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Filing 1040x With Form 982

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Filing 1040x With Form 982

Filing 1040x with form 982 4. Filing 1040x with form 982   Transportation Table of Contents Parking fees. Filing 1040x with form 982 Advertising display on car. Filing 1040x with form 982 Car pools. Filing 1040x with form 982 Hauling tools or instruments. Filing 1040x with form 982 Union members' trips from a union hall. Filing 1040x with form 982 Car ExpensesStandard Mileage Rate Actual Car Expenses Leasing a Car Disposition of a Car This chapter discusses expenses you can deduct for business transportation when you are not traveling away from home as defined in chapter 1. Filing 1040x with form 982 These expenses include the cost of transportation by air, rail, bus, taxi, etc. Filing 1040x with form 982 , and the cost of driving and maintaining your car. Filing 1040x with form 982 Transportation expenses include the ordinary and necessary costs of all of the following. Filing 1040x with form 982 Getting from one workplace to another in the course of your business or profession when you are traveling within the city or general area that is your tax home. Filing 1040x with form 982 Tax home is defined in chapter 1. Filing 1040x with form 982 Visiting clients or customers. Filing 1040x with form 982 Going to a business meeting away from your regular workplace. Filing 1040x with form 982 Getting from your home to a temporary workplace when you have one or more regular places of work. Filing 1040x with form 982 These temporary workplaces can be either within the area of your tax home or outside that area. Filing 1040x with form 982 Transportation expenses do not include expenses you have while traveling away from home overnight. Filing 1040x with form 982 Those expenses are travel expenses discussed in chapter 1 . Filing 1040x with form 982 However, if you use your car while traveling away from home overnight, use the rules in this chapter to figure your car expense deduction. Filing 1040x with form 982 See Car Expenses , later. Filing 1040x with form 982 Daily transportation expenses you incur while traveling from home to one or more regular places of business are generally nondeductible commuting expenses. Filing 1040x with form 982 However, there may be exceptions to this general rule. Filing 1040x with form 982 You can deduct daily transportation expenses incurred going between your residence and a temporary work station outside the metropolitan area where you live. Filing 1040x with form 982 Also, daily transportation expenses can be deducted if: (1) you have one or more regular work locations away from your residence or (2) your residence is your principal place of business and you incur expenses going between the residence and another work location in the same trade or business, regardless of whether the work is temporary or permanent and regardless of the distance. Filing 1040x with form 982 Illustration of transportation expenses. Filing 1040x with form 982    Figure B , earlier, illustrates the rules that apply for deducting transportation expenses when you have a regular or main job away from your home. Filing 1040x with form 982 You may want to refer to it when deciding whether you can deduct your transportation expenses. Filing 1040x with form 982 Temporary work location. Filing 1040x with form 982   If you have one or more regular work locations away from your home and you commute to a temporary work location in the same trade or business, you can deduct the expenses of the daily round-trip transportation between your home and the temporary location, regardless of distance. Filing 1040x with form 982   If your employment at a work location is realistically expected to last (and does in fact last) for 1 year or less, the employment is temporary unless there are facts and circumstances that would indicate otherwise. Filing 1040x with form 982   If your employment at a work location is realistically expected to last for more than 1 year or if there is no realistic expectation that the employment will last for 1 year or less, the employment is not temporary, regardless of whether it actually lasts for more than 1 year. Filing 1040x with form 982   If employment at a work location initially is realistically expected to last for 1 year or less, but at some later date the employment is realistically expected to last more than 1 year, that employment will be treated as temporary (unless there are facts and circumstances that would indicate otherwise) until your expectation changes. Filing 1040x with form 982 It will not be treated as temporary after the date you determine it will last more than 1 year. Filing 1040x with form 982   If the temporary work location is beyond the general area of your regular place of work and you stay overnight, you are traveling away from home. Filing 1040x with form 982 You may have deductible travel expenses as discussed in chapter 1 . Filing 1040x with form 982 No regular place of work. Filing 1040x with form 982   If you have no regular place of work but ordinarily work in the metropolitan area where you live, you can deduct daily transportation costs between home and a temporary work site outside that metropolitan area. Filing 1040x with form 982   Generally, a metropolitan area includes the area within the city limits and the suburbs that are considered part of that metropolitan area. Filing 1040x with form 982   You cannot deduct daily transportation costs between your home and temporary work sites within your metropolitan area. Filing 1040x with form 982 These are nondeductible commuting expenses. Filing 1040x with form 982 Two places of work. Filing 1040x with form 982   If you work at two places in one day, whether or not for the same employer, you can deduct the expense of getting from one workplace to the other. Filing 1040x with form 982 However, if for some personal reason you do not go directly from one location to the other, you cannot deduct more than the amount it would have cost you to go directly from the first location to the second. Filing 1040x with form 982   Transportation expenses you have in going between home and a part-time job on a day off from your main job are commuting expenses. Filing 1040x with form 982 You cannot deduct them. Filing 1040x with form 982 Armed Forces reservists. Filing 1040x with form 982   A meeting of an Armed Forces reserve unit is a second place of business if the meeting is held on a day on which you work at your regular job. Filing 1040x with form 982 You can deduct the expense of getting from one workplace to the other as just discussed under Two places of work . Filing 1040x with form 982   You usually cannot deduct the expense if the reserve meeting is held on a day on which you do not work at your regular job. Filing 1040x with form 982 In this case, your transportation generally is a nondeductible commuting expense. Filing 1040x with form 982 However, you can deduct your transportation expenses if the location of the meeting is temporary and you have one or more regular places of work. Filing 1040x with form 982   If you ordinarily work in a particular metropolitan area but not at any specific location and the reserve meeting is held at a temporary location outside that metropolitan area, you can deduct your transportation expenses. Filing 1040x with form 982   If you travel away from home overnight to attend a guard or reserve meeting, you can deduct your travel expenses. Filing 1040x with form 982 These expenses are discussed in chapter 1 . Filing 1040x with form 982   If you travel more than 100 miles away from home in connection with your performance of services as a member of the reserves, you may be able to deduct some of your reserve-related travel costs as an adjustment to gross income rather than as an itemized deduction. Filing 1040x with form 982 For more information, see Armed Forces Reservists Traveling More Than 100 Miles From Home under Special Rules, in chapter 6. Filing 1040x with form 982 Commuting expenses. Filing 1040x with form 982   You cannot deduct the costs of taking a bus, trolley, subway, or taxi, or of driving a car between your home and your main or regular place of work. Filing 1040x with form 982 These costs are personal commuting expenses. Filing 1040x with form 982 You cannot deduct commuting expenses no matter how far your home is from your regular place of work. Filing 1040x with form 982 You cannot deduct commuting expenses even if you work during the commuting trip. Filing 1040x with form 982 Example. Filing 1040x with form 982 You sometimes use your cell phone to make business calls while commuting to and from work. Filing 1040x with form 982 Sometimes business associates ride with you to and from work, and you have a business discussion in the car. Filing 1040x with form 982 These activities do not change the trip from personal to business. Filing 1040x with form 982 You cannot deduct your commuting expenses. Filing 1040x with form 982 Parking fees. Filing 1040x with form 982    Fees you pay to park your car at your place of business are nondeductible commuting expenses. Filing 1040x with form 982 You can, however, deduct business-related parking fees when visiting a customer or client. Filing 1040x with form 982 Advertising display on car. Filing 1040x with form 982   Putting display material that advertises your business on your car does not change the use of your car from personal use to business use. Filing 1040x with form 982 If you use this car for commuting or other personal uses, you still cannot deduct your expenses for those uses. Filing 1040x with form 982 Car pools. Filing 1040x with form 982   You cannot deduct the cost of using your car in a nonprofit car pool. Filing 1040x with form 982 Do not include payments you receive from the passengers in your income. Filing 1040x with form 982 These payments are considered reimbursements of your expenses. Filing 1040x with form 982 However, if you operate a car pool for a profit, you must include payments from passengers in your income. Filing 1040x with form 982 You can then deduct your car expenses (using the rules in this publication). Filing 1040x with form 982 Hauling tools or instruments. Filing 1040x with form 982   Hauling tools or instruments in your car while commuting to and from work does not make your car expenses deductible. Filing 1040x with form 982 However, you can deduct any additional costs you have for hauling tools or instruments (such as for renting a trailer you tow with your car). Filing 1040x with form 982 Union members' trips from a union hall. Filing 1040x with form 982   If you get your work assignments at a union hall and then go to your place of work, the costs of getting from the union hall to your place of work are nondeductible commuting expenses. Filing 1040x with form 982 Although you need the union to get your work assignments, you are employed where you work, not where the union hall is located. Filing 1040x with form 982 Office in the home. Filing 1040x with form 982   If you have an office in your home that qualifies as a principal place of business, you can deduct your daily transportation costs between your home and another work location in the same trade or business. Filing 1040x with form 982 (See Publication 587, Business Use of Your Home, for information on determining if your home office qualifies as a principal place of business. Filing 1040x with form 982 ) Examples of deductible transportation. Filing 1040x with form 982   The following examples show when you can deduct transportation expenses based on the location of your work and your home. Filing 1040x with form 982 Example 1. Filing 1040x with form 982 You regularly work in an office in the city where you live. Filing 1040x with form 982 Your employer sends you to a 1-week training session at a different office in the same city. Filing 1040x with form 982 You travel directly from your home to the training location and return each day. Filing 1040x with form 982 You can deduct the cost of your daily round-trip transportation between your home and the training location. Filing 1040x with form 982 Example 2. Filing 1040x with form 982 Your principal place of business is in your home. Filing 1040x with form 982 You can deduct the cost of round-trip transportation between your qualifying home office and your client's or customer's place of business. Filing 1040x with form 982 Example 3. Filing 1040x with form 982 You have no regular office, and you do not have an office in your home. Filing 1040x with form 982 In this case, the location of your first business contact inside the metropolitan area is considered your office. Filing 1040x with form 982 Transportation expenses between your home and this first contact are nondeductible commuting expenses. Filing 1040x with form 982 Transportation expenses between your last business contact and your home are also nondeductible commuting expenses. Filing 1040x with form 982 While you cannot deduct the costs of these trips, you can deduct the costs of going from one client or customer to another. Filing 1040x with form 982 Car Expenses If you use your car for business purposes, you ordinarily can deduct car expenses. Filing 1040x with form 982 You generally can use one of the two following methods to figure your deductible expenses. Filing 1040x with form 982 Standard mileage rate. Filing 1040x with form 982 Actual car expenses. Filing 1040x with form 982 If you use actual expenses to figure your deduction for a car you lease, there are rules that affect the amount of your lease payments you can deduct. Filing 1040x with form 982 See Leasing a Car , later. Filing 1040x with form 982 In this publication, “car” includes a van, pickup, or panel truck. Filing 1040x with form 982 For the definition of “car” for depreciation purposes, see Car defined under Actual Car Expenses, later. Filing 1040x with form 982 Rural mail carriers. Filing 1040x with form 982   If you are a rural mail carrier, you may be able to treat the qualified reimbursement you received as your allowable expense. Filing 1040x with form 982 Because the qualified reimbursement is treated as paid under an accountable plan, your employer should not include the reimbursement in your income. Filing 1040x with form 982   If your vehicle expenses are more than the amount of your reimbursement, you can deduct the unreimbursed expenses as an itemized deduction on Schedule A (Form 1040). Filing 1040x with form 982 You must complete Form 2106 and attach it to your Form 1040, U. Filing 1040x with form 982 S. Filing 1040x with form 982 Individual Income Tax Return. Filing 1040x with form 982   A “qualified reimbursement” is the reimbursement you receive that meets both of the following conditions. Filing 1040x with form 982 It is given as an equipment maintenance allowance (EMA) to employees of the U. Filing 1040x with form 982 S. Filing 1040x with form 982 Postal Service. Filing 1040x with form 982 It is at the rate contained in the 1991 collective bargaining agreement. Filing 1040x with form 982 Any later agreement cannot increase the qualified reimbursement amount by more than the rate of inflation. Filing 1040x with form 982 See your employer for information on your reimbursement. Filing 1040x with form 982    If you are a rural mail carrier and received a qualified reimbursement, you cannot use the standard mileage rate. Filing 1040x with form 982 Standard Mileage Rate You may be able to use the standard mileage rate to figure the deductible costs of operating your car for business purposes. Filing 1040x with form 982 For 2013, the standard mileage rate for the cost of operating your car for business use is 56½ cents per mile. Filing 1040x with form 982 If you use the standard mileage rate for a year, you cannot deduct your actual car expenses for that year. Filing 1040x with form 982 You cannot deduct depreciation, lease payments, maintenance and repairs, gasoline (including gasoline taxes), oil, insurance, or vehicle registration fees. Filing 1040x with form 982 See Choosing the standard mileage rate and Standard mileage rate not allowed, later. Filing 1040x with form 982 You generally can use the standard mileage rate whether or not you are reimbursed and whether or not any reimbursement is more or less than the amount figured using the standard mileage rate. Filing 1040x with form 982 See chapter 6 for more information on reimbursements . Filing 1040x with form 982 Choosing the standard mileage rate. Filing 1040x with form 982   If you want to use the standard mileage rate for a car you own, you must choose to use it in the first year the car is available for use in your business. Filing 1040x with form 982 Then, in later years, you can choose to use either the standard mileage rate or actual expenses. Filing 1040x with form 982   If you want to use the standard mileage rate for a car you lease, you must use it for the entire lease period. Filing 1040x with form 982 For leases that began on or before December 31, 1997, the standard mileage rate must be used for the entire portion of the lease period (including renewals) that is after 1997. Filing 1040x with form 982   You must make the choice to use the standard mileage rate by the due date (including extensions) of your return. Filing 1040x with form 982 You cannot revoke the choice. Filing 1040x with form 982 However, in later years, you can switch from the standard mileage rate to the actual expenses method. Filing 1040x with form 982 If you change to the actual expenses method in a later year, but before your car is fully depreciated, you have to estimate the remaining useful life of the car and use straight line depreciation. Filing 1040x with form 982 Example. Filing 1040x with form 982 Larry is an employee who occasionally uses his own car for business purposes. Filing 1040x with form 982 He purchased the car in 2011, but he did not claim any unreimbursed employee expenses on his 2011 tax return. Filing 1040x with form 982 Because Larry did not use the standard mileage rate the first year the car was available for business use, he cannot use the standard mileage rate in 2013 to claim unreimbursed employee business expenses. Filing 1040x with form 982   For more information about depreciation included in the standard mileage rate, see Exception under Methods of depreciation, later. Filing 1040x with form 982 Standard mileage rate not allowed. Filing 1040x with form 982   You cannot use the standard mileage rate if you: Use five or more cars at the same time (such as in fleet operations), Claimed a depreciation deduction for the car using any method other than straight line, for example, MACRS (as discussed later under Depreciation Deduction), Claimed a section 179 deduction (discussed later) on the car, Claimed the special depreciation allowance on the car, Claimed actual car expenses after 1997 for a car you leased, or Are a rural mail carrier who received a qualified reimbursement. Filing 1040x with form 982 (See Rural mail carriers , earlier. Filing 1040x with form 982 ) Note. Filing 1040x with form 982 You can elect to use the standard mileage rate if you used a car for hire (such as a taxi) unless the standard mileage rate is otherwise not allowed, as discussed above. Filing 1040x with form 982 Five or more cars. Filing 1040x with form 982   If you own or lease five or more cars that are used for business at the same time, you cannot use the standard mileage rate for the business use of any car. Filing 1040x with form 982 However, you may be able to deduct your actual expenses for operating each of the cars in your business. Filing 1040x with form 982 See Actual Car Expenses , later, for information on how to figure your deduction. Filing 1040x with form 982   You are not using five or more cars for business at the same time if you alternate using (use at different times) the cars for business. Filing 1040x with form 982   The following examples illustrate the rules for when you can and cannot use the standard mileage rate for five or more cars. Filing 1040x with form 982 Example 1. Filing 1040x with form 982 Marcia, a salesperson, owns three cars and two vans that she alternates using for calling on her customers. Filing 1040x with form 982 She can use the standard mileage rate for the business mileage of the three cars and the two vans because she does not use them at the same time. Filing 1040x with form 982 Example 2. Filing 1040x with form 982 Tony and his employees use his four pickup trucks in his landscaping business. Filing 1040x with form 982 During the year, he traded in two of his old trucks for two newer ones. Filing 1040x with form 982 Tony can use the standard mileage rate for the business mileage of all six of the trucks he owned during the year. Filing 1040x with form 982 Example 3. Filing 1040x with form 982 Chris owns a repair shop and an insurance business. Filing 1040x with form 982 He and his employees use his two pickup trucks and van for the repair shop. Filing 1040x with form 982 Chris alternates using his two cars for the insurance business. Filing 1040x with form 982 No one else uses the cars for business purposes. Filing 1040x with form 982 Chris can use the standard mileage rate for the business use of the pickup trucks, van, and the cars because he never has more than four vehicles used for business at the same time. Filing 1040x with form 982 Example 4. Filing 1040x with form 982 Maureen owns a car and four vans that are used in her housecleaning business. Filing 1040x with form 982 Her employees use the vans, and she uses the car to travel to various customers. Filing 1040x with form 982 Maureen cannot use the standard mileage rate for the car or the vans. Filing 1040x with form 982 This is because all five vehicles are used in Maureen's business at the same time. Filing 1040x with form 982 She must use actual expenses for all vehicles. Filing 1040x with form 982 Interest. Filing 1040x with form 982   If you are an employee, you cannot deduct any interest paid on a car loan. Filing 1040x with form 982 This applies even if you use the car 100% for business as an employee. Filing 1040x with form 982   However, if you are self-employed and use your car in your business, you can deduct that part of the interest expense that represents your business use of the car. Filing 1040x with form 982 For example, if you use your car 60% for business, you can deduct 60% of the interest on Schedule C (Form 1040). Filing 1040x with form 982 You cannot deduct the part of the interest expense that represents your personal use of the car. Filing 1040x with form 982    If you use a home equity loan to purchase your car, you may be able to deduct the interest. Filing 1040x with form 982 See Publication 936, Home Mortgage Interest Deduction, for more information. Filing 1040x with form 982 Personal property taxes. Filing 1040x with form 982   If you itemize your deductions on Schedule A (Form 1040), you can deduct on line 7 state and local personal property taxes on motor vehicles. Filing 1040x with form 982 You can take this deduction even if you use the standard mileage rate or if you do not use the car for business. Filing 1040x with form 982   If you are self-employed and use your car in your business, you can deduct the business part of state and local personal property taxes on motor vehicles on Schedule C (Form 1040), Schedule C-EZ (Form 1040), or Schedule F (Form 1040). Filing 1040x with form 982 If you itemize your deductions, you can include the remainder of your state and local personal property taxes on the car on Schedule A (Form 1040). Filing 1040x with form 982 Parking fees and tolls. Filing 1040x with form 982   In addition to using the standard mileage rate, you can deduct any business-related parking fees and tolls. Filing 1040x with form 982 (Parking fees you pay to park your car at your place of work are nondeductible commuting expenses. Filing 1040x with form 982 ) Sale, trade-in, or other disposition. Filing 1040x with form 982   If you sell, trade in, or otherwise dispose of your car, you may have a gain or loss on the transaction or an adjustment to the basis of your new car. Filing 1040x with form 982 See Disposition of a Car , later. Filing 1040x with form 982 Actual Car Expenses If you do not use the standard mileage rate, you may be able to deduct your actual car expenses. Filing 1040x with form 982 If you qualify to use both methods, you may want to figure your deduction both ways to see which gives you a larger deduction. Filing 1040x with form 982 Actual car expenses include: Depreciation Licenses Lease  payments Registration  fees Gas Insurance Repairs Oil Garage rent Tires Tolls Parking fees   If you have fully depreciated a car that you still use in your business, you can continue to claim your other actual car expenses. Filing 1040x with form 982 Continue to keep records, as explained later in chapter 5 . Filing 1040x with form 982 Business and personal use. Filing 1040x with form 982   If you use your car for both business and personal purposes, you must divide your expenses between business and personal use. Filing 1040x with form 982 You can divide your expense based on the miles driven for each purpose. Filing 1040x with form 982 Example. Filing 1040x with form 982 You are a sales representative for a clothing firm and drive your car 20,000 miles during the year: 12,000 miles for business and 8,000 miles for personal use. Filing 1040x with form 982 You can claim only 60% (12,000 ÷ 20,000) of the cost of operating your car as a business expense. Filing 1040x with form 982 Employer-provided vehicle. Filing 1040x with form 982   If you use a vehicle provided by your employer for business purposes, you can deduct your actual unreimbursed car expenses. Filing 1040x with form 982 You cannot use the standard mileage rate. Filing 1040x with form 982 See Vehicle Provided by Your Employer in chapter 6. Filing 1040x with form 982 Interest on car loans. Filing 1040x with form 982   If you are an employee, you cannot deduct any interest paid on a car loan. Filing 1040x with form 982 This interest is treated as personal interest and is not deductible. Filing 1040x with form 982 If you are self-employed and use your car in that business, see Interest , earlier, under Standard Mileage Rate. Filing 1040x with form 982 Taxes paid on your car. Filing 1040x with form 982   If you are an employee, you can deduct personal property taxes paid on your car if you itemize deductions. Filing 1040x with form 982 Enter the amount paid on line 7 of Schedule A (Form 1040). Filing 1040x with form 982 Sales taxes. Filing 1040x with form 982   Generally, sales taxes on your car are part of your car's basis and are recovered through depreciation, discussed later. Filing 1040x with form 982 Fines and collateral. Filing 1040x with form 982   You cannot deduct fines you pay or collateral you forfeit for traffic violations. Filing 1040x with form 982 Casualty and theft losses. Filing 1040x with form 982   If your car is damaged, destroyed, or stolen, you may be able to deduct part of the loss not covered by insurance. Filing 1040x with form 982 See Publication 547, Casualties, Disasters, and Thefts, for information on deducting a loss on your car. Filing 1040x with form 982 Depreciation and section 179 deductions. Filing 1040x with form 982   Generally, the cost of a car, plus sales tax and improvements, is a capital expense. Filing 1040x with form 982 Because the benefits last longer than 1 year, you generally cannot deduct a capital expense. Filing 1040x with form 982 However, you can recover this cost through the section 179 deduction (the deduction allowed by section 179 of the Internal Revenue Code), special depreciation allowance, and depreciation deductions. Filing 1040x with form 982 Depreciation allows you to recover the cost over more than 1 year by deducting part of it each year. Filing 1040x with form 982 The section 179 deduction , special depreciation allowance , and depreciation deductions are discussed later. Filing 1040x with form 982   Generally, there are limits on these deductions. Filing 1040x with form 982 Special rules apply if you use your car 50% or less in your work or business. Filing 1040x with form 982   You can claim a section 179 deduction and use a depreciation method other than straight line only if you do not use the standard mileage rate to figure your business-related car expenses in the year you first place a car in service. Filing 1040x with form 982   If, in the year you first place a car in service, you claim either a section 179 deduction or use a depreciation method other than straight line for its estimated useful life, you cannot use the standard mileage rate on that car in any future year. Filing 1040x with form 982 Car defined. Filing 1040x with form 982   For depreciation purposes, a car is any four-wheeled vehicle (including a truck or van) made primarily for use on public streets, roads, and highways. Filing 1040x with form 982 Its unloaded gross vehicle weight must not be more than 6,000 pounds. Filing 1040x with form 982 A car includes any part, component, or other item physically attached to it or usually included in the purchase price. Filing 1040x with form 982   A car does not include: An ambulance, hearse, or combination ambulance-hearse used directly in a business, A vehicle used directly in the business of transporting persons or property for pay or hire, or A truck or van that is a qualified nonpersonal use vehicle. Filing 1040x with form 982 Qualified nonpersonal use vehicles. Filing 1040x with form 982   These are vehicles that by their nature are not likely to be used more than a minimal amount for personal purposes. Filing 1040x with form 982 They include trucks and vans that have been specially modified so that they are not likely to be used more than a minimal amount for personal purposes, such as by installation of permanent shelving and painting the vehicle to display advertising or the company's name. Filing 1040x with form 982 Delivery trucks with seating only for the driver, or only for the driver plus a folding jump seat, are qualified nonpersonal use vehicles. Filing 1040x with form 982 More information. Filing 1040x with form 982   See Depreciation Deduction , later, for more information on how to depreciate your vehicle. Filing 1040x with form 982 Section 179 Deduction The section 179 deduction allows you to treat a portion or all of the cost of a car as a current expense. Filing 1040x with form 982 If you choose to deduct all or part of the cost as a current expense, you must reduce your depreciable basis in the car by the amount of the section 179 deduction. Filing 1040x with form 982 There is a limit on the total section 179 deduction, special depreciation allowance, and depreciation deduction for cars, trucks, and vans that may reduce or eliminate any benefit from claiming the section 179 deduction. Filing 1040x with form 982 See Depreciation Limits, later. Filing 1040x with form 982 You can claim the section 179 deduction only in the year you place the car in service. Filing 1040x with form 982 For this purpose, a car is placed in service when it is ready and available for a specifically assigned use, whether in a trade or business, a tax-exempt activity, a personal activity, or for the production of income. Filing 1040x with form 982 Even if you are not using the property, it is in service when it is ready and available for its specifically assigned use. Filing 1040x with form 982 A car first used for personal purposes cannot qualify for the deduction in a later year when its use changes to business. Filing 1040x with form 982 Example. Filing 1040x with form 982 In 2012, you bought a new car and used it for personal purposes. Filing 1040x with form 982 In 2013, you began to use it for business. Filing 1040x with form 982 Changing its use to business use does not qualify the cost of your car for a section 179 deduction in 2013. Filing 1040x with form 982 However, you can claim a depreciation deduction for the business use of the car starting in 2013. Filing 1040x with form 982 See Depreciation Deduction , later. Filing 1040x with form 982 More than 50% business use requirement. Filing 1040x with form 982   You must use the property more than 50% for business to claim any section 179 deduction. Filing 1040x with form 982 If you used the property more than 50% for business, multiply the cost of the property by the percentage of business use. Filing 1040x with form 982 The result is the cost of the property that can qualify for the section 179 deduction. Filing 1040x with form 982 Example. Filing 1040x with form 982 Peter purchased a car in April 2013 for $24,500 and used it 60% for business. Filing 1040x with form 982 Based on his business usage, the total cost of Peter's car that qualifies for the section 179 deduction is $14,700 ($24,500 cost × 60% business use). Filing 1040x with form 982 But see Limit on total section 179, special depreciation allowance, and depreciation deduction , discussed later. Filing 1040x with form 982 Limits. Filing 1040x with form 982   There are limits on: The amount of the section 179 deduction, The section 179 deduction for sport utility and certain other vehicles, and The total amount of the section 179 deduction, special depreciation allowance, and depreciation deduction (discussed later ) you can claim for a qualified property. Filing 1040x with form 982 Limit on the amount of the section 179 deduction. Filing 1040x with form 982   For 2013, the total amount you can choose to deduct under section 179 generally cannot be more than $500,000. Filing 1040x with form 982   If the cost of your section 179 property placed in service in 2013 is over $2,000,000, you must reduce the $500,000 dollar limit (but not below zero) by the amount of cost over $2,000,000. Filing 1040x with form 982 If the cost of your section 179 property placed in service during 2013 is $2,500,000 or more, you cannot take a section 179 deduction. Filing 1040x with form 982   The total amount you can deduct under section 179 each year after you apply the limits listed above cannot be more than the taxable income from the active conduct of any trade or business during the year. Filing 1040x with form 982   If you are married and file a joint return, you and your spouse are treated as one taxpayer in determining any reduction to the dollar limit, regardless of which of you purchased the property or placed it in service. Filing 1040x with form 982   If you and your spouse file separate returns, you are treated as one taxpayer for the dollar limit. Filing 1040x with form 982 You must allocate the dollar limit (after any reduction) between you. Filing 1040x with form 982   For more information on the above section 179 deduction limits, see Publication 946. Filing 1040x with form 982 Limit for sport utility and certain other vehicles. Filing 1040x with form 982   For sport utility and certain other vehicles placed in service in 2013, the portion of the vehicle's cost taken into account in figuring your section 179 deduction is limited to $25,000. Filing 1040x with form 982 This rule applies to any four-wheeled vehicle primarily designed or used to carry passengers over public streets, roads, or highways, that is not subject to any of the passenger automobile limits explained under Depreciation Limits , later, and that is rated at no more than 14,000 pounds gross vehicle weight. Filing 1040x with form 982 However, the $25,000 limit does not apply to any vehicle: Designed to have a seating capacity of more than nine persons behind the driver's seat, Equipped with a cargo area of at least 6 feet in interior length that is an open area or is designed for use as an open area but is enclosed by a cap and is not readily accessible directly from the passenger compartment, or That has an integral enclosure, fully enclosing the driver compartment and load carrying device, does not have seating rearward of the driver's seat, and has no body section protruding more than 30 inches ahead of the leading edge of the windshield. Filing 1040x with form 982    Limit on total section 179, special depreciation allowance, and depreciation deduction. Filing 1040x with form 982   Generally, the total amount of section 179, special depreciation allowance, and depreciation deduction you can claim for a car that is qualified property and that you placed in service in 2013 is $11,160. Filing 1040x with form 982 The limit is reduced if your business use of the car is less than 100%. Filing 1040x with form 982 See Depreciation Limits , later, for more information. Filing 1040x with form 982 Example. Filing 1040x with form 982 In the earlier example under More than 50% business use requirement, Peter had a car with a cost (for purposes of the section 179 deduction) of $14,700. Filing 1040x with form 982 However, based on Peter's business usage of his car, the total of his section 179, special depreciation allowance, and depreciation deductions is limited to $6,696 ($11,160 limit x 60% business use). Filing 1040x with form 982 Cost of car. Filing 1040x with form 982   For purposes of the section 179 deduction, the cost of the car does not include any amount figured by reference to any other property held by you at any time. Filing 1040x with form 982 For example, if you buy (for cash and a trade-in) a new car to use in your business, your cost for purposes of the section 179 deduction does not include your adjusted basis in the car you trade in for the new car. Filing 1040x with form 982 Your cost includes only the cash you paid. Filing 1040x with form 982 Basis of car for depreciation. Filing 1040x with form 982   The amount of the section 179 deduction reduces your basis in your car. Filing 1040x with form 982 If you choose the section 179 deduction, you must subtract the amount of the deduction from the cost of your car. Filing 1040x with form 982 The resulting amount is the basis in your car you use to figure your depreciation deduction. Filing 1040x with form 982 When to choose. Filing 1040x with form 982   If you want to take the section 179 deduction, you must make the choice in the tax year you place the car in service for business or work. Filing 1040x with form 982 How to choose. Filing 1040x with form 982    Employees use Form 2106 to make this choice and report the section 179 deduction. Filing 1040x with form 982 All others use Form 4562. Filing 1040x with form 982   File the appropriate form with either of the following. Filing 1040x with form 982 Your original tax return filed for the year the property was placed in service (whether or not you file it timely). Filing 1040x with form 982 An amended return filed within the time prescribed by law. Filing 1040x with form 982 An election made on an amended return must specify the item of section 179 property to which the election applies and the part of the cost of each such item to be taken into account. Filing 1040x with form 982 The amended return must also include any resulting adjustments to taxable income. Filing 1040x with form 982    You must keep records that show the specific identification of each piece of qualifying section 179 property. Filing 1040x with form 982 These records must show how you acquired the property, the person you acquired it from, and when you placed it in service. Filing 1040x with form 982 Revoking an election. Filing 1040x with form 982   An election (or any specification made in the election) to take a section 179 deduction for 2013 can only be revoked with the Commissioner's approval. Filing 1040x with form 982 Recapture of section 179 deduction. Filing 1040x with form 982   To be eligible to claim the section 179 deduction, you must use your car more than 50% for business or work in the year you acquired it. Filing 1040x with form 982 If your business use of the car is 50% or less in a later tax year during the recovery period, you have to recapture (include in income) in that later year any excess depreciation. Filing 1040x with form 982 Any section 179 deduction claimed on the car is included in calculating the excess depreciation. Filing 1040x with form 982 For information on this calculation, see Excess depreciation , later in this chapter under Car Used 50% or Less for Business. Filing 1040x with form 982 Dispositions. Filing 1040x with form 982   If you dispose of a car on which you had claimed the section 179 deduction, the amount of that deduction is treated as a depreciation deduction for recapture purposes. Filing 1040x with form 982 You treat any gain on the disposition of the property as ordinary income up to the amount of the section 179 deduction and any allowable depreciation (unless you establish the amount actually allowed). Filing 1040x with form 982 For information on the disposition of a car, see Disposition of a Car , later. Filing 1040x with form 982 Special Depreciation Allowance You may be able to claim the special depreciation allowance for your car, truck, or van, if it is qualified property and was placed in service in 2013. Filing 1040x with form 982 The allowance is an additional depreciation deduction of 50% of the car's depreciable basis (after any section 179 deduction, but before figuring your regular depreciation deduction under MACRS). Filing 1040x with form 982 The special depreciation allowance applies only for the first year the car is placed in service. Filing 1040x with form 982 To qualify for the allowance more than 50% of the use of the car must be in a qualified business use (as defined under Depreciation Deduction, later). Filing 1040x with form 982 Combined depreciation. Filing 1040x with form 982   Your combined section 179 deduction, special depreciation allowance, and regular MACRS depreciation deduction is limited to the maximum allowable depreciation deduction for cars of $11,160 ($3,160 if you elect not to claim the special depreciation allowance). Filing 1040x with form 982 For trucks and vans, the first-year limit remains at $11,360 ($3,360 if you elect not to claim the special depreciation allowance). Filing 1040x with form 982 See Depreciation Limits , later in this chapter. Filing 1040x with form 982 Qualified car. Filing 1040x with form 982   To be a qualified car (including trucks and vans), the car must meet all of the following tests. Filing 1040x with form 982 You purchased the car new on or after January 1, 2008, but only if no binding written contract to acquire the car existed before January 1, 2008, You placed the car in service in your trade or business before January 1, 2014, You used the car more than 50% in a qualified business use. Filing 1040x with form 982 Election not to claim the special depreciation allowance. Filing 1040x with form 982   You can elect not to claim the special depreciation allowance for your car, truck, or van, that is qualified property. Filing 1040x with form 982 If you make this election, it applies to all 5-year property placed in service during the year. Filing 1040x with form 982   To make the election, attach a statement to your timely filed return (including extensions) indicating the class of property (5-year for cars) for which you are making the election and that you are electing not to claim the special depreciation allowance for qualified property acquired on or after January 1, 2008. Filing 1040x with form 982    Unless you elect not to claim the special depreciation allowance, you must reduce the car's adjusted basis by the amount of the allowance, even if the allowance was not claimed. Filing 1040x with form 982 Depreciation Deduction If you use actual car expenses to figure your deduction for a car you own and use in your business, you can claim a depreciation deduction. Filing 1040x with form 982 This means you can deduct a certain amount each year as a recovery of your cost or other basis in your car. Filing 1040x with form 982 You generally need to know the following things about the car you intend to depreciate. Filing 1040x with form 982 Your basis in the car. Filing 1040x with form 982 The date you place the car in service. Filing 1040x with form 982 The method of depreciation and recovery period you will use. Filing 1040x with form 982 Basis. Filing 1040x with form 982   Your basis in a car for figuring depreciation is generally its cost. Filing 1040x with form 982 This includes any amount you borrow or pay in cash, other property, or services. Filing 1040x with form 982   Generally, you figure depreciation on your car, truck, or van using your unadjusted basis (see Unadjusted basis , later). Filing 1040x with form 982 However, in some situations you will use your adjusted basis (your basis reduced by depreciation allowed or allowable in earlier years). Filing 1040x with form 982 For one of these situations see Exception under Methods of depreciation, later. Filing 1040x with form 982   If you change the use of a car from personal to business, your basis for depreciation is the lesser of the fair market value or your adjusted basis in the car on the date of conversion. Filing 1040x with form 982 Additional rules concerning basis are discussed later in this chapter under Unadjusted basis . Filing 1040x with form 982 Placed in service. Filing 1040x with form 982   You generally place a car in service when it is available for use in your work or business, in an income-producing activity, or in a personal activity. Filing 1040x with form 982 Depreciation begins when the car is placed in service for use in your work or business or for the production of income. Filing 1040x with form 982   For purposes of computing depreciation, if you first start using the car only for personal use and later convert it to business use, you place the car in service on the date of conversion. Filing 1040x with form 982 Car placed in service and disposed of in the same year. Filing 1040x with form 982   If you place a car in service and dispose of it in the same tax year, you cannot claim any depreciation deduction for that car. Filing 1040x with form 982 Methods of depreciation. Filing 1040x with form 982   Generally, you figure depreciation on cars using the Modified Accelerated Cost Recovery System (MACRS). Filing 1040x with form 982 MACRS is discussed later in this chapter. Filing 1040x with form 982 Exception. Filing 1040x with form 982   If you used the standard mileage rate in the first year of business use and change to the actual expenses method in a later year, you cannot depreciate your car under the MACRS rules. Filing 1040x with form 982 You must use straight line depreciation over the estimated remaining useful life of the car. Filing 1040x with form 982   To figure depreciation under the straight line method, you must reduce your basis in the car (but not below zero) by a set rate per mile for all miles for which you used the standard mileage rate. Filing 1040x with form 982 The rate per mile varies depending on the year(s) you used the standard mileage rate. Filing 1040x with form 982 For the rate(s) to use, see Depreciation adjustment when you used the standard mileage rate under Disposition of a Car, later. Filing 1040x with form 982   This reduction of basis is in addition to those basis adjustments described later under Unadjusted basis . Filing 1040x with form 982 You must use your adjusted basis in your car to figure your depreciation deduction. Filing 1040x with form 982 For additional information on the straight line method of depreciation, see Publication 946. Filing 1040x with form 982 More-than-50%-use test. Filing 1040x with form 982   Generally, you must use your car more than 50% for qualified business use (defined next) during the year to use MACRS. Filing 1040x with form 982 You must meet this more-than-50%-use test each year of the recovery period (6 years under MACRS) for your car. Filing 1040x with form 982   If your business use is 50% or less, you must use the straight line method to depreciate your car. Filing 1040x with form 982 This is explained later under Car Used 50% or Less for Business . Filing 1040x with form 982 Qualified business use. Filing 1040x with form 982   A qualified business use is any use in your trade or business. Filing 1040x with form 982 It does not include use for the production of income (investment use). Filing 1040x with form 982 However, you do combine your business and investment use to compute your depreciation deduction for the tax year. Filing 1040x with form 982 Use of your car by another person. Filing 1040x with form 982   Do not treat any use of your car by another person as use in your trade or business unless that use meets one of the following conditions. Filing 1040x with form 982 It is directly connected with your business. Filing 1040x with form 982 It is properly reported by you as income to the other person (and, if you have to, you withhold tax on the income). Filing 1040x with form 982 It results in a payment of fair market rent. Filing 1040x with form 982 This includes any payment to you for the use of your car. Filing 1040x with form 982 Business use changes. Filing 1040x with form 982   If you used your car more than 50% in qualified business use in the year you placed it in service, but 50% or less in a later year (including the year of disposition), you have to change to the straight line method of depreciation. Filing 1040x with form 982 See Qualified business use 50% or less in a later year under Car Used 50% or Less for Business, later. Filing 1040x with form 982    Property does not cease to be used more than 50% in qualified business use by reason of a transfer at death. Filing 1040x with form 982 Use for more than one purpose. Filing 1040x with form 982   If you use your car for more than one purpose during the tax year, you must allocate the use to the various purposes. Filing 1040x with form 982 You do this on the basis of mileage. Filing 1040x with form 982 Figure the percentage of qualified business use by dividing the number of miles you drive your car for business purposes during the year by the total number of miles you drive the car during the year for any purpose. Filing 1040x with form 982 Change from personal to business use. Filing 1040x with form 982   If you change the use of a car from 100% personal use to business use during the tax year, you may not have mileage records for the time before the change to business use. Filing 1040x with form 982 In this case, you figure the percentage of business use for the year as follows. Filing 1040x with form 982 Determine the percentage of business use for the period following the change. Filing 1040x with form 982 Do this by dividing business miles by total miles driven during that period. Filing 1040x with form 982 Multiply the percentage in (1) by a fraction. Filing 1040x with form 982 The numerator (top number) is the number of months the car is used for business and the denominator (bottom number) is 12. Filing 1040x with form 982 Example. Filing 1040x with form 982 You use a car only for personal purposes during the first 6 months of the year. Filing 1040x with form 982 During the last 6 months of the year, you drive the car a total of 15,000 miles of which 12,000 miles are for business. Filing 1040x with form 982 This gives you a business use percentage of 80% (12,000 ÷ 15,000) for that period. Filing 1040x with form 982 Your business use for the year is 40% (80% × 6/12). Filing 1040x with form 982 Limits. Filing 1040x with form 982   The amount you can claim for section 179, special depreciation allowance, and depreciation deductions may be limited. Filing 1040x with form 982 The maximum amount you can claim depends on the year in which you placed your car in service. Filing 1040x with form 982 You have to reduce the maximum amount if you did not use the car exclusively for business. Filing 1040x with form 982 See Depreciation Limits , later. Filing 1040x with form 982 Unadjusted basis. Filing 1040x with form 982   You use your unadjusted basis (often referred to as your basis or your basis for depreciation) to figure your depreciation using the MACRS depreciation chart, explained later under Modified Accelerated Cost Recovery System (MACRS) . Filing 1040x with form 982 Your unadjusted basis for figuring depreciation is your original basis increased or decreased by certain amounts. Filing 1040x with form 982   To figure your unadjusted basis, begin with your car's original basis, which generally is its cost. Filing 1040x with form 982 Cost includes sales taxes (see Sales taxes , earlier), destination charges, and dealer preparation. Filing 1040x with form 982 Increase your basis by any substantial improvements you make to your car, such as adding air conditioning or a new engine. Filing 1040x with form 982 Decrease your basis by any section 179 deduction, special depreciation allowance, gas guzzler tax, clean-fuel vehicle deduction (for vehicles placed in service before Jan. Filing 1040x with form 982 1, 2006), and alternative motor vehicle credit. Filing 1040x with form 982   See Form 8910 for information on the alternative motor vehicle credit. Filing 1040x with form 982 If your business use later falls to 50% or less, you may have to recapture (include in your income) any excess depreciation. Filing 1040x with form 982 See Car Used 50% or Less for Business, later, for more information. Filing 1040x with form 982 If you acquired the car by gift or inheritance, see Publication 551, Basis of Assets, for information on your basis in the car. Filing 1040x with form 982 Improvements. Filing 1040x with form 982   A major improvement to a car is treated as a new item of 5-year recovery property. Filing 1040x with form 982 It is treated as placed in service in the year the improvement is made. Filing 1040x with form 982 It does not matter how old the car is when the improvement is added. Filing 1040x with form 982 Follow the same steps for depreciating the improvement as you would for depreciating the original cost of the car. Filing 1040x with form 982 However, you must treat the improvement and the car as a whole when applying the limits on the depreciation deductions. Filing 1040x with form 982 Your car's depreciation deduction for the year (plus any section 179 deduction, special depreciation allowance, and depreciation on any improvements) cannot be more than the depreciation limit that applies for that year. Filing 1040x with form 982 See Depreciation Limits , later. Filing 1040x with form 982 Car trade-in. Filing 1040x with form 982   If you traded one car (the “old car”) for another car (the “new car”) in 2013, there are two ways you can treat the transaction. Filing 1040x with form 982 You can elect to treat the transaction as a tax-free disposition of the old car and the purchase of the new car. Filing 1040x with form 982 If you make this election, you treat the old car as disposed of at the time of the trade-in. Filing 1040x with form 982 The depreciable basis of the new car is the adjusted basis of the old car (figured as if 100% of the car's use had been for business purposes) plus any additional amount you paid for the new car. Filing 1040x with form 982 You then figure your depreciation deduction for the new car beginning with the date you placed it in service. Filing 1040x with form 982 You make this election by completing Form 2106, Part II, Section D. Filing 1040x with form 982 This method is explained later, beginning at Effect of trade-in on basis . Filing 1040x with form 982 If you do not make the election described in (1), you must figure depreciation separately for the remaining basis of the old car and for any additional amount you paid for the new car. Filing 1040x with form 982 You must apply two depreciation limits (see Depreciation Limits , later). Filing 1040x with form 982 The limit that applies to the remaining basis of the old car generally is the amount that would have been allowed had you not traded in the old car. Filing 1040x with form 982 The limit that applies to the additional amount you paid for the new car generally is the limit that applies for the tax year, reduced by the depreciation allowance for the remaining basis of the old car. Filing 1040x with form 982 You must use Form 4562 to compute your depreciation deduction. Filing 1040x with form 982 You cannot use Form 2106, Part II, Section D. Filing 1040x with form 982 This method is explained in Publication 946. Filing 1040x with form 982   If you elect to use the method described in (1), you must do so on a timely filed tax return (including extensions). Filing 1040x with form 982 Otherwise, you must use the method described in (2). Filing 1040x with form 982 Effect of trade-in on basis. Filing 1040x with form 982   The discussion that follows applies to trade-ins of cars in 2013, where the election was made to treat the transaction as a tax-free disposition of the old car and the purchase of the new car. Filing 1040x with form 982 For information on how to figure depreciation for cars involved in a like-kind exchange (trade-in) in 2013, for which the election was not made, see Publication 946 and Regulations section 1. Filing 1040x with form 982 168(i)-6(d)(3). Filing 1040x with form 982 Traded car used only for business. Filing 1040x with form 982   If you trade in a car you used only in your business for another car that will be used only in your business, your original basis in the new car is your adjusted basis in the old car, plus any additional amount you pay for the new car. Filing 1040x with form 982 Example. Filing 1040x with form 982 Paul trades in a car that has an adjusted basis of $5,000 for a new car. Filing 1040x with form 982 In addition, he pays cash of $20,000 for the new car. Filing 1040x with form 982 His original basis of the new car is $25,000 (his $5,000 adjusted basis in the old car plus the $20,000 cash paid). Filing 1040x with form 982 Paul's unadjusted basis is $25,000 unless he claims the section 179 deduction, special depreciation allowance, or has other increases or decreases to his original basis, discussed under Unadjusted basis , earlier. Filing 1040x with form 982 Traded car used partly in business. Filing 1040x with form 982   If you trade in a car you used partly in your business for a new car you will use in your business, you must make a “trade-in” adjustment for the personal use of the old car. Filing 1040x with form 982 This adjustment has the effect of reducing your basis in your old car, but not below zero, for purposes of figuring your depreciation deduction for the new car. Filing 1040x with form 982 (This adjustment is not used, however, when you determine the gain or loss on the later disposition of the new car. Filing 1040x with form 982 See Publication 544, Sales and Other Dispositions of Assets, for information on how to report the disposition of your car. Filing 1040x with form 982 )   To figure the unadjusted basis of your new car for depreciation, first add to your adjusted basis in the old car any additional amount you pay for the new car. Filing 1040x with form 982 Then subtract from that total the excess, if any, of: The total of the amounts that would have been allowable as depreciation during the tax years before the trade if 100% of the use of the car had been business and investment use, over The total of the amounts actually allowed as depreciation during those years. Filing 1040x with form 982 For information about figuring depreciation, see Modified Accelerated Cost Recovery System (MACRS) , which follows Example 2, later. Filing 1040x with form 982 Modified Accelerated Cost Recovery System (MACRS). Filing 1040x with form 982   The Modified Accelerated Cost Recovery System (MACRS) is the name given to the tax rules for getting back (recovering) through depreciation deductions the cost of property used in a trade or business or to produce income. Filing 1040x with form 982   The maximum amount you can deduct is limited, depending on the year you placed your car in service. Filing 1040x with form 982 See Depreciation Limits , later. Filing 1040x with form 982 Recovery period. Filing 1040x with form 982   Under MACRS, cars are classified as 5-year property. Filing 1040x with form 982 You actually depreciate the cost of a car, truck, or van over a period of 6 calendar years. Filing 1040x with form 982 This is because your car is generally treated as placed in service in the middle of the year, and you claim depreciation for one-half of both the first year and the sixth year. Filing 1040x with form 982 Depreciation deduction for certain Indian reservation property. Filing 1040x with form 982   Shorter recovery periods are provided under MACRS for qualified Indian reservation property placed in service on Indian reservations after 1993 and before 2014. Filing 1040x with form 982 The recovery that applies for a business-use car is 3 years instead of 5 years. Filing 1040x with form 982 However, the depreciation limits, discussed later, will still apply. Filing 1040x with form 982   For more information on the qualifications for this shorter recovery period and the percentages to use in figuring the depreciation deduction, see chapter 4 of Publication 946. Filing 1040x with form 982 Depreciation methods. Filing 1040x with form 982   You can use one of the following methods to depreciate your car. Filing 1040x with form 982 The 200% declining balance method (200% DB) over a 5-year recovery period that switches to the straight line method when that method provides an equal or greater deduction. Filing 1040x with form 982 The 150% declining balance method (150% DB) over a 5-year recovery period that switches to the straight line method when that method provides an equal or greater deduction. Filing 1040x with form 982 The straight line method (SL) over a 5-year recovery period. Filing 1040x with form 982    If you use Table 4-1 (discussed later under MACRS depreciation chart) to determine your depreciation rate for 2013, you do not need to determine in what year using the straight line method provides an equal or greater deduction. Filing 1040x with form 982 This is because the chart has the switch to the straight line method built into its rates. Filing 1040x with form 982   Before choosing a method, you may wish to consider the following facts. Filing 1040x with form 982 Using the straight line method provides equal yearly deductions throughout the recovery period. Filing 1040x with form 982 Using the declining balance methods provides greater deductions during the earlier recovery years with the deductions generally getting smaller each year. Filing 1040x with form 982 MACRS depreciation chart. Filing 1040x with form 982   A 2013 MACRS Depreciation Chart and instructions are included in this chapter as Table 4-1 . Filing 1040x with form 982 Using this table will make it easy for you to figure the 2013 depreciation deduction for your car. Filing 1040x with form 982 A similar chart appears in the Instructions for Form 2106. Filing 1040x with form 982    You may have to use the tables in Publication 946 instead of using this MACRS Depreciation Chart. Filing 1040x with form 982   You must use the Depreciation Tables in Publication 946 rather than the 2013 MACRS Depreciation Chart in this publication if any one of the following four conditions applies to you. Filing 1040x with form 982 You file your return on a fiscal year basis. Filing 1040x with form 982 You file your return for a short tax year (less than 12 months). Filing 1040x with form 982 During the year, all of the following conditions apply. Filing 1040x with form 982 You placed some property in service from January through September. Filing 1040x with form 982 You placed some property in service from October through December. Filing 1040x with form 982 Your basis in the property you placed in service from October through December (excluding nonresidential real property, residential rental property, and property placed in service and disposed of in the same year) was more than 40% of your total bases in all property you placed in service during the year. Filing 1040x with form 982   You placed qualified property in service on an Indian reservation. Filing 1040x with form 982 Depreciation in future years. Filing 1040x with form 982   If you use the percentages from the chart, you generally must continue to use them for the entire recovery period of your car. Filing 1040x with form 982 However, you cannot continue to use the chart if your basis in your car is adjusted because of a casualty. Filing 1040x with form 982 In that case, for the year of the adjustment and the remaining recovery period, figure the depreciation without the chart using your adjusted basis in the car at the end of the year of the adjustment and over the remaining recovery period. Filing 1040x with form 982 See Figuring the Deduction Without Using the Tables in chapter 4 of Publication 946. Filing 1040x with form 982    In future years, do not use the chart in this edition of the publication. Filing 1040x with form 982 Instead, use the chart in the publication or the form instructions for those future years. Filing 1040x with form 982 Disposition of car during recovery period. Filing 1040x with form 982   If you dispose of the car before the end of the recovery period, you are generally allowed a half year of depreciation in the year of disposition unless you purchased the car during the last quarter of a year. Filing 1040x with form 982 See Depreciation deduction for the year of disposition under Disposition of a Car, later, for information on how to figure the depreciation allowed in the year of disposition. Filing 1040x with form 982 How to use the 2013 chart. Filing 1040x with form 982   To figure your depreciation deduction for 2013, find the percentage in the column of Table 4-1 based on the date that you first placed the car in service and the depreciation method that you are using. Filing 1040x with form 982 Multiply the unadjusted basis of your car (defined earlier) by that percentage to determine the amount of your depreciation deduction. Filing 1040x with form 982 If you prefer to figure your depreciation deduction without the help of the chart, see Publication 946. Filing 1040x with form 982    Your deduction cannot be more than the maximum depreciation limit for cars. Filing 1040x with form 982 See Depreciation Limits, later. Filing 1040x with form 982 Example. Filing 1040x with form 982 Phil bought a used truck in February 2012 to use exclusively in his landscape business. Filing 1040x with form 982 He paid $9,200 for the truck with no trade-in. Filing 1040x with form 982 Phil did not claim any section 179 deduction, the truck did not qualify for the special depreciation allowance, and he chose to use the 200% DB method to get the largest depreciation deduction in the early years. Filing 1040x with form 982 Phil used the MACRS depreciation chart in 2012 to find his percentage. Filing 1040x with form 982 The unadjusted basis of his truck equals its cost because Phil used it exclusively for business. Filing 1040x with form 982 He multiplied the unadjusted basis of his truck, $9,200, by the percentage that applied, 20%, to figure his 2012 depreciation deduction of $1,840. Filing 1040x with form 982 In 2013, Phil used the truck for personal purposes when he repaired his father's cabin. Filing 1040x with form 982 His records show that the business use of his truck was 90% in 2013. Filing 1040x with form 982 Phil used Table 4-1 to find his percentage. Filing 1040x with form 982 Reading down the first column for the date placed in service and across to the 200% DB column, he locates his percentage, 32%. Filing 1040x with form 982 He multiplies the unadjusted basis of his truck, $8,280 ($9,200 cost × 90% business use), by 32% to figure his 2013 depreciation deduction of $2,650. Filing 1040x with form 982 Depreciation Limits There are limits on the amount you can deduct for depreciation of your car, truck, or van. Filing 1040x with form 982 The section 179 deduction and special depreciation allowance are treated as depreciation for purposes of the limits. Filing 1040x with form 982 The maximum amount you can deduct each year depends on the year you place the car in service. Filing 1040x with form 982 These limits are shown in the following tables. Filing 1040x with form 982   Maximum Depreciation Deduction for Cars Date       4th & Placed 1st 2nd 3rd Later In Service Year Year Year Years 2012–2013 $11,1601 $5,100 $3,050 $1,875 2010–2011 11,0602 4,900 2,950 1,775 2008–2009 10,9603 4,800 2,850 1,775 2007 3,060 4,900 2,850 1,775 2006 2,960 4,800 2,850 1,775 2005 2,960 4,700 2,850 1,675 2004 10,6103 4,800 2,850 1,675 5/06/2003– 12/31/2003 10,7104 4,900 2,950 1,775 1/01/2003– 5/05/2003 7,6605 4,900 2,950 1,775 2001–2002 7,6605 4,900 2,950 1,775 2000 3,060 4,900 2,950 1,775 1$3,160 if the car is not qualified property or if you elect not to claim the special depreciation allowance. Filing 1040x with form 982 2$3,060 if the car is not qualified property or if you elect not to claim the special depreciation allowance. Filing 1040x with form 982 3$2,960 if the car is not qualified property or if you elect not to claim the special depreciation allowance. Filing 1040x with form 982 4$7,660 if you acquired the car before 5/6/2003. Filing 1040x with form 982 $3,060 if the car is not qualified property or if you elect not to claim any special depreciation allowance. Filing 1040x with form 982 5$3,060 if you acquired the car before 9/11/2001, the car is not qualified property, or you elect not to claim the special depreciation allowance. Filing 1040x with form 982 Trucks and vans. Filing 1040x with form 982   For 2013, the maximum depreciation deductions for trucks and vans are generally higher than those for cars. Filing 1040x with form 982 A truck or van is a passenger automobile that is classified by the manufacturer as a truck or van and rated at 6,000 pounds gross vehicle weight or less. Filing 1040x with form 982 For trucks and vans placed in service before 2003, use the Maximum Depreciation Deduction for Cars table. Filing 1040x with form 982 Maximum Depreciation Deduction for Trucks and Vans Date       4th & Placed 1st 2nd 3rd Later In Service Year Year Year Years 2013 $11,3601 $5,400 $3,250 $1,975 2012 $11,3601 $5,300 $3,150 $1,875 2011 11,2601 5,200 3,150 1,875 2010 11,1601 5,100 3,050 1,875 2009 11,0601 4,900 2,950 1,775 2008 11,1601 5,100 3,050 1,875 2007 3,260 5,200 3,050 1,875 2005–2006 3,260 5,200 3,150 1,875 2004 10,9101 5,300 3,150 1,875 2003 11,0101,2 5,400 3,250 1,975 1If the special depreciation allowance does not apply or you make the election not to claim the special depreciation allowance, the first-year limit is $3,360 for 2012 and 2013, $3,260 for 2011, $3,160 for 2010, $3,060 for 2009, $3,160 for 2008, $3,260 for 2004, and $3,360 for 2003. Filing 1040x with form 982 2If the truck or van was acquired before 5/06/2003, the truck or van is qualified property, and you claim the special depreciation allowance for the truck or van, the maximum deduction is $7,960. Filing 1040x with form 982 Car used less than full year. Filing 1040x with form 982   The depreciation limits are not reduced if you use a car for less than a full year. Filing 1040x with form 982 This means that you do not reduce the limit when you either place a car in service or dispose of a car during the year. Filing 1040x with form 982 However, the depreciation limits are reduced if you do not use the car exclusively for business and investment purposes. Filing 1040x with form 982 See Reduction for personal use , next. Filing 1040x with form 982 Reduction for personal use. Filing 1040x with form 982   The depreciation limits are reduced based on your percentage of personal use. Filing 1040x with form 982 If you use a car less than 100% in your business or work, you must determine the depreciation deduction limit by multiplying the limit amount by the percentage of business and investment use during the tax year. Filing 1040x with form 982 Section 179 deduction. Filing 1040x with form 982   The section 179 deduction is treated as a depreciation deduction. Filing 1040x with form 982 If you place a car that is not a truck or van in service in 2013, use it only for business, and choose the section 179 deduction, the special depreciation allowance, and the depreciation deduction for that car for 2013 is limited to $11,160. Filing 1040x with form 982 Example. Filing 1040x with form 982 On September 4, 2013, Jack bought a used car for $10,000 and placed it in service. Filing 1040x with form 982 He used it 80% for his business, and he chooses to take a section 179 deduction for the car. Filing 1040x with form 982 The car is not qualified property for purposes of the special depreciation allowance. Filing 1040x with form 982 Before applying the limit, Jack figures his maximum section 179 deduction to be $8,000. Filing 1040x with form 982 This is the cost of his qualifying property (up to the maximum $500,000 amount) multiplied by his business use ($10,000 × 80%). Filing 1040x with form 982 Jack then figures that his section 179 deduction for 2013 is limited to $2,528 (80% of $3,160). Filing 1040x with form 982 He then figures his unadjusted basis of $5,472 (($10,000 × 80%) − $2,528) for determining his depreciation deduction. Filing 1040x with form 982 Jack has reached his maximum depreciation deduction for 2013. Filing 1040x with form 982 For 2014, Jack will use his unadjusted basis of $5,472 to figure his depreciation deduction. Filing 1040x with form 982 Deductions in years after the recovery period. Filing 1040x with form 982   If the depreciation deductions for your car are reduced under the passenger automobile limits (discussed earlier), you will have unrecovered basis in your car at the end of the recovery period. Filing 1040x with form 982 If you continue to use your car for business, you can deduct that unrecovered basis (subject to depreciation limits) after the recovery period ends. Filing 1040x with form 982 Unrecovered basis. Filing 1040x with form 982   This is your cost or other basis in the car reduced by any clean-fuel vehicle deduction (for vehicles placed in service before January 1, 2006), alternative motor vehicle credit, electric vehicle credit, gas guzzler tax, and depreciation (including any special depreciation allowance , discussed earlier, unless you elect not to claim it) and section 179 deductions that would have been allowable if you had used the car 100% for business and investment use. Filing 1040x with form 982 The recovery period. Filing 1040x with form 982   For 5-year property, your recovery period is 6 calendar years. Filing 1040x with form 982 A part year's depreciation is allowed in the first calendar year, a full year's depreciation is allowed in each of the next 4 calendar years, and a part year's depreciation is allowed in the 6th calendar year. Filing 1040x with form 982   Under MACRS, your recovery period is the same whether you use declining balance or straight line depreciation. Filing 1040x with form 982 You determine your unrecovered basis in the 7th year after you placed the car in service. Filing 1040x with form 982 How to treat unrecovered basis. Filing 1040x with form 982   If you continue to use your car for business after the recovery period, you can claim a depreciation deduction in each succeeding tax year until you recover your basis in the car. Filing 1040x with form 982 The maximum amount you can deduct each year is determined by the date you placed the car in service and your business-use percentage. Filing 1040x with form 982 For example, no deduction is allowed for a year you use your car 100% for personal purposes. Filing 1040x with form 982 Example. Filing 1040x with form 982 In April 2007, Bob bought and placed in service a car he used exclusively in his business. Filing 1040x with form 982 The car cost $31,500. Filing 1040x with form 982 Bob did not claim a section 179 deduction or the special depreciation allowance for the car. Filing 1040x with form 982 He continued to use the car 100% in his business throughout the recovery period (2007 through 2012). Filing 1040x with form 982 For those years, Bob used the MACRS Depreciation Chart (200% declining balance method) and the Maximum Depreciation Deduction for Cars table, earlier, for the applicable tax year to compute his depreciation deductions during the recovery period. Filing 1040x with form 982 Bob's depreciation deductions were subject to the depreciation limits so he will have unrecovered basis at the end of the recovery period as shown in the following table. Filing 1040x with form 982      MACRS     Deprec. Filing 1040x with form 982 Year % Amount Limit Allowed 2007 20. Filing 1040x with form 982 00 $6,300 $3,060 $ 3,060 2008 32. Filing 1040x with form 982 00 10,080 4,900 4,900 2009 19. Filing 1040x with form 982 20 6,048 2,850 2,850 2010 11. Filing 1040x with form 982 52 3,629 1,775 1,775 2011 11. Filing 1040x with form 982 52 3,629 1,775 1,775 2012 5. Filing 1040x with form 982 76 1,814 1,775 1,775 Total $31,500   16,135 For the correct limit, see Maximum Depreciation Deduction for Cars under “Depreciation Limits,” earlier, for the maximum amount of depreciation allowed each year. Filing 1040x with form 982   At the end of 2012, Bob had an unrecovered basis in the car of $15,365 ($31,500 – $16,135). Filing 1040x with form 982 If Bob continued to use the car 100% for business in 2013 and later years, he can claim a depreciation deduction equal to the lesser of $1,775 or his remaining unrecovered basis. Filing 1040x with form 982   If Bob's business use of the car was less than 100% during any year, his depreciation deduction would be less than the maximum amount allowable for that year. Filing 1040x with form 982 However, in determining his unrecovered basis in the car, he would still reduce his original basis by the maximum amount allowable as if the business use had been 100%. Filing 1040x with form 982 For example, if Bob had used his car 60% for business instead of 100%, his allowable depreciation deductions would have been $9,681 ($16,135 × 60%), but he still would have to reduce his basis by $16,135 to determine his unrecovered basis. Filing 1040x with form 982 Table 4-1. Filing 1040x with form 982 2013 MACRS Depreciation Chart (Use to Figure Depreciation for 2013. Filing 1040x with form 982 ) If you claim actual expenses for your car, use the chart below to find the depreciation method and percentage to use for your 2013 return for cars placed in service in 2013. Filing 1040x with form 982   First, using the left column, find the date you first placed the car in service in 2013. Filing 1040x with form 982 Then select the depreciation method and percentage from column (a), (b), or (c) following the rules explained in this chapter. Filing 1040x with form 982 For cars placed in service before 2013, you must use the same method you used on last year's return unless a decline in your business use requires you to change to the straight line method. Filing 1040x with form 982 Refer back to the MACRS Depreciation Chart for the year you placed the car in service. Filing 1040x with form 982 (See Car Used 50% or Less for Business . Filing 1040x with form 982 )  Multiply the unadjusted basis of your car by your business use percentage. Filing 1040x with form 982 Multiply the result by the percentage you found in the chart to find the amount of your depreciation deduction for 2013. Filing 1040x with form 982 (Also see Depreciation Limits . Filing 1040x with form 982 )   If you placed your car in service after September of any year and you placed other business property in service during the same year, you may have to use the Jan. Filing 1040x with form 982 1—Sept. Filing 1040x with form 982 30 percentage instead of the Oct. Filing 1040x with form 982 1—Dec. Filing 1040x with form 982 31 percentage for your car. Filing 1040x with form 982               To find out if this applies to you, determine: 1) the basis of all business property you placed in service after September of that year and 2) the basis of all business property you placed in service during that entire year. Filing 1040x with form 982 If the basis of the property placed in service after September is not more than 40% of the basis of all property (certain property is excluded) placed in service for the entire year, use the percentage for Jan. Filing 1040x with form 982 1—Sept. Filing 1040x with form 982 30 for figuring depreciation for your car. Filing 1040x with form 982 See Which Convention Applies? in chapter 4 of Publication 946 for more details. Filing 1040x with form 982               Example. Filing 1040x with form 982 You buy machinery (basis of $32,000) in May 2013 and a new van (basis of $20,000) in October 2013, both used 100% in your business. Filing 1040x with form 982 You
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The Filing 1040x With Form 982

Filing 1040x with form 982 2. Filing 1040x with form 982   Simplified Employee Pensions (SEPs) Table of Contents Topics - This chapter discusses: Useful Items - You may want to see: Setting Up a SEPWhen not to use Form 5305-SEP. Filing 1040x with form 982 How Much Can I Contribute?Contribution Limits Deducting ContributionsDeduction Limit for Contributions for Participants Deduction Limit for Self-Employed Individuals Carryover of Excess SEP Contributions When To Deduct Contributions Where To Deduct Contributions Salary Reduction Simplified Employee Pensions (SARSEPs)SARSEP ADP test. Filing 1040x with form 982 Deferral percentage. Filing 1040x with form 982 Employee compensation. Filing 1040x with form 982 Compensation of self-employed individuals. Filing 1040x with form 982 Choice not to treat deferrals as compensation. Filing 1040x with form 982 Limit on Elective Deferrals Tax Treatment of Deferrals Distributions (Withdrawals) Additional TaxesEffects on employee. Filing 1040x with form 982 Reporting and Disclosure Requirements Topics - This chapter discusses: Setting up a SEP How much can I contribute Deducting contributions Salary reduction simplified employee pensions (SARSEPs) Distributions (withdrawals) Additional taxes Reporting and disclosure requirements Useful Items - You may want to see: Publication 590 Individual Retirement Arrangements (IRAs) 3998 Choosing A Retirement Solution for Your Small Business 4285 SEP Checklist 4286 SARSEP Checklist 4333 SEP Retirement Plans for Small Businesses 4336 SARSEP for Small Businesses 4407 SARSEP—Key Issues and Assistance Forms (and Instructions) W-2 Wage and Tax Statement 1040 U. Filing 1040x with form 982 S. Filing 1040x with form 982 Individual Income Tax Return 5305-SEP Simplified Employee Pension—Individual Retirement Accounts Contribution Agreement 5305A-SEP Salary Reduction Simplified Employee Pension—Individual Retirement Accounts Contribution Agreement 8880 Credit for Qualified Retirement Savings Contributions 8881 Credit for Small Employer Pension Plan Startup Costs A SEP is a written plan that allows you to make contributions toward your own retirement and your employees' retirement without getting involved in a more complex qualified plan. Filing 1040x with form 982 Under a SEP, you make contributions to a traditional individual retirement arrangement (called a SEP-IRA) set up by or for each eligible employee. Filing 1040x with form 982 A SEP-IRA is owned and controlled by the employee, and you make contributions to the financial institution where the SEP-IRA is maintained. Filing 1040x with form 982 SEP-IRAs are set up for, at a minimum, each eligible employee (defined below). Filing 1040x with form 982 A SEP-IRA may have to be set up for a leased employee (defined in chapter 1), but does not need to be set up for excludable employees (defined later). Filing 1040x with form 982 Eligible employee. Filing 1040x with form 982   An eligible employee is an individual who meets all the following requirements. Filing 1040x with form 982 Has reached age 21. Filing 1040x with form 982 Has worked for you in at least 3 of the last 5 years. Filing 1040x with form 982 Has received at least $550 in compensation from you in 2013. Filing 1040x with form 982 This amount remains the same in 2014. Filing 1040x with form 982    You can use less restrictive participation requirements than those listed, but not more restrictive ones. Filing 1040x with form 982 Excludable employees. Filing 1040x with form 982   The following employees can be excluded from coverage under a SEP. Filing 1040x with form 982 Employees covered by a union agreement and whose retirement benefits were bargained for in good faith by the employees' union and you. Filing 1040x with form 982 Nonresident alien employees who have received no U. Filing 1040x with form 982 S. Filing 1040x with form 982 source wages, salaries, or other personal services compensation from you. Filing 1040x with form 982 For more information about nonresident aliens, see Publication 519, U. Filing 1040x with form 982 S. Filing 1040x with form 982 Tax Guide for Aliens. Filing 1040x with form 982 Setting Up a SEP There are three basic steps in setting up a SEP. Filing 1040x with form 982 You must execute a formal written agreement to provide benefits to all eligible employees. Filing 1040x with form 982 You must give each eligible employee certain information about the SEP. Filing 1040x with form 982 A SEP-IRA must be set up by or for each eligible employee. Filing 1040x with form 982 Many financial institutions will help you set up a SEP. Filing 1040x with form 982 Formal written agreement. Filing 1040x with form 982   You must execute a formal written agreement to provide benefits to all eligible employees under a SEP. Filing 1040x with form 982 You can satisfy the written agreement requirement by adopting an IRS model SEP using Form 5305-SEP. Filing 1040x with form 982 However, see When not to use Form 5305-SEP, below. Filing 1040x with form 982   If you adopt an IRS model SEP using Form 5305-SEP, no prior IRS approval or determination letter is required. Filing 1040x with form 982 Keep the original form. Filing 1040x with form 982 Do not file it with the IRS. Filing 1040x with form 982 Also, using Form 5305-SEP will usually relieve you from filing annual retirement plan information returns with the IRS and the Department of Labor. Filing 1040x with form 982 See the Form 5305-SEP instructions for details. Filing 1040x with form 982 If you choose not to use Form 5305-SEP, you should seek professional advice in adopting a SEP. Filing 1040x with form 982 When not to use Form 5305-SEP. Filing 1040x with form 982   You cannot use Form 5305-SEP if any of the following apply. Filing 1040x with form 982 You currently maintain any other qualified retirement plan other than another SEP. Filing 1040x with form 982 You have any eligible employees for whom IRAs have not been set up. Filing 1040x with form 982 You use the services of leased employees, who are not your common-law employees (as described in chapter 1). Filing 1040x with form 982 You are a member of any of the following unless all eligible employees of all the members of these groups, trades, or businesses participate under the SEP. Filing 1040x with form 982 An affiliated service group described in section 414(m). Filing 1040x with form 982 A controlled group of corporations described in section 414(b). Filing 1040x with form 982 Trades or businesses under common control described in section 414(c). Filing 1040x with form 982 You do not pay the cost of the SEP contributions. Filing 1040x with form 982 Information you must give to employees. Filing 1040x with form 982   You must give each eligible employee a copy of Form 5305-SEP, its instructions, and the other information listed in the Form 5305-SEP instructions. Filing 1040x with form 982 An IRS model SEP is not considered adopted until you give each employee this information. Filing 1040x with form 982 Setting up the employee's SEP-IRA. Filing 1040x with form 982   A SEP-IRA must be set up by or for each eligible employee. Filing 1040x with form 982 SEP-IRAs can be set up with banks, insurance companies, or other qualified financial institutions. Filing 1040x with form 982 You send SEP contributions to the financial institution where the SEP-IRA is maintained. Filing 1040x with form 982 Deadline for setting up a SEP. Filing 1040x with form 982   You can set up a SEP for any year as late as the due date (including extensions) of your income tax return for that year. Filing 1040x with form 982 Credit for startup costs. Filing 1040x with form 982   You may be able to claim a tax credit for part of the ordinary and necessary costs of starting a SEP that first became effective in 2013. Filing 1040x with form 982 For more information, see Credit for startup costs under Reminders, earlier. Filing 1040x with form 982 How Much Can I Contribute? The SEP rules permit you to contribute a limited amount of money each year to each employee's SEP-IRA. Filing 1040x with form 982 If you are self-employed, you can contribute to your own SEP-IRA. Filing 1040x with form 982 Contributions must be in the form of money (cash, check, or money order). Filing 1040x with form 982 You cannot contribute property. Filing 1040x with form 982 However, participants may be able to transfer or roll over certain property from one retirement plan to another. Filing 1040x with form 982 See Publication 590 for more information about rollovers. Filing 1040x with form 982 You do not have to make contributions every year. Filing 1040x with form 982 But if you make contributions, they must be based on a written allocation formula and must not discriminate in favor of highly compensated employees (defined in chapter 1). Filing 1040x with form 982 When you contribute, you must contribute to the SEP-IRAs of all participants who actually performed personal services during the year for which the contributions are made, including employees who die or terminate employment before the contributions are made. Filing 1040x with form 982 Contributions are deductible within limits, as discussed later, and generally are not taxable to the plan participants. Filing 1040x with form 982 A SEP-IRA cannot be a Roth IRA. Filing 1040x with form 982 Employer contributions to a SEP-IRA will not affect the amount an individual can contribute to a Roth or traditional IRA. Filing 1040x with form 982 Unlike regular contributions to a traditional IRA, contributions under a SEP can be made to participants over age 70½. Filing 1040x with form 982 If you are self-employed, you can also make contributions under the SEP for yourself even if you are over 70½. Filing 1040x with form 982 Participants age 70½ or over must take required minimum distributions. Filing 1040x with form 982 Time limit for making contributions. Filing 1040x with form 982   To deduct contributions for a year, you must make the contributions by the due date (including extensions) of your tax return for the year. Filing 1040x with form 982 Contribution Limits Contributions you make for 2013 to a common-law employee's SEP-IRA cannot exceed the lesser of 25% of the employee's compensation or $51,000. Filing 1040x with form 982 Compensation generally does not include your contributions to the SEP. Filing 1040x with form 982 The SEP plan document will specify how the employer contribution is determined and how it will be allocated to participants. Filing 1040x with form 982 Example. Filing 1040x with form 982 Your employee, Mary Plant, earned $21,000 for 2013. Filing 1040x with form 982 The maximum contribution you can make to her SEP-IRA is $5,250 (25% x $21,000). Filing 1040x with form 982 Contributions for yourself. Filing 1040x with form 982   The annual limits on your contributions to a common-law employee's SEP-IRA also apply to contributions you make to your own SEP-IRA. Filing 1040x with form 982 However, special rules apply when figuring your maximum deductible contribution. Filing 1040x with form 982 See Deduction Limit for Self-Employed Individuals , later. Filing 1040x with form 982 Annual compensation limit. Filing 1040x with form 982   You cannot consider the part of an employee's compensation over $255,000 when figuring your contribution limit for that employee. Filing 1040x with form 982 However, $51,000 is the maximum contribution for an eligible employee. Filing 1040x with form 982 These limits are $260,000 and $52,000, respectively, in 2014. Filing 1040x with form 982 Example. Filing 1040x with form 982 Your employee, Susan Green, earned $210,000 for 2013. Filing 1040x with form 982 Because of the maximum contribution limit for 2013, you can only contribute $51,000 to her SEP-IRA. Filing 1040x with form 982 More than one plan. Filing 1040x with form 982   If you contribute to a defined contribution plan (defined in chapter 4), annual additions to an account are limited to the lesser of $51,000 or 100% of the participant's compensation. Filing 1040x with form 982 When you figure this limit, you must add your contributions to all defined contribution plans maintained by you. Filing 1040x with form 982 Because a SEP is considered a defined contribution plan for this limit, your contributions to a SEP must be added to your contributions to other defined contribution plans you maintain. Filing 1040x with form 982 Tax treatment of excess contributions. Filing 1040x with form 982   Excess contributions are your contributions to an employee's SEP-IRA (or to your own SEP-IRA) for 2013 that exceed the lesser of the following amounts. Filing 1040x with form 982 25% of the employee's compensation (or, for you, 20% of your net earnings from self-employment). Filing 1040x with form 982 $51,000. Filing 1040x with form 982 Excess contributions are included in the employee's income for the year and are treated as contributions by the employee to his or her SEP-IRA. Filing 1040x with form 982 For more information on employee tax treatment of excess contributions, see chapter 1 in Publication 590. Filing 1040x with form 982 Reporting on Form W-2. Filing 1040x with form 982   Do not include SEP contributions on your employee's Form W-2 unless contributions were made under a salary reduction arrangement (discussed later). Filing 1040x with form 982 Deducting Contributions Generally, you can deduct the contributions you make each year to each employee's SEP-IRA. Filing 1040x with form 982 If you are self-employed, you can deduct the contributions you make each year to your own SEP-IRA. Filing 1040x with form 982 Deduction Limit for Contributions for Participants The most you can deduct for your contributions to you or your employee's SEP-IRA is the lesser of the following amounts. Filing 1040x with form 982 Your contributions (including any excess contributions carryover). Filing 1040x with form 982 25% of the compensation (limited to $255,000 per participant) paid to the participants during 2013 from the business that has the plan, not to exceed $51,000 per participant. Filing 1040x with form 982 In 2014, the amounts in (2) above are $260,000 and $52,000, respectively. Filing 1040x with form 982 Deduction Limit for Self-Employed Individuals If you contribute to your own SEP-IRA, you must make a special computation to figure your maximum deduction for these contributions. Filing 1040x with form 982 When figuring the deduction for contributions made to your own SEP-IRA, compensation is your net earnings from self-employment (defined in chapter 1), which takes into account both the following deductions. Filing 1040x with form 982 The deduction for the deductible part of your self-employment tax. Filing 1040x with form 982 The deduction for contributions to your own SEP-IRA. Filing 1040x with form 982 The deduction for contributions to your own SEP-IRA and your net earnings depend on each other. Filing 1040x with form 982 For this reason, you determine the deduction for contributions to your own SEP-IRA indirectly by reducing the contribution rate called for in your plan. Filing 1040x with form 982 To do this, use the Rate Table for Self-Employed or the Rate Worksheet for Self-Employed, whichever is appropriate for your plan's contribution rate, in chapter 5. Filing 1040x with form 982 Then figure your maximum deduction by using the Deduction Worksheet for Self-Employed in chapter 5. Filing 1040x with form 982 Carryover of Excess SEP Contributions If you made SEP contributions that are more than the deduction limit (nondeductible contributions), you can carry over and deduct the difference in later years. Filing 1040x with form 982 However, the carryover, when combined with the contribution for the later year, is subject to the deduction limit for that year. Filing 1040x with form 982 If you also contributed to a defined benefit plan or defined contribution plan, see Carryover of Excess Contributions under Employer Deduction in chapter 4 for the carryover limit. Filing 1040x with form 982 Excise tax. Filing 1040x with form 982   If you made nondeductible (excess) contributions to a SEP, you may be subject to a 10% excise tax. Filing 1040x with form 982 For information about the excise tax, see Excise Tax for Nondeductible (Excess) Contributions under Employer Deduction in chapter 4. Filing 1040x with form 982 When To Deduct Contributions When you can deduct contributions made for a year depends on the tax year on which the SEP is maintained. Filing 1040x with form 982 If the SEP is maintained on a calendar year basis, you deduct the yearly contributions on your tax return for the year within which the calendar year ends. Filing 1040x with form 982 If you file your tax return and maintain the SEP using a fiscal year or short tax year, you deduct contributions made for a year on your tax return for that year. Filing 1040x with form 982 Example. Filing 1040x with form 982 You are a fiscal year taxpayer whose tax year ends June 30. Filing 1040x with form 982 You maintain a SEP on a calendar year basis. Filing 1040x with form 982 You deduct SEP contributions made for calendar year 2013 on your tax return for your tax year ending June 30, 2014. Filing 1040x with form 982 Where To Deduct Contributions Deduct the contributions you make for your common-law employees on your tax return. Filing 1040x with form 982 For example, sole proprietors deduct them on Schedule C (Form 1040) or Schedule F (Form 1040), Profit or Loss From Farming; partnerships deduct them on Form 1065, U. Filing 1040x with form 982 S. Filing 1040x with form 982 Return of Partnership Income; and corporations deduct them on Form 1120, U. Filing 1040x with form 982 S. Filing 1040x with form 982 Corporation Income Tax Return, or Form 1120S, U. Filing 1040x with form 982 S. Filing 1040x with form 982 Income Tax Return for an S Corporation. Filing 1040x with form 982 Sole proprietors and partners deduct contributions for themselves on line 28 of Form 1040. Filing 1040x with form 982 (If you are a partner, contributions for yourself are shown on the Schedule K-1 (Form 1065), Partner's Share of Income, Deductions, Credits, etc. Filing 1040x with form 982 , you receive from the partnership. Filing 1040x with form 982 ) Remember that sole proprietors and partners can't deduct as a business expense contributions made to a SEP for themselves, only those made for their common-law employees. Filing 1040x with form 982 Salary Reduction Simplified Employee Pensions (SARSEPs) A SARSEP is a SEP set up before 1997 that includes a salary reduction arrangement. Filing 1040x with form 982 (See the Caution, next. Filing 1040x with form 982 ) Under a SARSEP, your employees can choose to have you contribute part of their pay to their SEP-IRAs rather than receive it in cash. Filing 1040x with form 982 This contribution is called an “elective deferral” because employees choose (elect) to set aside the money, and they defer the tax on the money until it is distributed to them. Filing 1040x with form 982 You are not allowed to set up a SARSEP after 1996. Filing 1040x with form 982 However, participants (including employees hired after 1996) in a SARSEP set up before 1997 can continue to have you contribute part of their pay to the plan. Filing 1040x with form 982 If you are interested in setting up a retirement plan that includes a salary reduction arrangement, see chapter 3. Filing 1040x with form 982 Who can have a SARSEP?   A SARSEP set up before 1997 is available to you and your eligible employees only if all the following requirements are met. Filing 1040x with form 982 At least 50% of your employees eligible to participate choose to make elective deferrals. Filing 1040x with form 982 You have 25 or fewer employees who were eligible to participate in the SEP at any time during the preceding year. Filing 1040x with form 982 The elective deferrals of your highly compensated employees meet the SARSEP ADP test. Filing 1040x with form 982 SARSEP ADP test. Filing 1040x with form 982   Under the SARSEP ADP test, the amount deferred each year by each eligible highly compensated employee as a percentage of pay (the deferral percentage) cannot be more than 125% of the average deferral percentage (ADP) of all non-highly compensated employees eligible to participate. Filing 1040x with form 982 A highly compensated employee is defined in chapter 1. Filing 1040x with form 982 Deferral percentage. Filing 1040x with form 982   The deferral percentage for an employee for a year is figured as follows. Filing 1040x with form 982   The elective employer contributions (excluding certain catch-up contributions)  paid to the SEP for the employee for the year     The employee's compensation (limited to $255,000 in 2013)   The instructions for Form 5305A-SEP have a worksheet you can use to determine whether the elective deferrals of your highly compensated employees meet the SARSEP ADP test. Filing 1040x with form 982 Employee compensation. Filing 1040x with form 982   For figuring the deferral percentage, compensation is generally the amount you pay to the employee for the year. Filing 1040x with form 982 Compensation includes the elective deferral and other amounts deferred in certain employee benefit plans. Filing 1040x with form 982 See Compensation in chapter 1. Filing 1040x with form 982 Elective deferrals under the SARSEP are included in figuring your employees' deferral percentage even though they are not included in the income of your employees for income tax purposes. Filing 1040x with form 982 Compensation of self-employed individuals. Filing 1040x with form 982   If you are self-employed, compensation is your net earnings from self-employment as defined in chapter 1. Filing 1040x with form 982   Compensation does not include tax-free items (or deductions related to them) other than foreign earned income and housing cost amounts. Filing 1040x with form 982 Choice not to treat deferrals as compensation. Filing 1040x with form 982   You can choose not to treat elective deferrals (and other amounts deferred in certain employee benefit plans) for a year as compensation under your SARSEP. Filing 1040x with form 982 Limit on Elective Deferrals The most a participant can choose to defer for calendar year 2013 is the lesser of the following amounts. Filing 1040x with form 982 25% of the participant's compensation (limited to $255,000 of the participant's compensation). Filing 1040x with form 982 $17,500. Filing 1040x with form 982 The $17,500 limit applies to the total elective deferrals the employee makes for the year to a SEP and any of the following. Filing 1040x with form 982 Cash or deferred arrangement (section 401(k) plan). Filing 1040x with form 982 Salary reduction arrangement under a tax-sheltered annuity plan (section 403(b) plan). Filing 1040x with form 982 SIMPLE IRA plan. Filing 1040x with form 982 In 2014, the $255,000 limit increases to $260,000 and the $17,500 limit remains at $17,500. Filing 1040x with form 982 Catch-up contributions. Filing 1040x with form 982   A SARSEP can permit participants who are age 50 or over at the end of the calendar year to also make catch-up contributions. Filing 1040x with form 982 The catch-up contribution limit for 2013 is $5,500 and remains at $5,500 for 2014. Filing 1040x with form 982 Elective deferrals are not treated as catch-up contributions for 2013 until they exceed the elective deferral limit (the lesser of 25% of compensation or $17,500), the SARSEP ADP test limit discussed earlier, or the plan limit (if any). Filing 1040x with form 982 However, the catch-up contribution a participant can make for a year cannot exceed the lesser of the following amounts. Filing 1040x with form 982 The catch-up contribution limit. Filing 1040x with form 982 The excess of the participant's compensation over the elective deferrals that are not catch-up contributions. Filing 1040x with form 982   Catch-up contributions are not subject to the elective deferral limit (the lesser of 25% of compensation or $17,500 in 2013 and in 2014). Filing 1040x with form 982 Overall limit on SEP contributions. Filing 1040x with form 982   If you also make nonelective contributions to a SEP-IRA, the total of the nonelective and elective contributions to that SEP-IRA cannot exceed the lesser of 25% of the employee's compensation or $51,000 for 2013 ($52,000 for 2014). Filing 1040x with form 982 The same rule applies to contributions you make to your own SEP-IRA. Filing 1040x with form 982 See Contribution Limits , earlier. Filing 1040x with form 982 Figuring the elective deferral. Filing 1040x with form 982   For figuring the 25% limit on elective deferrals, compensation does not include SEP contributions, including elective deferrals or other amounts deferred in certain employee benefit plans. Filing 1040x with form 982 Tax Treatment of Deferrals Elective deferrals that are not more than the limits discussed earlier under Limit on Elective Deferrals are excluded from your employees' wages subject to federal income tax in the year of deferral. Filing 1040x with form 982 However, these deferrals are included in wages for social security, Medicare, and federal unemployment (FUTA) tax. Filing 1040x with form 982 Excess deferrals. Filing 1040x with form 982   For 2013, excess deferrals are the elective deferrals for the year that are more than the $17,500 limit discussed earlier. Filing 1040x with form 982 For a participant who is eligible to make catch-up contributions, excess deferrals are the elective deferrals that are more than $23,000. Filing 1040x with form 982 The treatment of excess deferrals made under a SARSEP is similar to the treatment of excess deferrals made under a qualified plan. Filing 1040x with form 982 See Treatment of Excess Deferrals under Elective Deferrals (401(k) Plans) in chapter 4. Filing 1040x with form 982 Excess SEP contributions. Filing 1040x with form 982   Excess SEP contributions are elective deferrals of highly compensated employees that are more than the amount permitted under the SARSEP ADP test. Filing 1040x with form 982 You must notify your highly compensated employees within 2½ months after the end of the plan year of their excess SEP contributions. Filing 1040x with form 982 If you do not notify them within this time period, you must pay a 10% tax on the excess. Filing 1040x with form 982 For an explanation of the notification requirements, see Rev. Filing 1040x with form 982 Proc. Filing 1040x with form 982 91-44, 1991-2 C. Filing 1040x with form 982 B. Filing 1040x with form 982 733. Filing 1040x with form 982 If you adopted a SARSEP using Form 5305A-SEP, the notification requirements are explained in the instructions for that form. Filing 1040x with form 982 Reporting on Form W-2. Filing 1040x with form 982   Do not include elective deferrals in the “Wages, tips, other compensation” box of Form W-2. Filing 1040x with form 982 You must, however, include them in the “Social security wages” and “Medicare wages and tips” boxes. Filing 1040x with form 982 You must also include them in box 12. Filing 1040x with form 982 Mark the “Retirement plan” checkbox in box 13. Filing 1040x with form 982 For more information, see the Form W-2 instructions. Filing 1040x with form 982 Distributions (Withdrawals) As an employer, you cannot prohibit distributions from a SEP-IRA. Filing 1040x with form 982 Also, you cannot make your contributions on the condition that any part of them must be kept in the account after you have made your contributions to the employee's accounts. Filing 1040x with form 982 Distributions are subject to IRA rules. Filing 1040x with form 982 Generally, you or your employee must begin to receive distributions from a SEP-IRA by April 1 of the first year after the calendar year in which you or your employee reaches age 70½. Filing 1040x with form 982 For more information about IRA rules, including the tax treatment of distributions, rollovers, required distributions, and income tax withholding, see Publication 590. Filing 1040x with form 982 Additional Taxes The tax advantages of using SEP-IRAs for retirement savings can be offset by additional taxes that may be imposed for all the following actions. Filing 1040x with form 982 Making excess contributions. Filing 1040x with form 982 Making early withdrawals. Filing 1040x with form 982 Not making required withdrawals. Filing 1040x with form 982 For information about these taxes, see chapter 1 in Publication 590. Filing 1040x with form 982 Also, a SEP-IRA may be disqualified, or an excise tax may apply, if the account is involved in a prohibited transaction, discussed next. Filing 1040x with form 982 Prohibited transaction. Filing 1040x with form 982   If an employee improperly uses his or her SEP-IRA, such as by borrowing money from it, the employee has engaged in a prohibited transaction. Filing 1040x with form 982 In that case, the SEP-IRA will no longer qualify as an IRA. Filing 1040x with form 982 For a list of prohibited transactions, see Prohibited Transactions in chapter 4. Filing 1040x with form 982 Effects on employee. Filing 1040x with form 982   If a SEP-IRA is disqualified because of a prohibited transaction, the assets in the account will be treated as having been distributed to the employee on the first day of the year in which the transaction occurred. Filing 1040x with form 982 The employee must include in income the fair market value of the assets (on the first day of the year) that is more than any cost basis in the account. Filing 1040x with form 982 Also, the employee may have to pay the additional tax for making early withdrawals. Filing 1040x with form 982 Reporting and Disclosure Requirements If you set up a SEP using Form 5305-SEP, you must give your eligible employees certain information about the SEP when you set it up. Filing 1040x with form 982 See Setting Up a SEP , earlier. Filing 1040x with form 982 Also, you must give your eligible employees a statement each year showing any contributions to their SEP-IRAs. Filing 1040x with form 982 You must also give them notice of any excess contributions. Filing 1040x with form 982 For details about other information you must give them, see the instructions for Form 5305-SEP or Form 5305A-SEP (for a salary reduction SEP). Filing 1040x with form 982 Even if you did not use Form 5305-SEP or Form 5305A-SEP to set up your SEP, you must give your employees information similar to that described above. Filing 1040x with form 982 For more information, see the instructions for either Form 5305-SEP or Form 5305A-SEP. Filing 1040x with form 982 Prev  Up  Next   Home   More Online Publications