-income housing. Amended return form 1040x   For low-income housing, the alternate recovery periods are 15, 35, or 45 years. Amended return form 1040x If you selected a 15-year period for this property, use 6. Amended return form 1040x 667% as the percentage. Amended return form 1040x If you selected a 35- or 45-year period, use either Table 11, 12, or 15. Amended return form 1040x Election. Amended return form 1040x   You had to make the election to use the alternate ACRS method by the return due date (including extensions) for the tax year you placed the property in service. Amended return form 1040x Revocation of election. Amended return form 1040x   Your election to use an alternate ACRS method, once made, can be changed only with the consent of the Commissioner. Amended return form 1040x The Commissioner grants consent only in extraordinary circumstances. Amended return form 1040x Any request for a revocation will be considered a request for a ruling. Amended return form 1040x ACRS Deduction in Short Tax Year For a tax year that is less than 12 months, the ACRS deduction is prorated on a 12-month basis. Amended return form 1040x Figure the amount of the ACRS deduction for a short tax year as follows: First, you figure the ACRS deduction for a full year. Amended return form 1040x You figure this by multiplying the unadjusted basis by the recovery percentage. Amended return form 1040x You then multiply the ACRS deduction determined for a full tax year by a fraction. Amended return form 1040x The numerator (top number) of the fraction is the number of months in the short tax year and the denominator (bottom number) is 12. Amended return form 1040x For example, a corporation placed in service in June 1986 an item of 3-year property with an unadjusted basis of $10,000. Amended return form 1040x The corporation files a tax return, because of a change in its accounting period, for the 6-month short tax year ending June 30, 1986. Amended return form 1040x The full year's ACRS deduction for this item is $2,500 ($10,000 ÷ 25%), the first year percentage from the 3-year table. Amended return form 1040x The ACRS deduction for the short tax year is $1,250 ($2,500 ÷ 6/12). Amended return form 1040x You use the full ACRS percentages during the remaining years of the recovery period. Amended return form 1040x For the first tax year after the recovery period, the unrecovered basis will be deductible. Amended return form 1040x Exception. Amended return form 1040x   For the tax year in which you placed 15-, 18-, or 19-year real property in service or in the tax year you dispose of it, you compute the ACRS deduction for the number of months that the property is in service during that tax year. Amended return form 1040x You compute the number of months using either a full month or mid-month convention. Amended return form 1040x This is true regardless of the number of months in the tax year and the recovery period and method used. Amended return form 1040x Dispositions A disposition is the permanent withdrawal of property from use in your trade or business or in the production of income. Amended return form 1040x You can make a withdrawal by sale, exchange, retirement, abandonment, or destruction. Amended return form 1040x You generally recognize gain or loss on the disposition of an asset by sale. Amended return form 1040x However, nonrecognition rules can allow you to postpone some gain. Amended return form 1040x See Publication 544. Amended return form 1040x If you physically abandon property, you can deduct as a loss the adjusted basis of the asset at the time of its abandonment. Amended return form 1040x Your intent must be to discard the asset so that you will not use it again or retrieve it for sale, exchange, or other disposition. Amended return form 1040x Early dispositions. Amended return form 1040x   The disposal of an asset before the end of its specified recovery period, is referred to as an early disposition. Amended return form 1040x When an early disposition occurs, the depreciation deduction in the year of disposition depends on the class of property involved. Amended return form 1040x Early dispositions of ACRS property other than 15-, 18-, or 19-year real property. Amended return form 1040x   Generally, you get no ACRS deduction for the tax year in which you dispose of or retire recovery property, except for 15-, 18-, and 19-year real property. Amended return form 1040x This means there is no depreciation deduction under ACRS in the year you dispose of or retire any of your 3-, 5-, or 10-year recovery property. Amended return form 1040x Dispositions — mass asset accounts. Amended return form 1040x   The law provides a special rule to avoid the calculation of gain on the disposition of assets from mass asset accounts. Amended return form 1040x A mass asset account includes items usually minor in value in relation to the group, numerous in quantity, impractical to separately identify, and not usually accounted for on a separate basis, but on a total dollar value. Amended return form 1040x Examples of mass assets include minor items of office, plant, and store furniture and fixtures. Amended return form 1040x   Under the special rule, if you elected to use a mass asset account, you recognize gain to the extent of the proceeds from the disposition of the asset. Amended return form 1040x You leave the unadjusted basis of the property in the account until recovered in future years. Amended return form 1040x If you did this, include the total proceeds realized from the disposition in income on the tax return for the year of disposition. Amended return form 1040x Early dispositions — 15-year real property. Amended return form 1040x   If you dispose of 15-year real property, you base your ACRS deduction for the year of disposition on the number of months in use. Amended return form 1040x You use a full-month convention. Amended return form 1040x For a disposition at any time during a particular month before the end of the recovery period, no deduction is allowed for the month of disposition. Amended return form 1040x This applies whether you use the regular ACRS method or elected the alternate ACRS method. Amended return form 1040x Example. Amended return form 1040x You purchased and placed in service a rental house on March 2, 1984, for $98,000 (not including the cost of land). Amended return form 1040x You file your return based on a calendar year. Amended return form 1040x Your rate from Table 1 for the third month is 10%. Amended return form 1040x Your ACRS deduction for 1984 was $9,800 ($98. Amended return form 1040x 000 ÷ 10%). Amended return form 1040x For 1985 through 1988, you figured your ACRS deductions using 11%, 9%, 8%, and 7% ÷ $98,000. Amended return form 1040x For 1989 through 1992, you figured your ACRS deductions using 6% for each year. Amended return form 1040x The deduction each year was $98,000 ÷ 6%. Amended return form 1040x For 1993 and 1994, the ACRS deduction is ($98,000 ÷ 5%) $4,900 for each year. Amended return form 1040x You sell the house on June 1, 1995. Amended return form 1040x You figure your ACRS deduction for 1995 for the full year and then prorate that amount for the months of use. Amended return form 1040x The full ACRS deduction for 1995 is $4,900 ($98,000 ÷ 5%). Amended return form 1040x You then prorate this amount to the 5 months in 1995 during which it was rented. Amended return form 1040x Your ACRS deduction for 1995 is $2,042 ($4,900 ÷ 5/12). Amended return form 1040x Early dispositions — 18- and 19-year real property. Amended return form 1040x   If you dispose of 18- or 19-year real property, you base your ACRS deduction for the year of disposition on the number of months in use. Amended return form 1040x For 18-year property placed in service before June 23, 1984, use a full-month convention on a disposition. Amended return form 1040x For 18-year property placed in service after June 22, 1984, and for 19-year property, determine the number of months in use by using the mid-month convention. Amended return form 1040x Under the mid-month convention,treat real property disposed of any time during a month as disposed of in the middle of that month. Amended return form 1040x Count the month of disposition as half a month of use. Amended return form 1040x Example. Amended return form 1040x You purchased and placed in service a rental house on July 2, 1984, for $100,000 (not including the cost of land). Amended return form 1040x You file your return based on a calendar year. Amended return form 1040x Your rate from Table 4 for the seventh month is 4%. Amended return form 1040x You figured your ACRS deduction for 1984 was $4,000 ($100,000 ÷ 4%). Amended return form 1040x In 1985 through 1994, your ACRS deductions were 9%, 8%, 8%, 7%, 6%, 6%, 5%, 5%, and 5% ÷ $100,000. Amended return form 1040x You sell the house on September 24, 1995. Amended return form 1040x Figure your ACRS deduction for 1995 for the months of use. Amended return form 1040x The full ACRS deduction for 1995 is $5,000 ($100,000 ÷ 5%). Amended return form 1040x Prorate this amount for the 8. Amended return form 1040x 5 months in 1995 that you held the property. Amended return form 1040x Under the mid-month convention, you count September as half a month. Amended return form 1040x Your ACRS deduction for 1995 is $3,542 ($5,000 ÷ 8. Amended return form 1040x 5/12). Amended return form 1040x Depreciation Recapture If you dispose of property depreciated under ACRS that is section 1245 recovery property, you will generally recognize gain or loss. Amended return form 1040x Gain recognized on a disposition is ordinary income to the extent of prior depreciation deductions taken. Amended return form 1040x This recapture rule applies to all personal property in the 3-year, 5-year, and 10-year classes. Amended return form 1040x You recapture gain on manufactured homes and theme park structures in the 10-year class as section 1245 property. Amended return form 1040x Section 1245 property generally includes all personal property. Amended return form 1040x See Section 1245 property in chapter 4 of Publication 544 for more information. Amended return form 1040x You treat dispositions of section 1250 real property on which you have a gain as section 1245 recovery property. Amended return form 1040x You recognize gain on this property as ordinary income to the extent of prior depreciation deductions taken. Amended return form 1040x Section 1250 property includes most real property. Amended return form 1040x See Section 1250 property in chapter 4 of Publication 544 for more information. Amended return form 1040x This rule applies to all section 1250 real property except the following property: Any 15-, 18-, or 19-year real property that is residential rental property. Amended return form 1040x Any 15-, 18-, or 19-year real property that you elected to depreciate using the alternate ACRS method. Amended return form 1040x Any 15-, 18-, or 19-year real property that is subsidized low-income housing. Amended return form 1040x For these recapture rules, you treat the section 179 deduction and 50% of the investment credit that reduced your basis as depreciation. Amended return form 1040x See Publication 544 for further discussion of dispositions of section 1245 and 1250 property. Amended return form 1040x Prev  Up  Next   Home   More Online Publications
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Page Last Reviewed or Updated: 06-Jun-2013

The Amended Return Form 1040x

Amended return form 1040x 10. Amended return form 1040x   Self-Employment (SE) Tax Table of Contents Who Must Pay SE Tax?Special Rules and Exceptions Figuring Earnings Subject to SE Tax Farm Optional Method Using Both Optional Methods Reporting Self-Employment Tax The SE tax rules apply no matter how old you are and even if you are already receiving social security and Medicare benefits. Amended return form 1040x Who Must Pay SE Tax? Generally, you must pay SE tax and file Schedule SE (Form 1040) if your net earnings from self-employment were $400 or more. Amended return form 1040x Use Schedule SE to figure net earnings from self-employment. Amended return form 1040x Sole proprietor or independent contractor. Amended return form 1040x   If you are self-employed as a sole proprietor or independent contractor, you generally use Schedule C or C-EZ (Form 1040) to figure your earnings subject to SE tax. Amended return form 1040x SE tax rate. Amended return form 1040x    For 2013, the SE tax rate on net earnings is 15. Amended return form 1040x 3% (12. Amended return form 1040x 4% social security tax plus 2. Amended return form 1040x 9% Medicare tax). Amended return form 1040x Maximum earnings subject to self-employment tax. Amended return form 1040x    Only the first $113,700 of your combined wages, tips, and net earnings in 2013 is subject to any combination of the 12. Amended return form 1040x 4% social security part of SE tax, social security tax, or railroad retirement (tier 1) tax. Amended return form 1040x   All of your combined wages, tips, and net earnings in 2013 are subject to any combination of the 2. Amended return form 1040x 9% Medicare part of SE tax, social security tax, or railroad retirement (tier 1) tax. Amended return form 1040x   If your wages and tips are subject to either social security or railroad retirement (tier 1) tax, or both, and total at least $113,700, do not pay the 12. Amended return form 1040x 4% social security part of the SE tax on any of your net earnings. Amended return form 1040x However, you must pay the 2. Amended return form 1040x 9% Medicare part of the SE tax on all your net earnings. Amended return form 1040x Special Rules and Exceptions Aliens. Amended return form 1040x   Generally, resident aliens must pay self-employment tax under the same rules that apply to U. Amended return form 1040x S. Amended return form 1040x citizens. Amended return form 1040x Nonresident aliens are not subject to SE tax unless an international social security agreement in effect determines that they are covered under the U. Amended return form 1040x S. Amended return form 1040x social security system. Amended return form 1040x However, residents of the Virgin Islands, Puerto Rico, Guam, the Commonwealth of the Northern Mariana Islands, or American Samoa are subject to self-employment tax, as they are considered U. Amended return form 1040x S. Amended return form 1040x residents for self-employment tax purposes. Amended return form 1040x For more information on aliens, see Publication 519, U. Amended return form 1040x S. Amended return form 1040x Tax Guide for Aliens. Amended return form 1040x Child employed by parent. Amended return form 1040x   You are not subject to SE tax if you are under age 18 and you are working for your father or mother. Amended return form 1040x Church employee. Amended return form 1040x    If you work for a church or a qualified church-controlled organization (other than as a minister or member of a religious order) that elected an exemption from social security and Medicare taxes, you are subject to SE tax if you receive $108. Amended return form 1040x 28 or more in wages from the church or organization. Amended return form 1040x For more information, see Publication 517, Social Security and Other Information for Members of the Clergy and Religious Workers. Amended return form 1040x Fishing crew member. Amended return form 1040x   If you are a member of the crew on a boat that catches fish or other water life, your earnings are subject to SE tax if all the following conditions apply. Amended return form 1040x You do not get any pay for the work except your share of the catch or a share of the proceeds from the sale of the catch, unless the pay meets all the following conditions. Amended return form 1040x The pay is not more than $100 per trip. Amended return form 1040x The pay is received only if there is a minimum catch. Amended return form 1040x The pay is solely for additional duties (such as mate, engineer, or cook) for which additional cash pay is traditional in the fishing industry. Amended return form 1040x You get a share of the catch or a share of the proceeds from the sale of the catch. Amended return form 1040x Your share depends on the amount of the catch. Amended return form 1040x The boat's operating crew normally numbers fewer than 10 individuals. Amended return form 1040x (An operating crew is considered as normally made up of fewer than 10 if the average size of the crew on trips made during the last four calendar quarters is fewer than 10. Amended return form 1040x ) Notary public. Amended return form 1040x   Fees you receive for services you perform as a notary public are reported on Schedule C or C-EZ but are not subject to self-employment tax (see the Instructions for Schedule SE (Form 1040)). Amended return form 1040x State or local government employee. Amended return form 1040x   You are subject to SE tax if you are an employee of a state or local government, are paid solely on a fee basis, and your services are not covered under a federal-state social security agreement. Amended return form 1040x Foreign government or international organization employee. Amended return form 1040x   You are subject to SE tax if both the following conditions are true. Amended return form 1040x You are a U. Amended return form 1040x S. Amended return form 1040x citizen employed in the United States, Puerto Rico, Guam, American Samoa, the Commonwealth of the Northern Mariana Islands, or the Virgin Islands by: A foreign government, A wholly-owned agency of a foreign government, or An international organization. Amended return form 1040x Your employer is not required to withhold social security and Medicare taxes from your wages. Amended return form 1040x U. Amended return form 1040x S. Amended return form 1040x citizen or resident alien residing abroad. Amended return form 1040x    If you are a self-employed U. Amended return form 1040x S. Amended return form 1040x citizen or resident alien living outside the United States, in most cases you must pay SE tax. Amended return form 1040x Do not reduce your foreign earnings from self-employment by your foreign earned income exclusion. Amended return form 1040x Exception. Amended return form 1040x    The United States has social security agreements with many countries to eliminate double taxation under two social security systems. Amended return form 1040x Under these agreements, you generally must only pay social security and Medicare taxes to the country in which you live. Amended return form 1040x The country to which you must pay the tax will issue a certificate which serves as proof of exemption from social security tax in the other country. Amended return form 1040x   For more information, see the Instructions for Schedule SE (Form 1040). Amended return form 1040x More Than One Business If you have earnings subject to SE tax from more than one trade, business, or profession, you must combine the net profit (or loss) from each to determine your total earnings subject to SE tax. Amended return form 1040x A loss from one business reduces your profit from another business. Amended return form 1040x Community Property Income If any of the income from a trade or business, other than a partnership, is community property income under state law, it is included in the earnings subject to SE tax of the spouse carrying on the trade or business. Amended return form 1040x Gain or Loss Do not include in earnings subject to SE tax a gain or loss from the disposition of property that is neither stock in trade nor held primarily for sale to customers. Amended return form 1040x It does not matter whether the disposition is a sale, exchange, or an involuntary conversion. Amended return form 1040x Lost Income Payments If you are self-employed and reduce or stop your business activities, any payment you receive from insurance or other sources for the lost business income is included in earnings subject to SE tax. Amended return form 1040x If you are not working when you receive the payment, it still relates to your business and is included in earnings subject to SE tax, even though your business is temporarily inactive. Amended return form 1040x Figuring Earnings Subject to SE Tax Methods for Figuring Net Earnings There are three ways to figure your net earnings from self-employment. Amended return form 1040x The regular method. Amended return form 1040x The nonfarm optional method. Amended return form 1040x The farm optional method. Amended return form 1040x You must use the regular method unless you are eligible to use one or both of the optional methods. Amended return form 1040x Why use an optional method?    You may want to use the optional methods (discussed later) when you have a loss or a small net profit and any one of the following applies. Amended return form 1040x You want to receive credit for social security benefit coverage. Amended return form 1040x You incurred child or dependent care expenses for which you could claim a credit. Amended return form 1040x (An optional method may increase your earned income, which could increase your credit. Amended return form 1040x ) You are entitled to the earned income credit. Amended return form 1040x (An optional method may increase your earned income, which could increase your credit. Amended return form 1040x ) You are entitled to the additional child tax credit. Amended return form 1040x (An optional method may increase your earned income, which could increase your credit. Amended return form 1040x ) Effects of using an optional method. Amended return form 1040x   Using an optional method could increase your SE tax. Amended return form 1040x Paying more SE tax could result in your getting higher benefits when you retire. Amended return form 1040x   If you use either or both optional methods, you must figure and pay the SE tax due under these methods even if you would have had a smaller tax or no tax using the regular method. Amended return form 1040x   The optional methods may be used only to figure your SE tax. Amended return form 1040x To figure your income tax, include your actual earnings in gross income, regardless of which method you use to determine SE tax. Amended return form 1040x Regular Method Multiply your total earnings subject to SE tax by 92. Amended return form 1040x 35% (. Amended return form 1040x 9235) to get your net earnings under the regular method. Amended return form 1040x See Short Schedule SE, line 4, or Long Schedule SE, line 4a. Amended return form 1040x Net earnings figured using the regular method are also called actual net earnings. Amended return form 1040x Nonfarm Optional Method Use the nonfarm optional method only for earnings that do not come from farming. Amended return form 1040x You may use this method if you meet all the following tests. Amended return form 1040x You are self-employed on a regular basis. Amended return form 1040x This means that your actual net earnings from self-employment were $400 or more in at least 2 of the 3 tax years before the one for which you use this method. Amended return form 1040x The net earnings can be from either farm or nonfarm earnings or both. Amended return form 1040x You have used this method less than 5 years. Amended return form 1040x (There is a 5-year lifetime limit. Amended return form 1040x ) The years do not have to be one after another. Amended return form 1040x Your net nonfarm profits were: Less than $5,024, and Less than 72. Amended return form 1040x 189% of your gross nonfarm income. Amended return form 1040x Net nonfarm profits. Amended return form 1040x   Net nonfarm profit generally is the total of the amounts from: Line 31, Schedule C (Form 1040), Line 3, Schedule C-EZ (Form 1040), Box 14, code A, Schedule K-1 (Form 1065) (from nonfarm partnerships), and Box 9, code J1, Schedule K-1 (Form 1065-B). Amended return form 1040x   However, you may need to adjust the amount reported on Schedule K-1 if you are a general partner or if it is a loss. Amended return form 1040x Gross nonfarm income. Amended return form 1040x   Your gross nonfarm income generally is the total of the amounts from: Line 7, Schedule C (Form 1040), Line 1, Schedule C-EZ (Form 1040), Box 14, code C, Schedule K-1 (Form 1065) (from nonfarm partnerships), and Box 9, code J2, Schedule K-1 (Form 1065-B). Amended return form 1040x Figuring Nonfarm Net Earnings If you meet the three tests explained earlier, use the following table to figure your net earnings from self-employment under the nonfarm optional method. Amended return form 1040x Table 10-1. Amended return form 1040x Figuring Nonfarm Net Earnings IF your gross nonfarm income is. Amended return form 1040x . Amended return form 1040x . Amended return form 1040x THEN your net earnings are equal to. Amended return form 1040x . Amended return form 1040x . Amended return form 1040x $6,960 or less Two-thirds of your gross nonfarm income. Amended return form 1040x More than $6,960 $4,640 Actual net earnings. Amended return form 1040x   Your actual net earnings are 92. Amended return form 1040x 35% of your total earnings subject to SE tax (that is, multiply total earnings subject to SE tax by 92. Amended return form 1040x 35% (. Amended return form 1040x 9235) to get actual net earnings). Amended return form 1040x Actual net earnings are equivalent to net earnings figured using the regular method. Amended return form 1040x Optional net earnings less than actual net earnings. Amended return form 1040x   You cannot use this method to report an amount less than your actual net earnings from self-employment. Amended return form 1040x Gross nonfarm income of $6,960 or less. Amended return form 1040x   The following examples illustrate how to figure net earnings when gross nonfarm income is $6,960 or less. Amended return form 1040x Example 1. Amended return form 1040x Net nonfarm profit less than $5,024 and less than 72. Amended return form 1040x 189% of gross nonfarm income. Amended return form 1040x Ann Green runs a craft business. Amended return form 1040x Her actual net earnings from self-employment were $800 in 2011 and $900 in 2012. Amended return form 1040x She meets the test for being self-employed on a regular basis. Amended return form 1040x She has used the nonfarm optional method less than 5 years. Amended return form 1040x Her gross income and net profit in 2013 are as follows: Gross nonfarm income $5,400 Net nonfarm profit $1,200 Ann's actual net earnings for 2013 are $1,108 ($1,200 × . Amended return form 1040x 9235). Amended return form 1040x Because her net profit is less than $5,024 and less than 72. Amended return form 1040x 189% of her gross income, she can use the nonfarm optional method to figure net earnings of $3,600 (2/3 × $5,400). Amended return form 1040x Because these net earnings are higher than her actual net earnings, she can report net earnings of $3,600 for 2013. Amended return form 1040x Example 2. Amended return form 1040x Net nonfarm profit less than $5,024 but not less than 72. Amended return form 1040x 189% of gross nonfarm income. Amended return form 1040x Assume that in Example 1 Ann's gross income is $1,000 and her net profit is $800. Amended return form 1040x She must use the regular method to figure her net earnings. Amended return form 1040x She cannot use the nonfarm optional method because her net profit is not less than 72. Amended return form 1040x 189% of her gross income. Amended return form 1040x Example 3. Amended return form 1040x Net loss from a nonfarm business. Amended return form 1040x Assume that in Example 1 Ann has a net loss of $700. Amended return form 1040x She can use the nonfarm optional method and report $3,600 (2/3 × $5,400) as her net earnings. Amended return form 1040x Example 4. Amended return form 1040x Nonfarm net earnings less than $400. Amended return form 1040x Assume that in Example 1 Ann has gross income of $525 and a net profit of $175. Amended return form 1040x In this situation, she would not pay any SE tax under either the regular method or the nonfarm optional method because her net earnings under both methods are less than $400. Amended return form 1040x Gross nonfarm income of more than $6,960. Amended return form 1040x   The following examples illustrate how to figure net earnings when gross nonfarm income is more than $6,960. Amended return form 1040x Example 1. Amended return form 1040x Net nonfarm profit less than $5,024 and less than 72. Amended return form 1040x 189% of gross nonfarm income. Amended return form 1040x John White runs an appliance repair shop. Amended return form 1040x His actual net earnings from self-employment were $10,500 in 2011 and $9,500 in 2012. Amended return form 1040x He meets the test for being self-employed on a regular basis. Amended return form 1040x He has used the nonfarm optional method less than 5 years. Amended return form 1040x His gross income and net profit in 2013 are as follows: Gross nonfarm income $12,000 Net nonfarm profit $1,200 John's actual net earnings for 2013 are $1,108 ($1,200 × . Amended return form 1040x 9235). Amended return form 1040x Because his net profit is less than $5,024 and less than 72. Amended return form 1040x 189% of his gross income, he can use the nonfarm optional method to figure net earnings of $4,640. Amended return form 1040x Because these net earnings are higher than his actual net earnings, he can report net earnings of $4,640 for 2013. Amended return form 1040x Example 2. Amended return form 1040x Net nonfarm profit not less than $5,024. Amended return form 1040x Assume that in Example 1 John's net profit is $5,400. Amended return form 1040x He must use the regular method. Amended return form 1040x He cannot use the nonfarm optional method because his net nonfarm profit is not less than $5,024. Amended return form 1040x Example 3. Amended return form 1040x Net loss from a nonfarm business. Amended return form 1040x Assume that in Example 1 John has a net loss of $700. Amended return form 1040x He can use the nonfarm optional method and report $4,640 as his net earnings from self-employment. Amended return form 1040x Farm Optional Method Use the farm optional method only for earnings from a farming business. Amended return form 1040x See Publication 225 for information about this method. Amended return form 1040x Using Both Optional Methods If you have both farm and nonfarm earnings, you may be able to use both optional methods to determine your net earnings from self-employment. Amended return form 1040x To figure your net earnings using both optional methods, you must: Figure your farm and nonfarm net earnings separately under each method. Amended return form 1040x Do not combine farm earnings with nonfarm earnings to figure your net earnings under either method. Amended return form 1040x Add the net earnings figured under each method to arrive at your total net earnings from self-employment. Amended return form 1040x You can report less than your total actual farm and nonfarm net earnings but not less than actual nonfarm net earnings. Amended return form 1040x If you use both optional methods, you can report no more than $4,640 as your combined net earnings from self-employment. Amended return form 1040x Example. Amended return form 1040x You are a self-employed farmer. Amended return form 1040x You also operate a retail grocery store. Amended return form 1040x Your gross income, actual net earnings from self-employment, and optional farm and optional nonfarm net earnings from self-employment are shown in Table 10-2. Amended return form 1040x Table 10-2. Amended return form 1040x Example—Farm and Nonfarm Earnings Income and Earnings Farm Nonfarm Gross income $3,000 $6,000 Actual net earnings $900 $500 Optional net earnings (2/3 of gross income) $2,000 $4,000 Table 10-3 shows four methods or combinations of methods you can use to figure net earnings from self-employment using the farm and nonfarm gross income and actual net earnings shown in Table 10-2. Amended return form 1040x Method 1. Amended return form 1040x Using the regular method for both farm and nonfarm income. Amended return form 1040x Method 2. Amended return form 1040x Using the optional method for farm income and the regular method for nonfarm income. Amended return form 1040x Method 3. Amended return form 1040x Using the regular method for farm income and the optional method for nonfarm income. Amended return form 1040x Method 4. Amended return form 1040x Using the optional method for both farm and nonfarm income. Amended return form 1040x Note. Amended return form 1040x Actual net earnings is the same as net earnings figured using the regular method. Amended return form 1040x Table 10-3. Amended return form 1040x Example—Net Earnings Net Earnings 1 2 3 4 Actual  farm $ 900   $ 900   Optional  farm   $ 2,000   $ 2,000 Actual nonfarm $ 500 $ 500     Optional nonfarm     $4,000 $4,000 Amount you can report: $1,400 $2,500 $4,900 $4,640* *Limited to $4,640 because you used both optional methods. Amended return form 1040x Fiscal Year Filer If you use a tax year other than the calendar year, you must use the tax rate and maximum earnings limit in effect at the beginning of your tax year. Amended return form 1040x Even if the tax rate or maximum earnings limit changes during your tax year, continue to use the same rate and limit throughout your tax year. Amended return form 1040x Reporting Self-Employment Tax Use Schedule SE (Form 1040) to figure and report your SE tax. Amended return form 1040x Then enter the SE tax on line 56 of Form 1040 and attach Schedule SE to Form 1040. Amended return form 1040x Most taxpayers can use Section A—Short Schedule SE to figure their SE tax. Amended return form 1040x However, certain taxpayers must use Section B—Long Schedule SE. Amended return form 1040x If you have to pay SE tax, you must file Form 1040 (with Schedule SE attached) even if you do not otherwise have to file a federal income tax return. Amended return form 1040x Joint return. Amended return form 1040x   Even if you file a joint return, you cannot file a joint Schedule SE. Amended return form 1040x This is true whether one spouse or both spouses have earnings subject to SE tax. Amended return form 1040x If both of you have earnings subject to SE tax, each of you must complete a separate Schedule SE. Amended return form 1040x However, if one spouse uses the Short Schedule SE and the other spouse has to use the Long Schedule SE, both can use the same form. Amended return form 1040x Attach both schedules to the joint return. Amended return form 1040x More than one business. Amended return form 1040x   If you have more than one trade or business, you must combine the net profit (or loss) from each business to figure your SE tax. Amended return form 1040x A loss from one business will reduce your profit from another business. Amended return form 1040x File one Schedule SE showing the earnings from self-employment, but file a separate Schedule C, C-EZ, or F for each business. Amended return form 1040x Example. Amended return form 1040x You are the sole proprietor of two separate businesses. Amended return form 1040x You operate a restaurant that made a net profit of $25,000. Amended return form 1040x You also have a cabinetmaking business that had a net loss of $500. Amended return form 1040x You must file a Schedule C for the restaurant showing your net profit of $25,000 and another Schedule C for the cabinetmaking business showing your net loss of $500. Amended return form 1040x You file Schedule SE showing total earnings subject to SE tax of $24,500. Amended return form 1040x Prev  Up  Next   Home   More Online Publications