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How Do You Amend Your Taxes

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How Do You Amend Your Taxes

How do you amend your taxes 3. How do you amend your taxes   Adjustments to Income Table of Contents Individual Retirement Arrangement (IRA) Contributions and DeductionsContributions to Kay Bailey Hutchison Spousal IRAs. How do you amend your taxes Deductible contribution. How do you amend your taxes Nondeductible contribution. How do you amend your taxes You may be able to subtract amounts from your total income (Form 1040, line 22 or Form 1040A, line 15) or total effectively connected income (Form 1040NR, line 23) to get your adjusted gross income (Form 1040, line 37; Form 1040A, line 21; or Form 1040NR, line 36). How do you amend your taxes Some adjustments to income follow. How do you amend your taxes Contributions to your individual retirement arrangement (IRA) (Form 1040, line 32; Form 1040A, line 17; or Form 1040NR, line 32), explained later in this publication. How do you amend your taxes Certain moving expenses (Form 1040, line 26; or Form 1040NR, line 26) if you changed job locations or started a new job in 2013. How do you amend your taxes See Publication 521, Moving Expenses, or see Form 3903, Moving Expenses, and its instructions. How do you amend your taxes Some health insurance costs (Form 1040, line 29 or Form 1040NR, line 29) if you were self-employed and had a net profit for the year, or if you received wages in 2013 from an S corporation in which you were a more-than-2% shareholder. How do you amend your taxes For more details, see Publication 535, Business Expenses. How do you amend your taxes Payments to your self-employed SEP, SIMPLE, or qualified plan (Form 1040, line 28 or Form 1040NR, line 28). How do you amend your taxes For more information, including limits on how much you can deduct, see Publication 560, Retirement Plans for Small Business. How do you amend your taxes Penalties paid on early withdrawal of savings (Form 1040, line 30 or Form 1040NR, line 30). How do you amend your taxes Form 1099-INT, Interest Income, or Form 1099-OID, Original Issue Discount, will show the amount of any penalty you were charged. How do you amend your taxes Alimony payments (Form 1040, line 31a). How do you amend your taxes For more information, see Publication 504, Divorced or Separated Individuals. How do you amend your taxes There are other items you can claim as adjustments to income. How do you amend your taxes These adjustments are discussed in your tax return instructions. How do you amend your taxes Individual Retirement Arrangement (IRA) Contributions and Deductions This section explains the tax treatment of amounts you pay into traditional IRAs. How do you amend your taxes A traditional IRA is any IRA that is not a Roth or SIMPLE IRA. How do you amend your taxes Roth and SIMPLE IRAs are defined earlier in the IRA discussion under Retirement Plan Distributions . How do you amend your taxes For more detailed information, see Publication 590. How do you amend your taxes Contributions. How do you amend your taxes   An IRA is a personal savings plan that offers you tax advantages to set aside money for your retirement. How do you amend your taxes Two advantages of a traditional IRA are: You may be able to deduct some or all of your contributions to it, depending on your circumstances, and Generally, amounts in your IRA, including earnings and gains, are not taxed until distributed. How do you amend your taxes    Although interest earned from your traditional IRA generally is not taxed in the year earned, it is not tax-exempt interest. How do you amend your taxes Do not report this interest on your tax return as tax-exempt interest. How do you amend your taxes General limit. How do you amend your taxes   The most that can be contributed for 2013 to your traditional IRA is the smaller of the following amounts. How do you amend your taxes Your taxable compensation for the year, or $5,500 ($6,500 if you were age 50 or older by the end of 2013). How do you amend your taxes Contributions to Kay Bailey Hutchison Spousal IRAs. How do you amend your taxes   In the case of a married couple filing a joint return for 2013, up to $5,500 ($6,500 for each spouse age 50 or older by the end of 2013) can be contributed to IRAs on behalf of each spouse, even if one spouse has little or no compensation. How do you amend your taxes For more information on the general limit and the Kay Bailey Hutchison Spousal IRA limit, see How Much Can Be Contributed? in Publication 590. How do you amend your taxes Deductible contribution. How do you amend your taxes   Generally, you can deduct the lesser of the contributions to your traditional IRA for the year or the general limit (or Kay Bailey Hutchison Spousal IRA limit, if applicable) just explained. How do you amend your taxes However, if you or your spouse was covered by an employer retirement plan at any time during the year for which contributions were made, you may not be able to deduct all of the contributions. How do you amend your taxes Your deduction may be reduced or eliminated, depending on your filing status and the amount of your income. How do you amend your taxes For more information, see Limit if Covered by Employer Plan in Publication 590. How do you amend your taxes Nondeductible contribution. How do you amend your taxes   The difference between your total permitted contributions and your IRA deduction, if any, is your nondeductible contribution. How do you amend your taxes You must file Form 8606, Nondeductible IRAs, to report nondeductible contributions even if you do not have to file a tax return for the year. How do you amend your taxes    For 2014, the most that can be contributed to your traditional IRA is $5,500 ($6,500 if you are age 50 or older at the end of 2014). How do you amend your taxes Prev  Up  Next   Home   More Online Publications
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How do you amend your taxes 2. How do you amend your taxes   Ordinary or Capital Gain or Loss Table of Contents IntroductionSection 1231 transactions. How do you amend your taxes Topics - This chapter discusses: Useful Items - You may want to see: Capital Assets Noncapital AssetsCommodities derivative dealer. How do you amend your taxes Sales and Exchanges Between Related PersonsGain Is Ordinary Income Nondeductible Loss Other DispositionsSale of a Business Dispositions of Intangible Property Subdivision of Land Timber Precious Metals and Stones, Stamps, and Coins Coal and Iron Ore Conversion Transactions Introduction You must classify your gains and losses as either ordinary or capital (and your capital gains or losses as either short-term or long-term). How do you amend your taxes You must do this to figure your net capital gain or loss. How do you amend your taxes For individuals, a net capital gain may be taxed at a different tax rate than ordinary income. How do you amend your taxes See Capital Gains Tax Rates in chapter 4. How do you amend your taxes Your deduction for a net capital loss may be limited. How do you amend your taxes See Treatment of Capital Losses in chapter 4. How do you amend your taxes Capital gain or loss. How do you amend your taxes   Generally, you will have a capital gain or loss if you sell or exchange a capital asset. How do you amend your taxes You also may have a capital gain if your section 1231 transactions result in a net gain. How do you amend your taxes Section 1231 transactions. How do you amend your taxes   Section 1231 transactions are sales and exchanges of property held longer than 1 year and either used in a trade or business or held for the production of rents or royalties. How do you amend your taxes They also include certain involuntary conversions of business or investment property, including capital assets. How do you amend your taxes See Section 1231 Gains and Losses in chapter 3 for more information. How do you amend your taxes Topics - This chapter discusses: Capital assets Noncapital assets Sales and exchanges between  related persons Other dispositions Useful Items - You may want to see: Publication 550 Investment Income and Expenses Form (and Instructions) Schedule D (Form 1040) Capital Gains and Losses 4797 Sales of Business Property 8594 Asset Acquisition Statement Under Section 1060 8949 Sales and Other Dispositions of Capital Assets See chapter 5 for information about getting publications and forms. How do you amend your taxes Capital Assets Almost everything you own and use for personal purposes, pleasure, or investment is a capital asset. How do you amend your taxes For exceptions, see Noncapital Assets, later. How do you amend your taxes The following items are examples of capital assets. How do you amend your taxes Stocks and bonds. How do you amend your taxes A home owned and occupied by you and your family. How do you amend your taxes Timber grown on your home property or investment property, even if you make casual sales of the timber. How do you amend your taxes Household furnishings. How do you amend your taxes A car used for pleasure or commuting. How do you amend your taxes Coin or stamp collections. How do you amend your taxes Gems and jewelry. How do you amend your taxes Gold, silver, and other metals. How do you amend your taxes Personal-use property. How do you amend your taxes   Generally, property held for personal use is a capital asset. How do you amend your taxes Gain from a sale or exchange of that property is a capital gain. How do you amend your taxes Loss from the sale or exchange of that property is not deductible. How do you amend your taxes You can deduct a loss relating to personal-use property only if it results from a casualty or theft. How do you amend your taxes Investment property. How do you amend your taxes   Investment property (such as stocks and bonds) is a capital asset, and a gain or loss from its sale or exchange is a capital gain or loss. How do you amend your taxes This treatment does not apply to property used to produce rental income. How do you amend your taxes See Business assets, later, under Noncapital Assets. How do you amend your taxes Release of restriction on land. How do you amend your taxes   Amounts you receive for the release of a restrictive covenant in a deed to land are treated as proceeds from the sale of a capital asset. How do you amend your taxes Noncapital Assets A noncapital asset is property that is not a capital asset. How do you amend your taxes The following kinds of property are not capital assets. How do you amend your taxes Stock in trade, inventory, and other property you hold mainly for sale to customers in your trade or business. How do you amend your taxes Inventories are discussed in Publication 538, Accounting Periods and Methods. How do you amend your taxes But, see the Tip below. How do you amend your taxes Accounts or notes receivable acquired in the ordinary course of a trade or business for services rendered or from the sale of any properties described in (1), above. How do you amend your taxes Depreciable property used in your trade or business or as rental property (including section 197 intangibles defined later), even if the property is fully depreciated (or amortized). How do you amend your taxes Sales of this type of property are discussed in chapter 3. How do you amend your taxes Real property used in your trade or business or as rental property, even if the property is fully depreciated. How do you amend your taxes A copyright; a literary, musical, or artistic composition; a letter; a memorandum; or similar property (such as drafts of speeches, recordings, transcripts, manuscripts, drawings, or photographs): Created by your personal efforts, Prepared or produced for you (in the case of a letter, memorandum, or similar property), or Received from a person who created the property or for whom the property was prepared under circumstances (for example, by gift) entitling you to the basis of the person who created the property, or for whom it was prepared or produced. How do you amend your taxes But, see the Tip below. How do you amend your taxes U. How do you amend your taxes S. How do you amend your taxes Government publications you got from the government for free or for less than the normal sales price or that you acquired under circumstances entitling you to the basis of someone who got the publications for free or for less than the normal sales price. How do you amend your taxes Any commodities derivative financial instrument (discussed later) held by a commodities derivatives dealer unless it meets both of the following requirements. How do you amend your taxes It is established to the satisfaction of the IRS that the instrument has no connection to the activities of the dealer as a dealer. How do you amend your taxes The instrument is clearly identified in the dealer's records as meeting (a) by the end of the day on which it was acquired, originated, or entered into. How do you amend your taxes Any hedging transaction (defined later) that is clearly identified as a hedging transaction by the end of the day on which it was acquired, originated, or entered into. How do you amend your taxes Supplies of a type you regularly use or consume in the ordinary course of your trade or business. How do you amend your taxes You can elect to treat as capital assets certain self-created musical compositions or copyrights you sold or exchanged. How do you amend your taxes See chapter 4 of Publication 550 for details. How do you amend your taxes Property held mainly for sale to customers. How do you amend your taxes   Stock in trade, inventory, and other property you hold mainly for sale to customers in your trade or business are not capital assets. How do you amend your taxes Inventories are discussed in Publication 538. How do you amend your taxes Business assets. How do you amend your taxes   Real property and depreciable property used in your trade or business or as rental property (including section 197 intangibles defined later under Dispositions of Intangible Property) are not capital assets. How do you amend your taxes The sale or disposition of business property is discussed in chapter 3. How do you amend your taxes Letters and memoranda. How do you amend your taxes   Letters, memoranda, and similar property (such as drafts of speeches, recordings, transcripts, manuscripts, drawings, or photographs) are not treated as capital assets (as discussed earlier) if your personal efforts created them or if they were prepared or produced for you. How do you amend your taxes Nor is this property a capital asset if your basis in it is determined by reference to the person who created it or the person for whom it was prepared. How do you amend your taxes For this purpose, letters and memoranda addressed to you are considered prepared for you. How do you amend your taxes If letters or memoranda are prepared by persons under your administrative control, they are considered prepared for you whether or not you review them. How do you amend your taxes Commodities derivative financial instrument. How do you amend your taxes   A commodities derivative financial instrument is a commodities contract or other financial instrument for commodities (other than a share of corporate stock, a beneficial interest in a partnership or trust, a note, bond, debenture, or other evidence of indebtedness, or a section 1256 contract) the value or settlement price of which is calculated or determined by reference to a specified index (as defined in section 1221(b) of the Internal Revenue Code). How do you amend your taxes Commodities derivative dealer. How do you amend your taxes   A commodities derivative dealer is a person who regularly offers to enter into, assume, offset, assign, or terminate positions in commodities derivative financial instruments with customers in the ordinary course of a trade or business. How do you amend your taxes Hedging transaction. How do you amend your taxes   A hedging transaction is any transaction you enter into in the normal course of your trade or business primarily to manage any of the following. How do you amend your taxes Risk of price changes or currency fluctuations involving ordinary property you hold or will hold. How do you amend your taxes Risk of interest rate or price changes or currency fluctuations for borrowings you make or will make, or ordinary obligations you incur or will incur. How do you amend your taxes Sales and Exchanges Between Related Persons This section discusses the rules that may apply to the sale or exchange of property between related persons. How do you amend your taxes If these rules apply, gains may be treated as ordinary income and losses may not be deductible. How do you amend your taxes See Transfers to Spouse in chapter 1 for rules that apply to spouses. How do you amend your taxes Gain Is Ordinary Income If a gain is recognized on the sale or exchange of property to a related person, the gain may be ordinary income even if the property is a capital asset. How do you amend your taxes It is ordinary income if the sale or exchange is a depreciable property transaction or a controlled partnership transaction. How do you amend your taxes Depreciable property transaction. How do you amend your taxes   Gain on the sale or exchange of property, including a leasehold or a patent application, that is depreciable property in the hands of the person who receives it is ordinary income if the transaction is either directly or indirectly between any of the following pairs of entities. How do you amend your taxes A person and the person's controlled entity or entities. How do you amend your taxes A taxpayer and any trust in which the taxpayer (or his or her spouse) is a beneficiary unless the beneficiary's interest in the trust is a remote contingent interest; that is, the value of the interest computed actuarially is 5% or less of the value of the trust property. How do you amend your taxes An executor and a beneficiary of an estate unless the sale or exchange is in satisfaction of a pecuniary bequest (a bequest for a sum of money). How do you amend your taxes An employer (or any person related to the employer under rules (1), (2), or (3)) and a welfare benefit fund (within the meaning of section 419(e) of the Internal Revenue Code) that is controlled directly or indirectly by the employer (or any person related to the employer). How do you amend your taxes Controlled entity. How do you amend your taxes   A person's controlled entity is either of the following. How do you amend your taxes A corporation in which more than 50% of the value of all outstanding stock, or a partnership in which more than 50% of the capital interest or profits interest, is directly or indirectly owned by or for that person. How do you amend your taxes An entity whose relationship with that person is one of the following. How do you amend your taxes A corporation and a partnership if the same persons own more than 50% in value of the outstanding stock of the corporation and more than 50% of the capital interest or profits interest in the partnership. How do you amend your taxes Two corporations that are members of the same controlled group as defined in section 1563(a) of the Internal Revenue Code, except that “more than 50%” is substituted for “at least 80%” in that definition. How do you amend your taxes Two S corporations, if the same persons own more than 50% in value of the outstanding stock of each corporation. How do you amend your taxes Two corporations, one of which is an S corporation, if the same persons own more than 50% in value of the outstanding stock of each corporation. How do you amend your taxes Controlled partnership transaction. How do you amend your taxes   A gain recognized in a controlled partnership transaction may be ordinary income. How do you amend your taxes The gain is ordinary income if it results from the sale or exchange of property that, in the hands of the party who receives it, is a noncapital asset such as trade accounts receivable, inventory, stock in trade, or depreciable or real property used in a trade or business. How do you amend your taxes   A controlled partnership transaction is a transaction directly or indirectly between either of the following pairs of entities. How do you amend your taxes A partnership and a person who directly or indirectly owns more than 50% of the capital interest or profits interest in the partnership. How do you amend your taxes Two partnerships, if the same persons directly or indirectly own more than 50% of the capital interests or profits interests in both partnerships. How do you amend your taxes Determining ownership. How do you amend your taxes   In the transactions under Depreciable property transaction and Controlled partnership transaction, earlier, use the following rules to determine the ownership of stock or a partnership interest. How do you amend your taxes Stock or a partnership interest directly or indirectly owned by or for a corporation, partnership, estate, or trust is considered owned proportionately by or for its shareholders, partners, or beneficiaries. How do you amend your taxes (However, for a partnership interest owned by or for a C corporation, this applies only to shareholders who directly or indirectly own 5% or more in value of the stock of the corporation. How do you amend your taxes ) An individual is considered as owning the stock or partnership interest directly or indirectly owned by or for his or her family. How do you amend your taxes Family includes only brothers, sisters, half-brothers, half-sisters, spouse, ancestors, and lineal descendants. How do you amend your taxes For purposes of applying (1) or (2), above, stock or a partnership interest constructively owned by a person under (1) is treated as actually owned by that person. How do you amend your taxes But stock or a partnership interest constructively owned by an individual under (2) is not treated as owned by the individual for reapplying (2) to make another person the constructive owner of that stock or partnership interest. How do you amend your taxes Nondeductible Loss A loss on the sale or exchange of property between related persons is not deductible. How do you amend your taxes This applies to both direct and indirect transactions, but not to distributions of property from a corporation in a complete liquidation. How do you amend your taxes For the list of related persons, see Related persons next. How do you amend your taxes If a sale or exchange is between any of these related persons and involves the lump-sum sale of a number of blocks of stock or pieces of property, the gain or loss must be figured separately for each block of stock or piece of property. How do you amend your taxes The gain on each item is taxable. How do you amend your taxes The loss on any item is nondeductible. How do you amend your taxes Gains from the sales of any of these items may not be offset by losses on the sales of any of the other items. How do you amend your taxes Related persons. How do you amend your taxes   The following is a list of related persons. How do you amend your taxes Members of a family, including only brothers, sisters, half-brothers, half-sisters, spouse, ancestors (parents, grandparents, etc. How do you amend your taxes ), and lineal descendants (children, grandchildren, etc. How do you amend your taxes ). How do you amend your taxes An individual and a corporation if the individual directly or indirectly owns more than 50% in value of the outstanding stock of the corporation. How do you amend your taxes Two corporations that are members of the same controlled group as defined in section 267(f) of the Internal Revenue Code. How do you amend your taxes A trust fiduciary and a corporation if the trust or the grantor of the trust directly or indirectly owns more than 50% in value of the outstanding stock of the corporation. How do you amend your taxes A grantor and fiduciary, and the fiduciary and beneficiary, of any trust. How do you amend your taxes Fiduciaries of two different trusts, and the fiduciary and beneficiary of two different trusts, if the same person is the grantor of both trusts. How do you amend your taxes A tax-exempt educational or charitable organization and a person who directly or indirectly controls the organization, or a member of that person's family. How do you amend your taxes A corporation and a partnership if the same persons own more than 50% in value of the outstanding stock of the corporation and more than 50% of the capital interest or profits interest in the partnership. How do you amend your taxes Two S corporations if the same persons own more than 50% in value of the outstanding stock of each corporation. How do you amend your taxes Two corporations, one of which is an S corporation, if the same persons own more than 50% in value of the outstanding stock of each corporation. How do you amend your taxes An executor and a beneficiary of an estate unless the sale or exchange is in satisfaction of a pecuniary bequest. How do you amend your taxes Two partnerships if the same persons directly or indirectly own more than 50% of the capital interests or profits interests in both partnerships. How do you amend your taxes A person and a partnership if the person directly or indirectly owns more than 50% of the capital interest or profits interest in the partnership. How do you amend your taxes Partnership interests. How do you amend your taxes   The nondeductible loss rule does not apply to a sale or exchange of an interest in the partnership between the related persons described in (12) or (13) above. How do you amend your taxes Controlled groups. How do you amend your taxes   Losses on transactions between members of the same controlled group described in (3) earlier are deferred rather than denied. How do you amend your taxes   For more information, see section 267(f) of the Internal Revenue Code. How do you amend your taxes Ownership of stock or partnership interests. How do you amend your taxes   In determining whether an individual directly or indirectly owns any of the outstanding stock of a corporation or an interest in a partnership for a loss on a sale or exchange, the following rules apply. How do you amend your taxes Stock or a partnership interest directly or indirectly owned by or for a corporation, partnership, estate, or trust is considered owned proportionately by or for its shareholders, partners, or beneficiaries. How do you amend your taxes (However, for a partnership interest owned by or for a C corporation, this applies only to shareholders who directly or indirectly own 5% or more in value of the stock of the corporation. How do you amend your taxes ) An individual is considered as owning the stock or partnership interest directly or indirectly owned by or for his or her family. How do you amend your taxes Family includes only brothers, sisters, half-brothers, half-sisters, spouse, ancestors, and lineal descendants. How do you amend your taxes An individual owning (other than by applying (2)) any stock in a corporation is considered to own the stock directly or indirectly owned by or for his or her partner. How do you amend your taxes For purposes of applying (1), (2), or (3), stock or a partnership interest constructively owned by a person under (1) is treated as actually owned by that person. How do you amend your taxes But stock or a partnership interest constructively owned by an individual under (2) or (3) is not treated as owned by the individual for reapplying either (2) or (3) to make another person the constructive owner of that stock or partnership interest. How do you amend your taxes Indirect transactions. How do you amend your taxes   You cannot deduct your loss on the sale of stock through your broker if under a prearranged plan a related person or entity buys the same stock you had owned. How do you amend your taxes This does not apply to a cross-trade between related parties through an exchange that is purely coincidental and is not prearranged. How do you amend your taxes Property received from a related person. How do you amend your taxes   If, in a purchase or exchange, you received property from a related person who had a loss that was not allowable and you later sell or exchange the property at a gain, you recognize the gain only to the extent it is more than the loss previously disallowed to the related person. How do you amend your taxes This rule applies only to the original transferee. How do you amend your taxes Example 1. How do you amend your taxes Your brother sold stock to you for $7,600. How do you amend your taxes His cost basis was $10,000. How do you amend your taxes His loss of $2,400 was not deductible. How do you amend your taxes You later sell the same stock to an unrelated party for $10,500, realizing a gain of $2,900 ($10,500 − $7,600). How do you amend your taxes Your recognized gain is only $500, the gain that is more than the $2,400 loss not allowed to your brother. How do you amend your taxes Example 2. How do you amend your taxes Assume the same facts as in Example 1, except that you sell the stock for $6,900 instead of $10,500. How do you amend your taxes Your recognized loss is only $700 ($7,600 − $6,900). How do you amend your taxes You cannot deduct the loss not allowed to your brother. How do you amend your taxes Other Dispositions This section discusses rules for determining the treatment of gain or loss from various dispositions of property. How do you amend your taxes Sale of a Business The sale of a business usually is not a sale of one asset. How do you amend your taxes Instead, all the assets of the business are sold. How do you amend your taxes Generally, when this occurs, each asset is treated as being sold separately for determining the treatment of gain or loss. How do you amend your taxes A business usually has many assets. How do you amend your taxes When sold, these assets must be classified as capital assets, depreciable property used in the business, real property used in the business, or property held for sale to customers, such as inventory or stock in trade. How do you amend your taxes The gain or loss on each asset is figured separately. How do you amend your taxes The sale of capital assets results in capital gain or loss. How do you amend your taxes The sale of real property or depreciable property used in the business and held longer than 1 year results in gain or loss from a section 1231 transaction (discussed in chapter 3). How do you amend your taxes The sale of inventory results in ordinary income or loss. How do you amend your taxes Partnership interests. How do you amend your taxes   An interest in a partnership or joint venture is treated as a capital asset when sold. How do you amend your taxes The part of any gain or loss from unrealized receivables or inventory items will be treated as ordinary gain or loss. How do you amend your taxes For more information, see Disposition of Partner's Interest in Publication 541. How do you amend your taxes Corporation interests. How do you amend your taxes   Your interest in a corporation is represented by stock certificates. How do you amend your taxes When you sell these certificates, you usually realize capital gain or loss. How do you amend your taxes For information on the sale of stock, see chapter 4 in Publication 550. How do you amend your taxes Corporate liquidations. How do you amend your taxes   Corporate liquidations of property generally are treated as a sale or exchange. How do you amend your taxes Gain or loss generally is recognized by the corporation on a liquidating sale of its assets. How do you amend your taxes Gain or loss generally is recognized also on a liquidating distribution of assets as if the corporation sold the assets to the distributee at fair market value. How do you amend your taxes   In certain cases in which the distributee is a corporation in control of the distributing corporation, the distribution may not be taxable. How do you amend your taxes For more information, see section 332 of the Internal Revenue Code and the related regulations. How do you amend your taxes Allocation of consideration paid for a business. How do you amend your taxes   The sale of a trade or business for a lump sum is considered a sale of each individual asset rather than of a single asset. How do you amend your taxes Except for assets exchanged under any nontaxable exchange rules, both the buyer and seller of a business must use the residual method (explained later) to allocate the consideration to each business asset transferred. How do you amend your taxes This method determines gain or loss from the transfer of each asset and how much of the consideration is for goodwill and certain other intangible property. How do you amend your taxes It also determines the buyer's basis in the business assets. How do you amend your taxes Consideration. How do you amend your taxes   The buyer's consideration is the cost of the assets acquired. How do you amend your taxes The seller's consideration is the amount realized (money plus the fair market value of property received) from the sale of assets. How do you amend your taxes Residual method. How do you amend your taxes   The residual method must be used for any transfer of a group of assets that constitutes a trade or business and for which the buyer's basis is determined only by the amount paid for the assets. How do you amend your taxes This applies to both direct and indirect transfers, such as the sale of a business or the sale of a partnership interest in which the basis of the buyer's share of the partnership assets is adjusted for the amount paid under section 743(b) of the Internal Revenue Code. How do you amend your taxes Section 743(b) applies if a partnership has an election in effect under section 754 of the Internal Revenue Code. How do you amend your taxes   A group of assets constitutes a trade or business if either of the following applies. How do you amend your taxes Goodwill or going concern value could, under any circumstances, attach to them. How do you amend your taxes The use of the assets would constitute an active trade or business under section 355 of the Internal Revenue Code. How do you amend your taxes   The residual method provides for the consideration to be reduced first by the amount of Class I assets (defined below). How do you amend your taxes The consideration remaining after this reduction must be allocated among the various business assets in a certain order. How do you amend your taxes See Classes of assets next for the complete order. How do you amend your taxes Classes of assets. How do you amend your taxes   The following definitions are the classifications for deemed or actual asset acquisitions. How do you amend your taxes Allocate the consideration among the assets in the following order. How do you amend your taxes The amount allocated to an asset, other than a Class VII asset, cannot exceed its fair market value on the purchase date. How do you amend your taxes The amount you can allocate to an asset also is subject to any applicable limits under the Internal Revenue Code or general principles of tax law. How do you amend your taxes Class I assets are cash and general deposit accounts (including checking and savings accounts but excluding certificates of deposit). How do you amend your taxes Class II assets are certificates of deposit, U. How do you amend your taxes S. How do you amend your taxes Government securities, foreign currency, and actively traded personal property, including stock and securities. How do you amend your taxes Class III assets are accounts receivable, other debt instruments, and assets that you mark to market at least annually for federal income tax purposes. How do you amend your taxes However, see section 1. How do you amend your taxes 338-6(b)(2)(iii) of the regulations for exceptions that apply to debt instruments issued by persons related to a target corporation, contingent debt instruments, and debt instruments convertible into stock or other property. How do you amend your taxes Class IV assets are property of a kind that would properly be included in inventory if on hand at the end of the tax year or property held by the taxpayer primarily for sale to customers in the ordinary course of business. How do you amend your taxes Class V assets are all assets other than Class I, II, III, IV, VI, and VII assets. How do you amend your taxes    Note. How do you amend your taxes Furniture and fixtures, buildings, land, vehicles, and equipment, which constitute all or part of a trade or business are generally Class V assets. How do you amend your taxes Class VI assets are section 197 intangibles (other than goodwill and going concern value). How do you amend your taxes Class VII assets are goodwill and going concern value (whether the goodwill or going concern value qualifies as a section 197 intangible). How do you amend your taxes   If an asset described in one of the classifications described above can be included in more than one class, include it in the lower numbered class. How do you amend your taxes For example, if an asset is described in both Class II and Class IV, choose Class II. How do you amend your taxes Example. How do you amend your taxes The total paid in the sale of the assets of Company SKB is $21,000. How do you amend your taxes No cash or deposit accounts or similar accounts were sold. How do you amend your taxes The company's U. How do you amend your taxes S. How do you amend your taxes Government securities sold had a fair market value of $3,200. How do you amend your taxes The only other asset transferred (other than goodwill and going concern value) was inventory with a fair market value of $15,000. How do you amend your taxes Of the $21,000 paid for the assets of Company SKB, $3,200 is allocated to U. How do you amend your taxes S. How do you amend your taxes Government securities, $15,000 to inventory assets, and the remaining $2,800 to goodwill and going concern value. How do you amend your taxes Agreement. How do you amend your taxes   The buyer and seller may enter into a written agreement as to the allocation of any consideration or the fair market value of any of the assets. How do you amend your taxes This agreement is binding on both parties unless the IRS determines the amounts are not appropriate. How do you amend your taxes Reporting requirement. How do you amend your taxes   Both the buyer and seller involved in the sale of business assets must report to the IRS the allocation of the sales price among section 197 intangibles and the other business assets. How do you amend your taxes Use Form 8594, Asset Acquisition Statement Under Section 1060, to provide this information. How do you amend your taxes Generally, the buyer and seller should each attach Form 8594 to their federal income tax return for the year in which the sale occurred. How do you amend your taxes See the Instructions for Form 8594. How do you amend your taxes Dispositions of Intangible Property Intangible property is any personal property that has value but cannot be seen or touched. How do you amend your taxes It includes such items as patents, copyrights, and the goodwill value of a business. How do you amend your taxes Gain or loss on the sale or exchange of amortizable or depreciable intangible property held longer than 1 year (other than an amount recaptured as ordinary income) is a section 1231 gain or loss. How do you amend your taxes The treatment of section 1231 gain or loss and the recapture of amortization and depreciation as ordinary income are explained in chapter 3. How do you amend your taxes See chapter 8 of Publication 535, Business Expenses, for information on amortizable intangible property and chapter 1 of Publication 946, How To Depreciate Property, for information on intangible property that can and cannot be depreciated. How do you amend your taxes Gain or loss on dispositions of other intangible property is ordinary or capital depending on whether the property is a capital asset or a noncapital asset. How do you amend your taxes The following discussions explain special rules that apply to certain dispositions of intangible property. How do you amend your taxes Section 197 Intangibles Section 197 intangibles are certain intangible assets acquired after August 10, 1993 (after July 25, 1991, if chosen), and held in connection with the conduct of a trade or business or an activity entered into for profit whose costs are amortized over 15 years. How do you amend your taxes They include the following assets. How do you amend your taxes Goodwill. How do you amend your taxes Going concern value. How do you amend your taxes Workforce in place. How do you amend your taxes Business books and records, operating systems, and other information bases. How do you amend your taxes Patents, copyrights, formulas, processes, designs, patterns, know how, formats, and similar items. How do you amend your taxes Customer-based intangibles. How do you amend your taxes Supplier-based intangibles. How do you amend your taxes Licenses, permits, and other rights granted by a governmental unit. How do you amend your taxes Covenants not to compete entered into in connection with the acquisition of a business. How do you amend your taxes Franchises, trademarks, and trade names. How do you amend your taxes See chapter 8 of Publication 535 for a description of each intangible. How do you amend your taxes Dispositions. How do you amend your taxes   You cannot deduct a loss from the disposition or worthlessness of a section 197 intangible you acquired in the same transaction (or series of related transactions) as another section 197 intangible you still hold. How do you amend your taxes Instead, you must increase the adjusted basis of your retained section 197 intangible by the nondeductible loss. How do you amend your taxes If you retain more than one section 197 intangible, increase each intangible's adjusted basis. How do you amend your taxes Figure the increase by multiplying the nondeductible loss by a fraction, the numerator (top number) of which is the retained intangible's adjusted basis on the date of the loss and the denominator (bottom number) of which is the total adjusted basis of all retained intangibles on the date of the loss. How do you amend your taxes   In applying this rule, members of the same controlled group of corporations and commonly controlled businesses are treated as a single entity. How do you amend your taxes For example, a corporation cannot deduct a loss on the sale of a section 197 intangible if, after the sale, a member of the same controlled group retains other section 197 intangibles acquired in the same transaction as the intangible sold. How do you amend your taxes Covenant not to compete. How do you amend your taxes   A covenant not to compete (or similar arrangement) that is a section 197 intangible cannot be treated as disposed of or worthless before you have disposed of your entire interest in the trade or business for which the covenant was entered into. How do you amend your taxes Members of the same controlled group of corporations and commonly controlled businesses are treated as a single entity in determining whether a member has disposed of its entire interest in a trade or business. How do you amend your taxes Anti-churning rules. How do you amend your taxes   Anti-churning rules prevent a taxpayer from converting section 197 intangibles that do not qualify for amortization into property that would qualify for amortization. How do you amend your taxes However, these rules do not apply to part of the basis of property acquired by certain related persons if the transferor elects to do both the following. How do you amend your taxes Recognize gain on the transfer of the property. How do you amend your taxes Pay income tax on the gain at the highest tax rate. How do you amend your taxes   If the transferor is a partnership or S corporation, the partnership or S corporation (not the partners or shareholders) can make the election. How do you amend your taxes But each partner or shareholder must pay the tax on his or her share of gain. How do you amend your taxes   To make the election, you, as the transferor, must attach a statement containing certain information to your income tax return for the year of the transfer. How do you amend your taxes You must file the tax return by the due date (including extensions). How do you amend your taxes You must also notify the transferee of the election in writing by the due date of the return. How do you amend your taxes   If you timely filed your return without making the election, you can make the election by filing an amended return within 6 months after the due date of the return (excluding extensions). How do you amend your taxes Attach the statement to the amended return and write “Filed pursuant to section 301. How do you amend your taxes 9100-2” at the top of the statement. How do you amend your taxes File the amended return at the same address the original return was filed. How do you amend your taxes For more information about making the election, see Regulations section 1. How do you amend your taxes 197-2(h)(9). How do you amend your taxes For information about reporting the tax on your income tax return, see the Instructions for Form 4797. How do you amend your taxes Patents The transfer of a patent by an individual is treated as a sale or exchange of a capital asset held longer than 1 year. How do you amend your taxes This applies even if the payments for the patent are made periodically during the transferee's use or are contingent on the productivity, use, or disposition of the patent. How do you amend your taxes For information on the treatment of gain or loss on the transfer of capital assets, see chapter 4. How do you amend your taxes This treatment applies to your transfer of a patent if you meet all the following conditions. How do you amend your taxes You are the holder of the patent. How do you amend your taxes You transfer the patent other than by gift, inheritance, or devise. How do you amend your taxes You transfer all substantial rights to the patent or an undivided interest in all such rights. How do you amend your taxes You do not transfer the patent to a related person. How do you amend your taxes Holder. How do you amend your taxes   You are the holder of a patent if you are either of the following. How do you amend your taxes The individual whose effort created the patent property and who qualifies as the original and first inventor. How do you amend your taxes The individual who bought an interest in the patent from the inventor before the invention was tested and operated successfully under operating conditions and who is neither related to, nor the employer of, the inventor. How do you amend your taxes All substantial rights. How do you amend your taxes   All substantial rights to patent property are all rights that have value when they are transferred. How do you amend your taxes A security interest (such as a lien), or a reservation calling for forfeiture for nonperformance, is not treated as a substantial right for these rules and may be kept by you as the holder of the patent. How do you amend your taxes   All substantial rights to a patent are not transferred if any of the following apply to the transfer. How do you amend your taxes The rights are limited geographically within a country. How do you amend your taxes The rights are limited to a period less than the remaining life of the patent. How do you amend your taxes The rights are limited to fields of use within trades or industries and are less than all the rights that exist and have value at the time of the transfer. How do you amend your taxes The rights are less than all the claims or inventions covered by the patent that exist and have value at the time of the transfer. How do you amend your taxes Related persons. How do you amend your taxes   This tax treatment does not apply if the transfer is directly or indirectly between you and a related person as defined earlier in the list under Nondeductible Loss, with the following changes. How do you amend your taxes Members of your family include your spouse, ancestors, and lineal descendants, but not your brothers, sisters, half-brothers, or half-sisters. How do you amend your taxes Substitute “25% or more” ownership for “more than 50%. How do you amend your taxes ”   If you fit within the definition of a related person independent of family status, the brother-sister exception in (1), earlier, does not apply. How do you amend your taxes For example, a transfer between a brother and a sister as beneficiary and fiduciary of the same trust is a transfer between related persons. How do you amend your taxes The brother-sister exception does not apply because the trust relationship is independent of family status. How do you amend your taxes Franchise, Trademark, or Trade Name If you transfer or renew a franchise, trademark, or trade name for a price contingent on its productivity, use, or disposition, the amount you receive generally is treated as an amount realized from the sale of a noncapital asset. How do you amend your taxes A franchise includes an agreement that gives one of the parties the right to distribute, sell, or provide goods, services, or facilities within a specified area. How do you amend your taxes Significant power, right, or continuing interest. How do you amend your taxes   If you keep any significant power, right, or continuing interest in the subject matter of a franchise, trademark, or trade name that you transfer or renew, the amount you receive is ordinary royalty income rather than an amount realized from a sale or exchange. How do you amend your taxes   A significant power, right, or continuing interest in a franchise, trademark, or trade name includes, but is not limited to, the following rights in the transferred interest. How do you amend your taxes A right to disapprove any assignment of the interest, or any part of it. How do you amend your taxes A right to end the agreement at will. How do you amend your taxes A right to set standards of quality for products used or sold, or for services provided, and for the equipment and facilities used to promote such products or services. How do you amend your taxes A right to make the recipient sell or advertise only your products or services. How do you amend your taxes A right to make the recipient buy most supplies and equipment from you. How do you amend your taxes A right to receive payments based on the productivity, use, or disposition of the transferred item of interest if those payments are a substantial part of the transfer agreement. How do you amend your taxes Subdivision of Land If you own a tract of land and, to sell or exchange it, you subdivide it into individual lots or parcels, the gain normally is ordinary income. How do you amend your taxes However, you may receive capital gain treatment on at least part of the proceeds provided you meet certain requirements. How do you amend your taxes See section 1237 of the Internal Revenue Code. How do you amend your taxes Timber Standing timber held as investment property is a capital asset. How do you amend your taxes Gain or loss from its sale is reported as a capital gain or loss on Form 8949, and Schedule D (Form 1040), as applicable. How do you amend your taxes If you held the timber primarily for sale to customers, it is not a capital asset. How do you amend your taxes Gain or loss on its sale is ordinary business income or loss. How do you amend your taxes It is reported in the gross receipts or sales and cost of goods sold items of your return. How do you amend your taxes Farmers who cut timber on their land and sell it as logs, firewood, or pulpwood usually have no cost or other basis for that timber. How do you amend your taxes These sales constitute a very minor part of their farm businesses. How do you amend your taxes In these cases, amounts realized from such sales, and the expenses of cutting, hauling, etc. How do you amend your taxes , are ordinary farm income and expenses reported on Schedule F (Form 1040), Profit or Loss From Farming. How do you amend your taxes Different rules apply if you owned the timber longer than 1 year and elect to either: Treat timber cutting as a sale or exchange, or Enter into a cutting contract. How do you amend your taxes Timber is considered cut on the date when, in the ordinary course of business, the quantity of felled timber is first definitely determined. How do you amend your taxes This is true whether the timber is cut under contract or whether you cut it yourself. How do you amend your taxes Under the rules discussed below, disposition of the timber is treated as a section 1231 transaction. How do you amend your taxes See chapter 3. How do you amend your taxes Gain or loss is reported on Form 4797. How do you amend your taxes Christmas trees. How do you amend your taxes   Evergreen trees, such as Christmas trees, that are more than 6 years old when severed from their roots and sold for ornamental purposes are included in the term timber. How do you amend your taxes They qualify for both rules discussed below. How do you amend your taxes Election to treat cutting as a sale or exchange. How do you amend your taxes   Under the general rule, the cutting of timber results in no gain or loss. How do you amend your taxes It is not until a sale or exchange occurs that gain or loss is realized. How do you amend your taxes But if you owned or had a contractual right to cut timber, you can elect to treat the cutting of timber as a section 1231 transaction in the year the timber is cut. How do you amend your taxes Even though the cut timber is not actually sold or exchanged, you report your gain or loss on the cutting for the year the timber is cut. How do you amend your taxes Any later sale results in ordinary business income or loss. How do you amend your taxes See Example, later. How do you amend your taxes   To elect this treatment, you must: Own or hold a contractual right to cut the timber for a period of more than 1 year before it is cut, and Cut the timber for sale or for use in your trade or business. How do you amend your taxes Making the election. How do you amend your taxes   You make the election on your return for the year the cutting takes place by including in income the gain or loss on the cutting and including a computation of the gain or loss. How do you amend your taxes You do not have to make the election in the first year you cut timber. How do you amend your taxes You can make it in any year to which the election would apply. How do you amend your taxes If the timber is partnership property, the election is made on the partnership return. How do you amend your taxes This election cannot be made on an amended return. How do you amend your taxes   Once you have made the election, it remains in effect for all later years unless you cancel it. How do you amend your taxes   If you previously elected to treat the cutting of timber as a sale or exchange, you may revoke this election without the consent of the IRS. How do you amend your taxes The prior election (and revocation) is disregarded for purposes of making a subsequent election. How do you amend your taxes See Form T (Timber), Forest Activities Schedule, for more information. How do you amend your taxes Gain or loss. How do you amend your taxes   Your gain or loss on the cutting of standing timber is the difference between its adjusted basis for depletion and its fair market value on the first day of your tax year in which it is cut. How do you amend your taxes   Your adjusted basis for depletion of cut timber is based on the number of units (feet board measure, log scale, or other units) of timber cut during the tax year and considered to be sold or exchanged. How do you amend your taxes Your adjusted basis for depletion is also based on the depletion unit of timber in the account used for the cut timber, and should be figured in the same manner as shown in section 611 of the Internal Revenue Code and the related regulations. How do you amend your taxes   Timber depletion is discussed in chapter 9 of Publication 535. How do you amend your taxes Example. How do you amend your taxes In April 2013, you had owned 4,000 MBF (1,000 board feet) of standing timber longer than 1 year. How do you amend your taxes It had an adjusted basis for depletion of $40 per MBF. How do you amend your taxes You are a calendar year taxpayer. How do you amend your taxes On January 1, 2013, the timber had a fair market value (FMV) of $350 per MBF. How do you amend your taxes It was cut in April for sale. How do you amend your taxes On your 2013 tax return, you elect to treat the cutting of the timber as a sale or exchange. How do you amend your taxes You report the difference between the fair market value and your adjusted basis for depletion as a gain. How do you amend your taxes This amount is reported on Form 4797 along with your other section 1231 gains and losses to figure whether it is treated as capital gain or as ordinary gain. How do you amend your taxes You figure your gain as follows. How do you amend your taxes FMV of timber January 1, 2013 $1,400,000 Minus: Adjusted basis for depletion 160,000 Section 1231 gain $1,240,000 The fair market value becomes your basis in the cut timber and a later sale of the cut timber including any by-product or tree tops will result in ordinary business income or loss. How do you amend your taxes Outright sales of timber. How do you amend your taxes   Outright sales of timber by landowners qualify for capital gains treatment using rules similar to the rules for certain disposal of timber under a contract with retained economic interest (defined below). How do you amend your taxes However, for outright sales, the date of disposal is not deemed to be the date the timber is cut because the landowner can elect to treat the payment date as the date of disposal (see below). How do you amend your taxes Cutting contract. How do you amend your taxes   You must treat the disposal of standing timber under a cutting contract as a section 1231 transaction if all the following apply to you. How do you amend your taxes You are the owner of the timber. How do you amend your taxes You held the timber longer than 1 year before its disposal. How do you amend your taxes You kept an economic interest in the timber. How do you amend your taxes   You have kept an economic interest in standing timber if, under the cutting contract, the expected return on your investment is conditioned on the cutting of the timber. How do you amend your taxes   The difference between the amount realized from the disposal of the timber and its adjusted basis for depletion is treated as gain or loss on its sale. How do you amend your taxes Include this amount on Form 4797 along with your other section 1231 gains or losses to figure whether it is treated as capital or ordinary gain or loss. How do you amend your taxes Date of disposal. How do you amend your taxes   The date of disposal is the date the timber is cut. How do you amend your taxes However, for outright sales by landowners or if you receive payment under the contract before the timber is cut, you can elect to treat the date of payment as the date of disposal. How do you amend your taxes   This election applies only to figure the holding period of the timber. How do you amend your taxes It has no effect on the time for reporting gain or loss (generally when the timber is sold or exchanged). How do you amend your taxes   To make this election, attach a statement to the tax return filed by the due date (including extensions) for the year payment is received. How do you amend your taxes The statement must identify the advance payments subject to the election and the contract under which they were made. How do you amend your taxes   If you timely filed your return for the year you received payment without making the election, you still can make the election by filing an amended return within 6 months after the due date for that year's return (excluding extensions). How do you amend your taxes Attach the statement to the amended return and write “Filed pursuant to section 301. How do you amend your taxes 9100-2” at the top of the statement. How do you amend your taxes File the amended return at the same address the original return was filed. How do you amend your taxes Owner. How do you amend your taxes   The owner of timber is any person who owns an interest in it, including a sublessor and the holder of a contract to cut the timber. How do you amend your taxes You own an interest in timber if you have the right to cut it for sale on your own account or for use in your business. How do you amend your taxes Tree stumps. How do you amend your taxes   Tree stumps are a capital asset if they are on land held by an investor who is not in the timber or stump business as a buyer, seller, or processor. How do you amend your taxes Gain from the sale of stumps sold in one lot by such a holder is taxed as a capital gain. How do you amend your taxes However, tree stumps held by timber operators after the saleable standing timber was cut and removed from the land are considered by-products. How do you amend your taxes Gain from the sale of stumps in lots or tonnage by such operators is taxed as ordinary income. How do you amend your taxes   See Form T (Timber) and its separate instructions for more information about dispositions of timber. How do you amend your taxes Precious Metals and Stones, Stamps, and Coins Gold, silver, gems, stamps, coins, etc. How do you amend your taxes , are capital assets except when they are held for sale by a dealer. How do you amend your taxes Any gain or loss from their sale or exchange generally is a capital gain or loss. How do you amend your taxes If you are a dealer, the amount received from the sale is ordinary business income. How do you amend your taxes Coal and Iron Ore You must treat the disposal of coal (including lignite) or iron ore mined in the United States as a section 1231 transaction if both the following apply to you. How do you amend your taxes You owned the coal or iron ore longer than 1 year before its disposal. How do you amend your taxes You kept an economic interest in the coal or iron ore. How do you amend your taxes For this rule, the date the coal or iron ore is mined is considered the date of its disposal. How do you amend your taxes Your gain or loss is the difference between the amount realized from disposal of the coal or iron ore and the adjusted basis you use to figure cost depletion (increased by certain expenses not allowed as deductions for the tax year). How do you amend your taxes This amount is included on Form 4797 along with your other section 1231 gains and losses. How do you amend your taxes You are considered an owner if you own or sublet an economic interest in the coal or iron ore in place. How do you amend your taxes If you own only an option to buy the coal in place, you do not qualify as an owner. How do you amend your taxes In addition, this gain or loss treatment does not apply to income realized by an owner who is a co-adventurer, partner, or principal in the mining of coal or iron ore. How do you amend your taxes The expenses of making and administering the contract under which the coal or iron ore was disposed of and the expenses of preserving the economic interest kept under the contract are not allowed as deductions in figuring taxable income. How do you amend your taxes Rather, their total, along with the adjusted depletion basis, is deducted from the amount received to determine gain. How do you amend your taxes If the total of these expenses plus the adjusted depletion basis is more than the amount received, the result is a loss. How do you amend your taxes Special rule. How do you amend your taxes   The above treatment does not apply if you directly or indirectly dispose of the iron ore or coal to any of the following persons. How do you amend your taxes A related person whose relationship to you would result in the disallowance of a loss (see Nondeductible Loss under Sales and Exchanges Between Related Persons, earlier). How do you amend your taxes An individual, trust, estate, partnership, association, company, or corporation owned or controlled directly or indirectly by the same interests that own or control your business. How do you amend your taxes Conversion Transactions Recognized gain on the disposition or termination of any position held as part of certain conversion transactions is treated as ordinary income. How do you amend your taxes This applies if substantially all your expected return is attributable to the time value of your net investment (like interest on a loan) and the transaction is any of the following. How do you amend your taxes An applicable straddle (generally, any set of offsetting positions with respect to personal property, including stock). How do you amend your taxes A transaction in which you acquire property and, at or about the same time, you contract to sell the same or substantially identical property at a specified price. How do you amend your taxes Any other transaction that is marketed and sold as producing capital gain from a transaction in which substantially all of your expected return is due to the time value of your net investment. How do you amend your taxes For more information, see chapter 4 of Publication 550. How do you amend your taxes Prev  Up  Next   Home   More Online Publications