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E file tax return Publication 15 - Introductory Material Table of Contents Future Developments What's New Reminders Electronic Filing and Payment Forms in Spanish Hiring New Employees Paying Wages, Pensions, or Annuities Information Returns Nonpayroll Income Tax Withholding Recordkeeping Change of Business Address or Responsible Party Private Delivery Services Telephone Help Ordering Employer Tax Forms and Publications Filing Addresses Dishonored Payments Photographs of Missing Children Calendar Introduction Future Developments For the latest information about developments related to Publication 15 (Circular E), such as legislation enacted after it was published, go to www. E file tax return irs. E file tax return gov/pub15. E file tax return What's New Social security and Medicare tax for 2014. E file tax return  The social security tax rate is 6. E file tax return 2% each for the employee and employer, unchanged from 2013. E file tax return The social security wage base limit is $117,000. E file tax return The Medicare tax rate is 1. E file tax return 45% each for the employee and employer, unchanged from 2013. E file tax return There is no wage base limit for Medicare tax. E file tax return Social security and Medicare taxes apply to the wages of household workers you pay $1,900 or more in cash or an equivalent form of compensation. E file tax return Social security and Medicare taxes apply to election workers who are paid $1,600 or more in cash or an equivalent form of compensation. E file tax return 2014 withholdng tables. E file tax return  This publication includes the 2014 Percentage Method Tables and Wage Bracket Tables for Income Tax Withholding. E file tax return Withholding allowance. E file tax return  The 2014 amount for one withholding allowance on an annual basis is $3,950. E file tax return Voluntary withholding on dividends and other distributions by an Alaska Native Corporation (ANC). E file tax return  A shareholder of an ANC may now request voluntary income tax withholding on dividends and other distributions paid by an ANC. E file tax return A shareholder may request voluntary withholding by giving the ANC a completed Form W-4V, Voluntary Withholding Request. E file tax return For more information see Notice 2013-77, 2013-50 I. E file tax return R. E file tax return B. E file tax return 632, available at www. E file tax return irs. E file tax return gov/irb/2013-50_IRB/ar10. E file tax return html. E file tax return Change of responsible party. E file tax return  Beginning January 1, 2014, any entity with an employer identification number (EIN) must file Form 8822-B, Change of Address or Responsible Party — Business, to report the latest change to its responsible party. E file tax return Form 8822-B must be filed within 60 days of the change. E file tax return If the change in the identity of your responsible party occurred before 2014, and you have not previously notified the IRS of the change, file Form 8822-B before March 1, 2014, reporting only the most recent change. E file tax return For a definition of “responsible party,” see the Form 8822-B instructions. E file tax return Same-sex marriage. E file tax return  For federal tax purposes, individuals of the same sex are considered married if they were lawfully married in a state (or foreign country) whose laws authorize the marriage of two individuals of the same sex, even if the state (or foreign country) in which they now live does not recognize same-sex marriage. E file tax return For more information, see Revenue Ruling 2013-17, 2013-38 I. E file tax return R. E file tax return B. E file tax return 201, available at www. E file tax return irs. E file tax return gov/irb/2013-38_IRB/ar07. E file tax return html. E file tax return Notice 2013-61 provides special administrative procedures for employers to make claims for refunds or adjustments of overpayments of social security and Medicare taxes with respect to certain same-sex spouse benefits before expiration of the period of limitations. E file tax return Notice 2013-61, 2013-44 I. E file tax return R. E file tax return B. E file tax return 432, is available at www. E file tax return irs. E file tax return gov/irb/2013-44_IRB/ar10. E file tax return html. E file tax return Reminders Additional Medicare Tax withholding. E file tax return  In addition to withholding Medicare tax at 1. E file tax return 45%, you must withhold a 0. E file tax return 9% Additional Medicare Tax from wages you pay to an employee in excess of $200,000 in a calendar year. E file tax return You are required to begin withholding Additional Medicare Tax in the pay period in which you pay wages in excess of $200,000 to an employee and continue to withhold it each pay period until the end of the calendar year. E file tax return Additional Medicare Tax is only imposed on the employee. E file tax return There is no employer share of Additional Medicare Tax. E file tax return All wages that are subject to Medicare tax are subject to Additional Medicare Tax withholding if paid in excess of the $200,000 withholding threshold. E file tax return For more information on what wages are subject to Medicare tax, see the chart, Special Rules for Various Types of Services and Payments , in section 15. E file tax return For more information on Additional Medicare Tax, visit IRS. E file tax return gov and enter “Additional Medicare Tax” in the search box. E file tax return Work opportunity tax credit for qualified tax-exempt organizations hiring qualified veterans. E file tax return  The work opportunity tax credit is available for eligible unemployed veterans who began work on or after November 22, 2011, and before January 1, 2014. E file tax return Qualified tax-exempt organizations that hire eligible unemployed veterans can claim the work opportunity tax credit against their payroll tax liability using Form 5884-C, Work Opportunity Credit for Qualified Tax-Exempt Organizations Hiring Qualified Veterans. E file tax return For more information, visit IRS. E file tax return gov and enter “work opportunity tax credit” in the search box. E file tax return Outsourcing payroll duties. E file tax return  Employers are responsible to ensure that tax returns are filed and deposits and payments are made, even if the employer contracts with a third party to perform these acts. E file tax return The employer remains responsible if the third party fails to perform any required action. E file tax return If you choose to outsource any of your payroll and related tax duties (that is, withholding, reporting, and paying over social security, Medicare, FUTA, and income taxes) to a third-party payer such as a payroll service provider or reporting agent, visit IRS. E file tax return gov and enter “outsourcing payroll duties” in the search box for helpful information on this topic. E file tax return COBRA premium assistance credit. E file tax return  The credit for COBRA premium assistance payments applies to premiums paid for employees involuntarily terminated between September 1, 2008, and May 31, 2010, and to premiums paid for up to 15 months. E file tax return See COBRA premium assistance credit under Introduction. E file tax return Federal tax deposits must be made by electronic funds transfer. E file tax return  You must use electronic funds transfer to make all federal tax deposits. E file tax return Generally, electronic fund transfers are made using the Electronic Federal Tax Payment System (EFTPS). E file tax return If you do not want to use EFTPS, you can arrange for your tax professional, financial institution, payroll service, or other trusted third party to make electronic deposits on your behalf. E file tax return Also, you may arrange for your financial institution to initiate a same-day wire payment on your behalf. E file tax return EFTPS is a free service provided by the Department of Treasury. E file tax return Services provided by your tax professional, financial institution, payroll service, or other third party may have a fee. E file tax return For more information on making federal tax deposits, see How To Deposit in section 11. E file tax return To get more information about EFTPS or to enroll in EFTPS, visit www. E file tax return eftps. E file tax return gov or call 1-800-555-4477 or 1-800-733-4829 (TDD). E file tax return Additional information about EFTPS is also available in Publication 966, Electronic Federal Tax Payment System: A Guide To Getting Started. E file tax return You must receive written notice from the IRS to file Form 944. E file tax return  If you have been filing Forms 941, Employer's QUARTERLY Federal Tax Return (or Forms 941-SS, Employer's QUARTERLY Federal Tax Return—American Samoa, Guam, the Commonwealth of the Northern Mariana Islands, and the U. E file tax return S. E file tax return Virgin Islands, or Formularios 941-PR, Planilla para la Declaración Federal TRIMESTRAL del Patrono), and believe your employment taxes for the calendar year will be $1,000 or less, and you would like to file Form 944, Employer's ANNUAL Federal Tax Return, instead of Forms 941, you must contact the IRS to request to file Form 944. E file tax return You must receive written notice from the IRS to file Form 944 instead of Forms 941 before you may file this form. E file tax return For more information on requesting to file Form 944, visit IRS. E file tax return gov and enter “file employment taxes annually” in the search box. E file tax return Employers can request to file Forms 941 instead of Form 944. E file tax return  If you received notice from the IRS and have been filing Form 944 but would like to file Forms 941 instead, you must contact the IRS to request to file Forms 941. E file tax return You must receive written notice from the IRS to file Forms 941 instead of Form 944 before you may file these forms. E file tax return For more information on requesting to file Form 944, visit IRS. E file tax return gov and enter “file employment taxes annually” in the search box. E file tax return Aggregate Form 941 filers. E file tax return  Agents must complete Schedule R (Form 941), Allocation Schedule for Aggregate Form 941 Filers, when filing an aggregate Form 941. E file tax return Aggregate Forms 941 may only be filed by agents approved by the IRS under section 3504 of the Internal Revenue Code. E file tax return To request approval to act as an agent for an employer, the agent files Form 2678, Employer/Payer Appointment of Agent, with the IRS. E file tax return Aggregate Form 940 filers. E file tax return  Agents must complete Schedule R (Form 940), Allocation Schedule for Aggregate Form 940 Filers, when filing an aggregate Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return. E file tax return Aggregate Forms 940 can be filed by agents acting on behalf of home care service recipients who receive home care services through a program administered by a federal, state, or local government. E file tax return To request approval to act as an agent on behalf of home care service recipients, the agent files Form 2678 with the IRS. E file tax return Electronic Filing and Payment  Now, more than ever before, businesses can enjoy the benefits of filing and paying their federal taxes electronically. E file tax return Whether you rely on a tax professional or handle your own taxes, the IRS offers you convenient programs to make filing and payment easier. E file tax return Spend less time and worry about taxes and more time running your business. E file tax return Use e-file and the Electronic Federal Tax Payment System (EFTPS) to your benefit. E file tax return For e-file, visit www. E file tax return irs. E file tax return gov/efile for additional information. E file tax return For EFTPS, visit www. E file tax return eftps. E file tax return gov or call EFTPS Customer Service at 1-800-555-4477 or 1-800-733-4829 (TDD). E file tax return For electronic filing of Forms W-2, Wage and Tax Statement, visit www. E file tax return socialsecurity. E file tax return gov/employer. E file tax return If you are filing your tax return or paying your federal taxes electronically, a valid EIN is required. E file tax return If a valid EIN is not provided, the return or payment will not be processed. E file tax return This may result in penalties and delays in processing your return or payment. E file tax return Electronic funds withdrawal (EFW). E file tax return  If you file Form 940, Form 941, Form 944, or Form 945 electronically, you can e-file and e-pay (electronic funds withdrawal) the balance due in a single step using tax preparation software or through a tax professional. E file tax return However, do not use EFW to make federal tax deposits. E file tax return For more information on paying your taxes using EFW, visit the IRS website at www. E file tax return irs. E file tax return gov/e-pay. E file tax return A fee may be charged to file electronically. E file tax return Credit or debit card payments. E file tax return  For information on paying your taxes with a credit or debit card, visit the IRS website at www. E file tax return irs. E file tax return gov/e-pay. E file tax return However, do not use credit or debit cards to make federal tax deposits. E file tax return Forms in Spanish You can provide Formulario W-4(SP), Certificado de Exención de Retenciones del Empleado, in place of Form W-4, Employee's Withholding Allowance Certificate, to your Spanish-speaking employees. E file tax return For more information, see Publicación 17(SP), El Impuesto Federal sobre los Ingresos (Para Personas Físicas). E file tax return For nonemployees, Formulario W-9(SP), Solicitud y Certificación del Número de Identificación del Contribuyente, may be used in place of Form W-9, Request for Taxpayer Identification Number and Certification. E file tax return Hiring New Employees Eligibility for employment. E file tax return  You must verify that each new employee is legally eligible to work in the United States. E file tax return This includes completing the U. E file tax return S. E file tax return Citizenship and Immigration Services (USCIS) Form I-9, Employment Eligibility Verification. E file tax return You can get the form from USCIS offices or by calling 1-800-870-3676. E file tax return Contact the USCIS at 1-800-375-5283, or visit the USCIS website at www. E file tax return uscis. E file tax return gov for more information. E file tax return New hire reporting. E file tax return  You are required to report any new employee to a designated state new hire registry. E file tax return A new employee is an employee who has not previously been employed by you or was previously employed by you but has been separated from such prior employment for at least 60 consecutive days. E file tax return Many states accept a copy of Form W-4 with employer information added. E file tax return Visit the Office of Child Support Enforcement website at www. E file tax return acf. E file tax return hhs. E file tax return gov/programs/cse/newhire for more information. E file tax return W-4 request. E file tax return  Ask each new employee to complete the 2014 Form W-4. E file tax return See section 9. E file tax return Name and social security number. E file tax return  Record each new employee's name and number from his or her social security card. E file tax return Any employee without a social security card should apply for one. E file tax return See section 4. E file tax return Paying Wages, Pensions, or Annuities Correcting Form 941 or Form 944. E file tax return  If you discover an error on a previously filed Form 941 or Form 944, make the correction using Form 941-X, Adjusted Employer's QUARTERLY Federal Tax Return or Claim for Refund, or Form 944-X, Adjusted Employer's ANNUAL Federal Tax Return or Claim for Refund. E file tax return Forms 941-X and 944-X are stand-alone forms, meaning taxpayers can file them when an error is discovered. E file tax return Forms 941-X and 944-X are used by employers to claim refunds or abatements of employment taxes, rather than Form 843, Claim for Refund and Request for Abatement. E file tax return See section 13 for more information. E file tax return Income tax withholding. E file tax return  Withhold federal income tax from each wage payment or supplemental unemployment compensation plan benefit payment according to the employee's Form W-4 and the correct withholding table. E file tax return If you have nonresident alien employees, see Withholding income taxes on the wages of nonresident alien employees in section 9. E file tax return Withhold from periodic pension and annuity payments as if the recipient is married claiming three withholding allowances, unless he or she has provided Form W-4P, Withholding Certificate for Pension or Annuity Payments, either electing no withholding or giving a different number of allowances, marital status, or an additional amount to be withheld. E file tax return Do not withhold on direct rollovers from qualified plans or governmental section 457(b) plans. E file tax return See section 9 and Publication 15-A, Employer's Supplemental Tax Guide. E file tax return Publication 15-A includes information about withholding on pensions and annuities. E file tax return Zero wage return. E file tax return  If you have not filed a “final” Form 941 or Form 944, or are not a “seasonal” employer, you must continue to file a Form 941 or Form 944 even for periods during which you paid no wages. E file tax return The IRS encourages you to file your “Zero Wage” Forms 941 or 944 electronically using IRS e-file at www. E file tax return irs. E file tax return gov/efile. E file tax return Employer Responsibilities Employer Responsibilities: The following list provides a brief summary of your basic responsibilities. E file tax return Because the individual circumstances for each employer can vary greatly, responsibilities for withholding, depositing, and reporting employment taxes can differ. E file tax return Each item in this list has a page reference to a more detailed discussion in this publication. E file tax return   New Employees: Page     Annually (By January 31 of the current year, Page □ Verify work eligibility of new employees 3     for the prior year):   □ Record employees' names and SSNs from     □ File Form 944 if required (pay tax with return if     social security cards 4     not required to deposit) 29 □ Ask employees for Form W-4 3     Annually (see Calendar for due dates):     Each Payday:     □ Remind employees to submit a new Form W-4   □ Withhold federal income tax based on each       if they need to change their withholding 20   employee's Form W-4 20   □ Ask for a new Form W-4 from employees   □ Withhold employee's share of social security       claiming exemption from income tax     and Medicare taxes 23     withholding 20 □ Deposit:     □ Reconcile Forms 941 (or Form 944) with Forms     • Withheld income tax       W-2 and W-3 31   • Withheld and employer social security taxes     □ Furnish each employee a Form W-2 7   • Withheld and employer Medicare taxes 24   □ File Copy A of Forms W-2 and the transmittal     Note:Due date of deposit generally depends       Form W-3 with the SSA 8   on your deposit schedule (monthly or semiweekly)     □ Furnish each other payee a Form 1099 (for example, Form 1099-MISC, Miscellaneous Income) 7   Quarterly (By April 30, July 31, October 31, and January 31):     □ File Forms 1099 and the transmittal Form   □ Deposit FUTA tax if undeposited amount       1096 8   is over $500 35   □ File Form 940 7 □ File Form 941 (pay tax with return if not     □ File Form 945 for any nonpayroll income tax     required to deposit) 29     withholding 8 Information Returns You may be required to file information returns to report certain types of payments made during the year. E file tax return For example, you must file Form 1099-MISC, Miscellaneous Income, to report payments of $600 or more to persons not treated as employees (for example, independent contractors) for services performed for your trade or business. E file tax return For details about filing Forms 1099 and for information about required electronic filing, see the General Instructions for Certain Information Returns for general information and the separate, specific instructions for each information return you file (for example, Instructions for Form 1099-MISC). E file tax return Generally, do not use Forms 1099 to report wages and other compensation you paid to employees; report these on Form W-2. E file tax return See the General Instructions for Forms W-2 and W-3 for details about filing Form W-2 and for information about required electronic filing. E file tax return If you file 250 or more Forms 1099, you must file them electronically. E file tax return If you file 250 or more Forms W-2, you must file them electronically. E file tax return SSA will not accept Forms W-2 and W-3 filed on magnetic media. E file tax return Information reporting customer service site. E file tax return  The IRS operates the Enterprise Computing Center—Martinsburg, a centralized customer service site, to answer questions about reporting on Forms W-2, W-3, 1099, and other information returns. E file tax return If you have questions related to reporting on information returns, call 1-866-455-7438 (toll free), 304-263-8700 (toll call), or 304-267-3367 (TDD/TTY for persons who are deaf, hard of hearing, or have a speech disability). E file tax return The center can also be reached by email at mccirp@irs. E file tax return gov. E file tax return Do not include tax identification numbers (TINs) or attachments in email correspondence because electronic mail is not secure. E file tax return Nonpayroll Income Tax Withholding Nonpayroll federal income tax withholding (reported on Forms 1099 and Form W-2G) must be reported on Form 945, Annual Return of Withheld Federal Income Tax. E file tax return Separate deposits are required for payroll (Form 941 or Form 944) and nonpayroll (Form 945) withholding. E file tax return Nonpayroll items include: Pensions (including distributions from tax-favored retirement plans, for example, section 401(k), section 403(b), and governmental section 457(b) plans) and annuities. E file tax return Military retirement. E file tax return Gambling winnings. E file tax return Indian gaming profits. E file tax return Certain government payments, such as unemployment compensation, social security, and Tier 1 railroad retirement benefits, subject to voluntary withholding. E file tax return Payments subject to backup withholding. E file tax return For details on depositing and reporting nonpayroll income tax withholding, see the Instructions for Form 945. E file tax return All income tax withholding reported on Form W-2 must be reported on Form 941, Form 943, Employer's Annual Federal Tax Return for Agricultural Employees, Form 944, or Schedule H (Form 1040), Household Employment Taxes. E file tax return Distributions from nonqualified pension plans and deferred compensation plans. E file tax return  Because distributions to participants from some nonqualified pension plans and deferred compensation plans (including section 457(b) plans of tax-exempt organizations) are treated as wages and are reported on Form W-2, income tax withheld must be reported on Form 941 or Form 944, not on Form 945. E file tax return However, distributions from such plans to a beneficiary or estate of a deceased employee are not wages and are reported on Forms 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. E file tax return ; income tax withheld must be reported on Form 945. E file tax return Backup withholding. E file tax return  You generally must withhold 28% of certain taxable payments if the payee fails to furnish you with his or her correct taxpayer identification number (TIN). E file tax return This withholding is referred to as “backup withholding. E file tax return ” Payments subject to backup withholding include interest, dividends, patronage dividends, rents, royalties, commissions, nonemployee compensation, and certain other payments you make in the course of your trade or business. E file tax return In addition, transactions by brokers and barter exchanges and certain payments made by fishing boat operators are subject to backup withholding. E file tax return Backup withholding does not apply to wages, pensions, annuities, IRAs (including simplified employee pension (SEP) and SIMPLE retirement plans), section 404(k) distributions from an employee stock ownership plan (ESOP), medical savings accounts, health savings accounts, long-term-care benefits, or real estate transactions. E file tax return You can use Form W-9 or Formulario W-9(SP) to request payees to furnish a TIN and to certify the number furnished is correct. E file tax return You can also use Form W-9 or Formulario W-9(SP) to get certifications from payees that they are not subject to backup withholding or that they are exempt from backup withholding. E file tax return The Instructions for the Requester of Form W-9 or Formulario W-9(SP) includes a list of types of payees who are exempt from backup withholding. E file tax return For more information, see Publication 1281, Backup Withholding for Missing and Incorrect Name/TIN(s). E file tax return Recordkeeping Keep all records of employment taxes for at least 4 years. E file tax return These should be available for IRS review. E file tax return Your records should include the following information. E file tax return Your EIN. E file tax return Amounts and dates of all wage, annuity, and pension payments. E file tax return Amounts of tips reported to you by your employees. E file tax return Records of allocated tips. E file tax return The fair market value of in-kind wages paid. E file tax return Names, addresses, social security numbers, and occupations of employees and recipients. E file tax return Any employee copies of Forms W-2 and W-2c returned to you as undeliverable. E file tax return Dates of employment for each employee. E file tax return Periods for which employees and recipients were paid while absent due to sickness or injury and the amount and weekly rate of payments you or third party payors made to them. E file tax return Copies of employees' and recipients' income tax withholding allowance certificates (Forms W-4, W-4P, W-4(SP), W-4S, and W-4V). E file tax return Copies of employees' Earned Income Credit Advance Payment Certificates (Forms W-5 and W-5(SP)). E file tax return Dates and amounts of tax deposits you made and acknowledgment numbers for deposits made by EFTPS. E file tax return Copies of returns filed and confirmation numbers. E file tax return Records of fringe benefits and expense reimbursements provided to your employees, including substantiation. E file tax return Change of Business Address or Responsible Party To notify the IRS of a change in business address or responsible party, file Form 8822-B. E file tax return Do not mail Form 8822-B with your employment tax return. E file tax return Private Delivery Services You can use certain private delivery services designated by the IRS to mail tax returns and payments. E file tax return The list includes only the following: DHL Express (DHL): DHL Same Day Service. E file tax return Federal Express (FedEx): FedEx Priority Overnight, FedEx Standard Overnight, FedEx 2Day, FedEx International Priority, and FedEx International First. E file tax return United Parcel Service (UPS): UPS Next Day Air, UPS Next Day Air Saver, UPS 2nd Day Air, UPS 2nd Day Air A. E file tax return M. E file tax return , UPS Worldwide Express Plus, and UPS Worldwide Express. E file tax return For the IRS mailing address to use if you are using a private delivery service, go to IRS. E file tax return gov and enter “private delivery service” in the search box. E file tax return Your private delivery service can tell you how to get written proof of the mailing date. E file tax return   Private delivery services cannot deliver items to P. E file tax return O. E file tax return boxes. E file tax return You must use the U. E file tax return S. E file tax return Postal Service to mail any item to an IRS P. E file tax return O. E file tax return box address. E file tax return Telephone Help Tax questions. E file tax return   You can call the IRS Business and Specialty Tax Line with your employment tax questions at 1-800-829-4933. E file tax return Help for people with disabilities. E file tax return  You may call 1-800-829-4059 (TDD/TTY for persons who are deaf, hard of hearing, or have a speech disability) with any tax question or to order forms and publications. E file tax return You may also use this number for assistance with unresolved tax problems. E file tax return Recorded tax information (TeleTax). E file tax return  The IRS TeleTax service provides recorded tax information on topics that answer many individual and business federal tax questions. E file tax return You can listen to up to three topics on each call you make. E file tax return Touch-Tone service is available 24 hours a day, 7 days a week. E file tax return TeleTax topics are also available on the IRS website at www. E file tax return irs. E file tax return gov/taxtopics. E file tax return Most tax topics listed below are also available in Spanish. E file tax return For a complete list of TeleTax topics in Spanish, visit the IRS website at www. E file tax return irs. E file tax return gov/Spanish/Índice-de-Temas-Tributarios-Año-2013. E file tax return A list of employment tax topics is provided next. E file tax return Select, by number, the topic you want to hear and call 1-800-829-4477. E file tax return For the directory of all topics, select Topic 123. E file tax return Teletax Topics Topic No. E file tax return Subject 751 Social Security and Medicare Withholding Rates 752 Form W-2—Where, When, and How to File 753 Form W-4—Employee's Withholding Allowance Certificate 755 Employer Identification Number (EIN)—How to Apply 756 Employment Taxes for Household Employees 757 Form 941 and Form 944—Deposit Requirements 758 Form 941—Employer's QUARTERLY Federal Tax Return and Form 944—Employer's ANNUAL Federal Tax Return 759 Form 940—Employer's Annual Federal Unemployment (FUTA) Tax Return—Filing and Deposit Requirements 760 Reporting and Deposit Requirements for Agricultural Employers 761 Tips—Withholding and Reporting 762 Independent Contractor vs. E file tax return Employee 763 The “Affordable Care Act” of 2010 Offers Employers New Tax Deductions and Credits Additional employment tax information. E file tax return  Visit the IRS website at www. E file tax return irs. E file tax return gov/businesses and click on the Employment Taxes link under Businesses Topics. E file tax return Ordering Employer Tax Forms and Publications You can order employer tax forms and publications and information returns online at www. E file tax return irs. E file tax return gov/businesses. E file tax return To order 2013 and 2014 forms, click on the Online Ordering for Information Returns and Employer Returns link. E file tax return You may also order employer tax forms and publications and information returns by calling 1-800-TAX-FORM (1-800-829-3676). E file tax return Instead of ordering paper Forms W-2 and W-3, consider filing them electronically using the Social Security Administration's (SSA) free e-file service. E file tax return Visit the SSA's Employer W-2 Filing Instructions & Information website at www. E file tax return socialsecurity. E file tax return gov/employer to register for Business Services Online. E file tax return You will be able to create Forms W-2 online and submit them to the SSA by typing your wage information into easy-to-use fill-in fields. E file tax return In addition, you can print out completed copies of Forms W-2 to file with state or local governments, distribute to your employees, and keep for your records. E file tax return Form W-3 will be created for you based on your Forms W-2. E file tax return Filing Addresses Generally, your filing address for Forms 940, 941, 943, 944, 945, and CT-1 depends on the location of your residence or principal place of business and whether or not you are including a payment with your return. E file tax return There are separate filing addresses for these returns if you are a tax-exempt organization or government entity. E file tax return See the separate instructions for Forms 940, 941, 943, 944, 945, or CT-1 for the filing addresses. E file tax return Dishonored Payments Any form of payment that is dishonored and returned from a financial institution is subject to a penalty. E file tax return The penalty is $25 or 2% of the payment, whichever is more. E file tax return However, the penalty on dishonored payments of $24. E file tax return 99 or less is an amount equal to the payment. E file tax return For example, a dishonored payment of $18 is charged a penalty of $18. E file tax return Photographs of Missing Children The IRS is a proud partner with the National Center for Missing and Exploited Children. E file tax return Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. E file tax return You can help bring these children home by looking at the photographs and calling 1-800-THE-LOST (1-800-843-5678) if you recognize a child. E file tax return Calendar The following is a list of important dates. E file tax return Also see Publication 509, Tax Calendars. E file tax return   If any date shown below for filing a return, furnishing a form, or depositing taxes falls on a Saturday, Sunday, or legal holiday, use the next business day. E file tax return A statewide legal holiday delays a filing due date only if the IRS office where you are required to file is located in that state. E file tax return However, a statewide legal holiday does not delay the due date of federal tax deposits. E file tax return See Deposits on Business Days Only in section 11. E file tax return For any filing due date, you will meet the “file” or “furnish” requirement if the envelope containing the return or form is properly addressed, contains sufficient postage, and is postmarked by the U. E file tax return S. E file tax return Postal Service on or before the due date, or sent by an IRS-designated private delivery service on or before the due date. E file tax return See Private Delivery Services under Reminders for more information. E file tax return Introduction This publication explains your tax responsibilities as an employer. E file tax return It explains the requirements for withholding, depositing, reporting, paying, and correcting employment taxes. E file tax return It explains the forms you must give to your employees, those your employees must give to you, and those you must send to the IRS and SSA. E file tax return This guide also has tax tables you need to figure the taxes to withhold from each employee for 2014. E file tax return References to “income tax” in this guide apply only to “federal” income tax. E file tax return Contact your state or local tax department to determine if their rules are different. E file tax return Additional employment tax information is available in Publication 15-A. E file tax return Publication 15-A includes specialized information supplementing the basic employment tax information provided in this publication. E file tax return Publication 15-B, Employer's Tax Guide to Fringe Benefits, contains information about the employment tax treatment and valuation of various types of noncash compensation. E file tax return Most employers must withhold (except FUTA), deposit, report, and pay the following employment taxes. E file tax return Income tax. E file tax return Social security tax. E file tax return Medicare tax. E file tax return FUTA tax. E file tax return There are exceptions to these requirements. E file tax return See section 15 for guidance. E file tax return Railroad retirement taxes are explained in the Instructions for Form CT-1. E file tax return Comments and suggestions. E file tax return   We welcome your comments about this publication and your suggestions for future editions. E file tax return   You can write to us at the following address: Internal Revenue Service Tax Forms & Publications Division 1111 Constitution Ave. E file tax return NW, IR-6526 Washington, DC 20224   We respond to many letters by telephone. E file tax return Therefore, it would be helpful if you would include your daytime phone number, including the area code, in your correspondence. E file tax return   You can also send us comments from www. E file tax return irs. E file tax return gov/formspubs. E file tax return Click on More Information and then click on Comment on Tax Forms and Publications. E file tax return   Although we cannot respond individually to each comment received, we do appreciate your feedback and will consider your comments as we revise our tax forms, instructions, and publications. E file tax return Federal Government employers. E file tax return   The information in this publication, including the rules for making federal tax deposits, applies to federal agencies. E file tax return State and local government employers. E file tax return   Payments to employees for services in the employ of state and local government employers are generally subject to federal income tax withholding but not FUTA tax. E file tax return Most elected and appointed public officials of state or local governments are employees under common law rules. E file tax return See chapter 3 of Publication 963, Federal-State Reference Guide. E file tax return In addition, wages, with certain exceptions, are subject to social security and Medicare taxes. E file tax return See section 15 for more information on the exceptions. E file tax return   If an election worker is employed in another capacity with the same government entity, see Revenue Ruling 2000-6 on page 512 of Internal Revenue Bulletin 2000-6 at www. E file tax return irs. E file tax return gov/pub/irs-irbs/irb00-06. E file tax return pdf. E file tax return   You can get information on reporting and social security coverage from your local IRS office. E file tax return If you have any questions about coverage under a section 218 (Social Security Act) agreement, contact the appropriate state official. E file tax return To find your State Social Security Administrator, visit the National Conference of State Social Security Administrators website at www. E file tax return ncsssa. E file tax return org. E file tax return Disregarded entities and qualified subchapter S subsidiaries (QSubs). E file tax return   Eligible single-owner disregarded entities and QSubs are treated as separate entities for employment tax purposes. E file tax return Eligible single-member entities that have not elected to be taxed as corporations must report and pay employment taxes on wages paid to their employees using the entities' own names and EINs. E file tax return See Regulations sections 1. E file tax return 1361-4(a)(7) and 301. E file tax return 7701-2(c)(2)(iv). E file tax return COBRA premium assistance credit. E file tax return   The Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) provides certain former employees, retirees, spouses, former spouses, and dependent children the right to temporary continuation of health coverage at group rates. E file tax return COBRA generally covers multiemployer health plans and health plans maintained by private-sector employers (other than churches) with 20 or more full and part-time employees. E file tax return Parallel requirements apply to these plans under the Employee Retirement Income Security Act of 1974 (ERISA). E file tax return Under the Public Health Service Act, COBRA requirements apply also to health plans covering state or local government employees. E file tax return Similar requirements apply under the Federal Employees Health Benefits Program and under some state laws. E file tax return For the premium assistance (or subsidy) discussed below, these requirements are all referred to as COBRA requirements. E file tax return   Under the American Recovery and Reinvestment Act of 2009 (ARRA), employers are allowed a credit against “payroll taxes” (referred to in this publication as “employment taxes”) for providing COBRA premium assistance to assistance eligible individuals. E file tax return For periods of COBRA continuation coverage beginning after February 16, 2009, a group health plan must treat an assistance eligible individual as having paid the required COBRA continuation coverage premium if the individual elects COBRA coverage and pays 35% of the amount of the premium. E file tax return   An assistance eligible individual is a qualified beneficiary of an employer's group health plan who is eligible for COBRA continuation coverage during the period beginning September 1, 2008, and ending May 31, 2010, due to the involuntarily termination from employment of a covered employee during the period and elects continuation COBRA coverage. E file tax return The assistance for the coverage can last up to 15 months. E file tax return   Employees terminated during the period beginning September 1, 2008, and ending May 31, 2010, who received a severance package that delayed the start of the COBRA continuation coverage, may still be eligible for premium assistance for COBRA continuation coverage. E file tax return For more information see Notice 2009-27, 2009-16 I. E file tax return R. E file tax return B. E file tax return 838, available at www. E file tax return irs. E file tax return gov/irb/2009-16_irb/ar09. E file tax return html. E file tax return   Administrators of the group health plans (or other entities) that provide or administer COBRA continuation coverage must provide notice to assistance eligible individuals of the COBRA premium assistance. E file tax return   The 65% of the premium not paid by the assistance eligible individuals is reimbursed to the employer maintaining the group health plan. E file tax return The reimbursement is made through a credit against the employer's employment tax liabilities. E file tax return For information on how to claim the credit, see the Instructions for Form 941 or the Instructions for Form 944. E file tax return The credit is treated as a deposit made on the first day of the return period (quarter or year). E file tax return In the case of a multiemployer plan, the credit is claimed by the plan, rather than the employer. E file tax return In the case of an insured plan subject to state law continuation coverage requirements, the credit is claimed by the insurance company, rather than the employer. E file tax return   Anyone claiming the credit for COBRA premium assistance payments must maintain the following information to support their claim, including the following. E file tax return Information on the receipt of the assistance eligible individuals' 35% share of the premium, including dates and amounts. E file tax return In the case of an insurance plan, a copy of invoice or other supporting statement from the insurance carrier and proof of timely payment of the full premium to the insurance carrier required under COBRA. E file tax return In the case of a self-insured plan, proof of the premium amount and proof of the coverage provided to the assistance eligible individuals. E file tax return Attestation of involuntary termination, including the date of the involuntary termination for each covered employee whose involuntary termination is the basis for eligibility for the subsidy. E file tax return Proof of each assistance eligible individual's eligibility for COBRA coverage and the election of COBRA coverage. E file tax return A record of the SSNs of all covered employees, the amount of the subsidy reimbursed with respect to each covered employee, and whether the subsidy was for one individual or two or more individuals. E file tax return   For more information, visit IRS. E file tax return gov and enter “COBRA” in the search box. E file tax return Prev  Up  Next   Home   More Online Publications
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Understanding your CP13A Notice

We made changes to your return because we found an error involving your Earned Income Credit. You're not due a refund nor do you owe an additional amount because of our changes. Your account balance is zero.

Printable samples of this notice (PDF)

Tax publications you may find useful

How to get help

Calling the 1-800 number listed on the top right corner of your notice is the fastest way to get your questions answered.

You can also authorize someone (such as an accountant) to contact the IRS on your behalf using this Power of Attorney and Declaration of Representative (Form 2848).

Or you may qualify for help from a Low Income Taxpayer Clinic.
 


What you need to do

  • Review the notice and compare our changes to the information on your tax return.
  • Correct the copy of your tax return that you kept for your records.
  • You don't need to do anything if you agree with the notice.
  • If you disagree with the notice, please contact us at the toll-free number listed on its top right corner (within 60 days of its date).

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Answers to Common Questions

What should I do if I disagree with the changes you made?
Contact us at the toll free number listed on the top right corner of your notice if you disagree with the changes we made.

What should I do if I need to make another correction to my tax return?
You'll need to file an amended return to make a correction.

What's the difference between the "Child Tax Credit" and the "Additional Child Tax Credit?" Can I qualify for both?
The Child Tax Credit is for people who have a qualifying child. The maximum amount you can claim is $1000 for each qualifying child. The Additional Child Tax Credit is for individuals who receive less than the full amount of Child Tax Credit. You may qualify for both the Child Tax Credit and the Additional Child Tax Credit.

How do I claim an Additional Child Tax Credit?
You can claim the credit by completing a Form 1040 Schedule 8812, Child Tax Credit and attaching it to your income tax return.

My child is turning 18 this year. Can I still get the Additional Child Tax Credit?
No. Your child must be under the age of 17 at the end of 2009 to qualify for both the Child Tax Credit and the Additional Child Tax Credit.


Tips for next year

Consider filing your taxes electronically. Filing online can help you avoid mistakes and find credits and deductions that you may qualify for. In many cases you can file for free. Learn more about e-file.

If you have any dependent children, remember to claim the Additional Child Tax Credit the next time you file your income tax return. Complete and attach a Form 1040 Schedule 8812, Child Tax Credit to your return to claim this credit.

Use the EITC Assistant to help you complete your Schedule EIC, Earned Income Credit and claim your Earned Income Credit.

Page Last Reviewed or Updated: 20-Feb-2014

The E File Tax Return

E file tax return Publication 925 - Main Content Table of Contents Passive Activity LimitsWho Must Use These Rules? Passive Activity Loss Passive Activity Credit Publicly Traded Partnership Excess Farm Loss Passive Activities Activities That Are Not Passive Activities Passive Activity Income and Deductions Grouping Your Activities Recharacterization of Passive Income Dispositions How To Report Your Passive Activity Loss Comprehensive ExampleGeneral Information At-Risk LimitsWho Is Affected? Activities Covered by the At-Risk Rules At-Risk Amounts Amounts Not At Risk Reductions of Amounts At Risk Recapture Rule How To Get Tax HelpLow Income Taxpayer Clinics Passive Activity Limits Who Must Use These Rules? The passive activity rules apply to: Individuals, Estates, Trusts (other than grantor trusts), Personal service corporations, and Closely held corporations. E file tax return Even though the rules do not apply to grantor trusts, partnerships, and S corporations directly, they do apply to the owners of these entities. E file tax return For information about personal service corporations and closely held corporations, including definitions and how the passive activity rules apply to these corporations, see Form 8810 and its instructions. E file tax return Before applying the passive activity limits, you must first determine the amount of the deductions disallowed under the basis, excess farm loss, or at-risk rules. E file tax return See Passive Activity Deductions, later. E file tax return Passive Activity Loss Generally, the passive activity loss for the tax year is not allowed. E file tax return However, there is a special allowance under which some or all of your passive activity loss may be allowed. E file tax return See Special $25,000 allowance , later. E file tax return Definition of passive activity loss. E file tax return    Generally, your passive activity loss for the tax year is the excess of your passive activity deductions over your passive activity gross income. E file tax return See Passive Activity Income and Deductions , later. E file tax return   For a closely held corporation, the passive activity loss is the excess of passive activity deductions over the sum of passive activity gross income and net active income. E file tax return For details on net active income, see the Instructions for Form 8810. E file tax return For the definition of passive activity gross income, see Passive Activity Income , later. E file tax return For the definition of passive activity deductions, see Passive Activity Deductions , later. E file tax return Identification of Disallowed Passive Activity Deductions If all or a part of your passive activity loss is disallowed for the tax year, you may need to allocate the disallowed passive activity loss among different passive activities and among different deductions within a passive activity. E file tax return Allocation of disallowed passive activity loss among activities. E file tax return   If all or any part of your passive activity loss is disallowed for the tax year, a ratable portion of the loss (if any) from each of your passive activities is disallowed. E file tax return The ratable portion of a loss from an activity is computed by multiplying the passive activity loss that is disallowed for the tax year by the fraction obtained by dividing: The loss from the activity for the tax year; by The sum of the losses for the tax year from all activities having losses for the tax year. E file tax return Use Worksheet 5 of Form 8582 to figure the ratable portion of the loss from each activity that is disallowed. E file tax return Loss from an activity. E file tax return   The term “loss from an activity” means: The amount by which the passive activity deductions (defined later) from the activity for the tax year exceed the passive activity gross income (defined later) from the activity for the tax year; reduced by Any part of such amount that is allowed under the Special $25,000 Allowance , later. E file tax return   If your passive activity gross income from significant participation passive activities (defined later) for the tax year is more than your passive activity deductions from those activities for the tax year, those activities shall be treated, solely for purposes of figuring your loss from the activity, as a single activity that does not have a loss for such taxable year. E file tax return See Significant Participation Passive Activities , later. E file tax return Example. E file tax return John Pine holds interests in three passive activities, A, B, and C. E file tax return The gross income and deductions from these activities for the taxable year are as follows:   A B C Total Gross income $7,000 $4,000 $12,000 $23,000 Deductions (16,000) (20,000) (8,000) (44,000)           Net income (loss) ($9,000) ($16,000) $4,000 ($21,000)   John Pine’s $21,000 passive activity loss for the taxable year is disallowed. E file tax return Therefore, a ratable portion of the losses from activities A and B is disallowed. E file tax return He figures the disallowed portion of each loss as follows: A: $21,000 x $9,000/$25,000 $7,560 B: $21,000 x $16,000/$25,000 13,440     Total $21,000 Allocation within loss activities. E file tax return   If all or any part of your loss from an activity is disallowed under Allocation of disallowed passive activity loss among activities for the tax year, a ratable portion of each of your passive activity deductions (defined later), other than an excluded deduction (defined below) from such activity is disallowed. E file tax return The ratable portion of a passive activity deduction is the amount of the disallowed portion of the loss from the activity for the tax year multiplied by the fraction obtained by dividing: The amount of such deduction; by The sum of all of your passive activity deductions (other than excluded deductions) from that activity from the tax year. E file tax return Excluded deductions. E file tax return    “Excluded deduction” means any passive activity deduction that is taken into account in computing your net income from an item of property for a taxable year in which an amount of the taxpayer's gross income from such item of property is treated as not from a passive activity. E file tax return See Recharacterization of Passive Income , later. E file tax return Separately identified deductions. E file tax return   In identifying the deductions from an activity that are disallowed, you do not need to account separately for a deduction unless such deduction may, if separately taken into account, result in an income tax liability for any tax year different from that which would result were such deduction not taken into account separately. E file tax return   Use Form 8582, Worksheet 7, for any activity if you have passive activity deductions for that activity that must be separately identified. E file tax return   Deductions that must be accounted for separately include (but are not limited to) the following deductions. E file tax return Deductions that arise in a rental real estate activity in tax years in which you actively participate in such activity. E file tax return See Active participation , later. E file tax return Deductions that arise in a rental real estate activity in tax years in which you do not actively participate in such activity. E file tax return See Active participation , later. E file tax return Losses from sales or exchanges of capital assets. E file tax return Section 1231 losses. E file tax return See Section 1231 Gains and Losses in Publication 544, Sales and Other Disposition of Assets, for more information. E file tax return Carryover of Disallowed Deductions In the case of an activity with respect to which any deductions or credits are disallowed for a taxable year (the loss activity), the disallowed deductions are allocated among your activities for the next tax year in a manner that reasonably reflects the extent to which each activity continues the loss activity. E file tax return The disallowed deductions or credits allocated to an activity under the preceding sentence are treated as deductions or credits from the activity for the next tax year. E file tax return For more information, see Regulations section 1. E file tax return 469-1(f)(4). E file tax return Passive Activity Credit Generally, the passive activity credit for the tax year is disallowed. E file tax return The passive activity credit is the amount by which the sum of all your credits subject to the passive activity rules exceed your regular tax liability allocable to all passive activities for the tax year. E file tax return Credits that are included in figuring the general business credit are subject to the passive activity rules. E file tax return See the Instructions for Form 8582-CR for more information. E file tax return Publicly Traded Partnership You must apply the rules in this part separately to your income or loss from a passive activity held through a publicly traded partnership (PTP). E file tax return You also must apply the limit on passive activity credits separately to your credits from a passive activity held through a PTP. E file tax return You can offset deductions from passive activities of a PTP only against income or gain from passive activities of the same PTP. E file tax return Likewise, you can offset credits from passive activities of a PTP only against the tax on the net passive income from the same PTP. E file tax return This separate treatment rule also applies to a regulated investment company holding an interest in a PTP for the items attributable to that interest. E file tax return For more information on how to apply the passive activity loss rules to PTPs, and on how to apply the limit on passive activity credits to PTPs, see Publicly Traded Partnerships (PTPs) in the Instructions for Forms 8582 and 8582-CR, respectively. E file tax return Excess Farm Loss If you receive an applicable subsidy for any tax year and you have an excess farm loss for the tax year, special rules apply. E file tax return These rules do not apply to C corporations. E file tax return For information, see the Instructions for Schedule F (Form 1040), Profit or Loss From Farming. E file tax return Passive Activities There are two kinds of passive activities. E file tax return Trade or business activities in which you do not materially participate during the year. E file tax return Rental activities, even if you do materially participate in them, unless you are a real estate professional. E file tax return Material participation in a trade or business is discussed later, under Activities That Are Not Passive Activities . E file tax return Treatment of former passive activities. E file tax return   A former passive activity is an activity that was a passive activity in any earlier tax year, but is not a passive activity in the current tax year. E file tax return You can deduct a prior year's unallowed loss from the activity up to the amount of your current year net income from the activity. E file tax return Treat any remaining prior year unallowed loss like you treat any other passive loss. E file tax return   In addition, any prior year unallowed passive activity credits from a former passive activity offset the allocable part of your current year tax liability. E file tax return The allocable part of your current year tax liability is that part of this year's tax liability that is allocable to the current year net income from the former passive activity. E file tax return You figure this after you reduce your net income from the activity by any prior year unallowed loss from that activity (but not below zero). E file tax return Trade or Business Activities A trade or business activity is an activity that: Involves the conduct of a trade or business (that is, deductions would be allowable under section 162 of the Internal Revenue Code if other limitations, such as the passive activity rules, did not apply), Is conducted in anticipation of starting a trade or business, or Involves research or experimental expenditures that are deductible under Internal Revenue Code section 174 (or that would be deductible if you chose to deduct rather than capitalize them). E file tax return A trade or business activity does not include a rental activity or the rental of property that is incidental to an activity of holding the property for investment. E file tax return You generally report trade or business activities on Schedule C, C-EZ, F, or in Part II or III of Schedule E. E file tax return Rental Activities A rental activity is a passive activity even if you materially participated in that activity, unless you materially participated as a real estate professional. E file tax return See Real Estate Professional under Activities That Are Not Passive Activities, later. E file tax return An activity is a rental activity if tangible property (real or personal) is used by customers or held for use by customers, and the gross income (or expected gross income) from the activity represents amounts paid (or to be paid) mainly for the use of the property. E file tax return It does not matter whether the use is under a lease, a service contract, or some other arrangement. E file tax return Exceptions. E file tax return   Your activity is not a rental activity if any of the following apply. E file tax return The average period of customer use of the property is 7 days or less. E file tax return You figure the average period of customer use by dividing the total number of days in all rental periods by the number of rentals during the tax year. E file tax return If the activity involves renting more than one class of property, multiply the average period of customer use of each class by a fraction. E file tax return The numerator of the fraction is the gross rental income from that class of property and the denominator is the activity's total gross rental income. E file tax return The activity's average period of customer use will equal the sum of the amounts for each class. E file tax return The average period of customer use of the property, as figured in (1) above, is 30 days or less and you provide significant personal services with the rentals. E file tax return Significant personal services include only services performed by individuals. E file tax return To determine if personal services are significant, all relevant facts and circumstances are taken into consideration, including the frequency of the services, the type and amount of labor required to perform the services, and the value of the services relative to the amount charged for use of the property. E file tax return Significant personal services do not include the following. E file tax return Services needed to permit the lawful use of the property, Services to repair or improve property that would extend its useful life for a period substantially longer than the average rental, and Services that are similar to those commonly provided with long-term rentals of real estate, such as cleaning and maintenance of common areas or routine repairs. E file tax return You provide extraordinary personal services in making the rental property available for customer use. E file tax return Services are extraordinary personal services if they are performed by individuals and the customers' use of the property is incidental to their receipt of the services. E file tax return The rental is incidental to a nonrental activity. E file tax return The rental of property is incidental to an activity of holding property for investment if the main purpose of holding the property is to realize a gain from its appreciation and the gross rental income from the property is less than 2% of the smaller of the property's unadjusted basis or fair market value. E file tax return The unadjusted basis of property is its cost not reduced by depreciation or any other basis adjustment. E file tax return The rental of property is incidental to a trade or business activity if all of the following apply. E file tax return You own an interest in the trade or business activity during the year. E file tax return The rental property was used mainly in that trade or business activity during the current year, or during at least 2 of the 5 preceding tax years. E file tax return Your gross rental income from the property is less than 2% of the smaller of its unadjusted basis or fair market value. E file tax return Lodging provided to an employee or the employee's spouse or dependents is incidental to the activity or activities in which the employee performs services if the lodging is furnished for the employer's convenience. E file tax return You customarily make the rental property available during defined business hours for nonexclusive use by various customers. E file tax return You provide the property for use in a nonrental activity in your capacity as an owner of an interest in the partnership, S corporation, or joint venture conducting that activity. E file tax return    If you meet any of the exceptions listed above, see the instructions for Form 8582 for information about how to report any income or loss from the activity. E file tax return Special $25,000 allowance. E file tax return   If you or your spouse actively participated in a passive rental real estate activity, the amount of the passive activity loss that is disallowed is decreased and you therefore can deduct up to $25,000 of loss from the activity from your nonpassive income. E file tax return This special allowance is an exception to the general rule disallowing the passive activity loss. E file tax return Similarly, you can offset credits from the activity against the tax on up to $25,000 of nonpassive income after taking into account any losses allowed under this exception. E file tax return   If you are married, filing a separate return, and lived apart from your spouse for the entire tax year, your special allowance cannot be more than $12,500. E file tax return If you lived with your spouse at any time during the year and are filing a separate return, you cannot use the special allowance to reduce your nonpassive income or tax on nonpassive income. E file tax return   The maximum special allowance is reduced if your modified adjusted gross income exceeds certain amounts. E file tax return See Phaseout rule , later. E file tax return Example. E file tax return Kate, a single taxpayer, has $70,000 in wages, $15,000 income from a limited partnership, a $26,000 loss from rental real estate activities in which she actively participated, and is not subject to the modified adjusted gross income phaseout rule. E file tax return She can use $15,000 of her $26,000 loss to offset her $15,000 passive income from the partnership. E file tax return She actively participated in her rental real estate activities, so she can use the remaining $11,000 rental real estate loss to offset $11,000 of her nonpassive income (wages). E file tax return Commercial revitalization deduction (CRD). E file tax return   The special allowance must first be applied to losses from rental real estate activities figured without the CRD. E file tax return Any remaining part of the special allowance is available for the CRD from the rental real estate activities and is not subject to the active participation rules or the phaseout based on modified adjusted gross income. E file tax return You cannot claim a CRD for a building placed in service after December 31, 2009. E file tax return Active participation. E file tax return   Active participation is not the same as material participation (defined later). E file tax return Active participation is a less stringent standard than material participation. E file tax return For example, you may be treated as actively participating if you make management decisions in a significant and bona fide sense. E file tax return Management decisions that count as active participation include approving new tenants, deciding on rental terms, approving expenditures, and similar decisions. E file tax return   Only individuals can actively participate in rental real estate activities. E file tax return However, a decedent's estate is treated as actively participating for its tax years ending less than 2 years after the decedent's death, if the decedent would have satisfied the active participation requirement for the activity for the tax year the decedent died. E file tax return   A decedent's qualified revocable trust can also be treated as actively participating if both the trustee and the executor (if any) of the estate choose to treat the trust as part of the estate. E file tax return The choice applies to tax years ending after the decedent's death and before: 2 years after the decedent's death if no estate tax return is required, or 6 months after the estate tax liability is finally determined if an estate tax return is required. E file tax return   The choice is irrevocable and cannot be made later than the due date for the estate's first income tax return (including any extensions). E file tax return   Limited partners are not treated as actively participating in a partnership's rental real estate activities. E file tax return   You are not treated as actively participating in a rental real estate activity unless your interest in the activity (including your spouse's interest) was at least 10% (by value) of all interests in the activity throughout the year. E file tax return   Active participation is not required to take the low-income housing credit, the rehabilitation investment credit, or CRD from rental real estate activities. E file tax return Example. E file tax return Mike, a single taxpayer, had the following income and loss during the tax year: Salary $42,300 Dividends 300 Interest 1,400 Rental loss (4,000) The rental loss came from a house Mike owned. E file tax return He advertised and rented the house to the current tenant himself. E file tax return He also collected the rents and did the repairs or hired someone to do them. E file tax return Even though the rental loss is a loss from a passive activity, Mike can use the entire $4,000 loss to offset his other income because he actively participated. E file tax return Phaseout rule. E file tax return   The maximum special allowance of $25,000 ($12,500 for married individuals filing separate returns and living apart at all times during the year) is reduced by 50% of the amount of your modified adjusted gross income that is more than $100,000 ($50,000 if you are married filing separately). E file tax return If your modified adjusted gross income is $150,000 or more ($75,000 or more if you are married filing separately), you generally cannot use the special allowance. E file tax return    Modified adjusted gross income for this purpose is your adjusted gross income figured without the following. E file tax return Taxable social security and tier 1 railroad retirement benefits. E file tax return Deductible contributions to individual retirement accounts (IRAs) and section 501(c)(18) pension plans. E file tax return The exclusion from income of interest from qualified U. E file tax return S. E file tax return savings bonds used to pay qualified higher education expenses. E file tax return The exclusion from income of amounts received from an employer's adoption assistance program. E file tax return Passive activity income or loss included on Form 8582. E file tax return Any rental real estate loss allowed because you materially participated in the rental activity as a Real Estate Professional (as discussed later, under Activities That Are Not Passive Activities). E file tax return Any overall loss from a publicly traded partnership (see Publicly Traded Partnerships (PTPs) in the instructions for Form 8582). E file tax return The deduction for the employer-equivalent portion of self-employment tax. E file tax return The deduction for domestic production activities. E file tax return The deduction allowed for interest on student loans. E file tax return The deduction for qualified tuition and related expenses. E file tax return Example. E file tax return During 2013, John was unmarried and was not a real estate professional. E file tax return For 2013, he had $120,000 in salary and a $31,000 loss from his rental real estate activities in which he actively participated. E file tax return His modified adjusted gross income is $120,000. E file tax return When he files his 2013 return, he can deduct only $15,000 of his passive activity loss. E file tax return He must carry over the remaining $16,000 passive activity loss to 2014. E file tax return He figures his deduction and carryover as follows: Adjusted gross income, modified as required $120,000       Minus amount not subject to phaseout 100,000 Amount subject to phaseout rule $20,000 Multiply by 50% × 50% Required reduction to special allowance $10,000 Maximum special allowance $25,000 Minus required reduction (see above) 10,000 Adjusted special allowance $15,000 Passive loss from rental real estate $31,000 Deduction allowable/Adjusted  special allowance (see above) 15,000       Amount that must be carried forward $16,000 Exceptions to the phaseout rules. E file tax return   A higher phaseout range applies to rehabilitation investment credits from rental real estate activities. E file tax return For those credits, the phaseout of the $25,000 special allowance starts when your modified adjusted gross income exceeds $200,000 ($100,000 if you are a married individual filing a separate return and living apart at all times during the year). E file tax return   There is no phaseout of the $25,000 special allowance for low-income housing credits or for the CRD. E file tax return Ordering rules. E file tax return   If you have more than one of the exceptions to the phaseout rules in the same tax year, you must apply the $25,000 phaseout against your passive activity losses and credits in the following order. E file tax return The portion of passive activity losses not attributable to the CRD. E file tax return The portion of passive activity losses attributable to the CRD. E file tax return The portion of passive activity credits attributable to credits other than the rehabilitation and low-income housing credits. E file tax return The portion of passive activity credits attributable to the rehabilitation credit. E file tax return The portion of passive activity credits attributable to the low-income housing credit. E file tax return Activities That Are Not Passive Activities The following are not passive activities. E file tax return Trade or business activities in which you materially participated for the tax year. E file tax return A working interest in an oil or gas well which you hold directly or through an entity that does not limit your liability (such as a general partner interest in a partnership). E file tax return It does not matter whether you materially participated in the activity for the tax year. E file tax return However, if your liability was limited for part of the year (for example, you converted your general partner interest to a limited partner interest during the year) and you had a net loss from the well for the year, some of your income and deductions from the working interest may be treated as passive activity gross income and passive activity deductions. E file tax return  See Temporary Regulations section 1. E file tax return 469-1T(e)(4)(ii). E file tax return The rental of a dwelling unit that you also used for personal purposes during the year for more than the greater of 14 days or 10% of the number of days during the year that the home was rented at a fair rental. E file tax return An activity of trading personal property for the account of those who own interests in the activity. E file tax return See Temporary Regulations section 1. E file tax return 469-1T(e)(6). E file tax return Rental real estate activities in which you materially participated as a real estate professional. E file tax return See Real Estate Professional , later. E file tax return You should not enter income and losses from these activities on Form 8582. E file tax return Instead, enter them on the forms or schedules you would normally use. E file tax return Material Participation A trade or business activity is not a passive activity if you materially participated in the activity. E file tax return Material participation tests. E file tax return    You materially participated in a trade or business activity for a tax year if you satisfy any of the following tests. E file tax return You participated in the activity for more than 500 hours. E file tax return Your participation was substantially all the participation in the activity of all individuals for the tax year, including the participation of individuals who did not own any interest in the activity. E file tax return You participated in the activity for more than 100 hours during the tax year, and you participated at least as much as any other individual (including individuals who did not own any interest in the activity) for the year. E file tax return The activity is a significant participation activity, and you participated in all significant participation activities for more than 500 hours. E file tax return A significant participation activity is any trade or business activity in which you participated for more than 100 hours during the year and in which you did not materially participate under any of the material participation tests, other than this test. E file tax return See Significant Participation Passive Activities , under Recharacterization of Passive Income, later. E file tax return You materially participated in the activity for any 5 (whether or not consecutive) of the 10 immediately preceding tax years. E file tax return The activity is a personal service activity in which you materially participated for any 3 (whether or not consecutive) preceding tax years. E file tax return An activity is a personal service activity if it involves the performance of personal services in the fields of health (including veterinary services), law, engineering, architecture, accounting, actuarial science, performing arts, consulting, or any other trade or business in which capital is not a material income-producing factor. E file tax return Based on all the facts and circumstances, you participated in the activity on a regular, continuous, and substantial basis during the year. E file tax return   You did not materially participate in the activity under test (7) if you participated in the activity for 100 hours or less during the year. E file tax return Your participation in managing the activity does not count in determining whether you materially participated under this test if: Any person other than you received compensation for managing the activity, or Any individual spent more hours during the tax year managing the activity than you did (regardless of whether the individual was compensated for the management services). E file tax return Participation. E file tax return   In general, any work you do in connection with an activity in which you own an interest is treated as participation in the activity. E file tax return Work not usually performed by owners. E file tax return   You do not treat the work you do in connection with an activity as participation in the activity if both of the following are true. E file tax return The work is not work that is customarily done by the owner of that type of activity. E file tax return One of your main reasons for doing the work is to avoid the disallowance of any loss or credit from the activity under the passive activity rules. E file tax return Participation as an investor. E file tax return   You do not treat the work you do in your capacity as an investor in an activity as participation unless you are directly involved in the day-to-day management or operations of the activity. E file tax return Work you do as an investor includes: Studying and reviewing financial statements or reports on operations of the activity, Preparing or compiling summaries or analyses of the finances or operations of the activity for your own use, and Monitoring the finances or operations of the activity in a nonmanagerial capacity. E file tax return Spouse's participation. E file tax return   Your participation in an activity includes your spouse's participation. E file tax return This applies even if your spouse did not own any interest in the activity and you and your spouse do not file a joint return for the year. E file tax return Proof of participation. E file tax return You can use any reasonable method to prove your participation in an activity for the year. E file tax return You do not have to keep contemporaneous daily time reports, logs, or similar documents if you can establish your participation in some other way. E file tax return For example, you can show the services you performed and the approximate number of hours spent by using an appointment book, calendar, or narrative summary. E file tax return Limited partners. E file tax return   If you owned an activity as a limited partner, you generally are not treated as materially participating in the activity. E file tax return However, you are treated as materially participating in the activity if you met test (1), (5), or (6) under Material participation tests , discussed earlier, for the tax year. E file tax return   You are not treated as a limited partner, however, if you also were a general partner in the partnership at all times during the partnership's tax year ending with or within your tax year (or, if shorter, during that part of the partnership's tax year in which you directly or indirectly owned your limited partner interest). E file tax return Retired or disabled farmer and surviving spouse of a farmer. E file tax return   If you are a retired or disabled farmer, you are treated as materially participating in a farming activity if you materially participated for 5 or more of the 8 years before your retirement or disability. E file tax return Similarly, if you are a surviving spouse of a farmer, you are treated as materially participating in a farming activity if the real property used in the activity meets the estate tax rules for special valuation of farm property passed from a qualifying decedent, and you actively manage the farm. E file tax return Corporations. E file tax return   A closely held corporation or a personal service corporation is treated as materially participating in an activity only if one or more shareholders holding more than 50% by value of the outstanding stock of the corporation materially participate in the activity. E file tax return   A closely held corporation can also satisfy the material participation standard by meeting the first two requirements for the qualifying business exception from the at-risk limits. E file tax return See Special exception for qualified corporations under Activities Covered by the At-Risk Rules, later. E file tax return Real Estate Professional Generally, rental activities are passive activities even if you materially participated in them. E file tax return However, if you qualified as a real estate professional, rental real estate activities in which you materially participated are not passive activities. E file tax return For this purpose, each interest you have in a rental real estate activity is a separate activity, unless you choose to treat all interests in rental real estate activities as one activity. E file tax return See the Instructions for Schedule E (Form 1040), Supplemental Income and Loss, for information about making this choice. E file tax return If you qualified as a real estate professional for 2013, report income or losses from rental real estate activities in which you materially participated as nonpassive income or losses, and complete line 43 of Schedule E (Form 1040). E file tax return If you also have an unallowed loss from these activities from an earlier year when you did not qualify, see Treatment of former passive activities under Passive Activities, earlier. E file tax return Qualifications. E file tax return   You qualified as a real estate professional for the year if you met both of the following requirements. E file tax return More than half of the personal services you performed in all trades or businesses during the tax year were performed in real property trades or businesses in which you materially participated. E file tax return You performed more than 750 hours of services during the tax year in real property trades or businesses in which you materially participated. E file tax return   Do not count personal services you performed as an employee in real property trades or businesses unless you were a 5% owner of your employer. E file tax return You were a 5% owner if you owned (or are considered to have owned) more than 5% of your employer's outstanding stock, outstanding voting stock, or capital or profits interest. E file tax return   If you file a joint return, do not count your spouse's personal services to determine whether you met the preceding requirements. E file tax return However, you can count your spouse's participation in an activity in determining if you materially participated. E file tax return Real property trades or businesses. E file tax return   A real property trade or business is a trade or business that does any of the following with real property. E file tax return Develops or redevelops it. E file tax return Constructs or reconstructs it. E file tax return Acquires it. E file tax return Converts it. E file tax return Rents or leases it. E file tax return Operates or manages it. E file tax return Brokers it. E file tax return Closely held corporations. E file tax return   A closely held corporation can qualify as a real estate professional if more than 50% of the gross receipts for its tax year came from real property trades or businesses in which it materially participated. E file tax return Passive Activity Income and Deductions In figuring your net income or loss from a passive activity, take into account only passive activity income and passive activity deductions. E file tax return Self-charged interest. E file tax return   Certain self-charged interest income or deductions may be treated as passive activity gross income or passive activity deductions if the loan proceeds are used in a passive activity. E file tax return   Generally, self-charged interest income and deductions result from loans between you and a partnership or S corporation in which you had a direct or indirect ownership interest. E file tax return This includes both loans you made to the partnership or S corporation and loans the partnership or S corporation made to you. E file tax return   It also includes loans from one partnership or S corporation to another partnership or S corporation if each owner in the borrowing entity has the same proportional ownership interest in the lending entity. E file tax return    Exception. E file tax return The self-charged interest rules do not apply to your interest in a partnership or S corporation if the entity made an election under Regulations section 1. E file tax return 469-7(g) to avoid the application of these rules. E file tax return For more details on the self-charged interest rules, see Regulations section 1. E file tax return 469-7. E file tax return Passive Activity Income Passive activity income includes all income from passive activities and generally includes gain from disposition of an interest in a passive activity or property used in a passive activity. E file tax return Passive activity income does not include the following items. E file tax return Income from an activity that is not a passive activity. E file tax return These activities are discussed under Activities That Are Not Passive Activities , earlier. E file tax return Portfolio income. E file tax return This includes interest, dividends, annuities, and royalties not derived in the ordinary course of a trade or business. E file tax return It includes gain or loss from the disposition of property that produces these types of income or that is held for investment. E file tax return The exclusion for portfolio income does not apply to self-charged interest treated as passive activity income. E file tax return For more information on self-charged interest, see Self-charged interest , earlier. E file tax return Personal service income. E file tax return This includes salaries, wages, commissions, self-employment income from trade or business activities in which you materially participated, deferred compensation, taxable social security and other retirement benefits, and payments from partnerships to partners for personal services. E file tax return Income from positive section 481 adjustments allocated to activities other than passive activities. E file tax return (Section 481 adjustments are adjustments that must be made due to changes in your accounting method. E file tax return ) Income or gain from investments of working capital. E file tax return Income from an oil or gas property if you treated any loss from a working interest in the property for any tax year beginning after 1986 as a nonpassive loss, as discussed in item (2) under Activities That Are Not Passive Activities , earlier. E file tax return This also applies to income from other oil and gas property the basis of which is determined wholly or partly by the basis of the property in the preceding sentence. E file tax return Any income from intangible property, such as a patent, copyright, or literary, musical, or artistic composition, if your personal efforts significantly contributed to the creation of the property. E file tax return Any other income that must be treated as nonpassive income. E file tax return See Recharacterization of Passive Income , later. E file tax return Overall gain from any interest in a publicly traded partnership. E file tax return See Publicly Traded Partnerships (PTPs) in the instructions for Form 8582. E file tax return State, local, and foreign income tax refunds. E file tax return Income from a covenant not to compete. E file tax return Reimbursement of a casualty or theft loss included in gross income to recover all or part of a prior year loss deduction, if the loss deduction was not a passive activity deduction. E file tax return Alaska Permanent Fund dividends. E file tax return Cancellation of debt income, if at the time the debt is discharged the debt is not allocated to passive activities under the interest expense allocation rules. E file tax return See chapter 4 of Publication 535, Business Expenses, for information about the rules for allocating interest. E file tax return Disposition of property interests. E file tax return   Gain on the disposition of an interest in property generally is passive activity income if, at the time of the disposition, the property was used in an activity that was a passive activity in the year of disposition. E file tax return The gain generally is not passive activity income if, at the time of disposition, the property was used in an activity that was not a passive activity in the year of disposition. E file tax return An exception to this general rule may apply if you previously used the property in a different activity. E file tax return Exception for more than one use in the preceding 12 months. E file tax return   If you used the property in more than one activity during the 12-month period before its disposition, you must allocate the gain between the activities on a basis that reasonably reflects the property's use during that period. E file tax return Any gain allocated to a passive activity is passive activity income. E file tax return   For this purpose, an allocation of the gain solely to the activity in which the property was mainly used during that period reasonably reflects the property's use if the fair market value of your interest in the property is not more than the lesser of: $10,000, or 10% of the total of the fair market value of your interest in the property and the fair market value of all other property used in that activity immediately before the disposition. E file tax return Exception for substantially appreciated property. E file tax return   The gain is passive activity income if the fair market value of the property at disposition was more than 120% of its adjusted basis and either of the following conditions applies. E file tax return You used the property in a passive activity for 20% of the time you held your interest in the property. E file tax return You used the property in a passive activity for the entire 24-month period before its disposition. E file tax return If neither condition applies, the gain is not passive activity income. E file tax return However, it is treated as portfolio income only if you held the property for investment for more than half of the time you held it in nonpassive activities. E file tax return   For this purpose, treat property you held through a corporation (other than an S corporation) or other entity whose owners receive only portfolio income as property held in a nonpassive activity and as property held for investment. E file tax return Also, treat the date you agree to transfer your interest for a fixed or determinable amount as the disposition date. E file tax return   If you used the property in more than one activity during the 12-month period before its disposition, this exception applies only to the part of the gain allocated to a passive activity under the rules described in the preceding discussion. E file tax return Disposition of property converted to inventory. E file tax return   If you disposed of property that you had converted to inventory from its use in another activity (for example, you sold condominium units you previously held for use in a rental activity), a special rule may apply. E file tax return Under this rule, you disregard the property's use as inventory and treat it as if it were still used in that other activity at the time of disposition. E file tax return This rule applies only if you meet all of the following conditions. E file tax return At the time of disposition, you held your interest in the property in a dealing activity (an activity that involves holding the property or similar property mainly for sale to customers in the ordinary course of a trade or business). E file tax return Your other activities included a nondealing activity (an activity that does not involve holding similar property for sale to customers in the ordinary course of a trade or business) in which you used the property for more than 80% of the period you held it. E file tax return You did not acquire or hold your interest in the property for the main purpose of selling it to customers in the ordinary course of a trade or business. E file tax return Passive Activity Deductions Generally, a deduction is a passive activity deduction for a taxable year if and only if such deduction either: Arises in connection with the conduct of an activity that is a passive activity for the tax year; or Is treated as a deduction from an activity for the tax year because it was disallowed by the passive activity rules in the preceding year and carried forward to the tax year. E file tax return For purposes of item (1), above, an item of deduction arises in the taxable year in which the item would be allowable as a deduction under the taxpayer's method of accounting if taxable income for all taxable years were determined without regard to the passive activity rules and without regard to the basis, excess farm loss, and at-risk limits. E file tax return See Coordination with other limitations on deductions that apply before the passive activity rules , later. E file tax return Passive activity deductions generally include losses from dispositions of property used in a passive activity at the time of the disposition and losses from a disposition of less than your entire interest in a passive activity. E file tax return Exceptions. E file tax return   Passive activity deductions do not include the following items. E file tax return Deductions for expenses (other than interest expense) that are clearly and directly allocable to portfolio income. E file tax return Qualified home mortgage interest, capitalized interest expenses, and other interest expenses (other than self-charged interest) properly allocable to passive activities. E file tax return For more information on self-charged interest, see Self-charged interest under Passive Activity Income and Deductions, earlier. E file tax return Losses from dispositions of property that produce portfolio income or property held for investment. E file tax return State, local, and foreign income taxes. E file tax return Miscellaneous itemized deductions that may be disallowed because of the 2%-of-adjusted-gross-income limit. E file tax return Charitable contribution deductions. E file tax return Net operating loss deductions. E file tax return Percentage depletion carryovers for oil and gas wells. E file tax return Capital loss carrybacks and carryovers. E file tax return Items of deduction from a passive activity that are disallowed under the limits on deductions that apply before the passive activity rules. E file tax return See Coordination with other limitations on deductions that apply before the passive activity rules , later. E file tax return Deductions and losses that would have been allowed for tax years beginning before 1987 but for basis or at-risk limits. E file tax return Net negative section 481 adjustments allocated to activities other than passive activities. E file tax return (Section 481 adjustments are adjustments required due to changes in accounting methods. E file tax return ) Casualty and theft losses, unless losses similar in cause and severity recur regularly in the activity. E file tax return The deduction for the employer-equivalent portion of self-employment tax. E file tax return Coordination with other limitations on deductions that apply before the passive activity rules. E file tax return   An item of deduction from a passive activity that is disallowed for a tax year under the basis or at-risk limitations is not a passive activity deduction for the tax year. E file tax return The following sections provide rules for figuring the extent to which items of deduction from a passive activity are disallowed for a tax year under the basis or at-risk limitations. E file tax return Proration of deductions disallowed under basis limitations. E file tax return   If any amount of your distributive share of a partnership's loss for the tax year is disallowed under the basis limitation, a ratable portion of your distributive share of each item of deduction or loss of the partnership is disallowed for the tax year. E file tax return For this purpose, the ratable portion of an item of deduction or loss is the amount of such item multiplied by the fraction obtained by dividing: The amount of your distributive share of partnership loss that is disallowed for the taxable year; by The sum of your distributive shares of all items of deduction and loss of the partnership for the tax year. E file tax return   If any amount of your pro rata share of an S corporation's loss for the tax year is disallowed under the basis limitation, a ratable portion of your pro rata share of each item of deduction or loss of the S corporation is disallowed for the tax year. E file tax return For this purpose, the ratable portion of an item of deduction or loss is the amount of such item multiplied by the fraction obtained by dividing: The amount of your share of S corporation loss that is disallowed for the tax year; by The sum of your pro rata shares of all items of deduction and loss of the corporation for the tax year. E file tax return Proration of deductions disallowed under at-risk limitation. E file tax return   If any amount of your loss from an activity (as defined in Activities Covered by the At-Risk Rules , later) is disallowed under the at-risk rules for the tax year, a ratable portion of each item of deduction or loss from the activity is disallowed for the tax year. E file tax return For this purpose, the ratable portion of an item of deduction or loss is the amount of such item multiplied by the fraction obtained by dividing: The amount of the loss from the activity that is disallowed for the tax year; by The sum of all deductions from the activity for the taxable year. E file tax return Coordination of basis and at-risk limitations. E file tax return   The portion of any item of deduction or loss that is disallowed for the tax year under the basis limitations is not taken into account for the taxable year in determining the loss from an activity (as defined in Activities Covered by the At-Risk Rules , later) for purposes of applying the at-risk rules. E file tax return Separately identified items of deduction and loss. E file tax return   In identifying the items of deduction and loss from an activity that are not disallowed under the basis and at-risk limitations (and that therefore may be treated as passive activity deductions), you need not account separately for any item of deduction or loss unless such item may, if separately taken into account, result in an income tax liability different from that which would result were such item of deduction or loss taken into account separately. E file tax return   Items of deduction or loss that must be accounted for separately include (but are not limited to) items of deduction or loss that: Are attributable to separate activities. E file tax return See Grouping Your Activities , later. E file tax return Arise in a rental real estate activity in tax years in which you actively participate in such activity; Arise in a rental real estate activity in taxable years in which you do not actively participate in such activity; Arose in a taxable year beginning before 1987 and were not allowed for such taxable year under the basis or at-risk limitations; Are taken into account under section 613A(d) (relating to limitations on certain depletion deductions); Are taken into account under section 1211 (relating to the limitation on capital losses); Are taken into account under section 1231 (relating to property used in a trade or business and involuntary conversions). E file tax return See Section 1231 Gains and Losses in Publication 544 for more information. E file tax return Are attributable to pre-enactment interests in activities. E file tax return See Regulations section 1. E file tax return 469-11T(c). E file tax return Grouping Your Activities You can treat one or more trade or business activities, or rental activities, as a single activity if those activities form an appropriate economic unit for measuring gain or loss under the passive activity rules. E file tax return Grouping is important for a number of reasons. E file tax return If you group two activities into one larger activity, you need only show material participation in the activity as a whole. E file tax return But if the two activities are separate, you must show material participation in each one. E file tax return On the other hand, if you group two activities into one larger activity and you dispose of one of the two, then you have disposed of only part of your entire interest in the activity. E file tax return But if the two activities are separate and you dispose of one of them, then you have disposed of your entire interest in that activity. E file tax return Grouping can also be important in determining whether you meet the 10% ownership requirement for actively participating in a rental real estate activity. E file tax return Appropriate Economic Units Generally, to determine if activities form an appropriate economic unit, you must consider all the relevant facts and circumstances. E file tax return You can use any reasonable method of applying the relevant facts and circumstances in grouping activities. E file tax return The following factors have the greatest weight in determining whether activities form an appropriate economic unit. E file tax return All of the factors do not have to apply to treat more than one activity as a single activity. E file tax return The factors that you should consider are: The similarities and differences in the types of trades or businesses, The extent of common control, The extent of common ownership, The geographical location, and The interdependencies between or among activities, which may include the extent to which the activities: Buy or sell goods between or among themselves, Involve products or services that are generally provided together, Have the same customers, Have the same employees, or Use a single set of books and records to account for the activities. E file tax return Example 1. E file tax return John Jackson owns a bakery and a movie theater at a shopping mall in Baltimore and a bakery and movie theater in Philadelphia. E file tax return Based on all the relevant facts and circumstances, there may be more than one reasonable method for grouping John's activities. E file tax return For example, John may be able to group the movie theaters and the bakeries into: One activity, A movie theater activity and a bakery activity, A Baltimore activity and a Philadelphia activity, or Four separate activities. E file tax return Example 2. E file tax return Betty is a partner in ABC partnership, which sells nonfood items to grocery stores. E file tax return Betty is also a partner in DEF (a trucking business). E file tax return ABC and DEF are under common control. E file tax return The main part of DEF's business is transporting goods for ABC. E file tax return DEF is the only trucking business in which Betty is involved. E file tax return Based on the rules of this section, Betty treats ABC's wholesale activity and DEF's trucking activity as a single activity. E file tax return Consistency and disclosure requirement. E file tax return   Generally, when you group activities into appropriate economic units, you may not regroup those activities in a later tax year. E file tax return You must meet any disclosure requirements of the IRS when you first group your activities and when you add or dispose of any activities in your groupings. E file tax return   However, if the original grouping is clearly inappropriate or there is a material change in the facts and circumstances that makes the original grouping clearly inappropriate, you must regroup the activities and comply with any disclosure requirements of the IRS. E file tax return   See Disclosure Requirement , later. E file tax return Regrouping by the IRS. E file tax return   If any of the activities resulting from your grouping is not an appropriate economic unit and one of the primary purposes of your grouping (or failure to regroup) is to avoid the passive activity rules, the IRS may regroup your activities. E file tax return Rental activities. E file tax return   In general, you cannot group a rental activity with a trade or business activity. E file tax return However, you can group them together if the activities form an appropriate economic unit and: The rental activity is insubstantial in relation to the trade or business activity, The trade or business activity is insubstantial in relation to the rental activity, or Each owner of the trade or business activity has the same ownership interest in the rental activity, in which case the part of the rental activity that involves the rental of items of property for use in the trade or business activity may be grouped with the trade or business activity. E file tax return Example. E file tax return Herbert and Wilma are married and file a joint return. E file tax return Healthy Food, an S corporation, is a grocery store business. E file tax return Herbert is Healthy Food's only shareholder. E file tax return Plum Tower, an S corporation, owns and rents out the building. E file tax return Wilma is Plum Tower's only shareholder. E file tax return Plum Tower rents part of its building to Healthy Food. E file tax return Plum Tower's grocery store rental business and Healthy Food's grocery business are not insubstantial in relation to each other. E file tax return Herbert and Wilma file a joint return, so they are treated as one taxpayer for purposes of the passive activity rules. E file tax return The same owner (Herbert and Wilma) owns both Healthy Food and Plum Tower with the same ownership interest (100% in each). E file tax return If the grouping forms an appropriate economic unit, as discussed earlier, Herbert and Wilma can group Plum Tower's grocery store rental and Healthy Food's grocery business into a single trade or business activity. E file tax return Grouping of real and personal property rentals. E file tax return   In general, you cannot treat an activity involving the rental of real property and an activity involving the rental of personal property as a single activity. E file tax return However, you can treat them as a single activity if you provide the personal property in connection with the real property or the real property in connection with the personal property. E file tax return Certain activities may not be grouped. E file tax return   In general, if you own an interest as a limited partner or a limited entrepreneur in one of the following activities, you may not group that activity with any other activity in another type of business. E file tax return Holding, producing, or distributing motion picture films or video tapes. E file tax return Farming. E file tax return Leasing any section 1245 property (as defined in section 1245(a)(3) of the Internal Revenue Code). E file tax return For a list of section 1245 property, see Section 1245 property under Activities Covered by the At-Risk Rules , later. E file tax return Exploring for, or exploiting, oil and gas resources. E file tax return Exploring for, or exploiting, geothermal deposits. E file tax return   If you own an interest as a limited partner or a limited entrepreneur in an activity described in the list above, you may group that activity with another activity in the same type of business if the grouping forms an appropriate economic unit as discussed earlier. E file tax return Limited entrepreneur. E file tax return   A limited entrepreneur is a person who: Has an interest in an enterprise other than as a limited partner, and Does not actively participate in the management of the enterprise. E file tax return Activities conducted through another entity. E file tax return   A personal service corporation, closely held corporation, partnership, or S corporation must group its activities using the rules discussed in this section. E file tax return Once the entity groups its activities, you, as the partner or shareholder of the entity, may group those activities (following the rules of this section): With each other, With activities conducted directly by you, or With activities conducted through other entities. E file tax return    You may not treat activities grouped together by the entity as separate activities. E file tax return Personal service and closely held corporations. E file tax return   You may group an activity conducted through a personal service or closely held corporation with your other activities only to determine whether you materially or significantly participated in those other activities. E file tax return See Material Participation , earlier, and Significant Participation Passive Activities , later. E file tax return Publicly traded partnership (PTP). E file tax return   You may not group activities conducted through a PTP with any other activity, including an activity conducted through another PTP. E file tax return Partial dispositions. E file tax return   If you dispose of substantially all of an activity during your tax year, you may treat the part disposed of as a separate activity. E file tax return However, you can do this only if you can show with reasonable certainty: The amount of deductions and credits disallowed in prior years under the passive activity rules that is allocable to the part of the activity disposed of, and The amount of gross income and any other deductions and credits for the current tax year that is allocable to the part of the activity disposed of. E file tax return Disclosure Requirement For tax years beginning after January 24, 2010, the following disclosure requirements for groupings apply. E file tax return You are required to report certain changes to your groupings that occur during the tax year to the IRS. E file tax return If you fail to report these changes, each trade or business activity or rental activity will be treated as a separate activity. E file tax return You will be considered to have made a timely disclosure if you filed all affected income tax returns consistent with the claimed grouping and make the required disclosure on the income tax return for the year in which you first discovered the failure to disclose. E file tax return If the IRS discovered the failure to disclose, you must have reasonable cause for not making the required disclosure. E file tax return New grouping. E file tax return   You must file a written statement with your original income tax return for the first tax year in which two or more activities are originally grouped into a single activity. E file tax return The statement must provide the names, addresses, and employer identification numbers (EINs), if applicable, for the activities being grouped as a single activity. E file tax return In addition, the statement must contain a declaration that the grouped activities make up an appropriate economic unit for the measurement of gain or loss under the passive activity rules. E file tax return Addition to an existing grouping. E file tax return   You must file a written statement with your original income tax return for the tax year in which you add a new activity to an existing group. E file tax return The statement must provide the name, address, and EIN, if applicable, for the activity that is being added and for the activities in the existing group. E file tax return In addition, the statement must contain a declaration that the activities make up an appropriate economic unit for the measurement of gain or loss under the passive activity rules. E file tax return Regrouping. E file tax return   You must file a written statement with your original income tax return for the tax year in which you regroup the activities. E file tax return The statement must provide the names, addresses, and EINs, if applicable, for the activities that are being regrouped. E file tax return If two or more activities are being regrouped into a single activity, the statement must contain a declaration that the regrouped activities make up an appropriate economic unit for the measurement of gain or loss under the passive activity rules. E file tax return In addition, the statement must contain an explanation of the material change in the facts and circumstances that made the original grouping clearly inappropriate. E file tax return Groupings by partnerships and S corporations. E file tax return   Partnerships and S corporations are not subject to the rules for new grouping, addition to an existing grouping, or regrouping. E file tax return Instead, they must comply with the disclosure instructions for grouping activities provided in their Form 1065, U. E file tax return S. E file tax return Return of Partnership Income, or Form 1120S, U. E file tax return S. E file tax return Income Tax Return for an S Corporation, whichever is applicable. E file tax return   The partner or shareholder is not required to make a separate disclosure of the groupings disclosed by the entity unless the partner or shareholder: Groups together any of the activities that the entity does not group together, Groups the entity's activities with activities conducted directly by the partner or shareholder, or Groups an entity's activities with activities conducted through another entity. E file tax return   A partner or shareholder may not treat activities grouped together by the entity as separate activities. E file tax return Recharacterization of Passive Income Net income from the following passive activities may have to be recharacterized and excluded from passive activity income. E file tax return Significant participation passive activities, Rental of property when less than 30% of the unadjusted basis of the property is subject to depreciation, Equity-financed lending activities, Rental of property incidental to development activities, Rental of property to nonpassive activities, and Licensing of intangible property by  pass-through entities. E file tax return If you are engaged in or have an interest in one of these activities during the tax year (either directly or through a partnership or an S corporation), combine the income and losses from the activity to determine if you have a net loss or net income from that activity. E file tax return If the result is a net loss, treat the income and losses the same as any other income or losses from that type of passive activity (trade or business activity or rental activity). E file tax return If the result is net income, do not enter any of the income or losses from the activity or property on Form 8582 or its worksheets. E file tax return Instead, enter income or losses on the form and schedules you normally use. E file tax return However, see Significant Participation Passive Activities , later, if the activity is a significant participation passive activity and you also have a net loss from a different significant participation passive activity. E file tax return Limit on recharacterized passive income. E file tax return   The total amount that you treat as nonpassive income under the rules described later in this discussion for significant participation passive activities, rental of nondepreciable property, and equity-financed lending activities cannot exceed the greatest amount that you treat as nonpassive income under any one of these rules. E file tax return Investment income and investment expense. E file tax return   To figure your investment interest expense limitation on Form 4952, treat as investment income any net passive income recharacterized as nonpassive income from rental of nondepreciable property, equity-financed lending activity, or licensing of intangible property by a pass-through entity. E file tax return Significant Participation Passive Activities A significant participation passive activity is any trade or business activity in which you participated for more than 100 hours during the tax year but did not materially participate. E file tax return If your gross income from all significant participation passive activities is more than your deductions from those activities, a part of your net income from each significant participation passive activity is treated as nonpassive income. E file tax return Corporations. E file tax return   An activity of a personal service corporation or closely held corporation is a significant participation passive activity if both of the following statements are true. E file tax return The corporation is not treated as materially participating in the activity for the year. E file tax return One or more individuals, each of whom is treated as significantly participating in the activity, directly or indirectly hold (in total) more than 50% (by value) of the corporation's outstanding stock. E file tax return Worksheet A. E file tax return   Complete Worksheet A. E file tax return Significant Participation Passive Activities , below, if you have income or losses from any significant participation activity. E file tax return Begin by entering the name of each activity in the left column. E file tax return Column (a). E file tax return   Enter the number of hours you participated in each activity and total the column. E file tax return   If the total is more than 500, do not complete Worksheet A or B. E file tax return None of the activities are passive activities because you satisfy test 4 for material participation. E file tax return (See Material participation tests , earlier. E file tax return ) Report all the income and losses from these activities on the forms and schedules you normally use. E file tax return Do not include the income and losses on Form 8582. E file tax return Column (b). E file tax return   Enter the net loss, if any, from the activity. E file tax return Net loss from an activity means either: The activity's current year net loss (if any) plus prior year unallowed losses (if any), or The excess of prior year unallowed losses over the current year net income (if any). E file tax return Enter -0- here if the prior year unallowed loss is the same as the current year net income. E file tax return Column (c). E file tax return   Enter net income (if any) from the activity. E file tax return Net income means the excess of the current year's net income from the activity over any prior year unallowed losses from the activity. E file tax return Column (d). E file tax return   Combine amounts in the Totals row for columns (b) and (c) and enter the total net income or net loss in the Totals row of column (d). E file tax return If column (d) is a net loss, skip Worksheet B, Significant Participation Activities With Net Income. E file tax return Include the income and losses in Worksheet 3 of Form 8582 (or Worksheet 2 in the Form 88