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H&r Block Online Filing

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H&r Block Online Filing

H&r block online filing 5. H&r block online filing   Recordkeeping Table of Contents How To Prove ExpensesWhat Are Adequate Records? What If I Have Incomplete Records? Separating and Combining Expenses How Long To Keep Records and Receipts Examples of Records If you deduct travel, entertainment, gift, or transportation expenses, you must be able to prove (substantiate) certain elements of expense. H&r block online filing This chapter discusses the records you need to keep to prove these expenses. H&r block online filing If you keep timely and accurate records, you will have support to show the IRS if your tax return is ever examined. H&r block online filing You will also have proof of expenses that your employer may require if you are reimbursed under an accountable plan. H&r block online filing These plans are discussed in chapter 6 under Reimbursements . H&r block online filing How To Prove Expenses Table 5-1 is a summary of records you need to prove each expense discussed in this publication. H&r block online filing You must be able to prove the elements listed across the top portion of the chart. H&r block online filing You prove them by having the information and receipts (where needed) for the expenses listed in the first column. H&r block online filing You cannot deduct amounts that you approximate or estimate. H&r block online filing You should keep adequate records to prove your expenses or have sufficient evidence that will support your own statement. H&r block online filing You must generally prepare a written record for it to be considered adequate. H&r block online filing This is because written evidence is more reliable than oral evidence alone. H&r block online filing However, if you prepare a record on a computer, it is considered an adequate record. H&r block online filing What Are Adequate Records? You should keep the proof you need in an account book, diary, log, statement of expense, trip sheets, or similar record. H&r block online filing You should also keep documentary evidence that, together with your record, will support each element of an expense. H&r block online filing Documentary evidence. H&r block online filing   You generally must have documentary evidence, such as receipts, canceled checks, or bills, to support your expenses. H&r block online filing Exception. H&r block online filing   Documentary evidence is not needed if any of the following conditions apply. H&r block online filing You have meals or lodging expenses while traveling away from home for which you account to your employer under an accountable plan, and you use a per diem allowance method that includes meals and/or lodging. H&r block online filing ( Accountable plans and per diem allowances are discussed in chapter 6. H&r block online filing ) Your expense, other than lodging, is less than $75. H&r block online filing You have a transportation expense for which a receipt is not readily available. H&r block online filing Adequate evidence. H&r block online filing   Documentary evidence ordinarily will be considered adequate if it shows the amount, date, place, and essential character of the expense. H&r block online filing   For example, a hotel receipt is enough to support expenses for business travel if it has all of the following information. H&r block online filing The name and location of the hotel. H&r block online filing The dates you stayed there. H&r block online filing Separate amounts for charges such as lodging, meals, and telephone calls. H&r block online filing   A restaurant receipt is enough to prove an expense for a business meal if it has all of the following information. H&r block online filing The name and location of the restaurant. H&r block online filing The number of people served. H&r block online filing The date and amount of the expense. H&r block online filing If a charge is made for items other than food and beverages, the receipt must show that this is the case. H&r block online filing Canceled check. H&r block online filing   A canceled check, together with a bill from the payee, ordinarily establishes the cost. H&r block online filing However, a canceled check by itself does not prove a business expense without other evidence to show that it was for a business purpose. H&r block online filing Duplicate information. H&r block online filing   You do not have to record information in your account book or other record that duplicates information shown on a receipt as long as your records and receipts complement each other in an orderly manner. H&r block online filing   You do not have to record amounts your employer pays directly for any ticket or other travel item. H&r block online filing However, if you charge these items to your employer, through a credit card or otherwise, you must keep a record of the amounts you spend. H&r block online filing Timely-kept records. H&r block online filing   You should record the elements of an expense or of a business use at or near the time of the expense or use and support it with sufficient documentary evidence. H&r block online filing A timely-kept record has more value than a statement prepared later when generally there is a lack of accurate recall. H&r block online filing   You do not need to write down the elements of every expense on the day of the expense. H&r block online filing If you maintain a log on a weekly basis that accounts for use during the week, the log is considered a timely-kept record. H&r block online filing   If you give your employer, client, or customer an expense account statement, it can also be considered a timely-kept record. H&r block online filing This is true if you copy it from your account book, diary, log, statement of expense, trip sheets, or similar record. H&r block online filing Proving business purpose. H&r block online filing   You must generally provide a written statement of the business purpose of an expense. H&r block online filing However, the degree of proof varies according to the circumstances in each case. H&r block online filing If the business purpose of an expense is clear from the surrounding circumstances, then you do not need to give a written explanation. H&r block online filing Example. H&r block online filing If you are a sales representative who calls on customers on an established sales route, you do not have to give a written explanation of the business purpose for traveling that route. H&r block online filing You can satisfy the requirements by recording the length of the delivery route once, the date of each trip at or near the time of the trips, and the total miles you drove the car during the tax year. H&r block online filing You could also establish the date of each trip with a receipt, record of delivery, or other documentary evidence. H&r block online filing Confidential information. H&r block online filing   You do not need to put confidential information relating to an element of a deductible expense (such as the place, business purpose, or business relationship) in your account book, diary, or other record. H&r block online filing However, you do have to record the information elsewhere at or near the time of the expense and have it available to fully prove that element of the expense. H&r block online filing What If I Have Incomplete Records? If you do not have complete records to prove an element of an expense, then you must prove the element with: Your own written or oral statement containing specific information about the element, and Other supporting evidence that is sufficient to establish the element. H&r block online filing If the element is the description of a gift, or the cost, time, place, or date of an expense, the supporting evidence must be either direct evidence or documentary evidence. H&r block online filing Direct evidence can be written statements or the oral testimony of your guests or other witnesses setting forth detailed information about the element. H&r block online filing Documentary evidence can be receipts, paid bills, or similar evidence. H&r block online filing If the element is either the business relationship of your guests or the business purpose of the amount spent, the supporting evidence can be circumstantial rather than direct. H&r block online filing For example, the nature of your work, such as making deliveries, provides circumstantial evidence of the use of your car for business purposes. H&r block online filing Invoices of deliveries establish when you used the car for business. H&r block online filing Table 5-1. H&r block online filing How To Prove Certain Business Expenses IF you have expenses for . H&r block online filing . H&r block online filing THEN you must keep records that show details of the following elements . H&r block online filing . H&r block online filing . H&r block online filing   Amount Time Place or  Description Business Purpose Business Relationship Travel Cost of each separate expense for travel, lodging, and meals. H&r block online filing Incidental expenses may be totaled in reasonable categories such as taxis, fees and tips, etc. H&r block online filing Dates you left and returned for each trip and number of days spent on business. H&r block online filing Destination or area of your travel (name of city, town, or other designation). H&r block online filing Purpose: Business purpose for the expense or the business benefit gained or expected to be gained. H&r block online filing    Relationship: N/A Entertainment Cost of each separate expense. H&r block online filing Incidental expenses such as taxis, telephones, etc. H&r block online filing , may be totaled on a daily basis. H&r block online filing Date of entertainment. H&r block online filing (Also see Business Purpose. H&r block online filing ) Name and address or location of place of entertainment. H&r block online filing Type of entertainment if not otherwise apparent. H&r block online filing (Also see Business Purpose. H&r block online filing ) Purpose: Business purpose for the expense or the business benefit gained or expected to be gained. H&r block online filing  For entertainment, the nature of the business discussion or activity. H&r block online filing If the entertainment was directly before or after a business discussion: the date, place, nature, and duration of the business discussion, and the identities of the persons who took part in both the business discussion and the entertainment activity. H&r block online filing    Relationship: Occupations or other information (such as names, titles, or other designations) about the recipients that shows their business relationship to you. H&r block online filing  For entertainment, you must also prove that you or your employee was present if the entertainment was a business meal. H&r block online filing Gifts Cost of the gift. H&r block online filing Date of the gift. H&r block online filing Description of the gift. H&r block online filing   Transportation Cost of each separate expense. H&r block online filing For car expenses, the cost of the car and any improvements, the date you started using it for business, the mileage for each business use, and the total miles for the year. H&r block online filing Date of the expense. H&r block online filing For car expenses, the date of the use of the car. H&r block online filing Your business destination. H&r block online filing Purpose: Business purpose for the expense. H&r block online filing    Relationship: N/A Sampling. H&r block online filing   You can keep an adequate record for parts of a tax year and use that record to prove the amount of business or investment use for the entire year. H&r block online filing You must demonstrate by other evidence that the periods for which an adequate record is kept are representative of the use throughout the tax year. H&r block online filing Example. H&r block online filing You use your car to visit the offices of clients, meet with suppliers and other subcontractors, and pick up and deliver items to clients. H&r block online filing There is no other business use of the car, but you and your family use the car for personal purposes. H&r block online filing You keep adequate records during the first week of each month that show that 75% of the use of the car is for business. H&r block online filing Invoices and bills show that your business use continues at the same rate during the later weeks of each month. H&r block online filing Your weekly records are representative of the use of the car each month and are sufficient evidence to support the percentage of business use for the year. H&r block online filing Exceptional circumstances. H&r block online filing   You can satisfy the substantiation requirements with other evidence if, because of the nature of the situation in which an expense is made, you cannot get a receipt. H&r block online filing This applies if all the following are true. H&r block online filing You were unable to obtain evidence for an element of the expense or use that completely satisfies the requirements explained earlier under What Are Adequate Records . H&r block online filing You are unable to obtain evidence for an element that completely satisfies the two rules listed earlier under What If I Have Incomplete Records . H&r block online filing You have presented other evidence for the element that is the best proof possible under the circumstances. H&r block online filing Destroyed records. H&r block online filing   If you cannot produce a receipt because of reasons beyond your control, you can prove a deduction by reconstructing your records or expenses. H&r block online filing Reasons beyond your control include fire, flood, and other casualties. H&r block online filing    Table 5-2. H&r block online filing Daily Business Mileage and Expense Log Name:       Odometer Readings Expenses Date Destination  (City, Town, or Area) Business Purpose Start Stop Miles  this trip Type  (Gas, oil, tolls, etc. H&r block online filing ) Amount                                                                                                                   Weekly  Total             Total Year-to-Date             Separating and Combining Expenses This section explains when expenses must be kept separate and when expenses can be combined. H&r block online filing Separating expenses. H&r block online filing   Each separate payment is generally considered a separate expense. H&r block online filing For example, if you entertain a customer or client at dinner and then go to the theater, the dinner expense and the cost of the theater tickets are two separate expenses. H&r block online filing You must record them separately in your records. H&r block online filing Season or series tickets. H&r block online filing   If you buy season or series tickets for business use, you must treat each ticket in the series as a separate item. H&r block online filing To determine the cost of individual tickets, divide the total cost (but not more than face value) by the number of games or performances in the series. H&r block online filing You must keep records to show whether you use each ticket as a gift or entertainment. H&r block online filing Also, you must be able to prove the cost of nonluxury box seat tickets if you rent a skybox or other private luxury box for more than one event. H&r block online filing See Entertainment tickets in chapter 2. H&r block online filing Combining items. H&r block online filing   You can make one daily entry in your record for reasonable categories of expenses. H&r block online filing Examples are taxi fares, telephone calls, or other incidental travel costs. H&r block online filing Meals should be in a separate category. H&r block online filing You can include tips for meal-related services with the costs of the meals. H&r block online filing   Expenses of a similar nature occurring during the course of a single event are considered a single expense. H&r block online filing For example, if during entertainment at a cocktail lounge, you pay separately for each serving of refreshments, the total expense for the refreshments is treated as a single expense. H&r block online filing Car expenses. H&r block online filing   You can account for several uses of your car that can be considered part of a single use, such as a round trip or uninterrupted business use, with a single record. H&r block online filing Minimal personal use, such as a stop for lunch on the way between two business stops, is not an interruption of business use. H&r block online filing Example. H&r block online filing You make deliveries at several different locations on a route that begins and ends at your employer's business premises and that includes a stop at the business premises between two deliveries. H&r block online filing You can account for these using a single record of miles driven. H&r block online filing Gift expenses. H&r block online filing   You do not always have to record the name of each recipient of a gift. H&r block online filing A general listing will be enough if it is evident that you are not trying to avoid the $25 annual limit on the amount you can deduct for gifts to any one person. H&r block online filing For example, if you buy a large number of tickets to local high school basketball games and give one or two tickets to each of many customers, it is usually enough to record a general description of the recipients. H&r block online filing Allocating total cost. H&r block online filing   If you can prove the total cost of travel or entertainment but you cannot prove how much it cost for each person who participated in the event, you may have to allocate the total cost among you and your guests on a pro rata basis. H&r block online filing To do so, you must establish the number of persons who participated in the event. H&r block online filing   An allocation would be needed, for example, if you did not have a business relationship with all of your guests. H&r block online filing See Allocating between business and nonbusiness in chapter 2. H&r block online filing If your return is examined. H&r block online filing    If your return is examined, you may have to provide additional information to the IRS. H&r block online filing This information could be needed to clarify or to establish the accuracy or reliability of information contained in your records, statements, testimony, or documentary evidence before a deduction is allowed. H&r block online filing    THIS IS NOT AN OFFICIAL INTERNAL REVENUE FORM Table 5-3. H&r block online filing Weekly Traveling Expense and Entertainment Record From: To: Name: Expenses Sunday Monday Tuesday Wednesday Thursday Friday Saturday Total 1. H&r block online filing Travel Expenses: Airlines                                 Excess Baggage                                 Bus – Train                                 Cab and Limousine                                 Tips                                 Porter                                 2. H&r block online filing Meals and Lodging:  Breakfast                                 Lunch                                 Dinner                                 Hotel and Motel  (Detail in Schedule B)                                 3. H&r block online filing Entertainment  (Detail in Schedule C)                                 4. H&r block online filing Other Expenses:  Postage                                 Telephone & Telegraph                                 Stationery & Printing                                 Stenographer                                 Sample Room                                 Advertising                                 Assistant(s)                                 Trade Shows                                 5. H&r block online filing Car Expenses: (List all car expenses - the division between business and personal expenses may be made at the end of the year. H&r block online filing ) (Detail mileage in Schedule A. H&r block online filing ) Gas, oil, lube, wash                                 Repairs, parts                                 Tires, supplies                                 Parking fees, tolls                                 6. H&r block online filing Other (Identify)                                 Total                                 Note: Attach receipted bills for (1) ALL lodging and (2) any other expenses of $75. H&r block online filing 00 or more. H&r block online filing Schedule A – Car Mileage: End                 Start                 Total                 Business Mileage                 Schedule B – Lodging Hotel or Motel Name                 City                 Schedule C – Entertainment Date Item Place Amount Business Purpose Business Relationship                                             WEEKLY REIMBURSEMENTS:     Travel and transportation expenses     Other reimbursements     TOTAL   How Long To Keep Records and Receipts You must keep records as long as they may be needed for the administration of any provision of the Internal Revenue Code. H&r block online filing Generally, this means you must keep records that support your deduction (or an item of income) for 3 years from the date you file the income tax return on which the deduction is claimed. H&r block online filing A return filed early is considered filed on the due date. H&r block online filing For a more complete explanation of how long to keep records, see Publication 583, Starting a Business and Keeping Records. H&r block online filing You must keep records of the business use of your car for each year of the recovery period. H&r block online filing See More-than-50%-use test in chapter 4 under Depreciation Deduction. H&r block online filing Reimbursed for expenses. H&r block online filing   Employees who give their records and documentation to their employers and are reimbursed for their expenses generally do not have to keep copies of this information. H&r block online filing However, you may have to prove your expenses if any of the following conditions apply. H&r block online filing You claim deductions for expenses that are more than reimbursements. H&r block online filing Your expenses are reimbursed under a nonaccountable plan. H&r block online filing Your employer does not use adequate accounting procedures to verify expense accounts. H&r block online filing You are related to your employer as defined under Per Diem and Car Allowances , in chapter 6. H&r block online filing Reimbursements , adequate accounting , and nonaccountable plans are discussed in chapter 6. H&r block online filing Examples of Records Table 5-2 and Table 5-3 are examples of worksheets which can be used for tracking business expenses. H&r block online filing Prev  Up  Next   Home   More Online Publications
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How to Forward the Header of a Phishing Email

It is important that the original communication you received is included, as well as Internet headers. The following instructions will assist you in forwarding a phishing communication to us at phishing@irs.gov.

If you receive an email or find a website you think is claiming to be the IRS

  1. Do not reply.
  2. Do not open any attachments. Attachments may contain malicious code that will infect your computer.
  3. Do not click on any links. If you clicked on links in a suspicious email or phishing website and entered confidential information, visit our identity protection page.

    Report email claiming to be from the IRS or bogus IRS websites to us by using the following steps
  4. Forward the email or the URL of the website to the IRS at phishing@irs.gov.
  5. You can forward the email message as received or provide the Internet header of the e-mail. The Internet header has additional information to help us locate the sender.
  6. After you forward the email or header information to us, delete the message you received.

If the methods above do not work, at a minimum, please send the underlying link of the phishing website.

If the suspicious e-mail includes a file attachment, it is safer to simply highlight the message and forward it. Some configurations, especially in Windows environments, may allow the execution of arbitrary code upon opening and viewing a malicious email message.

The IRS can use the information, URLs and links in the suspicious e-mails you forward to trace the hosting website and alert authorities to help shut down the fraudulent sites.

Main phishing resource page:
How to Report and Identify Phishing, E-mail Scams and Bogus IRS Web sites

Page Last Reviewed or Updated: 06-Dec-2013

The H&r Block Online Filing

H&r block online filing 3. H&r block online filing   Ordinary or Capital Gain or Loss for Business Property Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Section 1231 Gains and LossesNonrecaptured section 1231 losses. H&r block online filing Depreciation RecaptureSection 1245 Property Section 1250 Property Installment Sales Gifts Transfers at Death Like-Kind Exchanges and Involuntary Conversions Multiple Properties Introduction When you dispose of business property, your taxable gain or loss is usually a section 1231 gain or loss. H&r block online filing Its treatment as ordinary or capital is determined under rules for section 1231 transactions. H&r block online filing When you dispose of depreciable property (section 1245 property or section 1250 property) at a gain, you may have to recognize all or part of the gain as ordinary income under the depreciation recapture rules. H&r block online filing Any remaining gain is a section 1231 gain. H&r block online filing Topics - This chapter discusses: Section 1231 gains and losses Depreciation recapture Useful Items - You may want to see: Publication 534 Depreciating Property Placed in Service Before 1987 537 Installment Sales 547 Casualties, Disasters and Thefts 551 Basis of Assets 946 How To Depreciate Property Form (and Instructions) 4797 Sales of Business Property See chapter 5 for information about getting publications and forms. H&r block online filing Section 1231 Gains and Losses Section 1231 gains and losses are the taxable gains and losses from section 1231 transactions (discussed below). H&r block online filing Their treatment as ordinary or capital depends on whether you have a net gain or a net loss from all your section 1231 transactions. H&r block online filing If you have a gain from a section 1231 transaction, first determine whether any of the gain is ordinary income under the depreciation recapture rules (explained later). H&r block online filing Do not take that gain into account as section 1231 gain. H&r block online filing Section 1231 transactions. H&r block online filing   The following transactions result in gain or loss subject to section 1231 treatment. H&r block online filing Sales or exchanges of real property or depreciable personal property. H&r block online filing This property must be used in a trade or business and held longer than 1 year. H&r block online filing Generally, property held for the production of rents or royalties is considered to be used in a trade or business. H&r block online filing Depreciable personal property includes amortizable section 197 intangibles (described in chapter 2 under Other Dispositions). H&r block online filing Sales or exchanges of leaseholds. H&r block online filing The leasehold must be used in a trade or business and held longer than 1 year. H&r block online filing Sales or exchanges of cattle and horses. H&r block online filing The cattle and horses must be held for draft, breeding, dairy, or sporting purposes and held for 2 years or longer. H&r block online filing Sales or exchanges of other livestock. H&r block online filing This livestock does not include poultry. H&r block online filing It must be held for draft, breeding, dairy, or sporting purposes and held for 1 year or longer. H&r block online filing Sales or exchanges of unharvested crops. H&r block online filing The crop and land must be sold, exchanged, or involuntarily converted at the same time and to the same person and the land must be held longer than 1 year. H&r block online filing You cannot keep any right or option to directly or indirectly reacquire the land (other than a right customarily incident to a mortgage or other security transaction). H&r block online filing Growing crops sold with a lease on the land, though sold to the same person in the same transaction, are not included. H&r block online filing Cutting of timber or disposal of timber, coal, or iron ore. H&r block online filing The cutting or disposal must be treated as a sale, as described in chapter 2 under Timber and Coal and Iron Ore. H&r block online filing Condemnations. H&r block online filing The condemned property must have been held longer than 1 year. H&r block online filing It must be business property or a capital asset held in connection with a trade or business or a transaction entered into for profit, such as investment property. H&r block online filing It cannot be property held for personal use. H&r block online filing Casualties and thefts. H&r block online filing The casualty or theft must have affected business property, property held for the production of rents and royalties, or investment property (such as notes and bonds). H&r block online filing You must have held the property longer than 1 year. H&r block online filing However, if your casualty or theft losses are more than your casualty or theft gains, neither the gains nor the losses are taken into account in the section 1231 computation. H&r block online filing For more information on casualties and thefts, see Publication 547. H&r block online filing Property for sale to customers. H&r block online filing   A sale, exchange, or involuntary conversion of property held mainly for sale to customers is not a section 1231 transaction. H&r block online filing If you will get back all, or nearly all, of your investment in the property by selling it rather than by using it up in your business, it is property held mainly for sale to customers. H&r block online filing Example. H&r block online filing You manufacture and sell steel cable, which you deliver on returnable reels that are depreciable property. H&r block online filing Customers make deposits on the reels, which you refund if the reels are returned within a year. H&r block online filing If they are not returned, you keep each deposit as the agreed-upon sales price. H&r block online filing Most reels are returned within the 1-year period. H&r block online filing You keep adequate records showing depreciation and other charges to the capitalized cost of the reels. H&r block online filing Under these conditions, the reels are not property held for sale to customers in the ordinary course of your business. H&r block online filing Any gain or loss resulting from their not being returned may be capital or ordinary, depending on your section 1231 transactions. H&r block online filing Copyrights. H&r block online filing    The sale of a copyright, a literary, musical, or artistic composition, or similar property is not a section 1231 transaction if your personal efforts created the property, or if you acquired the property in a way that entitled you to the basis of the previous owner whose personal efforts created it (for example, if you receive the property as a gift). H&r block online filing The sale of such property results in ordinary income and generally is reported in Part II of Form 4797. H&r block online filing Treatment as ordinary or capital. H&r block online filing   To determine the treatment of section 1231 gains and losses, combine all your section 1231 gains and losses for the year. H&r block online filing If you have a net section 1231 loss, it is ordinary loss. H&r block online filing If you have a net section 1231 gain, it is ordinary income up to the amount of your nonrecaptured section 1231 losses from previous years. H&r block online filing The rest, if any, is long-term capital gain. H&r block online filing Nonrecaptured section 1231 losses. H&r block online filing   Your nonrecaptured section 1231 losses are your net section 1231 losses for the previous 5 years that have not been applied against a net section 1231 gain. H&r block online filing Therefore, if in any of your five preceding tax years you had section 1231 losses, a net gain for the current year from the sale of section 1231 assets is ordinary gain to the extent of your prior losses. H&r block online filing These losses are applied against your net section 1231 gain beginning with the earliest loss in the 5-year period. H&r block online filing Example. H&r block online filing In 2013, Ben has a $2,000 net section 1231 gain. H&r block online filing To figure how much he has to report as ordinary income and long-term capital gain, he must first determine his section 1231 gains and losses from the previous 5-year period. H&r block online filing From 2008 through 2012 he had the following section 1231 gains and losses. H&r block online filing Year Amount 2008 -0- 2009 -0- 2010 ($2,500) 2011 -0- 2012 $1,800 Ben uses this information to figure how to report his net section 1231 gain for 2013 as shown below. H&r block online filing 1) Net section 1231 gain (2013) $2,000 2) Net section 1231 loss (2010) ($2,500)   3) Net section 1231 gain (2012) 1,800   4) Remaining net section 1231 loss from prior 5 years ($700)   5) Gain treated as  ordinary income $700 6) Gain treated as long-term  capital gain $1,300 Depreciation Recapture If you dispose of depreciable or amortizable property at a gain, you may have to treat all or part of the gain (even if otherwise nontaxable) as ordinary income. H&r block online filing To figure any gain that must be reported as ordinary income, you must keep permanent records of the facts necessary to figure the depreciation or amortization allowed or allowable on your property. H&r block online filing This includes the date and manner of acquisition, cost or other basis, depreciation or amortization, and all other adjustments that affect basis. H&r block online filing On property you acquired in a nontaxable exchange or as a gift, your records also must indicate the following information. H&r block online filing Whether the adjusted basis was figured using depreciation or amortization you claimed on other property. H&r block online filing Whether the adjusted basis was figured using depreciation or amortization another person claimed. H&r block online filing Corporate distributions. H&r block online filing   For information on property distributed by corporations, see Distributions to Shareholders in Publication 542, Corporations. H&r block online filing General asset accounts. H&r block online filing   Different rules apply to dispositions of property you depreciated using a general asset account. H&r block online filing For information on these rules, see Publication 946. H&r block online filing Section 1245 Property A gain on the disposition of section 1245 property is treated as ordinary income to the extent of depreciation allowed or allowable on the property. H&r block online filing See Gain Treated as Ordinary Income, later. H&r block online filing Any gain recognized that is more than the part that is ordinary income from depreciation is a section 1231 gain. H&r block online filing See Treatment as ordinary or capital under Section 1231 Gains and Losses, earlier. H&r block online filing Section 1245 property defined. H&r block online filing   Section 1245 property includes any property that is or has been subject to an allowance for depreciation or amortization and that is any of the following types of property. H&r block online filing Personal property (either tangible or intangible). H&r block online filing Other tangible property (except buildings and their structural components) used as any of the following. H&r block online filing See Buildings and structural components below. H&r block online filing An integral part of manufacturing, production, or extraction, or of furnishing transportation, communications, electricity, gas, water, or sewage disposal services. H&r block online filing A research facility in any of the activities in (a). H&r block online filing A facility in any of the activities in (a) for the bulk storage of fungible commodities (discussed on the next page). H&r block online filing That part of real property (not included in (2)) with an adjusted basis reduced by (but not limited to) the following. H&r block online filing Amortization of certified pollution control facilities. H&r block online filing The section 179 expense deduction. H&r block online filing Deduction for clean-fuel vehicles and certain refueling property. H&r block online filing Deduction for capital costs incurred in complying with Environmental Protection Agency sulfur regulations. H&r block online filing Deduction for certain qualified refinery property. H&r block online filing Deduction for qualified energy efficient commercial building property. H&r block online filing Amortization of railroad grading and tunnel bores, if in effect before the repeal by the Revenue Reconciliation Act of 1990. H&r block online filing (Repealed by Public Law 99-514, Tax Reform Act of 1986, section 242(a). H&r block online filing ) Certain expenditures for child care facilities if in effect before repeal by Public Law 101-58, Omnibus Budget Reconciliation Act of 1990, section 11801(a)(13) (except with regards to deductions made prior to November 5, 1990). H&r block online filing Expenditures to remove architectural and transportation barriers to the handicapped and elderly. H&r block online filing Deduction for qualified tertiary injectant expenses. H&r block online filing Certain reforestation expenditures. H&r block online filing Deduction for election to expense qualified advanced mine safety equipment property. H&r block online filing Single purpose agricultural (livestock) or horticultural structures. H&r block online filing Storage facilities (except buildings and their structural components) used in distributing petroleum or any primary product of petroleum. H&r block online filing Any railroad grading or tunnel bore. H&r block online filing Buildings and structural components. H&r block online filing   Section 1245 property does not include buildings and structural components. H&r block online filing The term building includes a house, barn, warehouse, or garage. H&r block online filing The term structural component includes walls, floors, windows, doors, central air conditioning systems, light fixtures, etc. H&r block online filing   Do not treat a structure that is essentially machinery or equipment as a building or structural component. H&r block online filing Also, do not treat a structure that houses property used as an integral part of an activity as a building or structural component if the structure's use is so closely related to the property's use that the structure can be expected to be replaced when the property it initially houses is replaced. H&r block online filing   The fact that the structure is specially designed to withstand the stress and other demands of the property and cannot be used economically for other purposes indicates it is closely related to the use of the property it houses. H&r block online filing Structures such as oil and gas storage tanks, grain storage bins, silos, fractionating towers, blast furnaces, basic oxygen furnaces, coke ovens, brick kilns, and coal tipples are not treated as buildings, but as section 1245 property. H&r block online filing Facility for bulk storage of fungible commodities. H&r block online filing   This term includes oil or gas storage tanks and grain storage bins. H&r block online filing Bulk storage means the storage of a commodity in a large mass before it is used. H&r block online filing For example, if a facility is used to store oranges that have been sorted and boxed, it is not used for bulk storage. H&r block online filing To be fungible, a commodity must be such that one part may be used in place of another. H&r block online filing   Stored materials that vary in composition, size, and weight are not fungible. H&r block online filing Materials are not fungible if one part cannot be used in place of another part and the materials cannot be estimated and replaced by simple reference to weight, measure, and number. H&r block online filing For example, the storage of different grades and forms of aluminum scrap is not storage of fungible commodities. H&r block online filing Gain Treated as Ordinary Income The gain treated as ordinary income on the sale, exchange, or involuntary conversion of section 1245 property, including a sale and leaseback transaction, is the lesser of the following amounts. H&r block online filing The depreciation and amortization allowed or allowable on the property. H&r block online filing The gain realized on the disposition (the amount realized from the disposition minus the adjusted basis of the property). H&r block online filing A limit on this amount for gain on like-kind exchanges and involuntary conversions is explained later. H&r block online filing For any other disposition of section 1245 property, ordinary income is the lesser of (1) earlier or the amount by which its fair market value is more than its adjusted basis. H&r block online filing See Gifts and Transfers at Death, later. H&r block online filing Use Part III of Form 4797 to figure the ordinary income part of the gain. H&r block online filing Depreciation taken on other property or taken by other taxpayers. H&r block online filing   Depreciation and amortization include the amounts you claimed on the section 1245 property as well as the following depreciation and amortization amounts. H&r block online filing Amounts you claimed on property you exchanged for, or converted to, your section 1245 property in a like-kind exchange or involuntary conversion. H&r block online filing Amounts a previous owner of the section 1245 property claimed if your basis is determined with reference to that person's adjusted basis (for example, the donor's depreciation deductions on property you received as a gift). H&r block online filing Depreciation and amortization. H&r block online filing   Depreciation and amortization that must be recaptured as ordinary income include (but are not limited to) the following items. H&r block online filing Ordinary depreciation deductions. H&r block online filing Any special depreciation allowance you claimed. H&r block online filing Amortization deductions for all the following costs. H&r block online filing Acquiring a lease. H&r block online filing Lessee improvements. H&r block online filing Certified pollution control facilities. H&r block online filing Certain reforestation expenses. H&r block online filing Section 197 intangibles. H&r block online filing Childcare facility expenses made before 1982, if in effect before the repeal of IRC 188. H&r block online filing Franchises, trademarks, and trade names acquired before August 11, 1993. H&r block online filing The section 179 deduction. H&r block online filing Deductions for all the following costs. H&r block online filing Removing barriers to the disabled and the elderly. H&r block online filing Tertiary injectant expenses. H&r block online filing Depreciable clean-fuel vehicles and refueling property (minus the amount of any recaptured deduction). H&r block online filing Environmental cleanup costs. H&r block online filing Certain reforestation expenses. H&r block online filing Qualified disaster expenses. H&r block online filing Any basis reduction for the investment credit (minus any basis increase for credit recapture). H&r block online filing Any basis reduction for the qualified electric vehicle credit (minus any basis increase for credit recapture). H&r block online filing Example. H&r block online filing You file your returns on a calendar year basis. H&r block online filing In February 2011, you bought and placed in service for 100% use in your business a light-duty truck (5-year property) that cost $10,000. H&r block online filing You used the half-year convention and your MACRS deductions for the truck were $2,000 in 2011 and $3,200 in 2012. H&r block online filing You did not take the section 179 deduction. H&r block online filing You sold the truck in May 2013 for $7,000. H&r block online filing The MACRS deduction in 2013, the year of sale, is $960 (½ of $1,920). H&r block online filing Figure the gain treated as ordinary income as follows. H&r block online filing 1) Amount realized $7,000 2) Cost (February 2011) $10,000   3) Depreciation allowed or allowable (MACRS deductions: $2,000 + $3,200 + $960) 6,160   4) Adjusted basis (subtract line 3 from line 2) $3,840 5) Gain realized (subtract line 4 from line 1) $3,160 6) Gain treated as ordinary income (lesser of line 3 or line 5) $3,160 Depreciation on other tangible property. H&r block online filing   You must take into account depreciation during periods when the property was not used as an integral part of an activity or did not constitute a research or storage facility, as described earlier under Section 1245 property. H&r block online filing   For example, if depreciation deductions taken on certain storage facilities amounted to $10,000, of which $6,000 is from the periods before their use in a prescribed business activity, you must use the entire $10,000 in determining ordinary income from depreciation. H&r block online filing Depreciation allowed or allowable. H&r block online filing   The greater of the depreciation allowed or allowable is generally the amount to use in figuring the part of gain to report as ordinary income. H&r block online filing However, if in prior years, you have consistently taken proper deductions under one method, the amount allowed for your prior years will not be increased even though a greater amount would have been allowed under another proper method. H&r block online filing If you did not take any deduction at all for depreciation, your adjustments to basis for depreciation allowable are figured by using the straight line method. H&r block online filing   This treatment applies only when figuring what part of gain is treated as ordinary income under the rules for section 1245 depreciation recapture. H&r block online filing Multiple asset accounts. H&r block online filing   In figuring ordinary income from depreciation, you can treat any number of units of section 1245 property in a single depreciation account as one item if the total ordinary income from depreciation figured by using this method is not less than it would be if depreciation on each unit were figured separately. H&r block online filing Example. H&r block online filing In one transaction you sold 50 machines, 25 trucks, and certain other property that is not section 1245 property. H&r block online filing All of the depreciation was recorded in a single depreciation account. H&r block online filing After dividing the total received among the various assets sold, you figured that each unit of section 1245 property was sold at a gain. H&r block online filing You can figure the ordinary income from depreciation as if the 50 machines and 25 trucks were one item. H&r block online filing However, if five of the trucks had been sold at a loss, only the 50 machines and 20 of the trucks could be treated as one item in determining the ordinary income from depreciation. H&r block online filing Normal retirement. H&r block online filing   The normal retirement of section 1245 property in multiple asset accounts does not require recognition of gain as ordinary income from depreciation if your method of accounting for asset retirements does not require recognition of that gain. H&r block online filing Section 1250 Property Gain on the disposition of section 1250 property is treated as ordinary income to the extent of additional depreciation allowed or allowable on the property. H&r block online filing To determine the additional depreciation on section 1250 property, see Additional Depreciation, below. H&r block online filing Section 1250 property defined. H&r block online filing   This includes all real property that is subject to an allowance for depreciation and that is not and never has been section 1245 property. H&r block online filing It includes a leasehold of land or section 1250 property subject to an allowance for depreciation. H&r block online filing A fee simple interest in land is not included because it is not depreciable. H&r block online filing   If your section 1250 property becomes section 1245 property because you change its use, you can never again treat it as section 1250 property. H&r block online filing Additional Depreciation If you hold section 1250 property longer than 1 year, the additional depreciation is the actual depreciation adjustments that are more than the depreciation figured using the straight line method. H&r block online filing For a list of items treated as depreciation adjustments, see Depreciation and amortization under Gain Treated as Ordinary Income, earlier. H&r block online filing For the treatment of unrecaptured section 1250 gain, see Capital Gains Tax Rate, later. H&r block online filing If you hold section 1250 property for 1 year or less, all the depreciation is additional depreciation. H&r block online filing You will not have additional depreciation if any of the following conditions apply to the property disposed of. H&r block online filing You figured depreciation for the property using the straight line method or any other method that does not result in depreciation that is more than the amount figured by the straight line method; you held the property longer than 1 year; and, if the property was qualified property, you made a timely election not to claim any special depreciation allowance. H&r block online filing In addition, if the property was in a renewal community, you must not have elected to claim a commercial revitalization deduction for property placed in service before January 1, 2010. H&r block online filing The property was residential low-income rental property you held for 162/3 years or longer. H&r block online filing For low-income rental housing on which the special 60-month depreciation for rehabilitation expenses was allowed, the 162/3 years start when the rehabilitated property is placed in service. H&r block online filing You chose the alternate ACRS method for the property, which was a type of 15-, 18-, or 19-year real property covered by the section 1250 rules. H&r block online filing The property was residential rental property or nonresidential real property placed in service after 1986 (or after July 31, 1986, if the choice to use MACRS was made); you held it longer than 1 year; and, if the property was qualified property, you made a timely election not to claim any special depreciation allowance. H&r block online filing These properties are depreciated using the straight line method. H&r block online filing In addition, if the property was in a renewal community, you must not have elected to claim a commercial revitalization deduction. H&r block online filing Depreciation taken by other taxpayers or on other property. H&r block online filing   Additional depreciation includes all depreciation adjustments to the basis of section 1250 property whether allowed to you or another person (as carryover basis property). H&r block online filing Example. H&r block online filing Larry Johnson gives his son section 1250 property on which he took $2,000 in depreciation deductions, of which $500 is additional depreciation. H&r block online filing Immediately after the gift, the son's adjusted basis in the property is the same as his father's and reflects the $500 additional depreciation. H&r block online filing On January 1 of the next year, after taking depreciation deductions of $1,000 on the property, of which $200 is additional depreciation, the son sells the property. H&r block online filing At the time of sale, the additional depreciation is $700 ($500 allowed the father plus $200 allowed the son). H&r block online filing Depreciation allowed or allowable. H&r block online filing   The greater of depreciation allowed or allowable (to any person who held the property if the depreciation was used in figuring its adjusted basis in your hands) generally is the amount to use in figuring the part of the gain to be reported as ordinary income. H&r block online filing If you can show that the deduction allowed for any tax year was less than the amount allowable, the lesser figure will be the depreciation adjustment for figuring additional depreciation. H&r block online filing Retired or demolished property. H&r block online filing   The adjustments reflected in adjusted basis generally do not include deductions for depreciation on retired or demolished parts of section 1250 property unless these deductions are reflected in the basis of replacement property that is section 1250 property. H&r block online filing Example. H&r block online filing A wing of your building is totally destroyed by fire. H&r block online filing The depreciation adjustments figured in the adjusted basis of the building after the wing is destroyed do not include any deductions for depreciation on the destroyed wing unless it is replaced and the adjustments for depreciation on it are reflected in the basis of the replacement property. H&r block online filing Figuring straight line depreciation. H&r block online filing   The useful life and salvage value you would have used to figure straight line depreciation are the same as those used under the depreciation method you actually used. H&r block online filing If you did not use a useful life under the depreciation method actually used (such as with the units-of-production method) or if you did not take salvage value into account (such as with the declining balance method), the useful life or salvage value for figuring what would have been the straight line depreciation is the useful life and salvage value you would have used under the straight line method. H&r block online filing   Salvage value and useful life are not used for the ACRS method of depreciation. H&r block online filing Figure straight line depreciation for ACRS real property by using its 15-, 18-, or 19-year recovery period as the property's useful life. H&r block online filing   The straight line method is applied without any basis reduction for the investment credit. H&r block online filing Property held by lessee. H&r block online filing   If a lessee makes a leasehold improvement, the lease period for figuring what would have been the straight line depreciation adjustments includes all renewal periods. H&r block online filing This inclusion of the renewal periods cannot extend the lease period taken into account to a period that is longer than the remaining useful life of the improvement. H&r block online filing The same rule applies to the cost of acquiring a lease. H&r block online filing   The term renewal period means any period for which the lease may be renewed, extended, or continued under an option exercisable by the lessee. H&r block online filing However, the inclusion of renewal periods cannot extend the lease by more than two-thirds of the period that was the basis on which the actual depreciation adjustments were allowed. H&r block online filing Applicable Percentage The applicable percentage used to figure the ordinary income because of additional depreciation depends on whether the real property you disposed of is nonresidential real property, residential rental property, or low-income housing. H&r block online filing The percentages for these types of real property are as follows. H&r block online filing Nonresidential real property. H&r block online filing   For real property that is not residential rental property, the applicable percentage for periods after 1969 is 100%. H&r block online filing For periods before 1970, the percentage is zero and no ordinary income because of additional depreciation before 1970 will result from its disposition. H&r block online filing Residential rental property. H&r block online filing   For residential rental property (80% or more of the gross income is from dwelling units) other than low-income housing, the applicable percentage for periods after 1975 is 100%. H&r block online filing The percentage for periods before 1976 is zero. H&r block online filing Therefore, no ordinary income because of additional depreciation before 1976 will result from a disposition of residential rental property. H&r block online filing Low-income housing. H&r block online filing    Low-income housing includes all the following types of residential rental property. H&r block online filing Federally assisted housing projects if the mortgage is insured under section 221(d)(3) or 236 of the National Housing Act or housing financed or assisted by direct loan or tax abatement under similar provisions of state or local laws. H&r block online filing Low-income rental housing for which a depreciation deduction for rehabilitation expenses was allowed. H&r block online filing Low-income rental housing held for occupancy by families or individuals eligible to receive subsidies under section 8 of the United States Housing Act of 1937, as amended, or under provisions of state or local laws that authorize similar subsidies for low-income families. H&r block online filing Housing financed or assisted by direct loan or insured under Title V of the Housing Act of 1949. H&r block online filing   The applicable percentage for low-income housing is 100% minus 1% for each full month the property was held over 100 full months. H&r block online filing If you have held low-income housing at least 16 years and 8 months, the percentage is zero and no ordinary income will result from its disposition. H&r block online filing Foreclosure. H&r block online filing   If low-income housing is disposed of because of foreclosure or similar proceedings, the monthly applicable percentage reduction is figured as if you disposed of the property on the starting date of the proceedings. H&r block online filing Example. H&r block online filing On June 1, 2001, you acquired low-income housing property. H&r block online filing On April 3, 2012 (130 months after the property was acquired), foreclosure proceedings were started on the property and on December 3, 2013 (150 months after the property was acquired), the property was disposed of as a result of the foreclosure proceedings. H&r block online filing The property qualifies for a reduced applicable percentage because it was held more than 100 full months. H&r block online filing The applicable percentage reduction is 30% (130 months minus 100 months) rather than 50% (150 months minus 100 months) because it does not apply after April 3, 2012, the starting date of the foreclosure proceedings. H&r block online filing Therefore, 70% of the additional depreciation is treated as ordinary income. H&r block online filing Holding period. H&r block online filing   The holding period used to figure the applicable percentage for low-income housing generally starts on the day after you acquired it. H&r block online filing For example, if you bought low-income housing on January 1, 1997, the holding period starts on January 2, 1997. H&r block online filing If you sold it on January 2, 2013, the holding period is exactly 192 full months. H&r block online filing The applicable percentage for additional depreciation is 8%, or 100% minus 1% for each full month the property was held over 100 full months. H&r block online filing Holding period for constructed, reconstructed, or erected property. H&r block online filing   The holding period used to figure the applicable percentage for low-income housing you constructed, reconstructed, or erected starts on the first day of the month it is placed in service in a trade or business, in an activity for the production of income, or in a personal activity. H&r block online filing Property acquired by gift or received in a tax-free transfer. H&r block online filing   For low-income housing you acquired by gift or in a tax-free transfer the basis of which is figured by reference to the basis in the hands of the transferor, the holding period for the applicable percentage includes the holding period of the transferor. H&r block online filing   If the adjusted basis of the property in your hands just after acquiring it is more than its adjusted basis to the transferor just before transferring it, the holding period of the difference is figured as if it were a separate improvement. H&r block online filing See Low-Income Housing With Two or More Elements, next. H&r block online filing Low-Income Housing With Two or More Elements If you dispose of low-income housing property that has two or more separate elements, the applicable percentage used to figure ordinary income because of additional depreciation may be different for each element. H&r block online filing The gain to be reported as ordinary income is the sum of the ordinary income figured for each element. H&r block online filing The following are the types of separate elements. H&r block online filing A separate improvement (defined below). H&r block online filing The basic section 1250 property plus improvements not qualifying as separate improvements. H&r block online filing The units placed in service at different times before all the section 1250 property is finished. H&r block online filing For example, this happens when a taxpayer builds an apartment building of 100 units and places 30 units in service (available for renting) on January 4, 2011, 50 on July 18, 2011, and the remaining 20 on January 18, 2012. H&r block online filing As a result, the apartment house consists of three separate elements. H&r block online filing The 36-month test for separate improvements. H&r block online filing   A separate improvement is any improvement (qualifying under The 1-year test, below) added to the capital account of the property, but only if the total of the improvements during the 36-month period ending on the last day of any tax year is more than the greatest of the following amounts. H&r block online filing Twenty-five percent of the adjusted basis of the property at the start of the first day of the 36-month period, or the first day of the holding period of the property, whichever is later. H&r block online filing Ten percent of the unadjusted basis (adjusted basis plus depreciation and amortization adjustments) of the property at the start of the period determined in (1). H&r block online filing $5,000. H&r block online filing The 1-year test. H&r block online filing   An addition to the capital account for any tax year (including a short tax year) is treated as an improvement only if the sum of all additions for the year is more than the greater of $2,000 or 1% of the unadjusted basis of the property. H&r block online filing The unadjusted basis is figured as of the start of that tax year or the holding period of the property, whichever is later. H&r block online filing In applying the 36-month test, improvements in any one of the 3 years are omitted entirely if the total improvements in that year do not qualify under the 1-year test. H&r block online filing Example. H&r block online filing The unadjusted basis of a calendar year taxpayer's property was $300,000 on January 1 of this year. H&r block online filing During the year, the taxpayer made improvements A, B, and C, which cost $1,000, $600, and $700, respectively. H&r block online filing The sum of the improvements, $2,300, is less than 1% of the unadjusted basis ($3,000), so the improvements do not satisfy the 1-year test and are not treated as improvements for the 36-month test. H&r block online filing However, if improvement C had cost $1,500, the sum of these improvements would have been $3,100. H&r block online filing Then, it would be necessary to apply the 36-month test to figure if the improvements must be treated as separate improvements. H&r block online filing Addition to the capital account. H&r block online filing   Any addition to the capital account made after the initial acquisition or completion of the property by you or any person who held the property during a period included in your holding period is to be considered when figuring the total amount of separate improvements. H&r block online filing   The addition to the capital account of depreciable real property is the gross addition not reduced by amounts attributable to replaced property. H&r block online filing For example, if a roof with an adjusted basis of $20,000 is replaced by a new roof costing $50,000, the improvement is the gross addition to the account, $50,000, and not the net addition of $30,000. H&r block online filing The $20,000 adjusted basis of the old roof is no longer reflected in the basis of the property. H&r block online filing The status of an addition to the capital account is not affected by whether it is treated as a separate property for determining depreciation deductions. H&r block online filing   Whether an expense is treated as an addition to the capital account may depend on the final disposition of the entire property. H&r block online filing If the expense item property and the basic property are sold in two separate transactions, the entire section 1250 property is treated as consisting of two distinct properties. H&r block online filing Unadjusted basis. H&r block online filing   In figuring the unadjusted basis as of a certain date, include the actual cost of all previous additions to the capital account plus those that did not qualify as separate improvements. H&r block online filing However, the cost of components retired before that date is not included in the unadjusted basis. H&r block online filing Holding period. H&r block online filing   Use the following guidelines for figuring the applicable percentage for property with two or more elements. H&r block online filing The holding period of a separate element placed in service before the entire section 1250 property is finished starts on the first day of the month that the separate element is placed in service. H&r block online filing The holding period for each separate improvement qualifying as a separate element starts on the day after the improvement is acquired or, for improvements constructed, reconstructed, or erected, the first day of the month that the improvement is placed in service. H&r block online filing The holding period for each improvement not qualifying as a separate element takes the holding period of the basic property. H&r block online filing   If an improvement by itself does not meet the 1-year test (greater of $2,000 or 1% of the unadjusted basis), but it does qualify as a separate improvement that is a separate element (when grouped with other improvements made during the tax year), determine the start of its holding period as follows. H&r block online filing Use the first day of a calendar month that is closest to the middle of the tax year. H&r block online filing If there are two first days of a month that are equally close to the middle of the year, use the earlier date. H&r block online filing Figuring ordinary income attributable to each separate element. H&r block online filing   Figure ordinary income attributable to each separate element as follows. H&r block online filing   Step 1. H&r block online filing Divide the element's additional depreciation after 1975 by the sum of all the elements' additional depreciation after 1975 to determine the percentage used in Step 2. H&r block online filing   Step 2. H&r block online filing Multiply the percentage figured in Step 1 by the lesser of the additional depreciation after 1975 for the entire property or the gain from disposition of the entire property (the difference between the fair market value or amount realized and the adjusted basis). H&r block online filing   Step 3. H&r block online filing Multiply the result in Step 2 by the applicable percentage for the element. H&r block online filing Example. H&r block online filing You sold at a gain of $25,000 low-income housing property subject to the ordinary income rules of section 1250. H&r block online filing The property consisted of four elements (W, X, Y, and Z). H&r block online filing Step 1. H&r block online filing The additional depreciation for each element is: W-$12,000; X-None; Y-$6,000; and Z-$6,000. H&r block online filing The sum of the additional depreciation for all the elements is $24,000. H&r block online filing Step 2. H&r block online filing The depreciation deducted on element X was $4,000 less than it would have been under the straight line method. H&r block online filing Additional depreciation on the property as a whole is $20,000 ($24,000 − $4,000). H&r block online filing $20,000 is lower than the $25,000 gain on the sale, so $20,000 is used in Step 2. H&r block online filing Step 3. H&r block online filing The applicable percentages to be used in Step 3 for the elements are: W-68%; X-85%; Y-92%; and Z-100%. H&r block online filing From these facts, the sum of the ordinary income for each element is figured as follows. H&r block online filing   Step 1 Step 2 Step 3 Ordinary Income W . H&r block online filing 50 $10,000 68% $ 6,800 X -0- -0- 85% -0- Y . H&r block online filing 25 5,000 92% 4,600 Z . H&r block online filing 25 5,000 100% 5,000 Sum of ordinary income of separate elements $16,400 Gain Treated as Ordinary Income To find what part of the gain from the disposition of section 1250 property is treated as ordinary income, follow these steps. H&r block online filing In a sale, exchange, or involuntary conversion of the property, figure the amount realized that is more than the adjusted basis of the property. H&r block online filing In any other disposition of the property, figure the fair market value that is more than the adjusted basis. H&r block online filing Figure the additional depreciation for the periods after 1975. H&r block online filing Multiply the lesser of (1) or (2) by the applicable percentage, discussed earlier under Applicable Percentage. H&r block online filing Stop here if this is residential rental property or if (2) is equal to or more than (1). H&r block online filing This is the gain treated as ordinary income because of additional depreciation. H&r block online filing Subtract (2) from (1). H&r block online filing Figure the additional depreciation for periods after 1969 but before 1976. H&r block online filing Add the lesser of (4) or (5) to the result in (3). H&r block online filing This is the gain treated as ordinary income because of additional depreciation. H&r block online filing A limit on the amount treated as ordinary income for gain on like-kind exchanges and involuntary conversions is explained later. H&r block online filing Use Form 4797, Part III, to figure the ordinary income part of the gain. H&r block online filing Corporations. H&r block online filing   Corporations, other than S corporations, must recognize an additional amount as ordinary income on the sale or other disposition of section 1250 property. H&r block online filing The additional amount treated as ordinary income is 20% of the excess of the amount that would have been ordinary income if the property were section 1245 property over the amount treated as ordinary income under section 1250. H&r block online filing Report this additional ordinary income on Form 4797, Part III, line 26 (f). H&r block online filing Installment Sales If you report the sale of property under the installment method, any depreciation recapture under section 1245 or 1250 is taxable as ordinary income in the year of sale. H&r block online filing This applies even if no payments are received in that year. H&r block online filing If the gain is more than the depreciation recapture income, report the rest of the gain using the rules of the installment method. H&r block online filing For this purpose, include the recapture income in your installment sale basis to determine your gross profit on the installment sale. H&r block online filing If you dispose of more than one asset in a single transaction, you must figure the gain on each asset separately so that it may be properly reported. H&r block online filing To do this, allocate the selling price and the payments you receive in the year of sale to each asset. H&r block online filing Report any depreciation recapture income in the year of sale before using the installment method for any remaining gain. H&r block online filing For a detailed discussion of installment sales, see Publication 537. H&r block online filing Gifts If you make a gift of depreciable personal property or real property, you do not have to report income on the transaction. H&r block online filing However, if the person who receives it (donee) sells or otherwise disposes of the property in a disposition subject to recapture, the donee must take into account the depreciation you deducted in figuring the gain to be reported as ordinary income. H&r block online filing For low-income housing, the donee must take into account the donor's holding period to figure the applicable percentage. H&r block online filing See Applicable Percentage and its discussion Holding period under Section 1250 Property, earlier. H&r block online filing Part gift and part sale or exchange. H&r block online filing   If you transfer depreciable personal property or real property for less than its fair market value in a transaction considered to be partly a gift and partly a sale or exchange and you have a gain because the amount realized is more than your adjusted basis, you must report ordinary income (up to the amount of gain) to recapture depreciation. H&r block online filing If the depreciation (additional depreciation, if section 1250 property) is more than the gain, the balance is carried over to the transferee to be taken into account on any later disposition of the property. H&r block online filing However, see Bargain sale to charity, later. H&r block online filing Example. H&r block online filing You transferred depreciable personal property to your son for $20,000. H&r block online filing When transferred, the property had an adjusted basis to you of $10,000 and a fair market value of $40,000. H&r block online filing You took depreciation of $30,000. H&r block online filing You are considered to have made a gift of $20,000, the difference between the $40,000 fair market value and the $20,000 sale price to your son. H&r block online filing You have a taxable gain on the transfer of $10,000 ($20,000 sale price minus $10,000 adjusted basis) that must be reported as ordinary income from depreciation. H&r block online filing You report $10,000 of your $30,000 depreciation as ordinary income on the transfer of the property, so the remaining $20,000 depreciation is carried over to your son for him to take into account on any later disposition of the property. H&r block online filing Gift to charitable organization. H&r block online filing   If you give property to a charitable organization, you figure your deduction for your charitable contribution by reducing the fair market value of the property by the ordinary income and short-term capital gain that would have resulted had you sold the property at its fair market value at the time of the contribution. H&r block online filing Thus, your deduction for depreciable real or personal property given to a charitable organization does not include the potential ordinary gain from depreciation. H&r block online filing   You also may have to reduce the fair market value of the contributed property by the long-term capital gain (including any section 1231 gain) that would have resulted had the property been sold. H&r block online filing For more information, see Giving Property That Has Increased in Value in Publication 526. H&r block online filing Bargain sale to charity. H&r block online filing   If you transfer section 1245 or section 1250 property to a charitable organization for less than its fair market value and a deduction for the contribution part of the transfer is allowable, your ordinary income from depreciation is figured under different rules. H&r block online filing First, figure the ordinary income as if you had sold the property at its fair market value. H&r block online filing Then, allocate that amount between the sale and the contribution parts of the transfer in the same proportion that you allocated your adjusted basis in the property to figure your gain. H&r block online filing See Bargain Sale under Gain or Loss From Sales and Exchanges in chapter 1. H&r block online filing Report as ordinary income the lesser of the ordinary income allocated to the sale or your gain from the sale. H&r block online filing Example. H&r block online filing You sold section 1245 property in a bargain sale to a charitable organization and are allowed a deduction for your contribution. H&r block online filing Your gain on the sale was $1,200, figured by allocating 20% of your adjusted basis in the property to the part sold. H&r block online filing If you had sold the property at its fair market value, your ordinary income would have been $5,000. H&r block online filing Your ordinary income is $1,000 ($5,000 × 20%) and your section 1231 gain is $200 ($1,200 – $1,000). H&r block online filing Transfers at Death When a taxpayer dies, no gain is reported on depreciable personal property or real property transferred to his or her estate or beneficiary. H&r block online filing For information on the tax liability of a decedent, see Publication 559, Survivors, Executors, and Administrators. H&r block online filing However, if the decedent disposed of the property while alive and, because of his or her method of accounting or for any other reason, the gain from the disposition is reportable by the estate or beneficiary, it must be reported in the same way the decedent would have had to report it if he or she were still alive. H&r block online filing Ordinary income due to depreciation must be reported on a transfer from an executor, administrator, or trustee to an heir, beneficiary, or other individual if the transfer is a sale or exchange on which gain is realized. H&r block online filing Example 1. H&r block online filing Janet Smith owned depreciable property that, upon her death, was inherited by her son. H&r block online filing No ordinary income from depreciation is reportable on the transfer, even though the value used for estate tax purposes is more than the adjusted basis of the property to Janet when she died. H&r block online filing However, if she sold the property before her death and realized a gain and if, because of her method of accounting, the proceeds from the sale are income in respect of a decedent reportable by her son, he must report ordinary income from depreciation. H&r block online filing Example 2. H&r block online filing The trustee of a trust created by a will transfers depreciable property to a beneficiary in satisfaction of a specific bequest of $10,000. H&r block online filing If the property had a value of $9,000 at the date used for estate tax valuation purposes, the $1,000 increase in value to the date of distribution is a gain realized by the trust. H&r block online filing Ordinary income from depreciation must be reported by the trust on the transfer. H&r block online filing Like-Kind Exchanges and Involuntary Conversions A like-kind exchange of your depreciable property or an involuntary conversion of the property into similar or related property will not result in your having to report ordinary income from depreciation unless money or property other than like-kind, similar, or related property is also received in the transaction. H&r block online filing For information on like-kind exchanges and involuntary conversions, see chapter 1. H&r block online filing Depreciable personal property. H&r block online filing   If you have a gain from either a like-kind exchange or an involuntary conversion of your depreciable personal property, the amount to be reported as ordinary income from depreciation is the amount figured under the rules explained earlier (see Section 1245 Property), limited to the sum of the following amounts. H&r block online filing The gain that must be included in income under the rules for like-kind exchanges or involuntary conversions. H&r block online filing The fair market value of the like-kind, similar, or related property other than depreciable personal property acquired in the transaction. H&r block online filing Example 1. H&r block online filing You bought a new machine for $4,300 cash plus your old machine for which you were allowed a $1,360 trade-in. H&r block online filing The old machine cost you $5,000 two years ago. H&r block online filing You took depreciation deductions of $3,950. H&r block online filing Even though you deducted depreciation of $3,950, the $310 gain ($1,360 trade-in allowance minus $1,050 adjusted basis) is not reported because it is postponed under the rules for like-kind exchanges and you received only depreciable personal property in the exchange. H&r block online filing Example 2. H&r block online filing You bought office machinery for $1,500 two years ago and deducted $780 depreciation. H&r block online filing This year a fire destroyed the machinery and you received $1,200 from your fire insurance, realizing a gain of $480 ($1,200 − $720 adjusted basis). H&r block online filing You choose to postpone reporting gain, but replacement machinery cost you only $1,000. H&r block online filing Your taxable gain under the rules for involuntary conversions is limited to the remaining $200 insurance payment. H&r block online filing All your replacement property is depreciable personal property, so your ordinary income from depreciation is limited to $200. H&r block online filing Example 3. H&r block online filing A fire destroyed office machinery you bought for $116,000. H&r block online filing The depreciation deductions were $91,640 and the machinery had an adjusted basis of $24,360. H&r block online filing You received a $117,000 insurance payment, realizing a gain of $92,640. H&r block online filing You immediately spent $105,000 of the insurance payment for replacement machinery and $9,000 for stock that qualifies as replacement property and you choose to postpone reporting the gain. H&r block online filing $114,000 of the $117,000 insurance payment was used to buy replacement property, so the gain that must be included in income under the rules for involuntary conversions is the part not spent, or $3,000. H&r block online filing The part of the insurance payment ($9,000) used to buy the nondepreciable property (the stock) also must be included in figuring the gain from depreciation. H&r block online filing The amount you must report as ordinary income on the transaction is $12,000, figured as follows. H&r block online filing 1) Gain realized on the transaction ($92,640) limited to depreciation ($91,640) $91,640 2) Gain includible in income (amount not spent) 3,000     Plus: fair market value of property other than depreciable personal property (the stock) 9,000 12,000 Amount reportable as ordinary income (lesser of (1) or (2)) $12,000   If, instead of buying $9,000 in stock, you bought $9,000 worth of depreciable personal property similar or related in use to the destroyed property, you would only report $3,000 as ordinary income. H&r block online filing Depreciable real property. H&r block online filing   If you have a gain from either a like-kind exchange or involuntary conversion of your depreciable real property, ordinary income from additional depreciation is figured under the rules explained earlier (see Section 1250 Property), limited to the greater of the following amounts. H&r block online filing The gain that must be reported under the rules for like-kind exchanges or involuntary conversions plus the fair market value of stock bought as replacement property in acquiring control of a corporation. H&r block online filing The gain you would have had to report as ordinary income from additional depreciation had the transaction been a cash sale minus the cost (or fair market value in an exchange) of the depreciable real property acquired. H&r block online filing   The ordinary income not reported for the year of the disposition is carried over to the depreciable real property acquired in the like-kind exchange or involuntary conversion as additional depreciation from the property disposed of. H&r block online filing Further, to figure the applicable percentage of additional depreciation to be treated as ordinary income, the holding period starts over for the new property. H&r block online filing Example. H&r block online filing The state paid you $116,000 when it condemned your depreciable real property for public use. H&r block online filing You bought other real property similar in use to the property condemned for $110,000 ($15,000 for depreciable real property and $95,000 for land). H&r block online filing You also bought stock for $5,000 to get control of a corporation owning property similar in use to the property condemned. H&r block online filing You choose to postpone reporting the gain. H&r block online filing If the transaction had been a sale for cash only, under the rules described earlier, $20,000 would have been reportable as ordinary income because of additional depreciation. H&r block online filing The ordinary income to be reported is $6,000, which is the greater of the following amounts. H&r block online filing The gain that must be reported under the rules for involuntary conversions, $1,000 ($116,000 − $115,000) plus the fair market value of stock bought as qualified replacement property, $5,000, for a total of $6,000. H&r block online filing The gain you would have had to report as ordinary income from additional depreciation ($20,000) had this transaction been a cash sale minus the cost of the depreciable real property bought ($15,000), or $5,000. H&r block online filing   The ordinary income not reported, $14,000 ($20,000 − $6,000), is carried over to the depreciable real property you bought as additional depreciation. H&r block online filing Basis of property acquired. H&r block online filing   If the ordinary income you have to report because of additional depreciation is limited, the total basis of the property you acquired is its fair market value (its cost, if bought to replace property involuntarily converted into money) minus the gain postponed. H&r block online filing   If you acquired more than one item of property, allocate the total basis among the properties in proportion to their fair market value (their cost, in an involuntary conversion into money). H&r block online filing However, if you acquired both depreciable real property and other property, allocate the total basis as follows. H&r block online filing Subtract the ordinary income because of additional depreciation that you do not have to report from the fair market value (or cost) of the depreciable real property acquired. H&r block online filing Add the fair market value (or cost) of the other property acquired to the result in (1). H&r block online filing Divide the result in (1) by the result in (2). H&r block online filing Multiply the total basis by the result in (3). H&r block online filing This is the basis of the depreciable real property acquired. H&r block online filing If you acquired more than one item of depreciable real property, allocate this basis amount among the properties in proportion to their fair market value (or cost). H&r block online filing Subtract the result in (4) from the total basis. H&r block online filing This is the basis of the other property acquired. H&r block online filing If you acquired more than one item of other property, allocate this basis amount among the properties in proportion to their fair market value (or cost). H&r block online filing Example 1. H&r block online filing In 1988, low-income housing property that you acquired and placed in service in 1983 was destroyed by fire and you received a $90,000 insurance payment. H&r block online filing The property's adjusted basis was $38,400, with additional depreciation of $14,932. H&r block online filing On December 1, 1988, you used the insurance payment to acquire and place in service replacement low-income housing property. H&r block online filing Your realized gain from the involuntary conversion was $51,600 ($90,000 − $38,400). H&r block online filing You chose to postpone reporting the gain under the involuntary conversion rules. H&r block online filing Under the rules for depreciation recapture on real property, the ordinary gain was $14,932, but you did not have to report any of it because of the limit for involuntary conversions. H&r block online filing The basis of the replacement low-income housing property was its $90,000 cost minus the $51,600 gain you postponed, or $38,400. H&r block online filing The $14,932 ordinary gain you did not report is treated as additional depreciation on the replacement property. H&r block online filing If you sold the property in 2013, your holding period for figuring the applicable percentage of additional depreciation to report as ordinary income will have begun December 2, 1988, the day after you acquired the property. H&r block online filing Example 2. H&r block online filing John Adams received a $90,000 fire insurance payment for depreciable real property (office building) with an adjusted basis of $30,000. H&r block online filing He uses the whole payment to buy property similar in use, spending $42,000 for depreciable real property and $48,000 for land. H&r block online filing He chooses to postpone reporting the $60,000 gain realized on the involuntary conversion. H&r block online filing Of this gain, $10,000 is ordinary income from additional depreciation but is not reported because of the limit for involuntary conversions of depreciable real property. H&r block online filing The basis of the property bought is $30,000 ($90,000 − $60,000), allocated as follows. H&r block online filing The $42,000 cost of depreciable real property minus $10,000 ordinary income not reported is $32,000. H&r block online filing The $48,000 cost of other property (land) plus the $32,000 figured in (1) is $80,000. H&r block online filing The $32,000 figured in (1) divided by the $80,000 figured in (2) is 0. H&r block online filing 4. H&r block online filing The basis of the depreciable real property is $12,000. H&r block online filing This is the $30,000 total basis multiplied by the 0. H&r block online filing 4 figured in (3). H&r block online filing The basis of the other property (land) is $18,000. H&r block online filing This is the $30,000 total basis minus the $12,000 figured in (4). H&r block online filing The ordinary income that is not reported ($10,000) is carried over as additional depreciation to the depreciable real property that was bought and may be taxed as ordinary income on a later disposition. H&r block online filing Multiple Properties If you dispose of depreciable property and other property in one transaction and realize a gain, you must allocate the amount realized between the two types of property in proportion to their respective fair market values to figure the part of your gain to be reported as ordinary income from depreciation. H&r block online filing Different rules may apply to the allocation of the amount realized on the sale of a business that includes a group of assets. H&r block online filing See chapter 2. H&r block online filing In general, if a buyer and seller have adverse interests as to the allocation of the amount realized between the depreciable property and other property, any arm's length agreement between them will establish the allocation. H&r block online filing In the absence of an agreement, the allocation should be made by taking into account the appropriate facts and circumstances. H&r block online filing These include, but are not limited to, a comparison between the depreciable property and all the other property being disposed of in the transaction. H&r block online filing The comparison should take into account all the following facts and circumstances. H&r block online filing The original cost and reproduction cost of construction, erection, or production. H&r block online filing The remaining economic useful life. H&r block online filing The state of obsolescence. H&r block online filing The anticipated expenditures required to maintain, renovate, or modernize the properties. H&r block online filing Like-kind exchanges and involuntary conversions. H&r block online filing   If you dispose of and acquire depreciable personal property and other property (other than depreciable real property) in a like-kind exchange or involuntary conversion, the amount realized is allocated in the following way. H&r block online filing The amount allocated to the depreciable personal property disposed of is treated as consisting of, first, the fair market value of the depreciable personal property acquired and, second (to the extent of any remaining balance), the fair market value of the other property acquired. H&r block online filing The amount allocated to the other property disposed of is treated as consisting of the fair market value of all property acquired that has not already been taken into account. H&r block online filing   If you dispose of and acquire depreciable real property and other property in a like-kind exchange or involuntary conversion, the amount realized is allocated in the following way. H&r block online filing The amount allocated to each of the three types of property (depreciable real property, depreciable personal property, or other property) disposed of is treated as consisting of, first, the fair market value of that type of property acquired and, second (to the extent of any remaining balance), any excess fair market value of the other types of property acquired. H&r block online filing If the excess fair market value is more than the remaining balance of the amount realized and is from both of the other two types of property, you can apply the unallocated amount in any manner you choose. H&r block online filing Example. H&r block online filing A fire destroyed your property with a total fair market value of $50,000. H&r block online filing It consisted of machinery worth $30,000 and nondepreciable property worth $20,000. H&r block online filing You received an insurance payment of $40,000 and immediately used it with $10,000 of your own funds (for a total of $50,000) to buy machinery with a fair market value of $15,000 and nondepreciable property with a fair market value of $35,000. H&r block online filing The adjusted basis of the destroyed machinery was $5,000 and your depreciation on it was $35,000. H&r block online filing You choose to postpone reporting your gain from the involuntary conversion. H&r block online filing You must report $9,000 as ordinary income from depreciation arising from this transaction, figured as follows. H&r block online filing The $40,000 insurance payment must be allocated between the machinery and the other property destroyed in proportion to the fair market value of each. H&r block online filing The amount allocated to the machinery is 30,000/50,000 × $40,000, or $24,000. H&r block online filing The amount allocated to the other property is 20,000/50,000 × $40,000, or $16,000. H&r block online filing Your gain on the involuntary conversion of the machinery is $24,000 minus $5,000 adjusted basis, or $19,000. H&r block online filing The $24,000 allocated to the machinery disposed of is treated as consisting of the $15,000 fair market value of the replacement machinery bought and $9,000 of the fair market value of other property bought in the transaction. H&r block online filing All $16,000 allocated to the other property disposed of is treated as consisting of the fair market value of the other property that was bought. H&r block online filing Your potential ordinary income from depreciation is $19,000, the gain on the machinery, because it is less than the $35,000 depreciation. H&r block online filing However, the amount you must report as ordinary income is limited to the $9,000 included in the amount realized for the machinery that represents the fair market value of property other than the depreciable property you bought. H&r block online filing Prev  Up  Next   Home   More Online Publications