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Irs Form 1040 Ez

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Irs Form 1040 Ez

Irs form 1040 ez 5. Irs form 1040 ez   Additional Rules for Listed Property Table of Contents Introduction Useful Items - You may want to see: What Is Listed Property?Passenger Automobiles Other Property Used for Transportation Computers and Related Peripheral Equipment Can Employees Claim a Deduction? What Is the Business-Use Requirement?How To Allocate Use Qualified Business Use Recapture of Excess Depreciation Lessee's Inclusion Amount Do the Passenger Automobile Limits Apply?Maximum Depreciation Deduction Deductions After the Recovery Period Deductions For Passenger Automobiles Acquired in a Trade-in What Records Must Be Kept?Adequate Records How Is Listed Property Information Reported? Introduction This chapter discusses the deduction limits and other special rules that apply to certain listed property. Irs form 1040 ez Listed property includes cars and other property used for transportation, property used for entertainment, and certain computers. Irs form 1040 ez Deductions for listed property (other than certain leased property) are subject to the following special rules and limits. Irs form 1040 ez Deduction for employees. Irs form 1040 ez If your use of the property is not for your employer's convenience or is not required as a condition of your employment, you cannot deduct depreciation or rent expenses for your use of the property as an employee. Irs form 1040 ez Business-use requirement. Irs form 1040 ez If the property is not used predominantly (more than 50%) for qualified business use, you cannot claim the section 179 deduction or a special depreciation allowance. Irs form 1040 ez In addition, you must figure any depreciation deduction under the Modified Accelerated Cost Recovery System (MACRS) using the straight line method over the ADS recovery period. Irs form 1040 ez You may also have to recapture (include in income) any excess depreciation claimed in previous years. Irs form 1040 ez A similar inclusion amount applies to certain leased property. Irs form 1040 ez Passenger automobile limits and rules. Irs form 1040 ez Annual limits apply to depreciation deductions (including section 179 deductions and any special depreciation allowance) for certain passenger automobiles. Irs form 1040 ez You can continue to deduct depreciation for the unrecovered basis resulting from these limits after the end of the recovery period. Irs form 1040 ez This chapter defines listed property and explains the special rules and depreciation deduction limits that apply, including the special inclusion amount rule for leased property. Irs form 1040 ez It also discusses the recordkeeping rules for listed property and explains how to report information about the property on your tax return. Irs form 1040 ez Useful Items - You may want to see: Publication 463 Travel, Entertainment, Gift, and Car Expenses 535 Business Expenses 587 Business Use of Your Home (Including Use by Daycare Providers) Form (and Instructions) 2106 Employee Business Expenses 2106-EZ Unreimbursed Employee Business Expenses 4562 Depreciation and Amortization 4797 Sales of Business Property See chapter 6 for information about getting publications and forms. Irs form 1040 ez What Is Listed Property? Listed property is any of the following. Irs form 1040 ez Passenger automobiles (as defined later). Irs form 1040 ez Any other property used for transportation, unless it is an excepted vehicle. Irs form 1040 ez Property generally used for entertainment, recreation, or amusement (including photographic, phonographic, communication, and video-recording equipment). Irs form 1040 ez Computers and related peripheral equipment, unless used only at a regular business establishment and owned or leased by the person operating the establishment. Irs form 1040 ez A regular business establishment includes a portion of a dwelling unit that is used both regularly and exclusively for business as discussed in Publication 587. Irs form 1040 ez Improvements to listed property. Irs form 1040 ez   An improvement made to listed property that must be capitalized is treated as a new item of depreciable property. Irs form 1040 ez The recovery period and method of depreciation that apply to the listed property as a whole also apply to the improvement. Irs form 1040 ez For example, if you must depreciate the listed property using the straight line method, you also must depreciate the improvement using the straight line method. Irs form 1040 ez Passenger Automobiles A passenger automobile is any four-wheeled vehicle made primarily for use on public streets, roads, and highways and rated at 6,000 pounds or less of unloaded gross vehicle weight (6,000 pounds or less of gross vehicle weight for trucks and vans). Irs form 1040 ez It includes any part, component, or other item physically attached to the automobile at the time of purchase or usually included in the purchase price of an automobile. Irs form 1040 ez The following vehicles are not considered passenger automobiles for these purposes. Irs form 1040 ez An ambulance, hearse, or combination ambulance-hearse used directly in a trade or business. Irs form 1040 ez A vehicle used directly in the trade or business of transporting persons or property for pay or hire. Irs form 1040 ez A truck or van that is a qualified nonpersonal use vehicle. Irs form 1040 ez Qualified nonpersonal use vehicles. Irs form 1040 ez   Qualified nonpersonal use vehicles are vehicles that by their nature are not likely to be used more than a minimal amount for personal purposes. Irs form 1040 ez They include the trucks and vans listed as excepted vehicles under Other Property Used for Transportation , next. Irs form 1040 ez They also include trucks and vans that have been specially modified so that they are not likely to be used more than a minimal amount for personal purposes, such as by installation of permanent shelving and painting the vehicle to display advertising or the company's name. Irs form 1040 ez For a detailed discussion of passenger automobiles, including leased passenger automobiles, see  Publication 463. Irs form 1040 ez Other Property Used for Transportation Although vehicles used to transport persons or property for pay or hire and vehicles rated at more than the 6,000-pound threshold are not passenger automobiles, they are still “other property used for transportation” and are subject to the special rules for listed property. Irs form 1040 ez Other property used for transportation includes trucks, buses, boats, airplanes, motorcycles, and any other vehicles used to transport persons or goods. Irs form 1040 ez Excepted vehicles. Irs form 1040 ez   Other property used for transportation does not include the following qualified nonpersonal use vehicles (defined earlier under Passenger Automobiles ). Irs form 1040 ez Clearly marked police and fire vehicles. Irs form 1040 ez Unmarked vehicles used by law enforcement officers if the use is officially authorized. Irs form 1040 ez Ambulances used as such and hearses used as such. Irs form 1040 ez Any vehicle with a loaded gross vehicle weight of over 14,000 pounds that is designed to carry cargo. Irs form 1040 ez Bucket trucks (cherry pickers), cement mixers, dump trucks (including garbage trucks), flatbed trucks, and refrigerated trucks. Irs form 1040 ez Combines, cranes and derricks, and forklifts. Irs form 1040 ez Delivery trucks with seating only for the driver, or only for the driver plus a folding jump seat. Irs form 1040 ez Qualified moving vans. Irs form 1040 ez Qualified specialized utility repair trucks. Irs form 1040 ez School buses used in transporting students and employees of schools. Irs form 1040 ez Other buses with a capacity of at least 20 passengers that are used as passenger buses. Irs form 1040 ez Tractors and other special purpose farm vehicles. Irs form 1040 ez Clearly marked police and fire vehicle. Irs form 1040 ez   A clearly marked police or fire vehicle is a vehicle that meets all the following requirements. Irs form 1040 ez It is owned or leased by a governmental unit or an agency or instrumentality of a governmental unit. Irs form 1040 ez It is required to be used for commuting by a police officer or fire fighter who, when not on a regular shift, is on call at all times. Irs form 1040 ez It is prohibited from being used for personal use (other than commuting) outside the limit of the police officer's arrest powers or the fire fighter's obligation to respond to an emergency. Irs form 1040 ez It is clearly marked with painted insignia or words that make it readily apparent that it is a police or fire vehicle. Irs form 1040 ez A marking on a license plate is not a clear marking for these purposes. Irs form 1040 ez Qualified moving van. Irs form 1040 ez   A qualified moving van is any truck or van used by a professional moving company for moving household or business goods if the following requirements are met. Irs form 1040 ez No personal use of the van is allowed other than for travel to and from a move site or for minor personal use, such as a stop for lunch on the way from one move site to another. Irs form 1040 ez Personal use for travel to and from a move site happens no more than five times a month on average. Irs form 1040 ez Personal use is limited to situations in which it is more convenient to the employer, because of the location of the employee's residence in relation to the location of the move site, for the van not to be returned to the employer's business location. Irs form 1040 ez Qualified specialized utility repair truck. Irs form 1040 ez   A truck is a qualified specialized utility repair truck if it is not a van or pickup truck and all the following apply. Irs form 1040 ez The truck was specifically designed for and is used to carry heavy tools, testing equipment, or parts. Irs form 1040 ez Shelves, racks, or other permanent interior construction has been installed to carry and store the tools, equipment, or parts and would make it unlikely that the truck would be used, other than minimally, for personal purposes. Irs form 1040 ez The employer requires the employee to drive the truck home in order to be able to respond in emergency situations for purposes of restoring or maintaining electricity, gas, telephone, water, sewer, or steam utility services. Irs form 1040 ez Computers and Related Peripheral Equipment A computer is a programmable, electronically activated device capable of accepting information, applying prescribed processes to the information, and supplying the results of those processes with or without human intervention. Irs form 1040 ez It consists of a central processing unit with extensive storage, logic, arithmetic, and control capabilities. Irs form 1040 ez Related peripheral equipment is any auxiliary machine which is designed to be controlled by the central processing unit of a computer. Irs form 1040 ez The following are neither computers nor related peripheral equipment. Irs form 1040 ez Any equipment that is an integral part of other property that is not a computer. Irs form 1040 ez Typewriters, calculators, adding and accounting machines, copiers, duplicating equipment, and similar equipment. Irs form 1040 ez Equipment of a kind used primarily for the user's amusement or entertainment, such as video games. Irs form 1040 ez Can Employees Claim a Deduction? If you are an employee, you can claim a depreciation deduction for the use of your listed property (whether owned or rented) in performing services as an employee only if your use is a business use. Irs form 1040 ez The use of your property in performing services as an employee is a business use only if both the following requirements are met. Irs form 1040 ez The use is for your employer's convenience. Irs form 1040 ez The use is required as a condition of your employment. Irs form 1040 ez If these requirements are not met, you cannot deduct depreciation (including the section 179 deduction) or rent expenses for your use of the property as an employee. Irs form 1040 ez Employer's convenience. Irs form 1040 ez   Whether the use of listed property is for your employer's convenience must be determined from all the facts. Irs form 1040 ez The use is for your employer's convenience if it is for a substantial business reason of the employer. Irs form 1040 ez The use of listed property during your regular working hours to carry on your employer's business generally is for the employer's convenience. Irs form 1040 ez Condition of employment. Irs form 1040 ez   Whether the use of listed property is a condition of your employment depends on all the facts and circumstances. Irs form 1040 ez The use of property must be required for you to perform your duties properly. Irs form 1040 ez Your employer does not have to require explicitly that you use the property. Irs form 1040 ez However, a mere statement by the employer that the use of the property is a condition of your employment is not sufficient. Irs form 1040 ez Example 1. Irs form 1040 ez Virginia Sycamore is employed as a courier with We Deliver, which provides local courier services. Irs form 1040 ez She owns and uses a motorcycle to deliver packages to downtown offices. Irs form 1040 ez We Deliver explicitly requires all delivery persons to own a car or motorcycle for use in their employment. Irs form 1040 ez Virginia's use of the motorcycle is for the convenience of We Deliver and is required as a condition of employment. Irs form 1040 ez Example 2. Irs form 1040 ez Bill Nelson is an inspector for Uplift, a construction company with many sites in the local area. Irs form 1040 ez He must travel to these sites on a regular basis. Irs form 1040 ez Uplift does not furnish an automobile or explicitly require him to use his own automobile. Irs form 1040 ez However, it pays him for any costs he incurs in traveling to the various sites. Irs form 1040 ez The use of his own automobile or a rental automobile is for the convenience of Uplift and is required as a condition of employment. Irs form 1040 ez Example 3. Irs form 1040 ez Assume the same facts as in Example 2 except that Uplift furnishes a car to Bill, who chooses to use his own car and receive payment for using it. Irs form 1040 ez The use of his own car is neither for the convenience of Uplift nor required as a condition of employment. Irs form 1040 ez Example 4. Irs form 1040 ez Marilyn Lee is a pilot for Y Company, a small charter airline. Irs form 1040 ez Y requires pilots to obtain 80 hours of flight time annually in addition to flight time spent with the airline. Irs form 1040 ez Pilots usually can obtain these hours by flying with the Air Force Reserve or by flying part-time with another airline. Irs form 1040 ez Marilyn owns her own airplane. Irs form 1040 ez The use of her airplane to obtain the required flight hours is neither for the convenience of the employer nor required as a condition of employment. Irs form 1040 ez Example 5. Irs form 1040 ez David Rule is employed as an engineer with Zip, an engineering contracting firm. Irs form 1040 ez He occasionally takes work home at night rather than work late in the office. Irs form 1040 ez He owns and uses a home computer which is virtually identical to the office model. Irs form 1040 ez His use of the computer is neither for the convenience of his employer nor required as a condition of employment. Irs form 1040 ez What Is the Business-Use Requirement? You can claim the section 179 deduction and a special depreciation allowance for listed property and depreciate listed property using GDS and a declining balance method if the property meets the business-use requirement. Irs form 1040 ez To meet this requirement, listed property must be used predominantly (more than 50% of its total use) for qualified business use. Irs form 1040 ez If this requirement is not met, the following rules apply. Irs form 1040 ez Property not used predominantly for qualified business use during the year it is placed in service does not qualify for the section 179 deduction. Irs form 1040 ez Property not used predominantly for qualified business use during the year it is placed in service does not qualify for a special depreciation allowance. Irs form 1040 ez Any depreciation deduction under MACRS for property not used predominantly for qualified business use during any year must be figured using the straight line method over the ADS recovery period. Irs form 1040 ez This rule applies each year of the recovery period. Irs form 1040 ez Excess depreciation on property previously used predominantly for qualified business use must be recaptured (included in income) in the first year in which it is no longer used predominantly for qualified business use. Irs form 1040 ez A lessee must add an inclusion amount to income in the first year in which the leased property is not used predominantly for qualified business use. Irs form 1040 ez Being required to use the straight line method for an item of listed property not used predominantly for qualified business use is not the same as electing the straight line method. Irs form 1040 ez It does not mean that you have to use the straight line method for other property in the same class as the item of listed property. Irs form 1040 ez Exception for leased property. Irs form 1040 ez   The business-use requirement generally does not apply to any listed property leased or held for leasing by anyone regularly engaged in the business of leasing listed property. Irs form 1040 ez   You are considered regularly engaged in the business of leasing listed property only if you enter into contracts for the leasing of listed property with some frequency over a continuous period of time. Irs form 1040 ez This determination is made on the basis of the facts and circumstances in each case and takes into account the nature of your business in its entirety. Irs form 1040 ez Occasional or incidental leasing activity is insufficient. Irs form 1040 ez For example, if you lease only one passenger automobile during a tax year, you are not regularly engaged in the business of leasing automobiles. Irs form 1040 ez An employer who allows an employee to use the employer's property for personal purposes and charges the employee for the use is not regularly engaged in the business of leasing the property used by the employee. Irs form 1040 ez How To Allocate Use To determine whether the business-use requirement is met, you must allocate the use of any item of listed property used for more than one purpose during the year among its various uses. Irs form 1040 ez For passenger automobiles and other means of transportation, allocate the property's use on the basis of mileage. Irs form 1040 ez You determine the percentage of qualified business use by dividing the number of miles you drove the vehicle for business purposes during the year by the total number of miles you drove the vehicle for all purposes (including business miles) during the year. Irs form 1040 ez For other listed property, allocate the property's use on the basis of the most appropriate unit of time the property is actually used (rather than merely being available for use). Irs form 1040 ez For example, you can determine the percentage of business use of a computer by dividing the number of hours you used the computer for business purposes during the year by the total number of hours you used the computer for all purposes (including business use) during the year. Irs form 1040 ez Entertainment use. Irs form 1040 ez   Treat the use of listed property for entertainment, recreation, or amusement purposes as a business use only to the extent you can deduct expenses (other than interest and property tax expenses) due to its use as an ordinary and necessary business expense. Irs form 1040 ez Commuting use. Irs form 1040 ez   The use of an automobile for commuting is not business use, regardless of whether work is performed during the trip. Irs form 1040 ez For example, a business telephone call made on a car telephone while commuting to work does not change the character of the trip from commuting to business. Irs form 1040 ez This is also true for a business meeting held in a car while commuting to work. Irs form 1040 ez Similarly, a business call made on an otherwise personal trip does not change the character of a trip from personal to business. Irs form 1040 ez The fact that an automobile is used to display material that advertises the owner's or user's trade or business does not convert an otherwise personal use into business use. Irs form 1040 ez Use of your automobile by another person. Irs form 1040 ez   If someone else uses your automobile, do not treat that use as business use unless one of the following conditions applies. Irs form 1040 ez That use is directly connected with your business. Irs form 1040 ez You properly report the value of the use as income to the other person and withhold tax on the income where required. Irs form 1040 ez You are paid a fair market rent. Irs form 1040 ez Treat any payment to you for the use of the automobile as a rent payment for purposes of item (3). Irs form 1040 ez Employee deductions. Irs form 1040 ez   If you are an employee, do not treat your use of listed property as business use unless it is for your employer's convenience and is required as a condition of your employment. Irs form 1040 ez See Can Employees Claim a Deduction , earlier. Irs form 1040 ez Qualified Business Use Qualified business use of listed property is any use of the property in your trade or business. Irs form 1040 ez However, it does not include the following uses. Irs form 1040 ez The leasing of property to any 5% owner or related person (to the extent the property is used by a 5% owner or person related to the owner or lessee of the property). Irs form 1040 ez The use of property as pay for the services of a 5% owner or related person. Irs form 1040 ez The use of property as pay for services of any person (other than a 5% owner or related person), unless the value of the use is included in that person's gross income and income tax is withheld on that amount where required. Irs form 1040 ez Property does not stop being used predominantly for qualified business use because of a transfer at death. Irs form 1040 ez Exception for leasing or compensatory use of aircraft. Irs form 1040 ez   Treat the leasing of any aircraft by a 5% owner or related person, or the compensatory use of any aircraft, as a qualified business use if at least 25% of the total use of the aircraft during the year is for a qualified business use. Irs form 1040 ez 5% owner. Irs form 1040 ez   For a business entity that is not a corporation, a 5% owner is any person who owns more than 5% of the capital or profits interest in the business. Irs form 1040 ez   For a corporation, a 5% owner is any person who owns, or is considered to own, either of the following. Irs form 1040 ez More than 5% of the outstanding stock of the corporation. Irs form 1040 ez Stock possessing more than 5% of the total combined voting power of all stock in the corporation. Irs form 1040 ez Related persons. Irs form 1040 ez   For a description of related persons, see Related persons in the discussion on property owned or used in 1986 under What Method Can You Use To Depreciate Your Property in chapter 1 . Irs form 1040 ez For this purpose, however, treat as related persons only the relationships listed in items (1) through (10) of that discussion and substitute “50%” for “10%” each place it appears. Irs form 1040 ez Examples. Irs form 1040 ez   The following examples illustrate whether the use of business property is qualified business use. Irs form 1040 ez Example 1. Irs form 1040 ez John Maple is the sole proprietor of a plumbing contracting business. Irs form 1040 ez John employs his brother, Richard, in the business. Irs form 1040 ez As part of Richard's pay, he is allowed to use one of the company automobiles for personal use. Irs form 1040 ez The company includes the value of the personal use of the automobile in Richard's gross income and properly withholds tax on it. Irs form 1040 ez The use of the automobile is pay for the performance of services by a related person, so it is not a qualified business use. Irs form 1040 ez Example 2. Irs form 1040 ez John, in Example 1, allows unrelated employees to use company automobiles for personal purposes. Irs form 1040 ez He does not include the value of the personal use of the company automobiles as part of their compensation and he does not withhold tax on the value of the use of the automobiles. Irs form 1040 ez This use of company automobiles by employees is not a qualified business use. Irs form 1040 ez Example 3. Irs form 1040 ez James Company Inc. Irs form 1040 ez owns several automobiles that its employees use for business purposes. Irs form 1040 ez The employees also are allowed to take the automobiles home at night. Irs form 1040 ez The fair market value of each employee's use of an automobile for any personal purpose, such as commuting to and from work, is reported as income to the employee and James Company withholds tax on it. Irs form 1040 ez This use of company automobiles by employees, even for personal purposes, is a qualified business use for the company. Irs form 1040 ez Investment Use The use of property to produce income in a nonbusiness activity (investment use) is not a qualified business use. Irs form 1040 ez However, you can treat the investment use as business use to figure the depreciation deduction for the property in a given year. Irs form 1040 ez Example 1. Irs form 1040 ez Sarah Bradley uses a home computer 50% of the time to manage her investments. Irs form 1040 ez She also uses the computer 40% of the time in her part-time consumer research business. Irs form 1040 ez Sarah's home computer is listed property because it is not used at a regular business establishment. Irs form 1040 ez She does not use the computer predominantly for qualified business use. Irs form 1040 ez Therefore, she cannot elect a section 179 deduction or claim a special depreciation allowance for the computer. Irs form 1040 ez She must depreciate it using the straight line method over the ADS recovery period. Irs form 1040 ez Her combined business/investment use for determining her depreciation deduction is 90%. Irs form 1040 ez Example 2. Irs form 1040 ez If Sarah uses her computer 30% of the time to manage her investments and 60% of the time in her consumer research business, it is used predominantly for qualified business use. Irs form 1040 ez She can elect a section 179 deduction and, if she does not deduct all the computer's cost, she can claim a special depreciation allowance and depreciate the computer using the 200% declining balance method over the GDS recovery period. Irs form 1040 ez Her combined business/investment use for determining her depreciation deduction is 90%. Irs form 1040 ez Recapture of Excess Depreciation If you used listed property more than 50% in a qualified business use in the year you placed it in service, you must recapture (include in income) excess depreciation in the first year you use it 50% or less. Irs form 1040 ez You also increase the adjusted basis of your property by the same amount. Irs form 1040 ez Excess depreciation is: The depreciation allowable for the property (including any section 179 deduction and special depreciation allowance claimed) for years before the first year you do not use the property predominantly for qualified business use, minus The depreciation that would have been allowable for those years if you had not used the property predominantly for qualified business use in the year you placed it in service. Irs form 1040 ez To determine the amount in (2) above, you must refigure the depreciation using the straight line method and the ADS recovery period. Irs form 1040 ez Example. Irs form 1040 ez In June 2009, Ellen Rye purchased and placed in service a pickup truck that cost $18,000. Irs form 1040 ez She used it only for qualified business use for 2009 through 2012. Irs form 1040 ez Ellen claimed a section 179 deduction of $10,000 based on the purchase of the truck. Irs form 1040 ez She began depreciating it using the 200% DB method over a 5-year GDS recovery period. Irs form 1040 ez The pickup truck's gross vehicle weight was over 6,000 pounds, so it was not subject to the passenger automobile limits discussed later under Do the Passenger Automobile Limits Apply. Irs form 1040 ez During 2013, she used the truck 50% for business and 50% for personal purposes. Irs form 1040 ez She includes $4,018 excess depreciation in her gross income for 2013. Irs form 1040 ez The excess depreciation is determined as follows. Irs form 1040 ez Total section 179 deduction ($10,000) and depreciation claimed ($6,618) for 2009 through 2012. Irs form 1040 ez (Depreciation is from Table A-1. Irs form 1040 ez ) $16,618 Minus: Depreciation allowable (Table A-8):     2009 – 10% of $18,000 $1,800   2010 – 20% of $18,000 3,600   2011 – 20% of $18,000 3,600   2012 – 20% of $18,000 3,600 12,600 Excess depreciation $4,018 If Ellen's use of the truck does not change to 50% for business and 50% for personal purposes until 2015, there will be no excess depreciation. Irs form 1040 ez The total depreciation allowable using Table A-8 through 2015 will be $18,000, which equals the total of the section 179 deduction and depreciation she will have claimed. Irs form 1040 ez Where to figure and report recapture. Irs form 1040 ez   Use Form 4797, Part IV, to figure the recapture amount. Irs form 1040 ez Report the recapture amount as other income on the same form or schedule on which you took the depreciation deduction. Irs form 1040 ez For example, report the recapture amount as other income on Schedule C (Form 1040) if you took the depreciation deduction on Schedule C. Irs form 1040 ez If you took the depreciation deduction on Form 2106, report the recapture amount as other income on Form 1040, line 21. Irs form 1040 ez Lessee's Inclusion Amount If you use leased listed property other than a passenger automobile for business/investment use, you must include an amount in your income in the first year your qualified business-use percentage is 50% or less. Irs form 1040 ez Your qualified business-use percentage is the part of the property's total use that is qualified business use (defined earlier). Irs form 1040 ez For the inclusion amount rules for a leased passenger automobile, see Leasing a Car in chapter 4 of Publication 463. Irs form 1040 ez The inclusion amount is the sum of Amount A and Amount B, described next. Irs form 1040 ez However, see the special rules for the inclusion amount, later, if your lease begins in the last 9 months of your tax year or is for less than one year. Irs form 1040 ez Amount A. Irs form 1040 ez   Amount A is: The fair market value of the property, multiplied by The business/investment use for the first tax year the qualified business-use percentage is 50% or less, multiplied by The applicable percentage from Table A-19 in Appendix A . Irs form 1040 ez   The fair market value of the property is the value on the first day of the lease term. Irs form 1040 ez If the capitalized cost of an item of listed property is specified in the lease agreement, you must treat that amount as the fair market value. Irs form 1040 ez Amount B. Irs form 1040 ez   Amount B is: The fair market value of the property, multiplied by The average of the business/investment use for all tax years the property was leased that precede the first tax year the qualified business-use percentage is 50% or less, multiplied by The applicable percentage from Table A–20 in Appendix A . Irs form 1040 ez Maximum inclusion amount. Irs form 1040 ez   The inclusion amount cannot be more than the sum of the deductible amounts of rent for the tax year in which the lessee must include the amount in gross income. Irs form 1040 ez Inclusion amount worksheet. Irs form 1040 ez   The following worksheet is provided to help you figure the inclusion amount for leased listed property. Irs form 1040 ez Inclusion Amount Worksheet for Leased Listed Property 1. Irs form 1040 ez Fair market value   2. Irs form 1040 ez Business/investment use for first year business use is 50% or less   3. Irs form 1040 ez Multiply line 1 by line 2. Irs form 1040 ez   4. Irs form 1040 ez Rate (%) from Table A-19   5. Irs form 1040 ez Multiply line 3 by line 4. Irs form 1040 ez This is Amount A. Irs form 1040 ez   6. Irs form 1040 ez Fair market value   7. Irs form 1040 ez Average business/investment use for years property leased before the first year business use is 50% or less . Irs form 1040 ez . Irs form 1040 ez . Irs form 1040 ez . Irs form 1040 ez . Irs form 1040 ez . Irs form 1040 ez . Irs form 1040 ez . Irs form 1040 ez . Irs form 1040 ez . Irs form 1040 ez . Irs form 1040 ez . Irs form 1040 ez . Irs form 1040 ez   8. Irs form 1040 ez Multiply line 6 by line 7   9. Irs form 1040 ez Rate (%) from Table A-20   10. Irs form 1040 ez Multiply line 8 by line 9. Irs form 1040 ez This is Amount B. Irs form 1040 ez   11. Irs form 1040 ez Add line 5 and line 10. Irs form 1040 ez This is your inclusion amount. Irs form 1040 ez Enter here and as other income on the form or schedule on which you originally took the deduction (for example, Schedule C or F (Form 1040), Form 1040, Form 1120, etc. Irs form 1040 ez )         Example. Irs form 1040 ez On February 1, 2011, Larry House, a calendar year taxpayer, leased and placed in service a computer with a fair market value of $3,000. Irs form 1040 ez The lease is for a period of 5 years. Irs form 1040 ez Larry does not use the computer at a regular business establishment, so it is listed property. Irs form 1040 ez His business use of the property (all of which is qualified business use) is 80% in 2011, 60% in 2012, and 40% in 2013. Irs form 1040 ez He must add an inclusion amount to gross income for 2013, the first tax year his qualified business-use percentage is 50% or less. Irs form 1040 ez The computer has a 5-year recovery period under both GDS and ADS. Irs form 1040 ez 2013 is the third tax year of the lease, so the applicable percentage from Table A-19 is −19. Irs form 1040 ez 8%. Irs form 1040 ez The applicable percentage from Table A-20 is 22. Irs form 1040 ez 0%. Irs form 1040 ez Larry's deductible rent for the computer for 2013 is $800. Irs form 1040 ez Larry uses the Inclusion amount worksheet. Irs form 1040 ez to figure the amount he must include in income for 2013. Irs form 1040 ez His inclusion amount is $224, which is the sum of −$238 (Amount A) and $462 (Amount B). Irs form 1040 ez Inclusion Amount Worksheet for Leased Listed Property 1. Irs form 1040 ez Fair market value $3,000   2. Irs form 1040 ez Business/investment use for first year business use is 50% or less 40 % 3. Irs form 1040 ez Multiply line 1 by line 2. Irs form 1040 ez 1,200   4. Irs form 1040 ez Rate (%) from Table A-19 −19. Irs form 1040 ez 8 % 5. Irs form 1040 ez Multiply line 3 by line 4. Irs form 1040 ez This is Amount A. Irs form 1040 ez −238   6. Irs form 1040 ez Fair market value 3,000   7. Irs form 1040 ez Average business/investment use for years property leased before the first year business use is 50% or less 70 % 8. Irs form 1040 ez Multiply line 6 by line 7 2,100   9. Irs form 1040 ez Rate (%) from Table A-20 22. Irs form 1040 ez 0 % 10. Irs form 1040 ez Multiply line 8 by line 9. Irs form 1040 ez This is Amount B. Irs form 1040 ez 462   11. Irs form 1040 ez Add line 5 and line 10. Irs form 1040 ez This is your inclusion amount. Irs form 1040 ez Enter here and as other income on the form or schedule on which you originally took the deduction (for example, Schedule C or F (Form 1040), Form 1040, Form 1120, etc. Irs form 1040 ez ) $224           Lease beginning in the last 9 months of your tax year. Irs form 1040 ez    The inclusion amount is subject to a special rule if all the following apply. Irs form 1040 ez The lease term begins within 9 months before the close of your tax year. Irs form 1040 ez You do not use the property predominantly (more than 50%) for qualified business use during that part of the tax year. Irs form 1040 ez The lease term continues into your next tax year. Irs form 1040 ez Under this special rule, add the inclusion amount to income in the next tax year. Irs form 1040 ez Figure the inclusion amount by taking into account the average of the business/investment use for both tax years (line 2 of the Inclusion Amount Worksheet for Leased Listed Property) and the applicable percentage for the tax year the lease term begins. Irs form 1040 ez Skip lines 6 through 9 of the worksheet and enter zero on line 10. Irs form 1040 ez Example 1. Irs form 1040 ez On August 1, 2012, Julie Rule, a calendar year taxpayer, leased and placed in service an item of listed property. Irs form 1040 ez The property is 5-year property with a fair market value of $10,000. Irs form 1040 ez Her property has a recovery period of 5 years under ADS. Irs form 1040 ez The lease is for 5 years. Irs form 1040 ez Her business use of the property was 50% in 2012 and 90% in 2013. Irs form 1040 ez She paid rent of $3,600 for 2012, of which $3,240 is deductible. Irs form 1040 ez She must include $147 in income in 2013. Irs form 1040 ez The $147 is the sum of Amount A and Amount B. Irs form 1040 ez Amount A is $147 ($10,000 × 70% × 2. Irs form 1040 ez 1%), the product of the fair market value, the average business use for 2012 and 2013, and the applicable percentage for year one from Table A-19 . Irs form 1040 ez Amount B is zero. Irs form 1040 ez Lease for less than one year. Irs form 1040 ez   A special rule for the inclusion amount applies if the lease term is less than one year and you do not use the property predominantly (more than 50%) for qualified business use. Irs form 1040 ez The amount included in income is the inclusion amount (figured as described in the preceding discussions) multiplied by a fraction. Irs form 1040 ez The numerator of the fraction is the number of days in the lease term and the denominator is 365 (or 366 for leap years). Irs form 1040 ez   The lease term for listed property other than residential rental or nonresidential real property includes options to renew. Irs form 1040 ez If you have two or more successive leases that are part of the same transaction (or a series of related transactions) for the same or substantially similar property, treat them as one lease. Irs form 1040 ez Example 2. Irs form 1040 ez On October 1, 2012, John Joyce, a calendar year taxpayer, leased and placed in service an item of listed property that is 3-year property. Irs form 1040 ez This property had a fair market value of $15,000 and a recovery period of 5 years under ADS. Irs form 1040 ez The lease term was 6 months (ending on March 31, 2013), during which he used the property 45% in business. Irs form 1040 ez He must include $71 in income in 2013. Irs form 1040 ez The $71 is the sum of Amount A and Amount B. Irs form 1040 ez Amount A is $71 ($15,000 × 45% × 2. Irs form 1040 ez 1% × 183/365), the product of the fair market value, the average business use for both years, and the applicable percentage for year one from Table A-19 , prorated for the length of the lease. Irs form 1040 ez Amount B is zero. Irs form 1040 ez Where to report inclusion amount. Irs form 1040 ez   Report the inclusion amount figured as described in the preceding discussions as other income on the same form or schedule on which you took the deduction for your rental costs. Irs form 1040 ez For example, report the inclusion amount as other income on Schedule C (Form 1040) if you took the deduction on Schedule C. Irs form 1040 ez If you took the deduction for rental costs on Form 2106, report the inclusion amount as other income on Form 1040, line 21. Irs form 1040 ez Do the Passenger Automobile Limits Apply? The depreciation deduction, including the section 179 deduction and special depreciation allowance, you can claim for a passenger automobile (defined earlier) each year is limited. Irs form 1040 ez This section describes the maximum depreciation deduction amounts for 2013 and explains how to deduct, after the recovery period, the unrecovered basis of your property that results from applying the passenger automobile limit. Irs form 1040 ez Exception for leased cars. Irs form 1040 ez   The passenger automobile limits generally do not apply to passenger automobiles leased or held for leasing by anyone regularly engaged in the business of leasing passenger automobiles. Irs form 1040 ez For information on when you are considered regularly engaged in the business of leasing listed property, including passenger automobiles, see Exception for leased property , earlier, under What Is the Business-Use Requirement . Irs form 1040 ez Maximum Depreciation Deduction The passenger automobile limits are the maximum depreciation amounts you can deduct for a passenger automobile. Irs form 1040 ez They are based on the date you placed the automobile in service. Irs form 1040 ez Passenger Automobiles The maximum deduction amounts for most passenger automobiles are shown in the following table. Irs form 1040 ez Maximum Depreciation Deduction for Passenger Automobiles Date       4th & Placed 1st 2nd 3rd Later In Service Year Year Year Years 2013 $11,1601 $5,100 $3,050 $1,875 2012 11,1601 5,100 3,050 1,875 2011 11,0602 4,900 2,950 1,775 2010 11,0602  4,900 2,950 1,775 2009 10,9603 4,800 2,850 1,775 2008 10,9603  4,800 2,850 1,775 2007 3,060 4,900 2,850 1,775 2006 2,960 4,800 2,850 1,775 2005 2,960 4,700 2,850 1,675 2004 10,6104 4,800 2,850 1,675 5/06/2003– 12/31/2003 10,7105 4,900 2,950 1,775 1/01/2003– 5/05/2003 7,6606 4,900 2,950 1,775 1If you elected not to claim any special depreciation allowance or the vehicle is not qualified property, the maximum deduction is $3,160. Irs form 1040 ez 2If you elected not to claim any special depreciation allowance or the vehicle is not qualified property, the maximum deduction is $3,060. Irs form 1040 ez 3If you elected not to claim any special depreciation allowance for the vehicle or the vehicle is not qualified property, the maximum deduction is $2,960. Irs form 1040 ez 4If you elected not to claim any special depreciation allowance for the vehicle, the vehicle is not qualified property, or the vehicle is qualified Liberty Zone property, the maximum deduction is $2,960. Irs form 1040 ez 5If you acquired the vehicle before 5/06/03, the maximum deduction is $7,660. Irs form 1040 ez If you elected not to claim any special depreciation allowance for the vehicle, the vehicle is not qualified property, or the vehicle is qualified Liberty Zone property, the maximum deduction is $3,060. Irs form 1040 ez 6If you elected not to claim any special depreciation allowance for the vehicle, the vehicle is not qualified property, or the vehicle is qualified Liberty Zone property, the maximum deduction is $3,060. Irs form 1040 ez If your business/investment use of the automobile is less than 100%, you must reduce the maximum deduction amount by multiplying the maximum amount by the percentage of business/investment use determined on an annual basis during the tax year. Irs form 1040 ez If you have a short tax year, you must reduce the maximum deduction amount by multiplying the maximum amount by a fraction. Irs form 1040 ez The numerator of the fraction is the number of months and partial months in the short tax year and the denominator is 12. Irs form 1040 ez Example. Irs form 1040 ez On April 15, 2013, Virginia Hart bought and placed in service a new car for $14,500. Irs form 1040 ez She used the car only in her business. Irs form 1040 ez She files her tax return based on the calendar year. Irs form 1040 ez She does not elect a section 179 deduction and elected not to claim any special depreciation allowance for the car. Irs form 1040 ez Under MACRS, a car is 5-year property. Irs form 1040 ez Since she placed her car in service on April 15 and used it only for business, she uses the percentages in Table A-1 to figure her MACRS depreciation on the car. Irs form 1040 ez Virginia multiplies the $14,500 unadjusted basis of her car by 0. Irs form 1040 ez 20 to get her MACRS depreciation of $2,900 for 2013. Irs form 1040 ez This $2,900 is below the maximum depreciation deduction of $3,160 for passenger automobiles placed in service in 2013. Irs form 1040 ez She can deduct the full $2,900. Irs form 1040 ez Electric Vehicles The maximum depreciation deductions for passenger automobiles that are produced to run primarily on electricity are higher than those for other automobiles. Irs form 1040 ez The maximum deduction amounts for electric vehicles placed in service after August 5, 1997, and before January 1, 2007, are shown in the following table. Irs form 1040 ez Owners of electric vehicles placed in service after December 31, 2006, should use the table of maximum deduction amounts later for electric vehicles classified as passenger automobiles or use the table of maximum deduction amounts for trucks and vans later, for electric vehicles classified as trucks and vans. Irs form 1040 ez Maximum Depreciation Deduction For Electric Vehicles Date       4th & Placed 1st 2nd 3rd Later In Service Year Year Year Years 2006 $8,980 $14,400 $8,650 $5,225 2005 8,880 14,200 8,450 5,125 2004 31,8301 14,300 8,550 5,125 5/06/2003– 12/31/2003 32,0302 14,600 8,750 5,225 1/01/2003– 5/05/2003 22,8803 14,600 8,750 5,225 1If you elected not to claim any special depreciation allowance for the vehicle or the vehicle is not qualified property, or the vehicle is qualified Liberty Zone property, the maximum deduction is $8,880. Irs form 1040 ez 2If you acquired the vehicle before 5/06/03, the maximum deduction is $22,880. Irs form 1040 ez If you elected not to claim any special depreciation allowance for the vehicle, the vehicle is not qualified property, or the vehicle is qualified Liberty Zone property, the maximum deduction is $9,080. Irs form 1040 ez 3 If you elected not to claim any special depreciation allowance for the vehicle, the vehicle is not qualified property, or the vehicle is qualified Liberty Zone property, the maximum deduction is $9,080. Irs form 1040 ez Trucks and Vans The maximum depreciation deductions for trucks and vans placed in service after 2002 are higher than those for other passenger automobiles. Irs form 1040 ez The maximum deduction amounts for trucks and vans are shown in the following table. Irs form 1040 ez Maximum Depreciation Deduction For Trucks and Vans Date       4th & Placed 1st 2nd 3rd Later In Service Year Year Year Years 2013 $11,3601 $5,400 $3,250 $1,975 2012 11,3601 5,300 3,150 1,875 2011 11,2602 5,200 3,150 1,875 2010 11,1603 5,100 3,050 1,875 2009 11,0604 4,900 2,950 1,775 2008 11,1605 5,100 3,050 1,875 2007 3,260 5,200 3,050 1,875 2006 3,260 5,200 3,150 1,875 2005 3,260 5,200 3,150 1,875 2004 10,9106 5,300 3,150 1,875 5/06/2003– 12/31/2003 11,0107 5,400 3,250 1,975 1/01/2003– 5/05/2003 7,9608 5,400 3,250 1,975 1 If you elected not to claim any special depreciation allowance or the vehicle is not qualified property, the maximum deduction is $3,360. Irs form 1040 ez 2 If you elected not to claim any special depreciation allowance or the vehicle is not qualified property, the maximum deduction is $3,260. Irs form 1040 ez 3 If you elected not to claim any special depreciation allowance or the vehicle is not qualified property, the maximum deduction is $3,160. Irs form 1040 ez 4 If you elect not to claim any special depreciation allowance for the vehicle or the vehicle is not qualified property, the maximum deduction is $3,060. Irs form 1040 ez 5If you elected not to claim any special depreciation allowance for the vehicle or the vehicle is not qualified property, the maximum deduction is $3,160. Irs form 1040 ez 6If you elected not to claim any special depreciation allowance for the vehicle, the vehicle is not qualified property, or the vehicle is qualified Liberty Zone property, or the maximum deduction is $3,260. Irs form 1040 ez 7 If you acquired the vehicle before 5/06/03, the maximum deduction is $7,960. Irs form 1040 ez If you elected not to claim any special depreciation allowance for the vehicle, the vehicle is not qualified property, or the vehicle is qualified Liberty Zone property, the maximum deduction is $3,360. Irs form 1040 ez 8 If you elected not to claim any special depreciation allowance for the vehicle, the vehicle is not qualified property, or the vehicle is qualified Liberty Zone property, the maximum deduction is $3,360. Irs form 1040 ez Depreciation Worksheet for Passenger Automobiles You can use the following worksheet to figure your depreciation deduction using the percentage tables. Irs form 1040 ez Then use the information from this worksheet to prepare Form 4562. Irs form 1040 ez Depreciation Worksheet for Passenger Automobiles   Part I   1. Irs form 1040 ez MACRS system (GDS or ADS)     2. Irs form 1040 ez Property class     3. Irs form 1040 ez Date placed in service     4. Irs form 1040 ez Recovery period     5. Irs form 1040 ez Method and convention     6. Irs form 1040 ez Depreciation rate (from tables)     7. Irs form 1040 ez Maximum depreciation deduction for this year from the appropriate table       8. Irs form 1040 ez Business/investment-use percentage       9. Irs form 1040 ez Multiply line 7 by line 8. Irs form 1040 ez This is your adjusted maximum depreciation deduction       10. Irs form 1040 ez Section 179 deduction claimed this year (not more than line 9). Irs form 1040 ez Enter -0- if this is not the year you placed the car in service. Irs form 1040 ez         Note. Irs form 1040 ez  1) If line 10 is equal to line 9, stop here. Irs form 1040 ez Your combined section 179 and depreciation deduction (including your special depreciation allowance) is limited to the amount on line 9. Irs form 1040 ez  2) If line 10 is less than line 9, complete Part II. Irs form 1040 ez   Part II   11. Irs form 1040 ez Subtract line 10 from line 9. Irs form 1040 ez This is the limit on the amount you can deduct for depreciation (including any special depreciation allowance )       12. Irs form 1040 ez Cost or other basis (reduced by any alternative motor vehicle credit 1or credit for electric vehicles 2)       13. Irs form 1040 ez Multiply line 12 by line 8. Irs form 1040 ez This is your business/investment cost       14. Irs form 1040 ez Section 179 deduction claimed in the year you placed the car in service       15. Irs form 1040 ez Subtract line 14 from line 13. Irs form 1040 ez This is your tentative basis for depreciation       16. Irs form 1040 ez Multiply line 15 by . Irs form 1040 ez 50 if the 50% special depreciation allowance applies. Irs form 1040 ez This is your special depreciation allowance. Irs form 1040 ez Enter -0- if this is not the year you placed the car in service, the car is not qualified property, or you elected not to claim a special depreciation allowance       Note 1) If line 16 is equal to line 11, stop here. Irs form 1040 ez Your depreciation deduction (including your special depreciation allowance) is limited to the amount on line 11. Irs form 1040 ez  2) If line 16 is less than line 11, complete Part III. Irs form 1040 ez   Part III   17. Irs form 1040 ez Subtract line 16 from 11. Irs form 1040 ez This is the limit on the amount you can deduct for MACRS depreciation       18. Irs form 1040 ez Subtract line 16 from line 15. Irs form 1040 ez This is your basis for depreciation. Irs form 1040 ez       19. Irs form 1040 ez Multiply line 18 by line 6. Irs form 1040 ez This is your tentative MACRS depreciation deduction. Irs form 1040 ez       20. Irs form 1040 ez Enter the lesser of line 17 or line 19. Irs form 1040 ez This is your MACRS depreciation deduction. Irs form 1040 ez     1 When figuring the amount to enter on line 12, do not reduce your cost or other basis by any section 179 deduction you claimed for your car. Irs form 1040 ez 2 Reduce the basis by the lesser of $4,000 or 10% of the cost of the vehicle even if the credit is less than that amount. Irs form 1040 ez             Deductions After the Recovery Period If the depreciation deductions for your automobile are reduced under the passenger automobile limits, you will have unrecovered basis in your automobile at the end of the recovery period. Irs form 1040 ez If you continue to use the automobile for business, you can deduct that unrecovered basis after the recovery period ends. Irs form 1040 ez You can claim a depreciation deduction in each succeeding tax year until you recover your full basis in the car. Irs form 1040 ez The maximum amount you can deduct each year is determined by the date you placed the car in service and your business/investment-use percentage. Irs form 1040 ez See Maximum Depreciation Deduction , earlier. Irs form 1040 ez Unrecovered basis is the cost or other basis of the passenger automobile reduced by any clean-fuel vehicle deduction, electric vehicle credit, depreciation, and section 179 deductions that would have been allowable if you had used the car 100% for business and investment use and the passenger automobile limits had not applied. Irs form 1040 ez You cannot claim a depreciation deduction for listed property other than passenger automobiles after the recovery period ends. Irs form 1040 ez There is no unrecovered basis at the end of the recovery period because you are considered to have used this property 100% for business and investment purposes during all of the recovery period. Irs form 1040 ez Example. Irs form 1040 ez In May 2007, you bought and placed in service a car costing $31,500. Irs form 1040 ez The car was 5-year property under GDS (MACRS). Irs form 1040 ez You did not elect a section 179 deduction and elected not to claim any special depreciation allowance for the car. Irs form 1040 ez You used the car exclusively for business during the recovery period (2007 through 2012). Irs form 1040 ez You figured your depreciation as shown below. Irs form 1040 ez Year Percentage Amount Limit   Allowed 2007 20. Irs form 1040 ez 0% $6,300 $2,960   $2,960 2008 32. Irs form 1040 ez 0 10,080 4,800   4,800 2009 19. Irs form 1040 ez 2 6,048 2,850   2,850 2010 11. Irs form 1040 ez 52 3,629 1,675   1,675 2011 11. Irs form 1040 ez 52 3,629 1,675   1,675 2012 5. Irs form 1040 ez 76 1,814 1,675   1,675 Total   $15,635 At the end of 2012, you had an unrecovered basis of $15,865 ($31,500 − $15,635). Irs form 1040 ez If in 2013 and later years you continue to use the car 100% for business, you can deduct each year the lesser of $1,675 or your remaining unrecovered basis. Irs form 1040 ez If your business use of the car had been less than 100% during any year, your depreciation deduction would have been less than the maximum amount allowable for that year. Irs form 1040 ez However, in figuring your unrecovered basis in the car, you would still reduce your basis by the maximum amount allowable as if the business use had been 100%. Irs form 1040 ez For example, if you had used your car 60% for business instead of 100%, your allowable depreciation deductions would have been $9,519 ($15,865 × 60%), but you still would have to reduce your basis by $15,865 to determine your unrecovered basis. Irs form 1040 ez Deductions For Passenger Automobiles Acquired in a Trade-in If you acquire a passenger automobile in a trade-in, depreciate the carryover basis separately as if the trade-in did not occur. Irs form 1040 ez Depreciate the part of the new automobile's basis that exceeds its carryover basis (excess basis) as if it were newly placed in service property. Irs form 1040 ez This excess basis is the additional cash paid for the new automobile in the trade-in. Irs form 1040 ez The depreciation figured for the two components of the basis (carryover basis and excess basis) is subject to a single passenger automobile limit. Irs form 1040 ez Special rules apply in determining the passenger automobile limits. Irs form 1040 ez These rules and examples are discussed in section 1. Irs form 1040 ez 168(i)-6(d)(3) of the regulations. Irs form 1040 ez Instead of figuring depreciation for the carryover basis and the excess basis separately, you can elect to treat the old automobile as disposed of and both of the basis components for the new automobile as if placed in service at the time of the trade-in. Irs form 1040 ez For more information, including how to make this election, see Election out under Property Acquired in a Like-kind Exchange or Involuntary Conversion in chapter 4 and sections 1. Irs form 1040 ez 168(i)-6(i) and 1. Irs form 1040 ez 168(i)-6(j) of the regulations. Irs form 1040 ez What Records Must Be Kept? You cannot take any depreciation or section 179 deduction for the use of listed property unless you can prove your business/investment use with adequate records or with sufficient evidence to support your own statements. Irs form 1040 ez For listed property, you must keep records for as long as any recapture can still occur. Irs form 1040 ez Recapture can occur in any tax year of the recovery period. Irs form 1040 ez Adequate Records To meet the adequate records requirement, you must maintain an account book, diary, log, statement of expense, trip sheet, or similar record or other documentary evidence that, together with the receipt, is sufficient to establish each element of an expenditure or use. Irs form 1040 ez You do not have to record information in an account book, diary, or similar record if the information is already shown on the receipt. Irs form 1040 ez However, your records should back up your receipts in an orderly manner. Irs form 1040 ez Elements of expenditure or use. Irs form 1040 ez   Your records or other documentary evidence must support all the following. Irs form 1040 ez The amount of each separate expenditure, such as the cost of acquiring the item, maintenance and repair costs, capital improvement costs, lease payments, and any other expenses. Irs form 1040 ez The amount of each business and investment use (based on an appropriate measure, such as mileage for vehicles and time for other listed property), and the total use of the property for the tax year. Irs form 1040 ez The date of the expenditure or use. Irs form 1040 ez The business or investment purpose for the expenditure or use. Irs form 1040 ez   Written documents of your expenditure or use are generally better evidence than oral statements alone. Irs form 1040 ez You do not have to keep a daily log. Irs form 1040 ez However, some type of record containing the elements of an expenditure or the business or investment use of listed property made at or near the time of the expenditure or use and backed up by other documents is preferable to a statement you prepare later. Irs form 1040 ez Timeliness. Irs form 1040 ez   You must record the elements of an expenditure or use at the time you have full knowledge of the elements. Irs form 1040 ez An expense account statement made from an account book, diary, or similar record prepared or maintained at or near the time of the expenditure or use generally is considered a timely record if, in the regular course of business: The statement is given by an employee to the employer, or The statement is given by an independent contractor to the client or customer. Irs form 1040 ez   For example, a log maintained on a weekly basis, that accounts for use during the week, will be considered a record made at or near the time of use. Irs form 1040 ez Business purpose supported. Irs form 1040 ez   Generally, an adequate record of business purpose must be in the form of a written statement. Irs form 1040 ez However, the amount of detail necessary to establish a business purpose depends on the facts and circumstances of each case. Irs form 1040 ez A written explanation of the business purpose will not be required if the purpose can be determined from the surrounding facts and circumstances. Irs form 1040 ez For example, a salesperson visiting customers on an established sales route will not normally need a written explanation of the business purpose of his or her travel. Irs form 1040 ez Business use supported. Irs form 1040 ez   An adequate record contains enough information on each element of every business or investment use. Irs form 1040 ez The amount of detail required to support the use depends on the facts and circumstances. Irs form 1040 ez For example, a taxpayer who uses a truck for both business and personal purposes and whose only business use of the truck is to make customer deliveries on an established route can satisfy the requirement by recording the length of the route, including the total number of miles driven during the tax year and the date of each trip at or near the time of the trips. Irs form 1040 ez   Although you generally must prepare an adequate written record, you can prepare a record of the business use of listed property in a computer memory device that uses a logging program. Irs form 1040 ez Separate or combined expenditures or uses. Irs form 1040 ez   Each use by you normally is considered a separate use. Irs form 1040 ez However, you can combine repeated uses as a single item. Irs form 1040 ez   Record each expenditure as a separate item. Irs form 1040 ez Do not combine it with other expenditures. Irs form 1040 ez If you choose, however, you can combine amounts you spent for the use of listed property during a tax year, such as for gasoline or automobile repairs. Irs form 1040 ez If you combine these expenses, you do not need to support the business purpose of each expense. Irs form 1040 ez Instead, you can divide the expenses based on the total business use of the listed property. Irs form 1040 ez   You can account for uses that can be considered part of a single use, such as a round trip or uninterrupted business use, by a single record. Irs form 1040 ez For example, you can account for the use of a truck to make deliveries at several locations that begin and end at the business premises and can include a stop at the business in between deliveries by a single record of miles driven. Irs form 1040 ez You can account for the use of a passenger automobile by a salesperson for a business trip away from home over a period of time by a single record of miles traveled. Irs form 1040 ez Minimal personal use (such as a stop for lunch between two business stops) is not an interruption of business use. Irs form 1040 ez Confidential information. Irs form 1040 ez   If any of the information on the elements of an expenditure or use is confidential, you do not need to include it in the account book or similar record if you record it at or near the time of the expenditure or use. Irs form 1040 ez You must keep it elsewhere and make it available as support to the IRS director for your area on request. Irs form 1040 ez Substantial compliance. Irs form 1040 ez   If you have not fully supported a particular element of an expenditure or use, but have complied with the adequate records requirement for the expenditure or use to the satisfaction of the IRS director for your area, you can establish this element by any evidence the IRS director for your area deems adequate. Irs form 1040 ez   If you fail to establish to the satisfaction of the IRS director for your area that you have substantially complied with the adequate records requirement for an element of an expenditure or use, you must establish the element as follows. Irs form 1040 ez By your own oral or written statement containing detailed information as to the element. Irs form 1040 ez By other evidence sufficient to establish the element. Irs form 1040 ez   If the element is the cost or amount, time, place, or date of an expenditure or use, its supporting evidence must be direct evidence, such as oral testimony by witnesses or a written statement setting forth detailed information about the element or the documentary evidence. Irs form 1040 ez If the element is the business purpose of an expenditure, its supporting evidence can be circumstantial evidence. Irs form 1040 ez Sampling. Irs form 1040 ez   You can maintain an adequate record for part of a tax year and use that record to support your business and investment use of listed property for the entire tax year if it can be shown by other evidence that the periods for which you maintain an adequate record are representative of the use throughout the year. Irs form 1040 ez Example 1. Irs form 1040 ez Denise Williams, a sole proprietor and calendar year taxpayer, operates an interior decorating business out of her home. Irs form 1040 ez She uses her automobile for local business visits to the homes or offices of clients, for meetings with suppliers and subcontractors, and to pick up and deliver items to clients. Irs form 1040 ez There is no other business use of the automobile, but she and family members also use it for personal purposes. Irs form 1040 ez She maintains adequate records for the first 3 months of the year showing that 75% of the automobile use was for business. Irs form 1040 ez Subcontractor invoices and paid bills show that her business continued at approximately the same rate for the rest of the year. Irs form 1040 ez If there is no change in circumstances, such as the purchase of a second car for exclusive use in her business, the determination that her combined business/investment use of the automobile for the tax year is 75% rests on sufficient supporting evidence. Irs form 1040 ez Example 2. Irs form 1040 ez Assume the same facts as in Example 1, except that Denise maintains adequate records during the first week of every month showing that 75% of her use of the automobile is for business. Irs form 1040 ez Her business invoices show that her business continued at the same rate during the later weeks of each month so that her weekly records are representative of the automobile's business use throughout the month. Irs form 1040 ez The determination that her business/investment use of the automobile for the tax year is 75% rests on sufficient supporting evidence. Irs form 1040 ez Example 3. Irs form 1040 ez Bill Baker, a sole proprietor and calendar year taxpayer, is a salesman in a large metropolitan area for a company that manufactures household products. Irs form 1040 ez For the first 3 weeks of each month, he occasionally uses his own automobile for business travel within the metropolitan area. Irs form 1040 ez During these weeks, his business use of the automobile does not follow a consistent pattern. Irs form 1040 ez During the fourth week of each month, he delivers all business orders taken during the previous month. Irs form 1040 ez The business use of his automobile, as supported by adequate records, is 70% of its total use during that fourth week. Irs form 1040 ez The determination based on the record maintained during the fourth week of the month that his business/investment use of the automobile for the tax year is 70% does not rest on sufficient supporting evidence because his use during that week is not representative of use during other periods. Irs form 1040 ez Loss of records. Irs form 1040 ez   When you establish that failure to produce adequate records is due to loss of the records through circumstances beyond your control, such as through fire, flood, earthquake, or other casualty, you have the right to support a deduction by reasonable reconstruction of your expenditures and use. Irs form 1040 ez How Is Listed Property Information Reported? You must provide the information about your listed property requested in Part V of Form 4562, Section A, if you claim either of the following deductions. Irs form 1040 ez Any deduction for a vehicle. Irs form 1040 ez A depreciation deduction for any other listed property. Irs form 1040 ez If you claim any deduction for a vehicle, you also must provide the information requested in Section B. Irs form 1040 ez If you provide the vehicle for your employee's use, the employee must give you this information. Irs form 1040 ez If you provide any vehicle for use by an employee, you must first answer the questions in Section C to see if you meet an exception to completing Section B for that vehicle. Irs form 1040 ez Vehicles used by your employees. Irs form 1040 ez   You do not have to complete Section B, Part V, for vehicles used by your employees who are not more-than-5% owners or related persons if you meet at least one of the following requirements. Irs form 1040 ez You maintain a written policy statement that prohibits one of the following uses of the vehicles. Irs form 1040 ez All personal use including commuting. Irs form 1040 ez Personal use, other than commuting, by employees who are not officers, directors, or 1%-or-more owners. Irs form 1040 ez You treat all use of the vehicles by your employees as personal use. Irs form 1040 ez You provide more than five vehicles for use by your employees, and you keep in your records the information on their use given to you by the employees. Irs form 1040 ez For demonstrator automobiles provided to full-time salespersons, you maintain a written policy statement that limits the total mileage outside the salesperson's normal working hours and prohibits use of the automobile by anyone else, for vacation trips, or to store personal possessions. Irs form 1040 ez Exceptions. Irs form 1040 ez   If you file Form 2106, 2106-EZ, or Schedule C-EZ (Form 1040), and you are not required to file Form 4562, report information about listed property on that form and not on Form 4562. Irs form 1040 ez Also, if you file Schedule C (Form 1040) and are claiming the standard mileage rate or actual vehicle expenses (except depreciation) and you are not required to file Form 4562 for any other reason, report vehicle information in Part IV of Schedule C and not on Form 4562. Irs form 1040 ez Prev  Up  Next   Home   More Online Publications
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The Irs Form 1040 Ez

Irs form 1040 ez 10. Irs form 1040 ez   Business Bad Debts Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Definition of Business Bad DebtAccrual method. Irs form 1040 ez Cash method. Irs form 1040 ez Debt acquired from a decedent. Irs form 1040 ez Liquidation. Irs form 1040 ez Types of Business Bad Debts When a Debt Becomes Worthless How To Claim a Business Bad DebtSpecific Charge-Off Method Nonaccrual-Experience Method Recovery of a Bad DebtNet operating loss (NOL) carryover. Irs form 1040 ez Introduction You have a bad debt if you cannot collect money owed to you. Irs form 1040 ez A bad debt is either a business bad debt or a nonbusiness bad debt. Irs form 1040 ez This chapter discusses only business bad debts. Irs form 1040 ez Generally, a business bad debt is one that comes from operating your trade or business. Irs form 1040 ez You can deduct business bad debts on Schedule C (Form 1040) or your applicable business income tax return. Irs form 1040 ez All other bad debts are nonbusiness bad debts and are deductible only as short-term capital losses. Irs form 1040 ez For more information on nonbusiness bad debts, see Publication 550. Irs form 1040 ez Topics - This chapter discusses: Definition of business bad debt When a debt becomes worthless How to claim a business bad debt Recovery of a bad debt Useful Items - You may want to see: Publication 525 Taxable and Nontaxable Income 536 Net Operating Losses (NOLs) for Individuals, Estates, and Trusts 544 Sales and Other Dispositions of Assets 550 Investment Income and Expenses 556 Examination of Returns, Appeal Rights, and Claims for Refund Form (and Instructions) Schedule C (Form 1040) Profit or Loss From Business 1040X Amended U. Irs form 1040 ez S. Irs form 1040 ez Individual Income Tax Return 1045 Application for Tentative Refund 1139 Corporation Application for Tentative Refund 3115 Application for Change in Accounting Method See chapter 12 for information about getting publications and forms. Irs form 1040 ez Definition of Business Bad Debt A business bad debt is a loss from the worthlessness of a debt that was either: Created or acquired in your trade or business, or Closely related to your trade or business when it became partly or totally worthless. Irs form 1040 ez A debt is closely related to your trade or business if your primary motive for incurring the debt is business related. Irs form 1040 ez Bad debts of a corporation (other than an S corporation) are always business bad debts. Irs form 1040 ez Credit sales. Irs form 1040 ez   Business bad debts are mainly the result of credit sales to customers. Irs form 1040 ez Goods that have been sold, but not yet paid for, and services that have been performed, but not yet paid for, are recorded in your books as either accounts receivable or notes receivable. Irs form 1040 ez After a reasonable period of time, if you have tried to collect the amount due, but are unable to do so, the uncollectible part becomes a business bad debt. Irs form 1040 ez   Accounts or notes receivable valued at fair market value (FMV) when received are deductible only at that value, even though the FMV may be less than the face value. Irs form 1040 ez If you purchased an account receivable for less than its face value, and the receivable subsequently becomes worthless, the most you are allowed to deduct is the amount you paid to acquire it. Irs form 1040 ez    You can claim a business bad debt deduction only if the amount owed to you was previously included in gross income. Irs form 1040 ez This applies to amounts owed to you from all sources of taxable income, including sales, services, rents, and interest. Irs form 1040 ez Accrual method. Irs form 1040 ez   If you use the accrual method of accounting, you generally report income as you earn it. Irs form 1040 ez You can only claim a bad debt deduction for an uncollectible receivable if you have previously included the uncollectible amount in income. Irs form 1040 ez   If you qualify, you can use the nonaccrual-experience method of accounting discussed later. Irs form 1040 ez Under this method, you do not have to accrue income that, based on your experience, you do not expect to collect. Irs form 1040 ez Cash method. Irs form 1040 ez   If you use the cash method of accounting, you generally report income when you receive payment. Irs form 1040 ez You cannot claim a bad debt deduction for amounts owed to you because you never included those amounts in income. Irs form 1040 ez For example, a cash basis architect cannot claim a bad debt deduction if a client fails to pay the bill because the architect's fee was never included in income. Irs form 1040 ez Debts from a former business. Irs form 1040 ez   If you sell your business but retain its receivables, these debts are business debts because they arose out of your trade or business. Irs form 1040 ez If any of these receivables subsequently become worthless, the loss is still a business bad debt. Irs form 1040 ez Debt acquired from a decedent. Irs form 1040 ez   The character of a loss from debts of a business acquired from a decedent is determined in the same way as debts acquired on the purchase of a business. Irs form 1040 ez The executor of the decedent's estate treats any loss from the debts as a business bad debt if the debts were closely related to the decedent's trade or business when they became worthless. Irs form 1040 ez Otherwise, a loss from these debts becomes a nonbusiness bad debt for the decedent's estate. Irs form 1040 ez Liquidation. Irs form 1040 ez   If you liquidate your business and some of the accounts receivable that you retain become worthless, they become business bad debts. Irs form 1040 ez Types of Business Bad Debts Business bad debts may result from the following. Irs form 1040 ez Loans to clients and suppliers. Irs form 1040 ez   If you loan money to a client, supplier, employee, or distributor for a business reason and you are unable to collect the loan after attempting to do so, you have a business bad debt. Irs form 1040 ez Debts owed by political parties. Irs form 1040 ez   If a political party (or other organization that accepts contributions or spends money to influence elections) owes you money and the debt becomes worthless, you can claim a bad debt deduction only if all of the following requirements are met. Irs form 1040 ez You use the accrual method of accounting. Irs form 1040 ez The debt arose from the sale of goods or services in the ordinary course of your trade or business. Irs form 1040 ez More than 30% of your receivables accrued in the year of the sale were from sales to political parties. Irs form 1040 ez You made substantial and continuing efforts to collect on the debt. Irs form 1040 ez Loan or capital contribution. Irs form 1040 ez   You cannot claim a bad debt deduction for a loan you made to a corporation if, based on the facts and circumstances, the loan is actually a contribution to capital. Irs form 1040 ez Debts of an insolvent partner. Irs form 1040 ez   If your business partnership breaks up and one of your former partners becomes insolvent, you may have to pay more than your pro rata share of the partnership's debts. Irs form 1040 ez If you pay any part of the insolvent partner's share of the debts, you can claim a bad debt deduction for the amount you paid that is attributable to the insolvent partner's share. Irs form 1040 ez Business loan guarantee. Irs form 1040 ez   If you guarantee a debt that subsequently becomes worthless, the debt can qualify as a business bad debt if all the following requirements are met. Irs form 1040 ez You made the guarantee in the course of your trade or business. Irs form 1040 ez You have a legal duty to pay the debt. Irs form 1040 ez You made the guarantee before the debt became worthless. Irs form 1040 ez You meet this requirement if you reasonably expected you would not have to pay the debt without full reimbursement from the borrower. Irs form 1040 ez You received reasonable consideration for making the guarantee. Irs form 1040 ez You meet this requirement if you made the guarantee in accord with normal business practice or for a good faith business purpose. Irs form 1040 ez Example. Irs form 1040 ez Jane Zayne owns the Zayne Dress Company. Irs form 1040 ez She guaranteed payment of a $20,000 note for Elegant Fashions, a dress outlet. Irs form 1040 ez Elegant Fashions is one of Zayne's largest clients. Irs form 1040 ez Elegant Fashions later defaulted on the loan. Irs form 1040 ez As a result, Ms. Irs form 1040 ez Zayne paid the remaining balance of the loan in full to the bank. Irs form 1040 ez She can claim a business bad debt deduction only for the amount she paid, since her guarantee was made in the course of her trade or business for a good faith business purpose. Irs form 1040 ez She was motivated by the desire to retain one of her better clients and keep a sales outlet. Irs form 1040 ez Deductible in the year paid. Irs form 1040 ez   If you make a payment on a loan you guaranteed, you can deduct it in the year paid, unless you have rights against the borrower. Irs form 1040 ez Rights against a borrower. Irs form 1040 ez   When you make payment on a loan you guaranteed, you may have the right to take the place of the lender. Irs form 1040 ez The debt is then owed to you. Irs form 1040 ez If you have this right, or some other right to demand payment from the borrower, you cannot claim a bad debt deduction until these rights become partly or totally worthless. Irs form 1040 ez Joint debtor. Irs form 1040 ez   If two or more debtors jointly owe you money, your inability to collect from one does not enable you to deduct a proportionate amount as a bad debt. Irs form 1040 ez Sale of mortgaged property. Irs form 1040 ez   If mortgaged or pledged property is sold for less than the debt, the unpaid, uncollectible balance of the debt is a bad debt. Irs form 1040 ez When a Debt Becomes Worthless A debt becomes worthless when there is no longer any chance the amount owed will be paid. Irs form 1040 ez This may occur when the debt is due or prior to that date. Irs form 1040 ez To demonstrate worthlessness, you must only show that you have taken reasonable steps to collect the debt but were unable to do so. Irs form 1040 ez It is not necessary to go to court if you can show that a judgment from the court would be uncollectible. Irs form 1040 ez Bankruptcy of your debtor is generally good evidence of the worthlessness of at least a part of an unsecured and unpreferred debt. Irs form 1040 ez Property received for debt. Irs form 1040 ez   If you receive property in partial settlement of a debt, reduce the debt by the property's FMV, which becomes the property's basis. Irs form 1040 ez You can deduct the remaining debt as a bad debt if and when it becomes worthless. Irs form 1040 ez   If you later sell the property for more than its basis, any gain on the sale is due to the appreciation of the property. Irs form 1040 ez It is not a recovery of a bad debt. Irs form 1040 ez For information on the sale of an asset, see Publication 544. Irs form 1040 ez How To Claim a Business Bad Debt There are two methods to claim a business bad debt. Irs form 1040 ez The specific charge-off method. Irs form 1040 ez The nonaccrual-experience method. Irs form 1040 ez Generally, you must use the specific charge-off method. Irs form 1040 ez However, you may use the nonaccrual-experience method if you meet the requirements discussed later under Nonaccrual-Experience Method . Irs form 1040 ez Specific Charge-Off Method If you use the specific charge-off method, you can deduct specific business bad debts that become either partly or totally worthless during the tax year. Irs form 1040 ez However, with respect to partly worthless bad debts, your deduction is limited to the amount you charged off on your books during the year. Irs form 1040 ez Partly worthless debts. Irs form 1040 ez   You can deduct specific bad debts that become partly uncollectible during the tax year. Irs form 1040 ez Your tax deduction is limited to the amount you charge off on your books during the year. Irs form 1040 ez You do not have to charge off and deduct your partly worthless debts annually. Irs form 1040 ez You can delay the charge off until a later year. Irs form 1040 ez However, you cannot deduct any part of a debt after the year it becomes totally worthless. Irs form 1040 ez Significantly modified debt. Irs form 1040 ez   An exception to the charge-off rule exists for debt which has been significantly modified and on which the holder recognized gain. Irs form 1040 ez For more information, see Regulations section 1. Irs form 1040 ez 166-3(a)(3). Irs form 1040 ez Deduction disallowed. Irs form 1040 ez   Generally, you can claim a partial bad debt deduction only in the year you make the charge-off on your books. Irs form 1040 ez If, under audit, the IRS does not allow your deduction and the debt becomes partly worthless in a later tax year, you can deduct the amount you charged off in that year plus the disallowed amount charged off in the earlier year. Irs form 1040 ez The charge-off in the earlier year, unless reversed on your books, fulfills the charge-off requirement for the later year. Irs form 1040 ez Totally worthless debts. Irs form 1040 ez   If a debt becomes totally worthless in the current tax year, you can deduct the entire amount, less any amount deducted in an earlier tax year when the debt was only partly worthless. Irs form 1040 ez   You do not have to make an actual charge-off on your books to claim a bad debt deduction for a totally worthless debt. Irs form 1040 ez However, you may want to do so. Irs form 1040 ez If you do not and the IRS later rules the debt is only partly worthless, you will not be allowed a deduction for the debt in that tax year because a deduction of a partly worthless bad debt is limited to the amount actually charged off. Irs form 1040 ez See Partly worthless debts, earlier. Irs form 1040 ez Filing a claim for refund. Irs form 1040 ez   If you did not deduct a bad debt on your original return for the year it became worthless, you can file a claim for a credit or refund. Irs form 1040 ez If the bad debt was totally worthless, you must file the claim by the later of the following dates. Irs form 1040 ez 7 years from the date your original return was due (not including extensions). Irs form 1040 ez 2 years from the date you paid the tax. Irs form 1040 ez   If the claim is for a partly worthless bad debt, you must file the claim by the later of the following dates. Irs form 1040 ez 3 years from the date you filed your original return. Irs form 1040 ez 2 years from the date you paid the tax. Irs form 1040 ez You may have longer to file the claim if you were unable to manage your financial affairs due to a physical or mental impairment. Irs form 1040 ez Such an impairment requires proof of existence. Irs form 1040 ez   For details and more information about filing a claim, see Publication 556. Irs form 1040 ez Use one of the following forms to file a claim. Irs form 1040 ez For more information, see the instructions for the applicable form. Irs form 1040 ez Table 10-1. Irs form 1040 ez Forms Used To File a Claim IF you filed as a. Irs form 1040 ez . Irs form 1040 ez . Irs form 1040 ez THEN file. Irs form 1040 ez . Irs form 1040 ez . Irs form 1040 ez Sole proprietor or farmer Form 1040X Corporation Form 1120X S corporation Form 1120S and check box H(4) Partnership Form 1065X if filing on paper or  Form 1065 and check box G(5) if filing electronically Nonaccrual-Experience Method If you use an accrual method of accounting and qualify under the rules explained in this section, you can use the nonaccrual-experience method for bad debts. Irs form 1040 ez Under this method, you do not accrue service related income you expect to be uncollectible. Irs form 1040 ez Because the expected uncollectible amounts are not included in income, these amounts are not later deducted from income. Irs form 1040 ez Generally, you can use the nonaccrual-experience method for accounts receivable for services you performed only if: The services are provided in the fields of accounting, actuarial science, architecture, consulting, engineering, health, law, or the performing arts, or You meet the $5 million gross receipts test for all prior years. Irs form 1040 ez Service related income. Irs form 1040 ez   You can use the nonaccrual-experience method only for amounts earned by performing services. Irs form 1040 ez You cannot use this method for amounts owed to you from activities such as lending money, selling goods, or acquiring receivables or other rights to receive payment. Irs form 1040 ez Gross receipts test. Irs form 1040 ez   To find out if you meet the $5 million gross receipts test for all prior years, you must figure the average annual gross receipts for each prior year. Irs form 1040 ez If your average annual gross receipts for any year exceeds $5 million, you cannot use the non-accural experience method. Irs form 1040 ez   The average annual gross receipts for any year is the average of gross receipts from the year in question and the 2 previous years. Irs form 1040 ez For example, if you were figuring the average annual gross receipts for 2013, you would average your gross receipts for 2011, 2012, and 2013. Irs form 1040 ez Interest or penalty charged. Irs form 1040 ez   Generally, you cannot use the nonaccrual-experience method for amounts due on which you charge interest or a late payment penalty. Irs form 1040 ez However, do not treat a discount offered for early payment as the charging of interest or a penalty if both the following apply. Irs form 1040 ez You otherwise accrue the full amount due as gross income at the time you provide the services. Irs form 1040 ez You treat the discount allowed for early payment as an adjustment to gross income in the year of payment. Irs form 1040 ez Change in accounting method. Irs form 1040 ez   Generally, you must obtain consent to change to a nonaccrual-experience method (other than one of the safe harbor methods) or to change from one method to another. Irs form 1040 ez See Form 3115 and the Instructions for Form 3115 for more information. Irs form 1040 ez Recovery of a Bad Debt If you claim a deduction for a bad debt on your income tax return and later recover (collect) all or part of it, you may have to include all or part of the recovery in gross income. Irs form 1040 ez The amount you include is limited to the amount you actually deducted. Irs form 1040 ez However, you can exclude the amount deducted that did not reduce your tax. Irs form 1040 ez Report the recovery as “Other income” on the appropriate business form or schedule. Irs form 1040 ez See Recoveries in Publication 525 for more information. Irs form 1040 ez Net operating loss (NOL) carryover. Irs form 1040 ez   If a bad debt deduction increases an NOL carryover that has not expired before the beginning of the tax year in which the recovery takes place, you treat the deduction as having reduced your tax. Irs form 1040 ez A bad debt deduction that contributes to a NOL helps lower taxes in the year to which you carry the NOL. Irs form 1040 ez For more information about NOLs, see Publication 536. Irs form 1040 ez Also, see the Instructions for Form 1045, and the Instructions for Form 1139. Irs form 1040 ez Prev  Up  Next   Home   More Online Publications