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Free E File Form 4868

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Free E File Form 4868

Free e file form 4868 7. Free e file form 4868   Depreciation, Depletion, and Amortization Table of Contents What's New for 2013 Introduction Topics - This chapter discusses: Useful Items - You may want to see: Overview of DepreciationWhat Property Can Be Depreciated? What Property Cannot Be Depreciated? When Does Depreciation Begin and End? Can You Use MACRS To Depreciate Your Property? What Is the Basis of Your Depreciable Property? How Do You Treat Repairs and Improvements? Do You Have To File Form 4562? How Do You Correct Depreciation Deductions? Section 179 Expense DeductionWhat Property Qualifies? What Property Does Not Qualify? How Much Can You Deduct? How Do You Elect the Deduction? When Must You Recapture the Deduction? Claiming the Special Depreciation AllowanceWhat is Qualified Property? How Can You Elect Not To Claim the Allowance? When Must You Recapture an Allowance Figuring Depreciation Under MACRSWhich Depreciation System (GDS or ADS) Applies? Which Property Class Applies Under GDS? What Is the Placed-in-Service Date? What Is the Basis for Depreciation? Which Recovery Period Applies? Which Convention Applies? Which Depreciation Method Applies? How Is the Depreciation Deduction Figured? How Do You Use General Asset Accounts? When Do You Recapture MACRS Depreciation? Additional Rules for Listed PropertyWhat Is Listed Property? What Is the Business-Use Requirement? Do the Passenger Automobile Limits Apply? Depletion Who Can Claim Depletion? Figuring Depletion AmortizationBusiness Start-Up Costs Reforestation Costs Section 197 Intangibles What's New for 2013 Increased section 179 expense deduction dollar limits. Free e file form 4868  The maximum amount you can elect to deduct for most section 179 property you placed in service in 2013 is $500,000. Free e file form 4868 This limit is reduced by the amount by which the cost of the property placed in service during the tax year exceeds $2 million. Free e file form 4868 See Dollar Limits under Section 179 Expense Deduction , later. Free e file form 4868 Extension of special depreciation allowance for certain qualified property acquired after December 31, 2007. Free e file form 4868 . Free e file form 4868  You may be able to take a 50% special depreciation allowance for certain qualified property acquired after December 31, 2007, and placed in service before January 1, 2014. Free e file form 4868 See Claiming the Special Depreciation Allowance , later. Free e file form 4868 Expiration of the 3- year recovery period for certain race horses. Free e file form 4868  The 3-year recovery period for race horses two years old or younger will expire for such horses placed in service after December 31, 2013. Free e file form 4868 Introduction If you buy or make improvements to farm property such as machinery, equipment, livestock, or a structure with a useful life of more than a year, you generally cannot deduct its entire cost in one year. Free e file form 4868 Instead, you must spread the cost over the time you use the property and deduct part of it each year. Free e file form 4868 For most types of property, this is called depreciation. Free e file form 4868 This chapter gives information on depreciation methods that generally apply to property placed in service after 1986. Free e file form 4868 For information on depreciating pre-1987 property, see Publication 534, Depreciating Property Placed in Service Before 1987. Free e file form 4868 Topics - This chapter discusses: Overview of depreciation Section 179 expense deduction Special depreciation allowance Modified Accelerated Cost Recovery System (MACRS) Listed property Basic information on cost depletion (including timber depletion) and percentage depletion Amortization of the costs of going into business, reforestation costs, the costs of pollution control facilities, and the costs of section 197 intangibles Useful Items - You may want to see: Publication 463 Travel, Entertainment, Gift, and Car Expenses 534 Depreciating Property Placed in Service Before 1987 535 Business Expenses 544 Sales and Other Dispositions of Assets 551 Basis of Assets 946 How To Depreciate Property Form (and Instructions) T (Timber), Forest Activities Schedule 3115 Application for Change in Accounting Method 4562 Depreciation and Amortization 4797 Sales of Business Property See chapter 16 for information about getting publications and forms. Free e file form 4868 It is important to keep good records for property you depreciate. Free e file form 4868 Do not file these records with your return. Free e file form 4868 Instead, you should keep them as part of the permanent records of the depreciated property. Free e file form 4868 They will help you verify the accuracy of the depreciation of assets placed in service in the current and previous tax years. Free e file form 4868 For general information on recordkeeping, see Publication 583, Starting a Business and Keeping Records. Free e file form 4868 For specific information on keeping records for section 179 property and listed property, see Publication 946, How To Depreciate Property. Free e file form 4868 Overview of Depreciation This overview discusses basic information on the following. Free e file form 4868 What property can be depreciated. Free e file form 4868 What property cannot be depreciated. Free e file form 4868 When depreciation begins and ends. Free e file form 4868 Whether MACRS can be used to figure depreciation. Free e file form 4868 What is the basis of your depreciable property. Free e file form 4868 How to treat repairs and improvements. Free e file form 4868 When you must file Form 4562. Free e file form 4868 How you can correct depreciation claimed incorrectly. Free e file form 4868 What Property Can Be Depreciated? You can depreciate most types of tangible property (except land), such as buildings, machinery, equipment, vehicles, certain livestock, and furniture. Free e file form 4868 You can also depreciate certain intangible property, such as copyrights, patents, and computer software. Free e file form 4868 To be depreciable, the property must meet all the following requirements. Free e file form 4868 It must be property you own. Free e file form 4868 It must be used in your business or income-producing activity. Free e file form 4868 It must have a determinable useful life. Free e file form 4868 It must have a useful life that extends substantially beyond the year you place it in service. Free e file form 4868 Property You Own To claim depreciation, you usually must be the owner of the property. Free e file form 4868 You are considered as owning property even if it is subject to a debt. Free e file form 4868 Leased property. Free e file form 4868   You can depreciate leased property only if you retain the incidents of ownership in the property. Free e file form 4868 This means you bear the burden of exhaustion of the capital investment in the property. Free e file form 4868 Therefore, if you lease property from someone to use in your trade or business or for the production of income, you generally cannot depreciate its cost because you do not retain the incidents of ownership. Free e file form 4868 You can, however, depreciate any capital improvements you make to the leased property. Free e file form 4868 See Additions and Improvements under Which Recovery Period Applies in chapter 4 of Publication 946. Free e file form 4868   If you lease property to someone, you generally can depreciate its cost even if the lessee (the person leasing from you) has agreed to preserve, replace, renew, and maintain the property. Free e file form 4868 However, you cannot depreciate the cost of the property if the lease provides that the lessee is to maintain the property and return to you the same property or its equivalent in value at the expiration of the lease in as good condition and value as when leased. Free e file form 4868 Life tenant. Free e file form 4868   Generally, if you hold business or investment property as a life tenant, you can depreciate it as if you were the absolute owner of the property. Free e file form 4868 See Certain term interests in property , later, for an exception. Free e file form 4868 Property Used in Your Business or Income-Producing Activity To claim depreciation on property, you must use it in your business or income-producing activity. Free e file form 4868 If you use property to produce income (investment use), the income must be taxable. Free e file form 4868 You cannot depreciate property that you use solely for personal activities. Free e file form 4868 However, if you use property for business or investment purposes and for personal purposes, you can deduct depreciation based only on the percentage of business or investment use. Free e file form 4868 Example 1. Free e file form 4868   If you use your car for farm business, you can deduct depreciation based on its percentage of use in farming. Free e file form 4868 If you also use it for investment purposes, you can depreciate it based on its percentage of investment use. Free e file form 4868 Example 2. Free e file form 4868   If you use part of your home for business, you may be able to deduct depreciation on that part based on its business use. Free e file form 4868 For more information, see Business Use of Your Home in chapter 4. Free e file form 4868 Inventory. Free e file form 4868   You can never depreciate inventory because it is not held for use in your business. Free e file form 4868 Inventory is any property you hold primarily for sale to customers in the ordinary course of your business. Free e file form 4868 Livestock. Free e file form 4868   Livestock purchased for draft, breeding, or dairy purposes can be depreciated only if they are not kept in an inventory account. Free e file form 4868 Livestock you raise usually has no depreciable basis because the costs of raising them are deducted and not added to their basis. Free e file form 4868 However, see Immature livestock under When Does Depreciation Begin and End , later, for a special rule. Free e file form 4868 Property Having a Determinable Useful Life To be depreciable, your property must have a determinable useful life. Free e file form 4868 This means it must be something that wears out, decays, gets used up, becomes obsolete, or loses its value from natural causes. Free e file form 4868 Irrigation systems and water wells. Free e file form 4868   Irrigation systems and wells used in a trade or business can be depreciated if their useful life can be determined. Free e file form 4868 You can depreciate irrigation systems and wells composed of masonry, concrete, tile, metal, or wood. Free e file form 4868 In addition, you can depreciate costs for moving dirt to construct irrigation systems and water wells composed of these materials. Free e file form 4868 However, land preparation costs for center pivot irrigation systems are not depreciable. Free e file form 4868 Dams, ponds, and terraces. Free e file form 4868   In general, you cannot depreciate earthen dams, ponds, and terraces unless the structures have a determinable useful life. Free e file form 4868 What Property Cannot Be Depreciated? Certain property cannot be depreciated, even if the requirements explained earlier are met. Free e file form 4868 This includes the following. Free e file form 4868 Land. Free e file form 4868 You can never depreciate the cost of land because land does not wear out, become obsolete, or get used up. Free e file form 4868 The cost of land generally includes the cost of clearing, grading, planting, and landscaping. Free e file form 4868 Although you cannot depreciate land, you can depreciate certain costs incurred in preparing land for business use. Free e file form 4868 See chapter 1 of Publication 946. Free e file form 4868 Property placed in service and disposed of in the same year. Free e file form 4868 Determining when property is placed in service is explained later. Free e file form 4868 Equipment used to build capital improvements. Free e file form 4868 You must add otherwise allowable depreciation on the equipment during the period of construction to the basis of your improvements. Free e file form 4868 Intangible property such as section 197 intangibles. Free e file form 4868 This property does not have a determinable useful life and generally cannot be depreciated. Free e file form 4868 However, see Amortization , later. Free e file form 4868 Special rules apply to computer software (discussed below). Free e file form 4868 Certain term interests (discussed below). Free e file form 4868 Computer software. Free e file form 4868   Computer software is generally not a section 197 intangible even if acquired in connection with the acquisition of a business, if it meets all of the following tests. Free e file form 4868 It is readily available for purchase by the general public. Free e file form 4868 It is subject to a nonexclusive license. Free e file form 4868 It has not been substantially modified. Free e file form 4868   If the software meets the tests above, it can be depreciated and may qualify for the section 179 expense deduction and the special depreciation allowance (if applicable), discussed later. Free e file form 4868 Certain term interests in property. Free e file form 4868   You cannot depreciate a term interest in property created or acquired after July 27, 1989, for any period during which the remainder interest is held, directly or indirectly, by a person related to you. Free e file form 4868 This rule does not apply to the holder of a term interest in property acquired by gift, bequest, or inheritance. Free e file form 4868 For more information, see chapter 1 of Publication 946. Free e file form 4868 When Does Depreciation Begin and End? You begin to depreciate your property when you place it in service for use in your trade or business or for the production of income. Free e file form 4868 You stop depreciating property either when you have fully recovered your cost or other basis or when you retire it from service, whichever happens first. Free e file form 4868 Placed in Service Property is placed in service when it is ready and available for a specific use, whether in a business activity, an income-producing activity, a tax-exempt activity, or a personal activity. Free e file form 4868 Even if you are not using the property, it is in service when it is ready and available for its specific use. Free e file form 4868 Example. Free e file form 4868 You bought a planter for use in your farm business. Free e file form 4868 The planter was delivered in December 2012 after harvest was over. Free e file form 4868 You begin to depreciate the planter for 2012 because it was ready and available for its specific use in 2012, even though it will not be used until the spring of 2013. Free e file form 4868 If your planter comes unassembled in December 2012 and is put together in February 2013, it is not placed in service until 2013. Free e file form 4868 You begin to depreciate it in 2013. Free e file form 4868 If your planter was delivered and assembled in February 2013 but not used until April 2013, it is placed in service in February 2013, because this is when the planter was ready for its specified use. Free e file form 4868 You begin to depreciate it in 2013. Free e file form 4868 Fruit or nut trees and vines. Free e file form 4868   If you acquire an orchard, grove, or vineyard before the trees or vines have reached the income-producing stage, and they have a preproductive period of more than 2 years, you must capitalize the preproductive-period costs under the uniform capitalization rules (unless you elect not to use these rules). Free e file form 4868 See chapter 6 for information about the uniform capitalization rules. Free e file form 4868 Your depreciation begins when the trees and vines reach the income-producing stage (that is, when they bear fruit, nuts, or grapes in quantities sufficient to commercially warrant harvesting). Free e file form 4868 Immature livestock. Free e file form 4868   Depreciation for livestock begins when the livestock reaches the age of maturity. Free e file form 4868 If you bought immature livestock for drafting purposes, depreciation begins when they can be worked. Free e file form 4868 If you bought immature livestock for dairy purposes, depreciation begins when they can be milked. Free e file form 4868 If you bought immature livestock for breeding purposes, depreciation begins when they can be bred. Free e file form 4868 Your basis for depreciation is your initial cost for the immature livestock. Free e file form 4868 Idle Property Continue to claim a deduction for depreciation on property used in your business or for the production of income even if it is temporarily idle. Free e file form 4868 For example, if you stop using a machine because there is a temporary lack of a market for a product made with that machine, continue to deduct depreciation on the machine. Free e file form 4868 Cost or Other Basis Fully Recovered You stop depreciating property when you have fully recovered your cost or other basis. Free e file form 4868 This happens when your section 179 and allowed or allowable depreciation deductions equal your cost or investment in the property. Free e file form 4868 Retired From Service You stop depreciating property when you retire it from service, even if you have not fully recovered its cost or other basis. Free e file form 4868 You retire property from service when you permanently withdraw it from use in a trade or business or from use in the production of income because of any of the following events. Free e file form 4868 You sell or exchange the property. Free e file form 4868 You convert the property to personal use. Free e file form 4868 You abandon the property. Free e file form 4868 You transfer the property to a supplies or scrap account. Free e file form 4868 The property is destroyed. Free e file form 4868 For information on abandonment of property, see chapter 8. Free e file form 4868 For information on destroyed property, see chapter 11 and Publication 547, Casualties, Disasters, and Thefts. Free e file form 4868 Can You Use MACRS To Depreciate Your Property? You must use the Modified Accelerated Cost Recovery System (MACRS) to depreciate most business and investment property placed in service after 1986. Free e file form 4868 MACRS is explained later under Figuring Depreciation Under MACRS . Free e file form 4868 You cannot use MACRS to depreciate the following property. Free e file form 4868 Property you placed in service before 1987. Free e file form 4868 Use the methods discussed in Publication 534. Free e file form 4868 Certain property owned or used in 1986. Free e file form 4868 See chapter 1 of Publication 946. Free e file form 4868 Intangible property. Free e file form 4868 Films, video tapes, and recordings. Free e file form 4868 Certain corporate or partnership property acquired in a nontaxable transfer. Free e file form 4868 Property you elected to exclude from MACRS. Free e file form 4868 For more information, see chapter 1 of Publication 946. Free e file form 4868 What Is the Basis of Your Depreciable Property? To figure your depreciation deduction, you must determine the basis of your property. Free e file form 4868 To determine basis, you need to know the cost or other basis of your property. Free e file form 4868 Cost or other basis. Free e file form 4868   The basis of property you buy is usually its cost plus amounts you paid for items such as sales tax, freight charges, and installation and testing fees. Free e file form 4868 The cost includes the amount you pay in cash, debt obligations, other property, or services. Free e file form 4868   There are times when you cannot use cost as basis. Free e file form 4868 In these situations, the fair market value (FMV) or the adjusted basis of the property may be used. Free e file form 4868 Adjusted basis. Free e file form 4868   To find your property's basis for depreciation, you may have to make certain adjustments (increases and decreases) to the basis of the property for events occurring between the time you acquired the property and the time you placed it in service. Free e file form 4868 Basis adjustment for depreciation allowed or allowable. Free e file form 4868   After you place your property in service, you must reduce the basis of the property by the depreciation allowed or allowable, whichever is greater. Free e file form 4868 Depreciation allowed is depreciation you actually deducted (from which you received a tax benefit). Free e file form 4868 Depreciation allowable is depreciation you are entitled to deduct. Free e file form 4868   If you do not claim depreciation you are entitled to deduct, you must still reduce the basis of the property by the full amount of depreciation allowable. Free e file form 4868   If you deduct more depreciation than you should, you must reduce your basis by any amount deducted from which you received a tax benefit (the depreciation allowed). Free e file form 4868   For more information, see chapter 6. Free e file form 4868 How Do You Treat Repairs and Improvements? You generally deduct the cost of repairing business property in the same way as any other business expense. Free e file form 4868 However, if a repair or replacement increases the value of your property, makes it more useful, or lengthens its life, you must treat it as an improvement and depreciate it. Free e file form 4868 Treat improvements as separate depreciable property. Free e file form 4868 See chapter 1 of Publication 946 for more information. Free e file form 4868 Example. Free e file form 4868 You repair a small section on a corner of the roof of a barn that you rent to others. Free e file form 4868 You deduct the cost of the repair as a business expense. Free e file form 4868 However, if you replace the entire roof, the new roof is considered to be an improvement because it increases the value and lengthens the life for the property. Free e file form 4868 You depreciate the cost of the new roof. Free e file form 4868 Improvements to rented property. Free e file form 4868   You can depreciate permanent improvements you make to business property you rent from someone else. Free e file form 4868 Do You Have To File Form 4562? Use Form 4562 to claim your deduction for depreciation and amortization. Free e file form 4868 You must complete and attach Form 4562 to your tax return if you are claiming any of the following. Free e file form 4868 A section 179 expense deduction for the current year or a section 179 carryover from a prior year. Free e file form 4868 Depreciation for property placed in service during the current year. Free e file form 4868 Depreciation on any vehicle or other listed property, regardless of when it was placed in service. Free e file form 4868 Amortization of costs that began in the current year. Free e file form 4868 For more information, see the Instructions for Form 4562. Free e file form 4868 How Do You Correct Depreciation Deductions? If you deducted an incorrect amount of depreciation in any year, you may be able to make a correction by filing an amended return for that year. Free e file form 4868 You can file an amended return to correct the amount of depreciation claimed for any property in any of the following situations. Free e file form 4868 You claimed the incorrect amount because of a mathematical error made in any year. Free e file form 4868 You claimed the incorrect amount because of a posting error made in any year, for example, omitting an asset from the depreciation schedule. Free e file form 4868 You have not adopted a method of accounting for the property placed in service by you in tax years ending after December 29, 2003. Free e file form 4868 You claimed the incorrect amount on property placed in service by you in tax years ending before December 30, 2003. Free e file form 4868 Note. Free e file form 4868 You have adopted a method of accounting if you used the same incorrect method of depreciation for two or more consecutively filed returns. Free e file form 4868 If you are not allowed to make the correction on an amended return, you may be able to change your accounting method to claim the correct amount of depreciation. Free e file form 4868 See the Instructions for Form 3115. Free e file form 4868 Section 179 Expense Deduction You can elect to recover all or part of the cost of certain qualifying property, up to a limit, by deducting it in the year you place the property in service. Free e file form 4868 This is the section 179 expense deduction. Free e file form 4868 You can elect the section 179 expense deduction instead of recovering the cost by taking depreciation deductions. Free e file form 4868 This part of the chapter explains the rules for the section 179 expense deduction. Free e file form 4868 It explains what property qualifies for the deduction, what property does not qualify for the deduction, the limits that may apply, how to elect the deduction, and when you may have to recapture the deduction. Free e file form 4868 For more information, see chapter 2 of Publication 946. Free e file form 4868 What Property Qualifies? To qualify for the section 179 expense deduction, your property must meet all the following requirements. Free e file form 4868 It must be eligible property. Free e file form 4868 It must be acquired for business use. Free e file form 4868 It must have been acquired by purchase. Free e file form 4868 Eligible Property To qualify for the section 179 expense deduction, your property must be one of the following types of depreciable property. Free e file form 4868 Tangible personal property. Free e file form 4868 Qualified real property. Free e file form 4868 (Special rules apply to qualified real property that you elect to treat as qualified section 179 real property. Free e file form 4868 For more information, see chapter 2 of Publication 946 and section 179(f) of the Internal Revenue Code. Free e file form 4868 ) Other tangible property (except buildings and their structural components) used as: An integral part of manufacturing, production, or extraction or of furnishing transportation, communications, electricity, gas, water, or sewage disposal services; A research facility used in connection with any of the activities in (a) above; or A facility used in connection with any of the activities in (a) for the bulk storage of fungible commodities. Free e file form 4868 Single purpose agricultural (livestock) or horticultural structures. Free e file form 4868 Storage facilities (except buildings and their structural components) used in connection with distributing petroleum or any primary product of petroleum. Free e file form 4868 Off-the-shelf computer software that is readily available for purchase by the general public, is subject to a nonexclusive lease, and has not been substantially modified. Free e file form 4868 Tangible personal property. Free e file form 4868   Tangible personal property is any tangible property that is not real property. Free e file form 4868 It includes the following property. Free e file form 4868 Machinery and equipment. Free e file form 4868 Property contained in or attached to a building (other than structural components), such as milk tanks, automatic feeders, barn cleaners, and office equipment. Free e file form 4868 Gasoline storage tanks and pumps at retail service stations. Free e file form 4868 Livestock, including horses, cattle, hogs, sheep, goats, and mink and other fur-bearing animals. Free e file form 4868 Facility used for the bulk storage of fungible commodities. Free e file form 4868   A facility used for the bulk storage of fungible commodities is qualifying property for purposes of the section 179 expense deduction if it is used in connection with any of the activities listed earlier in item (3)(a). Free e file form 4868 Bulk storage means the storage of a commodity in a large mass before it is used. Free e file form 4868 Grain bins. Free e file form 4868   A grain bin is an example of a storage facility that is qualifying section 179 property. Free e file form 4868 It is a facility used in connection with the production of grain or livestock for the bulk storage of fungible commodities. Free e file form 4868 Single purpose agricultural or horticultural structures. Free e file form 4868   A single purpose agricultural (livestock) or horticultural structure is qualifying property for purposes of the section 179 expense deduction. Free e file form 4868 Agricultural structure. Free e file form 4868   A single purpose agricultural (livestock) structure is any building or enclosure specifically designed, constructed, and used for both the following reasons. Free e file form 4868 To house, raise, and feed a particular type of livestock and its produce. Free e file form 4868 To house the equipment, including any replacements, needed to house, raise, or feed the livestock. Free e file form 4868 For this purpose, livestock includes poultry. Free e file form 4868   Single purpose structures are qualifying property if used, for example, to breed chickens or hogs, produce milk from dairy cattle, or produce feeder cattle or pigs, broiler chickens, or eggs. Free e file form 4868 The facility must include, as an integral part of the structure or enclosure, equipment necessary to house, raise, and feed the livestock. Free e file form 4868 Horticultural structure. Free e file form 4868   A single purpose horticultural structure is either of the following. Free e file form 4868 A greenhouse specifically designed, constructed, and used for the commercial production of plants. Free e file form 4868 A structure specifically designed, constructed, and used for the commercial production of mushrooms. Free e file form 4868 Use of structure. Free e file form 4868   A structure must be used only for the purpose that qualified it. Free e file form 4868 For example, a hog barn will not be qualifying property if you use it to house poultry. Free e file form 4868 Similarly, using part of your greenhouse to sell plants will make the greenhouse nonqualifying property. Free e file form 4868   If a structure includes work space, the work space can be used only for the following activities. Free e file form 4868 Stocking, caring for, or collecting livestock or plants or their produce. Free e file form 4868 Maintaining the enclosure or structure. Free e file form 4868 Maintaining or replacing the equipment or stock enclosed or housed in the structure. Free e file form 4868 Property Acquired by Purchase To qualify for the section 179 expense deduction, your property must have been acquired by purchase. Free e file form 4868 For example, property acquired by gift or inheritance does not qualify. Free e file form 4868 Property acquired from a related person (that is, your spouse, ancestors, or lineal descendants) is not considered acquired by purchase. Free e file form 4868 Example. Free e file form 4868 Ken is a farmer. Free e file form 4868 He purchased two tractors, one from his brother and one from his father. Free e file form 4868 He placed both tractors in service in the same year he bought them. Free e file form 4868 The tractor purchased from his father does not qualify for the section 179 expense deduction because he is a related person (as defined above). Free e file form 4868 The tractor purchased from his brother does qualify for the deduction because Ken is not a related person (as defined above). Free e file form 4868 What Property Does Not Qualify? Land and improvements. Free e file form 4868   Land and land improvements, do not qualify as section 179 property. Free e file form 4868 Land improvements include nonagricultural fences, swimming pools, paved parking areas, wharves, docks, bridges, and fences. Free e file form 4868 However, agricultural fences do qualify as section 179 property. Free e file form 4868 Similarly, field drainage tile also qualifies as section 179 property. Free e file form 4868 Excepted property. Free e file form 4868   Even if the requirements explained in the preceding discussions are met, farmers cannot elect the section 179 expense deduction for the following property. Free e file form 4868 Certain property you lease to others (if you are a noncorporate lessor). Free e file form 4868 Certain property used predominantly to furnish lodging or in connection with the furnishing of lodging. Free e file form 4868 Property used by a tax-exempt organization (other than a tax-exempt farmers' cooperative) unless the property is used mainly in a taxable unrelated trade or business. Free e file form 4868 Property used by governmental units or foreign persons or entities (except property used under a lease with a term of less than 6 months). Free e file form 4868 How Much Can You Deduct? Your section 179 expense deduction is generally the cost of the qualifying property. Free e file form 4868 However, the total amount you can elect to deduct under section 179 is subject to a dollar limit and a business income limit. Free e file form 4868 These limits apply to each taxpayer, not to each business. Free e file form 4868 However, see Married individuals under Dollar Limits , later. Free e file form 4868 See also the special rules for applying the limits for partnerships and S corporations under Partnerships and S Corporations , later. Free e file form 4868 If you deduct only part of the cost of qualifying property as a section 179 expense deduction, you can generally depreciate the cost you do not deduct. Free e file form 4868 Use Part I of Form 4562 to figure your section 179 expense deduction. Free e file form 4868 Partial business use. Free e file form 4868   When you use property for business and nonbusiness purposes, you can elect the section 179 expense deduction only if you use it more than 50% for business in the year you place it in service. Free e file form 4868 If you used the property more than 50% for business, multiply the cost of the property by the percentage of business use. Free e file form 4868 Use the resulting business cost to figure your section 179 expense deduction. Free e file form 4868 Trade-in of other property. Free e file form 4868   If you buy qualifying property with cash and a trade-in, its cost for purposes of the section 179 expense deduction includes only the cash you paid. Free e file form 4868 For example, if you buy (for cash and a trade-in) a new tractor for use in your business, your cost for the section 179 expense deduction is the cash you paid. Free e file form 4868 It does not include the adjusted basis of the old tractor you trade for the new tractor. Free e file form 4868 Example. Free e file form 4868 J-Bar Farms traded two cultivators having a total adjusted basis of $6,800 for a new cultivator costing $13,200. Free e file form 4868 They received an $8,000 trade-in allowance for the old cultivators and paid $5,200 cash for the new cultivator. Free e file form 4868 J-Bar also traded a used pickup truck with an adjusted basis of $8,000 for a new pickup truck costing $35,000. Free e file form 4868 They received a $5,000 trade-in allowance and paid $30,000 cash for the new pickup truck. Free e file form 4868 Only the cash paid by J-Bar qualifies for the section 179 expense deduction. Free e file form 4868 J-Bar's business costs that qualify for a section 179 expense deduction are $35,200 ($5,200 + $30,000). Free e file form 4868 Dollar Limits The total amount you can elect to deduct under section 179 for most property placed in service in 2013 is $500,000. Free e file form 4868 If you acquire and place in service more than one item of qualifying property during the year, you can allocate the section 179 expense deduction among the items in any way, as long as the total deduction is not more than $500,000. Free e file form 4868 Qualified real property that you elect to treat as section 179 property is limited to $250,000 of the maximum section 179 deduction of $500,000 for 2013. Free e file form 4868 You do not have to claim the full $500,000. Free e file form 4868 For specific information on the section 179 dollar limits, see chapter 2 of Publication 946. Free e file form 4868 Reduced dollar limit for cost exceeding $2 million. Free e file form 4868   If the cost of your qualifying section 179 property placed in service in 2013 is over $2 million, you must reduce the dollar limit (but not below zero) by the amount of cost over $2 million. Free e file form 4868 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 expense deduction and you cannot carry over the cost that is more than $2,500,000. Free e file form 4868 Example. Free e file form 4868 This year, James Smith placed in service machinery costing $2,050,000. Free e file form 4868 Because this cost is $50,000 more than $2 million, he must reduce his dollar limit to $450,000 ($500,000 − $50,000). Free e file form 4868 Limits for sport utility vehicles. Free e file form 4868   The total amount you can elect to deduct for certain sport utility vehicles and certain other vehicles placed in service in 2013 is $25,000. Free e file form 4868 This rule applies to any 4-wheeled vehicle primarily designed or used to carry passengers over public streets, roads, and highways that is rated at more than 6,000 pounds gross vehicle weight and not more than 14,000 pounds gross vehicle weight. Free e file form 4868   For more information, see chapter 2 of Publication 946. Free e file form 4868 Limits for passenger automobiles. Free e file form 4868   For a passenger automobile that is placed in service in 2013, the total section 179 and depreciation deduction is limited. Free e file form 4868 See Do the Passenger Automobile Limits Apply , later. Free e file form 4868 Married individuals. Free e file form 4868   If you are married, how you figure your section 179 expense deduction depends on whether you file jointly or separately. Free e file form 4868 If you 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. Free e file form 4868 If you and your spouse file separate returns, you are treated as one taxpayer for the dollar limit, including the reduction for costs over $2 million. Free e file form 4868 You must allocate the dollar limit (after any reduction) equally between you, unless you both elect a different allocation. Free e file form 4868 If the percentages elected by each of you do not total 100%, 50% will be allocated to each of you. Free e file form 4868 Joint return after separate returns. Free e file form 4868   If you and your spouse elect to amend your separate returns by filing a joint return after the due date for filing your return, the dollar limit on the joint return is the lesser of the following amounts. Free e file form 4868 The dollar limit (after reduction for any cost of section 179 property over $2 million). Free e file form 4868 The total cost of section 179 property you and your spouse elected to expense on your separate returns. Free e file form 4868 Business Income Limit The total cost you can deduct each year after you apply the dollar limit is limited to the taxable income from the active conduct of any trade or business during the year. Free e file form 4868 Generally, you are considered to actively conduct a trade or business if you meaningfully participate in the management or operations of the trade or business. Free e file form 4868 Any cost not deductible in one year under section 179 because of this limit can be carried to the next year. Free e file form 4868 See Carryover of disallowed deduction , later. Free e file form 4868 Taxable income. Free e file form 4868   In general, figure taxable income for this purpose by totaling the net income and losses from all trades and businesses you actively conducted during the year. Free e file form 4868 In addition to net income or loss from a sole proprietorship, partnership, or S corporation, net income or loss derived from a trade or business also includes the following items. Free e file form 4868 Section 1231 gains (or losses) as discussed in chapter 9. Free e file form 4868 Interest from working capital of your trade or business. Free e file form 4868 Wages, salaries, tips, or other pay earned by you (or your spouse if you file a joint return) as an employee of any employer. Free e file form 4868   In addition, figure taxable income without regard to any of the following. Free e file form 4868 The section 179 expense deduction. Free e file form 4868 The self-employment tax deduction. Free e file form 4868 Any net operating loss carryback or carryforward. Free e file form 4868 Any unreimbursed employee business expenses. Free e file form 4868 Two different taxable income limits. Free e file form 4868   In addition to the business income limit for your section 179 expense deduction, you may have a taxable income limit for some other deduction (for example, charitable contributions). Free e file form 4868 You may have to figure the limit for this other deduction taking into account the section 179 expense deduction. Free e file form 4868 If so, complete the following steps. Free e file form 4868 Step Action 1 Figure taxable income without the section 179 expense deduction or the other deduction. Free e file form 4868 2 Figure a hypothetical section 179 expense deduction using the taxable income figured in Step 1. Free e file form 4868 3 Subtract the hypothetical section 179 expense deduction figured in Step 2 from the taxable income figured in Step 1. Free e file form 4868 4 Figure a hypothetical amount for the other deduction using the amount figured in Step 3 as taxable income. Free e file form 4868 5 Subtract the hypothetical other deduction figured in Step 4 from the taxable income figured in  Step 1. Free e file form 4868 6 Figure your actual section 179 expense deduction using the taxable income figured in Step 5. Free e file form 4868 7 Subtract your actual section 179 expense deduction figured in Step 6 from the taxable income figured in Step 1. Free e file form 4868 8 Figure your actual other deduction using the taxable income figured in Step 7. Free e file form 4868 Example. Free e file form 4868 On February 1, 2013, the XYZ farm corporation purchased and placed in service qualifying section 179 property that cost $500,000. Free e file form 4868 It elects to expense the entire $500,000 cost under section 179. Free e file form 4868 In June, the corporation gave a charitable contribution of $10,000. Free e file form 4868 A corporation's limit on charitable contributions is figured after subtracting any section 179 expense deduction. Free e file form 4868 The business income limit for the section 179 expense deduction is figured after subtracting any allowable charitable contributions. Free e file form 4868 XYZ's taxable income figured without the section 179 expense deduction or the deduction for charitable contributions is $520,000. Free e file form 4868 XYZ figures its section 179 expense deduction and its deduction for charitable contributions as follows. Free e file form 4868 Step 1. Free e file form 4868 Taxable income figured without either deduction is $520,000. Free e file form 4868 Step 2. Free e file form 4868 Using $520,000 as taxable income, XYZ's hypothetical section 179 expense deduction is $500,000. Free e file form 4868 Step 3. Free e file form 4868 $20,000 ($520,000 − $500,000). Free e file form 4868 Step 4. Free e file form 4868 Using $20,000 (from Step 3) as taxable income, XYZ's hypothetical charitable contribution (limited to 10% of taxable income) is $2,000. Free e file form 4868 Step 5. Free e file form 4868 $518,000 ($520,000 − $2,000). Free e file form 4868 Step 6. Free e file form 4868 Using $518,000 (from Step 5) as taxable income, XYZ figures the actual section 179 expense deduction. Free e file form 4868 Because the taxable income is at least $500,000, XYZ can take a $500,000 section 179 expense deduction. Free e file form 4868 Step 7. Free e file form 4868 $20,000 ($520,000 − $500,000). Free e file form 4868 Step 8. Free e file form 4868 Using $20,000 (from Step 7) as taxable income, XYZ's actual charitable contribution (limited to 10% of taxable income) is $2,000. Free e file form 4868 Carryover of disallowed deduction. Free e file form 4868   You can carry over for an unlimited number of years the cost of any section 179 property you elected to expense but were unable to because of the business income limit. Free e file form 4868   The amount you carry over is used in determining your section 179 expense deduction in the next year. Free e file form 4868 However, it is subject to the limits in that year. Free e file form 4868 If you place more than one property in service in a year, you can select the properties for which all or a part of the cost will be carried forward. Free e file form 4868 Your selections must be shown in your books and records. Free e file form 4868 Example. Free e file form 4868 Last year, Joyce Jones placed in service a machine that cost $8,000 and elected to deduct all $8,000 under section 179. Free e file form 4868 The taxable income from her business (determined without regard to both a section 179 expense deduction for the cost of the machine and the self-employment tax deduction) was $6,000. Free e file form 4868 Her section 179 expense deduction was limited to $6,000. Free e file form 4868 The $2,000 cost that was not allowed as a section 179 expense deduction (because of the business income limit) is carried to this year. Free e file form 4868 This year, Joyce placed another machine in service that cost $9,000. Free e file form 4868 Her taxable income from business (determined without regard to both a section 179 expense deduction for the cost of the machine and the self-employment tax deduction) is $10,000. Free e file form 4868 Joyce can deduct the full cost of the machine ($9,000) but only $1,000 of the carryover from last year because of the business income limit. Free e file form 4868 She can carry over the balance of $1,000 to next year. Free e file form 4868 Partnerships and S Corporations The section 179 expense deduction limits apply both to the partnership or S corporation and to each partner or shareholder. Free e file form 4868 The partnership or S corporation determines its section 179 expense deduction subject to the limits. Free e file form 4868 It then allocates the deduction among its partners or shareholders. Free e file form 4868 If you are a partner in a partnership or shareholder of an S corporation, you add the amount allocated from the partnership or S corporation to any section 179 costs not related to the partnership or S corporation and then apply the dollar limit to this total. Free e file form 4868 To determine any reduction in the dollar limit for costs over $560,000, you do not include any of the cost of section 179 property placed in service by the partnership or S corporation. Free e file form 4868 After you apply the dollar limit, you apply the business income limit to any remaining section 179 costs. Free e file form 4868 For more information, see chapter 2 of Publication 946. Free e file form 4868 Example. Free e file form 4868 In 2013, Partnership P placed in service section 179 property with a total cost of $2,160,000. Free e file form 4868 P must reduce its dollar limit by $160,000 ($2,160,000 − $2,000,000). Free e file form 4868 Its maximum section 179 expense deduction is $340,000 ($500,000 − $160,000), and it elects to expense that amount. Free e file form 4868 Because P's taxable income from the active conduct of all its trades or businesses for the year was $400,000, it can deduct the full $340,000. Free e file form 4868 P allocates $100,000 of its section 179 expense deduction and $110,000 of its taxable income to John, one of its partners. Free e file form 4868 John also conducts a business as a sole proprietor and in 2013, placed in service in that business, section 179 property costing $28,000. Free e file form 4868 John's taxable income from that business was $10,000. Free e file form 4868 In addition to the $100,000 allocated from P, he elects to expense the $28,000 of his sole proprietorship's section 179 costs. Free e file form 4868 However, John's deduction is limited to his business taxable income of $120,000 ($110,000 from P plus $10,000 from his sole proprietorship). Free e file form 4868 He carries over $8,000 ($128,000 − $120,000) of the elected section 179 costs to 2014. Free e file form 4868 How Do You Elect the Deduction? You elect to take the section 179 expense deduction by completing Part I of Form 4562. Free e file form 4868 If you elect the deduction for listed property, complete Part V of  Form 4562 before completing Part I. Free e file form 4868   File Form 4562 with either of the following: Your original tax return (whether or not you filed it timely), or An amended return filed within the time prescribed by law. Free e file form 4868 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. Free e file form 4868 The amended return must also include any resulting adjustments to taxable income. Free e file form 4868 Revoking an election. Free e file form 4868   An election (or any specification made in the election) to take a section 179 expense deduction for 2013 can be revoked without IRS approval by filing an amended return. Free e file form 4868 The amended return must be filed within the time prescribed by law. Free e file form 4868 The amended return must also include any resulting adjustments to taxable income (for example, allowable depreciation in that tax year for the item of section 179 property for which the election pertains. Free e file form 4868 ) Once made, the revocation is irrevocable. Free e file form 4868 When Must You Recapture the Deduction? You may have to recapture the section 179 expense deduction if, in any year during the property's recovery period, the percentage of business use drops to 50% or less. Free e file form 4868 In the year the business use drops to 50% or less, you include the recapture amount as ordinary income. Free e file form 4868 You also increase the basis of the property by the recapture amount. Free e file form 4868 Recovery periods for property are discussed later. Free e file form 4868 If you sell, exchange, or otherwise dispose of the property, do not figure the recapture amount under the rules explained in this discussion. Free e file form 4868 Instead, use the rules for recapturing depreciation explained in  chapter 9 under Section 1245 Property. Free e file form 4868   If the property is listed property, do not figure the recapture amount under the rules explained in this discussion when the percentage of business use drops to 50% or less. Free e file form 4868 Instead, use the rules for recapturing depreciation explained in chapter 5 of Publication 946 under Recapture of Excess Depreciation. Free e file form 4868 Figuring the recapture amount. Free e file form 4868   To figure the amount to recapture, take the following steps. Free e file form 4868 Figure the allowable depreciation for the section 179 expense deduction you claimed. Free e file form 4868 Begin with the year you placed the property in service and include the year of recapture. Free e file form 4868 Subtract the depreciation figured in (1) from the section 179 expense deduction you actually claimed. Free e file form 4868 The result is the amount you must recapture. Free e file form 4868 Example. Free e file form 4868 In January 2011, Paul Lamb, a calendar year taxpayer, bought and placed in service section 179 property costing $10,000. Free e file form 4868 The property is not listed property. Free e file form 4868 He elected a $5,000 section 179 expense deduction for the property and also elected not to claim a special depreciation allowance. Free e file form 4868 He used the property only for business in 2011 and 2012. Free e file form 4868 During 2013, he used the property 40% for business and 60% for personal use. Free e file form 4868 He figures his recapture amount as follows. Free e file form 4868 Section 179 expense deduction claimed (2011) $5,000 Minus: Allowable depreciation (instead of section 179 expense deduction):   2011 $1,250   2012 1,875   2013 ($1,250 × 40% (business)) 500 3,625 2013 — Recapture amount $1,375     Paul must include $1,375 in income for 2013. Free e file form 4868 Where to report recapture. Free e file form 4868   Report any recapture of the section 179 expense deduction as ordinary income in Part IV of Form 4797 and include it in income on Schedule F (Form 1040). Free e file form 4868 Recapture for qualified section 179 GO Zone property. Free e file form 4868   If any qualified section 179 GO Zone property ceases to be used in the GO Zone in a later year, you must recapture the benefit of the increased section 179 expense deduction as “other income. Free e file form 4868 ” Claiming the Special Depreciation Allowance For qualified property (defined below) placed in service in 2013, you can take an additional 50% special depreciation allowance. Free e file form 4868 The allowance is an additional deduction you can take after any section 179 expense deduction and before you figure regular depreciation under MACRS. Free e file form 4868 Figure the special depreciation allowance by multiplying the depreciable basis of the qualified property by 50%. Free e file form 4868 What is Qualified Property? For farmers, qualified property generally is certain qualified property acquired after December 31, 2007, and placed in service before January 1, 2014. Free e file form 4868 Certain qualified property acquired after December 31, 2007, and placed in service before January 1, 2014. Free e file form 4868   Certain qualified property (defined below) acquired after December 31, 2007, and before January 1, 2014, is eligible for a 50% special depreciation allowance. Free e file form 4868   Qualified property includes the following: Tangible property depreciated under the Modified Accelerated Cost Recovery System (MACRS) with a recovery period of 20 years or less. Free e file form 4868 Water utility property. Free e file form 4868 Off-the-shelf computer software. Free e file form 4868 Qualified leasehold improvement property. Free e file form 4868   Qualified property must also meet all of the following tests: You must have acquired qualified property by purchase after December 31, 2007. Free e file form 4868 If a binding contract to acquire the property existed before January 1, 2008, the property does not qualify. Free e file form 4868 Qualified property must be placed in service after December 31, 2007 and placed in service before January 1, 2014 (before January 1, 2015 for certain property with a long production period and for certain aircraft). Free e file form 4868 The original use of the property must begin with you after December 31, 2007. Free e file form 4868 For more information, see chapter 3 of Publication 946. Free e file form 4868 How Can You Elect Not To Claim the Allowance? You can elect, for any class of property, not to deduct the special depreciation allowance for all property in such class placed in service during the tax year. Free e file form 4868 To make the election, attach a statement to your return indicating the class of property for which you are making the election. Free e file form 4868 Generally, you must make the election on a timely filed tax return (including extensions) for the year in which you place the property in service. Free e file form 4868 However, if you timely filed your return for the year without making the election, you still can make the election by filing an amended return within 6 months of the due date of the original return (not including extensions). Free e file form 4868 Attach the election statement to the amended return. Free e file form 4868 On the amended return, write “Filed pursuant to section 301. Free e file form 4868 9100-2. Free e file form 4868 ” Once made, the election may not be revoked without IRS consent. Free e file form 4868 If you elect not to have the special depreciation allowance apply, the property may be subject to an alternative minimum tax adjustment for depreciation. Free e file form 4868 When Must You Recapture an Allowance When you dispose of property for which you claimed a special depreciation allowance, any gain on the disposition is generally recaptured (included in income) as ordinary income up to the amount of the special depreciation allowance previously allowed or allowable. Free e file form 4868 For more information, see chapter 3 of Publication 946. Free e file form 4868 Figuring Depreciation Under MACRS The Modified Accelerated Cost Recovery System (MACRS) is used to recover the basis of most business and investment property placed in service after 1986. Free e file form 4868 MACRS consists of two depreciation systems, the General Depreciation System (GDS) and the Alternative Depreciation System (ADS). Free e file form 4868 Generally, these systems provide different methods and recovery periods to use in figuring depreciation deductions. Free e file form 4868 To be sure you can use MACRS to figure depreciation for your property, see Can You Use MACRS To Depreciate Your Property, earlier. Free e file form 4868 This part explains how to determine which MACRS depreciation system applies to your property. Free e file form 4868 It also discusses the following information that you need to know before you can figure depreciation under MACRS. Free e file form 4868 Property's recovery class. Free e file form 4868 Placed-in-service date. Free e file form 4868 Basis for depreciation. Free e file form 4868 Recovery period. Free e file form 4868 Convention. Free e file form 4868 Depreciation method. Free e file form 4868 Finally, this part explains how to use this information to figure your depreciation deduction. Free e file form 4868 Which Depreciation System (GDS or ADS) Applies? Your use of either the General Depreciation System (GDS) or the Alternative Depreciation System (ADS) to depreciate property under MACRS determines what depreciation method and recovery period you use. Free e file form 4868 You generally must use GDS unless you are specifically required by law to use ADS or you elect to use ADS. Free e file form 4868 Required use of ADS. Free e file form 4868   You must use ADS for the following property. Free e file form 4868 All property used predominantly in a farming business and placed in service in any tax year during which an election not to apply the uniform capitalization rules to certain farming costs is in effect. Free e file form 4868 Listed property used 50% or less in a qualified business use. Free e file form 4868 See Additional Rules for Listed Property , later. Free e file form 4868 Any tax-exempt use property. Free e file form 4868 Any tax-exempt bond-financed property. Free e file form 4868 Any property imported from a foreign country for which an Executive Order is in effect because the country maintains trade restrictions or engages in other discriminatory acts. Free e file form 4868 Any tangible property used predominantly outside the United States during the year. Free e file form 4868 If you are required to use ADS to depreciate your property, you cannot claim the special depreciation allowance. Free e file form 4868 Electing ADS. Free e file form 4868   Although your property may qualify for GDS, you can elect to use ADS. Free e file form 4868 The election generally must cover all property in the same property class you placed in service during the year. Free e file form 4868 However, the election for residential rental property and nonresidential real property can be made on a property-by-property basis. Free e file form 4868 Once you make this election, you can never revoke it. Free e file form 4868   You make the election by completing line 20 in Part III of Form 4562. Free e file form 4868 Which Property Class Applies Under GDS? The following is a list of the nine property classes under GDS. Free e file form 4868 3-year property. Free e file form 4868 5-year property. Free e file form 4868 7-year property. Free e file form 4868 10-year property. Free e file form 4868 15-year property. Free e file form 4868 20-year property. Free e file form 4868 25-year property. Free e file form 4868 Residential rental property. Free e file form 4868 Nonresidential real property. Free e file form 4868 See Which Property Class Applies Under GDS in chapter 4 of Publication 946 for examples of the types of property included in each class. Free e file form 4868 What Is the Placed-in-Service Date? You begin to claim depreciation when your property is placed in service for use either in a trade or business or for the production of income. Free e file form 4868 The placed-in-service date for your property is the date the property is ready and available for a specific use. Free e file form 4868 It is therefore not necessarily the date it is first used. Free e file form 4868 If you converted property held for personal use to use in a trade or business or for the production of income, treat the property as being placed in service on the conversion date. Free e file form 4868 See Placed in Service under When Does Depreciation Begin and End , earlier, for examples illustrating when property is placed in service. Free e file form 4868 What Is the Basis for Depreciation? The basis for depreciation of MACRS property is the property's cost or other basis multiplied by the percentage of business/investment use. Free e file form 4868 Reduce that amount by any credits and deductions allocable to the property. Free e file form 4868 The following are examples of some of the credits and deductions that reduce basis. Free e file form 4868 Any deduction for section 179 property. Free e file form 4868 Any deduction for removal of barriers to the disabled and the elderly. Free e file form 4868 Any disabled access credit, enhanced oil recovery credit, and credit for employer-provided childcare facilities and services. Free e file form 4868 Any special depreciation allowance. Free e file form 4868 Basis adjustment for investment credit property under section 50(c) of the Internal Revenue Code. Free e file form 4868 For information about how to determine the cost or other basis of property, see What Is the Basis of Your Depreciable Property , earlier. Free e file form 4868 Also, see chapter 6. Free e file form 4868 For additional credits and deductions that affect basis, see section 1016 of the Internal Revenue Code. Free e file form 4868 Which Recovery Period Applies? The recovery period of property is the number of years over which you recover its cost or other basis. Free e file form 4868 It is determined based on the depreciation system (GDS or ADS) used. Free e file form 4868 See Table 7-1 for recovery periods under both GDS and ADS for some commonly used assets. Free e file form 4868 For a complete list of recovery periods, see the Table of Class Lives and Recovery Periods in Appendix B of Publication 946. Free e file form 4868 House trailers for farm laborers. Free e file form 4868   To depreciate a house trailer you supply as housing for those who work on your farm, use one of the following recovery periods if the house trailer is mobile (it has wheels and a history of movement). Free e file form 4868 A 7-year recovery period under GDS. Free e file form 4868 A 10-year recovery period under ADS. Free e file form 4868   However, if the house trailer is not mobile (its wheels have been removed and permanent utilities and pipes attached to it), use one of the following recovery periods. Free e file form 4868 A 20-year recovery period under GDS. Free e file form 4868 A 25-year recovery period under ADS. Free e file form 4868 Water wells. Free e file form 4868   Water wells used to provide water for raising poultry and livestock are land improvements. Free e file form 4868 If they are depreciable, use one of the following recovery periods. Free e file form 4868 A 15-year recovery period under GDS. Free e file form 4868 A 20-year recovery period under ADS. Free e file form 4868   The types of water wells that can be depreciated were discussed earlier in Irrigation systems and water wells under Property Having a Determinable Useful Life . Free e file form 4868 Table 7-1. Free e file form 4868 Farm Property Recovery Periods   Recovery Period in Years Assets GDS ADS Agricultural structures (single purpose) 10 15 Automobiles 5 5 Calculators and copiers 5 6 Cattle (dairy or breeding) 5 7 Communication equipment1 7 10 Computer and peripheral equipment 5 5 Drainage facilities 15 20 Farm buildings2 20 25 Farm machinery and equipment 7 10 Fences (agricultural) 7 10 Goats and sheep (breeding) 5 5 Grain bin 7 10 Hogs (breeding) 3 3 Horses (age when placed in service)     Breeding and working (12 years or less) 7 10 Breeding and working (more than 12 years) 3 10 Racing horses 3 12 Horticultural structures (single purpose) 10 15 Logging machinery and equipment3 5 6 Nonresidential real property 394 40 Office furniture, fixtures, and equipment (not calculators, copiers, or typewriters) 7 10 Paved lots 15 20 Residential rental property 27. Free e file form 4868 5 40 Tractor units (over-the-road) 3 4 Trees or vines bearing fruit or nuts 10 20 Truck (heavy duty, unloaded weight 13,000 lbs. Free e file form 4868 or more) 5 6 Truck (actual weight less than 13,000 lbs) 5 5 Water wells 15 20 1 Not including communication equipment listed in other classes. Free e file form 4868 2 Not including single purpose agricultural or horticultural structures. Free e file form 4868 3 Used by logging and sawmill operators for cutting of timber. Free e file form 4868 4 For property placed in service after May 12, 1993; for property placed in service before May 13, 1993,  the recovery period is 31. Free e file form 4868 5 years. Free e file form 4868 Which Convention Applies? Under MACRS, averaging conventions establish when the recovery period begins and ends. Free e file form 4868 The convention you use determines the number of months for which you can claim depreciation in the year you place property in service and in the year you dispose of the property. Free e file form 4868 Use one of the following conventions. Free e file form 4868 The half-year convention. Free e file form 4868 The mid-month convention. Free e file form 4868 The mid-quarter convention. Free e file form 4868 For a detailed explanation of each convention, see Which Convention Applies in chapter 4 of Publication 946. Free e file form 4868 Also, see the Instructions for Form 4562. Free e file form 4868 Which Depreciation Method Applies? MACRS provides three depreciation methods under GDS and one depreciation method under ADS. Free e file form 4868 The 200% declining balance method over a GDS recovery period. Free e file form 4868 The 150% declining balance method over a GDS recovery period. Free e file form 4868 The straight line method over a GDS recovery period. Free e file form 4868 The straight line method over an ADS recovery period. Free e file form 4868 Depreciation Table. Free e file form 4868   The following table lists the types of property you can depreciate under each method. Free e file form 4868 The declining balance method is abbreviated as DB and the straight line method is abbreviated as SL. Free e file form 4868 Depreciation Table System/Method   Type of Property GDS using  150% DB • All property used in a farming business (except real property)   • All 15- and 20-year property   • Nonfarm 3-, 5-, 7-, and 10-year property1 GDS using SL • Nonresidential real property   • Residential rental property   • Trees or vines bearing fruit or nuts   • All 3-, 5-, 7-, 10-, 15-, and 20-year property1 ADS using SL • Property used predomi- nantly outside the United States   • Farm property used when an election not to apply the uniform capitalization rules is in effect   • Tax-exempt property   • Tax-exempt bond-financed property   • Imported property2   • Any property for which you elect to use this method1 GDS using  200% DB • Nonfarm 3-, 5-, 7-, and 10-year property 1Elective method 2See section 168(g)(6) of the Internal Revenue  Code Property used in farming business. Free e file form 4868   For personal property placed in service after 1988 in a farming business, you must use the 150% declining balance method over a GDS recovery period or you can elect one of the following methods. Free e file form 4868 The straight line method over a GDS recovery period. Free e file form 4868 The straight line method over an ADS recovery period. Free e file form 4868 For property placed in service before 1999, you could have elected to use the 150% declining balance method using the ADS recovery periods for certain property classes. Free e file form 4868 If you made this election, continue to use the same method and recovery period for that property. Free e file form 4868 Real property. Free e file form 4868   You can depreciate real property using the straight line method under either GDS or ADS. Free e file form 4868 Switching to straight line. Free e file form 4868   If you use a declining balance method, you switch to the straight line method in the year it provides an equal or greater deduction. Free e file form 4868 If you use the MACRS percentage tables, discussed later under How Is the Depreciation Deduction Figured , you do not need to determine in which year your deduction is greater using the straight line method. Free e file form 4868 The tables have the switch to the straight line method built into their rates. Free e file form 4868 Fruit or nut trees and vines. Free e file form 4868   Depreciate trees and vines bearing fruit or nuts under GDS using the straight line method over a 10-year recovery period. Free e file form 4868 ADS required for some farmers. Free e file form 4868   If you elect not to apply the uniform capitalization rules to any plant shown in Table 6-1 of chapter 6 and produced in your farming business, you must use ADS for all property you place in service in any year the election is in effect. Free e file form 4868 See chapter 6 for a discussion of the application of the uniform capitalization rules to farm property. Free e file form 4868 Electing a different method. Free e file form 4868   As shown in the Depreciation Table , you can elect a different method for depreciation for certain types of property. Free e file form 4868 You must make the election by the due date of the return (including extensions) for the year you placed the property in service. Free e file form 4868 However, if you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of your return (excluding extensions). Free e file form 4868 Attach the election to the amended return and write “Filed pursuant to section 301. Free e file form 4868 9100-2” on the election statement. Free e file form 4868 File the amended return at the same address you filed the original return. Free e file form 4868 Once you make the election, you cannot change it. Free e file form 4868    If you elect to use a different method for one item in a property class, you must apply the same method to all property in that class placed in service during the year of the election. Free e file form 4868 However, you can make the election on a property-by-property basis for residential rental and nonresidential real property. Free e file form 4868 Straight line election. Free e file form 4868   Instead of using the declining balance method, you can elect to use the straight line method over the GDS recovery period. Free e file form 4868 Make the election by entering “S/L” under column (f) in Part III of Form 4562. Free e file form 4868 ADS election. Free e file form 4868   As explained earlier under Which Depreciation System (GDS or ADS) Applies , you can elect to use ADS even though your property may come under GDS. Free e file form 4868 ADS uses the straight line method of depreciation over the ADS recovery periods, which are generally longer than the GDS recovery periods. Free e file form 4868 The ADS recovery periods for many assets used in the business of farming are listed in Table 7–1. Free e file form 4868 Additional ADS recovery periods for other classes of property may be found in the Table of Class Lives and Recovery Periods in Appendix B of Publication 946. Free e file form 4868 How Is the Depreciation Deduction Figured? To figure your depreciation deduction under MACRS, you first determine the depreciation system, property class, placed-in-service date, basis amount, recovery period, convention, and depreciation method that applies to your property. Free e file form 4868 Then you are ready to figure your depreciation deduction. Free e file form 4868 You can figure it in one of two ways. Free e file form 4868 You can use the percentage tables provided by the IRS. Free e file form 4868 You can figure your own deduction without using the tables. Free e file form 4868 Figuring your own MACRS deduction will generally result in a slightly different amount than using the tables. Free e file form 4868 Using the MACRS Percentage Tables To help you figure your deduction under MACRS, the IRS has established percentage tables that incorporate the applicable convention and depreciation method. Free e file form 4868 These percentage tables are in Appendix A of Publication 946. Free e file form 4868 Rules for using the tables. Free e file form 4868   The following rules cover the use of the percentage tables. Free e file form 4868 You must apply the rates in the percentage tables to your property's unadjusted basis. Free e file form 4868 Unadjusted basis is the same basis amount you would use to figure gain on a sale but figured without reducing your original basis by any MACRS depreciation taken in earlier years. Free e file form 4868 You cannot use the percentage tables for a short tax year. Free e file form 4868 See chapter 4 of Publication 946 for information on how to figure the deduction for a short tax year. Free e file form 4868 You generally must continue to use them for the entire recovery period of the property. Free e file form 4868 You must stop using the tables if you adjust the basis of the property for any reason other than— Depreciation allowed or allowable, or An addition or improvement to the property, which is depreciated as a separate property. Free e file form 4868 Basis adjustment due to casualty loss. Free e file form 4868   If you reduce the basis of your property because of a casualty, you cannot continue to use the percentage tables. Free e file form 4868 For the year of the adjustment and the remaining recovery period, you must figure the depreciation yourself using the property's adjusted basis at the end of the year. Free e file form 4868 See Figuring the Deduction Without Using the Tables in chapter 4 of Publication 946. Free e file form 4868 Figuring depreciation using the 150% DB method and half-year convention. Free e file form 4868    Table 7-2 has the percentages for 3-, 5-, 7-, and 20-year property. Free e file form 4868 The percentages are based on the 150% declining balance method with a change to the straight line method. Free e file form 4868 This table covers only the half-year convention and the first 8 years for 20-year property. Free e file form 4868 See Appendix A in Publication 946 for complete MACRS tables, including tables for the mid-quarter and mid-month convention. Free e file form 4868   The following examples show how to figure depreciation under MACRS using the percentages in Table 7-2 . Free e file form 4868 Example 1. Free e file form 4868 During the year, you bought an item of 7-year property for $10,000 and placed it in service. Free e file form 4868 You do not elect a section 179 expense deduction for this property. Free e file form 4868 In addition, the property is not qualified property for purposes of the special depreciation allowance. Free e file form 4868 The unadjusted basis of the property is $10,000. Free e file form 4868 You use the percentages in Table 7-2 to figure your deduction. Free e file form 4868 Since this is 7-year property, you multiply $10,000 by 10. Free e file form 4868 71% to get this year's depreciation of $1,071. Free e file form 4868 For next year, your depreciation will be $1,913 ($10,000 × 19. Free e file form 4868 13%). Free e file form 4868 Example 2. Free e file form 4868 You had a barn constructed on your farm at a cost of $20,000. Free e file form 4868 You placed the barn in service this year. Free e file form 4868 You elect not to claim the special depreciation allowance. Free e file form 4868 The barn is 20-year property and you use the table percentages to figure your deduction. Free e file form 4868 You figure this year's depreciation by multiplying $20,000 (unadjusted basis) by 3. Free e file form 4868 75% to get $750. Free e file form 4868 For next year, your depreciation will be $1,443. Free e file form 4868 80 ($20,000 × 7. Free e file form 4868 219%). Free e file form 4868 Table 7-2. Free e file form 4868 150% Declining Balance Method (Half-Year Convention) Year 3-Year 5-Year 7-Year 20-Year 1 25. Free e file form 4868 0 % 15. Free e file form 4868 00 % 10. Free e file form 4868 71 % 3. Free e file form 4868 750 % 2 37. Free e file form 4868 5   25. Free e file form 4868 50   19. Free e file form 4868 13   7. Free e file form 4868 219   3 25. Free e file form 4868 0   17. Free e file form 4868 85   15. Free e file form 4868 03   6. Free e file form 4868 677   4 12. Free e file form 4868 5   16. Free e file form 4868 66   12. Free e file form 4868 25   6. Free e file form 4868 177   5     16. Free e file form 4868 66   12. Free e file form 4868 25   5. Free e file form 4868 713   6     8. Free e file form 4868 33   12. Free e file form 4868 25   5. Free e file form 4868 285   7         12. Free e file form 4868 25   4. Free e file form 4868 888   8         6. Free e file form 4868 13   4. Free e file form 4868 522   Figuring depreciation using the straight line method and half-year convention. Free e file form 4868   The following table has the straight line percentages for 3-, 5-, 7-, and 20-year property using the half-year convention. Free e file form 4868 The table covers only the first 8 years for 20-year property. Free e file form 4868 See Appendix A in Publication 946 for complete MACRS tables, including tables for the mid-quarter and mid-month convention. Free e file form 4868 Table 7-3. Free e file form 4868 Straight Line Method (Half-Year Convention) Year 3-Year 5-Year 7-Year 20-Year 1 16. Free e file form 4868 67 % 10 % 7. Free e file form 4868 14 % 2. Free e file form 4868 5 % 2 33. Free e file form 4868 33   20   14. Free e file form 4868 29   5. Free e file form 4868 0   3 33. Free e file form 4868 33   20   14. Free e file form 4868 29   5. Free e file form 4868 0   4 16. Free e file form 4868 67   20   14. Free e file form 4868 28   5. Free e file form 4868 0   5     20   14. Free e file form 4868 29   5. Free e file form 4868 0   6     10   14. Free e file form 4868 28   5. Free e file form 4868 0   7         14. Free e file form 4868 29   5. Free e file form 4868 0   8         7. Free e file form 4868 14   5. Free e file form 4868 0    
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The Free E File Form 4868

Free e file form 4868 4. Free e file form 4868   Interest Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Allocation of InterestOrder of funds spent. Free e file form 4868 Payments from checking accounts. Free e file form 4868 Amounts paid within 30 days. Free e file form 4868 Optional method for determining date of reallocation. Free e file form 4868 Interest on a segregated account. Free e file form 4868 How to report. Free e file form 4868 Interest You Can DeductStatement. Free e file form 4868 Expenses paid to obtain a mortgage. Free e file form 4868 Prepayment penalty. Free e file form 4868 De minimis OID. Free e file form 4868 Constant-yield method. Free e file form 4868 Loan or mortgage ends. Free e file form 4868 Interest You Cannot DeductPenalties. Free e file form 4868 Who is a key person? Exceptions for pre-June 1997 contracts. Free e file form 4868 Interest allocated to unborrowed policy cash value. Free e file form 4868 Capitalization of Interest When To Deduct InterestPrepaid interest. Free e file form 4868 Discounted loan. Free e file form 4868 Refunds of interest. Free e file form 4868 Prepaid interest. Free e file form 4868 Discounted loan. Free e file form 4868 Tax deficiency. Free e file form 4868 Related person. Free e file form 4868 Below-Market LoansLimit on forgone interest for gift loans of $100,000 or less. Free e file form 4868 Introduction This chapter discusses the tax treatment of business interest expense. Free e file form 4868 Business interest expense is an amount charged for the use of money you borrowed for business activities. Free e file form 4868 Topics - This chapter discusses: Allocation of interest Interest you can deduct Interest you cannot deduct Capitalization of interest When to deduct interest Below-market loans Useful Items - You may want to see: Publication 537 Installment Sales 550 Investment Income and Expenses 936 Home Mortgage Interest Deduction Form (and Instructions) Sch A (Form 1040) Itemized Deductions Sch E (Form 1040) Supplemental Income and Loss Sch K-1 (Form 1065) Partner's Share of Income, Deductions, Credits, etc. Free e file form 4868 Sch K-1 (Form 1120S) Shareholder's Share of Income, Deductions, Credits, etc. Free e file form 4868 1098 Mortgage Interest Statement 3115 Application for Change in Accounting Method 4952 Investment Interest Expense Deduction 8582 Passive Activity Loss Limitations See chapter 12 for information about getting publications and forms. Free e file form 4868 Allocation of Interest The rules for deducting interest vary, depending on whether the loan proceeds are used for business, personal, or investment activities. Free e file form 4868 If you use the proceeds of a loan for more than one type of expense, you must allocate the interest based on the use of the loan's proceeds. Free e file form 4868 Allocate your interest expense to the following categories. Free e file form 4868 Nonpassive trade or business activity interest Passive trade or business activity interest Investment interest Portfolio interest Personal interest In general, you allocate interest on a loan the same way you allocate the loan proceeds. Free e file form 4868 You allocate loan proceeds by tracing disbursements to specific uses. Free e file form 4868 The easiest way to trace disbursements to specific uses is to keep the proceeds of a particular loan separate from any other funds. Free e file form 4868 Secured loan. Free e file form 4868   The allocation of loan proceeds and the related interest is not generally affected by the use of property that secures the loan. Free e file form 4868 Example. Free e file form 4868 You secure a loan with property used in your business. Free e file form 4868 You use the loan proceeds to buy an automobile for personal use. Free e file form 4868 You must allocate interest expense on the loan to personal use (purchase of the automobile) even though the loan is secured by business property. Free e file form 4868    If the property that secures the loan is your home, you generally do not allocate the loan proceeds or the related interest. Free e file form 4868 The interest is usually deductible as qualified home mortgage interest, regardless of how the loan proceeds are used. Free e file form 4868 For more information, see Publication 936. Free e file form 4868 Allocation period. Free e file form 4868   The period for which a loan is allocated to a particular use begins on the date the proceeds are used and ends on the earlier of the following dates. Free e file form 4868 The date the loan is repaid. Free e file form 4868 The date the loan is reallocated to another use. Free e file form 4868 Proceeds not disbursed to borrower. Free e file form 4868   Even if the lender disburses the loan proceeds to a third party, the allocation of the loan is still based on your use of the funds. Free e file form 4868 This applies whether you pay for property, services, or anything else by incurring a loan, or you take property subject to a debt. Free e file form 4868 Proceeds deposited in borrower's account. Free e file form 4868   Treat loan proceeds deposited in an account as property held for investment. Free e file form 4868 It does not matter whether the account pays interest. Free e file form 4868 Any interest you pay on the loan is investment interest expense. Free e file form 4868 If you withdraw the proceeds of the loan, you must reallocate the loan based on the use of the funds. Free e file form 4868 Example. Free e file form 4868 Celina, a calendar-year taxpayer, borrows $100,000 on January 4 and immediately uses the proceeds to open a checking account. Free e file form 4868 No other amounts are deposited in the account during the year and no part of the loan principal is repaid during the year. Free e file form 4868 On April 2, Celina uses $20,000 from the checking account for a passive activity expenditure. Free e file form 4868 On September 4, Celina uses an additional $40,000 from the account for personal purposes. Free e file form 4868 Under the interest allocation rules, the entire $100,000 loan is treated as property held for investment for the period from January 4 through April 1. Free e file form 4868 From April 2 through September 3, Celina must treat $20,000 of the loan as used in the passive activity and $80,000 of the loan as property held for investment. Free e file form 4868 From September 4 through December 31, she must treat $40,000 of the loan as used for personal purposes, $20,000 as used in the passive activity, and $40,000 as property held for investment. Free e file form 4868 Order of funds spent. Free e file form 4868   Generally, you treat loan proceeds deposited in an account as used (spent) before either of the following amounts. Free e file form 4868 Any unborrowed amounts held in the same account. Free e file form 4868 Any amounts deposited after these loan proceeds. Free e file form 4868 Example. Free e file form 4868 On January 9, Olena opened a checking account, depositing $500 of the proceeds of Loan A and $1,000 of unborrowed funds. Free e file form 4868 The following table shows the transactions in her account during the tax year. Free e file form 4868 Date Transaction January 9 $500 proceeds of Loan A and $1,000 unborrowed funds deposited January 14 $500 proceeds of Loan B  deposited February 19 $800 used for personal purposes February 27 $700 used for passive activity June 19 $1,000 proceeds of Loan C  deposited November 20 $800 used for an investment December 18 $600 used for personal purposes Olena treats the $800 used for personal purposes as made from the $500 proceeds of Loan A and $300 of the proceeds of Loan B. Free e file form 4868 She treats the $700 used for a passive activity as made from the remaining $200 proceeds of Loan B and $500 of unborrowed funds. Free e file form 4868 She treats the $800 used for an investment as made entirely from the proceeds of Loan C. Free e file form 4868 She treats the $600 used for personal purposes as made from the remaining $200 proceeds of Loan C and $400 of unborrowed funds. Free e file form 4868 For the periods during which loan proceeds are held in the account, Olena treats them as property held for investment. Free e file form 4868 Payments from checking accounts. Free e file form 4868   Generally, you treat a payment from a checking or similar account as made at the time the check is written if you mail or deliver it to the payee within a reasonable period after you write it. Free e file form 4868 You can treat checks written on the same day as written in any order. Free e file form 4868 Amounts paid within 30 days. Free e file form 4868   If you receive loan proceeds in cash or if the loan proceeds are deposited in an account, you can treat any payment (up to the amount of the proceeds) made from any account you own, or from cash, as made from those proceeds. Free e file form 4868 This applies to any payment made within 30 days before or after the proceeds are received in cash or deposited in your account. Free e file form 4868   If the loan proceeds are deposited in an account, you can apply this rule even if the rules stated earlier under Order of funds spent would otherwise require you to treat the proceeds as used for other purposes. Free e file form 4868 If you apply this rule to any payments, disregard those payments (and the proceeds from which they are made) when applying the rules stated under Order of funds spent. Free e file form 4868   If you received the loan proceeds in cash, you can treat the payment as made on the date you received the cash instead of the date you actually made the payment. Free e file form 4868 Example. Free e file form 4868 Giovanni gets a loan of $1,000 on August 4 and receives the proceeds in cash. Free e file form 4868 Giovanni deposits $1,500 in an account on August 18 and on August 28 writes a check on the account for a passive activity expense. Free e file form 4868 Also, Giovanni deposits his paycheck, deposits other loan proceeds, and pays his bills during the same period. Free e file form 4868 Regardless of these other transactions, Giovanni can treat $1,000 of the deposit he made on August 18 as being paid on August 4 from the loan proceeds. Free e file form 4868 In addition, Giovanni can treat the passive activity expense he paid on August 28 as made from the $1,000 loan proceeds treated as deposited in the account. Free e file form 4868 Optional method for determining date of reallocation. Free e file form 4868   You can use the following method to determine the date loan proceeds are reallocated to another use. Free e file form 4868 You can treat all payments from loan proceeds in the account during any month as taking place on the later of the following dates. Free e file form 4868 The first day of that month. Free e file form 4868 The date the loan proceeds are deposited in the account. Free e file form 4868 However, you can use this optional method only if you treat all payments from the account during the same calendar month in the same way. Free e file form 4868 Interest on a segregated account. Free e file form 4868   If you have an account that contains only loan proceeds and interest earned on the account, you can treat any payment from that account as being made first from the interest. Free e file form 4868 When the interest earned is used up, any remaining payments are from loan proceeds. Free e file form 4868 Example. Free e file form 4868 You borrowed $20,000 and used the proceeds of this loan to open a new savings account. Free e file form 4868 When the account had earned interest of $867, you withdrew $20,000 for personal purposes. Free e file form 4868 You can treat the withdrawal as coming first from the interest earned on the account, $867, and then from the loan proceeds, $19,133 ($20,000 − $867). Free e file form 4868 All the interest charged on the loan from the time it was deposited in the account until the time of the withdrawal is investment interest expense. Free e file form 4868 The interest charged on the part of the proceeds used for personal purposes ($19,133) from the time you withdrew it until you either repay it or reallocate it to another use is personal interest expense. Free e file form 4868 The interest charged on the loan proceeds you left in the account ($867) continues to be investment interest expense until you either repay it or reallocate it to another use. Free e file form 4868 Loan repayment. Free e file form 4868   When you repay any part of a loan allocated to more than one use, treat it as being repaid in the following order. Free e file form 4868 Personal use. Free e file form 4868 Investments and passive activities (other than those included in (3)). Free e file form 4868 Passive activities in connection with a rental real estate activity in which you actively participate. Free e file form 4868 Former passive activities. Free e file form 4868 Trade or business use and expenses for certain low-income housing projects. Free e file form 4868 Line of credit (continuous borrowings). Free e file form 4868   The following rules apply if you have a line of credit or similar arrangement. Free e file form 4868 Treat all borrowed funds on which interest accrues at the same fixed or variable rate as a single loan. Free e file form 4868 Treat borrowed funds or parts of borrowed funds on which interest accrues at different fixed or variable rates as different loans. Free e file form 4868 Treat these loans as repaid in the order shown on the loan agreement. Free e file form 4868 Loan refinancing. Free e file form 4868   Allocate the replacement loan to the same uses to which the repaid loan was allocated. Free e file form 4868 Make the allocation only to the extent you use the proceeds of the new loan to repay any part of the original loan. Free e file form 4868 Debt-financed distribution. Free e file form 4868   A debt-financed distribution occurs when a partnership or S corporation borrows funds and allocates those funds to distributions made to partners or shareholders. Free e file form 4868 The manner in which you report the interest expense associated with the distributed debt proceeds depends on your use of those proceeds. Free e file form 4868 How to report. Free e file form 4868   If the proceeds were used in a nonpassive trade or business activity, report the interest on Schedule E (Form 1040), line 28; enter “interest expense” and the name of the partnership or S corporation in column (a) and the amount in column (h). Free e file form 4868 If the proceeds were used in a passive activity, follow the Instructions for Form 8582, Passive Activity Loss Limitations, to determine the amount of interest expense that can be reported on Schedule E (Form 1040), line 28; enter “interest expense” and the name of the partnership in column (a) and the amount in column (f). Free e file form 4868 If the proceeds were used in an investment activity, enter the interest on Form 4952. Free e file form 4868 If the proceeds are used for personal purposes, the interest is generally not deductible. Free e file form 4868 Interest You Can Deduct You can generally deduct as a business expense all interest you pay or accrue during the tax year on debts related to your trade or business. Free e file form 4868 Interest relates to your trade or business if you use the proceeds of the loan for a trade or business expense. Free e file form 4868 It does not matter what type of property secures the loan. Free e file form 4868 You can deduct interest on a debt only if you meet all the following requirements. Free e file form 4868 You are legally liable for that debt. Free e file form 4868 Both you and the lender intend that the debt be repaid. Free e file form 4868 You and the lender have a true debtor-creditor relationship. Free e file form 4868 Partial liability. Free e file form 4868   If you are liable for part of a business debt, you can deduct only your share of the total interest paid or accrued. Free e file form 4868 Example. Free e file form 4868 You and your brother borrow money. Free e file form 4868 You are liable for 50% of the note. Free e file form 4868 You use your half of the loan in your business, and you make one-half of the loan payments. Free e file form 4868 You can deduct your half of the total interest payments as a business deduction. Free e file form 4868 Mortgage. Free e file form 4868   Generally, mortgage interest paid or accrued on real estate you own legally or equitably is deductible. Free e file form 4868 However, rather than deducting the interest currently, you may have to add it to the cost basis of the property as explained later under Capitalization of Interest. Free e file form 4868 Statement. Free e file form 4868   If you paid $600 or more of mortgage interest (including certain points) during the year on any one mortgage, you generally will receive a Form 1098 or a similar statement. Free e file form 4868 You will receive the statement if you pay interest to a person (including a financial institution or a cooperative housing corporation) in the course of that person's trade or business. Free e file form 4868 A governmental unit is a person for purposes of furnishing the statement. Free e file form 4868   If you receive a refund of interest you overpaid in an earlier year, this amount will be reported in box 3 of Form 1098. Free e file form 4868 You cannot deduct this amount. Free e file form 4868 For information on how to report this refund, see Refunds of interest, later in this chapter. Free e file form 4868 Expenses paid to obtain a mortgage. Free e file form 4868   Certain expenses you pay to obtain a mortgage cannot be deducted as interest. Free e file form 4868 These expenses, which include mortgage commissions, abstract fees, and recording fees, are capital expenses. Free e file form 4868 If the property mortgaged is business or income-producing property, you can amortize the costs over the life of the mortgage. Free e file form 4868 Prepayment penalty. Free e file form 4868   If you pay off your mortgage early and pay the lender a penalty for doing this, you can deduct the penalty as interest. Free e file form 4868 Interest on employment tax deficiency. Free e file form 4868   Interest charged on employment taxes assessed on your business is deductible. Free e file form 4868 Original issue discount (OID). Free e file form 4868   OID is a form of interest. Free e file form 4868 A loan (mortgage or other debt) generally has OID when its proceeds are less than its principal amount. Free e file form 4868 The OID is the difference between the stated redemption price at maturity and the issue price of the loan. Free e file form 4868   A loan's stated redemption price at maturity is the sum of all amounts (principal and interest) payable on it other than qualified stated interest. Free e file form 4868 Qualified stated interest is stated interest that is unconditionally payable in cash or property (other than another loan of the issuer) at least annually over the term of the loan at a single fixed rate. Free e file form 4868 You generally deduct OID over the term of the loan. Free e file form 4868 Figure the amount to deduct each year using the constant-yield method, unless the OID on the loan is de minimis. Free e file form 4868 De minimis OID. Free e file form 4868   The OID is de minimis if it is less than one-fourth of 1% (. Free e file form 4868 0025) of the stated redemption price of the loan at maturity multiplied by the number of full years from the date of original issue to maturity (the term of the loan). Free e file form 4868   If the OID is de minimis, you can choose one of the following ways to figure the amount you can deduct each year. Free e file form 4868 On a constant-yield basis over the term of the loan. Free e file form 4868 On a straight-line basis over the term of the loan. Free e file form 4868 In proportion to stated interest payments. Free e file form 4868 In its entirety at maturity of the loan. Free e file form 4868 You make this choice by deducting the OID in a manner consistent with the method chosen on your timely filed tax return for the tax year in which the loan is issued. Free e file form 4868 Example. Free e file form 4868 On January 1, 2013, you took out a $100,000 discounted loan and received $98,500 in proceeds. Free e file form 4868 The loan will mature on January 1, 2023 (a 10-year term), and the $100,000 principal is payable on that date. Free e file form 4868 Interest of $10,000 is payable on January 1 of each year, beginning January 1, 2014. Free e file form 4868 The $1,500 OID on the loan is de minimis because it is less than $2,500 ($100,000 × . Free e file form 4868 0025 × 10). Free e file form 4868 You choose to deduct the OID on a straight-line basis over the term of the loan. Free e file form 4868 Beginning in 2013, you can deduct $150 each year for 10 years. Free e file form 4868 Constant-yield method. Free e file form 4868   If the OID is not de minimis, you must use the constant-yield method to figure how much you can deduct each year. Free e file form 4868 You figure your deduction for the first year using the following steps. Free e file form 4868 Determine the issue price of the loan. Free e file form 4868 Generally, this equals the proceeds of the loan. Free e file form 4868 If you paid points on the loan (as discussed later), the issue price generally is the difference between the proceeds and the points. Free e file form 4868 Multiply the result in (1) by the yield to maturity. Free e file form 4868 Subtract any qualified stated interest payments from the result in (2). Free e file form 4868 This is the OID you can deduct in the first year. Free e file form 4868   To figure your deduction in any subsequent year, follow the above steps, except determine the adjusted issue price in step (1). Free e file form 4868 To get the adjusted issue price, add to the issue price any OID previously deducted. Free e file form 4868 Then follow steps (2) and (3) above. Free e file form 4868   The yield to maturity is generally shown in the literature you receive from your lender. Free e file form 4868 If you do not have this information, consult your lender or tax advisor. Free e file form 4868 In general, the yield to maturity is the discount rate that, when used in computing the present value of all principal and interest payments, produces an amount equal to the principal amount of the loan. Free e file form 4868 Example. Free e file form 4868 The facts are the same as in the previous example, except that you deduct the OID on a constant yield basis over the term of the loan. Free e file form 4868 The yield to maturity on your loan is 10. Free e file form 4868 2467%, compounded annually. Free e file form 4868 For 2013, you can deduct $93 [($98,500 × . Free e file form 4868 102467) − $10,000]. Free e file form 4868 For 2014, you can deduct $103 [($98,593 × . Free e file form 4868 102467) − $10,000]. Free e file form 4868 Loan or mortgage ends. Free e file form 4868   If your loan or mortgage ends, you may be able to deduct any remaining OID in the tax year in which the loan or mortgage ends. Free e file form 4868 A loan or mortgage may end due to a refinancing, prepayment, foreclosure, or similar event. Free e file form 4868 If you refinance with the original lender, you generally cannot deduct the remaining OID in the year in which the refinancing occurs, but you may be able to deduct it over the term of the new mortgage or loan. Free e file form 4868 See Interest paid with funds borrowed from original lender under Interest You Cannot Deduct, later. Free e file form 4868 Points. Free e file form 4868   The term “points” is used to describe certain charges paid, or treated as paid, by a borrower to obtain a loan or a mortgage. Free e file form 4868 These charges are also called loan origination fees, maximum loan charges, discount points, or premium charges. Free e file form 4868 If any of these charges (points) are solely for the use of money, they are interest. Free e file form 4868   Because points are prepaid interest, you generally cannot deduct the full amount in the year paid. Free e file form 4868 However, you can choose to fully deduct points in the year paid if you meet certain tests. Free e file form 4868 For exceptions to the general rule, see Publication 936. Free e file form 4868 The points reduce the issue price of the loan and result in original issue discount (OID), deductible as explained in the preceding discussion. Free e file form 4868 Partial payments on a nontax debt. Free e file form 4868   If you make partial payments on a debt (other than a debt owed the IRS), the payments are applied, in general, first to interest and any remainder to principal. Free e file form 4868 You can deduct only the interest. Free e file form 4868 This rule does not apply when it can be inferred that the borrower and lender understood that a different allocation of the payments would be made. Free e file form 4868 Installment purchase. Free e file form 4868   If you make an installment purchase of business property, the contract between you and the seller generally provides for the payment of interest. Free e file form 4868 If no interest or a low rate of interest is charged under the contract, a portion of the stated principal amount payable under the contract may be recharacterized as interest (unstated interest). Free e file form 4868 The amount recharacterized as interest reduces your basis in the property and increases your interest expense. Free e file form 4868 For more information on installment sales and unstated interest, see Publication 537. Free e file form 4868 Interest You Cannot Deduct Certain interest payments cannot be deducted. Free e file form 4868 In addition, certain other expenses that may seem to be interest but are not, cannot be deducted as interest. Free e file form 4868 You cannot currently deduct interest that must be capitalized, and you generally cannot deduct personal interest. Free e file form 4868 Interest paid with funds borrowed from original lender. Free e file form 4868   If you use the cash method of accounting, you cannot deduct interest you pay with funds borrowed from the original lender through a second loan, an advance, or any other arrangement similar to a loan. Free e file form 4868 You can deduct the interest expense once you start making payments on the new loan. Free e file form 4868   When you make a payment on the new loan, you first apply the payment to interest and then to the principal. Free e file form 4868 All amounts you apply to the interest on the first loan are deductible, along with any interest you pay on the second loan, subject to any limits that apply. Free e file form 4868 Capitalized interest. Free e file form 4868   You cannot currently deduct interest you are required to capitalize under the uniform capitalization rules. Free e file form 4868 See Capitalization of Interest, later. Free e file form 4868 In addition, if you buy property and pay interest owed by the seller (for example, by assuming the debt and any interest accrued on the property), you cannot deduct the interest. Free e file form 4868 Add this interest to the basis of the property. Free e file form 4868 Commitment fees or standby charges. Free e file form 4868   Fees you incur to have business funds available on a standby basis, but not for the actual use of the funds, are not deductible as interest payments. Free e file form 4868 You may be able to deduct them as business expenses. Free e file form 4868   If the funds are for inventory or certain property used in your business, the fees are indirect costs and you generally must capitalize them under the uniform capitalization rules. Free e file form 4868 See Capitalization of Interest, later. Free e file form 4868 Interest on income tax. Free e file form 4868   Interest charged on income tax assessed on your individual income tax return is not a business deduction even though the tax due is related to income from your trade or business. Free e file form 4868 Treat this interest as a business deduction only in figuring a net operating loss deduction. Free e file form 4868 Penalties. Free e file form 4868   Penalties on underpaid deficiencies and underpaid estimated tax are not interest. Free e file form 4868 You cannot deduct them. Free e file form 4868 Generally, you cannot deduct any fines or penalties. Free e file form 4868 Interest on loans with respect to life insurance policies. Free e file form 4868   You generally cannot deduct interest on a debt incurred with respect to any life insurance, annuity, or endowment contract that covers any individual unless that individual is a key person. Free e file form 4868   If the policy or contract covers a key person, you can deduct the interest on up to $50,000 of debt for that person. Free e file form 4868 However, the deduction for any month cannot be more than the interest figured using Moody's Composite Yield on Seasoned Corporate Bonds (formerly known as Moody's Corporate Bond Yield Average-Monthly Average Corporates) (Moody's rate) for that month. Free e file form 4868 Who is a key person?   A key person is an officer or 20% owner. Free e file form 4868 However, the number of individuals you can treat as key persons is limited to the greater of the following. Free e file form 4868 Five individuals. Free e file form 4868 The lesser of 5% of the total officers and employees of the company or 20 individuals. Free e file form 4868 Exceptions for pre-June 1997 contracts. Free e file form 4868   You can generally deduct the interest if the contract was issued before June 9, 1997, and the covered individual is someone other than an employee, officer, or someone financially interested in your business. Free e file form 4868 If the contract was purchased before June 21, 1986, you can generally deduct the interest no matter who is covered by the contract. Free e file form 4868 Interest allocated to unborrowed policy cash value. Free e file form 4868   Corporations and partnerships generally cannot deduct any interest expense allocable to unborrowed cash values of life insurance, annuity, or endowment contracts. Free e file form 4868 This rule applies to contracts issued after June 8, 1997, that cover someone other than an officer, director, employee, or 20% owner. Free e file form 4868 For more information, see section 264(f) of the Internal Revenue Code. Free e file form 4868 Capitalization of Interest Under the uniform capitalization rules, you generally must capitalize interest on debt equal to your expenditures to produce real property or certain tangible personal property. Free e file form 4868 The property must be produced by you for use in your trade or business or for sale to customers. Free e file form 4868 You cannot capitalize interest related to property that you acquire in any other manner. Free e file form 4868 Interest you paid or incurred during the production period must be capitalized if the property produced is designated property. Free e file form 4868 Designated property is any of the following. Free e file form 4868 Real property. Free e file form 4868 Tangible personal property with a class life of 20 years or more. Free e file form 4868 Tangible personal property with an estimated production period of more than 2 years. Free e file form 4868 Tangible personal property with an estimated production period of more than 1 year if the estimated cost of production is more than $1 million. Free e file form 4868 Property you produce. Free e file form 4868   You produce property if you construct, build, install, manufacture, develop, improve, create, raise, or grow it. Free e file form 4868 Treat property produced for you under a contract as produced by you up to the amount you pay or incur for the property. Free e file form 4868 Carrying charges. Free e file form 4868   Carrying charges include taxes you pay to carry or develop real estate or to carry, transport, or install personal property. Free e file form 4868 You can choose to capitalize carrying charges not subject to the uniform capitalization rules if they are otherwise deductible. Free e file form 4868 For more information, see chapter 7. Free e file form 4868 Capitalized interest. Free e file form 4868   Treat capitalized interest as a cost of the property produced. Free e file form 4868 You recover your interest when you sell or use the property. Free e file form 4868 If the property is inventory, recover capitalized interest through cost of goods sold. Free e file form 4868 If the property is used in your trade or business, recover capitalized interest through an adjustment to basis, depreciation, amortization, or other method. Free e file form 4868 Partnerships and S corporations. Free e file form 4868   The interest capitalization rules are applied first at the partnership or S corporation level. Free e file form 4868 The rules are then applied at the partners' or shareholders' level to the extent the partnership or S corporation has insufficient debt to support the production or construction costs. Free e file form 4868   If you are a partner or a shareholder, you may have to capitalize interest you incur during the tax year for the production costs of the partnership or S corporation. Free e file form 4868 You may also have to capitalize interest incurred by the partnership or S corporation for your own production costs. Free e file form 4868 To properly capitalize interest under these rules, you must be given the required information in an attachment to the Schedule K-1 you receive from the partnership or S corporation. Free e file form 4868 Additional information. Free e file form 4868   The procedures for applying the uniform capitalization rules are beyond the scope of this publication. Free e file form 4868 For more information, see sections 1. Free e file form 4868 263A-8 through 1. Free e file form 4868 263A-15 of the regulations and Notice 88-99. Free e file form 4868 Notice 88-99 is in Cumulative Bulletin 1988-2. Free e file form 4868 When To Deduct Interest If the uniform capitalization rules, discussed under Capitalization of Interest, earlier, do not apply to you, deduct interest as follows. Free e file form 4868 Cash method. Free e file form 4868   Under the cash method, you can generally deduct only the interest you actually paid during the tax year. Free e file form 4868 You cannot deduct a promissory note you gave as payment because it is a promise to pay and not an actual payment. Free e file form 4868 Prepaid interest. Free e file form 4868   You generally cannot deduct any interest paid before the year it is due. Free e file form 4868 Interest paid in advance can be deducted only in the tax year in which it is due. Free e file form 4868 Discounted loan. Free e file form 4868   If interest or a discount is subtracted from your loan proceeds, it is not a payment of interest and you cannot deduct it when you get the loan. Free e file form 4868 For more information, see Original issue discount (OID) under Interest You Can Deduct, earlier. Free e file form 4868 Refunds of interest. Free e file form 4868   If you pay interest and then receive a refund in the same tax year of any part of the interest, reduce your interest deduction by the refund. Free e file form 4868 If you receive the refund in a later tax year, include the refund in your income to the extent the deduction for the interest reduced your tax. Free e file form 4868 Accrual method. Free e file form 4868   Under an accrual method, you can deduct only interest that has accrued during the tax year. Free e file form 4868 Prepaid interest. Free e file form 4868   See Prepaid interest, earlier. Free e file form 4868 Discounted loan. Free e file form 4868   See Discounted loan, earlier. Free e file form 4868 Tax deficiency. Free e file form 4868   If you contest a federal income tax deficiency, interest does not accrue until the tax year the final determination of liability is made. Free e file form 4868 If you do not contest the deficiency, then the interest accrues in the year the tax was asserted and agreed to by you. Free e file form 4868   However, if you contest but pay the proposed tax deficiency and interest, and you do not designate the payment as a cash bond, then the interest is deductible in the year paid. Free e file form 4868 Related person. Free e file form 4868   If you use an accrual method, you cannot deduct interest owed to a related person who uses the cash method until payment is made and the interest is includible in the gross income of that person. Free e file form 4868 The relationship is determined as of the end of the tax year for which the interest would otherwise be deductible. Free e file form 4868 See section 267 of the Internal Revenue Code for more information. Free e file form 4868 Below-Market Loans If you receive a below-market gift or demand loan and use the proceeds in your trade or business, you may be able to deduct the forgone interest. Free e file form 4868 See Treatment of gift and demand loans, later, in this discussion. Free e file form 4868 A below-market loan is a loan on which no interest is charged or on which interest is charged at a rate below the applicable federal rate. Free e file form 4868 A gift or demand loan that is a below-market loan generally is considered an arm's-length transaction in which you, the borrower, are considered as having received both the following. Free e file form 4868 A loan in exchange for a note that requires the payment of interest at the applicable federal rate. Free e file form 4868 An additional payment in an amount equal to the forgone interest. Free e file form 4868 The additional payment is treated as a gift, dividend, contribution to capital, payment of compensation, or other payment, depending on the substance of the transaction. Free e file form 4868 Forgone interest. Free e file form 4868   For any period, forgone interest is The interest that would be payable for that period if interest accrued on the loan at the applicable federal rate and was payable annually on December 31, minus Any interest actually payable on the loan for the period. Free e file form 4868 Applicable federal rates are published by the IRS each month in the Internal Revenue Bulletin. Free e file form 4868 Internal Revenue Bulletins are available on the IRS web site at www. Free e file form 4868 irs. Free e file form 4868 gov/irb. Free e file form 4868 You can also contact an IRS office to get these rates. Free e file form 4868 Loans subject to the rules. Free e file form 4868   The rules for below-market loans apply to the following. Free e file form 4868 Gift loans (below-market loans where the forgone interest is in the nature of a gift). Free e file form 4868 Compensation-related loans (below-market loans between an employer and an employee or between an independent contractor and a person for whom the contractor provides services). Free e file form 4868 Corporation-shareholder loans. Free e file form 4868 Tax avoidance loans (below-market loans where the avoidance of federal tax is one of the main purposes of the interest arrangement). Free e file form 4868 Loans to qualified continuing care facilities under a continuing care contract (made after October 11, 1985). Free e file form 4868   Except as noted in (5) above, these rules apply to demand loans (loans payable in full at any time upon the lender's demand) outstanding after June 6, 1984, and to term loans (loans that are not demand loans) made after that date. Free e file form 4868 Treatment of gift and demand loans. Free e file form 4868   If you receive a below-market gift loan or demand loan, you are treated as receiving an additional payment (as a gift, dividend, etc. Free e file form 4868 ) equal to the forgone interest on the loan. Free e file form 4868 You are then treated as transferring this amount back to the lender as interest. Free e file form 4868 These transfers are considered to occur annually, generally on December 31. Free e file form 4868 If you use the loan proceeds in your trade or business, you can deduct the forgone interest each year as a business interest expense. Free e file form 4868 The lender must report it as interest income. Free e file form 4868 Limit on forgone interest for gift loans of $100,000 or less. Free e file form 4868   For gift loans between individuals, forgone interest treated as transferred back to the lender is limited to the borrower's net investment income for the year. Free e file form 4868 This limit applies if the outstanding loans between the lender and borrower total $100,000 or less. Free e file form 4868 If the borrower's net investment income is $1,000 or less, it is treated as zero. Free e file form 4868 This limit does not apply to a loan if the avoidance of any federal tax is one of the main purposes of the interest arrangement. Free e file form 4868 Treatment of term loans. Free e file form 4868   If you receive a below-market term loan other than a gift or demand loan, you are treated as receiving an additional cash payment (as a dividend, etc. Free e file form 4868 ) on the date the loan is made. Free e file form 4868 This payment is equal to the loan amount minus the present value, at the applicable federal rate, of all payments due under the loan. Free e file form 4868 The same amount is treated as original issue discount on the loan. Free e file form 4868 See Original issue discount (OID) under Interest You Can Deduct, earlier. Free e file form 4868 Exceptions for loans of $10,000 or less. Free e file form 4868   The rules for below-market loans do not apply to any day on which the total outstanding loans between the borrower and lender is $10,000 or less. Free e file form 4868 This exception applies only to the following. Free e file form 4868 Gift loans between individuals if the loan is not directly used to buy or carry income-producing assets. Free e file form 4868 Compensation-related loans or corporation-shareholder loans if the avoidance of any federal tax is not a principal purpose of the interest arrangement. Free e file form 4868 This exception does not apply to a term loan described in (2) above that was previously subject to the below-market loan rules. Free e file form 4868 Those rules will continue to apply even if the outstanding balance is reduced to $10,000 or less. Free e file form 4868 Exceptions for loans without significant tax effect. Free e file form 4868   The following loans are specifically exempted from the rules for below-market loans because their interest arrangements do not have a significant effect on the federal tax liability of the borrower or the lender. Free e file form 4868 Loans made available by lenders to the general public on the same terms and conditions that are consistent with the lender's customary business practices. Free e file form 4868 Loans subsidized by a federal, state, or municipal government that are made available under a program of general application to the public. Free e file form 4868 Certain employee-relocation loans. Free e file form 4868 Certain loans to or from a foreign person, unless the interest income would be effectively connected with the conduct of a U. Free e file form 4868 S. Free e file form 4868 trade or business and not exempt from U. Free e file form 4868 S. Free e file form 4868 tax under an income tax treaty. Free e file form 4868 Any other loan if the taxpayer can show that the interest arrangement has no significant effect on the federal tax liability of the lender or the borrower. Free e file form 4868 Whether an interest arrangement has a significant effect on the federal tax liability of the lender or the borrower will be determined by all the facts and circumstances. Free e file form 4868 Consider all the following factors. Free e file form 4868 Whether items of income and deduction generated by the loan offset each other. Free e file form 4868 The amount of the items. Free e file form 4868 The cost of complying with the below-market loan provisions if they were to apply. Free e file form 4868 Any reasons, other than taxes, for structuring the transaction as a below-market loan. Free e file form 4868 Exception for loans to qualified continuing care facilities. Free e file form 4868   The below-market interest rules do not apply to a loan owed by a qualified continuing care facility under a continuing care contract if the lender or lender's spouse is age 62 or older by the end of the calendar year. Free e file form 4868 A qualified continuing care facility is one or more facilities (excluding nursing homes) meeting the requirements listed below. Free e file form 4868 Designed to provide services under continuing care contracts (defined below). Free e file form 4868 Includes an independent living unit, and either an assisted living or nursing facility, or both. Free e file form 4868 Substantially all of the independent living unit residents are covered by continuing care contracts. Free e file form 4868 A continuing care contract is a written contract between an individual and a qualified continuing care facility that includes all of the following conditions. Free e file form 4868 The individual or individual's spouse must be entitled to use the facility for the rest of their life or lives. Free e file form 4868 The individual or individual's spouse will be provided with housing, as appropriate for the health of the individual or individual's spouse in an: independent living unit (which has additional available facilities outside the unit for the provision of meals and other personal care), and assisted living or nursing facility available in the continuing care facility. Free e file form 4868 The individual or individual's spouse will be provided with assisted living or nursing care available in the continuing care facility, as required for the health of the individual or the individual's spouse. Free e file form 4868 For more information, see section 7872(h) of the Internal Revenue Code. Free e file form 4868 Sale or exchange of property. Free e file form 4868   Different rules generally apply to a loan connected with the sale or exchange of property. Free e file form 4868 If the loan does not provide adequate stated interest, part of the principal payment may be considered interest. Free e file form 4868 However, there are exceptions that may require you to apply the below-market interest rate rules to these loans. Free e file form 4868 See Unstated Interest and Original Issue Discount (OID) in Publication 537. Free e file form 4868 More information. Free e file form 4868   For more information on below-market loans, see section 7872 of the Internal Revenue Code and section 1. Free e file form 4868 7872-5 of the regulations. Free e file form 4868 Prev  Up  Next   Home   More Online Publications