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Federal Income Tax Return

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Federal Income Tax Return

Federal income tax return 8. Federal income tax return   Gains and Losses Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Sales and ExchangesDetermining Gain or Loss Like-Kind Exchanges Transfer to Spouse Ordinary or Capital Gain or LossCapital Assets Noncapital Assets Hedging (Commodity Futures) Livestock Converted Wetland and Highly Erodible Cropland Timber Sale of a Farm Foreclosure or Repossession Abandonment Introduction This chapter explains how to figure, and report on your tax return, your gain or loss on the disposition of your property or debt and whether such gain or loss is ordinary or capital. Federal income tax return Ordinary gain is taxed at the same rates as wages and interest income while capital gain is generally taxed at lower rates. Federal income tax return Dispositions discussed in this chapter include sales, exchanges, foreclosures, repossessions, canceled debts, hedging transactions, and elections to treat cutting of timber as a sale or exchange. Federal income tax return Topics - This chapter discusses: Sales and exchanges Ordinary or capital gain or loss Useful Items - You may want to see: Publication 334 Tax Guide for Small Business 523 Selling Your Home 544 Sales and Other Dispositions of Assets 550 Investment Income and Expenses 908 Bankruptcy Tax Guide Form (and Instructions) 982 Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment) Sch D (Form 1040) Capital Gains and Losses Sch F (Form 1040) Profit or Loss From Farming 1099-A Acquisition or Abandonment of Secured Property 1099-C Cancellation of Debt 4797 Sales of Business Property 8949 Sales and Other Dispositions of Capital Assets See chapter 16 for information about getting publications and forms. Federal income tax return Sales and Exchanges If you sell, exchange, or otherwise dispose of your property, you usually have a gain or a loss. Federal income tax return This section explains certain rules for determining whether any gain you have is taxable, and whether any loss you have is deductible. Federal income tax return A sale is a transfer of property for money or a mortgage, note, or other promise to pay money. Federal income tax return An exchange is a transfer of property for other property or services. Federal income tax return Determining Gain or Loss You usually realize a gain or loss when you sell or exchange property. Federal income tax return If the amount you realize from a sale or exchange of property is more than its adjusted basis, you will have a gain. Federal income tax return If the adjusted basis of the property is more than the amount you realize, you will have a loss. Federal income tax return Basis and adjusted basis. Federal income tax return   The basis of property you buy is usually its cost. Federal income tax return The adjusted basis of property is basis plus certain additions and minus certain deductions. Federal income tax return See chapter 6 for more information about basis and adjusted basis. Federal income tax return Amount realized. Federal income tax return   The amount you realize from a sale or exchange is the total of all money you receive plus the fair market value (FMV) (defined in chapter 6) of all property or services you receive. Federal income tax return The amount you realize also includes any of your liabilities assumed by the buyer and any liabilities to which the property you transferred is subject, such as real estate taxes or a mortgage. Federal income tax return   If the liabilities relate to an exchange of multiple properties, see Multiple Property Exchanges in chapter 1 of Publication 544. Federal income tax return Amount recognized. Federal income tax return   Your gain or loss realized from a sale or exchange of certain property is usually a recognized gain or loss for tax purposes. Federal income tax return A recognized gain is a gain you must include in gross income and report on your income tax return. Federal income tax return A recognized loss is a loss you deduct from gross income. Federal income tax return However, your gain or loss realized from the exchange of certain property may not be recognized for tax purposes. Federal income tax return See Like-Kind Exchanges next. Federal income tax return Also, a loss from the disposition of property held for personal use is not deductible. Federal income tax return Like-Kind Exchanges Certain exchanges of property are not taxable. Federal income tax return This means any gain from the exchange is not recognized, and any loss cannot be deducted. Federal income tax return Your gain or loss will not be recognized until you sell or otherwise dispose of the property you receive. Federal income tax return The exchange of property for the same kind of property is the most common type of nontaxable exchange. Federal income tax return To qualify for treatment as a like-kind exchange, the property traded and the property received must be both of the following. Federal income tax return Qualifying property. Federal income tax return Like-kind property. Federal income tax return These two requirements are discussed later. Federal income tax return Multiple-party transactions. Federal income tax return   The like-kind exchange rules also apply to property exchanges that involve three and four-party transactions. Federal income tax return Any part of these multiple-party transactions can qualify as a like-kind exchange if it meets all the requirements described in this section. Federal income tax return Receipt of title from third party. Federal income tax return   If you receive property in a like-kind exchange and the other party who transfers the property to you does not give you the title, but a third party does, you can still treat this transaction as a like-kind exchange if it meets all the requirements. Federal income tax return Basis of property received. Federal income tax return   If you receive property in a like-kind exchange, the basis of the property will be the same as the basis of the property you gave up. Federal income tax return See chapter 6 for more information. Federal income tax return Money paid. Federal income tax return   If, in addition to giving up like-kind property, you pay money in a like-kind exchange, you still have no recognized gain or loss. Federal income tax return The basis of the property received is the basis of the property given up, increased by the money paid. Federal income tax return Example. Federal income tax return You traded an old tractor with an adjusted basis of $15,000 for a new one. Federal income tax return The new tractor costs $300,000. Federal income tax return You were allowed $80,000 for the old tractor and paid $220,000 cash. Federal income tax return You have no recognized gain or loss on the transaction regardless of the adjusted basis of your old tractor and the basis of the new tractor is $235,000, the adjusted basis of the old tractor plus the cash paid ($15,000 + $220,000). Federal income tax return If you had sold the old tractor to a third party for $80,000 and bought a new one, you would have a recognized gain or loss on the sale of your old tractor equal to the difference between the amount realized and the adjusted basis of the old tractor. Federal income tax return In this case, the taxable gain would be $65,000 ($80,000 − $15,000) and the basis of the new tractor would be $300,000. Federal income tax return Reporting the exchange. Federal income tax return   Report the exchange of like-kind property, even though no gain or loss is recognized, on Form 8824, Like-Kind Exchanges. Federal income tax return The Instructions for Form 8824 explain how to report the details of the exchange. Federal income tax return   If you have any recognized gain because you received money or unlike property, report it on Schedule D (Form 1040) or Form 4797, whichever applies. Federal income tax return You may also have to report the recognized gain as ordinary income because of depreciation recapture on Form 4797. Federal income tax return See chapter 9 for more information. Federal income tax return Qualifying property. Federal income tax return   In a like-kind exchange, both the property you give up and the property you receive must be held by you for investment or for productive use in your trade or business. Federal income tax return Machinery, buildings, land, trucks, breeding livestock, rental houses, and certain mutual ditch, reservoir, or irrigation company stock are examples of property that may qualify. Federal income tax return Nonqualifying property. Federal income tax return   The rules for like-kind exchanges do not apply to exchanges of the following property. Federal income tax return Property you use for personal purposes, such as your home and family car. Federal income tax return Stock in trade or other property held primarily for sale, such as crops and produce. Federal income tax return Stocks, bonds, or notes. Federal income tax return However, see Qualifying property above. Federal income tax return Other securities or evidences of indebtedness, such as accounts receivable. Federal income tax return Partnership interests. Federal income tax return However, you may have a nontaxable exchange under other rules. Federal income tax return See Other Nontaxable Exchanges in chapter 1 of Publication 544. Federal income tax return Like-kind property. Federal income tax return   To qualify as a nontaxable exchange, the properties exchanged must be of like kind. Federal income tax return Like-kind properties are properties of the same nature or character, even if they differ in grade or quality. Federal income tax return Generally, real property exchanged for real property qualifies as an exchange of like-kind property. Federal income tax return For example, an exchange of city property for farm property or improved property for unimproved property is a like-kind exchange. Federal income tax return   An exchange of a tractor for a new tractor is an exchange of like-kind property, and so is an exchange of timber land for crop acreage. Federal income tax return An exchange of a tractor for acreage, however, is not an exchange of like-kind property. Federal income tax return The exchange of livestock of one sex for livestock of the other sex is not a like-kind exchange. Federal income tax return For example, the exchange of a bull for a cow is not a like-kind exchange. Federal income tax return An exchange of the assets of a business for the assets of a similar business cannot be treated as an exchange of one property for another property. Federal income tax return    Note. Federal income tax return Whether you engaged in a like-kind exchange depends on an analysis of each asset involved in the exchange. Federal income tax return Personal property. Federal income tax return   Depreciable tangible personal property can be either like kind or like class to qualify for nontaxable exchange treatment. Federal income tax return Like-class properties are depreciable tangible personal properties within the same General Asset Class or Product Class. Federal income tax return Property classified in any General Asset Class may not be classified within a Product Class. Federal income tax return Assets that are not in the same class will qualify as like-kind property if they are of the same nature or character. Federal income tax return General Asset Classes. Federal income tax return   General Asset Classes describe the types of property frequently used in many businesses. Federal income tax return They include, but are not limited to, the following property. Federal income tax return Office furniture, fixtures, and equipment (asset class 00. Federal income tax return 11). Federal income tax return Information systems, such as computers and peripheral equipment (asset class 00. Federal income tax return 12). Federal income tax return Data handling equipment except computers (asset class 00. Federal income tax return 13). Federal income tax return Automobiles and taxis (asset class 00. Federal income tax return 22). Federal income tax return Light general purpose trucks (asset class 00. Federal income tax return 241). Federal income tax return Heavy general purpose trucks (asset class 00. Federal income tax return 242). Federal income tax return Tractor units for use over-the-road (asset class 00. Federal income tax return 26). Federal income tax return Trailers and trailer-mounted containers (asset class 00. Federal income tax return 27). Federal income tax return Industrial steam and electric generation and/or distribution systems (asset class 00. Federal income tax return 4). Federal income tax return Product Classes. Federal income tax return   Product Classes include property listed in a 6-digit product class in sectors 31 through 33 of the North American Industry Classification System (NAICS) of the Executive Office of the President, Office of Management and Budget, United States, (NAICS Manual). Federal income tax return The latest version of the manual can be accessed at www. Federal income tax return census. Federal income tax return gov/eos/www/naics/. Federal income tax return Copies of the printed manual may be purchased from the National Technical Information Service (NTIS) at  www. Federal income tax return ntis. Federal income tax return gov/products/naics. Federal income tax return aspx or by calling 1-800-553-NTIS (1-800-553-6847) or (703) 605-6000. Federal income tax return A CD-ROM version with search and retrieval software is also available from NTIS. Federal income tax return    NAICS class 333111, Farm Machinery and Equipment Manufacturing, includes most machinery and equipment used in a farming business. Federal income tax return Partially nontaxable exchange. Federal income tax return   If, in addition to like-kind property, you receive money or unlike property in an exchange on which you realize gain, you have a partially nontaxable exchange. Federal income tax return You are taxed on the gain you realize, but only to the extent of the money and the FMV of the unlike property you receive. Federal income tax return A loss is not deductible. Federal income tax return Example 1. Federal income tax return You trade farmland that cost $30,000 for $10,000 cash and other land to be used in farming with a FMV of $50,000. Federal income tax return You have a realized gain of $30,000 ($50,000 FMV of new land + $10,000 cash − $30,000 basis of old farmland = $30,000 realized gain). Federal income tax return However, only $10,000, the cash received, is recognized (included in income). Federal income tax return Example 2. Federal income tax return Assume the same facts as in Example 1, except that, instead of money, you received a tractor with a FMV of $10,000. Federal income tax return Your recognized gain is still limited to $10,000, the value of the tractor (the unlike property). Federal income tax return Example 3. Federal income tax return Assume in Example 1 that the FMV of the land you received was only $15,000. Federal income tax return Your $5,000 loss is not recognized. Federal income tax return Unlike property given up. Federal income tax return   If, in addition to like-kind property, you give up unlike property, you must recognize gain or loss on the unlike property you give up. Federal income tax return The gain or loss is the difference between the FMV of the unlike property and the adjusted basis of the unlike property. Federal income tax return Like-kind exchanges between related persons. Federal income tax return   Special rules apply to like-kind exchanges between related persons. Federal income tax return These rules affect both direct and indirect exchanges. Federal income tax return Under these rules, if either person disposes of the property within 2 years after the exchange, the exchange is disqualified from nonrecognition treatment. Federal income tax return The gain or loss on the original exchange must be recognized as of the date of the later disposition. Federal income tax return The 2-year holding period begins on the date of the last transfer of property that was part of the like-kind exchange. Federal income tax return Related persons. Federal income tax return   Under these rules, related persons include, for example, you and a member of your family (spouse, brother, sister, parent, child, etc. Federal income tax return ), you and a corporation in which you have more than 50% ownership, you and a partnership in which you directly or indirectly own more than a 50% interest of the capital or profits, and two partnerships in which you directly or indirectly own more than 50% of the capital interests or profits. Federal income tax return   For the complete list of related persons, see Related persons in chapter 2 of Publication 544. Federal income tax return Example. Federal income tax return You used a grey pickup truck in your farming business. Federal income tax return Your sister used a red pickup truck in her landscaping business. Federal income tax return In December 2012, you exchanged your grey pickup truck, plus $200, for your sister's red pickup truck. Federal income tax return At that time, the FMV of the grey pickup truck was $7,000 and its adjusted basis was $6,000. Federal income tax return The FMV of the red pickup truck was $7,200 and its adjusted basis was $1,000. Federal income tax return You realized a gain of $1,000 (the $7,200 FMV of the red pickup truck, minus the grey pickup truck's $6,000 adjusted basis, minus the $200 you paid). Federal income tax return Your sister realized a gain of $6,200 (the $7,000 FMV of the grey pickup truck plus the $200 you paid, minus the $1,000 adjusted basis of the red pickup truck). Federal income tax return However, because this was a like-kind exchange, you recognized no gain. Federal income tax return Your basis in the red pickup truck was $6,200 (the $6,000 adjusted basis of the grey pickup truck plus the $200 you paid). Federal income tax return She recognized gain only to the extent of the money she received, $200. Federal income tax return Her basis in the grey pickup truck was $1,000 (the $1,000 adjusted basis of the red pickup truck minus the $200 received, plus the $200 gain recognized). Federal income tax return In 2013, you sold the red pickup truck to a third party for $7,000. Federal income tax return Because you sold it within 2 years after the exchange, the exchange is disqualified from nonrecognition treatment. Federal income tax return On your tax return for 2013, you must report your $1,000 gain on the 2012 exchange. Federal income tax return You also report a loss on the sale as $200 (the adjusted basis of the red pickup truck, $7,200 (its $6,200 basis plus the $1,000 gain recognized), minus the $7,000 realized from the sale). Federal income tax return In addition, your sister must report on her tax return for 2013 the $6,000 balance of her gain on the 2012 exchange. Federal income tax return Her adjusted basis in the grey pickup truck is increased to $7,000 (its $1,000 basis plus the $6,000 gain recognized). Federal income tax return Exceptions to the rules for related persons. Federal income tax return   The following property dispositions are excluded from these rules. Federal income tax return Dispositions due to the death of either related person. Federal income tax return Involuntary conversions. Federal income tax return Dispositions where it is established to the satisfaction of the IRS that neither the exchange nor the disposition has, as a main purpose, the avoidance of federal income tax. Federal income tax return Multiple property exchanges. Federal income tax return   Under the like-kind exchange rules, you must generally make a property-by-property comparison to figure your recognized gain and the basis of the property you receive in the exchange. Federal income tax return However, for exchanges of multiple properties, you do not make a property-by-property comparison if you do either of the following. Federal income tax return Transfer and receive properties in two or more exchange groups. Federal income tax return Transfer or receive more than one property within a single exchange group. Federal income tax return   For more information, see Multiple Property Exchanges in chapter 1 of Publication 544. Federal income tax return Deferred exchange. Federal income tax return   A deferred exchange for like-kind property may qualify for nonrecognition of gain or loss. Federal income tax return A deferred exchange is an exchange in which you transfer property you use in business or hold for investment and later receive like-kind property you will use in business or hold for investment. Federal income tax return The property you receive is replacement property. Federal income tax return The transaction must be an exchange of property for property rather than a transfer of property for money used to buy replacement property. Federal income tax return In addition, the replacement property will not be treated as like-kind property unless certain identification and receipt requirements are met. Federal income tax return   For more information see Deferred Exchanges in chapter 1 of Publication 544. Federal income tax return Transfer to Spouse No gain or loss is recognized on a transfer of property from an individual to (or in trust for the benefit of) a spouse, or a former spouse if incident to divorce. Federal income tax return This rule does not apply if the recipient is a nonresident alien. Federal income tax return Nor does this rule apply to a transfer in trust to the extent the liabilities assumed and the liabilities on the property are more than the property's adjusted basis. Federal income tax return Any transfer of property to a spouse or former spouse on which gain or loss is not recognized is not considered a sale or exchange. Federal income tax return The recipient's basis in the property will be the same as the adjusted basis of the giver immediately before the transfer. Federal income tax return This carryover basis rule applies whether the adjusted basis of the transferred property is less than, equal to, or greater than either its FMV at the time of transfer or any consideration paid by the recipient. Federal income tax return This rule applies for determining loss as well as gain. Federal income tax return Any gain recognized on a transfer in trust increases the basis. Federal income tax return For more information on transfers of property incident to divorce, see Property Settlements in Publication 504, Divorced or Separated Individuals. Federal income tax return Ordinary or Capital Gain or Loss Generally, you will have a capital gain or loss if you sell or exchange a capital asset (defined below). Federal income tax return You may also have a capital gain if your section 1231 transactions result in a net gain. Federal income tax return See Section 1231 Gains and Losses in  chapter 9. Federal income tax return To figure your net capital gain or loss, you must classify your gains and losses as either ordinary or capital (and your capital gains or losses as either short-term or long-term). Federal income tax return Your net capital gains may be taxed at a lower tax rate than ordinary income. Federal income tax return See Capital Gains Tax Rates , later. Federal income tax return Your deduction for a net capital loss may be limited. Federal income tax return See Treatment of Capital Losses , later. Federal income tax return Capital Assets Almost everything you own and use for personal purposes or investment is a capital asset. Federal income tax return The following items are examples of capital assets. Federal income tax return A home owned and occupied by you and your family. Federal income tax return Household furnishings. Federal income tax return A car used for pleasure. Federal income tax return If your car is used both for pleasure and for farm business, it is partly a capital asset and partly a noncapital asset, defined later. Federal income tax return Stocks and bonds. Federal income tax return However, there are special rules for gains on qualified small business stock. Federal income tax return For more information on this subject, see Gains on Qualified Small Business Stock and Losses on Section 1244 (Small Business) Stock in chapter 4 of Publication 550. Federal income tax return Personal-use property. Federal income tax return   Gain from a sale or exchange of personal-use property is a capital gain and is taxable. Federal income tax return Loss from the sale or exchange of personal-use property is not deductible. Federal income tax return You can deduct a loss relating to personal-use property only if it results from a casualty or theft. Federal income tax return For information on casualties and thefts, see chapter 11. Federal income tax return Long and Short Term Where you report a capital gain or loss depends on how long you own the asset before you sell or exchange it. Federal income tax return The time you own an asset before disposing of it is the holding period. Federal income tax return If you hold a capital asset 1 year or less, the gain or loss resulting from its disposition is short term. Federal income tax return Report it in Part I of Schedule D (Form 1040). Federal income tax return If you hold a capital asset longer than 1 year, the gain or loss resulting from its disposition is long term. Federal income tax return Report it in Part II of Schedule D (Form 1040). Federal income tax return Holding period. Federal income tax return   To figure if you held property longer than 1 year, start counting on the day after the day you acquired the property. Federal income tax return The day you disposed of the property is part of your holding period. Federal income tax return Example. Federal income tax return If you bought an asset on June 19, 2012, you should start counting on June 20, 2012. Federal income tax return If you sold the asset on June 19, 2013, your holding period is not longer than 1 year, but if you sold it on June 20, 2013, your holding period is longer than 1 year. Federal income tax return Inherited property. Federal income tax return   If you inherit property, you are considered to have held the property longer than 1 year, regardless of how long you actually held it. Federal income tax return This rule does not apply to livestock used in a farm business. Federal income tax return See Holding period under Livestock , later. Federal income tax return Nonbusiness bad debt. Federal income tax return   A nonbusiness bad debt is a short-term capital loss, deductible in the year the debt becomes worthless. Federal income tax return See chapter 4 of Publication 550. Federal income tax return Nontaxable exchange. Federal income tax return   If you acquire an asset in exchange for another asset and your basis for the new asset is figured, in whole or in part, by using your basis in the old property, the holding period of the new property includes the holding period of the old property. Federal income tax return That is, it begins on the same day as your holding period for the old property. Federal income tax return Gift. Federal income tax return   If you receive a gift of property and your basis in it is figured using the donor's basis, your holding period includes the donor's holding period. Federal income tax return Real property. Federal income tax return   To figure how long you held real property, start counting on the day after you received title to it or, if earlier, on the day after you took possession of it and assumed the burdens and privileges of ownership. Federal income tax return   However, taking possession of real property under an option agreement is not enough to start the holding period. Federal income tax return The holding period cannot start until there is an actual contract of sale. Federal income tax return The holding period of the seller cannot end before that time. Federal income tax return Figuring Net Gain or Loss The totals for short-term capital gains and losses and the totals for long-term capital gains and losses must be figured separately. Federal income tax return Net short-term capital gain or loss. Federal income tax return   Combine your short-term capital gains and losses. Federal income tax return Do this by adding all of your short-term capital gains. Federal income tax return Then add all of your short-term capital losses. Federal income tax return Subtract the lesser total from the greater. Federal income tax return The difference is your net short-term capital gain or loss. Federal income tax return Net long-term capital gain or loss. Federal income tax return   Follow the same steps to combine your long-term capital gains and losses. Federal income tax return The result is your net long-term capital gain or loss. Federal income tax return Net gain. Federal income tax return   If the total of your capital gains is more than the total of your capital losses, the difference is taxable. Federal income tax return However, part of your gain (but not more than your net capital gain) may be taxed at a lower rate than the rate of tax on your ordinary income. Federal income tax return See Capital Gains Tax Rates , later. Federal income tax return Net loss. Federal income tax return   If the total of your capital losses is more than the total of your capital gains, the difference is deductible. Federal income tax return But there are limits on how much loss you can deduct and when you can deduct it. Federal income tax return See Treatment of Capital Losses next. Federal income tax return Treatment of Capital Losses If your capital losses are more than your capital gains, you must claim the difference even if you do not have ordinary income to offset it. Federal income tax return For taxpayers other than corporations, the yearly limit on the capital loss you can deduct is $3,000 ($1,500 if you are married and file a separate return). Federal income tax return If your other income is low, you may not be able to use the full $3,000. Federal income tax return The part of the $3,000 you cannot use becomes part of your capital loss carryover (discussed next). Federal income tax return Capital loss carryover. Federal income tax return   Generally, you have a capital loss carryover if either of the following situations applies to you. Federal income tax return Your net loss on Schedule D (Form 1040), is more than the yearly limit. Federal income tax return Your taxable income without your deduction for exemptions is less than zero. Federal income tax return If either of these situations applies to you for 2013, see Capital Losses under Reporting Capital Gains and Losses in chapter 4 of Publication 550 to figure the amount you can carry over to 2014. Federal income tax return    To figure your capital loss carryover from 2013 to 2014, you will need a copy of your 2013 Form 1040 and Schedule D (Form 1040). Federal income tax return Capital Gains Tax Rates The tax rates that apply to a net capital gain are generally lower than the tax rates that apply to other income. Federal income tax return These lower rates are called the maximum capital gains rates. Federal income tax return The term “net capital gain” means the amount by which your net long-term capital gain for the year is more than your net short-term capital loss. Federal income tax return See Schedule D (Form 1040) and the Instructions for Schedule D (Form 1040). Federal income tax return Also see Publication 550. Federal income tax return Noncapital Assets Noncapital assets include property such as inventory and depreciable property used in a trade or business. Federal income tax return A list of properties that are not capital assets is provided in the Instructions for Schedule D (Form 1040). Federal income tax return Property held for sale in the ordinary course of your farm business. Federal income tax return   Property you hold mainly for sale to customers, such as livestock, poultry, livestock products, and crops, is a noncapital asset. Federal income tax return Gain or loss from sales or other dispositions of this property is reported on Schedule F (Form 1040) (not on Schedule D (Form 1040) or Form 4797). Federal income tax return The treatment of this property is discussed in chapter 3. Federal income tax return Land and depreciable properties. Federal income tax return   Land and depreciable property you use in farming are not capital assets. Federal income tax return Noncapital assets also include livestock held for draft, breeding, dairy, or sporting purposes. Federal income tax return However, your gains and losses from sales and exchanges of your farmland and depreciable properties must be considered together with certain other transactions to determine whether the gains and losses are treated as capital or ordinary gains and losses. Federal income tax return The sales of these business assets are reported on Form 4797. Federal income tax return See chapter 9 for more information. Federal income tax return Hedging (Commodity Futures) Hedging transactions are transactions that you enter into in the normal course of business primarily to manage the risk of interest rate or price changes, or currency fluctuations, with respect to borrowings, ordinary property, or ordinary obligations. Federal income tax return Ordinary property or obligations are those that cannot produce capital gain or loss if sold or exchanged. Federal income tax return A commodity futures contract is a standardized, exchange-traded contract for the sale or purchase of a fixed amount of a commodity at a future date for a fixed price. Federal income tax return The holder of an option on a futures contract has the right (but not the obligation) for a specified period of time to enter into a futures contract to buy or sell at a particular price. Federal income tax return A forward contract is generally similar to a futures contract except that the terms are not standardized and the contract is not exchange traded. Federal income tax return Businesses may enter into commodity futures contracts or forward contracts and may acquire options on commodity futures contracts as either of the following. Federal income tax return Hedging transactions. Federal income tax return Transactions that are not hedging transactions. Federal income tax return Futures transactions with exchange-traded commodity futures contracts that are not hedging transactions, generally, result in capital gain or loss and are subject to the mark-to-market rules discussed in Publication 550. Federal income tax return There is a limit on the amount of capital losses you can deduct each year. Federal income tax return Hedging transactions are not subject to the mark-to-market rules. Federal income tax return If, as a farmer-producer, to protect yourself from the risk of unfavorable price fluctuations, you enter into commodity forward contracts, futures contracts, or options on futures contracts and the contracts cover an amount of the commodity within your range of production, the transactions are generally considered hedging transactions. Federal income tax return They can take place at any time you have the commodity under production, have it on hand for sale, or reasonably expect to have it on hand. Federal income tax return The gain or loss on the termination of these hedges is generally ordinary gain or loss. Federal income tax return Farmers who file their income tax returns on the cash method report any profit or loss on the hedging transaction on Schedule F, line 8. Federal income tax return Gains or losses from hedging transactions that hedge supplies of a type regularly used or consumed in the ordinary course of your trade or business may be ordinary gains or losses. Federal income tax return Examples include fuel and feed. Federal income tax return If you have numerous transactions in the commodity futures market during the year, you must be able to show which transactions are hedging transactions. Federal income tax return Clearly identify a hedging transaction on your books and records before the end of the day you entered into the transaction. Federal income tax return It may be helpful to have separate brokerage accounts for your hedging and speculation transactions. Federal income tax return Retain the identification of each hedging transaction with your books and records. Federal income tax return Also, identify the item(s) or aggregate risk that is being hedged in your records. Federal income tax return Although the identification of the hedging transaction must be made before the end of the day it was entered into, you have 35 days after entering into the transaction to identify the hedged item(s) or risk. Federal income tax return For more information on the tax treatment of futures and options contracts, see Commodity Futures and Section 1256 Contracts Marked to Market in Publication 550. Federal income tax return Accounting methods for hedging transactions. Federal income tax return   The accounting method you use for a hedging transaction must clearly reflect income. Federal income tax return This means that your accounting method must reasonably match the timing of income, deduction, gain, or loss from a hedging transaction with the timing of income, deduction, gain, or loss from the item or items being hedged. Federal income tax return There are requirements and limits on the method you can use for certain hedging transactions. Federal income tax return See Regulations section 1. Federal income tax return 446-4(e) for those requirements and limits. Federal income tax return   Hedging transactions must be accounted for under the rules stated above unless the transaction is subject to mark-to-market accounting under section 475 or you use an accounting method other than the following methods. Federal income tax return Cash method. Federal income tax return Farm-price method. Federal income tax return Unit-livestock-price method. Federal income tax return   Once you adopt a method, you must apply it consistently and must have IRS approval before changing it. Federal income tax return   Your books and records must describe the accounting method used for each type of hedging transaction. Federal income tax return They must also contain any additional identification necessary to verify the application of the accounting method you used for the transaction. Federal income tax return You must make the additional identification no more than 35 days after entering into the hedging transaction. Federal income tax return Example of a hedging transaction. Federal income tax return   You file your income tax returns on the cash method. Federal income tax return On July 2 you anticipate a yield of 50,000 bushels of corn this year. Federal income tax return The December futures price is $5. Federal income tax return 75 a bushel, but there are indications that by harvest time the price will drop. Federal income tax return To protect yourself against a drop in the price, you enter into the following hedging transaction. Federal income tax return You sell ten December futures contracts of 5,000 bushels each for a total of 50,000 bushels of corn at $5. Federal income tax return 75 a bushel. Federal income tax return   The price did not drop as anticipated but rose to $6 a bushel. Federal income tax return In November, you sell your crop at a local elevator for $6 a bushel. Federal income tax return You also close out your futures position by buying ten December contracts for $6 a bushel. Federal income tax return You paid a broker's commission of $1,400 ($70 per contract) for the complete in and out position in the futures market. Federal income tax return   The result is that the price of corn rose 25 cents a bushel and the actual selling price is $6 a bushel. Federal income tax return Your loss on the hedge is 25 cents a bushel. Federal income tax return In effect, the net selling price of your corn is $5. Federal income tax return 75 a bushel. Federal income tax return   Report the results of your futures transactions and your sale of corn separately on Schedule F. Federal income tax return See the instructions for the 2013 Schedule F (Form 1040). Federal income tax return   The loss on your futures transactions is $13,900, figured as follows. Federal income tax return July 2 - Sold December corn futures (50,000 bu. Federal income tax return @$5. Federal income tax return 75) $287,500 November 6 - Bought December corn futures (50,000 bu. Federal income tax return @$6 plus $1,400 broker's commission) 301,400 Futures loss ($13,900) This loss is reported as a negative figure on Schedule F, Part I, line 8, as other income. Federal income tax return   The proceeds from your corn sale at the local elevator are $300,000 (50,000 bu. Federal income tax return × $6). Federal income tax return Report it on Schedule F, Part I, line 2, as income from sales of products you raised. Federal income tax return   Assume you were right and the price went down 25 cents a bushel. Federal income tax return In effect, you would still net $5. Federal income tax return 75 a bushel, figured as follows. Federal income tax return Sold cash corn, per bushel $5. Federal income tax return 50 Gain on hedge, per bushel . Federal income tax return 25 Net price, per bushel $5. Federal income tax return 75       The gain on your futures transactions would have been $11,100, figured as follows. Federal income tax return July 2 - Sold December corn futures (50,000 bu. Federal income tax return @$5. Federal income tax return 75) $287,500 November 6 - Bought December corn futures (50,000 bu. Federal income tax return @$5. Federal income tax return 50 plus $1,400 broker's commission) 276,400 Futures gain $11,100 The $11,100 is reported on Schedule F, Part I, line 8, as other income. Federal income tax return   The proceeds from the sale of your corn at the local elevator, $275,000, are reported on Schedule F, Part I, line 2, as income from sales of products you raised. Federal income tax return Livestock This part discusses the sale or exchange of livestock used in your farm business. Federal income tax return Gain or loss from the sale or exchange of this livestock may qualify as a section 1231 gain or loss. Federal income tax return However, any part of the gain that is ordinary income from the recapture of depreciation is not included as section 1231 gain. Federal income tax return See chapter 9 for more information on section 1231 gains and losses and the recapture of depreciation under section 1245. Federal income tax return The rules discussed here do not apply to the sale of livestock held primarily for sale to customers. Federal income tax return The sale of this livestock is reported on Schedule F. Federal income tax return See chapter 3. Federal income tax return Also, special rules apply to sales or exchanges caused by weather-related conditions. Federal income tax return See chapter 3. Federal income tax return Holding period. Federal income tax return   The sale or exchange of livestock used in your farm business (defined below) qualifies as a section 1231 transaction if you held the livestock for 12 months or more (24 months or more for horses and cattle). Federal income tax return Livestock. Federal income tax return   For section 1231 transactions, livestock includes cattle, hogs, horses, mules, donkeys, sheep, goats, fur-bearing animals, and other mammals. Federal income tax return Also, for section 1231 transactions, livestock does not include chickens, turkeys, pigeons, geese, emus, ostriches, rheas, or other birds, fish, frogs, reptiles, etc. Federal income tax return Livestock used in farm business. Federal income tax return   If livestock is held primarily for draft, breeding, dairy, or sporting purposes, it is used in your farm business. Federal income tax return The purpose for which an animal is held ordinarily is determined by a farmer's actual use of the animal. Federal income tax return An animal is not held for draft, breeding, dairy, or sporting purposes merely because it is suitable for that purpose, or because it is held for sale to other persons for use by them for that purpose. Federal income tax return However, a draft, breeding, or sporting purpose may be present if an animal is disposed of within a reasonable time after it is prevented from its intended use or made undesirable as a result of an accident, disease, drought, or unfitness of the animal. Federal income tax return Example 1. Federal income tax return You discover an animal that you intend to use for breeding purposes is sterile. Federal income tax return You dispose of it within a reasonable time. Federal income tax return This animal was held for breeding purposes. Federal income tax return Example 2. Federal income tax return You retire and sell your entire herd, including young animals that you would have used for breeding or dairy purposes had you remained in business. Federal income tax return These young animals were held for breeding or dairy purposes. Federal income tax return Also, if you sell young animals to reduce your breeding or dairy herd because of drought, these animals are treated as having been held for breeding or dairy purposes. Federal income tax return See Sales Caused by Weather-Related Conditions in chapter 3. Federal income tax return Example 3. Federal income tax return You are in the business of raising hogs for slaughter. Federal income tax return Customarily, before selling your sows, you obtain a single litter of pigs that you will raise for sale. Federal income tax return You sell the brood sows after obtaining the litter. Federal income tax return Even though you hold these brood sows for ultimate sale to customers in the ordinary course of your business, they are considered to be held for breeding purposes. Federal income tax return Example 4. Federal income tax return You are in the business of raising registered cattle for sale to others for use as breeding cattle. Federal income tax return The business practice is to breed the cattle before sale to establish their fitness as registered breeding cattle. Federal income tax return Your use of the young cattle for breeding purposes is ordinary and necessary for selling them as registered breeding cattle. Federal income tax return Such use does not demonstrate that you are holding the cattle for breeding purposes. Federal income tax return However, those cattle you held as additions or replacements to your own breeding herd to produce calves are considered to be held for breeding purposes, even though they may not actually have produced calves. Federal income tax return The same applies to hog and sheep breeders. Federal income tax return Example 5. Federal income tax return You breed, raise, and train horses for racing purposes. Federal income tax return Every year you cull horses from your racing stable. Federal income tax return In 2013, you decided that to prevent your racing stable from getting too large to be effectively operated, you must cull six horses that had been raced at public tracks in 2012. Federal income tax return These horses are all considered held for sporting purposes. Federal income tax return Figuring gain or loss on the cash method. Federal income tax return   Farmers or ranchers who use the cash method of accounting figure their gain or loss on the sale of livestock used in their farming business as follows. Federal income tax return Raised livestock. Federal income tax return   Gain on the sale of raised livestock is generally the gross sales price reduced by any expenses of the sale. Federal income tax return Expenses of sale include sales commissions, freight or hauling from farm to commission company, and other similar expenses. Federal income tax return The basis of the animal sold is zero if the costs of raising it were deducted during the years the animal was being raised. Federal income tax return However, see Uniform Capitalization Rules in chapter 6. Federal income tax return Purchased livestock. Federal income tax return   The gross sales price minus your adjusted basis and any expenses of sale is the gain or loss. Federal income tax return Example. Federal income tax return A farmer sold a breeding cow on January 8, 2013, for $1,250. Federal income tax return Expenses of the sale were $125. Federal income tax return The cow was bought July 2, 2009, for $1,300. Federal income tax return Depreciation (not less than the amount allowable) was $867. Federal income tax return Gross sales price $1,250 Cost (basis) $1,300   Minus: Depreciation deduction 867   Unrecovered cost (adjusted basis) $ 433   Expense of sale 125 558 Gain realized $ 692 Converted Wetland and Highly Erodible Cropland Special rules apply to dispositions of land converted to farming use after March 1, 1986. Federal income tax return Any gain realized on the disposition of converted wetland or highly erodible cropland is treated as ordinary income. Federal income tax return Any loss on the disposition of such property is treated as a long-term capital loss. Federal income tax return Converted wetland. Federal income tax return   This is generally land that was drained or filled to make the production of agricultural commodities possible. Federal income tax return It includes converted wetland held by the person who originally converted it or held by any other person who used the converted wetland at any time after conversion for farming. Federal income tax return   A wetland (before conversion) is land that meets all the following conditions. Federal income tax return It is mostly soil that, in its undrained condition, is saturated, flooded, or ponded long enough during a growing season to develop an oxygen-deficient state that supports the growth and regeneration of plants growing in water. Federal income tax return It is saturated by surface or groundwater at a frequency and duration sufficient to support mostly plants that are adapted for life in saturated soil. Federal income tax return It supports, under normal circumstances, mostly plants that grow in saturated soil. Federal income tax return Highly erodible cropland. Federal income tax return   This is cropland subject to erosion that you used at any time for farming purposes other than grazing animals. Federal income tax return Generally, highly erodible cropland is land currently classified by the Department of Agriculture as Class IV, VI, VII, or VIII under its classification system. Federal income tax return Highly erodible cropland also includes land that would have an excessive average annual erosion rate in relation to the soil loss tolerance level, as determined by the Department of Agriculture. Federal income tax return Successor. Federal income tax return   Converted wetland or highly erodible cropland is also land held by any person whose basis in the land is figured by reference to the adjusted basis of a person in whose hands the property was converted wetland or highly erodible cropland. Federal income tax return Timber Standing timber you held as investment property is a capital asset. Federal income tax return Gain or loss from its sale is capital gain or loss reported on Form 8949 and Schedule D (Form 1040), as applicable. Federal income tax return If you held the timber primarily for sale to customers, it is not a capital asset. Federal income tax return Gain or loss on its sale is ordinary business income or loss. Federal income tax return It is reported on Schedule F, line 1 (purchased timber) or line 2 (raised timber). Federal income tax return See the Instructions for Schedule F (Form 1040). Federal income tax return Farmers who cut timber on their land and sell it as logs, firewood, or pulpwood usually have no cost or other basis for that timber. Federal income tax return Amounts realized from these sales, and the expenses incurred in cutting, hauling, etc. Federal income tax return , are ordinary farm income and expenses reported on Schedule F. Federal income tax return Different rules apply if you owned the timber longer than 1 year and elect to treat timber cutting as a sale or exchange or you enter into a cutting contract, discussed below. Federal income tax return Timber considered cut. Federal income tax return   Timber is considered cut on the date when, in the ordinary course of business, the quantity of felled timber is first definitely determined. Federal income tax return This is true whether the timber is cut under contract or whether you cut it yourself. Federal income tax return Christmas trees. Federal income tax return   Evergreen trees, such as Christmas trees, that are more than 6 years old when severed from their roots and sold for ornamental purposes are included in the term timber. Federal income tax return They qualify for both rules discussed below. Federal income tax return Election to treat cutting as a sale or exchange. Federal income tax return   Under the general rule, the cutting of timber results in no gain or loss. Federal income tax return It is not until a sale or exchange occurs that gain or loss is realized. Federal income tax return But if you owned or had a contractual right to cut timber, you can elect to treat the cutting of timber as a section 1231 transaction in the year it is cut. Federal income tax return Even though the cut timber is not actually sold or exchanged, you report your gain or loss on the cutting for the year the timber is cut. Federal income tax return Any later sale results in ordinary business income or loss. Federal income tax return See the example below. Federal income tax return   To elect this treatment, you must: Own or hold a contractual right to cut the timber for a period of more than 1 year before it is cut, and Cut the timber for sale or use in your trade or business. Federal income tax return Making the election. Federal income tax return   You make the election on your return for the year the cutting takes place by including in income the gain or loss on the cutting and including a computation of your gain or loss. Federal income tax return You do not have to make the election in the first year you cut the timber. Federal income tax return You can make it in any year to which the election would apply. Federal income tax return If the timber is partnership property, the election is made on the partnership return. Federal income tax return This election cannot be made on an amended return. Federal income tax return   Once you have made the election, it remains in effect for all later years unless you revoke it. Federal income tax return Election under section 631(a) may be revoked. Federal income tax return   If you previously elected for any tax year ending before October 23, 2004, to treat the cutting of timber as a sale or exchange under section 631(a), you may revoke this election without the consent of the IRS for any tax year ending after October 22, 2004. Federal income tax return The prior election (and revocation) is disregarded for purposes of making a subsequent election. Federal income tax return See Form T (Timber), Forest Activities Schedule, for more information. Federal income tax return Gain or loss. Federal income tax return   Your gain or loss on the cutting of standing timber is the difference between its adjusted basis for depletion and its FMV on the first day of your tax year in which it is cut. Federal income tax return   Your adjusted basis for depletion of cut timber is based on the number of units (board feet, log scale, or other units) of timber cut during the tax year and considered to be sold or exchanged. Federal income tax return Your adjusted basis for depletion is also based on the depletion unit of timber in the account used for the cut timber, and should be figured in the same manner as shown in section 611 and Regulations section 1. Federal income tax return 611-3. Federal income tax return   Depletion of timber is discussed in chapter 7. Federal income tax return Example. Federal income tax return   In April 2013, you owned 4,000 MBF (1,000 board feet) of standing timber longer than 1 year. Federal income tax return It had an adjusted basis for depletion of $40 per MBF. Federal income tax return You are a calendar year taxpayer. Federal income tax return On January 1, 2013, the timber had a FMV of $350 per MBF. Federal income tax return It was cut in April for sale. Federal income tax return On your 2013 tax return, you elect to treat the cutting of the timber as a sale or exchange. Federal income tax return You report the difference between the FMV and your adjusted basis for depletion as a gain. Federal income tax return This amount is reported on Form 4797 along with your other section 1231 gains and losses to figure whether it is treated as a capital gain or as ordinary gain. Federal income tax return You figure your gain as follows. Federal income tax return FMV of timber January 1, 2013 $1,400,000 Minus: Adjusted basis for depletion 160,000 Section 1231 gain $1,240,000   The FMV becomes your basis in the cut timber, and a later sale of the cut timber, including any by-product or tree tops, will result in ordinary business income or loss. Federal income tax return Outright sales of timber. Federal income tax return   Outright sales of timber by landowners qualify for capital gains treatment using rules similar to the rules for certain disposal of timber under a contract with retained economic interest (defined later). Federal income tax return However, for outright sales, the date of disposal is not deemed to be the date the timber is cut because the landowner can elect to treat the payment date as the date of disposal (see Date of disposal below). Federal income tax return Cutting contract. Federal income tax return   You must treat the disposal of standing timber under a cutting contract as a section 1231 transaction if all the following apply to you. Federal income tax return You are the owner of the timber. Federal income tax return You held the timber longer than 1 year before its disposal. Federal income tax return You kept an economic interest in the timber. Federal income tax return   You have kept an economic interest in standing timber if, under the cutting contract, the expected return on your investment is conditioned on the cutting of the timber. Federal income tax return   The difference between the amount realized from the disposal of the timber and its adjusted basis for depletion is treated as gain or loss on its sale. Federal income tax return Include this amount on Form 4797 along with your other section 1231 gains or losses. Federal income tax return Date of disposal. Federal income tax return   The date of disposal is the date the timber is cut. Federal income tax return However, for outright sales by landowners or if you receive payment under the contract before the timber is cut, you can elect to treat the date of payment as the date of disposal. Federal income tax return   This election applies only to figure the holding period of the timber. Federal income tax return It has no effect on the time for reporting gain or loss (generally when the timber is sold or exchanged). Federal income tax return   To make this election, attach a statement to the tax return filed by the due date (including extensions) for the year payment is received. Federal income tax return The statement must identify the advance payments subject to the election and the contract under which they were made. Federal income tax return   If you timely filed your return for the year you received payment without making the election, you can still make the election by filing an amended return within 6 months after the due date for that year's return (excluding extensions). Federal income tax return Attach the statement to the amended return and write “Filed pursuant to section 301. Federal income tax return 9100-2” at the top of the statement. Federal income tax return File the amended return at the same address the original return was filed. Federal income tax return Owner. Federal income tax return   An owner is any person who owns an interest in the timber, including a sublessor and the holder of a contract to cut the timber. Federal income tax return You own an interest in timber if you have the right to cut it for sale on your own account or for use in your business. Federal income tax return Tree stumps. Federal income tax return   Tree stumps are a capital asset if they are on land held by an investor who is not in the timber or stump business as a buyer, seller, or processor. Federal income tax return Gain from the sale of stumps sold in one lot by such a holder is taxed as a capital gain. Federal income tax return However, tree stumps held by timber operators after the saleable standing timber was cut and removed from the land are considered by-products. Federal income tax return Gain from the sale of stumps in lots or tonnage by such operators is taxed as ordinary income. Federal income tax return   See Form T (Timber) and its separate instructions for more information about dispositions of timber. Federal income tax return Sale of a Farm The sale of your farm will usually involve the sale of both nonbusiness property (your home) and business property (the land and buildings used in the farm operation and perhaps machinery and livestock). Federal income tax return If you have a gain from the sale, you may be allowed to exclude the gain on your home. Federal income tax return For more information, see Publication 523, Selling Your Home. Federal income tax return The gain on the sale of your business property is taxable. Federal income tax return A loss on the sale of your business property to an unrelated person is deducted as an ordinary loss. Federal income tax return Your taxable gain or loss on the sale of property used in your farm business is taxed under the rules for section 1231 transactions. Federal income tax return See chapter 9. Federal income tax return Losses from personal-use property, other than casualty or theft losses, are not deductible. Federal income tax return If you receive payments for your farm in installments, your gain is taxed over the period of years the payments are received, unless you elect not to use the installment method of reporting the gain. Federal income tax return See chapter 10 for information about installment sales. Federal income tax return When you sell your farm, the gain or loss on each asset is figured separately. Federal income tax return The tax treatment of gain or loss on the sale of each asset is determined by the classification of the asset. Federal income tax return Each of the assets sold must be classified as one of the following. Federal income tax return Capital asset held 1 year or less. Federal income tax return Capital asset held longer than 1 year. Federal income tax return Property (including real estate) used in your business and held 1 year or less (including draft, breeding, dairy, and sporting animals held less than the holding periods discussed earlier under Livestock ). Federal income tax return Property (including real estate) used in your business and held longer than 1 year (including only draft, breeding, dairy, and sporting animals held for the holding periods discussed earlier). Federal income tax return Property held primarily for sale or which is of the kind that would be included in inventory if on hand at the end of your tax year. Federal income tax return Allocation of consideration paid for a farm. Federal income tax return   The sale of a farm for a lump sum is considered a sale of each individual asset rather than a single asset. Federal income tax return The residual method is required only if the group of assets sold constitutes a trade or business. Federal income tax return This method determines gain or loss from the transfer of each asset. Federal income tax return It also determines the buyer's basis in the business assets. Federal income tax return For more information, see Sale of a Business in chapter 2 of Publication 544. Federal income tax return Property used in farm operation. Federal income tax return   The rules for excluding the gain on the sale of your home, described later under Sale of your home , do not apply to the property used for your farming business. Federal income tax return Recognized gains and losses on business property must be reported on your return for the year of the sale. Federal income tax return If the property was held longer than 1 year, it may qualify for section 1231 treatment (see chapter 9). Federal income tax return Example. Federal income tax return You sell your farm, including your main home, which you have owned since December 2001. Federal income tax return You realize gain on the sale as follows. Federal income tax return   Farm   Farm   With Home Without   Home Only Home Selling price $382,000 $158,000 $224,000 Cost (or other basis) 240,000 110,000 130,000 Gain $142,000 $48,000 $94,000 You must report the $94,000 gain from the sale of the property used in your farm business. Federal income tax return All or a part of that gain may have to be reported as ordinary income from the recapture of depreciation or soil and water conservation expenses. Federal income tax return Treat the balance as section 1231 gain. Federal income tax return The $48,000 gain from the sale of your home is not taxable as long as you meet the requirements explained later under Sale of your home . Federal income tax return Partial sale. Federal income tax return   If you sell only part of your farm, you must report any recognized gain or loss on the sale of that part on your tax return for the year of the sale. Federal income tax return You cannot wait until you have sold enough of the farm to recover its entire cost before reporting gain or loss. Federal income tax return For a detailed discussion on installment sales, see Publication 544. Federal income tax return Adjusted basis of the part sold. Federal income tax return   This is the properly allocated part of your original cost or other basis of the entire farm plus or minus necessary adjustments for improvements, depreciation, etc. Federal income tax return , on the part sold. Federal income tax return If your home is on the farm, you must properly adjust the basis to exclude those costs from your farm asset costs, as discussed below under Sale of your home . Federal income tax return Example. Federal income tax return You bought a 600-acre farm for $700,000. Federal income tax return The farm included land and buildings. Federal income tax return The purchase contract designated $600,000 of the purchase price to the land. Federal income tax return You later sold 60 acres of land on which you had installed a fence. Federal income tax return Your adjusted basis for the part of your farm sold is $60,000 (1/10 of $600,000), plus any unrecovered cost (cost not depreciated) of the fence on the 60 acres at the time of sale. Federal income tax return Use this amount to determine your gain or loss on the sale of the 60 acres. Federal income tax return Assessed values for local property taxes. Federal income tax return   If you paid a flat sum for the entire farm and no other facts are available for properly allocating your original cost or other basis between the land and the buildings, you can use the assessed values for local property taxes for the year of purchase to allocate the costs. Federal income tax return Example. Federal income tax return Assume that in the preceding example there was no breakdown of the $700,000 purchase price between land and buildings. Federal income tax return However, in the year of purchase, local taxes on the entire property were based on assessed valuations of $420,000 for land and $140,000 for improvements, or a total of $560,000. Federal income tax return The assessed valuation of the land is 3/4 (75%) of the total assessed valuation. Federal income tax return Multiply the $700,000 total purchase price by 75% to figure basis of $525,000 for the 600 acres of land. Federal income tax return The unadjusted basis of the 60 acres you sold would then be $52,500 (1/10 of $525,000). Federal income tax return Sale of your home. Federal income tax return   Your home is a capital asset and not property used in the trade or business of farming. Federal income tax return If you sell a farm that includes a house you and your family occupy, you must determine the part of the selling price and the part of the cost or other basis allocable to your home. Federal income tax return Your home includes the immediate surroundings and outbuildings relating to it that are not used for business purposes. Federal income tax return   If you use part of your home for business, you must make an appropriate adjustment to the basis for depreciation allowed or allowable. Federal income tax return For more information on basis, see chapter 6. Federal income tax return More information. Federal income tax return   For more information on selling your home, see Publication 523. Federal income tax return Gain from condemnation. Federal income tax return   If you have a gain from a condemnation or sale under threat of condemnation, you may use the preceding rules for excluding the gain, rather than the rules discussed under Postponing Gain in chapter 11. Federal income tax return However, any gain that cannot be excluded (because it is more than the limit) may be postponed under the rules discussed under Postponing Gain in chapter 11. Federal income tax return Foreclosure or Repossession If you do not make payments you owe on a loan secured by property, the lender may foreclose on the loan or repossess the property. Federal income tax return The foreclosure or repossession is treated as a sale or exchange from which you may realize gain or loss. Federal income tax return This is true even if you voluntarily return the property to the lender. Federal income tax return You may also realize ordinary income from cancellation of debt if the loan balance is more than the FMV of the property. Federal income tax return Buyer's (borrower's) gain or loss. Federal income tax return   You figure and report gain or loss from a foreclosure or repossession in the same way as gain or loss from a sale or exchange. Federal income tax return The gain or loss is the difference between your adjusted basis in the transferred property and the amount realized. Federal income tax return See Determining Gain or Loss , earlier. Federal income tax return Worksheet 8-1. Federal income tax return Worksheet for Foreclosures andRepossessions Part 1. Federal income tax return Use Part 1 to figure your ordinary income from the cancellation of debt upon foreclosure or repossession. Federal income tax return Complete this part only if you were personally liable for the debt. Federal income tax return Otherwise, go to Part 2. Federal income tax return   1. Federal income tax return Enter the amount of outstanding debt immediately before the transfer of property reduced by any amount for which you remain personally liable after the transfer of property   2. Federal income tax return Enter the Fair Market Value of the transferred property   3. Federal income tax return Ordinary income from cancellation of debt upon foreclosure or repossession. Federal income tax return * Subtract line 2 from line 1. Federal income tax return If zero or less, enter -0-   Part 2. Federal income tax return Figure your gain or loss from foreclosure or repossession. Federal income tax return   4. Federal income tax return If you completed Part 1, enter the smaller of line 1 or line 2. Federal income tax return If you did not complete Part 1, enter the outstanding debt immediately before the transfer of property   5. Federal income tax return Enter any proceeds you received from the foreclosure sale   6. Federal income tax return Add lines 4 and 5   7. Federal income tax return Enter the adjusted basis of the transferred property   8. Federal income tax return Gain or loss from foreclosure or repossession. Federal income tax return Subtract line 7  from line 6   * The income may not be taxable. Federal income tax return See Cancellation of debt . Federal income tax return    You can use Worksheet 8-1 to figure your gain or loss from a foreclosure or repossession. Federal income tax return Amount realized on a nonrecourse debt. Federal income tax return   If you are not personally liable for repaying the debt (nonrecourse debt) secured by the transferred property, the amount you realize includes the full amount of the debt canceled by the transfer. Federal income tax return The full canceled debt is included in the amount realized even if the fair market value of the property is less than the canceled debt. Federal income tax return Example 1. Federal income tax return Ann paid $200,000 for land used in her farming business. Federal income tax return She paid $15,000 down and borrowed the remaining $185,000 from a bank. Federal income tax return Ann is not personally liable for the loan (nonrecourse debt), but pledges the land as security. Federal income tax return The bank foreclosed on the loan 2 years after Ann stopped making payments. Federal income tax return When the bank foreclosed, the balance due on the loan was $180,000 and the FMV of the land was $170,000. Federal income tax return The amount Ann realized on the foreclosure was $180,000, the debt canceled by the foreclosure. Federal income tax return She figures her gain or loss on Form 4797, Part I, by comparing the amount realized ($180,000) with her adjusted basis ($200,000). Federal income tax return She has a $20,000 deductible loss. Federal income tax return Example 2. Federal income tax return Assume the same facts as in Example 1 except the FMV of the land was $210,000. Federal income tax return The result is the same. Federal income tax return The amount Ann realized on the foreclosure is $180,000, the debt canceled by the foreclosure. Federal income tax return Because her adjusted basis is $200,000, she has a deductible loss of $20,000, which she reports on Form 4797, Part I. Federal income tax return Amount realized on a recourse debt. Federal income tax return   If you are personally liable for the debt (recourse debt), the amount realized on the foreclosure or repossession includes the lesser of: The outstanding debt immediately before the transfer reduced by any amount for which you remain personally liable immediately after the transfer, or The fair market value of the transferred property. Federal income tax return   You are treated as receiving ordinary income from the canceled debt for the part of the debt that is more than the fair market value. Federal income tax return The amount realized does not include the canceled debt that is your income from cancellation of debt. Federal income tax return See Cancellation of debt , later. Federal income tax return Example 3. Federal income tax return Assume the same facts as in Example 1 above except Ann is personally liable for the loan (recourse debt). Federal income tax return In this case, the amount she realizes is $170,000. Federal income tax return This is the canceled debt ($180,000) up to the FMV of the land ($170,000). Federal income tax return Ann figures her gain or loss on the foreclosure by comparing the amount realized ($170,000) with her adjusted basis ($200,000). Federal income tax return She has a $30,000 deductible loss, which she figures on Form 4797, Part I. Federal income tax return She is also treated as receiving ordinary income from cancellation of debt. Federal income tax return That income is $10,000 ($180,000 − $170,000). Federal income tax return This is the part of the canceled debt not included in the amount realized. Federal income tax return She reports this as other income on Schedule F, line 8. Federal income tax return Seller's (lender's) gain or loss on repossession. Federal income tax return   If you finance a buyer's purchase of property and later acquire an interest in it through foreclosure or repossession, you may have a gain or loss on the acquisition. Federal income tax return For more information, see Repossession in Publication 537, Installment Sales. Federal income tax return Cancellation of debt. Federal income tax return   If property that is repossessed or foreclosed upon secures a debt for which you are personally liable (recourse debt), you generally must report as ordinary income the amount by which the canceled debt is more than the FMV of the property. Federal income tax return This income is separate from any gain or loss realized from the foreclosure or repossession. Federal income tax return Report the income from cancellation of a business debt on Schedule F, line 8. Federal income tax return Report the income from cancellation of a nonbusiness debt as miscellaneous income on Form 1040. Federal income tax return    You can use Worksheet 8-1 to figure your income from cancellation of debt. Federal income tax return   However, income from cancellation of debt is not taxed if any of the following apply. Federal income tax return The cancellation is intended as a gift. Federal income tax return The debt is qualified farm debt (see chapter 3). Federal income tax return The debt is qualified real property business debt (see chapter 5 of Publication 334). Federal income tax return You are insolvent or bankrupt (see  chapter 3). Federal income tax return The debt is qualified principal residence indebtedness (see chapter 3). Federal income tax return   Use Form 982 to report the income exclusion. Federal income tax return Abandonment The abandonment of property is a disposition of property. Federal income tax return You abandon property when you voluntarily and permanently give up possession and use of the property with the intention of ending your ownership, but without passing it on to anyone else. Federal income tax return Business or investment property. Federal income tax return   Loss from abandonment of business or investment property is deductible as a loss. Federal income tax return Loss from abandonment of business or investment property that is not treated as a sale or exchange generally is an ordinary loss. Federal income tax return If your adjusted basis is more than the amount you realize (if any), then you have a loss. Federal income tax return If the amount you realize (if any) is more than your adjusted basis, then you have a gain. Federal income tax return This rule also applies to leasehold improvements the lessor made for the lessee. Federal income tax return However, if the property is foreclosed on or repossessed in lieu of abandonment, gain or loss is figured as discussed earlier under Foreclosure or Repossession . Federal income tax return   If the abandoned property is secured by debt, special rules apply. Federal income tax return The tax consequences of abandonment of property that secures a debt depend on whether you are personally liable for the debt (recourse debt) or were not personally liable for the debt (nonrecourse debt). Federal income tax return For more information, see chapter 3 of Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments (for Individuals). Federal income tax return The abandonment loss is deducted in the tax year in which the loss is sustained. Federal income tax return Report the loss on Form 4797, Part II, line 10. Federal income tax return Personal-use property. Federal income tax return   You cannot deduct any loss from abandonment of your home or other property held for personal use. Federal income tax return Canceled debt. Federal income tax return   If the abandoned property secures a debt for which you are personally liable and the debt is canceled, you will realize ordinary income equal to the canceled debt. Federal income tax return This income is separate from any loss realized from abandonment of the property. Federal income tax return Report income from cancellation of a debt related to a business or rental activity as business or rental income. Federal income tax return Report income from cancellation of a nonbusiness debt as miscellaneous income on Form 1040. Federal income tax return   However, income from cancellation of debt is not taxed in certain circumstances. Federal income tax return See Cancellation of debt earlier under Foreclosure or Repossession . Federal income tax return Forms 1099-A and 1099-C. Federal income tax return   A lender who acquires an interest in your property in a foreclosure, repossession, or abandonment should send you Form 1099-A showing the information you need to figure your loss from the foreclosure, repossession, or abandonment. Federal income tax return However, if the lender cancels part of your debt and the lender must file Form 1099-C, the lender may include the information about the foreclosure, repossession, or abandonment on that form instead of Form 1099-A. Federal income tax return The lender must file Form 1099-C and send you a copy if the canceled debt is $600 or more and the lender is a financial institution, credit union, federal government agency, or any organization that has a significant trade or business of lending money. Federal income tax return For foreclosures, repossessions, abandonments of property, and debt cancellations occurring in 2013, these forms should be sent to you by January 31, 2014. Federal income tax return Prev  Up  Next   Home   More Online Publications
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The Federal Income Tax Return

Federal income tax return 8. Federal income tax return   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. Federal income tax return 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. Federal income tax return It is similar to the straight line method of depreciation. Federal income tax return The various amortizable costs covered in this chapter are included in the list below. Federal income tax return However, this chapter does not discuss amortization of bond premium. Federal income tax return For information on that topic, see chapter 3 of Publication 550, Investment Income and Expenses. Federal income tax return 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. Federal income tax return 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. Federal income tax return To report amortization from previous years, in addition to amortization that begins in the current year, list on Form 4562 each item separately. Federal income tax return For example, in 2012, you began to amortize a lease. Federal income tax return In 2013, you began to amortize a second lease. Federal income tax return Report amortization from the new lease on line 42 of your 2013 Form 4562. Federal income tax return Report amortization from the 2012 lease on line 43 of your 2013 Form 4562. Federal income tax return 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). Federal income tax return 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. Federal income tax return 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. Federal income tax return Generally, you recover costs for particular assets through depreciation deductions. Federal income tax return However, you generally cannot recover other costs until you sell the business or otherwise go out of business. Federal income tax return 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. Federal income tax return For costs paid or incurred after September 8, 2008, you can deduct a limited amount of start-up and organizational costs. Federal income tax return The costs that are not deducted currently can be amortized ratably over a 180-month period. Federal income tax return The amortization period starts with the month you begin operating your active trade or business. Federal income tax return You are not required to attach a statement to make this election. Federal income tax return 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. Federal income tax return 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. Federal income tax return See Regulations sections 1. Federal income tax return 195-1, 1. Federal income tax return 248-1, and 1. Federal income tax return 709-1. Federal income tax return 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. Federal income tax return Any costs not deducted can be amortized ratably over a 180-month period, beginning with the month you begin business. Federal income tax return If the election is made, you must attach any statement required by Regulations sections 1. Federal income tax return 195-1(b), 1. Federal income tax return 248-1(c), and 1. Federal income tax return 709-1(c), as in effect before September 9, 2008. Federal income tax return Note. Federal income tax return You can apply the provisions of Regulations sections 1. Federal income tax return 195-1, 1. Federal income tax return 248-1, and 1. Federal income tax return 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. Federal income tax return Otherwise, the provisions under Regulations sections 1. Federal income tax return 195-1(b), 1. Federal income tax return 248-1(c), and 1. Federal income tax return 709-1(c), as in effect before September 9, 2008, will apply. Federal income tax return 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. Federal income tax return See How To Make the Election , later. Federal income tax return The cost must qualify as one of the following. Federal income tax return A business start-up cost. Federal income tax return An organizational cost for a corporation. Federal income tax return An organizational cost for a partnership. Federal income tax return 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. Federal income tax return 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. Federal income tax return Qualifying costs. Federal income tax return   A start-up cost is amortizable if it meets both of the following tests. Federal income tax return 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). Federal income tax return It is a cost you pay or incur before the day your active trade or business begins. Federal income tax return   Start-up costs include amounts paid for the following: An analysis or survey of potential markets, products, labor supply, transportation facilities, etc. Federal income tax return Advertisements for the opening of the business. Federal income tax return Salaries and wages for employees who are being trained and their instructors. Federal income tax return Travel and other necessary costs for securing prospective distributors, suppliers, or customers. Federal income tax return Salaries and fees for executives and consultants, or for similar professional services. Federal income tax return Nonqualifying costs. Federal income tax return   Start-up costs do not include deductible interest, taxes, or research and experimental costs. Federal income tax return See Research and Experimental Costs , later. Federal income tax return Purchasing an active trade or business. Federal income tax return   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. Federal income tax return These are costs that help you decide whether to purchase a business. Federal income tax return Costs you incur in an attempt to purchase a specific business are capital expenses that you cannot amortize. Federal income tax return Example. Federal income tax return On June 1st, you hired an accounting firm and a law firm to assist you in the potential purchase of XYZ, Inc. Federal income tax return They researched XYZ's industry and analyzed the financial projections of XYZ, Inc. Federal income tax return In September, the law firm prepared and submitted a letter of intent to XYZ, Inc. Federal income tax return The letter stated that a binding commitment would result only after a purchase agreement was signed. Federal income tax return 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. Federal income tax return On October 22nd, you signed a purchase agreement with XYZ, Inc. Federal income tax return All amounts paid or incurred to investigate the business before October 22nd are amortizable investigative costs. Federal income tax return Amounts paid on or after that date relate to the attempt to purchase the business and therefore must be capitalized. Federal income tax return Disposition of business. Federal income tax return   If you completely dispose of your business before the end of the amortization period, you can deduct any remaining deferred start-up costs. Federal income tax return However, you can deduct these deferred start-up costs only to the extent they qualify as a loss from a business. Federal income tax return Costs of Organizing a Corporation Amounts paid to organize a corporation are the direct costs of creating the corporation. Federal income tax return Qualifying costs. Federal income tax return   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. Federal income tax return   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. Federal income tax return   Examples of organizational costs include: The cost of temporary directors. Federal income tax return The cost of organizational meetings. Federal income tax return State incorporation fees. Federal income tax return The cost of legal services. Federal income tax return Nonqualifying costs. Federal income tax return   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. Federal income tax return Costs associated with the transfer of assets to the corporation. Federal income tax return Costs of Organizing a Partnership The costs to organize a partnership are the direct costs of creating the partnership. Federal income tax return Qualifying costs. Federal income tax return   A partnership can amortize an organizational cost only if it meets all the following tests. Federal income tax return It is for the creation of the partnership and not for starting or operating the partnership trade or business. Federal income tax return It is chargeable to a capital account (see chapter 1). Federal income tax return It could be amortized over the life of the partnership if the partnership had a fixed life. Federal income tax return 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. Federal income tax return 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. Federal income tax return It is for a type of item normally expected to benefit the partnership throughout its entire life. Federal income tax return   Organizational costs include the following fees. Federal income tax return Legal fees for services incident to the organization of the partnership, such as negotiation and preparation of the partnership agreement. Federal income tax return Accounting fees for services incident to the organization of the partnership. Federal income tax return Filing fees. Federal income tax return Nonqualifying costs. Federal income tax return   The following costs cannot be amortized. Federal income tax return The cost of acquiring assets for the partnership or transferring assets to the partnership. Federal income tax return The cost of admitting or removing partners, other than at the time the partnership is first organized. Federal income tax return The cost of making a contract concerning the operation of the partnership trade or business including a contract between a partner and the partnership. Federal income tax return The costs for issuing and marketing interests in the partnership such as brokerage, registration, and legal fees and printing costs. Federal income tax return These “syndication fees” are capital expenses that cannot be depreciated or amortized. Federal income tax return Liquidation of partnership. Federal income tax return   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. Federal income tax return However, these costs can be deducted only to the extent they qualify as a loss from a business. Federal income tax return How To Amortize Deduct start-up and organizational costs in equal amounts over the applicable amortization period (discussed earlier). Federal income tax return 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. Federal income tax return Once you choose an amortization period, you cannot change it. Federal income tax return To figure your deduction, divide your total start-up or organizational costs by the months in the amortization period. Federal income tax return The result is the amount you can deduct for each month. Federal income tax return Cash method partnership. Federal income tax return   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. Federal income tax return 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. Federal income tax return 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. Federal income tax return You may also be required to attach an accompanying statement (described later) to your return. Federal income tax return For start-up or organizational costs paid or incurred after September 8, 2008, an accompanying statement is not required. Federal income tax return 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. Federal income tax return 195-1, 1. Federal income tax return 248-1, and 1. Federal income tax return 709-1, you must also attach an accompanying statement to elect to amortize the costs. Federal income tax return If you have both start-up and organizational costs, attach a separate statement (if required) to your return for each type of cost. Federal income tax return See Starting a Business , earlier, for more information. Federal income tax return Generally, you must file the return by the due date (including any extensions). Federal income tax return 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). Federal income tax return For more information, see the instructions for Part VI of Form 4562. Federal income tax return 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. Federal income tax return Note. Federal income tax return 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. Federal income tax return 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. Federal income tax return A shareholder or partner cannot make this election. Federal income tax return You, as a shareholder or partner, cannot amortize any costs you incur in setting up your corporation or partnership. Federal income tax return Only the corporation or partnership can amortize these costs. Federal income tax return However, you, as an individual, can elect to amortize costs you incur to investigate an interest in an existing partnership. Federal income tax return These costs qualify as business start-up costs if you acquire the partnership interest. Federal income tax return Start-up costs election statement. Federal income tax return   If you elect to amortize your start-up costs, attach a separate statement (if required) that contains the following information. Federal income tax return A description of the business to which the start-up costs relate. Federal income tax return A description of each start-up cost incurred. Federal income tax return The month your active business began (or was acquired). Federal income tax return The number of months in your amortization period (which is generally 180 months). Federal income tax return Filing the statement early. Federal income tax return   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. Federal income tax return If you file the statement early, the election becomes effective in the month of the tax year your active business begins. Federal income tax return Revised statement. Federal income tax return   You can file a revised statement to include any start-up costs not included in your original statement. Federal income tax return 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. Federal income tax return You can file the revised statement with a return filed after the return on which you elected to amortize your start-up costs. Federal income tax return Organizational costs election statement. Federal income tax return   If you elect to amortize your corporation's or partnership's organizational costs, attach a separate statement (if required) that contains the following information. Federal income tax return A description of each cost. Federal income tax return The amount of each cost. Federal income tax return The date each cost was incurred. Federal income tax return The month your corporation or partnership began active business (or acquired the business). Federal income tax return The number of months in your amortization period (which is generally 180 months). Federal income tax return Partnerships. Federal income tax return   The statement prepared for a cash basis partnership must also indicate the amount paid before the end of the year for each cost. Federal income tax return   You do not need to separately list any partnership organizational cost that is less than $10. Federal income tax return Instead, you can list the total amount of these costs with the dates the first and last costs were incurred. Federal income tax return   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. Federal income tax return 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. Federal income tax return 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). Federal income tax return 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). Federal income tax return For more information on the costs of getting a lease, see Cost of Getting a Lease in  chapter 3. Federal income tax return How to amortize. Federal income tax return   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. Federal income tax return Section 197 Intangibles Generally, you may amortize the capitalized costs of “section 197 intangibles” (defined later) ratably over a 15-year period. Federal income tax return 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. Federal income tax return 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. Federal income tax return See Anti-Churning Rules, later. Federal income tax return 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). Federal income tax return 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. Federal income tax return You cannot deduct amortization for the month you dispose of the intangible. Federal income tax return 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. Federal income tax return You are not allowed any other depreciation or amortization deduction for an amortizable section 197 intangible. Federal income tax return Tax-exempt use property subject to a lease. Federal income tax return   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. Federal income tax return Cost attributable to other property. Federal income tax return   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. Federal income tax return 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. Federal income tax return 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. Federal income tax return 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. Federal income tax return 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. Federal income tax return Goodwill. Federal income tax return   This is the value of a trade or business based on expected continued customer patronage due to its name, reputation, or any other factor. Federal income tax return Going concern value. Federal income tax return   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. Federal income tax return 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). Federal income tax return 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. Federal income tax return Workforce in place, etc. Federal income tax return   This includes the composition of a workforce (for example, its experience, education, or training). Federal income tax return 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. Federal income tax return   For example, you must amortize the part of the purchase price of a business that is for the existence of a highly skilled workforce. Federal income tax return Also, you must amortize the cost of acquiring an existing employment contract or relationship with employees or consultants. Federal income tax return Business books and records, etc. Federal income tax return   This includes the intangible value of technical manuals, training manuals or programs, data files, and accounting or inventory control systems. Federal income tax return 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. Federal income tax return Patents, copyrights, etc. Federal income tax return   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 . Federal income tax return Customer-based intangible. Federal income tax return   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. Federal income tax return For example, you must amortize the part of the purchase price of a business that is for the existence of the following intangibles. Federal income tax return A customer base. Federal income tax return A circulation base. Federal income tax return An undeveloped market or market growth. Federal income tax return Insurance in force. Federal income tax return A mortgage servicing contract. Federal income tax return An investment management contract. Federal income tax return Any other relationship with customers involving the future provision of goods or services. Federal income tax return   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. Federal income tax return Supplier-based intangible. Federal income tax return   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. Federal income tax return 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. Federal income tax return Do not include any amount required to be paid for the goods or services to honor the terms of the agreement or other relationship. Federal income tax return Also, see Assets That Are Not Section 197 Intangibles below. Federal income tax return Government-granted license, permit, etc. Federal income tax return   This is any right granted by a governmental unit or an agency or instrumentality of a governmental unit. Federal income tax return 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. Federal income tax return Covenant not to compete. Federal income tax return   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. Federal income tax return An interest in a trade or business includes an interest in a partnership or a corporation engaged in a trade or business. Federal income tax return   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. Federal income tax return Franchise, trademark, or trade name. Federal income tax return   A franchise, trademark, or trade name is a section 197 intangible. Federal income tax return You must amortize its purchase or renewal costs, other than certain contingent payments that you can deduct currently. Federal income tax return For information on currently deductible contingent payments, see chapter 11. Federal income tax return Professional sports franchise. Federal income tax return   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. Federal income tax return Contract for the use of, or a term interest in, a section 197 intangible. Federal income tax return   Section 197 intangibles include any right under a license, contract, or other arrangement providing for the use of any section 197 intangible. Federal income tax return It also includes any term interest in any section 197 intangible, whether the interest is outright or in trust. Federal income tax return Assets That Are Not Section 197 Intangibles The following assets are not section 197 intangibles. Federal income tax return Any interest in a corporation, partnership, trust, or estate. Federal income tax return Any interest under an existing futures contract, foreign currency contract, notional principal contract, interest rate swap, or similar financial contract. Federal income tax return Any interest in land. Federal income tax return Most computer software. Federal income tax return (See Computer software , later. Federal income tax return ) 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. Federal income tax return An interest in a film, sound recording, video tape, book, or similar property. Federal income tax return A right to receive tangible property or services under a contract or from a governmental agency. Federal income tax return An interest in a patent or copyright. Federal income tax return Certain rights that have a fixed duration or amount. Federal income tax return (See Rights of fixed duration or amount , later. Federal income tax return ) An interest under either of the following. Federal income tax return An existing lease or sublease of tangible property. Federal income tax return A debt that was in existence when the interest was acquired. Federal income tax return 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. Federal income tax return Certain transaction costs incurred by parties to a corporate organization or reorganization in which any part of a gain or loss is not recognized. Federal income tax return Intangible property that is not amortizable under the rules for section 197 intangibles can be depreciated if it meets certain requirements. Federal income tax return You generally must use the straight line method over its useful life. Federal income tax return For certain intangibles, the depreciation period is specified in the law and regulations. Federal income tax return For example, the depreciation period for computer software that is not a section 197 intangible is generally 36 months. Federal income tax return 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. Federal income tax return Computer software. Federal income tax return   Section 197 intangibles do not include the following types of computer software. Federal income tax return Software that meets all the following requirements. Federal income tax return It is, or has been, readily available for purchase by the general public. Federal income tax return It is subject to a nonexclusive license. Federal income tax return It has not been substantially modified. Federal income tax return 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. Federal income tax return Software that is not acquired in connection with the acquisition of a trade or business or a substantial part of a trade or business. Federal income tax return Computer software defined. Federal income tax return   Computer software includes all programs designed to cause a computer to perform a desired function. Federal income tax return It also includes any database or similar item that is in the public domain and is incidental to the operation of qualifying software. Federal income tax return Rights of fixed duration or amount. Federal income tax return   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. Federal income tax return However, this does not apply to the following intangibles. Federal income tax return Goodwill. Federal income tax return Going concern value. Federal income tax return A covenant not to compete. Federal income tax return A franchise, trademark, or trade name. Federal income tax return A customer-related information base, customer-based intangible, or similar item. Federal income tax return 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. Federal income tax return 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. Federal income tax return 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. Federal income tax return 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. Federal income tax return Amortize these costs using the rules of Revenue Procedure 2004-36. Federal income tax return For more information, see Revenue Procedure 2004-36, 2004-24 I. Federal income tax return R. Federal income tax return B. Federal income tax return 1063, available at  www. Federal income tax return irs. Federal income tax return gov/irb/2004-24_IRB/ar16. Federal income tax return html. Federal income tax return A change in the treatment of creative property costs is a change in method of accounting. Federal income tax return 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. Federal income tax return These rules apply to goodwill and going concern value, and to any other section 197 intangible that is not otherwise depreciable or amortizable. Federal income tax return Under the anti-churning rules, you cannot use 15-year amortization for the intangible if any of the following conditions apply. Federal income tax return You or a related person (defined later) held or used the intangible at any time from July 25, 1991, through August 10, 1993. Federal income tax return 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. Federal income tax return 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). Federal income tax return 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. Federal income tax return See Related person , later, for more information. Federal income tax return Exceptions. Federal income tax return   The anti-churning rules do not apply in the following situations. Federal income tax return You acquired the intangible from a decedent and its basis was stepped up to its fair market value. Federal income tax return The intangible was amortizable as a section 197 intangible by the seller or transferor you acquired it from. Federal income tax return 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. Federal income tax return The gain-recognition exception, discussed later, applies. Federal income tax return Related person. Federal income tax return   For purposes of the anti-churning rules, the following are related persons. Federal income tax return An individual and his or her brothers, sisters, half-brothers, half-sisters, spouse, ancestors (parents, grandparents, etc. Federal income tax return ), and lineal descendants (children, grandchildren, etc. Federal income tax return ). Federal income tax return A corporation and an individual who owns, directly or indirectly, more than 20% of the value of the corporation's outstanding stock. Federal income tax return 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. Federal income tax return (For an exception, see section 1. Federal income tax return 197-2(h)(6)(iv) of the regulations. Federal income tax return ) 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. Federal income tax return The grantor and fiduciary, and the fiduciary and beneficiary, of any trust. Federal income tax return 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. Federal income tax return The executor and beneficiary of an estate. Federal income tax return A tax-exempt educational or charitable organization and a person who directly or indirectly controls the organization (or whose family members control it). Federal income tax return 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. Federal income tax return 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. Federal income tax return Two partnerships if the same persons own, directly or indirectly, more than 20% of the capital or profits interests in both partnerships. Federal income tax return A partnership and a person who owns, directly or indirectly, more than 20% of the capital or profits interests in the partnership. Federal income tax return Two persons who are engaged in trades or businesses under common control (as described in section 41(f)(1) of the Internal Revenue Code). Federal income tax return When to determine relationship. Federal income tax return   Persons are treated as related if the relationship existed at the following time. Federal income tax return In the case of a single transaction, immediately before or immediately after the transaction in which the intangible was acquired. Federal income tax return 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. Federal income tax return Ownership of stock. Federal income tax return   In determining whether an individual directly or indirectly owns any of the outstanding stock of a corporation, the following rules apply. Federal income tax return Rule 1. Federal income tax return   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. Federal income tax return Rule 2. Federal income tax return   An individual is considered to own the stock directly or indirectly owned by or for his or her family. Federal income tax return Family includes only brothers and sisters, half-brothers and half-sisters, spouse, ancestors, and lineal descendants. Federal income tax return Rule 3. Federal income tax return   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. Federal income tax return Rule 4. Federal income tax return   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. Federal income tax return 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. Federal income tax return Gain-recognition exception. Federal income tax return   This exception to the anti-churning rules applies if the person you acquired the intangible from (the transferor) meets both of the following requirements. Federal income tax return 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. Federal income tax return That person chose to recognize gain on the disposition of the intangible and pay income tax on the gain at the highest tax rate. Federal income tax return See chapter 2 in Publication 544 for information on making this choice. Federal income tax return   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. Federal income tax return Notification. Federal income tax return   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. Federal income tax return Anti-abuse rule. Federal income tax return   You cannot amortize any section 197 intangible acquired in a transaction for which the principal purpose was either of the following. Federal income tax return To avoid the requirement that the intangible be acquired after August 10, 1993. Federal income tax return To avoid any of the anti-churning rules. Federal income tax return More information. Federal income tax return   For more information about the anti-churning rules, including additional rules for partnerships, see Regulations section 1. Federal income tax return 197-2(h). Federal income tax return 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. Federal income tax return See Amended Return , next. Federal income tax return If you are not allowed to make the correction on an amended return, you can change your accounting method to claim the correct amortization. Federal income tax return See Changing Your Accounting Method , later. Federal income tax return Amended Return If you deducted an incorrect amount for amortization, you can file an amended return to correct the following. Federal income tax return A mathematical error made in any year. Federal income tax return A posting error made in any year. Federal income tax return An amortization deduction for a section 197 intangible for which you have not adopted a method of accounting. Federal income tax return When to file. Federal income tax return   If an amended return is allowed, you must file it by the later of the following dates. Federal income tax return 3 years from the date you filed your original return for the year in which you did not deduct the correct amount. Federal income tax return (A return filed early is considered filed on the due date. Federal income tax return ) 2 years from the time you paid your tax for that year. Federal income tax return Changing Your Accounting Method Generally, you must get IRS approval to change your method of accounting. Federal income tax return File Form 3115, Application for Change in Accounting Method, to request a change to a permissible method of accounting for amortization. Federal income tax return The following are examples of a change in method of accounting for amortization. Federal income tax return A change in the amortization method, period of recovery, or convention of an amortizable asset. Federal income tax return A change in the accounting for amortizable assets from a single asset account to a multiple asset account (pooling), or vice versa. Federal income tax return A change in the accounting for amortizable assets from one type of multiple asset account to a different type of multiple asset account. Federal income tax return 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. Federal income tax return An adjustment in the useful life of an amortizable asset. Federal income tax return Generally, the making of a late amortization election or the revocation of a timely valid amortization election. Federal income tax return Any change in the placed-in-service date of an amortizable asset. Federal income tax return See Regulations section 1. Federal income tax return 446-1(e)(2)(ii)(a) for more information and examples. Federal income tax return Automatic approval. Federal income tax return   In some instances, you may be able to get automatic approval from the IRS to change your method of accounting for amortization. Federal income tax return For a list of automatic accounting method changes, see the Instructions for Form 3115. Federal income tax return 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. Federal income tax return 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. Federal income tax return See Revenue Procedure 2006-12, 2006-3 I. Federal income tax return R. Federal income tax return B. Federal income tax return 310, available at  www. Federal income tax return irs. Federal income tax return gov/irb/2006-03_IRB/ar14. Federal income tax return html. Federal income tax return  See Revenue Procedure 2006-37, 2006-38 I. Federal income tax return R. Federal income tax return B. Federal income tax return 499, available at  www. Federal income tax return irs. Federal income tax return gov/irb/2006-38_IRB/ar10. Federal income tax return html. Federal income tax return  See Revenue Procedure 2008-52, 2008-36 I. Federal income tax return R. Federal income tax return B. Federal income tax return 587, available at www. Federal income tax return irs. Federal income tax return gov/irb/2008-36_IRB/ar09. Federal income tax return html. Federal income tax return  See Revenue Procedure 2009-39, 2009-38 I. Federal income tax return R. Federal income tax return B. Federal income tax return 371, available at  www. Federal income tax return irs. Federal income tax return gov/irb/2009-38_IRB/ar08. Federal income tax return html. Federal income tax return  See Revenue Procedure 2011-14, 2011-4 I. Federal income tax return R. Federal income tax return B. Federal income tax return 330, available at  www. Federal income tax return irs. Federal income tax return gov/irb/2011-04_IRB/ar08. Federal income tax return html. Federal income tax return  See Revenue Procedure 2011-22, 2011-18 I. Federal income tax return R. Federal income tax return B. Federal income tax return 737, available at  www. Federal income tax return irs. Federal income tax return gov/irb/2011-18_IRB/ar08. Federal income tax return html. Federal income tax return Also, see Revenue Procedure 2012-39, 2012-41 I. Federal income tax return R. Federal income tax return B. Federal income tax return 470 available at www. Federal income tax return irs. Federal income tax return gov/irb/2012-41_IRB/index. Federal income tax return html. Federal income tax return Disposition of Section 197 Intangibles A section 197 intangible is treated as depreciable property used in your trade or business. Federal income tax return 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). Federal income tax return 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. Federal income tax return Any remaining gain, or any loss, is a section 1231 gain or loss. Federal income tax return If you held the intangible 1 year or less, any gain or loss on its disposition is an ordinary gain or loss. Federal income tax return For more information on ordinary or capital gain or loss on business property, see chapter 3 in Publication 544. Federal income tax return Nondeductible loss. Federal income tax return   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. Federal income tax return Instead, increase the adjusted basis of each remaining amortizable section 197 intangible by a proportionate part of the nondeductible loss. Federal income tax return Figure the increase by multiplying the nondeductible loss on the disposition of the intangible by the following fraction. Federal income tax return The numerator is the adjusted basis of each remaining intangible on the date of the disposition. Federal income tax return The denominator is the total adjusted bases of all remaining amortizable section 197 intangibles on the date of the disposition. Federal income tax return Covenant not to compete. Federal income tax return   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. Federal income tax return Nonrecognition transfers. Federal income tax return   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. Federal income tax return You amortize this part of the adjusted basis over the intangible's remaining amortization period in the hands of the transferor. Federal income tax return Nonrecognition transfers include transfers to a corporation, partnership contributions and distributions, like-kind exchanges, and involuntary conversions. Federal income tax return   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. Federal income tax return 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. Federal income tax return Example. Federal income tax return You own a section 197 intangible you have amortized for 4 full years. Federal income tax return It has a remaining unamortized basis of $30,000. Federal income tax return You exchange the asset plus $10,000 for a like-kind section 197 intangible. Federal income tax return The nonrecognition provisions of like-kind exchanges apply. Federal income tax return 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. Federal income tax return You amortize the other $10,000 of adjusted basis over a new 15-year period. Federal income tax return For more information, see Regulations section 1. Federal income tax return 197-2(g). Federal income tax return Reforestation Costs You can elect to deduct a limited amount of reforestation costs paid or incurred during the tax year. Federal income tax return See Reforestation Costs in chapter 7. Federal income tax return You can elect to amortize the qualifying costs that are not deducted currently over an 84-month period. Federal income tax return There is no limit on the amount of your amortization deduction for reforestation costs paid or incurred during the tax year. Federal income tax return The election to amortize reforestation costs incurred by a partnership, S corporation, or estate must be made by the partnership, corporation, or estate. Federal income tax return A partner, shareholder, or beneficiary cannot make that election. Federal income tax return A partner's or shareholder's share of amortizable costs is figured under the general rules for allocating items of income, loss, deduction, etc. Federal income tax return , of a partnership or S corporation. Federal income tax return 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. Federal income tax return Qualifying costs. Federal income tax return   Reforestation costs are the direct costs of planting or seeding for forestation or reforestation. Federal income tax return Qualifying costs include only those costs you must capitalize and include in the adjusted basis of the property. Federal income tax return They include costs for the following items. Federal income tax return Site preparation. Federal income tax return Seeds or seedlings. Federal income tax return Labor. Federal income tax return Tools. Federal income tax return Depreciation on equipment used in planting and seeding. Federal income tax return 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. Federal income tax return Qualified timber property. Federal income tax return   Qualified timber property is property that contains trees in significant commercial quantities. Federal income tax return It can be a woodlot or other site that you own or lease. Federal income tax return The property qualifies only if it meets all of the following requirements. Federal income tax return It is located in the United States. Federal income tax return 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. Federal income tax return It consists of at least one acre planted with tree seedlings in the manner normally used in forestation or reforestation. Federal income tax return Qualified timber property does not include property on which you have planted shelter belts or ornamental trees, such as Christmas trees. Federal income tax return Amortization period. Federal income tax return   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. Federal income tax return You can claim amortization deductions for no more than 6 months of the first and last (eighth) tax years of the period. Federal income tax return Life tenant and remainderman. Federal income tax return   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. Federal income tax return Any remainder interest in the property is ignored for amortization purposes. Federal income tax return Recapture. Federal income tax return   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. Federal income tax return See chapter 3 of Publication 544 for more information. Federal income tax return How to make the election. Federal income tax return   To elect to amortize qualifying reforestation costs, complete Part VI of Form 4562 and attach a statement that contains the following information. Federal income tax return A description of the costs and the dates you incurred them. Federal income tax return A description of the type of timber being grown and the purpose for which it is grown. Federal income tax return Attach a separate statement for each property for which you amortize reforestation costs. Federal income tax return   Generally, you must make the election on a timely filed return (including extensions) for the tax year in which you incurred the costs. Federal income tax return 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). Federal income tax return Attach Form 4562 and the statement to the amended return and write “Filed pursuant to section 301. Federal income tax return 9100-2” on Form 4562. Federal income tax return File the amended return at the same address you filed the original return. Federal income tax return Revoking the election. Federal income tax return   You must get IRS approval to revoke your election to amortize qualifying reforestation costs. Federal income tax return 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. Federal income tax return Please provide your daytime telephone number (optional), in case we need to contact you. Federal income tax return 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. Federal income tax return    Send the application to: Internal Revenue Service Associate Chief Counsel Passthroughs and Special Industries CC:PSI:6 1111 Constitution Ave. Federal income tax return 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. Federal income tax return 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. Federal income tax return 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). Federal income tax return If you retire or abandon the property during the amortization period, no amortization deduction is allowed in the year of retirement or abandonment. Federal income tax return Pollution Control Facilities You can elect to amortize the cost of a certified pollution control facility over 60 months. Federal income tax return However, see Atmospheric pollution control facilities for an exception. Federal income tax return The cost of a pollution control facility that is not eligible for amortization can be depreciated under the regular rules for depreciation. Federal income tax return 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. Federal income tax return You must reduce its cost (amortizable basis) by the amount of any special allowance you claim. Federal income tax return See chapter 3 of Publication 946. Federal income tax return 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. Federal income tax return The facility must do so by removing, changing, disposing, storing, or preventing the creation or emission of pollutants, contaminants, wastes, or heat. Federal income tax return The facility must be certified by state and federal certifying authorities. Federal income tax return 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. Federal income tax return Also, it must not significantly change the nature of the manufacturing or production process or facility. Federal income tax return 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). Federal income tax return The federal certifying authority will describe the nature of the potential cost recovery. Federal income tax return You must then reduce the amortizable basis of the facility by this potential recovery. Federal income tax return New identifiable treatment facility. Federal income tax return   A new identifiable treatment facility is tangible depreciable property that is identifiable as a treatment facility. Federal income tax return It does not include a building and its structural components unless the building is exclusively a treatment facility. Federal income tax return Atmospheric pollution control facilities. Federal income tax return   Certain atmospheric pollution control facilities can be amortized over 84 months. Federal income tax return To qualify, the following must apply. Federal income tax return The facility must be acquired and placed in service after April 11, 2005. Federal income tax return If acquired, the original use must begin with you after April 11, 2005. Federal income tax return 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. Federal income tax return If you construct, reconstruct, or erect the facility, only the basis attributable to the construction, reconstruction, or erection completed after April 11, 2005, qualifies. Federal income tax return Basis reduction for corporations. Federal income tax return   A corporation must reduce the amortizable basis of a pollution control facility by 20% before figuring the amortization deduction. Federal income tax return More information. Federal income tax return   For more information on the amortization of pollution control facilities, see Code sections 169 and 291(c) and the related regulations. Federal income tax return 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). Federal income tax return If you elect to amortize these costs, deduct them in equal amounts over 60 months or more. Federal income tax return The amortization period begins the month you first receive an economic benefit from the costs. Federal income tax return For a definition of “research and experimental costs” and information on deducting them as current business expenses, see chapter 7. Federal income tax return Optional write-off method. Federal income tax return   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. Federal income tax return For more information, see Optional Write-off of Certain Tax Preferences , later, and section 59(e) of the Internal Revenue Code. Federal income tax return Costs you can amortize. Federal income tax return   You can amortize costs chargeable to a capital account (see chapter 1) if you meet both of the following requirements. Federal income tax return You paid or incurred the costs in your trade or business. Federal income tax return You are not deducting the costs currently. Federal income tax return How to make the election. Federal income tax return   To elect to amortize research and experimental costs, complete Part VI of Form 4562 and attach it to your income tax return. Federal income tax return Generally, you must file the return by the due date (including extensions). Federal income tax return 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). Federal income tax return Attach Form 4562 to the amended return and write “Filed pursuant to section 301. Federal income tax return 9100-2” on Form 4562. Federal income tax return File the amended return at the same address you filed the original return. Federal income tax return   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. Federal income tax return 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. Federal income tax return If you make this election, there is no AMT adjustment. Federal income tax return 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. Federal income tax return How to make the election. Federal income tax return   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. Federal income tax return   Generally, the election must be made on a timely filed return (including extensions) for the tax year in which you incurred the costs. Federal income tax return 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). Federal income tax return Attach Form 4562 to the amended return and write “Filed pursuant to section 301. Federal income tax return 9100-2” on Form 4562. Federal income tax return File the amended return at the same address you filed the original return. Federal income tax return Revoking the election. Federal income tax return   You must obtain consent from the IRS to revoke your election. Federal income tax return 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. Federal income tax return The request must contain all of the information necessary to demonstrate the rare and unusual circumstances that would justify granting revocation. Federal income tax return If the request for revocation is approved, any unamortized costs are deductible in the year the revocation is effective. Federal income tax return Prev  Up  Next   Home   More Online Publications