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Express 1040

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Express 1040

Express 1040 8. Express 1040   Amortization Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: How To Deduct Amortization Starting a BusinessBusiness Start-Up Costs Costs of Organizing a Corporation Costs of Organizing a Partnership How To Amortize Getting a Lease Section 197 IntangiblesSection 197 Intangibles Defined Assets That Are Not Section 197 Intangibles Safe Harbor for Creative Property Costs Anti-Churning Rules Incorrect Amount of Amortization Deducted Disposition of Section 197 Intangibles Reforestation Costs Geological and Geophysical Costs Pollution Control FacilitiesNew identifiable treatment facility. Express 1040 Research and Experimental Costs Optional Write-off of Certain Tax Preferences Introduction Amortization is a method of recovering (deducting) certain capital costs over a fixed period of time. Express 1040 It is similar to the straight line method of depreciation. Express 1040 The various amortizable costs covered in this chapter are included in the list below. Express 1040 However, this chapter does not discuss amortization of bond premium. Express 1040 For information on that topic, see chapter 3 of Publication 550, Investment Income and Expenses. Express 1040 Topics - This chapter discusses: Deducting amortization Amortizing costs of starting a business Amortizing costs of getting a lease Amortizing costs of section 197 intangibles Amortizing reforestation costs Amortizing costs of geological and geophysical costs Amortizing costs of pollution control facilities Amortizing costs of research and experimentation Amortizing costs of certain tax preferences Useful Items - You may want to see: Publication 544 Sales and Other Dispositions of Assets 550 Investment Income and Expenses 946 How To Depreciate Property Form (and Instructions) 4562 Depreciation and Amortization 4626 Alternative Minimum Tax—Corporations 6251 Alternative Minimum Tax—Individuals See chapter 12 for information about getting publications and forms. Express 1040 How To Deduct Amortization To deduct amortization that begins during the current tax year, complete Part VI of Form 4562 and attach it to your income tax return. Express 1040 To report amortization from previous years, in addition to amortization that begins in the current year, list on Form 4562 each item separately. Express 1040 For example, in 2012, you began to amortize a lease. Express 1040 In 2013, you began to amortize a second lease. Express 1040 Report amortization from the new lease on line 42 of your 2013 Form 4562. Express 1040 Report amortization from the 2012 lease on line 43 of your 2013 Form 4562. Express 1040 If you do not have any new amortizable expenses for the current year, you are not required to complete Form 4562 (unless you are claiming depreciation). Express 1040 Report the current year's deduction for amortization that began in a prior year directly on the “Other deduction” or “Other expense line” of your return. Express 1040 Starting a Business When you start a business, treat all eligible costs you incur before you begin operating the business as capital expenditures which are part of your basis in the business. Express 1040 Generally, you recover costs for particular assets through depreciation deductions. Express 1040 However, you generally cannot recover other costs until you sell the business or otherwise go out of business. Express 1040 For a discussion on how to treat these costs, see If your attempt to go into business is unsuccessful under Capital Expenses in chapter 1. Express 1040 For costs paid or incurred after September 8, 2008, you can deduct a limited amount of start-up and organizational costs. Express 1040 The costs that are not deducted currently can be amortized ratably over a 180-month period. Express 1040 The amortization period starts with the month you begin operating your active trade or business. Express 1040 You are not required to attach a statement to make this election. Express 1040 You can choose to forgo this election by affirmatively electing to capitalize your start-up costs on your income tax return filed by the due date (including extensions) for the tax year in which the active trade or business begins. Express 1040 Once made, the election to either amortize or capitalize start-up costs is irrevocable and applies to all start-up costs that are related to your trade or business. Express 1040 See Regulations sections 1. Express 1040 195-1, 1. Express 1040 248-1, and 1. Express 1040 709-1. Express 1040 For costs paid or incurred after October 22, 2004, and before September 9, 2008, you can elect to deduct a limited amount of business start-up and organizational costs in the year your active trade or business begins. Express 1040 Any costs not deducted can be amortized ratably over a 180-month period, beginning with the month you begin business. Express 1040 If the election is made, you must attach any statement required by Regulations sections 1. Express 1040 195-1(b), 1. Express 1040 248-1(c), and 1. Express 1040 709-1(c), as in effect before September 9, 2008. Express 1040 Note. Express 1040 You can apply the provisions of Regulations sections 1. Express 1040 195-1, 1. Express 1040 248-1, and 1. Express 1040 709-1 to all business start-up and organizational costs paid or incurred after October 22, 2004, provided the period of limitations on assessment has not expired for the year of the election. Express 1040 Otherwise, the provisions under Regulations sections 1. Express 1040 195-1(b), 1. Express 1040 248-1(c), and 1. Express 1040 709-1(c), as in effect before September 9, 2008, will apply. Express 1040 For costs paid or incurred before October 23, 2004, you can elect to amortize business start-up and organization costs over an amortization period of 60 months or more. Express 1040 See How To Make the Election , later. Express 1040 The cost must qualify as one of the following. Express 1040 A business start-up cost. Express 1040 An organizational cost for a corporation. Express 1040 An organizational cost for a partnership. Express 1040 Business Start-Up Costs Start-up costs are amounts paid or incurred for: (a) creating an active trade or business; or (b) investigating the creation or acquisition of an active trade or business. Express 1040 Start-up costs include amounts paid or incurred in connection with an existing activity engaged in for profit; and for the production of income in anticipation of the activity becoming an active trade or business. Express 1040 Qualifying costs. Express 1040   A start-up cost is amortizable if it meets both of the following tests. Express 1040 It is a cost you could deduct if you paid or incurred it to operate an existing active trade or business (in the same field as the one you entered into). Express 1040 It is a cost you pay or incur before the day your active trade or business begins. Express 1040   Start-up costs include amounts paid for the following: An analysis or survey of potential markets, products, labor supply, transportation facilities, etc. Express 1040 Advertisements for the opening of the business. Express 1040 Salaries and wages for employees who are being trained and their instructors. Express 1040 Travel and other necessary costs for securing prospective distributors, suppliers, or customers. Express 1040 Salaries and fees for executives and consultants, or for similar professional services. Express 1040 Nonqualifying costs. Express 1040   Start-up costs do not include deductible interest, taxes, or research and experimental costs. Express 1040 See Research and Experimental Costs , later. Express 1040 Purchasing an active trade or business. Express 1040   Amortizable start-up costs for purchasing an active trade or business include only investigative costs incurred in the course of a general search for or preliminary investigation of the business. Express 1040 These are costs that help you decide whether to purchase a business. Express 1040 Costs you incur in an attempt to purchase a specific business are capital expenses that you cannot amortize. Express 1040 Example. Express 1040 On June 1st, you hired an accounting firm and a law firm to assist you in the potential purchase of XYZ, Inc. Express 1040 They researched XYZ's industry and analyzed the financial projections of XYZ, Inc. Express 1040 In September, the law firm prepared and submitted a letter of intent to XYZ, Inc. Express 1040 The letter stated that a binding commitment would result only after a purchase agreement was signed. Express 1040 The law firm and accounting firm continued to provide services including a review of XYZ's books and records and the preparation of a purchase agreement. Express 1040 On October 22nd, you signed a purchase agreement with XYZ, Inc. Express 1040 All amounts paid or incurred to investigate the business before October 22nd are amortizable investigative costs. Express 1040 Amounts paid on or after that date relate to the attempt to purchase the business and therefore must be capitalized. Express 1040 Disposition of business. Express 1040   If you completely dispose of your business before the end of the amortization period, you can deduct any remaining deferred start-up costs. Express 1040 However, you can deduct these deferred start-up costs only to the extent they qualify as a loss from a business. Express 1040 Costs of Organizing a Corporation Amounts paid to organize a corporation are the direct costs of creating the corporation. Express 1040 Qualifying costs. Express 1040   To qualify as an organizational cost, it must be: For the creation of the corporation, Chargeable to a capital account (see chapter 1), Amortized over the life of the corporation if the corporation had a fixed life, and Incurred before the end of the first tax year in which the corporation is in business. Express 1040   A corporation using the cash method of accounting can amortize organizational costs incurred within the first tax year, even if it does not pay them in that year. Express 1040   Examples of organizational costs include: The cost of temporary directors. Express 1040 The cost of organizational meetings. Express 1040 State incorporation fees. Express 1040 The cost of legal services. Express 1040 Nonqualifying costs. Express 1040   The following items are capital expenses that cannot be amortized: Costs for issuing and selling stock or securities, such as commissions, professional fees, and printing costs. Express 1040 Costs associated with the transfer of assets to the corporation. Express 1040 Costs of Organizing a Partnership The costs to organize a partnership are the direct costs of creating the partnership. Express 1040 Qualifying costs. Express 1040   A partnership can amortize an organizational cost only if it meets all the following tests. Express 1040 It is for the creation of the partnership and not for starting or operating the partnership trade or business. Express 1040 It is chargeable to a capital account (see chapter 1). Express 1040 It could be amortized over the life of the partnership if the partnership had a fixed life. Express 1040 It is incurred by the due date of the partnership return (excluding extensions) for the first tax year in which the partnership is in business. Express 1040 However, if the partnership uses the cash method of accounting and pays the cost after the end of its first tax year, see Cash method partnership under How To Amortize, later. Express 1040 It is for a type of item normally expected to benefit the partnership throughout its entire life. Express 1040   Organizational costs include the following fees. Express 1040 Legal fees for services incident to the organization of the partnership, such as negotiation and preparation of the partnership agreement. Express 1040 Accounting fees for services incident to the organization of the partnership. Express 1040 Filing fees. Express 1040 Nonqualifying costs. Express 1040   The following costs cannot be amortized. Express 1040 The cost of acquiring assets for the partnership or transferring assets to the partnership. Express 1040 The cost of admitting or removing partners, other than at the time the partnership is first organized. Express 1040 The cost of making a contract concerning the operation of the partnership trade or business including a contract between a partner and the partnership. Express 1040 The costs for issuing and marketing interests in the partnership such as brokerage, registration, and legal fees and printing costs. Express 1040 These “syndication fees” are capital expenses that cannot be depreciated or amortized. Express 1040 Liquidation of partnership. Express 1040   If a partnership is liquidated before the end of the amortization period, the unamortized amount of qualifying organizational costs can be deducted in the partnership's final tax year. Express 1040 However, these costs can be deducted only to the extent they qualify as a loss from a business. Express 1040 How To Amortize Deduct start-up and organizational costs in equal amounts over the applicable amortization period (discussed earlier). Express 1040 You can choose an amortization period for start-up costs that is different from the period you choose for organizational costs, as long as both are not less than the applicable amortization period. Express 1040 Once you choose an amortization period, you cannot change it. Express 1040 To figure your deduction, divide your total start-up or organizational costs by the months in the amortization period. Express 1040 The result is the amount you can deduct for each month. Express 1040 Cash method partnership. Express 1040   A partnership using the cash method of accounting can deduct an organizational cost only if it has been paid by the end of the tax year. Express 1040 However, any cost the partnership could have deducted as an organizational cost in an earlier tax year (if it had been paid that year) can be deducted in the tax year of payment. Express 1040 How To Make the Election To elect to amortize start-up or organizational costs, you must complete and attach Form 4562 to your return for the first tax year you are in business. Express 1040 You may also be required to attach an accompanying statement (described later) to your return. Express 1040 For start-up or organizational costs paid or incurred after September 8, 2008, an accompanying statement is not required. Express 1040 Generally, for start-up or organizational costs paid or incurred before September 9, 2008, and after October 22, 2004, unless you choose to apply Regulations sections 1. Express 1040 195-1, 1. Express 1040 248-1, and 1. Express 1040 709-1, you must also attach an accompanying statement to elect to amortize the costs. Express 1040 If you have both start-up and organizational costs, attach a separate statement (if required) to your return for each type of cost. Express 1040 See Starting a Business , earlier, for more information. Express 1040 Generally, you must file the return by the due date (including any extensions). Express 1040 However, if you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). Express 1040 For more information, see the instructions for Part VI of Form 4562. Express 1040 You can choose to forgo the election to amortize by affirmatively electing to capitalize your start-up or organizational costs on your income tax return filed by the due date (including extensions) for the tax year in which the active trade or business begins. Express 1040 Note. Express 1040 The election to either amortize or capitalize start-up or organizational costs is irrevocable and applies to all start-up and organizational costs that are related to the trade or business. Express 1040 If your business is organized as a corporation or partnership, only the corporation or partnership can elect to amortize its start-up or organizational costs. Express 1040 A shareholder or partner cannot make this election. Express 1040 You, as a shareholder or partner, cannot amortize any costs you incur in setting up your corporation or partnership. Express 1040 Only the corporation or partnership can amortize these costs. Express 1040 However, you, as an individual, can elect to amortize costs you incur to investigate an interest in an existing partnership. Express 1040 These costs qualify as business start-up costs if you acquire the partnership interest. Express 1040 Start-up costs election statement. Express 1040   If you elect to amortize your start-up costs, attach a separate statement (if required) that contains the following information. Express 1040 A description of the business to which the start-up costs relate. Express 1040 A description of each start-up cost incurred. Express 1040 The month your active business began (or was acquired). Express 1040 The number of months in your amortization period (which is generally 180 months). Express 1040 Filing the statement early. Express 1040   You can elect to amortize your start-up costs by filing the statement with a return for any tax year before the year your active business begins. Express 1040 If you file the statement early, the election becomes effective in the month of the tax year your active business begins. Express 1040 Revised statement. Express 1040   You can file a revised statement to include any start-up costs not included in your original statement. Express 1040 However, you cannot include on the revised statement any cost you previously treated on your return as a cost other than a start-up cost. Express 1040 You can file the revised statement with a return filed after the return on which you elected to amortize your start-up costs. Express 1040 Organizational costs election statement. Express 1040   If you elect to amortize your corporation's or partnership's organizational costs, attach a separate statement (if required) that contains the following information. Express 1040 A description of each cost. Express 1040 The amount of each cost. Express 1040 The date each cost was incurred. Express 1040 The month your corporation or partnership began active business (or acquired the business). Express 1040 The number of months in your amortization period (which is generally 180 months). Express 1040 Partnerships. Express 1040   The statement prepared for a cash basis partnership must also indicate the amount paid before the end of the year for each cost. Express 1040   You do not need to separately list any partnership organizational cost that is less than $10. Express 1040 Instead, you can list the total amount of these costs with the dates the first and last costs were incurred. Express 1040   After a partnership makes the election to amortize organizational costs, it can later file an amended return to include additional organizational costs not included in the partnership's original return and statement. Express 1040 Getting a Lease If you get a lease for business property, you may recover the cost of acquiring the lease by amortizing it over the term of the lease. Express 1040 The term of the lease for amortization purposes generally includes all renewal options (and any other period for which you and the lessor reasonably expect the lease to be renewed). Express 1040 However, renewal periods are not included if 75% or more of the cost of acquiring the lease is for the term of the lease remaining on the acquisition date (not including any period for which you may choose to renew, extend, or continue the lease). Express 1040 For more information on the costs of getting a lease, see Cost of Getting a Lease in  chapter 3. Express 1040 How to amortize. Express 1040   Enter your deduction in Part VI of Form 4562 if you are deducting amortization that begins during the current year, or on the appropriate line of your tax return if you are not otherwise required to file Form 4562. Express 1040 Section 197 Intangibles Generally, you may amortize the capitalized costs of “section 197 intangibles” (defined later) ratably over a 15-year period. Express 1040 You must amortize these costs if you hold the section 197 intangibles in connection with your trade or business or in an activity engaged in for the production of income. Express 1040 You may not be able to amortize section 197 intangibles acquired in a transaction that did not result in a significant change in ownership or use. Express 1040 See Anti-Churning Rules, later. Express 1040 Your amortization deduction each year is the applicable part of the intangible's adjusted basis (for purposes of determining gain), figured by amortizing it ratably over 15 years (180 months). Express 1040 The 15-year period begins with the later of: The month the intangible is acquired, or The month the trade or business or activity engaged in for the production of income begins. Express 1040 You cannot deduct amortization for the month you dispose of the intangible. Express 1040 If you pay or incur an amount that increases the basis of an amortizable section 197 intangible after the 15-year period begins, amortize it over the remainder of the 15-year period beginning with the month the basis increase occurs. Express 1040 You are not allowed any other depreciation or amortization deduction for an amortizable section 197 intangible. Express 1040 Tax-exempt use property subject to a lease. Express 1040   The amortization period for any section 197 intangible leased under a lease agreement entered into after March 12, 2004, to a tax-exempt organization, governmental unit, or foreign person or entity (other than a partnership), shall not be less than 125 percent of the lease term. Express 1040 Cost attributable to other property. Express 1040   The rules for section 197 intangibles do not apply to any amount that is included in determining the cost of property that is not a section 197 intangible. Express 1040 For example, if the cost of computer software is not separately stated from the cost of hardware or other tangible property and you consistently treat it as part of the cost of the hardware or other tangible property, these rules do not apply. Express 1040 Similarly, none of the cost of acquiring real property held for the production of rental income is considered the cost of goodwill, going concern value, or any other section 197 intangible. Express 1040 Section 197 Intangibles Defined The following assets are section 197 intangibles and must be amortized over 180 months: Goodwill; Going concern value; Workforce in place; Business books and records, operating systems, or any other information base, including lists or other information concerning current or prospective customers; A patent, copyright, formula, process, design, pattern, know-how, format, or similar item; A customer-based intangible; A supplier-based intangible; Any item similar to items (3) through (7); A license, permit, or other right granted by a governmental unit or agency (including issuances and renewals); A covenant not to compete entered into in connection with the acquisition of an interest in a trade or business; Any franchise, trademark, or trade name; and A contract for the use of, or a term interest in, any item in this list. Express 1040 You cannot amortize any of the intangibles listed in items (1) through (8) that you created rather than acquired unless you created them in acquiring assets that make up a trade or business or a substantial part of a trade or business. Express 1040 Goodwill. Express 1040   This is the value of a trade or business based on expected continued customer patronage due to its name, reputation, or any other factor. Express 1040 Going concern value. Express 1040   This is the additional value of a trade or business that attaches to property because the property is an integral part of an ongoing business activity. Express 1040 It includes value based on the ability of a business to continue to function and generate income even though there is a change in ownership (but does not include any other section 197 intangible). Express 1040 It also includes value based on the immediate use or availability of an acquired trade or business, such as the use of earnings during any period in which the business would not otherwise be available or operational. Express 1040 Workforce in place, etc. Express 1040   This includes the composition of a workforce (for example, its experience, education, or training). Express 1040 It also includes the terms and conditions of employment, whether contractual or otherwise, and any other value placed on employees or any of their attributes. Express 1040   For example, you must amortize the part of the purchase price of a business that is for the existence of a highly skilled workforce. Express 1040 Also, you must amortize the cost of acquiring an existing employment contract or relationship with employees or consultants. Express 1040 Business books and records, etc. Express 1040   This includes the intangible value of technical manuals, training manuals or programs, data files, and accounting or inventory control systems. Express 1040 It also includes the cost of customer lists, subscription lists, insurance expirations, patient or client files, and lists of newspaper, magazine, radio, and television advertisers. Express 1040 Patents, copyrights, etc. Express 1040   This includes package design, computer software, and any interest in a film, sound recording, videotape, book, or other similar property, except as discussed later under Assets That Are Not Section 197 Intangibles . Express 1040 Customer-based intangible. Express 1040   This is the composition of market, market share, and any other value resulting from the future provision of goods or services because of relationships with customers in the ordinary course of business. Express 1040 For example, you must amortize the part of the purchase price of a business that is for the existence of the following intangibles. Express 1040 A customer base. Express 1040 A circulation base. Express 1040 An undeveloped market or market growth. Express 1040 Insurance in force. Express 1040 A mortgage servicing contract. Express 1040 An investment management contract. Express 1040 Any other relationship with customers involving the future provision of goods or services. Express 1040   Accounts receivable or other similar rights to income for goods or services provided to customers before the acquisition of a trade or business are not section 197 intangibles. Express 1040 Supplier-based intangible. Express 1040   A supplier-based intangible is the value resulting from the future acquisitions, (through contract or other relationships with suppliers in the ordinary course of business) of goods or services that you will sell or use. Express 1040 The amount you pay or incur for supplier-based intangibles includes, for example, any portion of the purchase price of an acquired trade or business that is attributable to the existence of a favorable relationship with persons providing distribution services (such as a favorable shelf or display space or a retail outlet), or the existence of favorable supply contracts. Express 1040 Do not include any amount required to be paid for the goods or services to honor the terms of the agreement or other relationship. Express 1040 Also, see Assets That Are Not Section 197 Intangibles below. Express 1040 Government-granted license, permit, etc. Express 1040   This is any right granted by a governmental unit or an agency or instrumentality of a governmental unit. Express 1040 For example, you must amortize the capitalized costs of acquiring (including issuing or renewing) a liquor license, a taxicab medallion or license, or a television or radio broadcasting license. Express 1040 Covenant not to compete. Express 1040   Section 197 intangibles include a covenant not to compete (or similar arrangement) entered into in connection with the acquisition of an interest in a trade or business, or a substantial portion of a trade or business. Express 1040 An interest in a trade or business includes an interest in a partnership or a corporation engaged in a trade or business. Express 1040   An arrangement that requires the former owner to perform services (or to provide property or the use of property) is not similar to a covenant not to compete to the extent the amount paid under the arrangement represents reasonable compensation for those services or for that property or its use. Express 1040 Franchise, trademark, or trade name. Express 1040   A franchise, trademark, or trade name is a section 197 intangible. Express 1040 You must amortize its purchase or renewal costs, other than certain contingent payments that you can deduct currently. Express 1040 For information on currently deductible contingent payments, see chapter 11. Express 1040 Professional sports franchise. Express 1040   A franchise engaged in professional sports and any intangible assets acquired in connection with acquiring the franchise (including player contracts) is a section 197 intangible amortizable over a 15-year period. Express 1040 Contract for the use of, or a term interest in, a section 197 intangible. Express 1040   Section 197 intangibles include any right under a license, contract, or other arrangement providing for the use of any section 197 intangible. Express 1040 It also includes any term interest in any section 197 intangible, whether the interest is outright or in trust. Express 1040 Assets That Are Not Section 197 Intangibles The following assets are not section 197 intangibles. Express 1040 Any interest in a corporation, partnership, trust, or estate. Express 1040 Any interest under an existing futures contract, foreign currency contract, notional principal contract, interest rate swap, or similar financial contract. Express 1040 Any interest in land. Express 1040 Most computer software. Express 1040 (See Computer software , later. Express 1040 ) Any of the following assets not acquired in connection with the acquisition of a trade or business or a substantial part of a trade or business. Express 1040 An interest in a film, sound recording, video tape, book, or similar property. Express 1040 A right to receive tangible property or services under a contract or from a governmental agency. Express 1040 An interest in a patent or copyright. Express 1040 Certain rights that have a fixed duration or amount. Express 1040 (See Rights of fixed duration or amount , later. Express 1040 ) An interest under either of the following. Express 1040 An existing lease or sublease of tangible property. Express 1040 A debt that was in existence when the interest was acquired. Express 1040 A right to service residential mortgages unless the right is acquired in connection with the acquisition of a trade or business or a substantial part of a trade or business. Express 1040 Certain transaction costs incurred by parties to a corporate organization or reorganization in which any part of a gain or loss is not recognized. Express 1040 Intangible property that is not amortizable under the rules for section 197 intangibles can be depreciated if it meets certain requirements. Express 1040 You generally must use the straight line method over its useful life. Express 1040 For certain intangibles, the depreciation period is specified in the law and regulations. Express 1040 For example, the depreciation period for computer software that is not a section 197 intangible is generally 36 months. Express 1040 For more information on depreciating intangible property, see Intangible Property under What Method Can You Use To Depreciate Your Property? in chapter 1 of Publication 946. Express 1040 Computer software. Express 1040   Section 197 intangibles do not include the following types of computer software. Express 1040 Software that meets all the following requirements. Express 1040 It is, or has been, readily available for purchase by the general public. Express 1040 It is subject to a nonexclusive license. Express 1040 It has not been substantially modified. Express 1040 This requirement is considered met if the cost of all modifications is not more than the greater of 25% of the price of the publicly available unmodified software or $2,000. Express 1040 Software that is not acquired in connection with the acquisition of a trade or business or a substantial part of a trade or business. Express 1040 Computer software defined. Express 1040   Computer software includes all programs designed to cause a computer to perform a desired function. Express 1040 It also includes any database or similar item that is in the public domain and is incidental to the operation of qualifying software. Express 1040 Rights of fixed duration or amount. Express 1040   Section 197 intangibles do not include any right under a contract or from a governmental agency if the right is acquired in the ordinary course of a trade or business (or in an activity engaged in for the production of income) but not as part of a purchase of a trade or business and either: Has a fixed life of less than 15 years, or Is of a fixed amount that, except for the rules for section 197 intangibles, would be recovered under a method similar to the unit-of-production method of cost recovery. Express 1040 However, this does not apply to the following intangibles. Express 1040 Goodwill. Express 1040 Going concern value. Express 1040 A covenant not to compete. Express 1040 A franchise, trademark, or trade name. Express 1040 A customer-related information base, customer-based intangible, or similar item. Express 1040 Safe Harbor for Creative Property Costs If you are engaged in the trade or business of film production, you may be able to amortize the creative property costs for properties not set for production within 3 years of the first capitalized transaction. Express 1040 You may amortize these costs ratably over a 15-year period beginning on the first day of the second half of the tax year in which you properly write off the costs for financial accounting purposes. Express 1040 If, during the 15-year period, you dispose of the creative property rights, you must continue to amortize the costs over the remainder of the 15-year period. Express 1040 Creative property costs include costs paid or incurred to acquire and develop screenplays, scripts, story outlines, motion picture production rights to books and plays, and other similar properties for purposes of potential future film development, production, and exploitation. Express 1040 Amortize these costs using the rules of Revenue Procedure 2004-36. Express 1040 For more information, see Revenue Procedure 2004-36, 2004-24 I. Express 1040 R. Express 1040 B. Express 1040 1063, available at  www. Express 1040 irs. Express 1040 gov/irb/2004-24_IRB/ar16. Express 1040 html. Express 1040 A change in the treatment of creative property costs is a change in method of accounting. Express 1040 Anti-Churning Rules Anti-churning rules prevent you from amortizing most section 197 intangibles if the transaction in which you acquired them did not result in a significant change in ownership or use. Express 1040 These rules apply to goodwill and going concern value, and to any other section 197 intangible that is not otherwise depreciable or amortizable. Express 1040 Under the anti-churning rules, you cannot use 15-year amortization for the intangible if any of the following conditions apply. Express 1040 You or a related person (defined later) held or used the intangible at any time from July 25, 1991, through August 10, 1993. Express 1040 You acquired the intangible from a person who held it at any time during the period in (1) and, as part of the transaction, the user did not change. Express 1040 You granted the right to use the intangible to a person (or a person related to that person) who held or used it at any time during the period in (1). Express 1040 This applies only if the transaction in which you granted the right and the transaction in which you acquired the intangible are part of a series of related transactions. Express 1040 See Related person , later, for more information. Express 1040 Exceptions. Express 1040   The anti-churning rules do not apply in the following situations. Express 1040 You acquired the intangible from a decedent and its basis was stepped up to its fair market value. Express 1040 The intangible was amortizable as a section 197 intangible by the seller or transferor you acquired it from. Express 1040 This exception does not apply if the transaction in which you acquired the intangible and the transaction in which the seller or transferor acquired it are part of a series of related transactions. Express 1040 The gain-recognition exception, discussed later, applies. Express 1040 Related person. Express 1040   For purposes of the anti-churning rules, the following are related persons. Express 1040 An individual and his or her brothers, sisters, half-brothers, half-sisters, spouse, ancestors (parents, grandparents, etc. Express 1040 ), and lineal descendants (children, grandchildren, etc. Express 1040 ). Express 1040 A corporation and an individual who owns, directly or indirectly, more than 20% of the value of the corporation's outstanding stock. Express 1040 Two corporations that are members of the same controlled group as defined in section 1563(a) of the Internal Revenue Code, except that “more than 20%” is substituted for “at least 80%” in that definition and the determination is made without regard to subsections (a)(4) and (e)(3)(C) of section 1563. Express 1040 (For an exception, see section 1. Express 1040 197-2(h)(6)(iv) of the regulations. Express 1040 ) A trust fiduciary and a corporation if more than 20% of the value of the corporation's outstanding stock is owned, directly or indirectly, by or for the trust or grantor of the trust. Express 1040 The grantor and fiduciary, and the fiduciary and beneficiary, of any trust. Express 1040 The fiduciaries of two different trusts, and the fiduciaries and beneficiaries of two different trusts, if the same person is the grantor of both trusts. Express 1040 The executor and beneficiary of an estate. Express 1040 A tax-exempt educational or charitable organization and a person who directly or indirectly controls the organization (or whose family members control it). Express 1040 A corporation and a partnership if the same persons own more than 20% of the value of the outstanding stock of the corporation and more than 20% of the capital or profits interest in the partnership. Express 1040 Two S corporations, and an S corporation and a regular corporation, if the same persons own more than 20% of the value of the outstanding stock of each corporation. Express 1040 Two partnerships if the same persons own, directly or indirectly, more than 20% of the capital or profits interests in both partnerships. Express 1040 A partnership and a person who owns, directly or indirectly, more than 20% of the capital or profits interests in the partnership. Express 1040 Two persons who are engaged in trades or businesses under common control (as described in section 41(f)(1) of the Internal Revenue Code). Express 1040 When to determine relationship. Express 1040   Persons are treated as related if the relationship existed at the following time. Express 1040 In the case of a single transaction, immediately before or immediately after the transaction in which the intangible was acquired. Express 1040 In the case of a series of related transactions (or a series of transactions that comprise a qualified stock purchase under section 338(d)(3) of the Internal Revenue Code), immediately before the earliest transaction or immediately after the last transaction. Express 1040 Ownership of stock. Express 1040   In determining whether an individual directly or indirectly owns any of the outstanding stock of a corporation, the following rules apply. Express 1040 Rule 1. Express 1040   Stock directly or indirectly owned by or for a corporation, partnership, estate, or trust is considered owned proportionately by or for its shareholders, partners, or beneficiaries. Express 1040 Rule 2. Express 1040   An individual is considered to own the stock directly or indirectly owned by or for his or her family. Express 1040 Family includes only brothers and sisters, half-brothers and half-sisters, spouse, ancestors, and lineal descendants. Express 1040 Rule 3. Express 1040   An individual owning (other than by applying Rule 2) any stock in a corporation is considered to own the stock directly or indirectly owned by or for his or her partner. Express 1040 Rule 4. Express 1040   For purposes of applying Rule 1, 2, or 3, treat stock constructively owned by a person under Rule 1 as actually owned by that person. Express 1040 Do not treat stock constructively owned by an individual under Rule 2 or 3 as owned by the individual for reapplying Rule 2 or 3 to make another person the constructive owner of the stock. Express 1040 Gain-recognition exception. Express 1040   This exception to the anti-churning rules applies if the person you acquired the intangible from (the transferor) meets both of the following requirements. Express 1040 That person would not be related to you (as described under Related person , earlier) if the 20% test for ownership of stock and partnership interests were replaced by a 50% test. Express 1040 That person chose to recognize gain on the disposition of the intangible and pay income tax on the gain at the highest tax rate. Express 1040 See chapter 2 in Publication 544 for information on making this choice. Express 1040   If this exception applies, the anti-churning rules apply only to the amount of your adjusted basis in the intangible that is more than the gain recognized by the transferor. Express 1040 Notification. Express 1040   If the person you acquired the intangible from chooses to recognize gain under the rules for this exception, that person must notify you in writing by the due date of the return on which the choice is made. Express 1040 Anti-abuse rule. Express 1040   You cannot amortize any section 197 intangible acquired in a transaction for which the principal purpose was either of the following. Express 1040 To avoid the requirement that the intangible be acquired after August 10, 1993. Express 1040 To avoid any of the anti-churning rules. Express 1040 More information. Express 1040   For more information about the anti-churning rules, including additional rules for partnerships, see Regulations section 1. Express 1040 197-2(h). Express 1040 Incorrect Amount of Amortization Deducted If you later discover that you deducted an incorrect amount for amortization for a section 197 intangible in any year, you may be able to make a correction for that year by filing an amended return. Express 1040 See Amended Return , next. Express 1040 If you are not allowed to make the correction on an amended return, you can change your accounting method to claim the correct amortization. Express 1040 See Changing Your Accounting Method , later. Express 1040 Amended Return If you deducted an incorrect amount for amortization, you can file an amended return to correct the following. Express 1040 A mathematical error made in any year. Express 1040 A posting error made in any year. Express 1040 An amortization deduction for a section 197 intangible for which you have not adopted a method of accounting. Express 1040 When to file. Express 1040   If an amended return is allowed, you must file it by the later of the following dates. Express 1040 3 years from the date you filed your original return for the year in which you did not deduct the correct amount. Express 1040 (A return filed early is considered filed on the due date. Express 1040 ) 2 years from the time you paid your tax for that year. Express 1040 Changing Your Accounting Method Generally, you must get IRS approval to change your method of accounting. Express 1040 File Form 3115, Application for Change in Accounting Method, to request a change to a permissible method of accounting for amortization. Express 1040 The following are examples of a change in method of accounting for amortization. Express 1040 A change in the amortization method, period of recovery, or convention of an amortizable asset. Express 1040 A change in the accounting for amortizable assets from a single asset account to a multiple asset account (pooling), or vice versa. Express 1040 A change in the accounting for amortizable assets from one type of multiple asset account to a different type of multiple asset account. Express 1040 Changes in amortization that are not a change in method of accounting include the following: A change in computing amortization in the tax year in which your use of the asset changes. Express 1040 An adjustment in the useful life of an amortizable asset. Express 1040 Generally, the making of a late amortization election or the revocation of a timely valid amortization election. Express 1040 Any change in the placed-in-service date of an amortizable asset. Express 1040 See Regulations section 1. Express 1040 446-1(e)(2)(ii)(a) for more information and examples. Express 1040 Automatic approval. Express 1040   In some instances, you may be able to get automatic approval from the IRS to change your method of accounting for amortization. Express 1040 For a list of automatic accounting method changes, see the Instructions for Form 3115. Express 1040 Also see the Instructions for Form 3115 for more information on getting approval, automatic approval procedures, and a list of exceptions to the automatic approval process. Express 1040 For more information, see Revenue Procedure 2006-12, as modified by Revenue Procedure 2006-37, and Revenue Procedure 2008-52, as amplified, clarified, and modified by Revenue Procedure 2009-39, as clarified and modified by Revenue Procedure 2011-14, as modified and amplified by Revenue Procedure 2011-22, as modified by Revenue Procedure 2012-39, or any successor. Express 1040 See Revenue Procedure 2006-12, 2006-3 I. Express 1040 R. Express 1040 B. Express 1040 310, available at  www. Express 1040 irs. Express 1040 gov/irb/2006-03_IRB/ar14. Express 1040 html. Express 1040  See Revenue Procedure 2006-37, 2006-38 I. Express 1040 R. Express 1040 B. Express 1040 499, available at  www. Express 1040 irs. Express 1040 gov/irb/2006-38_IRB/ar10. Express 1040 html. Express 1040  See Revenue Procedure 2008-52, 2008-36 I. Express 1040 R. Express 1040 B. Express 1040 587, available at www. Express 1040 irs. Express 1040 gov/irb/2008-36_IRB/ar09. Express 1040 html. Express 1040  See Revenue Procedure 2009-39, 2009-38 I. Express 1040 R. Express 1040 B. Express 1040 371, available at  www. Express 1040 irs. Express 1040 gov/irb/2009-38_IRB/ar08. Express 1040 html. Express 1040  See Revenue Procedure 2011-14, 2011-4 I. Express 1040 R. Express 1040 B. Express 1040 330, available at  www. Express 1040 irs. Express 1040 gov/irb/2011-04_IRB/ar08. Express 1040 html. Express 1040  See Revenue Procedure 2011-22, 2011-18 I. Express 1040 R. Express 1040 B. Express 1040 737, available at  www. Express 1040 irs. Express 1040 gov/irb/2011-18_IRB/ar08. Express 1040 html. Express 1040 Also, see Revenue Procedure 2012-39, 2012-41 I. Express 1040 R. Express 1040 B. Express 1040 470 available at www. Express 1040 irs. Express 1040 gov/irb/2012-41_IRB/index. Express 1040 html. Express 1040 Disposition of Section 197 Intangibles A section 197 intangible is treated as depreciable property used in your trade or business. Express 1040 If you held the intangible for more than 1 year, any gain on its disposition, up to the amount of allowable amortization, is ordinary income (section 1245 gain). Express 1040 If multiple section 197 intangibles are disposed of in a single transaction or a series of related transactions, treat all of the section 197 intangibles as if they were a single asset for purposes of determining the amount of gain that is ordinary income. Express 1040 Any remaining gain, or any loss, is a section 1231 gain or loss. Express 1040 If you held the intangible 1 year or less, any gain or loss on its disposition is an ordinary gain or loss. Express 1040 For more information on ordinary or capital gain or loss on business property, see chapter 3 in Publication 544. Express 1040 Nondeductible loss. Express 1040   You cannot deduct any loss on the disposition or worthlessness of a section 197 intangible that you acquired in the same transaction (or series of related transactions) as other section 197 intangibles you still have. Express 1040 Instead, increase the adjusted basis of each remaining amortizable section 197 intangible by a proportionate part of the nondeductible loss. Express 1040 Figure the increase by multiplying the nondeductible loss on the disposition of the intangible by the following fraction. Express 1040 The numerator is the adjusted basis of each remaining intangible on the date of the disposition. Express 1040 The denominator is the total adjusted bases of all remaining amortizable section 197 intangibles on the date of the disposition. Express 1040 Covenant not to compete. Express 1040   A covenant not to compete, or similar arrangement, is not considered disposed of or worthless before you dispose of your entire interest in the trade or business for which you entered into the covenant. Express 1040 Nonrecognition transfers. Express 1040   If you acquire a section 197 intangible in a nonrecognition transfer, you are treated as the transferor with respect to the part of your adjusted basis in the intangible that is not more than the transferor's adjusted basis. Express 1040 You amortize this part of the adjusted basis over the intangible's remaining amortization period in the hands of the transferor. Express 1040 Nonrecognition transfers include transfers to a corporation, partnership contributions and distributions, like-kind exchanges, and involuntary conversions. Express 1040   In a like-kind exchange or involuntary conversion of a section 197 intangible, you must continue to amortize the part of your adjusted basis in the acquired intangible that is not more than your adjusted basis in the exchanged or converted intangible over the remaining amortization period of the exchanged or converted intangible. Express 1040 Amortize over a new 15-year period the part of your adjusted basis in the acquired intangible that is more than your adjusted basis in the exchanged or converted intangible. Express 1040 Example. Express 1040 You own a section 197 intangible you have amortized for 4 full years. Express 1040 It has a remaining unamortized basis of $30,000. Express 1040 You exchange the asset plus $10,000 for a like-kind section 197 intangible. Express 1040 The nonrecognition provisions of like-kind exchanges apply. Express 1040 You amortize $30,000 of the $40,000 adjusted basis of the acquired intangible over the 11 years remaining in the original 15-year amortization period for the transferred asset. Express 1040 You amortize the other $10,000 of adjusted basis over a new 15-year period. Express 1040 For more information, see Regulations section 1. Express 1040 197-2(g). Express 1040 Reforestation Costs You can elect to deduct a limited amount of reforestation costs paid or incurred during the tax year. Express 1040 See Reforestation Costs in chapter 7. Express 1040 You can elect to amortize the qualifying costs that are not deducted currently over an 84-month period. Express 1040 There is no limit on the amount of your amortization deduction for reforestation costs paid or incurred during the tax year. Express 1040 The election to amortize reforestation costs incurred by a partnership, S corporation, or estate must be made by the partnership, corporation, or estate. Express 1040 A partner, shareholder, or beneficiary cannot make that election. Express 1040 A partner's or shareholder's share of amortizable costs is figured under the general rules for allocating items of income, loss, deduction, etc. Express 1040 , of a partnership or S corporation. Express 1040 The amortizable costs of an estate are divided between the estate and the income beneficiary based on the income of the estate allocable to each. Express 1040 Qualifying costs. Express 1040   Reforestation costs are the direct costs of planting or seeding for forestation or reforestation. Express 1040 Qualifying costs include only those costs you must capitalize and include in the adjusted basis of the property. Express 1040 They include costs for the following items. Express 1040 Site preparation. Express 1040 Seeds or seedlings. Express 1040 Labor. Express 1040 Tools. Express 1040 Depreciation on equipment used in planting and seeding. Express 1040 Qualifying costs do not include costs for which the government reimburses you under a cost-sharing program, unless you include the reimbursement in your income. Express 1040 Qualified timber property. Express 1040   Qualified timber property is property that contains trees in significant commercial quantities. Express 1040 It can be a woodlot or other site that you own or lease. Express 1040 The property qualifies only if it meets all of the following requirements. Express 1040 It is located in the United States. Express 1040 It is held for the growing and cutting of timber you will either use in, or sell for use in, the commercial production of timber products. Express 1040 It consists of at least one acre planted with tree seedlings in the manner normally used in forestation or reforestation. Express 1040 Qualified timber property does not include property on which you have planted shelter belts or ornamental trees, such as Christmas trees. Express 1040 Amortization period. Express 1040   The 84-month amortization period starts on the first day of the first month of the second half of the tax year you incur the costs (July 1 for a calendar year taxpayer), regardless of the month you actually incur the costs. Express 1040 You can claim amortization deductions for no more than 6 months of the first and last (eighth) tax years of the period. Express 1040 Life tenant and remainderman. Express 1040   If one person holds the property for life with the remainder going to another person, the life tenant is entitled to the full amortization for qualifying reforestation costs incurred by the life tenant. Express 1040 Any remainder interest in the property is ignored for amortization purposes. Express 1040 Recapture. Express 1040   If you dispose of qualified timber property within 10 years after the tax year you incur qualifying reforestation expenses, report any gain as ordinary income up to the amortization you took. Express 1040 See chapter 3 of Publication 544 for more information. Express 1040 How to make the election. Express 1040   To elect to amortize qualifying reforestation costs, complete Part VI of Form 4562 and attach a statement that contains the following information. Express 1040 A description of the costs and the dates you incurred them. Express 1040 A description of the type of timber being grown and the purpose for which it is grown. Express 1040 Attach a separate statement for each property for which you amortize reforestation costs. Express 1040   Generally, you must make the election on a timely filed return (including extensions) for the tax year in which you incurred the costs. Express 1040 However, if you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). Express 1040 Attach Form 4562 and the statement to the amended return and write “Filed pursuant to section 301. Express 1040 9100-2” on Form 4562. Express 1040 File the amended return at the same address you filed the original return. Express 1040 Revoking the election. Express 1040   You must get IRS approval to revoke your election to amortize qualifying reforestation costs. Express 1040 Your application to revoke the election must include your name, address, the years for which your election was in effect, and your reason for revoking it. Express 1040 Please provide your daytime telephone number (optional), in case we need to contact you. Express 1040 You, or your duly authorized representative, must sign the application and file it at least 90 days before the due date (without extensions) for filing your income tax return for the first tax year for which your election is to end. Express 1040    Send the application to: Internal Revenue Service Associate Chief Counsel Passthroughs and Special Industries CC:PSI:6 1111 Constitution Ave. Express 1040 NW, IR-5300 Washington, DC 20224 Geological and Geophysical Costs You can amortize the cost of geological and geophysical expenses paid or incurred in connection with oil and gas exploration or development within the United States. Express 1040 These costs can be amortized ratably over a 24-month period beginning on the mid-point of the tax year in which the expenses were paid or incurred. Express 1040 For major integrated oil companies (as defined in section 167(h)(5)), these costs must be amortized ratably over a 5-year period for costs paid or incurred after May 17, 2006 (a 7-year period for costs paid or incurred after December 19, 2007). Express 1040 If you retire or abandon the property during the amortization period, no amortization deduction is allowed in the year of retirement or abandonment. Express 1040 Pollution Control Facilities You can elect to amortize the cost of a certified pollution control facility over 60 months. Express 1040 However, see Atmospheric pollution control facilities for an exception. Express 1040 The cost of a pollution control facility that is not eligible for amortization can be depreciated under the regular rules for depreciation. Express 1040 Also, you can claim a special depreciation allowance on a certified pollution control facility that is qualified property even if you elect to amortize its cost. Express 1040 You must reduce its cost (amortizable basis) by the amount of any special allowance you claim. Express 1040 See chapter 3 of Publication 946. Express 1040 A certified pollution control facility is a new identifiable treatment facility used in connection with a plant or other property in operation before 1976, to reduce or control water or atmospheric pollution or contamination. Express 1040 The facility must do so by removing, changing, disposing, storing, or preventing the creation or emission of pollutants, contaminants, wastes, or heat. Express 1040 The facility must be certified by state and federal certifying authorities. Express 1040 The facility must not significantly increase the output or capacity, extend the useful life, or reduce the total operating costs of the plant or other property. Express 1040 Also, it must not significantly change the nature of the manufacturing or production process or facility. Express 1040 The federal certifying authority will not certify your property to the extent it appears you will recover (over the property's useful life) all or part of its cost from the profit based on its operation (such as through sales of recovered wastes). Express 1040 The federal certifying authority will describe the nature of the potential cost recovery. Express 1040 You must then reduce the amortizable basis of the facility by this potential recovery. Express 1040 New identifiable treatment facility. Express 1040   A new identifiable treatment facility is tangible depreciable property that is identifiable as a treatment facility. Express 1040 It does not include a building and its structural components unless the building is exclusively a treatment facility. Express 1040 Atmospheric pollution control facilities. Express 1040   Certain atmospheric pollution control facilities can be amortized over 84 months. Express 1040 To qualify, the following must apply. Express 1040 The facility must be acquired and placed in service after April 11, 2005. Express 1040 If acquired, the original use must begin with you after April 11, 2005. Express 1040 The facility must be used in connection with an electric generation plant or other property placed in operation after December 31, 1975, that is primarily coal fired. Express 1040 If you construct, reconstruct, or erect the facility, only the basis attributable to the construction, reconstruction, or erection completed after April 11, 2005, qualifies. Express 1040 Basis reduction for corporations. Express 1040   A corporation must reduce the amortizable basis of a pollution control facility by 20% before figuring the amortization deduction. Express 1040 More information. Express 1040   For more information on the amortization of pollution control facilities, see Code sections 169 and 291(c) and the related regulations. Express 1040 Research and Experimental Costs You can elect to amortize your research and experimental costs, deduct them as current business expenses, or write them off over a 10-year period (see Optional write-off method below). Express 1040 If you elect to amortize these costs, deduct them in equal amounts over 60 months or more. Express 1040 The amortization period begins the month you first receive an economic benefit from the costs. Express 1040 For a definition of “research and experimental costs” and information on deducting them as current business expenses, see chapter 7. Express 1040 Optional write-off method. Express 1040   Rather than amortize these costs or deduct them as a current expense, you have the option of deducting (writing off) research and experimental costs ratably over a 10-year period beginning with the tax year in which you incurred the costs. Express 1040 For more information, see Optional Write-off of Certain Tax Preferences , later, and section 59(e) of the Internal Revenue Code. Express 1040 Costs you can amortize. Express 1040   You can amortize costs chargeable to a capital account (see chapter 1) if you meet both of the following requirements. Express 1040 You paid or incurred the costs in your trade or business. Express 1040 You are not deducting the costs currently. Express 1040 How to make the election. Express 1040   To elect to amortize research and experimental costs, complete Part VI of Form 4562 and attach it to your income tax return. Express 1040 Generally, you must file the return by the due date (including extensions). Express 1040 However, if you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). Express 1040 Attach Form 4562 to the amended return and write “Filed pursuant to section 301. Express 1040 9100-2” on Form 4562. Express 1040 File the amended return at the same address you filed the original return. Express 1040   Your election is binding for the year it is made and for all later years unless you obtain approval from the IRS to change to a different method. Express 1040 Optional Write-off of Certain Tax Preferences You can elect to amortize certain tax preference items over an optional period beginning in the tax year in which you incurred the costs. Express 1040 If you make this election, there is no AMT adjustment. Express 1040 The applicable costs and the optional recovery periods are as follows: Circulation costs — 3 years, Intangible drilling and development costs — 60 months, Mining exploration and development costs — 10 years, and Research and experimental costs — 10 years. Express 1040 How to make the election. Express 1040   To elect to amortize qualifying costs over the optional recovery period, complete Part VI of Form 4562 and attach a statement containing the following information to your return for the tax year in which the election begins: Your name, address, and taxpayer identification number; and The type of cost and the specific amount of the cost for which you are making the election. Express 1040   Generally, the election must be made on a timely filed return (including extensions) for the tax year in which you incurred the costs. Express 1040 However, if you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). Express 1040 Attach Form 4562 to the amended return and write “Filed pursuant to section 301. Express 1040 9100-2” on Form 4562. Express 1040 File the amended return at the same address you filed the original return. Express 1040 Revoking the election. Express 1040   You must obtain consent from the IRS to revoke your election. Express 1040 Your request to revoke the election must be submitted to the IRS in the form of a letter ruling before the end of the tax year in which the optional recovery period ends. Express 1040 The request must contain all of the information necessary to demonstrate the rare and unusual circumstances that would justify granting revocation. Express 1040 If the request for revocation is approved, any unamortized costs are deductible in the year the revocation is effective. Express 1040 Prev  Up  Next   Home   More Online Publications
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Understanding your CP152 Notice

This notice acknowledges that we received your Form 8703, Annual Certification of a Residential Rental Project.


What you need to do

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You may want to...

Keep a copy of this notice for your records.


Answers to Common Questions

Will I receive a notice for each Form 8703 I filed?
Yes. We'll send a separate acknowledgement for each form.

Page Last Reviewed or Updated: 26-Mar-2014

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How to get help

  • Call the 1-800 number listed on the top right corner of your notice.
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  • See if you qualify for help from a Low Income Taxpayer Clinic.
     

The Express 1040

Express 1040 Publication 525 - Main Content Table of Contents Employee CompensationBabysitting. Express 1040 Miscellaneous Compensation Fringe Benefits Retirement Plan Contributions Stock Options Restricted Property Special Rules for Certain EmployeesClergy Members of Religious Orders Foreign Employer Military Volunteers Business and Investment IncomeRents From Personal Property Royalties Partnership Income S Corporation Income Sickness and Injury BenefitsDisability Pensions Long-Term Care Insurance Contracts Workers' Compensation Other Sickness and Injury Benefits Miscellaneous IncomeBartering Canceled Debts Host or Hostess Life Insurance Proceeds Recoveries Survivor Benefits Unemployment Benefits Welfare and Other Public Assistance Benefits Other Income RepaymentsMethod 1. Express 1040 Method 2. Express 1040 How To Get Tax HelpLow Income Taxpayer Clinics Employee Compensation In most cases, you must include in gross income everything you receive in payment for personal services. Express 1040 In addition to wages, salaries, commissions, fees, and tips, this includes other forms of compensation such as fringe benefits and stock options. Express 1040 You should receive a Form W-2 from your employer or former employer showing the pay you received for your services. Express 1040 Include all your pay on line 7 of Form 1040 or Form 1040A or on line 1 of Form 1040EZ, even if you do not receive Form W-2, or you receive a Form W-2 that does not include all pay that should be included on the Form W-2. Express 1040 If you performed services, other than as an independent contractor, and your employer did not withhold social security and Medicare taxes from your pay, you must file Form 8919, Uncollected Social Security and Medicare Tax on Wages, with your Form 1040. Express 1040 These wages must be included on line 7 of Form 1040. Express 1040 See Form 8919 for more information. Express 1040 Childcare providers. Express 1040   If you provide childcare, either in the child's home or in your home or other place of business, the pay you receive must be included in your income. Express 1040 If you are not an employee, you are probably self-employed and must include payments for your services on Schedule C (Form 1040), Profit or Loss From Business, or Schedule C-EZ (Form 1040), Net Profit From Business. Express 1040 You generally are not an employee unless you are subject to the will and control of the person who employs you as to what you are to do and how you are to do it. Express 1040 Babysitting. Express 1040   If you babysit for relatives or neighborhood children, whether on a regular basis or only periodically, the rules for childcare providers apply to you. Express 1040 Bankruptcy. Express 1040   If you filed for bankruptcy under Chapter 11 of the Bankruptcy Code, you must allocate your wages and withheld income tax. Express 1040 Your W-2 will show your total wages and withheld income tax for the year. Express 1040 On your tax return, you report the wages and withheld income tax for the period before you filed for bankruptcy. Express 1040 Your bankruptcy estate reports the wages and withheld income tax for the period after you filed for bankruptcy. Express 1040 If you receive other information returns (such as Form 1099-DIV, Dividends and Distributions, or 1099-INT, Interest Income) that report gross income to you, rather than to the bankruptcy estate, you must allocate that income. Express 1040   The only exception is for purposes of figuring your self-employment tax, if you are self-employed. Express 1040 For that purpose, you must take into account all your self-employment income for the year from services performed both before and after the beginning of the case. Express 1040   You must file a statement with your income tax return stating you filed a Chapter 11 bankruptcy case. Express 1040 The statement must show the allocation and describe the method used to make the allocation. Express 1040 For a sample of this statement and other information, see Notice 2006-83, 2006-40 I. Express 1040 R. Express 1040 B. Express 1040 596, available at www. Express 1040 irs. Express 1040 gov/irb/2006-40_IRB/ar12. Express 1040 html. Express 1040 Miscellaneous Compensation This section discusses many types of employee compensation. Express 1040 The subjects are arranged in alphabetical order. Express 1040 Advance commissions and other earnings. Express 1040   If you receive advance commissions or other amounts for services to be performed in the future and you are a cash-method taxpayer, you must include these amounts in your income in the year you receive them. Express 1040    If you repay unearned commissions or other amounts in the same year you receive them, reduce the amount included in your income by the repayment. Express 1040 If you repay them in a later tax year, you can deduct the repayment as an itemized deduction on your Schedule A (Form 1040), Itemized Deductions, or you may be able to take a credit for that year. Express 1040 See Repayments , later. Express 1040 Allowances and reimbursements. Express 1040    If you receive travel, transportation, or other business expense allowances or reimbursements from your employer, see Publication 463, Travel, Entertainment, Gift, and Car Expenses. Express 1040 If you are reimbursed for moving expenses, see Publication 521, Moving Expenses. Express 1040 Back pay awards. Express 1040   Include in income amounts you are awarded in a settlement or judgment for back pay. Express 1040 These include payments made to you for damages, unpaid life insurance premiums, and unpaid health insurance premiums. Express 1040 They should be reported to you by your employer on Form W-2. Express 1040 Bonuses and awards. Express 1040    Bonuses or awards you receive for outstanding work are included in your income and should be shown on your Form W-2. Express 1040 These include prizes such as vacation trips for meeting sales goals. Express 1040 If the prize or award you receive is goods or services, you must include the fair market value of the goods or services in your income. Express 1040 However, if your employer merely promises to pay you a bonus or award at some future time, it is not taxable until you receive it or it is made available to you. Express 1040 Employee achievement award. Express 1040   If you receive tangible personal property (other than cash, a gift certificate, or an equivalent item) as an award for length of service or safety achievement, you generally can exclude its value from your income. Express 1040 However, the amount you can exclude is limited to your employer's cost and cannot be more than $1,600 ($400 for awards that are not qualified plan awards) for all such awards you receive during the year. Express 1040 Your employer can tell you whether your award is a qualified plan award. Express 1040 Your employer must make the award as part of a meaningful presentation, under conditions and circumstances that do not create a significant likelihood of it being disguised pay. Express 1040   However, the exclusion does not apply to the following awards. Express 1040 A length-of-service award if you received it for less than 5 years of service or if you received another length-of-service award during the year or the previous 4 years. Express 1040 A safety achievement award if you are a manager, administrator, clerical employee, or other professional employee or if more than 10% of eligible employees previously received safety achievement awards during the year. Express 1040 Example. Express 1040 Ben Green received three employee achievement awards during the year: a nonqualified plan award of a watch valued at $250, and two qualified plan awards of a stereo valued at $1,000 and a set of golf clubs valued at $500. Express 1040 Assuming that the requirements for qualified plan awards are otherwise satisfied, each award by itself would be excluded from income. Express 1040 However, because the $1,750 total value of the awards is more than $1,600, Ben must include $150 ($1,750 − $1,600) in his income. Express 1040 Differential wage payments. Express 1040   This is any payment made by an employer to an individual for any period during which the individual is, for a period of more than 30 days, an active duty member of the uniformed services and represents all or a portion of the wages the individual would have received from the employer for that period. Express 1040 These payments are treated as wages and are subject to income tax withholding, but not FICA or FUTA taxes. Express 1040 The payments are reported as wages on Form W-2. Express 1040 Government cost-of-living allowances. Express 1040   Most payments received by U. Express 1040 S. Express 1040 Government civilian employees for working abroad are taxable. Express 1040 However, certain cost-of-living allowances are tax free. Express 1040 Publication 516, U. Express 1040 S. Express 1040 Government Civilian Employees Stationed Abroad, explains the tax treatment of allowances, differentials, and other special pay you receive for employment abroad. Express 1040 Nonqualified deferred compensation plans. Express 1040   Your employer will report to you the total amount of deferrals for the year under a nonqualified deferred compensation plan. Express 1040 This amount is shown on Form W-2, box 12, using code Y. Express 1040 This amount is not included in your income. Express 1040   However, if at any time during the tax year, the plan fails to meet certain requirements, or is not operated under those requirements, all amounts deferred under the plan for the tax year and all preceding tax years are included in your income for the current year. Express 1040 This amount is included in your wages shown on Form W-2, box 1. Express 1040 It is also shown on Form W-2, box 12, using code Z. Express 1040 Nonqualified deferred compensation plans of nonqualified entities. Express 1040   In most cases, any compensation deferred under a nonqualified deferred compensation plan of a nonqualified entity is included in gross income when there is no substantial risk of forfeiture of the rights to such compensation. Express 1040 For this purpose, a nonqualified entity is: A foreign corporation unless substantially all of its income is: Effectively connected with the conduct of a trade or business in the United States, or Subject to a comprehensive foreign income tax. Express 1040 A partnership unless substantially all of its income is allocated to persons other than: Foreign persons for whom the income is not subject to a comprehensive foreign income tax, and Tax-exempt organizations. Express 1040 Note received for services. Express 1040   If your employer gives you a secured note as payment for your services, you must include the fair market value (usually the discount value) of the note in your income for the year you receive it. Express 1040 When you later receive payments on the note, a proportionate part of each payment is the recovery of the fair market value that you previously included in your income. Express 1040 Do not include that part again in your income. Express 1040 Include the rest of the payment in your income in the year of payment. Express 1040   If your employer gives you a nonnegotiable unsecured note as payment for your services, payments on the note that are credited toward the principal amount of the note are compensation income when you receive them. Express 1040 Severance pay. Express 1040   You must include in income amounts you receive as severance pay and any payment for the cancellation of your employment contract. Express 1040 Accrued leave payment. Express 1040   If you are a federal employee and receive a lump-sum payment for accrued annual leave when you retire or resign, this amount will be included as wages on your Form W-2. Express 1040   If you resign from one agency and are reemployed by another agency, you may have to repay part of your lump-sum annual leave payment to the second agency. Express 1040 You can reduce gross wages by the amount you repaid in the same tax year in which you received it. Express 1040 Attach to your tax return a copy of the receipt or statement given to you by the agency you repaid to explain the difference between the wages on your return and the wages on your Forms W-2. Express 1040 Outplacement services. Express 1040   If you choose to accept a reduced amount of severance pay so that you can receive outplacement services (such as training in résumé writing and interview techniques), you must include the unreduced amount of the severance pay in income. Express 1040    However, you can deduct the value of these outplacement services (up to the difference between the severance pay included in income and the amount actually received) as a miscellaneous deduction (subject to the 2%-of-adjusted-gross-income (AGI) limit) on Schedule A (Form 1040). Express 1040 Sick pay. Express 1040   Pay you receive from your employer while you are sick or injured is part of your salary or wages. Express 1040 In addition, you must include in your income sick pay benefits received from any of the following payers. Express 1040 A welfare fund. Express 1040 A state sickness or disability fund. Express 1040 An association of employers or employees. Express 1040 An insurance company, if your employer paid for the plan. Express 1040 However, if you paid the premiums on an accident or health insurance policy, the benefits you receive under the policy are not taxable. Express 1040 For more information, see Other Sickness and Injury Benefits under Sickness and Injury Benefits, later. Express 1040 Social security and Medicare taxes paid by employer. Express 1040   If you and your employer have an agreement that your employer pays your social security and Medicare taxes without deducting them from your gross wages, you must report the amount of tax paid for you as taxable wages on your tax return. Express 1040 The payment is also treated as wages for figuring your social security and Medicare taxes and your social security and Medicare benefits. Express 1040 However, these payments are not treated as social security and Medicare wages if you are a household worker or a farm worker. Express 1040 Stock appreciation rights. Express 1040   Do not include a stock appreciation right granted by your employer in income until you exercise (use) the right. Express 1040 When you use the right, you are entitled to a cash payment equal to the fair market value of the corporation's stock on the date of use minus the fair market value on the date the right was granted. Express 1040 You include the cash payment in income in the year you use the right. Express 1040 Fringe Benefits Fringe benefits received in connection with the performance of your services are included in your income as compensation unless you pay fair market value for them or they are specifically excluded by law. Express 1040 Abstaining from the performance of services (for example, under a covenant not to compete) is treated as the performance of services for purposes of these rules. Express 1040 See Valuation of Fringe Benefits , later in this discussion, for information on how to determine the amount to include in income. Express 1040 Recipient of fringe benefit. Express 1040   You are the recipient of a fringe benefit if you perform the services for which the fringe benefit is provided. Express 1040 You are considered to be the recipient even if it is given to another person, such as a member of your family. Express 1040 An example is a car your employer gives to your spouse for services you perform. Express 1040 The car is considered to have been provided to you and not to your spouse. Express 1040   You do not have to be an employee of the provider to be a recipient of a fringe benefit. Express 1040 If you are a partner, director, or independent contractor, you also can be the recipient of a fringe benefit. Express 1040 Provider of benefit. Express 1040   Your employer or another person for whom you perform services is the provider of a fringe benefit regardless of whether that person actually provides the fringe benefit to you. Express 1040 The provider can be a client or customer of an independent contractor. Express 1040 Accounting period. Express 1040   You must use the same accounting period your employer uses to report your taxable noncash fringe benefits. Express 1040 Your employer has the option to report taxable noncash fringe benefits by using either of the following rules. Express 1040 The general rule: benefits are reported for a full calendar year (January 1–December 31). Express 1040 The special accounting period rule: benefits provided during the last 2 months of the calendar year (or any shorter period) are treated as paid during the following calendar year. Express 1040 For example, each year your employer reports the value of benefits provided during the last 2 months of the prior year and the first 10 months of the current year. Express 1040 Your employer does not have to use the same accounting period for each fringe benefit, but must use the same period for all employees who receive a particular benefit. Express 1040   You must use the same accounting period that you use to report the benefit to claim an employee business deduction (for use of a car, for example). Express 1040 Form W-2. Express 1040   Your employer must include all taxable fringe benefits in box 1 of Form W-2 as wages, tips and other compensation and, if applicable, in boxes 3 and 5 as social security and Medicare wages. Express 1040 Although not required, your employer may include the total value of fringe benefits in box 14 (or on a separate statement). Express 1040 However, if your employer provided you with a vehicle and included 100% of its annual lease value in your income, the employer must separately report this value to you in box 14 (or on a separate statement). Express 1040 Accident or Health Plan In most cases, the value of accident or health plan coverage provided to you by your employer is not included in your income. Express 1040 Benefits you receive from the plan may be taxable, as explained, later, under Sickness and Injury Benefits . Express 1040 For information on the items covered in this section, other than Long-term care coverage , see Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans. Express 1040 Long-term care coverage. Express 1040   Contributions by your employer to provide coverage for long-term care services generally are not included in your income. Express 1040 However, contributions made through a flexible spending or similar arrangement (such as a cafeteria plan) must be included in your income. Express 1040 This amount will be reported as wages in box 1 of your Form W-2. Express 1040 Archer MSA contributions. Express 1040    Contributions by your employer to your Archer MSA generally are not included in your income. Express 1040 Their total will be reported in box 12 of Form W-2, with code R. Express 1040 You must report this amount on Form 8853, Archer MSAs and Long-Term Care Insurance Contracts. Express 1040 File the form with your return. Express 1040 Health flexible spending arrangement (health FSA). Express 1040   If your employer provides a health FSA that qualifies as an accident or health plan, the amount of your salary reduction, and reimbursements of your medical care expenses, in most cases, are not included in your income. Express 1040   Health FSAs are subject to a $2,500 limit on salary reduction contributions for plan years beginning after 2012. Express 1040 The $2,500 limit is subject to an inflation adjustment for plan years beginning after 2013. Express 1040 For more information, see Notice 2012-40, 2012-26 I. Express 1040 R. Express 1040 B. Express 1040 1046, available at www. Express 1040 irs. Express 1040 gov/irb/2012-26 IRB/ar09. Express 1040 html. Express 1040 Health reimbursement arrangement (HRA). Express 1040   If your employer provides an HRA that qualifies as an accident or health plan, coverage and reimbursements of your medical care expenses generally are not included in your income. Express 1040 Health savings accounts (HSA). Express 1040   If you are an eligible individual, you and any other person, including your employer or a family member, can make contributions to your HSA. Express 1040 Contributions, other than employer contributions, are deductible on your return whether or not you itemize deductions. Express 1040 Contributions made by your employer are not included in your income. Express 1040 Distributions from your HSA that are used to pay qualified medical expenses are not included in your income. Express 1040 Distributions not used for qualified medical expenses are included in your income. Express 1040 See Publication 969 for the requirements of an HSA. Express 1040   Contributions by a partnership to a bona fide partner's HSA are not contributions by an employer. Express 1040 The contributions are treated as a distribution of money and are not included in the partner's gross income. Express 1040 Contributions by a partnership to a partner's HSA for services rendered are treated as guaranteed payments that are includible in the partner's gross income. Express 1040 In both situations, the partner can deduct the contribution made to the partner's HSA. Express 1040   Contributions by an S corporation to a 2% shareholder-employee's HSA for services rendered are treated as guaranteed payments and are includible in the shareholder-employee's gross income. Express 1040 The shareholder-employee can deduct the contribution made to the shareholder-employee's HSA. Express 1040 Qualified HSA funding distribution. Express 1040   You can make a one-time distribution from your individual retirement account (IRA) to an HSA and you generally will not include any of the distribution in your income. Express 1040 See Publication 590, Individual Retirement Arrangements (IRAs), for the requirements for these qualified HSA funding distributions. Express 1040 Failure to maintain eligibility. Express 1040   If your HSA received qualified HSA distributions from a health FSA or HRA (discussed earlier) or a qualified HSA funding distribution, you must be an eligible individual for HSA purposes for the period beginning with the month in which the qualified distribution was made and ending on the last day of the 12th month following that month. Express 1040 If you fail to be an eligible individual during this period, other than because of death or disability, you must include the distribution in your income for the tax year in which you become ineligible. Express 1040 This income is also subject to an additional 10% tax. Express 1040 Adoption Assistance You may be able to exclude from your income amounts paid or expenses incurred by your employer for qualified adoption expenses in connection with your adoption of an eligible child. Express 1040 See Instructions for Form 8839, Qualified Adoption Expenses, for more information. Express 1040 Adoption benefits are reported by your employer in box 12 of Form W-2 with code T. Express 1040 They also are included as social security and Medicare wages in boxes 3 and 5. Express 1040 However, they are not included as wages in box 1. Express 1040 To determine the taxable and nontaxable amounts, you must complete Part III of Form 8839. Express 1040 File the form with your return. Express 1040 Athletic Facilities If your employer provides you with the free or low-cost use of an employer-operated gym or other athletic club on your employer's premises, the value is not included in your compensation. Express 1040 The gym must be used primarily by employees, their spouses, and their dependent children. Express 1040 If your employer pays for a fitness program provided to you at an off-site resort hotel or athletic club, the value of the program is included in your compensation. Express 1040 De Minimis (Minimal) Benefits If your employer provides you with a product or service and the cost of it is so small that it would be unreasonable for the employer to account for it, the value is not included in your income. Express 1040 In most cases, the value of benefits such as discounts at company cafeterias, cab fares home when working overtime, and company picnics are not included in your income. Express 1040 Also see Employee Discounts , later. Express 1040 Holiday gifts. Express 1040   If your employer gives you a turkey, ham, or other item of nominal value at Christmas or other holidays, do not include the value of the gift in your income. Express 1040 However, if your employer gives you cash, a gift certificate, or a similar item that you can easily exchange for cash, you include the value of that gift as extra salary or wages regardless of the amount involved. Express 1040 Dependent Care Benefits If your employer provides dependent care benefits under a qualified plan, you may be able to exclude these benefits from your income. Express 1040 Dependent care benefits include: Amounts your employer pays directly to either you or your care provider for the care of your qualifying person while you work, and The fair market value of care in a daycare facility provided or sponsored by your employer. Express 1040 The amount you can exclude is limited to the lesser of: The total amount of dependent care benefits you received during the year, The total amount of qualified expenses you incurred during the year, Your earned income, Your spouse's earned income, or $5,000 ($2,500 if married filing separately). Express 1040 Your employer must show the total amount of dependent care benefits provided to you during the year under a qualified plan in box 10 of your Form W-2. Express 1040 Your employer also will include any dependent care benefits over $5,000 in your wages shown in box 1 of your Form W-2. Express 1040 To claim the exclusion, you must complete Part III of Form 2441, Child and Dependent Care Expenses. Express 1040 See the Instructions for Form 2441 for more information. Express 1040 Educational Assistance You can exclude from your income up to $5,250 of qualified employer-provided educational assistance. Express 1040 For more information, see Publication 970. Express 1040 Employee Discounts If your employer sells you property or services at a discount, you may be able to exclude the amount of the discount from your income. Express 1040 The exclusion applies to discounts on property or services offered to customers in the ordinary course of the line of business in which you work. Express 1040 However, it does not apply to discounts on real property or property commonly held for investment (such as stocks or bonds). Express 1040 The exclusion is limited to the price charged nonemployee customers multiplied by the following percentage. Express 1040 For a discount on property, your employer's gross profit percentage (gross profit divided by gross sales) on all property sold during the employer's previous tax year. Express 1040 (Ask your employer for this percentage. Express 1040 ) For a discount on services, 20%. Express 1040 Financial Counseling Fees Financial counseling fees paid for you by your employer are included in your income and must be reported as part of wages. Express 1040 If the fees are for tax or investment counseling, they can be deducted on Schedule A (Form 1040) as a miscellaneous deduction (subject to the 2%-of-AGI limit). Express 1040 Qualified retirement planning services paid for you by your employer may be excluded from your income. Express 1040 For more information, see Retirement Planning Services , later. Express 1040 Group-Term Life Insurance In most cases, the cost of up to $50,000 of group-term life insurance coverage provided to you by your employer (or former employer) is not included in your income. Express 1040 However, you must include in income the cost of employer-provided insurance that is more than the cost of $50,000 of coverage reduced by any amount you pay toward the purchase of the insurance. Express 1040 For exceptions to this rule, see Entire cost excluded , and Entire cost taxed , later. Express 1040 If your employer provided more than $50,000 of coverage, the amount included in your income is reported as part of your wages in box 1 of your Form W-2. Express 1040 Also, it is shown separately in box 12 with code C. Express 1040 Group-term life insurance. Express 1040   This insurance is term life insurance protection (insurance for a fixed period of time) that: Provides a general death benefit, Is provided to a group of employees, Is provided under a policy carried by the employer, and Provides an amount of insurance to each employee based on a formula that prevents individual selection. Express 1040 Permanent benefits. Express 1040   If your group-term life insurance policy includes permanent benefits, such as a paid-up or cash surrender value, you must include in your income, as wages, the cost of the permanent benefits minus the amount you pay for them. Express 1040 Your employer should be able to tell you the amount to include in your income. Express 1040 Accidental death benefits. Express 1040   Insurance that provides accidental or other death benefits but does not provide general death benefits (travel insurance, for example) is not group-term life insurance. Express 1040 Former employer. Express 1040   If your former employer provided more than $50,000 of group-term life insurance coverage during the year, the amount included in your income is reported as wages in box 1 of Form W-2. Express 1040 Also, it is shown separately in box 12 with code C. Express 1040 Box 12 also will show the amount of uncollected social security and Medicare taxes on the excess coverage, with codes M and N. Express 1040 You must pay these taxes with your income tax return. Express 1040 Include them on line 60, Form 1040, and follow the instructions forline 60. Express 1040 For more information, see the Instructions for Form 1040. Express 1040 Two or more employers. Express 1040   Your exclusion for employer-provided group-term life insurance coverage cannot exceed the cost of $50,000 of coverage, whether the insurance is provided by a single employer or multiple employers. Express 1040 If two or more employers provide insurance coverage that totals more than $50,000, the amounts reported as wages on your Forms W-2 will not be correct. Express 1040 You must figure how much to include in your income. Express 1040 Reduce the amount you figure by any amount reported with code C in box 12 of your Forms W-2, add the result to the wages reported in box 1, and report the total on your return. Express 1040 Figuring the taxable cost. Express 1040    Use the following worksheet to figure the amount to include in your income. Express 1040   If you pay any part of the cost of the insurance, your entire payment reduces, dollar for dollar, the amount you otherwise would include in your income. Express 1040 However, you cannot reduce the amount to include in your income by: Payments for coverage in a different tax year, Payments for coverage through a cafeteria plan, unless the payments are after-tax contributions, or Payments for coverage not taxed to you because of the exceptions discussed later under Entire cost excluded . Express 1040 Worksheet 1. Express 1040 Figuring the Cost of Group-Term Life Insurance To Include in Income 1. Express 1040 Enter the total amount of your insurance coverage from your employer(s) 1. Express 1040   2. Express 1040 Limit on exclusion for employer-provided group-term life insurance coverage 2. Express 1040 50,000 3. Express 1040 Subtract line 2 from line 1 3. Express 1040   4. Express 1040 Divide line 3 by $1,000. Express 1040 Figure to the nearest tenth 4. Express 1040   5. Express 1040 Go to Table 1. Express 1040 Using your age on the last day of the tax year, find your age group in the left column, and enter the cost from the column on the right for your age group 5. Express 1040   6. Express 1040 Multiply line 4 by line 5 6. Express 1040     7. Express 1040 Enter the number of full months of coverage at this cost 7. Express 1040   8. Express 1040 Multiply line 6 by line 7 8. Express 1040   9. Express 1040 Enter the premiums you paid per month 9. Express 1040       10. Express 1040 Enter the number of months you paid the  premiums 10. Express 1040       11. Express 1040 Multiply line 9 by line 10. Express 1040 11. Express 1040   12. Express 1040 Subtract line 11 from line 8. Express 1040 Include this amount in your income as wages 12. Express 1040   Table 1. Express 1040 Cost of $1,000 of Group-Term Life Insurance for One Month   Age Cost     Under 25 $ . Express 1040 05     25 through 29 . Express 1040 06     30 through 34 . Express 1040 08     35 through 39 . Express 1040 09     40 through 44 . Express 1040 10     45 through 49 . Express 1040 15     50 through 54 . Express 1040 23     55 through 59 . Express 1040 43     60 through 64 . Express 1040 66     65 through 69 1. Express 1040 27     70 and older 2. Express 1040 06   Example. Express 1040 You are 51 years old and work for employers A and B. Express 1040 Both employers provide group-term life insurance coverage for you for the entire year. Express 1040 Your coverage is $35,000 with employer A and $45,000 with employer B. Express 1040 You pay premiums of $4. Express 1040 15 a month under the employer B group plan. Express 1040 You figure the amount to include in your income as follows. Express 1040   Worksheet 1. Express 1040 Figuring the Cost of Group-Term Life Insurance To Include in Income—Illustrated 1. Express 1040 Enter the total amount of your insurance coverage from your employer(s) 1. Express 1040 80,000 2. Express 1040 Limit on exclusion for employer-provided group-term life insurance coverage 2. Express 1040 50,000 3. Express 1040 Subtract line 2 from line 1 3. Express 1040 30,000 4. Express 1040 Divide line 3 by $1,000. Express 1040 Figure to the nearest tenth 4. Express 1040 30. Express 1040 0 5. Express 1040 Go to Table 1. Express 1040 Using your age on the last day of the tax year, find your age group in the left column, and enter the cost from the column on the right for your age group 5. Express 1040 . Express 1040 23 6. Express 1040 Multiply line 4 by line 5 6. Express 1040 6. Express 1040 90 7. Express 1040 Enter the number of full months of coverage at this cost. Express 1040 7. Express 1040 12 8. Express 1040 Multiply line 6 by line 7 8. Express 1040 82. Express 1040 80 9. Express 1040 Enter the premiums you paid per month 9. Express 1040 4. Express 1040 15     10. Express 1040 Enter the number of months you paid the premiums 10. Express 1040 12     11. Express 1040 Multiply line 9 by line 10. Express 1040 11. Express 1040 49. Express 1040 80 12. Express 1040 Subtract line 11 from line 8. Express 1040 Include this amount in your income as wages 12. Express 1040 33. Express 1040 00 The total amount to include in income for the cost of excess group-term life insurance is $33. Express 1040 Neither employer provided over $50,000 insurance coverage, so the wages shown on your Forms W-2 do not include any part of that $33. Express 1040 You must add it to the wages shown on your Forms W-2 and include the total on your return. Express 1040 Entire cost excluded. Express 1040   You are not taxed on the cost of group-term life insurance if any of the following circumstances apply. Express 1040 You are permanently and totally disabled and have ended your employment. Express 1040 Your employer is the beneficiary of the policy for the entire period the insurance is in force during the tax year. Express 1040 A charitable organization to which contributions are deductible is the only beneficiary of the policy for the entire period the insurance is in force during the tax year. Express 1040 (You are not entitled to a deduction for a charitable contribution for naming a charitable organization as the beneficiary of your policy. Express 1040 ) The plan existed on January 1, 1984, and: You retired before January 2, 1984, and were covered by the plan when you retired, or You reached age 55 before January 2, 1984, and were employed by the employer or its predecessor in 1983. Express 1040 Entire cost taxed. Express 1040   You are taxed on the entire cost of group-term life insurance if either of the following circumstances apply. Express 1040 The insurance is provided by your employer through a qualified employees' trust, such as a pension trust or a qualified annuity plan. Express 1040 You are a key employee and your employer's plan discriminates in favor of key employees. Express 1040 Meals and Lodging You do not include in your income the value of meals and lodging provided to you and your family by your employer at no charge if the following conditions are met. Express 1040 The meals are: Furnished on the business premises of your employer, and Furnished for the convenience of your employer. Express 1040 The lodging is: Furnished on the business premises of your employer, Furnished for the convenience of your employer, and A condition of your employment. Express 1040 (You must accept it in order to be able to properly perform your duties. Express 1040 ) You also do not include in your income the value of meals or meal money that qualifies as a de minimis fringe benefit. Express 1040 See De Minimis (Minimal) Benefits , earlier. Express 1040 Faculty lodging. Express 1040   If you are an employee of an educational institution or an academic health center and you are provided with lodging that does not meet the three conditions given earlier, you still may not have to include the value of the lodging in income. Express 1040 However, the lodging must be qualified campus lodging, and you must pay an adequate rent. Express 1040 Academic health center. Express 1040   This is an organization that meets the following conditions. Express 1040 Its principal purpose or function is to provide medical or hospital care or medical education or research. Express 1040 It receives payments for graduate medical education under the Social Security Act. Express 1040 One of its principal purposes or functions is to provide and teach basic and clinical medical science and research using its own faculty. Express 1040 Qualified campus lodging. Express 1040   Qualified campus lodging is lodging furnished to you, your spouse, or one of your dependents by, or on behalf of, the institution or center for use as a home. Express 1040 The lodging must be located on or near a campus of the educational institution or academic health center. Express 1040 Adequate rent. Express 1040   The amount of rent you pay for the year for qualified campus lodging is considered adequate if it is at least equal to the lesser of: 5% of the appraised value of the lodging, or The average of rentals paid by individuals (other than employees or students) for comparable lodging held for rent by the educational institution. Express 1040 If the amount you pay is less than the lesser of these amounts, you must include the difference in your income. Express 1040   The lodging must be appraised by an independent appraiser and the appraisal must be reviewed on an annual basis. Express 1040 Example. Express 1040 Carl Johnson, a sociology professor for State University, rents a home from the university that is qualified campus lodging. Express 1040 The house is appraised at $200,000. Express 1040 The average rent paid for comparable university lodging by persons other than employees or students is $14,000 a year. Express 1040 Carl pays an annual rent of $11,000. Express 1040 Carl does not include in his income any rental value because the rent he pays equals at least 5% of the appraised value of the house (5% × $200,000 = $10,000). Express 1040 If Carl paid annual rent of only $8,000, he would have to include $2,000 in his income ($10,000 − $8,000). Express 1040 Moving Expense Reimbursements In most cases, if your employer pays for your moving expenses (either directly or indirectly) and the expenses would have been deductible if you paid them yourself, the value is not included in your income. Express 1040 See Publication 521 for more information. Express 1040 No-Additional-Cost Services The value of services you receive from your employer for free, at cost, or for a reduced price is not included in your income if your employer: Offers the same service for sale to customers in the ordinary course of the line of business in which you work, and Does not have a substantial additional cost (including any sales income given up) to provide you with the service (regardless of what you paid for the service). Express 1040 In most cases, no-additional-cost services are excess capacity services, such as airline, bus, or train tickets, hotel rooms, and telephone services. Express 1040 Example. Express 1040 You are employed as a flight attendant for a company that owns both an airline and a hotel chain. Express 1040 Your employer allows you to take personal flights (if there is an unoccupied seat) and stay in any one of their hotels (if there is an unoccupied room) at no cost to you. Express 1040 The value of the personal flight is not included in your income. Express 1040 However, the value of the hotel room is included in your income because you do not work in the hotel business. Express 1040 Retirement Planning Services If your employer has a qualified retirement plan, qualified retirement planning services provided to you (and your spouse) by your employer are not included in your income. Express 1040 Qualified services include retirement planning advice, information about your employer's retirement plan, and information about how the plan may fit into your overall individual retirement income plan. Express 1040 You cannot exclude the value of any tax preparation, accounting, legal, or brokerage services provided by your employer. Express 1040 Also, see Financial Counseling Fees , earlier. Express 1040 Transportation If your employer provides you with a qualified transportation fringe benefit, it can be excluded from your income, up to certain limits. Express 1040 A qualified transportation fringe benefit is: Transportation in a commuter highway vehicle (such as a van) between your home and work place, A transit pass, Qualified parking, or Qualified bicycle commuting reimbursement. Express 1040 Cash reimbursement by your employer for these expenses under a bona fide reimbursement arrangement is also excludable. Express 1040 However, cash reimbursement for a transit pass is excludable only if a voucher or similar item that can be exchanged only for a transit pass is not readily available for direct distribution to you. Express 1040 Exclusion limit. Express 1040   The exclusion for commuter vehicle transportation and transit pass fringe benefits cannot be more than $245 a month. Express 1040   The exclusion for the qualified parking fringe benefit cannot be more than $245 a month. Express 1040   The exclusion for qualified bicycle commuting in a calendar year is $20 multiplied by the number of qualified bicycle commuting months that year. Express 1040   If the benefits have a value that is more than these limits, the excess must be included in your income. Express 1040 You are not entitled to these exclusions if the reimbursements are made under a compensation reduction agreement. Express 1040 Commuter highway vehicle. Express 1040   This is a highway vehicle that seats at least six adults (not including the driver). Express 1040 At least 80% of the vehicle's mileage must reasonably be expected to be: For transporting employees between their homes and work place, and On trips during which employees occupy at least half of the vehicle's adult seating capacity (not including the driver). Express 1040 Transit pass. Express 1040   This is any pass, token, farecard, voucher, or similar item entitling a person to ride mass transit (whether public or private) free or at a reduced rate or to ride in a commuter highway vehicle operated by a person in the business of transporting persons for compensation. Express 1040 Qualified parking. Express 1040   This is parking provided to an employee at or near the employer's place of business. Express 1040 It also includes parking provided on or near a location from which the employee commutes to work by mass transit, in a commuter highway vehicle, or by carpool. Express 1040 It does not include parking at or near the employee's home. Express 1040 Qualified bicycle commuting. Express 1040   This is reimbursement based on the number of qualified bicycle commuting months for the year. Express 1040 A qualified bicycle commuting month is any month you use the bicycle regularly for a substantial portion of the travel between your home and place of employment and you do not receive any of the other qualified transportation fringe benefits. Express 1040 The reimbursement can be for expenses you incurred during the year for the purchase of a bicycle and bicycle improvements, repair, and storage. Express 1040 Tuition Reduction You can exclude a qualified tuition reduction from your income. Express 1040 This is the amount of a reduction in tuition: For education (below graduate level) furnished by an educational institution to an employee, former employee who retired or became disabled, or his or her spouse and dependent children. Express 1040 For education furnished to a graduate student at an educational institution if the graduate student is engaged in teaching or research activities for that institution. Express 1040 Representing payment for teaching, research, or other services if you receive the amount under the National Health Service Corps Scholarship Program or the Armed Forces Health Professions Scholarship and Financial Assistance program. Express 1040 For more information, see Publication 970. Express 1040 Working Condition Benefits If your employer provides you with a product or service and the cost of it would have been allowable as a business or depreciation deduction if you paid for it yourself, the cost is not included in your income. Express 1040 Example. Express 1040 You work as an engineer and your employer provides you with a subscription to an engineering trade magazine. Express 1040 The cost of the subscription is not included in your income because the cost would have been allowable to you as a business deduction if you had paid for the subscription yourself. Express 1040 Valuation of Fringe Benefits If a fringe benefit is included in your income, the amount included is generally its value determined under the general valuation rule or under the special valuation rules. Express 1040 For an exception, see Group-Term Life Insurance , earlier. Express 1040 General valuation rule. Express 1040   You must include in your income the amount by which the fair market value of the fringe benefit is more than the sum of: The amount, if any, you paid for the benefit, plus The amount, if any, specifically excluded from your income by law. Express 1040 If you pay fair market value for a fringe benefit, no amount is included in your income. Express 1040 Fair market value. Express 1040   The fair market value of a fringe benefit is determined by all the facts and circumstances. Express 1040 It is the amount you would have to pay a third party to buy or lease the benefit. Express 1040 This is determined without regard to: Your perceived value of the benefit, or The amount your employer paid for the benefit. Express 1040 Employer-provided vehicles. Express 1040   If your employer provides a car (or other highway motor vehicle) to you, your personal use of the car is usually a taxable noncash fringe benefit. Express 1040   Under the general valuation rules, the value of an employer-provided vehicle is the amount you would have to pay a third party to lease the same or a similar vehicle on the same or comparable terms in the same geographic area where you use the vehicle. Express 1040 An example of a comparable lease term is the amount of time the vehicle is available for your use, such as a 1-year period. Express 1040 The value cannot be determined by multiplying a cents-per-mile rate times the number of miles driven unless you prove the vehicle could have been leased on a cents-per-mile basis. Express 1040 Flights on employer-provided aircraft. Express 1040   Under the general valuation rules, if your flight on an employer-provided piloted aircraft is primarily personal and you control the use of the aircraft for the flight, the value is the amount it would cost to charter the flight from a third party. Express 1040   If there is more than one employee on the flight, the cost to charter the aircraft must be divided among those employees. Express 1040 The division must be based on all the facts, including which employee or employees control the use of the aircraft. Express 1040 Special valuation rules. Express 1040   You generally can use a special valuation rule for a fringe benefit only if your employer uses the rule. Express 1040 If your employer uses a special valuation rule, you cannot use a different special rule to value that benefit. Express 1040 You always can use the general valuation rule discussed earlier, based on facts and circumstances, even if your employer uses a special rule. Express 1040   If you and your employer use a special valuation rule, you must include in your income the amount your employer determines under the special rule minus the sum of: Any amount you repaid your employer, plus Any amount specifically excluded from income by law. Express 1040 The special valuation rules are the following. Express 1040 The automobile lease rule. Express 1040 The vehicle cents-per-mile rule. Express 1040 The commuting rule. Express 1040 The unsafe conditions commuting rule. Express 1040 The employer-operated eating-facility rule. Express 1040   For more information on these rules, see Publication 15-B, Employer's Tax Guide to Fringe Benefits. Express 1040    For information on the non-commercial flight and commercial flight valuation rules, see sections 1. Express 1040 61-21(g) and 1. Express 1040 61-21(h) of the regulations. Express 1040 Retirement Plan Contributions Your employer's contributions to a qualified retirement plan for you are not included in income at the time contributed. Express 1040 (Your employer can tell you whether your retirement plan is qualified. Express 1040 ) However, the cost of life insurance coverage included in the plan may have to be included. Express 1040 See Group-Term Life Insurance , earlier, under Fringe Benefits. Express 1040 If your employer pays into a nonqualified plan for you, you generally must include the contributions in your income as wages for the tax year in which the contributions are made. Express 1040 However, if your interest in the plan is not transferable or is subject to a substantial risk of forfeiture (you have a good chance of losing it) at the time of the contribution, you do not have to include the value of your interest in your income until it is transferable or is no longer subject to a substantial risk of forfeiture. Express 1040 For information on distributions from retirement plans, see Publication 575 (or Publication 721, Tax Guide to U. Express 1040 S. Express 1040 Civil Service Retirement Benefits, if you are a federal employee or retiree). Express 1040 Elective Deferrals If you are covered by certain kinds of retirement plans, you can choose to have part of your compensation contributed by your employer to a retirement fund, rather than have it paid to you. Express 1040 The amount you set aside (called an elective deferral) is treated as an employer contribution to a qualified plan. Express 1040 An elective deferral, other than a designated Roth contribution (discussed later), is not included in wages subject to income tax at the time contributed. Express 1040 However, it is included in wages subject to social security and Medicare taxes. Express 1040 Elective deferrals include elective contributions to the following retirement plans. Express 1040 Cash or deferred arrangements (section 401(k) plans). Express 1040 The Thrift Savings Plan for federal employees. Express 1040 Salary reduction simplified employee pension plans (SARSEP). Express 1040 Savings incentive match plans for employees (SIMPLE plans). Express 1040 Tax-sheltered annuity plans (403(b) plans). Express 1040 Section 501(c)(18)(D) plans. Express 1040 (But see Reporting by employer , later. Express 1040 ) Section 457 plans. Express 1040 Qualified automatic contribution arrangements. Express 1040   Under a qualified automatic contribution arrangement, your employer can treat you as having elected to have a part of your compensation contributed to a section 401(k) plan. Express 1040 You are to receive written notice of your rights and obligations under the qualified automatic contribution arrangement. Express 1040 The notice must explain: Your rights to elect not to have elective contributions made, or to have contributions made at a different percentage, and How contributions made will be invested in the absence of any investment decision by you. Express 1040   You must be given a reasonable period of time after receipt of the notice and before the first elective contribution is made to make an election with respect to the contributions. Express 1040 Overall limit on deferrals. Express 1040   For 2013, in most cases, you should not have deferred more than a total of $17,500 of contributions to the plans listed in (1) through (3), earlier. Express 1040 The specific plan limits for the plans listed in (4) through (7), earlier, are discussed later. Express 1040 Amounts deferred under specific plan limits are part of the overall limit on deferrals. Express 1040   Your employer or plan administrator should apply the proper annual limit when figuring your plan contributions. Express 1040 However, you are responsible for monitoring the total you defer to ensure that the deferrals are not more than the overall limit. Express 1040 Catch-up contributions. Express 1040   You may be allowed catch-up contributions (additional elective deferrals) if you are age 50 or older by the end of your tax year. Express 1040 For more information about catch-up contributions to 403(b) plans, see chapter 6 of Publication 571, Tax Sheltered Annuity Plans. Express 1040   For more information about additional elective deferrals to: SEPs (SARSEPs), see Salary Reduction Simplified Employee Pension in chapter 2 of Publication 560, Retirement Plans for Small Business. Express 1040 SIMPLE plans, see How Much Can Be Contributed on Your Behalf? in chapter 3 of Publication 590. Express 1040 Section 457 plans, see Limit for deferrals under section 457 plans , later. Express 1040 Limit for deferrals under SIMPLE plans. Express 1040   If you are a participant in a SIMPLE plan, you generally should not have deferred more than $12,000 in 2013. Express 1040 Amounts you defer under a SIMPLE plan count toward the overall limit ($17,500 for 2013) and may affect the amount you can defer under other elective deferral plans. Express 1040 Limit for tax-sheltered annuities. Express 1040   If you are a participant in a tax-sheltered annuity plan (403(b) plan), the limit on elective deferrals for 2013 generally is $17,500. Express 1040 However, if you have at least 15 years of service with a public school system, a hospital, a home health service agency, a health and welfare service agency, a church, or a convention or association of churches (or associated organization), the limit on elective deferrals is increased by the least of the following amounts. Express 1040 $3,000, $15,000, reduced by the sum of: The additional pre-tax elective deferrals made in earlier years because of this rule, plus The aggregate amount of designated Roth contributions permitted for prior tax years because of this rule, or $5,000 times the number of your years of service for the organization, minus the total elective deferrals made by your employer on your behalf for earlier years. Express 1040   If you qualify for the 15-year rule, your elective deferrals under this limit can be as high as $20,500 for 2013. Express 1040   For more information, see Publication 571. Express 1040 Limit for deferral under section 501(c)(18) plans. Express 1040   If you are a participant in a section 501(c)(18) plan (a trust created before June 25, 1959, funded only by employee contributions), you should have deferred no more than the lesser of $7,000 or 25% of your compensation. Express 1040 Amounts you defer under a section 501(c)(18) plan count toward the overall limit ($17,500 in 2013) and may affect the amount you can defer under other elective deferral plans. Express 1040 Limit for deferrals under section 457 plans. Express 1040   If you are a participant in a section 457 plan (a deferred compensation plan for employees of state or local governments or tax-exempt organizations), you should have deferred no more than the lesser of your includible compensation or $17,500 in 2013. Express 1040 However, if you are within 3 years of normal retirement age, you may be allowed an increased limit if the plan allows it. Express 1040 See Increased limit , later. Express 1040 Includible compensation. Express 1040   This is the pay you received for the year from the employer who maintained the section 457 plan. Express 1040 In most cases, it includes all the following payments. Express 1040 Wages and salaries. Express 1040 Fees for professional services. Express 1040 The value of any employer-provided qualified transportation fringe benefit (defined under Transportation , earlier) that is not included in your income. Express 1040 Other amounts received (cash or noncash) for personal services you performed, including, but not limited to, the following items. Express 1040 Commissions and tips. Express 1040 Fringe benefits. Express 1040 Bonuses. Express 1040 Employer contributions (elective deferrals) to: The section 457 plan. Express 1040 Qualified cash or deferred arrangements (section 401(k) plans) that are not included in your income. Express 1040 A salary reduction simplified employee pension (SARSEP). Express 1040 A tax-sheltered annuity (section 403(b) plan). Express 1040 A savings incentive match plan for employees (SIMPLE plan). Express 1040 A section 125 cafeteria plan. Express 1040   Instead of using the amounts listed earlier to determine your includible compensation, your employer can use any of the following amounts. Express 1040 Your wages as defined for income tax withholding purposes. Express 1040 Your wages as reported in box 1 of Form W-2. Express 1040 Your wages that are subject to social security withholding (including elective deferrals). Express 1040 Increased limit. Express 1040   During any, or all, of the last 3 years ending before you reach normal retirement age under the plan, your plan may provide that your limit is the lesser of: Twice the annual limit ($35,000 for 2013), or The basic annual limit plus the amount of the basic limit not used in prior years (only allowed if not using age 50 or over catch-up contributions). Express 1040 Catch-up contributions. Express 1040   You generally can have additional elective deferrals made to your governmental section 457 plan if: You reached age 50 by the end of the year, and No other elective deferrals can be made for you to the plan for the year because of limits or restrictions. Express 1040 If you qualify, your limit can be the lesser of your includible compensation or $17,500, plus $5,500. Express 1040 However, if you are within 3 years of retirement age and your plan provides the increased limit, discussed earlier, that limit may be higher. Express 1040 Designated Roth contributions. Express 1040   Employers with section 401(k) and section 403(b) plans can create qualified Roth contribution programs so that you may elect to have part or all of your elective deferrals to the plan designated as after-tax Roth contributions. Express 1040 Designated Roth contributions are treated as elective deferrals, except that they are included in income. Express 1040 Your retirement plan must maintain separate accounts and recordkeeping for the designated Roth contributions. Express 1040   Qualified distributions from a Roth plan are not included in income. Express 1040 In most cases, a distribution made before the end of the 5-tax-year period beginning with the first tax year for which you made a designated Roth contribution to the plan is not a qualified distribution. Express 1040 Reporting by employer. Express 1040   Your employer generally should not include elective deferrals in your wages in box 1 of Form W-2. Express 1040 Instead, your employer should mark the Retirement plan checkbox in box 13 and show the total amount deferred in box 12. Express 1040 Section 501(c)(18)(D) contributions. Express 1040   Wages shown in box 1 of your Form W-2 should not have been reduced for contributions you made to a section 501(c)(18)(D) retirement plan. Express 1040 The amount you contributed should be identified with code “H” in box 12. Express 1040 You may deduct the amount deferred subject to the limits that apply. Express 1040 Include your deduction in the total on Form 1040, line 36. Express 1040 Enter the amount and “501(c)(18)(D)” on the dotted line next to line 36. Express 1040 Designated Roth contributions. Express 1040    These contributions are elective deferrals but are included in your wages in box 1 of Form W-2. Express 1040 Designated Roth contributions to a section 401(k) plan are reported using code AA in box 12, or, for section 403(b) plans, code BB in box 12. Express 1040 Excess deferrals. Express 1040   If your deferrals exceed the limit, you must notify your plan by the date required by the plan. Express 1040 If the plan permits, the excess amount will be distributed to you. Express 1040 If you participate in more than one plan, you can have the excess paid out of any of the plans that permit these distributions. Express 1040 You must notify each plan by the date required by that plan of the amount to be paid from that particular plan. Express 1040 The plan then must pay you the amount of the excess, along with any income earned on that amount, by April 15 of the following year. Express 1040   You must include the excess deferral in your income for the year of the deferral unless you have an excess deferral of a designated Roth contribution. Express 1040 File Form 1040 to add the excess deferral amount to your wages on line 7. Express 1040 Do not use Form 1040A or Form 1040EZ to report excess deferral amounts. Express 1040 Excess not distributed. Express 1040   If you do not take out the excess amount, you cannot include it in the cost of the contract even though you included it in your income. Express 1040 Therefore, you are taxed twice on the excess deferral left in the plan—once when you contribute it, and again when you receive it as a distribution. Express 1040 Excess distributed to you. Express 1040   If you take out the excess after the year of the deferral and you receive the corrective distribution by April 15 of the following year, do not include it in income again in the year you receive it. Express 1040 If you receive it later, you must include it in income in both the year of the deferral and the year you receive it. Express 1040 Any income on the excess deferral taken out is taxable in the tax year in which you take it out. Express 1040 If you take out part of the excess deferral and the income on it, allocate the distribution proportionately between the excess deferral and the income. Express 1040    You should receive a Form 1099-R for the year in which the excess deferral is distributed to you. Express 1040 Use the following rules to report a corrective distribution shown on Form 1099-R for 2013. Express 1040 If the distribution was for a 2013 excess deferral, your Form 1099-R should have the code “8” in box 7. Express 1040 Add the excess deferral amount to your wages on your 2013 tax return. Express 1040 If the distribution was for a 2013 excess deferral to a designated Roth account, your Form 1099-R should have code “B” in box 7. Express 1040 Do not add this amount to your wages on your 2013 return. Express 1040 If the distribution was for a 2012 excess deferral, your Form 1099-R should have the code “P” in box 7. Express 1040 If you did not add the excess deferral amount to your wages on your 2012 tax return, you must file an amended return on Form 1040X, Amended U. Express 1040 S. Express 1040 Individual Income Tax Return. Express 1040 If you did not receive the distribution by April 15, 2013, you also must add it to your wages on your 2013 tax return. Express 1040 If the distribution was for the income earned on an excess deferral, your Form 1099-R should have the code “8” in box 7. Express 1040 Add the income amount to your wages on your 2013 income tax return, regardless of when the excess deferral was made. Express 1040 Report a loss on a corrective distribution of an excess deferral in the year the excess amount (reduced by the loss) is distributed to you. Express 1040 Include the loss as a negative amount on Form 1040, line 21 and identify it as “Loss on Excess Deferral Distribution. Express 1040 ”    Even though a corrective distribution of excess deferrals is reported on Form 1099-R, it is not otherwise treated as a distribution from the plan. Express 1040 It cannot be rolled over into another plan, and it is not subject to the additional tax on early distributions. Express 1040 Excess Contributions If you are a highly compensated employee, the total of your elective deferrals and other contributions made for you for any year under a section 401(k) plan or SARSEP can be, as a percentage of pay, no more than 125% of the average deferral percentage (ADP) of all eligible non-highly compensated employees. Express 1040 If the total contributed to the plan is more than the amount allowed under the ADP test, the excess contributions must be either distributed to you or recharacterized as after-tax employee contributions by treating them as distributed to you and then contributed by you to the plan. Express 1040 You must include the excess contributions in your income as wages on Form 1040, line 7. Express 1040 You cannot use Form 1040A or Form 1040EZ to report excess contribution amounts. Express 1040 If you receive a corrective distribution of excess contributions (and allocable income), it is included in your income in the year of the distribution. Express 1040 The allocable income is the amount of gain or loss through the end of the plan year for which the contribution was made that is allocable to the excess contributions. Express 1040 You should receive a Form 1099-R for the year the excess contributions are distributed to you. Express 1040 Add the distribution to your wages for that year. Express 1040 Even though a corrective distribution of excess contributions is reported on Form 1099-R, it is not otherwise treated as a distribution from the plan. Express 1040 It cannot be rolled over into another plan, and it is not subject to the additional tax on early distributions. Express 1040 Excess Annual Additions The amount contributed in 2013 to a defined contribution plan is generally limited to the lesser of 100% of your compensation or $51,000. Express 1040 Under certain circumstances, contributions that exceed these limits (excess annual additions) may be corrected by a distribution of your elective deferrals or a return of your after-tax contributions and earnings from these contributions. Express 1040 A corrective payment of excess annual additions consisting of elective deferrals or earnings from your after-tax contributions is fully taxable in the year paid. Express 1040 A corrective payment consisting of your after-tax contributions is not taxable. Express 1040 If you received a corrective payment of excess annual additions, you should receive a separate Form 1099-R for the year of the payment with the code “E” in box 7. Express 1040 Report the total payment shown in box 1 of Form 1099-R on line 16a of Form 1040 or line 12a of Form 1040A. Express 1040 Report the taxable amount shown in box 2a of Form 1099-R on line 16b of Form 1040 or line 12b of Form 1040A. Express 1040 Even though a corrective distribution of excess annual additions is reported on Form 1099-R, it is not otherwise treated as a distribution from the plan. Express 1040 It cannot be rolled over into another plan, and it is not subject to the additional tax on early distributions. Express 1040 Stock Options If you receive an option to buy or sell stock or other property as payment for your services, you may have income when you receive the option (the grant), when you exercise the option (use it to buy or sell the stock or other property), or when you sell or otherwise dispose of the option or property acquired through exercise of the option. Express 1040 The timing, type, and amount of income inclusion depend on whether you receive a nonstatutory stock option or a statutory stock option. Express 1040 Your employer can tell you which kind of option you hold. Express 1040 Nonstatutory Stock Options Grant of option. Express 1040   If you are granted a nonstatutory stock option, you may have income when you receive the option. Express 1040 The amount of income to include and the time to include it depend on whether the fair market value of the option can be readily determined. Express 1040 The fair market value of an option can be readily determined if it is actively traded on an established market. Express 1040    The fair market value of an option that is not traded on an established market can be readily determined only if all of the following conditions exist. Express 1040 You can transfer the option. Express 1040 You can exercise the option immediately in full. Express 1040 The option or the property subject to the option is not subject to any condition or restriction (other than a condition to secure payment of the purchase price) that has a significant effect on the fair market value of the option. Express 1040 The fair market value of the option privilege can be readily determined. Express 1040 The option privilege for an option to buy is the opportunity to benefit during the option's exercise period from any increase in the value of property subject to the option without risking any capital. Express 1040 For example, if during the exercise period the fair market value of stock subject to an option is greater than the option's exercise price, a profit may be realized by exercising the option and immediately selling the stock at its higher value. Express 1040 The option privilege for an option to sell is the opportunity to benefit during the exercise period from a decrease in the value of the property subject to the option. Express 1040 If you or a member of your family is an officer, director, or more-than-10% owner of an expatriated corporation, you may owe an excise tax on the value of nonstatutory options and other stock-based compensation from that corporation. Express 1040 For more information on the excise tax, see Internal Revenue Code section 4985. Express 1040 Option with readily determinable value. Express 1040   If you receive a nonstatutory stock option that has a readily determinable fair market value at the time it is granted to you, the option is treated like other property received as compensation. Express 1040 See Restricted Property , later, for rules on how much income to include and when to include it. Express 1040 However, the rule described in that discussion for choosing to include the value of property in your income for the year of the transfer does not apply to a nonstatutory option. Express 1040 Option without readily determinable value. Express 1040   If the fair market value of the option is not readily determinable at the time it is granted to you (even if it is determined later), you do not have income until you exercise or transfer the option. Express 1040    Exercise or transfer of option. Express 1040   When you exercise a nonstatutory stock option, the amount to include in your income depends on whether the option had a readily determinable value. Express 1040 Option with readily determinable value. Express 1040   When you exercise a nonstatutory stock option that had a readily determinable value at the time the option was granted, you do not have to include any amount in income. Express 1040 Option without readily determinable value. Express 1040   When you exercise a nonstatutory stock option that did not have a readily determinable value at the time the option was granted, the restricted prope