File your Taxes for Free!
  • Get your maximum refund*
  • 100% accurate calculations guaranteed*

TurboTax Federal Free Edition - File Taxes Online

Don't let filing your taxes get you down! We'll help make it as easy as possible. With e-file and direct deposit, there's no faster way to get your refund!

Approved TurboTax Affiliate Site. TurboTax and TurboTax Online, among others, are registered trademarks and/or service marks of Intuit Inc. in the United States and other countries. Other parties' trademarks or service marks are the property of the respective owners.


© 2012 - 2018 All rights reserved.

This is an Approved TurboTax Affiliate site. TurboTax and TurboTax Online, among other are registered trademarks and/or service marks of Intuit, Inc. in the United States and other countries. Other parties' trademarks or service marks are the property of the respective owners.
When discussing "Free e-file", note that state e-file is an additional fee. E-file fees do not apply to New York state returns. Prices are subject to change without notice. E-file and get your refund faster
*If you pay an IRS or state penalty or interest because of a TurboTax calculations error, we'll pay you the penalty and interest.
*Maximum Refund Guarantee - or Your Money Back: If you get a larger refund or smaller tax due from another tax preparation method, we'll refund the applicable TurboTax federal and/or state purchase price paid. TurboTax Federal Free Edition customers are entitled to payment of $14.99 and a refund of your state purchase price paid. Claims must be submitted within sixty (60) days of your TurboTax filing date and no later than 6/15/14. E-file, Audit Defense, Professional Review, Refund Transfer and technical support fees are excluded. This guarantee cannot be combined with the TurboTax Satisfaction (Easy) Guarantee. *We're so confident your return will be done right, we guarantee it. Accurate calculations guaranteed. If you pay an IRS or state penalty or interest because of a TurboTax calculations error, we'll pay you the penalty and interest.
https://turbotax.intuit.com/corp/guarantees.jsp

Free Federal Tax E Filing

File State Tax Only1040ez InstructionsAmended Tax Return Online1040ez 2011 Tax FormE File State Taxes Only1040ez Free FilingFile My State Tax Return FreeUnemployment Tax FilingHow To Amend Tax Return 2013104ezState Taxes For FreeCan Tax Form 1040x Be Filed OnlineFree Ez FormHow To File An Amended Tax Return 2013File 2011 Taxes Online For Free1040a Income Tax FormFree State FilingHow Do You Amend TaxesHow Do I Amend A Tax Return For 2010Federal Taxes 2011Refile Tax ReturnFiling Form 1040ezFile Taxes 2010File Past Year TaxesState Income Tax Filing FreeWhere To File 2012 Tax ReturnForm 1040nrHr Block TaxesHow To File A 2012 Tax Return2009 Federal Income Tax FormsForm 1040x 2013How To Refile Taxes1040nr Tax FormForm 1040Free Online 1040x FilingH&r Block Amended Tax ReturnFree Tax SoftwareFree Ez FormTax Form 10402012 Irs 1040a Instructions

Free Federal Tax E Filing

Free federal tax e filing Publication 515 - Main Content Table of Contents Withholding of TaxWithholding Agent Withholding and Reporting Obligations Persons Subject to NRA WithholdingIdentifying the Payee Foreign Persons DocumentationBeneficial Owners Foreign Intermediaries and Foreign Flow-Through Entities Standards of Knowledge Presumption Rules Income Subject to NRA WithholdingSource of Income Fixed or Determinable Annual or Periodical Income (FDAP) Withholding on Specific IncomeEffectively Connected Income Income Not Effectively Connected Pay for Personal Services Performed Artists and Athletes (Income Codes 42 and 43) Other Income Foreign Governments and Certain Other Foreign Organizations U. Free federal tax e filing S. Free federal tax e filing Taxpayer Identification NumbersUnexpected payment. Free federal tax e filing Depositing Withheld TaxesWhen Deposits Are Required Adjustment for Overwithholding Returns RequiredJoint owners. Free federal tax e filing Electronic reporting. Free federal tax e filing Partnership Withholding on Effectively Connected IncomeWho Must Withhold Foreign Partner Publicly Traded Partnerships U. Free federal tax e filing S. Free federal tax e filing Real Property InterestForeign corporations. Free federal tax e filing Domestic corporations. Free federal tax e filing U. Free federal tax e filing S. Free federal tax e filing real property holding corporations. Free federal tax e filing Partnerships. Free federal tax e filing Trusts and estates. Free federal tax e filing Domestically controlled QIE. Free federal tax e filing Late filing of certifications or notices. Free federal tax e filing Certifications. Free federal tax e filing Liability of agent or qualified substitute. Free federal tax e filing Reporting and Paying the Tax Withholding Certificates Tax Treaty TablesTable 1 Table 2 Table 3 How To Get Tax HelpLow Income Taxpayer Clinics (LITCs). Free federal tax e filing Withholding of Tax In most cases, a foreign person is subject to U. Free federal tax e filing S. Free federal tax e filing tax on its U. Free federal tax e filing S. Free federal tax e filing source income. Free federal tax e filing Most types of U. Free federal tax e filing S. Free federal tax e filing source income received by a foreign person are subject to U. Free federal tax e filing S. Free federal tax e filing tax of 30%. Free federal tax e filing A reduced rate, including exemption, may apply if there is a tax treaty between the foreign person's country of residence and the United States. Free federal tax e filing The tax is generally withheld (NRA withholding) from the payment made to the foreign person. Free federal tax e filing The term “NRA withholding” is used in this publication descriptively to refer to withholding required under sections 1441, 1442, and 1443 of the Internal Revenue Code. Free federal tax e filing In most cases, NRA withholding describes the withholding regime that requires withholding on a payment of U. Free federal tax e filing S. Free federal tax e filing source income. Free federal tax e filing Payments to foreign persons, including nonresident alien individuals, foreign entities, and governments, may be subject to NRA withholding. Free federal tax e filing NRA withholding does not include withholding under section 1445 of the Code (see U. Free federal tax e filing S. Free federal tax e filing Real Property Interest, later) or under section 1446 of the Code (see Partnership Withholding on Effectively Connected Income , later). Free federal tax e filing A withholding agent (defined next) is the person responsible for withholding on payments made to a foreign person. Free federal tax e filing However, a withholding agent that can reliably associate the payment with documentation (discussed later) from a U. Free federal tax e filing S. Free federal tax e filing person is not required to withhold. Free federal tax e filing In addition, a withholding agent may apply a reduced rate of withholding (including an exemption from withholding) if it can reliably associate the payment with documentation from a beneficial owner that is a foreign person entitled to a reduced rate of withholding. Free federal tax e filing Withholding Agent You are a withholding agent if you are a U. Free federal tax e filing S. Free federal tax e filing or foreign person that has control, receipt, custody, disposal, or payment of any item of income of a foreign person that is subject to withholding. Free federal tax e filing A withholding agent may be an individual, corporation, partnership, trust, association, nominee (under section 1446 of the Code), or any other entity, including any foreign intermediary, foreign partnership, or U. Free federal tax e filing S. Free federal tax e filing branch of certain foreign banks and insurance companies. Free federal tax e filing You may be a withholding agent even if there is no requirement to withhold from a payment or even if another person has withheld the required amount from the payment. Free federal tax e filing Although several persons may be withholding agents for a single payment, the full tax is required to be withheld only once. Free federal tax e filing In most cases, the U. Free federal tax e filing S. Free federal tax e filing person who pays an amount subject to NRA withholding is the person responsible for withholding. Free federal tax e filing However, other persons may be required to withhold. Free federal tax e filing For example, a payment made by a flow-through entity or nonqualified intermediary that knows, or has reason to know, that the full amount of NRA withholding was not done by the person from which it receives a payment is required to do the appropriate withholding since it also falls within the definition of a withholding agent. Free federal tax e filing In addition, withholding must be done by any qualified intermediary, withholding foreign partnership, or withholding foreign trust in accordance with the terms of its withholding agreement, discussed later. Free federal tax e filing Liability for tax. Free federal tax e filing   As a withholding agent, you are personally liable for any tax required to be withheld. Free federal tax e filing This liability is independent of the tax liability of the foreign person to whom the payment is made. Free federal tax e filing If you fail to withhold and the foreign payee fails to satisfy its U. Free federal tax e filing S. Free federal tax e filing tax liability, then both you and the foreign person are liable for tax, as well as interest and any applicable penalties. Free federal tax e filing   The applicable tax will be collected only once. Free federal tax e filing If the foreign person satisfies its U. Free federal tax e filing S. Free federal tax e filing tax liability, you are not liable for the tax but remain liable for any interest and penalties for failure to withhold. Free federal tax e filing Determination of amount to withhold. Free federal tax e filing   You must withhold on the gross amount subject to NRA withholding. Free federal tax e filing You cannot reduce the gross amount by any deductions. Free federal tax e filing However, see Scholarships and Fellowship Grants and Pay for Personal Services Performed , later, for when a deduction for a personal exemption may be allowed. Free federal tax e filing   If the determination of the source of the income or the amount subject to tax depends on facts that are not known at the time of payment, you must withhold an amount sufficient to ensure that at least 30% of the amount subsequently determined to be subject to withholding is withheld. Free federal tax e filing In no case, however, should you withhold more than 30% of the total amount paid. Free federal tax e filing Or, you may make a reasonable estimate of the amount from U. Free federal tax e filing S. Free federal tax e filing sources and put a corresponding part of the amount due in escrow until the amount from U. Free federal tax e filing S. Free federal tax e filing sources can be determined, at which time withholding becomes due. Free federal tax e filing When to withhold. Free federal tax e filing   Withholding is required at the time you make a payment of an amount subject to withholding. Free federal tax e filing A payment is made to a person if that person realizes income, whether or not there is an actual transfer of cash or other property. Free federal tax e filing A payment is considered made to a person if it is paid for that person's benefit. Free federal tax e filing For example, a payment made to a creditor of a person in satisfaction of that person's debt to the creditor is considered made to the person. Free federal tax e filing A payment also is considered made to a person if it is made to that person's agent. Free federal tax e filing   A U. Free federal tax e filing S. Free federal tax e filing partnership should withhold when any distributions that include amounts subject to withholding are made. Free federal tax e filing However, if a foreign partner's distributive share of income subject to withholding is not actually distributed, the U. Free federal tax e filing S. Free federal tax e filing partnership must withhold on the foreign partner's distributive share of the income on the earlier of the date that a Schedule K-1 (Form 1065) is provided or mailed to the partner or the due date for furnishing that schedule. Free federal tax e filing If the distributable amount consists of effectively connected income, see Partnership Withholding on Effectively Connected Income , later. Free federal tax e filing A U. Free federal tax e filing S. Free federal tax e filing trust is required to withhold on the amount includible in the gross income of a foreign beneficiary to the extent the trust's distributable net income consists of an amount subject to withholding. Free federal tax e filing To the extent a U. Free federal tax e filing S. Free federal tax e filing trust is required to distribute an amount subject to withholding but does not actually distribute the amount, it must withhold on the foreign beneficiary's allocable share at the time the income is required to be reported on Form 1042-S. Free federal tax e filing Withholding and Reporting Obligations You are required to report payments subject to NRA withholding on Form 1042-S and to file a tax return on Form 1042. Free federal tax e filing (See Returns Required , later. Free federal tax e filing ) An exception from reporting may apply to individuals who are not required to withhold from a payment and who do not make the payment in the course of their trade or business. Free federal tax e filing Form 1099 reporting and backup withholding. Free federal tax e filing    You also may be responsible as a payer for reporting on Form 1099 payments made to a U. Free federal tax e filing S. Free federal tax e filing person. Free federal tax e filing You must withhold 28% (backup withholding rate) from a reportable payment made to a U. Free federal tax e filing S. Free federal tax e filing person that is subject to Form 1099 reporting if any of the following apply. Free federal tax e filing The U. Free federal tax e filing S. Free federal tax e filing person has not provided its taxpayer identification number (TIN) in the manner required. Free federal tax e filing The IRS notifies you that the TIN furnished by the payee is incorrect. Free federal tax e filing There has been a notified payee underreporting. Free federal tax e filing There has been a payee certification failure. Free federal tax e filing In most cases, a TIN must be provided by a U. Free federal tax e filing S. Free federal tax e filing non-exempt recipient on Form W-9, Request for Taxpayer Identification Number and Certification. Free federal tax e filing A payer files a tax return on Form 945, Annual Return of Withheld Federal Income Tax, for backup withholding. Free federal tax e filing You may be required to file Form 1099 and, if appropriate, backup withhold, even if you do not make the payments directly to that U. Free federal tax e filing S. Free federal tax e filing person. Free federal tax e filing For example, you are required to report income paid to a foreign intermediary or flow-through entity that collects for a U. Free federal tax e filing S. Free federal tax e filing person subject to Form 1099 reporting. Free federal tax e filing See Identifying the Payee , later, for more information. Free federal tax e filing Also see Section S. Free federal tax e filing Special Rules for Reporting Payments Made Through Foreign Intermediaries and Foreign Flow-Through Entities on Form 1099 in the General Instructions for Certain Information Returns. Free federal tax e filing Foreign persons who provide Form W-8BEN, Form W-8ECI, or Form W-8EXP (or applicable documentary evidence) are exempt from backup withholding and Form 1099 reporting. Free federal tax e filing Wages paid to employees. Free federal tax e filing   If you are the employer of a nonresident alien, you generally must withhold taxes at graduated rates. Free federal tax e filing See Pay for Personal Services Performed , later. Free federal tax e filing Effectively connected income by partnerships. Free federal tax e filing   A withholding agent that is a partnership (whether U. Free federal tax e filing S. Free federal tax e filing or foreign) is also responsible for withholding on its income effectively connected with a U. Free federal tax e filing S. Free federal tax e filing trade or business that is allocable to foreign partners. Free federal tax e filing See Partnership Withholding on Effectively Connected Income , later, for more information. Free federal tax e filing U. Free federal tax e filing S. Free federal tax e filing real property interest. Free federal tax e filing   A withholding agent also may be responsible for withholding if a foreign person transfers a U. Free federal tax e filing S. Free federal tax e filing real property interest to the agent, or if it is a corporation, partnership, trust, or estate that distributes a U. Free federal tax e filing S. Free federal tax e filing real property interest to a shareholder, partner, or beneficiary that is a foreign person. Free federal tax e filing See U. Free federal tax e filing S. Free federal tax e filing Real Property Interest , later. Free federal tax e filing Persons Subject to NRA Withholding NRA withholding applies only to payments made to a payee that is a foreign person. Free federal tax e filing It does not apply to payments made to U. Free federal tax e filing S. Free federal tax e filing persons. Free federal tax e filing Usually, you determine the payee's status as a U. Free federal tax e filing S. Free federal tax e filing or foreign person based on the documentation that person provides. Free federal tax e filing See Documentation , later. Free federal tax e filing However, if you have received no documentation or you cannot reliably associate all or a part of a payment with documentation, then you must apply certain presumption rules, discussed later. Free federal tax e filing Identifying the Payee In most cases, the payee is the person to whom you make the payment, regardless of whether that person is the beneficial owner of the income. Free federal tax e filing However, there are situations in which the payee is a person other than the one to whom you actually make a payment. Free federal tax e filing U. Free federal tax e filing S. Free federal tax e filing agent of foreign person. Free federal tax e filing   If you make a payment to a U. Free federal tax e filing S. Free federal tax e filing person and you have actual knowledge that the U. Free federal tax e filing S. Free federal tax e filing person is receiving the payment as an agent of a foreign person, you must treat the payment as made to the foreign person. Free federal tax e filing However, if the U. Free federal tax e filing S. Free federal tax e filing person is a financial institution, you may treat the institution as the payee provided you have no reason to believe that the institution will not comply with its own obligation to withhold. Free federal tax e filing   If the payment is not subject to NRA withholding (for example, gross proceeds from the sales of securities), you must treat the payment as made to a U. Free federal tax e filing S. Free federal tax e filing person and not as a payment to a foreign person. Free federal tax e filing You may be required to report the payment on Form 1099 and, if applicable, backup withhold. Free federal tax e filing Disregarded entities. Free federal tax e filing   A business entity that is not a corporation and that has a single owner may be disregarded as an entity separate from its owner (a disregarded entity) for federal tax purposes. Free federal tax e filing The payee of a payment made to a disregarded entity is the owner of the entity. Free federal tax e filing   If the owner of the entity is a foreign person, you must apply NRA withholding unless you can treat the foreign owner as a beneficial owner entitled to a reduced rate of withholding. Free federal tax e filing   If the owner is a U. Free federal tax e filing S. Free federal tax e filing person, you do not apply NRA withholding. Free federal tax e filing However, you may be required to report the payment on Form 1099 and, if applicable, backup withhold. Free federal tax e filing You may assume that a foreign entity is not a disregarded entity unless you can reliably associate the payment with documentation provided by the owner or you have actual knowledge or reason to know that the foreign entity is a disregarded entity. Free federal tax e filing Flow-Through Entities The payees of payments (other than income effectively connected with a U. Free federal tax e filing S. Free federal tax e filing trade or business) made to a foreign flow-through entity are the owners or beneficiaries of the flow-through entity. Free federal tax e filing This rule applies for purposes of NRA withholding and for Form 1099 reporting and backup withholding. Free federal tax e filing Income that is, or is deemed to be, effectively connected with the conduct of a U. Free federal tax e filing S. Free federal tax e filing trade or business of a flow-through entity is treated as paid to the entity. Free federal tax e filing All of the following are flow-through entities. Free federal tax e filing A foreign partnership (other than a withholding foreign partnership). Free federal tax e filing A foreign simple or foreign grantor trust (other than a withholding foreign trust). Free federal tax e filing A fiscally transparent entity receiving income for which treaty benefits are claimed. Free federal tax e filing See Fiscally transparent entity , later. Free federal tax e filing In most cases, you treat a payee as a flow-through entity if it provides you with a Form W-8IMY (see Documentation , later) on which it claims such status. Free federal tax e filing You also may be required to treat the entity as a flow-through entity under the presumption rules, discussed later. Free federal tax e filing You must determine whether the owners or beneficiaries of a flow-through entity are U. Free federal tax e filing S. Free federal tax e filing or foreign persons, how much of the payment relates to each owner or beneficiary, and, if the owner or beneficiary is foreign, whether a reduced rate of NRA withholding applies. Free federal tax e filing You make these determinations based on the documentation and other information (contained in a withholding statement) that is associated with the flow-through entity's Form W-8IMY. Free federal tax e filing If you do not have all of the information that is required to reliably associate a payment with a specific payee, you must apply the presumption rules. Free federal tax e filing See Documentation and Presumption Rules , later. Free federal tax e filing Withholding foreign partnerships and withholding foreign trusts are not flow-through entities. Free federal tax e filing Foreign partnerships. Free federal tax e filing    A foreign partnership is any partnership that is not organized under the laws of any state of the United States or the District of Columbia or any partnership that is treated as foreign under the income tax regulations. Free federal tax e filing If a foreign partnership is not a withholding foreign partnership, the payees of income are the partners of the partnership, provided the partners are not themselves a flow-through entity or a foreign intermediary. Free federal tax e filing However, the payee is the partnership itself if the partnership is claiming treaty benefits on the basis that it is not fiscally transparent and that it meets all the other requirements for claiming treaty benefits. Free federal tax e filing If a partner is a foreign flow-through entity or a foreign intermediary, you apply the payee determination rules to that partner to determine the payees. Free federal tax e filing Example 1. Free federal tax e filing A nonwithholding foreign partnership has three partners: a nonresident alien individual; a foreign corporation; and a U. Free federal tax e filing S. Free federal tax e filing citizen. Free federal tax e filing You make a payment of U. Free federal tax e filing S. Free federal tax e filing source interest to the partnership. Free federal tax e filing It gives you a Form W-8IMY with which it associates Form W-8BEN from the nonresident alien; Form W-8BEN from the foreign corporation; and Form W-9 from the U. Free federal tax e filing S. Free federal tax e filing citizen. Free federal tax e filing The partnership also gives you a complete withholding statement that enables you to associate a part of the interest payment to each partner. Free federal tax e filing You must treat all three partners as the payees of the interest payment as if the payment were made directly to them. Free federal tax e filing Report the payment to the nonresident alien and the foreign corporation on Forms 1042-S. Free federal tax e filing Report the payment to the U. Free federal tax e filing S. Free federal tax e filing citizen on Form 1099-INT. Free federal tax e filing Example 2. Free federal tax e filing A nonwithholding foreign partnership has two partners: a foreign corporation and a nonwithholding foreign partnership. Free federal tax e filing The second partnership has two partners, both nonresident alien individuals. Free federal tax e filing You make a payment of U. Free federal tax e filing S. Free federal tax e filing source interest to the first partnership. Free federal tax e filing It gives you a valid Form W-8IMY with which it associates a Form W-8BEN from the foreign corporation and a Form W-8IMY from the second partnership. Free federal tax e filing In addition, Forms W-8BEN from the partners are associated with the Form W-8IMY from the second partnership. Free federal tax e filing The Forms W-8IMY from the partnerships have complete withholding statements associated with them. Free federal tax e filing Because you can reliably associate a part of the interest payment with the Form W-8BEN provided by the foreign corporation and the Forms W-8BEN provided by the nonresident alien individual partners as a result of the withholding statements, you must treat them as the payees of the interest. Free federal tax e filing Example 3. Free federal tax e filing You make a payment of U. Free federal tax e filing S. Free federal tax e filing source dividends to a withholding foreign partnership. Free federal tax e filing The partnership has two partners, both foreign corporations. Free federal tax e filing You can reliably associate the payment with a valid Form W-8IMY from the partnership on which it represents that it is a withholding foreign partnership. Free federal tax e filing You must treat the partnership as the payee of the dividends. Free federal tax e filing Foreign simple and grantor trust. Free federal tax e filing   A trust is foreign unless it meets both of the following tests. Free federal tax e filing A court within the United States is able to exercise primary supervision over the administration of the trust. Free federal tax e filing One or more U. Free federal tax e filing S. Free federal tax e filing persons have the authority to control all substantial decisions of the trust. Free federal tax e filing   In most cases, a foreign simple trust is a foreign trust that is required to distribute all of its income annually. Free federal tax e filing A foreign grantor trust is a foreign trust that is treated as a grantor trust under sections 671 through 679 of the Code. Free federal tax e filing   The payees of a payment made to a foreign simple trust are the beneficiaries of the trust. Free federal tax e filing The payees of a payment made to a foreign grantor trust are the owners of the trust. Free federal tax e filing However, the payee is the foreign simple or grantor trust itself if the trust is claiming treaty benefits on the basis that it is not fiscally transparent and that it meets all the other requirements for claiming treaty benefits. Free federal tax e filing If the beneficiaries or owners are themselves flow-through entities or foreign intermediaries, you apply the payee determination rules to that beneficiary or owner to determine the payees. Free federal tax e filing Example. Free federal tax e filing A foreign simple trust has three beneficiaries: two nonresident alien individuals and a U. Free federal tax e filing S. Free federal tax e filing citizen. Free federal tax e filing You make a payment of interest to the foreign trust. Free federal tax e filing It gives you a Form W-8IMY with which it associates Forms W-8BEN from the nonresident aliens and a Form W-9 from the U. Free federal tax e filing S. Free federal tax e filing citizen. Free federal tax e filing The trust also gives you a complete withholding statement that enables you to associate a part of the interest payment with the forms provided by each beneficiary. Free federal tax e filing You must treat all three beneficiaries as the payees of the interest payment as if the payment were made directly to them. Free federal tax e filing Report the payment to the nonresident aliens on Forms 1042-S. Free federal tax e filing Report the payment to the U. Free federal tax e filing S. Free federal tax e filing citizen on Form 1099-INT. Free federal tax e filing Fiscally transparent entity. Free federal tax e filing   If a reduced rate of withholding under an income tax treaty is claimed, a flow-through entity includes any entity in which the interest holder must treat the entity as fiscally transparent. Free federal tax e filing The determination of whether an entity is fiscally transparent is made on an item of income basis (that is, the determination is made separately for interest, dividends, royalties, etc. Free federal tax e filing ). Free federal tax e filing The interest holder in an entity makes the determination by applying the laws of the jurisdiction where the interest holder is organized, incorporated, or otherwise considered a resident. Free federal tax e filing An entity is considered to be fiscally transparent for the income to the extent the laws of that jurisdiction require the interest holder to separately take into account on a current basis the interest holder's share of the income, whether or not distributed to the interest holder, and the character and source of the income to the interest holder are determined as if the income was realized directly from the source that paid it to the entity. Free federal tax e filing Subject to the standards of knowledge rules discussed later, you generally make the determination that an entity is fiscally transparent based on a Form W-8IMY provided by the entity. Free federal tax e filing   The payees of a payment made to a fiscally transparent entity are the interest holders of the entity. Free federal tax e filing Example. Free federal tax e filing Entity A is a business organization organized under the laws of country X that has an income tax treaty in force with the United States. Free federal tax e filing A has two interest holders, B and C. Free federal tax e filing B is a corporation organized under the laws of country Y. Free federal tax e filing C is a corporation organized under the laws of country Z. Free federal tax e filing Both countries Y and Z have an income tax treaty in force with the United States. Free federal tax e filing A receives royalty income from U. Free federal tax e filing S. Free federal tax e filing sources that is not effectively connected with the conduct of a trade or business in the United States. Free federal tax e filing For U. Free federal tax e filing S. Free federal tax e filing income tax purposes, A is treated as a partnership. Free federal tax e filing Country X treats A as a partnership and requires the interest holders in A to separately take into account on a current basis their respective shares of the income paid to A even if the income is not distributed. Free federal tax e filing The laws of country X provide that the character and source of the income to A's interest holders are determined as if the income was realized directly from the source that paid it to A. Free federal tax e filing Accordingly, A is fiscally transparent in its jurisdiction, country X. Free federal tax e filing B and C are not fiscally transparent under the laws of their respective countries of incorporation. Free federal tax e filing Country Y requires B to separately take into account on a current basis B's share of the income paid to A, and the character and source of the income to B is determined as if the income was realized directly from the source that paid it to A. Free federal tax e filing Accordingly, A is fiscally transparent for that income under the laws of country Y, and B is treated as deriving its share of the U. Free federal tax e filing S. Free federal tax e filing source royalty income for purposes of the U. Free federal tax e filing S. Free federal tax e filing -Y income tax treaty. Free federal tax e filing Country Z, on the other hand, treats A as a corporation and does not require C to take into account its share of A's income on a current basis whether or not distributed. Free federal tax e filing Therefore, A is not treated as fiscally transparent under the laws of country Z. Free federal tax e filing Accordingly, C is not treated as deriving its share of the U. Free federal tax e filing S. Free federal tax e filing source royalty income for purposes of the U. Free federal tax e filing S. Free federal tax e filing -Z income tax treaty. Free federal tax e filing Foreign Intermediaries In most cases, if you make payments to a foreign intermediary, the payees are the persons for whom the foreign intermediary collects the payment, such as account holders or customers, not the intermediary itself. Free federal tax e filing This rule applies for purposes of NRA withholding and for Form 1099 reporting and backup withholding. Free federal tax e filing You may, however, treat a qualified intermediary that has assumed primary withholding responsibility for a payment as the payee, and you are not required to withhold. Free federal tax e filing An intermediary is a custodian, broker, nominee, or any other person that acts as an agent for another person. Free federal tax e filing A foreign intermediary is either a qualified intermediary or a nonqualified intermediary. Free federal tax e filing In most cases, you determine whether an entity is a qualified intermediary or a nonqualified intermediary based on the representations the intermediary makes on Form W-8IMY. Free federal tax e filing You must determine whether the customers or account holders of a foreign intermediary are U. Free federal tax e filing S. Free federal tax e filing or foreign persons and, if the account holder or customer is foreign, whether a reduced rate of NRA withholding applies. Free federal tax e filing You make these determinations based on the foreign intermediary's Form W-8IMY and associated information and documentation. Free federal tax e filing If you do not have all of the information or documentation that is required to reliably associate a payment with a payee, you must apply the presumption rules. Free federal tax e filing See Documentation and Presumption Rules , later. Free federal tax e filing Nonqualified intermediary. Free federal tax e filing   A nonqualified intermediary (NQI) is any intermediary that is a foreign person and that is not a qualified intermediary. Free federal tax e filing The payees of a payment made to an NQI are the customers or account holders on whose behalf the NQI is acting. Free federal tax e filing Example. Free federal tax e filing You make a payment of interest to a foreign bank that is a nonqualified intermediary. Free federal tax e filing The bank gives you a Form W-8IMY and the Forms W-8BEN of two foreign persons, and a Form W-9 from a U. Free federal tax e filing S. Free federal tax e filing person for whom the bank is collecting the payments. Free federal tax e filing The bank also associates with its Form W-8IMY a withholding statement on which it allocates the interest payment to each account holder and provides all other information required to be on the withholding statement. Free federal tax e filing The account holders are the payees of the interest payment. Free federal tax e filing You should report the part of the interest paid to the two foreign persons on Forms 1042-S and the part paid to the U. Free federal tax e filing S. Free federal tax e filing person on Form 1099-INT. Free federal tax e filing Qualified intermediary. Free federal tax e filing   A qualified intermediary (QI) is any foreign intermediary (or foreign branch of a U. Free federal tax e filing S. Free federal tax e filing intermediary) that has entered into a qualified intermediary withholding agreement (discussed later) with the IRS. Free federal tax e filing You may treat a QI as a payee to the extent the QI assumes primary withholding responsibility or primary Form 1099 reporting and backup withholding responsibility for a payment. Free federal tax e filing In this situation, the QI is required to withhold the tax. Free federal tax e filing You can determine whether a QI has assumed responsibility from the Form W-8IMY provided by the QI. Free federal tax e filing   A payment to a QI to the extent it does not assume primary NRA withholding responsibility is considered made to the person on whose behalf the QI acts. Free federal tax e filing If a QI does not assume Form 1099 reporting and backup withholding responsibility, you must report on Form 1099 and, if applicable, backup withhold as if you were making the payment directly to the U. Free federal tax e filing S. Free federal tax e filing person. Free federal tax e filing Branches of financial institutions. Free federal tax e filing   Branches of financial institutions are not permitted to operate as QIs if they are located outside of countries having approved “know-your-customer” (KYC) rules. Free federal tax e filing The countries with approved KYC rules are listed on IRS. Free federal tax e filing gov. Free federal tax e filing QI withholding agreement. Free federal tax e filing   Foreign financial institutions and foreign branches of U. Free federal tax e filing S. Free federal tax e filing financial institutions can enter into an agreement with the IRS to be a qualified intermediary. Free federal tax e filing   A QI is entitled to certain simplified withholding and reporting rules. Free federal tax e filing In general, there are three major areas whereby intermediaries with QI status are afforded such simplified treatment. Free federal tax e filing   To apply for QI status, complete Form 14345, Qualified Intermediary Application, and Form SS-4, Application for Employer Identification Number. Free federal tax e filing These forms, and the procedures required to obtain a QI withholding agreement are available at www. Free federal tax e filing irs. Free federal tax e filing gov/Businesses/Corporations/Qualified-Intermediaries-(QI). Free federal tax e filing Documentation. Free federal tax e filing   A QI is not required to forward documentation obtained from foreign account holders to the U. Free federal tax e filing S. Free federal tax e filing withholding agent from whom the QI receives a payment of U. Free federal tax e filing S. Free federal tax e filing source income. Free federal tax e filing The QI maintains such documentation at its location and provides the U. Free federal tax e filing S. Free federal tax e filing withholding agent with withholding rate pools. Free federal tax e filing A withholding rate pool is a payment of a single type of income that is subject to a single rate of withholding. Free federal tax e filing   A QI is required to provide the U. Free federal tax e filing S. Free federal tax e filing withholding agent with information regarding U. Free federal tax e filing S. Free federal tax e filing persons subject to Form 1099 information reporting unless the QI assumes the primary obligation to do Form 1099 reporting and backup withholding. Free federal tax e filing   If a QI obtains documentary evidence under the “know-your-customer” rules that apply to the QI under local law, and the documentary evidence is of a type specified in an attachment to the QI agreement, the documentary evidence remains valid until there is a change in circumstances or the QI knows the information is incorrect. Free federal tax e filing This indefinite validity period rule does not apply to Forms W-8 or to documentary evidence that is not of the type specified in the attachment to the agreement. Free federal tax e filing Form 1042-S reporting. Free federal tax e filing   A QI is permitted to report payments made to its direct foreign account holders on a pooled basis rather than reporting payments to each direct account holder specifically. Free federal tax e filing Pooled basis reporting is not available for payments to certain account holders, such as a nonqualified intermediary or a flow-through entity (discussed earlier). Free federal tax e filing Collective refund procedures. Free federal tax e filing   A QI may seek a refund on behalf of its direct account holders. Free federal tax e filing The direct account holders, therefore, are not required to file returns with the IRS to obtain refunds, but rather may obtain them from the QI. Free federal tax e filing U. Free federal tax e filing S. Free federal tax e filing branches of foreign banks and foreign insurance companies. Free federal tax e filing   Special rules apply to a U. Free federal tax e filing S. Free federal tax e filing branch of a foreign bank subject to Federal Reserve Board supervision or a foreign insurance company subject to state regulatory supervision. Free federal tax e filing If you agree to treat the branch as a U. Free federal tax e filing S. Free federal tax e filing person, you may treat the branch as a U. Free federal tax e filing S. Free federal tax e filing payee for a payment subject to NRA withholding provided you receive a Form W-8IMY from the U. Free federal tax e filing S. Free federal tax e filing branch on which the agreement is evidenced. Free federal tax e filing If you treat the branch as a U. Free federal tax e filing S. Free federal tax e filing payee, you are not required to withhold. Free federal tax e filing Even though you agree to treat the branch as a U. Free federal tax e filing S. Free federal tax e filing person, you must report the payment on Form 1042-S. Free federal tax e filing   A financial institution organized in a U. Free federal tax e filing S. Free federal tax e filing possession is treated as a U. Free federal tax e filing S. Free federal tax e filing branch. Free federal tax e filing The special rules discussed in this section apply to a possessions financial institution. Free federal tax e filing   If you are paying a U. Free federal tax e filing S. Free federal tax e filing branch an amount that is not subject to NRA withholding, treat the payment as made to a foreign person, irrespective of any agreement to treat the branch as a U. Free federal tax e filing S. Free federal tax e filing person for amounts subject to NRA withholding. Free federal tax e filing Consequently, amounts not subject to NRA withholding that are paid to a U. Free federal tax e filing S. Free federal tax e filing branch are not subject to Form 1099 reporting or backup withholding. Free federal tax e filing   Alternatively, a U. Free federal tax e filing S. Free federal tax e filing branch may provide you with a Form W-8IMY with which it associates the documentation of the persons on whose behalf it acts. Free federal tax e filing In this situation, the payees are the persons on whose behalf the branch acts provided you can reliably associate the payment with valid documentation from those persons. Free federal tax e filing See Nonqualified Intermediaries under  Documentation, later. Free federal tax e filing   If the U. Free federal tax e filing S. Free federal tax e filing branch does not provide you with a Form W-8IMY, then you should treat a payment subject to NRA withholding as made to the foreign person of which the branch is a part and the income as effectively connected with the conduct of a trade or business in the United States. Free federal tax e filing Withholding foreign partnership and foreign trust. Free federal tax e filing   A withholding foreign partnership (WP) is any foreign partnership that has entered into a WP withholding agreement with the IRS and is acting in that capacity. Free federal tax e filing A withholding foreign trust (WT) is a foreign simple or grantor trust that has entered into a WT withholding agreement with the IRS and is acting in that capacity. Free federal tax e filing   A WP or WT may act in that capacity only for payments of amounts subject to NRA withholding that are distributed to, or included in the distributive share of, its direct partners, beneficiaries, or owners. Free federal tax e filing A WP or WT acting in that capacity must assume NRA withholding responsibility for these amounts. Free federal tax e filing You may treat a WP or WT as a payee if it has provided you with documentation (discussed later) that represents that it is acting as a WP or WT for such amounts. Free federal tax e filing WP and WT withholding agreements. Free federal tax e filing   The WP and WT withholding agreements and the application procedures for the agreements are in Revenue Procedure 2003-64. Free federal tax e filing Also see the following items. Free federal tax e filing Revenue Procedure 2004-21. Free federal tax e filing Revenue Procedure 2005-77. Free federal tax e filing Employer identification number (EIN). Free federal tax e filing   A completed Form SS-4 must be submitted with the application for being a WP or WT. Free federal tax e filing The WP or WT will be assigned a WP-EIN or WT-EIN to be used only when acting in that capacity. Free federal tax e filing Documentation. Free federal tax e filing   A WP or WT must provide you with a Form W-8IMY that certifies that the WP or WT is acting in that capacity and a written statement identifying the amounts for which it is so acting. Free federal tax e filing The statement is not required to contain withholding rate pool information or any information relating to the identity of a direct partner, beneficiary, or owner. Free federal tax e filing The Form W-8IMY must contain the WP-EIN or WT-EIN. Free federal tax e filing Foreign Persons A payee is subject to NRA withholding only if it is a foreign person. Free federal tax e filing A foreign person includes a nonresident alien individual, foreign corporation, foreign partnership, foreign trust, foreign estate, and any other person that is not a U. Free federal tax e filing S. Free federal tax e filing person. Free federal tax e filing It also includes a foreign branch of a U. Free federal tax e filing S. Free federal tax e filing financial institution if the foreign branch is a qualified intermediary. Free federal tax e filing In most cases, the U. Free federal tax e filing S. Free federal tax e filing branch of a foreign corporation or partnership is treated as a foreign person. Free federal tax e filing Nonresident alien. Free federal tax e filing   A nonresident alien is an individual who is not a U. Free federal tax e filing S. Free federal tax e filing citizen or a resident alien. Free federal tax e filing A resident of a foreign country under the residence article of an income tax treaty is a nonresident alien individual for purposes of withholding. Free federal tax e filing Married to U. Free federal tax e filing S. Free federal tax e filing citizen or resident alien. Free federal tax e filing   Nonresident alien individuals married to U. Free federal tax e filing S. Free federal tax e filing citizens or resident aliens may choose to be treated as resident aliens for certain income tax purposes. Free federal tax e filing However, these individuals are still subject to the NRA withholding rules that apply to nonresident aliens for all income except wages. Free federal tax e filing Wages paid to these individuals are subject to graduated withholding. Free federal tax e filing See Wages Paid to Employees—Graduated Withholding . Free federal tax e filing Resident alien. Free federal tax e filing   A resident alien is an individual who is not a citizen or national of the United States and who meets either the green card test or the substantial presence test for the calendar year. Free federal tax e filing Green card test. Free federal tax e filing An alien is a resident alien if the individual was a lawful permanent resident of the United States at any time during the calendar year. Free federal tax e filing This is known as the green card test because these aliens hold immigrant visas (also known as green cards). Free federal tax e filing Substantial presence test. Free federal tax e filing An alien is considered a resident alien if the individual meets the substantial presence test for the calendar year. Free federal tax e filing Under this test, the individual must be physically present in the United States on at least: 31 days during the current calendar year, and 183 days during the current year and the 2 preceding years, counting all the days of physical presence in the current year, but only 1/3 the number of days of presence in the first preceding year, and only 1/6 the number of days in the second preceding year. Free federal tax e filing   In most cases, the days the alien is in the United States as a teacher, student, or trainee on an “F,” “J,” “M,” or “Q” visa are not counted. Free federal tax e filing This exception is for a limited period of time. Free federal tax e filing   For more information on resident and nonresident status, the tests for residence, and the exceptions to them, see Publication 519. Free federal tax e filing Note. Free federal tax e filing   If your employee is late in notifying you that his or her status changed from nonresident alien to resident alien, you may have to make an adjustment to Form 941 if that employee was exempt from withholding of social security and Medicare taxes as a nonresident alien. Free federal tax e filing For more information on making adjustments, see chapter 13 of Publication 15 (Circular E). Free federal tax e filing Resident of a U. Free federal tax e filing S. Free federal tax e filing possession. Free federal tax e filing   A bona fide resident of Puerto Rico, the U. Free federal tax e filing S. Free federal tax e filing Virgin Islands, Guam, the Commonwealth of the Northern Mariana Islands (CNMI), or American Samoa who is not a U. Free federal tax e filing S. Free federal tax e filing citizen or a U. Free federal tax e filing S. Free federal tax e filing national is treated as a nonresident alien for the withholding rules explained here. Free federal tax e filing A bona fide resident of a possession is someone who: Meets the presence test, Does not have a tax home outside the possession, and Does not have a closer connection to the United States or to a foreign country than to the possession. Free federal tax e filing   For more information, see Publication 570, Tax Guide for Individuals With Income From U. Free federal tax e filing S. Free federal tax e filing Possessions. Free federal tax e filing Foreign corporations. Free federal tax e filing   A foreign corporation is one that does not fit the definition of a domestic corporation. Free federal tax e filing A domestic corporation is one that was created or organized in the United States or under the laws of the United States, any of its states, or the District of Columbia. Free federal tax e filing Guam or Northern Mariana Islands corporations. Free federal tax e filing   A corporation created or organized in, or under the laws of, Guam or the CNMI is not considered a foreign corporation for the purpose of withholding tax for the tax year if: At all times during the tax year less than 25% in value of the corporation's stock is owned, directly or indirectly, by foreign persons; and At least 20% of the corporation's gross income is derived from sources within Guam or the CNMI for the 3-year period ending with the close of the preceding tax year of the corporation (or the period the corporation has been in existence, if less). Free federal tax e filing Note. Free federal tax e filing   The provisions discussed below under U. Free federal tax e filing S. Free federal tax e filing Virgin Islands and American Samoa corporations will apply to Guam or CNMI corporations when an implementing agreement is in effect between the United States and that possession. Free federal tax e filing U. Free federal tax e filing S. Free federal tax e filing Virgin Islands and American Samoa corporations. Free federal tax e filing   A corporation created or organized in, or under the laws of, the U. Free federal tax e filing S. Free federal tax e filing Virgin Islands or American Samoa is not considered a foreign corporation for the purposes of withholding tax for the tax year if: At all times during the tax year less than 25% in value of the corporation's stock is owned, directly or indirectly, by foreign persons, At least 65% of the corporation's gross income is effectively connected with the conduct of a trade or business in the U. Free federal tax e filing S. Free federal tax e filing Virgin Islands, American Samoa, Guam, the CNMI, or the United States for the 3-year period ending with the close of the tax year of the corporation (or the period the corporation or any predecessor has been in existence, if less), and No substantial part of the income of the corporation is used, directly or indirectly, to satisfy obligations to a person who is not a bona fide resident of the U. Free federal tax e filing S. Free federal tax e filing Virgin Islands, American Samoa, Guam, the CNMI, or the United States. Free federal tax e filing Foreign private foundations. Free federal tax e filing   A private foundation that was created or organized under the laws of a foreign country is a foreign private foundation. Free federal tax e filing Gross investment income from sources within the United States paid to a qualified foreign private foundation is subject to NRA withholding at a 4% rate (unless exempted by a treaty) rather than the ordinary statutory 30% rate. Free federal tax e filing Other foreign organizations, associations, and charitable institutions. Free federal tax e filing   An organization may be exempt from income tax under section 501(a) of the Internal Revenue Code even if it was formed under foreign law. Free federal tax e filing In most cases, you do not have to withhold tax on payments of income to these foreign tax-exempt organizations unless the IRS has determined that they are foreign private foundations. Free federal tax e filing   Payments to these organizations, however, must be reported on Form 1042-S, even though no tax is withheld. Free federal tax e filing   You must withhold tax on the unrelated business income (as described in Publication 598, Tax on Unrelated Business Income of Exempt Organizations) of foreign tax-exempt organizations in the same way that you would withhold tax on similar income of nonexempt organizations. Free federal tax e filing U. Free federal tax e filing S. Free federal tax e filing branches of foreign persons. Free federal tax e filing   In most cases, a payment to a U. Free federal tax e filing S. Free federal tax e filing branch of a foreign person is a payment made to the foreign person. Free federal tax e filing However, you may treat payments to U. Free federal tax e filing S. Free federal tax e filing branches of foreign banks and foreign insurance companies (discussed earlier) that are subject to U. Free federal tax e filing S. Free federal tax e filing regulatory supervision as payments made to a U. Free federal tax e filing S. Free federal tax e filing person, if you and the U. Free federal tax e filing S. Free federal tax e filing branch have agreed to do so, and if their agreement is evidenced by a withholding certificate, Form W-8IMY. Free federal tax e filing For this purpose, a financial institution organized under the laws of a U. Free federal tax e filing S. Free federal tax e filing possession is treated as a U. Free federal tax e filing S. Free federal tax e filing branch. Free federal tax e filing Documentation In most cases, you must withhold 30% from the gross amount paid to a foreign payee unless you can reliably associate the payment with valid documentation that establishes either of the following. Free federal tax e filing The payee is a U. Free federal tax e filing S. Free federal tax e filing person. Free federal tax e filing The payee is a foreign person that is the beneficial owner of the income and is entitled to a reduced rate of withholding. Free federal tax e filing In most cases, you must get the documentation before you make the payment. Free federal tax e filing The documentation is not valid if you know, or have reason to know, that it is unreliable or incorrect. Free federal tax e filing See Standards of Knowledge , later. Free federal tax e filing If you cannot reliably associate a payment with valid documentation, you must use the presumption rules discussed later. Free federal tax e filing For example, if you do not have documentation or you cannot determine the part of a payment that is allocable to specific documentation, you must use the presumption rules. Free federal tax e filing The specific types of documentation are discussed in this section. Free federal tax e filing However, see Withholding on Specific Income , later, as well as the instructions to the particular forms. Free federal tax e filing As the withholding agent, you also may want to see the Instructions for the Requester of Forms W-8BEN, W-8ECI, W-8EXP, and W-8IMY. Free federal tax e filing Section 1446 withholding. Free federal tax e filing   Under section 1446 of the Code, a partnership must withhold tax on its effectively connected income allocable to a foreign partner. Free federal tax e filing In most cases, a partnership determines if a partner is a foreign partner and the partner's tax classification based on the withholding certificate provided by the partner. Free federal tax e filing This is the same documentation that is filed for NRA withholding, but may require additional information as discussed under each of the forms in this section. Free federal tax e filing Joint owners. Free federal tax e filing    If you make a payment to joint owners, you need to get documentation from each owner. Free federal tax e filing Form W-9. Free federal tax e filing   In most cases, you can treat the payee as a U. Free federal tax e filing S. Free federal tax e filing person if the payee gives you a Form W-9. Free federal tax e filing The Form W-9 can be used only by a U. Free federal tax e filing S. Free federal tax e filing person and must contain the payee's taxpayer identification number (TIN). Free federal tax e filing If there is more than one owner, you may treat the total amount as paid to a U. Free federal tax e filing S. Free federal tax e filing person if any one of the owners gives you a Form W-9. Free federal tax e filing See U. Free federal tax e filing S. Free federal tax e filing Taxpayer Identification Numbers , later. Free federal tax e filing U. Free federal tax e filing S. Free federal tax e filing persons are not subject to NRA withholding, but may be subject to Form 1099 reporting and backup withholding. Free federal tax e filing Form W-8. Free federal tax e filing   In most cases, a foreign payee of the income should give you a form in the Form W-8 series. Free federal tax e filing Until further notice, you can rely upon Forms W-8 that contain a P. Free federal tax e filing O. Free federal tax e filing box as a permanent residence address provided you do not know, or have reason to know, that the person providing the form is a U. Free federal tax e filing S. Free federal tax e filing person and that a street address is available. Free federal tax e filing You may rely on Forms W-8 for which there is a U. Free federal tax e filing S. Free federal tax e filing mailing address provided you received the form prior to December 31, 2001. Free federal tax e filing   If certain requirements are met, the foreign person can give you documentary evidence, rather than a Form W-8. Free federal tax e filing You can rely on documentary evidence in lieu of a Form W-8 for a payment made in a U. Free federal tax e filing S. Free federal tax e filing possession. Free federal tax e filing Other documentation. Free federal tax e filing   Other documentation may be required to claim an exemption from, or a reduced rate of, withholding on pay for personal services. Free federal tax e filing The nonresident alien individual may have to give you a Form W-4 or a Form 8233, Exemption From Withholding on Compensation for Independent (and Certain Dependent) Personal Services of a Nonresident Alien Individual. Free federal tax e filing These forms are discussed in Pay for Personal Services Performed under Withholding on Specific Income. Free federal tax e filing Beneficial Owners If all the appropriate requirements have been established on a Form W-8BEN, W-8ECI, W-8EXP or, if applicable, on documentary evidence, you may treat the payee as a foreign beneficial owner. Free federal tax e filing Form W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding. Free federal tax e filing   This form is used by a foreign person to: Establish foreign status; Claim that such person is the beneficial owner of the income for which the form is being furnished or a partner in a partnership subject to section 1446 withholding; and If applicable, claim a reduced rate of, or exemption from, withholding under an income tax treaty. Free federal tax e filing   Form W-8BEN also may be used to claim that the foreign person is exempt from Form 1099 reporting and backup withholding for income that is not subject to NRA withholding. Free federal tax e filing For example, a foreign person may provide a Form W-8BEN to a broker to establish that the gross proceeds from the sale of securities are not subject to Form 1099 reporting or backup withholding. Free federal tax e filing Claiming treaty benefits. Free federal tax e filing   You may apply a reduced rate of withholding to a foreign person that provides a Form W-8BEN claiming a reduced rate of withholding under an income tax treaty only if the person provides a U. Free federal tax e filing S. Free federal tax e filing TIN and certifies that: It is a resident of a treaty country; It is the beneficial owner of the income; If it is an entity, it derives the income within the meaning of section 894 of the Internal Revenue Code (it is not fiscally transparent); and It meets any limitation on benefits provision contained in the treaty, if applicable. Free federal tax e filing   If the foreign beneficial owner claiming a treaty benefit is related to you, the foreign beneficial owner also must certify on Form W-8BEN that it will file Form 8833, Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b), if the amount subject to NRA withholding received during a calendar year exceeds, in the aggregate, $500,000. Free federal tax e filing   An entity derives income for which it is claiming treaty benefits only if the entity is not treated as fiscally transparent for that income. Free federal tax e filing See Fiscally transparent entity discussed earlier under Flow-Through Entities. Free federal tax e filing   Limitations on benefits provisions generally prohibit third country residents from obtaining treaty benefits. Free federal tax e filing For example, a foreign corporation may not be entitled to a reduced rate of withholding unless a minimum percentage of its owners are citizens or residents of the United States or the treaty country. Free federal tax e filing   The exemptions from, or reduced rates of, U. Free federal tax e filing S. Free federal tax e filing tax vary under each treaty. Free federal tax e filing You must check the provisions of the tax treaty that apply. Free federal tax e filing Tables at the end of this publication show the countries with which the United States has income tax treaties and the rates of withholding that apply in cases where all conditions of the particular treaty articles are satisfied. Free federal tax e filing   If you know, or have reason to know, that an owner of income is not eligible for treaty benefits claimed, you must not apply the treaty rate. Free federal tax e filing You are not, however, responsible for misstatements on a Form W-8, documentary evidence, or statements accompanying documentary evidence for which you did not have actual knowledge, or reason to know, that the statements were incorrect. Free federal tax e filing Exceptions to TIN requirement. Free federal tax e filing   A foreign person does not have to provide a TIN to claim a reduced rate of withholding under a treaty if the requirements for the following exceptions are met. Free federal tax e filing Income from marketable securities (discussed next). Free federal tax e filing Unexpected payments to an individual (discussed under U. Free federal tax e filing S. Free federal tax e filing Taxpayer Identification Numbers ). Free federal tax e filing Marketable securities. Free federal tax e filing   A Form W-8BEN provided to claim treaty benefits does not need a U. Free federal tax e filing S. Free federal tax e filing TIN if the foreign beneficial owner is claiming the benefits on income from marketable securities. Free federal tax e filing For this purpose, income from a marketable security consists of the following items. Free federal tax e filing Dividends and interest from stocks and debt obligations that are actively traded. Free federal tax e filing Dividends from any redeemable security issued by an investment company registered under the Investment Company Act of 1940 (mutual fund). Free federal tax e filing Dividends, interest, or royalties from units of beneficial interest in a unit investment trust that are (or were upon issuance) publicly offered and are registered with the SEC under the Securities Act of 1933. Free federal tax e filing Income related to loans of any of the above securities. Free federal tax e filing Offshore accounts. Free federal tax e filing   If a payment is made outside the United States to an offshore account, a payee may give you documentary evidence, rather than Form W-8BEN. Free federal tax e filing   In most cases, a payment is made outside the United States if you complete the acts necessary to effect the payment outside the United States. Free federal tax e filing However, an amount paid by a bank or other financial institution on a deposit or account usually will be treated as paid at the branch or office where the amount is credited. Free federal tax e filing An offshore account is an account maintained at an office or branch of a U. Free federal tax e filing S. Free federal tax e filing or foreign bank or other financial institution at any location outside the United States. Free federal tax e filing   You may rely on documentary evidence given to you by a nonqualified intermediary or a flow-through entity with its Form W-8IMY. Free federal tax e filing This rule applies even though you make the payment to a nonqualified intermediary or flow-through entity in the United States. Free federal tax e filing In most cases, the nonqualified intermediary or flow-through entity that gives you documentary evidence also will have to give you a withholding statement, discussed later. Free federal tax e filing Documentary evidence. Free federal tax e filing   You may apply a reduced rate of withholding to income from marketable securities (discussed earlier) paid outside the United States to an offshore account if the beneficial owner gives you documentary evidence in place of a Form W-8BEN. Free federal tax e filing To claim treaty benefits, the documentary evidence must be one of the following: A certificate of residence that: Is issued by a tax official of the treaty country of which the foreign beneficial owner claims to be a resident, States that the person has filed its most recent income tax return as a resident of that country, and Is issued within 3 years prior to being presented to you. Free federal tax e filing Documentation for an individual that: Includes the individual's name, address, and photograph, Is an official document issued by an authorized governmental body, and Is issued no more than 3 years prior to being presented to you. Free federal tax e filing Documentation for an entity that: Includes the name of the entity, Includes the address of its principal office in the treaty country, and Is an official document issued by an authorized governmental body. Free federal tax e filing In addition to the documentary evidence, a foreign beneficial owner that is an entity must provide a statement that it derives the income for which it claims treaty benefits and that it meets one or more of the conditions set forth in a limitation on benefits article, if any, (or similar provision) contained in the applicable treaty. Free federal tax e filing Form W-8ECI, Certificate of Foreign Person's Claim That Income Is Effectively Connected With the Conduct of a Trade or Business in the United States. Free federal tax e filing   This form is used by a foreign person to: Establish foreign status, Claim that such person is the beneficial owner of the income for which the form is being furnished, and Claim that the income is effectively connected with the conduct of a trade or business in the United States. Free federal tax e filing (See Effectively Connected Income , later. Free federal tax e filing )   Effectively connected income for which a valid Form W-8ECI has been provided is generally not subject to NRA withholding. Free federal tax e filing   If a partner submits this form to a partnership, the income claimed to be effectively connected with the conduct of a U. Free federal tax e filing S. Free federal tax e filing trade or business is subject to withholding under section 1446. Free federal tax e filing If the partner has made, or will make, an election under section 871(d) or 882(d), the partner must submit Form W-8ECI, and attach a copy of the election, or a statement of intent to elect, to the form. Free federal tax e filing    If the partner's only effectively connected income is the income allocated from the partnership and the partner is not making the election under section 871(d) or 882(d), the partner should provide Form W-8BEN to the partnership. Free federal tax e filing Form W-8EXP, Certificate of Foreign Government or Other Foreign Organization for United States Tax Withholding. Free federal tax e filing   This form is used by a foreign government, international organization, foreign central bank of issue, foreign tax-exempt organization, foreign private foundation, or government of a U. Free federal tax e filing S. Free federal tax e filing possession to: Establish foreign status, Claim that such person is the beneficial owner of the income for which the form is being furnished, and Claim a reduced rate of, or an exemption from, withholding as such an entity. Free federal tax e filing   If the government or organization is a partner in a partnership carrying on a trade or business in the United States, the effectively connected income allocable to the partner is subject to withholding under section 1446. Free federal tax e filing   See Foreign Governments and Certain Other Foreign Organizations , later. Free federal tax e filing Foreign Intermediaries and Foreign Flow-Through Entities Payments made to a foreign intermediary or foreign flow-through entity are treated as made to the payees on whose behalf the intermediary or entity acts. Free federal tax e filing The Form W-8IMY provided by a foreign intermediary or flow-through entity must be accompanied by additional information for you to be able to reliably associate the payment with a payee. Free federal tax e filing The additional information required depends on the type of intermediary or flow-through entity and the extent of the withholding responsibilities it assumes. Free federal tax e filing Form W-8IMY, Certificate of Foreign Intermediary, Foreign Flow-Through Entity, or Certain U. Free federal tax e filing S. Free federal tax e filing Branches for United States Tax Withholding. Free federal tax e filing   This form is used by foreign intermediaries and foreign flow-through entities, as well as certain U. Free federal tax e filing S. Free federal tax e filing branches, to: Represent that a foreign person is a qualified intermediary or nonqualified intermediary, Represent, if applicable, that the qualified intermediary is assuming primary NRA withholding responsibility and/or primary Form 1099 reporting and backup withholding responsibility, Represent that a foreign partnership or a foreign simple or grantor trust is a withholding foreign partnership or a withholding foreign trust, Represent that a foreign flow-through entity is a nonwithholding foreign partnership, or a nonwithholding foreign trust and that the income is not effectively connected with the conduct of a trade or business in the United States, Represent that the provider is a U. Free federal tax e filing S. Free federal tax e filing branch of a foreign bank or insurance company and either is agreeing to be treated as a U. Free federal tax e filing S. Free federal tax e filing person or is transmitting documentation of the persons on whose behalf it is acting, or Represent that, for purposes of section 1446, it is an upper-tier foreign partnership or a foreign grantor trust and that the form is being used to transmit the required documentation. Free federal tax e filing For information on qualifying as an upper-tier foreign partnership, see Regulations section 1. Free federal tax e filing 1446-5. Free federal tax e filing Qualified Intermediaries In most cases, a QI is any foreign intermediary that has entered into a QI withholding agreement (discussed earlier) with the IRS. Free federal tax e filing A foreign intermediary that has received a QI employer identification number (QI-EIN) may represent on Form W-8IMY that it is a QI before it receives a fully executed agreement. Free federal tax e filing The intermediary can claim that it is a QI until the IRS revokes its QI-EIN. Free federal tax e filing The IRS will revoke a QI-EIN if the QI agreement is not executed and returned to the IRS within a reasonable period of time after the agreement was sent to the intermediary for signature. Free federal tax e filing Responsibilities. Free federal tax e filing   Payments made to a QI that does not assume NRA withholding responsibility are treated as paid to its account holders and customers. Free federal tax e filing However, a QI is not required to provide you with documentation it obtains from its foreign account holders and customers. Free federal tax e filing Instead, it provides you with a withholding statement that contains withholding rate pool information. Free federal tax e filing A withholding rate pool is a payment of a single type of income, determined in accordance with the categories of income reported on Form 1042-S that is subject to a single rate of withholding. Free federal tax e filing A qualified intermediary is required to provide you with information regarding U. Free federal tax e filing S. Free federal tax e filing persons subject to Form 1099 reporting and to provide you withholding rate pool information separately for each such U. Free federal tax e filing S. Free federal tax e filing person unless it has assumed Form 1099 reporting and backup withholding responsibility. Free federal tax e filing For the alternative procedure for providing rate pool information for U. Free federal tax e filing S. Free federal tax e filing non-exempt persons, see the Form W-8IMY instructions. Free federal tax e filing   The withholding statement must: Designate those accounts for which it acts as a qualified intermediary, Designate those accounts for which it assumes primary NRA withholding responsibility and/or primary Form 1099 and backup withholding responsibility, and Provide sufficient information for you to allocate the payment to a withholding rate pool. Free federal tax e filing   The extent to which you must have withholding rate pool information depends on the withholding and reporting obligations assumed by the QI. Free federal tax e filing Primary responsibility not assumed. Free federal tax e filing   If a QI does not assume primary NRA withholding responsibility or primary Form 1099 reporting and backup withholding responsibility for the payment, you can reliably associate the payment with valid documentation only to the extent you can reliably determine the part of the payment that relates to each withholding rate pool for foreign payees. Free federal tax e filing Unless the alternative procedure applies, the qualified intermediary must provide you with a separate withholding rate pool for each U. Free federal tax e filing S. Free federal tax e filing person subject to Form 1099 reporting and/or backup withholding. Free federal tax e filing The QI must provide a Form W-9 or, in the absence of the form, the name, address, and TIN, if available, for such person. Free federal tax e filing Primary NRA withholding responsibility assumed. Free federal tax e filing   If you make a payment to a QI that assumes primary NRA withholding responsibility (but not primary Form 1099 reporting and backup withholding responsibility), you can reliably associate the payment with valid documentation only to the extent you can reliably determine the part of the payment that relates to the withholding rate pool for which the QI assumes primary NRA withholding responsibility and the part of the payment attributable to withholding rate pools for each U. Free federal tax e filing S. Free federal tax e filing person, unless the alternative procedure applies, subject to Form 1099 reporting and/or backup withholding. Free federal tax e filing The QI must provide a Form W-9 or, in the absence of the form, the name, address, and TIN, if available, for such person. Free federal tax e filing Primary NRA and Form 1099 responsibility assumed. Free federal tax e filing   If you make a payment to a QI that assumes both primary NRA withholding responsibility and primary Form 1099 reporting and backup withholding responsibility, you can reliably associate a payment with valid documentation provided that you receive a valid Form W-8IMY. Free federal tax e filing It is not necessary to associate the payment with withholding rate pools. Free federal tax e filing Example. Free federal tax e filing You make a payment of dividends to a QI. Free federal tax e filing It has five customers: two are foreign persons who have provided documentation entitling them to a 15% rate of withholding on dividends; two are foreign persons subject to a 30% rate of withholding on dividends; and one is a U. Free federal tax e filing S. Free federal tax e filing individual who provides it with a Form W-9. Free federal tax e filing Each customer is entitled to 20% of the dividend payment. Free federal tax e filing The QI does not assume any primary withholding responsibility. Free federal tax e filing The QI gives you a Form W-8IMY with which it associates the Form W-9 and a withholding statement that allocates 40% of the dividend to a 15% withholding rate pool, 40% to a 30% withholding rate pool, and 20% to the U. Free federal tax e filing S. Free federal tax e filing individual. Free federal tax e filing You should report on Forms 1042-S 40% of the payment as made to a 15% rate dividend pool and 40% of the payment as made to a 30% rate dividend pool. Free federal tax e filing The part of the payment allocable to the U. Free federal tax e filing S. Free federal tax e filing individual (20%) is reportable on Form 1099-DIV. Free federal tax e filing Smaller partnerships and trusts. Free federal tax e filing   A QI may apply special rules to a smaller partnership or trust (Joint Account Provision) only if the partnership or trust meets the following conditions. Free federal tax e filing It is a foreign partnership or foreign simple or grantor trust. Free federal tax e filing It is a direct account holder of the QI. Free federal tax e filing It does not have any partner, beneficiary, or owner that is a U. Free federal tax e filing S. Free federal tax e filing person or a pass- through partner, beneficiary, or owner. Free federal tax e filing   For information on these rules, see section 4A. Free federal tax e filing 01 of the QI agreement. Free federal tax e filing This is found in Appendix 3 of Revenue Procedure 2003-64. Free federal tax e filing Also see Revenue Procedure 2004-21. Free federal tax e filing Related partnerships and trusts. Free federal tax e filing    A QI may apply special rules to a related partnership or trust only if the partnership or trust meets the following conditions. Free federal tax e filing It is a foreign partnership or foreign simple or grantor trust. Free federal tax e filing It is either: A direct account holder of the QI, or An indirect account holder of the QI that is a direct partner, beneficiary, or owner of a partnership or trust to which the QI has applied this rule. Free federal tax e filing For information on these rules, see section 4A. Free federal tax e filing 02 of the QI agreement. Free federal tax e filing This is found in Appendix 3 of Revenue Procedure 2003-64. Free federal tax e filing Also see Revenue Procedure 2005-77. Free federal tax e filing Nonqualified Intermediaries If you are making a payment to an NQI, foreign flow-through entity, or U. Free federal tax e filing S. Free federal tax e filing branch that is using Form W-8IMY to transmit information about the branch's account holders or customers, you can treat the payment (or a part of the payment) as reliably associated with valid documentation from a specific payee only if, prior to making the payment: You can allocate the payment to a valid Form W-8IMY, You can reliably determine how much of the payment relates to valid documentation provided by a payee (a person that is not itself a foreign intermediary, flow- through entity, or U. Free federal tax e filing S. Free federal tax e filing branch), and You have sufficient information to report the payment on Form 1042-S or Form 1099, if reporting is required. Free federal tax e filing The NQI, flow-through entity, or U. Free federal tax e filing S. Free federal tax e filing branch must give you certain information on a withholding statement that is associated with the Form W-8IMY. Free federal tax e filing A withholding statement must be updated to keep the information accurate prior to each payment. Free federal tax e filing Withholding statement. Free federal tax e filing   In most cases, a withholding statement must contain the following information. Free federal tax e filing The name, address, and TIN (if any, or if required) of each person for whom documentation is provided. Free federal tax e filing The type of documentation (documentary evidence, Form W-8, or Form W-9) for every person for whom documentation has been provided. Free federal tax e filing The status of the person for whom the documentation has been provided, such as whether the person is a U. Free federal tax e filing S. Free federal tax e filing exempt recipient (U. Free federal tax e filing S. Free federal tax e filing person exempt from Form 1099 reporting), U. Free federal tax e filing S. Free federal tax e filing non-exempt recipient (U. Free federal tax e filing S. Free federal tax e filing person subject to Form 1099 reporting), or a foreign person. Free federal tax e filing For a foreign person, the statement must indicate whether the person is a beneficial owner or a foreign intermediary, flow-through entity, or a U. Free federal tax e filing S. Free federal tax e filing branch. Free federal tax e filing The type of recipient the person is, based on the recipient codes used on Form 1042-S. Free federal tax e filing Information allocating each payment, by income type, to each payee (including U. Free federal tax e filing S. Free federal tax e filing exempt and U. Free federal tax e filing S. Free federal tax e filing non-exempt recipients) for whom documentation has been provided. Free federal tax e filing The rate of withholding that applies to each foreign person to whom a payment is allocated. Free federal tax e filing A foreign payee's country of residence. Free federal tax e filing If a reduced rate of withholding is claimed, the basis for a reduced rate of withholding (for example, portfolio interest, treaty benefit, etc. Free federal tax e filing ). Free federal tax e filing In the case of treaty benefits claimed by entities, whether the applicable limitation on benefits statement and the statement that the foreign person derives the income for which treaty benefits are claimed, have been made. Free federal tax e filing The name, address, and TIN (if any) of any other NQI, flow-through entity, or U. Free federal tax e filing S. Free federal tax e filing branch from which the payee will directly receive a payment. Free federal tax e filing Any other information a withholding agent requests to fulfill its reporting and withholding obligations. Free federal tax e filing Alternative procedure. Free federal tax e filing   Under this alternative procedure the NQI can give you the information that allocates each payment to each foreign and U. Free federal tax e filing S. Free federal tax e filing exempt recipient by January 31 following the calendar year of payment, rather than prior to the payment being made as otherwise required. Free federal tax e filing To take advantage of this procedure, the NQI must: (a) inform you, on its withholding statement, that it is using the alternative procedure; and (b) obtain your consent. Free federal tax e filing You must receive the withholding statement with all the required information (other than item 5) prior to making the payment. Free federal tax e filing    This alternative procedure cannot be used for payments to U. Free federal tax e filing S. Free federal tax e filing non-exempt recipients. Free federal tax e filing Therefore, an NQI must always provide you with allocation information for all U. Free federal tax e filing S. Free federal tax e filing non-exempt recipients prior to a payment being made. Free federal tax e filing Pooled withholding information. Free federal tax e filing   If an NQI uses the alternative procedure, it must provide you with withholding rate pool information, as opposed to individual allocation information, prior to the payment of a reportable amount. Free federal tax e filing A withholding rate pool is a payment of a single type of income (as determined by the income categories on Form 1042-S) that is subject to a single rate of withholding. Free federal tax e filing For example, an NQI that has foreign account holders receiving royalties and dividends, both subject to the 15% rate, will provide you with information for two withholding rate pools (one for royalties and one for dividends). Free federal tax e filing The NQI must provide you with the payee specific allocation information (information allocating each payment to each payee) by January 31 following the calendar year of payment. Free federal tax e filing Failure to provide allocation information. Free federal tax e filing   If an NQI fails to provide you with the payee specific allocation information for a withholding rate pool by January 31, you must not apply the alternative procedure to any of the NQI's withholding rate pools from that date forward. Free federal tax e filing You must treat the payees as undocumented and apply the presumption rules, discussed later in Presumption Rules . Free federal tax e filing An NQI is deemed to have f
Print - Click this link to Print this page

Understanding your CP21A Notice

We made the change(s) you requested to your tax return for the tax year specified on the notice. You owe money on your taxes as a result of the change(s).

Tax publications you may find useful

How to get help

Calling the toll free number listed on the top right corner of your notice is the fastest way to get your questions answered.

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

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


What you need to do

  • Read your notice carefully ― it will explain why you owe money on your taxes.
  • Pay the amount owed by the date on the notice's payment coupon.
  • Make payment arrangements if you can't pay the full amount you owe.
  • Contact us if you disagree with the change(s) we made.
  • Correct the copy of your tax return that you kept for your records.

You may want to...


Answers to Common Questions

The notice says "Based on the information you provided, we changed your 200X Form 1040 to correct your:..." but I don't remember sending any change to IRS. How can I find out what IRS received to initiate this change?
Please contact us at the number listed on the top right corner of your notice for specific information about your tax return.

What do I say when I call the IRS?
Mention that you got a CP21A notice with a balance due and you need to review your account with a customer service representative. Be sure to have a copy of your notice and your tax return before you call.

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

What happens if I can't pay the full amount I owe?
You can arrange to make a payment plan with us if you can't pay the full amount you owe.

Am I charged interest on the money I owe?
If you don't full pay the amount you owe by the date on the payment coupon, interest will accrue on the unpaid balance after that date.

Will I receive a penalty if I can't pay the full amount?
Yes, you'll receive a late payment penalty. You can contact us at the number listed on your notice if you’re unable to pay the full amount shown in your specific notice because of circumstances beyond your control. Contact us by the due date of your payment and, depending on your situation, we may be able to remove the penalty.

Can I set up a payment plan?
Yes. Call the toll-free number listed on the top right corner of your notice to discuss payment options or check out more information on payment options and how to make a payment arrangement.

There are other options, such as paying by credit card. Note: There may be a fee to pay by credit card.

What if I need to make another correction to my account?
You'll need to file Form 1040X, Amended U.S. Individual Income Tax Return.

What if I have tried to get answers and after contacting IRS several times have not been successful?
Call Taxpayer Advocate at 1-877-777-4778 or for TTY/TDD 1-800-829-4059.

What if I think I’m a victim of identity theft?
Please contact us at the number listed on the top right corner of your notice. Refer to the IRS Identity Theft resource page for more information.


Tips for next year

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

Page Last Reviewed or Updated: 26-Feb-2014

The Free Federal Tax E Filing

Free federal tax e filing 1. Free federal tax e filing   Overview of Depreciation Table of Contents Introduction Useful Items - You may want to see: What Property Can Be Depreciated?Property You Own Property Used in Your Business or Income-Producing Activity Property Having a Determinable Useful Life Property Lasting More Than One Year What Property Cannot Be Depreciated?Land Excepted Property When Does Depreciation Begin and End?Placed in Service Idle Property Cost or Other Basis Fully Recovered Retired From Service What Method Can You Use To Depreciate Your Property?Property You Placed in Service Before 1987 Property Owned or Used in 1986 Intangible Property Corporate or Partnership Property Acquired in a Nontaxable Transfer Election To Exclude Property From MACRS What Is the Basis of Your Depreciable Property?Cost as Basis Other Basis Adjusted Basis How Do You Treat Repairs and Improvements? Do You Have To File Form 4562? How Do You Correct Depreciation Deductions?Filing an Amended Return Changing Your Accounting Method Introduction Depreciation is an annual income tax deduction that allows you to recover the cost or other basis of certain property over the time you use the property. Free federal tax e filing It is an allowance for the wear and tear, deterioration, or obsolescence of the property. Free federal tax e filing This chapter discusses the general rules for depreciating property and answers the following questions. Free federal tax e filing What property can be depreciated? What property cannot be depreciated? When does depreciation begin and end? What method can you use 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? Useful Items - You may want to see: Publication 534 Depreciating Property Placed in Service Before 1987 535 Business Expenses 538 Accounting Periods and Methods 551 Basis of Assets Form (and Instructions) Sch C (Form 1040) Profit or Loss From Business Sch C-EZ (Form 1040) Net Profit From Business 2106 Employee Business Expenses 2106-EZ Unreimbursed Employee Business Expenses 3115 Application for Change in Accounting Method 4562 Depreciation and Amortization See chapter 6 for information about getting publications and forms. Free federal tax e filing What Property Can Be Depreciated? You can depreciate most types of tangible property (except land), such as buildings, machinery, vehicles, furniture, and equipment. Free federal tax e filing You also can depreciate certain intangible property, such as patents, copyrights, and computer software. Free federal tax e filing To be depreciable, the property must meet all the following requirements. Free federal tax e filing It must be property you own. Free federal tax e filing It must be used in your business or income-producing activity. Free federal tax e filing It must have a determinable useful life. Free federal tax e filing It must be expected to last more than one year. Free federal tax e filing The following discussions provide information about these requirements. Free federal tax e filing Property You Own To claim depreciation, you usually must be the owner of the property. Free federal tax e filing You are considered as owning property even if it is subject to a debt. Free federal tax e filing Example 1. Free federal tax e filing You made a down payment to purchase rental property and assumed the previous owner's mortgage. Free federal tax e filing You own the property and you can depreciate it. Free federal tax e filing Example 2. Free federal tax e filing You bought a new van that you will use only for your courier business. Free federal tax e filing You will be making payments on the van over the next 5 years. Free federal tax e filing You own the van and you can depreciate it. Free federal tax e filing Leased property. Free federal tax e filing   You can depreciate leased property only if you retain the incidents of ownership in the property (explained below). Free federal tax e filing This means you bear the burden of exhaustion of the capital investment in the property. Free federal tax e filing 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 federal tax e filing You can, however, depreciate any capital improvements you make to the property. Free federal tax e filing See How Do You Treat Repairs and Improvements later in this chapter and Additions and Improvements under Which Recovery Period Applies in chapter 4. Free federal tax e filing   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 federal tax e filing However, 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, you cannot depreciate the cost of the property. Free federal tax e filing Incidents of ownership. Free federal tax e filing   Incidents of ownership in property include the following. Free federal tax e filing The legal title to the property. Free federal tax e filing The legal obligation to pay for the property. Free federal tax e filing The responsibility to pay maintenance and operating expenses. Free federal tax e filing The duty to pay any taxes on the property. Free federal tax e filing The risk of loss if the property is destroyed, condemned, or diminished in value through obsolescence or exhaustion. Free federal tax e filing Life tenant. Free federal tax e filing   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 federal tax e filing However, see Certain term interests in property under Excepted Property, later. Free federal tax e filing Cooperative apartments. Free federal tax e filing   If you are a tenant-stockholder in a cooperative housing corporation and use your cooperative apartment in your business or for the production of income, you can depreciate your stock in the corporation, even though the corporation owns the apartment. Free federal tax e filing   Figure your depreciation deduction as follows. Free federal tax e filing Figure the depreciation for all the depreciable real property owned by the corporation in which you have a proprietary lease or right of tenancy. Free federal tax e filing If you bought your cooperative stock after its first offering, figure the depreciable basis of this property as follows. Free federal tax e filing Multiply your cost per share by the total number of outstanding shares, including any shares held by the corporation. Free federal tax e filing Add to the amount figured in (a) any mortgage debt on the property on the date you bought the stock. Free federal tax e filing Subtract from the amount figured in (b) any mortgage debt that is not for the depreciable real property, such as the part for the land. Free federal tax e filing Subtract from the amount figured in (1) any depreciation for space owned by the corporation that can be rented but cannot be lived in by tenant-stockholders. Free federal tax e filing Divide the number of your shares of stock by the total number of outstanding shares, including any shares held by the corporation. Free federal tax e filing Multiply the result of (2) by the percentage you figured in (3). Free federal tax e filing This is your depreciation on the stock. Free federal tax e filing   Your depreciation deduction for the year cannot be more than the part of your adjusted basis in the stock of the corporation that is allocable to your business or income-producing property. Free federal tax e filing You must also reduce your depreciation deduction if only a portion of the property is used in a business or for the production of income. Free federal tax e filing Example. Free federal tax e filing You figure your share of the cooperative housing corporation's depreciation to be $30,000. Free federal tax e filing Your adjusted basis in the stock of the corporation is $50,000. Free federal tax e filing You use one half of your apartment solely for business purposes. Free federal tax e filing Your depreciation deduction for the stock for the year cannot be more than $25,000 (½ of $50,000). Free federal tax e filing Change to business use. Free federal tax e filing   If you change your cooperative apartment to business use, figure your allowable depreciation as explained earlier. Free federal tax e filing The basis of all the depreciable real property owned by the cooperative housing corporation is the smaller of the following amounts. Free federal tax e filing The fair market value of the property on the date you change your apartment to business use. Free federal tax e filing This is considered to be the same as the corporation's adjusted basis minus straight line depreciation, unless this value is unrealistic. Free federal tax e filing The corporation's adjusted basis in the property on that date. Free federal tax e filing Do not subtract depreciation when figuring the corporation's adjusted basis. Free federal tax e filing   If you bought the stock after its first offering, the corporation's adjusted basis in the property is the amount figured in (1), above. Free federal tax e filing The fair market value of the property is considered to be the same as the corporation's adjusted basis figured in this way minus straight line depreciation, unless the value is unrealistic. Free federal tax e filing   For a discussion of fair market value and adjusted basis, see Publication 551. Free federal tax e filing 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 federal tax e filing If you use property to produce income (investment use), the income must be taxable. Free federal tax e filing You cannot depreciate property that you use solely for personal activities. Free federal tax e filing Partial business or investment use. Free federal tax e filing   If you use property for business or investment purposes and for personal purposes, you can deduct depreciation based only on the business or investment use. Free federal tax e filing For example, you cannot deduct depreciation on a car used only for commuting, personal shopping trips, family vacations, driving children to and from school, or similar activities. Free federal tax e filing    You must keep records showing the business, investment, and personal use of your property. Free federal tax e filing For more information on the records you must keep for listed property, such as a car, see What Records Must Be Kept in chapter 5. Free federal tax e filing    Although you can combine business and investment use of property when figuring depreciation deductions, do not treat investment use as qualified business use when determining whether the business-use requirement for listed property is met. Free federal tax e filing For information about qualified business use of listed property, see What Is the Business-Use Requirement in chapter 5. Free federal tax e filing Office in the home. Free federal tax e filing   If you use part of your home as an office, you may be able to deduct depreciation on that part based on its business use. Free federal tax e filing For information about depreciating your home office, see Publication 587. Free federal tax e filing Inventory. Free federal tax e filing   You cannot depreciate inventory because it is not held for use in your business. Free federal tax e filing Inventory is any property you hold primarily for sale to customers in the ordinary course of your business. Free federal tax e filing   If you are a rent-to-own dealer, you may be able to treat certain property held in your business as depreciable property rather than as inventory. Free federal tax e filing See Rent-to-own dealer under Which Property Class Applies Under GDS in chapter 4. Free federal tax e filing   In some cases, it is not clear whether property is held for sale (inventory) or for use in your business. Free federal tax e filing If it is unclear, examine carefully all the facts in the operation of the particular business. Free federal tax e filing The following example shows how a careful examination of the facts in two similar situations results in different conclusions. Free federal tax e filing Example. Free federal tax e filing Maple Corporation is in the business of leasing cars. Free federal tax e filing At the end of their useful lives, when the cars are no longer profitable to lease, Maple sells them. Free federal tax e filing Maple does not have a showroom, used car lot, or individuals to sell the cars. Free federal tax e filing Instead, it sells them through wholesalers or by similar arrangements in which a dealer's profit is not intended or considered. Free federal tax e filing Maple can depreciate the leased cars because the cars are not held primarily for sale to customers in the ordinary course of business, but are leased. Free federal tax e filing If Maple buys cars at wholesale prices, leases them for a short time, and then sells them at retail prices or in sales in which a dealer's profit is intended, the cars are treated as inventory and are not depreciable property. Free federal tax e filing In this situation, the cars are held primarily for sale to customers in the ordinary course of business. Free federal tax e filing Containers. Free federal tax e filing   Generally, containers for the products you sell are part of inventory and you cannot depreciate them. Free federal tax e filing However, you can depreciate containers used to ship your products if they have a life longer than one year and meet the following requirements. Free federal tax e filing They qualify as property used in your business. Free federal tax e filing Title to the containers does not pass to the buyer. Free federal tax e filing   To determine if these requirements are met, consider the following questions. Free federal tax e filing Does your sales contract, sales invoice, or other type of order acknowledgment indicate whether you have retained title? Does your invoice treat the containers as separate items? Do any of your records state your basis in the containers? Property Having a Determinable Useful Life To be depreciable, your property must have a determinable useful life. Free federal tax e filing This means that it must be something that wears out, decays, gets used up, becomes obsolete, or loses its value from natural causes. Free federal tax e filing Property Lasting More Than One Year To be depreciable, property must have a useful life that extends substantially beyond the year you place it in service. Free federal tax e filing Example. Free federal tax e filing You maintain a library for use in your profession. Free federal tax e filing You can depreciate it. Free federal tax e filing However, if you buy technical books, journals, or information services for use in your business that have a useful life of one year or less, you cannot depreciate them. Free federal tax e filing Instead, you deduct their cost as a business expense. Free federal tax e filing What Property Cannot Be Depreciated? Certain property cannot be depreciated. Free federal tax e filing This includes land and certain excepted property. Free federal tax e filing Land You cannot depreciate the cost of land because land does not wear out, become obsolete, or get used up. Free federal tax e filing The cost of land generally includes the cost of clearing, grading, planting, and landscaping. Free federal tax e filing Although you cannot depreciate land, you can depreciate certain land preparation costs, such as landscaping costs, incurred in preparing land for business use. Free federal tax e filing These costs must be so closely associated with other depreciable property that you can determine a life for them along with the life of the associated property. Free federal tax e filing Example. Free federal tax e filing You constructed a new building for use in your business and paid for grading, clearing, seeding, and planting bushes and trees. Free federal tax e filing Some of the bushes and trees were planted right next to the building, while others were planted around the outer border of the lot. Free federal tax e filing If you replace the building, you would have to destroy the bushes and trees right next to it. Free federal tax e filing These bushes and trees are closely associated with the building, so they have a determinable useful life. Free federal tax e filing Therefore, you can depreciate them. Free federal tax e filing Add your other land preparation costs to the basis of your land because they have no determinable life and you cannot depreciate them. Free federal tax e filing Excepted Property Even if the requirements explained in the preceding discussions are met, you cannot depreciate the following property. Free federal tax e filing Property placed in service and disposed of in the same year. Free federal tax e filing Determining when property is placed in service is explained later. Free federal tax e filing Equipment used to build capital improvements. Free federal tax e filing You must add otherwise allowable depreciation on the equipment during the period of construction to the basis of your improvements. Free federal tax e filing See Uniform Capitalization Rules in Publication 551. Free federal tax e filing Section 197 intangibles. Free federal tax e filing You must amortize these costs. Free federal tax e filing Section 197 intangibles are discussed in detail in Chapter 8 of Publication 535. Free federal tax e filing Intangible property, such as certain computer software, that is not section 197 intangible property, can be depreciated if it meets certain requirements. Free federal tax e filing See Intangible Property , later. Free federal tax e filing Certain term interests. Free federal tax e filing Certain term interests in property. Free federal tax e filing   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 federal tax e filing A term interest in property means a life interest in property, an interest in property for a term of years, or an income interest in a trust. Free federal tax e filing Related persons. Free federal tax e filing   For a description of related persons, see Related Persons, later. Free federal tax e filing For this purpose, however, treat as related persons only the relationships listed in items (1) through (10) of that discussion and substitute “50%” for “10%” each place it appears. Free federal tax e filing Basis adjustments. Free federal tax e filing   If you would be allowed a depreciation deduction for a term interest in property except that the holder of the remainder interest is related to you, you generally must reduce your basis in the term interest by any depreciation or amortization not allowed. Free federal tax e filing   If you hold the remainder interest, you generally must increase your basis in that interest by the depreciation not allowed to the term interest holder. Free federal tax e filing However, do not increase your basis for depreciation not allowed for periods during which either of the following situations applies. Free federal tax e filing The term interest is held by an organization exempt from tax. Free federal tax e filing The term interest is held by a nonresident alien individual or foreign corporation, and the income from the term interest is not effectively connected with the conduct of a trade or business in the United States. Free federal tax e filing Exceptions. Free federal tax e filing   The above rules do not apply to the holder of a term interest in property acquired by gift, bequest, or inheritance. Free federal tax e filing They also do not apply to the holder of dividend rights that were separated from any stripped preferred stock if the rights were purchased after April 30, 1993, or to a person whose basis in the stock is determined by reference to the basis in the hands of the purchaser. Free federal tax e filing 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 federal tax e filing 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 federal tax e filing Placed in Service You place property 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 federal tax e filing Even if you are not using the property, it is in service when it is ready and available for its specific use. Free federal tax e filing Example 1. Free federal tax e filing Donald Steep bought a machine for his business. Free federal tax e filing The machine was delivered last year. Free federal tax e filing However, it was not installed and operational until this year. Free federal tax e filing It is considered placed in service this year. Free federal tax e filing If the machine had been ready and available for use when it was delivered, it would be considered placed in service last year even if it was not actually used until this year. Free federal tax e filing Example 2. Free federal tax e filing On April 6, Sue Thorn bought a house to use as residential rental property. Free federal tax e filing She made several repairs and had it ready for rent on July 5. Free federal tax e filing At that time, she began to advertise it for rent in the local newspaper. Free federal tax e filing The house is considered placed in service in July when it was ready and available for rent. Free federal tax e filing She can begin to depreciate it in July. Free federal tax e filing Example 3. Free federal tax e filing James Elm is a building contractor who specializes in constructing office buildings. Free federal tax e filing He bought a truck last year that had to be modified to lift materials to second-story levels. Free federal tax e filing The installation of the lifting equipment was completed and James accepted delivery of the modified truck on January 10 of this year. Free federal tax e filing The truck was placed in service on January 10, the date it was ready and available to perform the function for which it was bought. Free federal tax e filing Conversion to business use. Free federal tax e filing   If you place property in service in a personal activity, you cannot claim depreciation. Free federal tax e filing However, if you change the property's use to use in a business or income-producing activity, then you can begin to depreciate it at the time of the change. Free federal tax e filing You place the property in service in the business or income-producing activity on the date of the change. Free federal tax e filing Example. Free federal tax e filing You bought a home and used it as your personal home several years before you converted it to rental property. Free federal tax e filing Although its specific use was personal and no depreciation was allowable, you placed the home in service when you began using it as your home. Free federal tax e filing You can begin to claim depreciation in the year you converted it to rental property because its use changed to an income-producing use at that time. Free federal tax e filing 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 (not in use). Free federal tax e filing 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 federal tax e filing Cost or Other Basis Fully Recovered You stop depreciating property when you have fully recovered your cost or other basis. Free federal tax e filing You recover your basis when your section 179 and allowed or allowable depreciation deductions equal your cost or investment in the property. Free federal tax e filing See What Is the Basis of Your Depreciable Property , later. Free federal tax e filing 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 federal tax e filing 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 federal tax e filing You sell or exchange the property. Free federal tax e filing You convert the property to personal use. Free federal tax e filing You abandon the property. Free federal tax e filing You transfer the property to a supplies or scrap account. Free federal tax e filing The property is destroyed. Free federal tax e filing If you included the property in a general asset account, see How Do You Use General Asset Accounts in chapter 4 for the rules that apply when you dispose of that property. Free federal tax e filing What Method Can You Use To Depreciate Your Property? You must use the Modified Accelerated Cost Recovery System (MACRS) to depreciate most property. Free federal tax e filing MACRS is discussed in chapter 4. Free federal tax e filing You cannot use MACRS to depreciate the following property. Free federal tax e filing Property you placed in service before 1987. Free federal tax e filing Certain property owned or used in 1986. Free federal tax e filing Intangible property. Free federal tax e filing Films, video tapes, and recordings. Free federal tax e filing Certain corporate or partnership property acquired in a nontaxable transfer. Free federal tax e filing Property you elected to exclude from MACRS. Free federal tax e filing The following discussions describe the property listed above and explain what depreciation method should be used. Free federal tax e filing Property You Placed in Service Before 1987 You cannot use MACRS for property you placed in service before 1987 (except property you placed in service after July 31, 1986, if MACRS was elected). Free federal tax e filing Property placed in service before 1987 must be depreciated under the methods discussed in Publication 534. Free federal tax e filing For a discussion of when property is placed in service, see When Does Depreciation Begin and End , earlier. Free federal tax e filing Use of real property changed. Free federal tax e filing   You generally must use MACRS to depreciate real property that you acquired for personal use before 1987 and changed to business or income-producing use after 1986. Free federal tax e filing Improvements made after 1986. Free federal tax e filing   You must treat an improvement made after 1986 to property you placed in service before 1987 as separate depreciable property. Free federal tax e filing Therefore, you can depreciate that improvement as separate property under MACRS if it is the type of property that otherwise qualifies for MACRS depreciation. Free federal tax e filing For more information about improvements, see How Do You Treat Repairs and Improvements , later and Additions and Improvements under Which Recovery Period Applies in chapter 4. Free federal tax e filing Property Owned or Used in 1986 You may not be able to use MACRS for property you acquired and placed in service after 1986 if any of the situations described below apply. Free federal tax e filing If you cannot use MACRS, the property must be depreciated under the methods discussed in Publication 534. Free federal tax e filing For the following discussions, do not treat property as owned before you placed it in service. Free federal tax e filing If you owned property in 1986 but did not place it in service until 1987, you do not treat it as owned in 1986. Free federal tax e filing Personal property. Free federal tax e filing   You cannot use MACRS for personal property (section 1245 property) in any of the following situations. Free federal tax e filing You or someone related to you owned or used the property in 1986. Free federal tax e filing You acquired the property from a person who owned it in 1986 and as part of the transaction the user of the property did not change. Free federal tax e filing You lease the property to a person (or someone related to this person) who owned or used the property in 1986. Free federal tax e filing You acquired the property in a transaction in which: The user of the property did not change, and The property was not MACRS property in the hands of the person from whom you acquired it because of (2) or (3) above. Free federal tax e filing Real property. Free federal tax e filing   You generally cannot use MACRS for real property (section 1250 property) in any of the following situations. Free federal tax e filing You or someone related to you owned the property in 1986. Free federal tax e filing You lease the property to a person who owned the property in 1986 (or someone related to that person). Free federal tax e filing You acquired the property in a like-kind exchange, involuntary conversion, or repossession of property you or someone related to you owned in 1986. Free federal tax e filing MACRS applies only to that part of your basis in the acquired property that represents cash paid or unlike property given up. Free federal tax e filing It does not apply to the carried-over part of the basis. Free federal tax e filing Exceptions. Free federal tax e filing   The rules above do not apply to the following. Free federal tax e filing Residential rental property or nonresidential real property. Free federal tax e filing Any property if, in the first tax year it is placed in service, the deduction under the Accelerated Cost Recovery System (ACRS) is more than the deduction under MACRS using the half-year convention. Free federal tax e filing For information on how to figure depreciation under ACRS, see Publication 534. Free federal tax e filing Property that was MACRS property in the hands of the person from whom you acquired it because of (2) above. Free federal tax e filing Related persons. Free federal tax e filing   For this purpose, the following are related persons. Free federal tax e filing An individual and a member of his or her family, including only a spouse, child, parent, brother, sister, half-brother, half-sister, ancestor, and lineal descendant. Free federal tax e filing A corporation and an individual who directly or indirectly owns more than 10% of the value of the outstanding stock of that corporation. Free federal tax e filing Two corporations that are members of the same controlled group. Free federal tax e filing A trust fiduciary and a corporation if more than 10% of the value of the outstanding stock is directly or indirectly owned by or for the trust or grantor of the trust. Free federal tax e filing The grantor and fiduciary, and the fiduciary and beneficiary, of any trust. Free federal tax e filing The fiduciaries of two different trusts, and the fiduciaries and beneficiaries of two different trusts, if the same person is the grantor of both trusts. Free federal tax e filing A tax-exempt educational or charitable organization and any person (or, if that person is an individual, a member of that person's family) who directly or indirectly controls the organization. Free federal tax e filing Two S corporations, and an S corporation and a regular corporation, if the same persons own more than 10% of the value of the outstanding stock of each corporation. Free federal tax e filing A corporation and a partnership if the same persons own both of the following. Free federal tax e filing More than 10% of the value of the outstanding stock of the corporation. Free federal tax e filing More than 10% of the capital or profits interest in the partnership. Free federal tax e filing The executor and beneficiary of any estate. Free federal tax e filing A partnership and a person who directly or indirectly owns more than 10% of the capital or profits interest in the partnership. Free federal tax e filing Two partnerships, if the same persons directly or indirectly own more than 10% of the capital or profits interest in each. Free federal tax e filing The related person and a person who is engaged in trades or businesses under common control. Free federal tax e filing See section 52(a) and 52(b) of the Internal Revenue Code. Free federal tax e filing When to determine relationship. Free federal tax e filing   You must determine whether you are related to another person at the time you acquire the property. Free federal tax e filing   A partnership acquiring property from a terminating partnership must determine whether it is related to the terminating partnership immediately before the event causing the termination. Free federal tax e filing For this rule, a terminating partnership is one that sells or exchanges, within 12 months, 50% or more of its total interest in partnership capital or profits. Free federal tax e filing Constructive ownership of stock or partnership interest. Free federal tax e filing   To determine whether a person directly or indirectly owns any of the outstanding stock of a corporation or an interest in a partnership, apply the following rules. Free federal tax e filing Stock or a partnership interest directly or indirectly owned by or for a corporation, partnership, estate, or trust is considered owned proportionately by or for its shareholders, partners, or beneficiaries. Free federal tax e filing However, for a partnership interest owned by or for a C corporation, this applies only to shareholders who directly or indirectly own 5% or more of the value of the stock of the corporation. Free federal tax e filing An individual is considered to own the stock or partnership interest directly or indirectly owned by or for the individual's family. Free federal tax e filing An individual who owns, except by applying rule (2), any stock in a corporation is considered to own the stock directly or indirectly owned by or for the individual's partner. Free federal tax e filing For purposes of rules (1), (2), or (3), stock or a partnership interest considered to be owned by a person under rule (1) is treated as actually owned by that person. Free federal tax e filing However, stock or a partnership interest considered to be owned by an individual under rule (2) or (3) is not treated as owned by that individual for reapplying either rule (2) or (3) to make another person considered to be the owner of the same stock or partnership interest. Free federal tax e filing Intangible Property Generally, if you can depreciate intangible property, you usually use the straight line method of depreciation. Free federal tax e filing However, you can choose to depreciate certain intangible property under the income forecast method (discussed later). Free federal tax e filing You cannot depreciate intangible property that is a section 197 intangible or that otherwise does not meet all the requirements discussed earlier under What Property Can Be Depreciated. Free federal tax e filing Straight Line Method This method lets you deduct the same amount of depreciation each year over the useful life of the property. Free federal tax e filing To figure your deduction, first determine the adjusted basis, salvage value, and estimated useful life of your property. Free federal tax e filing Subtract the salvage value, if any, from the adjusted basis. Free federal tax e filing The balance is the total depreciation you can take over the useful life of the property. Free federal tax e filing Divide the balance by the number of years in the useful life. Free federal tax e filing This gives you your yearly depreciation deduction. Free federal tax e filing Unless there is a big change in adjusted basis or useful life, this amount will stay the same throughout the time you depreciate the property. Free federal tax e filing If, in the first year, you use the property for less than a full year, you must prorate your depreciation deduction for the number of months in use. Free federal tax e filing Example. Free federal tax e filing In April, Frank bought a patent for $5,100 that is not a section 197 intangible. Free federal tax e filing He depreciates the patent under the straight line method, using a 17-year useful life and no salvage value. Free federal tax e filing He divides the $5,100 basis by 17 years to get his $300 yearly depreciation deduction. Free federal tax e filing He only used the patent for 9 months during the first year, so he multiplies $300 by 9/12 to get his deduction of $225 for the first year. Free federal tax e filing Next year, Frank can deduct $300 for the full year. Free federal tax e filing Patents and copyrights. Free federal tax e filing   If you can depreciate the cost of a patent or copyright, use the straight line method over the useful life. Free federal tax e filing The useful life of a patent or copyright is the lesser of the life granted to it by the government or the remaining life when you acquire it. Free federal tax e filing However, if the patent or copyright becomes valueless before the end of its useful life, you can deduct in that year any of its remaining cost or other basis. Free federal tax e filing Computer software. Free federal tax e filing   Computer software is generally a section 197 intangible and cannot be depreciated if you acquired it in connection with the acquisition of assets constituting a business or a substantial part of a business. Free federal tax e filing   However, computer software is not a section 197 intangible and can be depreciated, even if acquired in connection with the acquisition of a business, if it meets all of the following tests. Free federal tax e filing It is readily available for purchase by the general public. Free federal tax e filing It is subject to a nonexclusive license. Free federal tax e filing It has not been substantially modified. Free federal tax e filing   If the software meets the tests above, it may also qualify for the section 179 deduction and the special depreciation allowance, discussed later. Free federal tax e filing If you can depreciate the cost of computer software, use the straight line method over a useful life of 36 months. Free federal tax e filing    Tax-exempt use property subject to a lease. Free federal tax e filing   The useful life of computer software leased under a lease agreement entered into after March 12, 2004, to a tax-exempt organization, governmental unit, or foreign person or entity (other than a partnership), cannot be less than 125% of the lease term. Free federal tax e filing Certain created intangibles. Free federal tax e filing   You can amortize certain intangibles created on or after December 31, 2003, over a 15-year period using the straight line method and no salvage value, even though they have a useful life that cannot be estimated with reasonable accuracy. Free federal tax e filing For example, amounts paid to acquire memberships or privileges of indefinite duration, such as a trade association membership, are eligible costs. Free federal tax e filing   The following are not eligible. Free federal tax e filing Any intangible asset acquired from another person. Free federal tax e filing Created financial interests. Free federal tax e filing Any intangible asset that has a useful life that can be estimated with reasonable accuracy. Free federal tax e filing Any intangible asset that has an amortization period or limited useful life that is specifically prescribed or prohibited by the Code, regulations, or other published IRS guidance. Free federal tax e filing Any amount paid to facilitate an acquisition of a trade or business, a change in the capital structure of a business entity, and certain other transactions. Free federal tax e filing   You must also increase the 15-year safe harbor amortization period to a 25-year period for certain intangibles related to benefits arising from the provision, production, or improvement of real property. Free federal tax e filing For this purpose, real property includes property that will remain attached to the real property for an indefinite period of time, such as roads, bridges, tunnels, pavements, and pollution control facilities. Free federal tax e filing Income Forecast Method You can choose to use the income forecast method instead of the straight line method to depreciate the following depreciable intangibles. Free federal tax e filing Motion picture films or video tapes. Free federal tax e filing Sound recordings. Free federal tax e filing Copyrights. Free federal tax e filing Books. Free federal tax e filing Patents. Free federal tax e filing Under the income forecast method, each year's depreciation deduction is equal to the cost of the property, multiplied by a fraction. Free federal tax e filing The numerator of the fraction is the current year's net income from the property, and the denominator is the total income anticipated from the property through the end of the 10th taxable year following the taxable year the property is placed in service. Free federal tax e filing For more information, see section 167(g) of the Internal Revenue Code. Free federal tax e filing Films, video tapes, and recordings. Free federal tax e filing   You cannot use MACRS for motion picture films, video tapes, and sound recordings. Free federal tax e filing For this purpose, sound recordings are discs, tapes, or other phonorecordings resulting from the fixation of a series of sounds. Free federal tax e filing You can depreciate this property using either the straight line method or the income forecast method. Free federal tax e filing Participations and residuals. Free federal tax e filing   You can include participations and residuals in the adjusted basis of the property for purposes of computing your depreciation deduction under the income forecast method. Free federal tax e filing The participations and residuals must relate to income to be derived from the property before the end of the 10th taxable year after the property is placed in service. Free federal tax e filing For this purpose, participations and residuals are defined as costs which by contract vary with the amount of income earned in connection with the property. Free federal tax e filing   Instead of including these amounts in the adjusted basis of the property, you can deduct the costs in the taxable year that they are paid. Free federal tax e filing Videocassettes. Free federal tax e filing   If you are in the business of renting videocassettes, you can depreciate only those videocassettes bought for rental. Free federal tax e filing If the videocassette has a useful life of one year or less, you can currently deduct the cost as a business expense. Free federal tax e filing Corporate or Partnership Property Acquired in a Nontaxable Transfer MACRS does not apply to property used before 1987 and transferred after 1986 to a corporation or partnership (except property the transferor placed in service after July 31, 1986, if MACRS was elected) to the extent its basis is carried over from the property's adjusted basis in the transferor's hands. Free federal tax e filing You must continue to use the same depreciation method as the transferor and figure depreciation as if the transfer had not occurred. Free federal tax e filing However, if MACRS would otherwise apply, you can use it to depreciate the part of the property's basis that exceeds the carried-over basis. Free federal tax e filing The nontaxable transfers covered by this rule include the following. Free federal tax e filing A distribution in complete liquidation of a subsidiary. Free federal tax e filing A transfer to a corporation controlled by the transferor. Free federal tax e filing An exchange of property solely for corporate stock or securities in a reorganization. Free federal tax e filing A contribution of property to a partnership in exchange for a partnership interest. Free federal tax e filing A partnership distribution of property to a partner. Free federal tax e filing Election To Exclude Property From MACRS If you can properly depreciate any property under a method not based on a term of years, such as the unit-of-production method, you can elect to exclude that property from MACRS. Free federal tax e filing You make the election by reporting your depreciation for the property on line 15 in Part II of Form 4562 and attaching a statement as described in the instructions for Form 4562. Free federal tax e filing You must make this election by the return due date (including extensions) for the tax year you place your property in service. Free federal tax e filing 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 six months of the due date of the return (excluding extensions). Free federal tax e filing Attach the election to the amended return and write “Filed pursuant to section 301. Free federal tax e filing 9100-2” on the election statement. Free federal tax e filing File the amended return at the same address you filed the original return. Free federal tax e filing Use of standard mileage rate. Free federal tax e filing   If you use the standard mileage rate to figure your tax deduction for your business automobile, you are treated as having made an election to exclude the automobile from MACRS. Free federal tax e filing See Publication 463 for a discussion of the standard mileage rate. Free federal tax e filing What Is the Basis of Your Depreciable Property? To figure your depreciation deduction, you must determine the basis of your property. Free federal tax e filing To determine basis, you need to know the cost or other basis of your property. Free federal tax e filing Cost as Basis The basis of property you buy is its cost plus amounts you paid for items such as sales tax (see Exception , below), freight charges, and installation and testing fees. Free federal tax e filing The cost includes the amount you pay in cash, debt obligations, other property, or services. Free federal tax e filing Exception. Free federal tax e filing   You can elect to deduct state and local general sales taxes instead of state and local income taxes as an itemized deduction on Schedule A (Form 1040). Free federal tax e filing If you make that choice, you cannot include those sales taxes as part of your cost basis. Free federal tax e filing Assumed debt. Free federal tax e filing   If you buy property and assume (or buy subject to) an existing mortgage or other debt on the property, your basis includes the amount you pay for the property plus the amount of the assumed debt. Free federal tax e filing Example. Free federal tax e filing You make a $20,000 down payment on property and assume the seller's mortgage of $120,000. Free federal tax e filing Your total cost is $140,000, the cash you paid plus the mortgage you assumed. Free federal tax e filing Settlement costs. Free federal tax e filing   The basis of real property also includes certain fees and charges you pay in addition to the purchase price. Free federal tax e filing These generally are shown on your settlement statement and include the following. Free federal tax e filing Legal and recording fees. Free federal tax e filing Abstract fees. Free federal tax e filing Survey charges. Free federal tax e filing Owner's title insurance. Free federal tax e filing Amounts the seller owes that you agree to pay, such as back taxes or interest, recording or mortgage fees, charges for improvements or repairs, and sales commissions. Free federal tax e filing   For fees and charges you cannot include in the basis of property, see Real Property in Publication 551. Free federal tax e filing Property you construct or build. Free federal tax e filing   If you construct, build, or otherwise produce property for use in your business, you may have to use the uniform capitalization rules to determine the basis of your property. Free federal tax e filing For information about the uniform capitalization rules, see Publication 551 and the regulations under section 263A of the Internal Revenue Code. Free federal tax e filing Other Basis Other basis usually refers to basis that is determined by the way you received the property. Free federal tax e filing For example, your basis is other than cost if you acquired the property in exchange for other property, as payment for services you performed, as a gift, or as an inheritance. Free federal tax e filing If you acquired property in this or some other way, see Publication 551 to determine your basis. Free federal tax e filing Property changed from personal use. Free federal tax e filing   If you held property for personal use and later use it in your business or income-producing activity, your depreciable basis is the lesser of the following. Free federal tax e filing The fair market value (FMV) of the property on the date of the change in use. Free federal tax e filing Your original cost or other basis adjusted as follows. Free federal tax e filing Increased by the cost of any permanent improvements or additions and other costs that must be added to basis. Free federal tax e filing Decreased by any deductions you claimed for casualty and theft losses and other items that reduced your basis. Free federal tax e filing Example. Free federal tax e filing Several years ago, Nia paid $160,000 to have her home built on a lot that cost her $25,000. Free federal tax e filing Before changing the property to rental use last year, she paid $20,000 for permanent improvements to the house and claimed a $2,000 casualty loss deduction for damage to the house. Free federal tax e filing Land is not depreciable, so she includes only the cost of the house when figuring the basis for depreciation. Free federal tax e filing Nia's adjusted basis in the house when she changed its use was $178,000 ($160,000 + $20,000 − $2,000). Free federal tax e filing On the same date, her property had an FMV of $180,000, of which $15,000 was for the land and $165,000 was for the house. Free federal tax e filing The basis for depreciation on the house is the FMV on the date of change ($165,000), because it is less than her adjusted basis ($178,000). Free federal tax e filing Property acquired in a nontaxable transaction. Free federal tax e filing   Generally, if you receive property in a nontaxable exchange, the basis of the property you receive is the same as the adjusted basis of the property you gave up. Free federal tax e filing Special rules apply in determining the basis and figuring the MACRS depreciation deduction and special depreciation allowance for property acquired in a like-kind exchange or involuntary conversion. Free federal tax e filing See Like-kind exchanges and involuntary conversions. Free federal tax e filing under How Much Can You Deduct? in chapter 3 and Figuring the Deduction for Property Acquired in a Nontaxable Exchange in chapter 4. Free federal tax e filing   There are also special rules for determining the basis of MACRS property involved in a like-kind exchange or involuntary conversion when the property is contained in a general asset account. Free federal tax e filing See How Do You Use General Asset Accounts in chapter 4. Free federal tax e filing Adjusted Basis 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 federal tax e filing These events could include the following. Free federal tax e filing Installing utility lines. Free federal tax e filing Paying legal fees for perfecting the title. Free federal tax e filing Settling zoning issues. Free federal tax e filing Receiving rebates. Free federal tax e filing Incurring a casualty or theft loss. Free federal tax e filing For a discussion of adjustments to the basis of your property, see Adjusted Basis in Publication 551. Free federal tax e filing If you depreciate your property under MACRS, you also may have to reduce your basis by certain deductions and credits with respect to the property. Free federal tax e filing For more information, see What Is the Basis for Depreciation in chapter 4. Free federal tax e filing . Free federal tax e filing Basis adjustment for depreciation allowed or allowable. Free federal tax e filing   You must reduce the basis of property by the depreciation allowed or allowable, whichever is greater. Free federal tax e filing Depreciation allowed is depreciation you actually deducted (from which you received a tax benefit). Free federal tax e filing Depreciation allowable is depreciation you are entitled to deduct. Free federal tax e filing   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 federal tax e filing   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 federal tax e filing How Do You Treat Repairs and Improvements? If you improve depreciable property, you must treat the improvement as separate depreciable property. Free federal tax e filing Improvement means an addition to or partial replacement of property that adds to its value, appreciably lengthens the time you can use it, or adapts it to a different use. Free federal tax e filing You generally deduct the cost of repairing business property in the same way as any other business expense. Free federal tax e filing 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 federal tax e filing Example. Free federal tax e filing You repair a small section on one corner of the roof of a rental house. Free federal tax e filing You deduct the cost of the repair as a rental expense. Free federal tax e filing However, if you completely replace the roof, the new roof is an improvement because it increases the value and lengthens the life of the property. Free federal tax e filing You depreciate the cost of the new roof. Free federal tax e filing Improvements to rented property. Free federal tax e filing   You can depreciate permanent improvements you make to business property you rent from someone else. Free federal tax e filing Do You Have To File Form 4562? Use Form 4562 to figure your deduction for depreciation and amortization. Free federal tax e filing Attach Form 4562 to your tax return for the current tax year if you are claiming any of the following items. Free federal tax e filing A section 179 deduction for the current year or a section 179 carryover from a prior year. Free federal tax e filing See chapter 2 for information on the section 179 deduction. Free federal tax e filing Depreciation for property placed in service during the current year. Free federal tax e filing Depreciation on any vehicle or other listed property, regardless of when it was placed in service. Free federal tax e filing See chapter 5 for information on listed property. Free federal tax e filing A deduction for any vehicle if the deduction is reported on a form other than Schedule C (Form 1040) or Schedule C-EZ (Form 1040). Free federal tax e filing Amortization of costs if the current year is the first year of the amortization period. Free federal tax e filing Depreciation or amortization on any asset on a corporate income tax return (other than Form 1120S, U. Free federal tax e filing S. Free federal tax e filing Income Tax Return for an S Corporation) regardless of when it was placed in service. Free federal tax e filing You must submit a separate Form 4562 for each business or activity on your return for which a Form 4562 is required. Free federal tax e filing Table 1-1 presents an overview of the purpose of the various parts of Form 4562. Free federal tax e filing Employee. Free federal tax e filing   Do not use Form 4562 if you are an employee and you deduct job-related vehicle expenses using either actual expenses (including depreciation) or the standard mileage rate. Free federal tax e filing Instead, use either Form 2106 or Form 2106-EZ. Free federal tax e filing Use Form 2106-EZ if you are claiming the standard mileage rate and you are not reimbursed by your employer for any expenses. Free federal tax e filing 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 federal tax e filing See Filing an Amended Return , next. Free federal tax e filing 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 federal tax e filing See Changing Your Accounting Method , later. Free federal tax e filing Filing an Amended Return You can file an amended return to correct the amount of depreciation claimed for any property in any of the following situations. Free federal tax e filing You claimed the incorrect amount because of a mathematical error made in any year. Free federal tax e filing You claimed the incorrect amount because of a posting error made in any year. Free federal tax e filing You have not adopted a method of accounting for property placed in service by you in tax years ending after December 29, 2003. Free federal tax e filing You claimed the incorrect amount on property placed in service by you in tax years ending before December 30, 2003. Free federal tax e filing Adoption of accounting method defined. Free federal tax e filing   Generally, you adopt a method of accounting for depreciation by using a permissible method of determining depreciation when you file your first tax return, or by using the same impermissible method of determining depreciation in two or more consecutively filed tax returns. Free federal tax e filing   For an exception to this 2-year rule, see Revenue Procedure 2011-14 on page 330 of the Internal Revenue Bulletin 2011-4, available at www. Free federal tax e filing irs. Free federal tax e filing gov/pub/irs-irbs/irb11-04. Free federal tax e filing pdf. Free federal tax e filing (Note. Free federal tax e filing Revenue Procedure 2011-14 is clarified and modified by Revenue Procedure 2012-20. Free federal tax e filing For more information, see Revenue Procedure 2012-20 on page 700 of the Internal Revenue Bulletin 2012-14, available at www. Free federal tax e filing irs. Free federal tax e filing gov/pub/irs-irbs/irb12-14. Free federal tax e filing pdf. Free federal tax e filing )   For a safe harbor method of accounting to treat rotable spare parts as depreciable assets and procedures to obtain automatic consent to change to the safe harbor method of accounting, see Revenue Procedure 2007-48 on page 110 of Internal Revenue Bulletin 2007-29, available at www. Free federal tax e filing irs. Free federal tax e filing gov/pub/irs-irbs/irb07-29. Free federal tax e filing pdf. Free federal tax e filing When to file. Free federal tax e filing   If an amended return is allowed, you must file it by the later of the following. Free federal tax e filing 3 years from the date you filed your original return for the year in which you did not deduct the correct amount. Free federal tax e filing A return filed before an unextended due date is considered filed on that due date. Free federal tax e filing 2 years from the time you paid your tax for that year. Free federal tax e filing Changing Your Accounting Method Generally, you must get IRS approval to change your method of accounting. Free federal tax e filing You generally must file Form 3115, Application for Change in Accounting Method, to request a change in your method of accounting for depreciation. Free federal tax e filing The following are examples of a change in method of accounting for depreciation. Free federal tax e filing A change from an impermissible method of determining depreciation for depreciable property, if the impermissible method was used in two or more consecutively filed tax returns. Free federal tax e filing A change in the treatment of an asset from nondepreciable to depreciable or vice versa. Free federal tax e filing A change in the depreciation method, period of recovery, or convention of a depreciable asset. Free federal tax e filing A change from not claiming to claiming the special depreciation allowance if you did not make the election to not claim any special allowance. Free federal tax e filing A change from claiming a 50% special depreciation allowance to claiming a 30% special depreciation allowance for qualified property (including property that is included in a class of property for which you elected a 30% special allowance instead of a 50% special allowance). Free federal tax e filing Changes in depreciation that are not a change in method of accounting (and may only be made on an amended return) include the following. Free federal tax e filing An adjustment in the useful life of a depreciable asset for which depreciation is determined under section 167. Free federal tax e filing A change in use of an asset in the hands of the same taxpayer. Free federal tax e filing Making a late depreciation election or revoking a timely valid depreciation election (including the election not to deduct the special depreciation allowance). Free federal tax e filing If you elected not to claim any special allowance, a change from not claiming to claiming the special allowance is a revocation of the election and is not an accounting method change. Free federal tax e filing Generally, you must get IRS approval to make a late depreciation election or revoke a depreciation election. Free federal tax e filing You must submit a request for a letter ruling to make a late election or revoke an election. Free federal tax e filing Any change in the placed in service date of a depreciable asset. Free federal tax e filing See section 1. Free federal tax e filing 446-1(e)(2)(ii)(d) of the regulations for more information and examples. Free federal tax e filing IRS approval. Free federal tax e filing   In some instances, you may be able to get approval from the IRS to change your method of accounting for depreciation under the automatic change request procedures generally covered in Revenue Procedure 2011-14. Free federal tax e filing If you do not qualify to use the automatic procedures to get approval, you must use the advance consent request procedures generally covered in Revenue Procedure 97-27, 1997-1 C. Free federal tax e filing B. Free federal tax e filing 680. Free federal tax e filing Also see the Instructions for Form 3115 for more information on getting approval, including lists of scope limitations and automatic accounting method changes. Free federal tax e filing Additional guidance. Free federal tax e filing    For additional guidance and special procedures for changing your accounting method, automatic change procedures, amending your return, and filing Form 3115, see Revenue Procedure 2011-14 on page 330 of the Internal Revenue Bulletin 2011-4, available at www. Free federal tax e filing irs. Free federal tax e filing gov/pub/irs-irbs/irb11-04. Free federal tax e filing pdf. Free federal tax e filing (Note. Free federal tax e filing Revenue Procedure 2011-14 is clarified and modified by Revenue Procedure 2012-20. Free federal tax e filing For more information, see Revenue Procedure 2012-20 on page 700 of the Internal Revenue Bulletin 2012-14, available at www. Free federal tax e filing irs. Free federal tax e filing gov/pub/irs-irbs/irb12-14. Free federal tax e filing pdf. Free federal tax e filing )   For a safe harbor method of accounting to treat rotable spare parts as depreciable assets, see Revenue Procedure 2007-48 on page 110 of Internal Revenue Bulletin 2007-29, available at www. Free federal tax e filing irs. Free federal tax e filing gov/pub/irs-irbs/irb07-29. Free federal tax e filing pdf. Free federal tax e filing Table 1-1. Free federal tax e filing Purpose of Form 4562 This table describes the purpose of the various parts of Form 4562. Free federal tax e filing For more information, see Form 4562 and its instructions. Free federal tax e filing Part Purpose I • Electing the section 179 deduction • Figuring the maximum section 179 deduction for the current year • Figuring any section 179 deduction carryover to the next year II • Reporting the special depreciation allowance for property (other than listed property) placed in service during the tax year • Reporting depreciation deductions on property being depreciated under any method other than Modified Accelerated Cost Recovery System (MACRS) III • Reporting MACRS depreciation deductions for property placed in service before this year • Reporting MACRS depreciation deductions for property (other than listed property) placed in service during the current year IV • Summarizing other parts V • Reporting the special depreciation allowance for automobiles and other listed property • Reporting MACRS depreciation on automobiles and other listed property • Reporting the section 179 cost elected for automobiles and other listed property • Reporting information on the use of automobiles and other transportation vehicles VI • Reporting amortization deductions Section 481(a) adjustment. Free federal tax e filing   If you file Form 3115 and change from an impermissible method to a permissible method of accounting for depreciation, you can make a section 481(a) adjustment for any unclaimed or excess amount of allowable depreciation. Free federal tax e filing The adjustment is the difference between the total depreciation actually deducted for the property and the total amount allowable prior to the year of change. Free federal tax e filing If no depreciation was deducted, the adjustment is the total depreciation allowable prior to the year of change. Free federal tax e filing A negative section 481(a) adjustment results in a decrease in taxable income. Free federal tax e filing It is taken into account in the year of change and is reported on your business tax returns as “other expenses. Free federal tax e filing ” A positive section 481(a) adjustment results in an increase in taxable income. Free federal tax e filing It is generally taken into account over 4 tax years and is reported on your business tax returns as “other income. Free federal tax e filing ” However, you can elect to use a one-year adjustment period and report the adjustment in the year of change if the total adjustment is less than $25,000. Free federal tax e filing Make the election by completing the appropriate line on Form 3115. Free federal tax e filing   If you file a Form 3115 and change from one permissible method to another permissible method, the section 481(a) adjustment is zero. Free federal tax e filing Prev  Up  Next   Home   More Online Publications