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Military Taxes

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Military Taxes

Military taxes 8. Military taxes   Amortization Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: How To Deduct Amortization Starting a BusinessBusiness Start-Up Costs Costs of Organizing a Corporation Costs of Organizing a Partnership How To Amortize Getting a Lease Section 197 IntangiblesSection 197 Intangibles Defined Assets That Are Not Section 197 Intangibles Safe Harbor for Creative Property Costs Anti-Churning Rules Incorrect Amount of Amortization Deducted Disposition of Section 197 Intangibles Reforestation Costs Geological and Geophysical Costs Pollution Control FacilitiesNew identifiable treatment facility. Military taxes Research and Experimental Costs Optional Write-off of Certain Tax Preferences Introduction Amortization is a method of recovering (deducting) certain capital costs over a fixed period of time. Military taxes It is similar to the straight line method of depreciation. Military taxes The various amortizable costs covered in this chapter are included in the list below. Military taxes However, this chapter does not discuss amortization of bond premium. Military taxes For information on that topic, see chapter 3 of Publication 550, Investment Income and Expenses. Military taxes Topics - This chapter discusses: Deducting amortization Amortizing costs of starting a business Amortizing costs of getting a lease Amortizing costs of section 197 intangibles Amortizing reforestation costs Amortizing costs of geological and geophysical costs Amortizing costs of pollution control facilities Amortizing costs of research and experimentation Amortizing costs of certain tax preferences Useful Items - You may want to see: Publication 544 Sales and Other Dispositions of Assets 550 Investment Income and Expenses 946 How To Depreciate Property Form (and Instructions) 4562 Depreciation and Amortization 4626 Alternative Minimum Tax—Corporations 6251 Alternative Minimum Tax—Individuals See chapter 12 for information about getting publications and forms. Military taxes How To Deduct Amortization To deduct amortization that begins during the current tax year, complete Part VI of Form 4562 and attach it to your income tax return. Military taxes To report amortization from previous years, in addition to amortization that begins in the current year, list on Form 4562 each item separately. Military taxes For example, in 2012, you began to amortize a lease. Military taxes In 2013, you began to amortize a second lease. Military taxes Report amortization from the new lease on line 42 of your 2013 Form 4562. Military taxes Report amortization from the 2012 lease on line 43 of your 2013 Form 4562. Military taxes If you do not have any new amortizable expenses for the current year, you are not required to complete Form 4562 (unless you are claiming depreciation). Military taxes Report the current year's deduction for amortization that began in a prior year directly on the “Other deduction” or “Other expense line” of your return. Military taxes Starting a Business When you start a business, treat all eligible costs you incur before you begin operating the business as capital expenditures which are part of your basis in the business. Military taxes Generally, you recover costs for particular assets through depreciation deductions. Military taxes However, you generally cannot recover other costs until you sell the business or otherwise go out of business. Military taxes For a discussion on how to treat these costs, see If your attempt to go into business is unsuccessful under Capital Expenses in chapter 1. Military taxes For costs paid or incurred after September 8, 2008, you can deduct a limited amount of start-up and organizational costs. Military taxes The costs that are not deducted currently can be amortized ratably over a 180-month period. Military taxes The amortization period starts with the month you begin operating your active trade or business. Military taxes You are not required to attach a statement to make this election. Military taxes You can choose to forgo this election by affirmatively electing to capitalize your start-up costs on your income tax return filed by the due date (including extensions) for the tax year in which the active trade or business begins. Military taxes Once made, the election to either amortize or capitalize start-up costs is irrevocable and applies to all start-up costs that are related to your trade or business. Military taxes See Regulations sections 1. Military taxes 195-1, 1. Military taxes 248-1, and 1. Military taxes 709-1. Military taxes For costs paid or incurred after October 22, 2004, and before September 9, 2008, you can elect to deduct a limited amount of business start-up and organizational costs in the year your active trade or business begins. Military taxes Any costs not deducted can be amortized ratably over a 180-month period, beginning with the month you begin business. Military taxes If the election is made, you must attach any statement required by Regulations sections 1. Military taxes 195-1(b), 1. Military taxes 248-1(c), and 1. Military taxes 709-1(c), as in effect before September 9, 2008. Military taxes Note. Military taxes You can apply the provisions of Regulations sections 1. Military taxes 195-1, 1. Military taxes 248-1, and 1. Military taxes 709-1 to all business start-up and organizational costs paid or incurred after October 22, 2004, provided the period of limitations on assessment has not expired for the year of the election. Military taxes Otherwise, the provisions under Regulations sections 1. Military taxes 195-1(b), 1. Military taxes 248-1(c), and 1. Military taxes 709-1(c), as in effect before September 9, 2008, will apply. Military taxes For costs paid or incurred before October 23, 2004, you can elect to amortize business start-up and organization costs over an amortization period of 60 months or more. Military taxes See How To Make the Election , later. Military taxes The cost must qualify as one of the following. Military taxes A business start-up cost. Military taxes An organizational cost for a corporation. Military taxes An organizational cost for a partnership. Military taxes Business Start-Up Costs Start-up costs are amounts paid or incurred for: (a) creating an active trade or business; or (b) investigating the creation or acquisition of an active trade or business. Military taxes Start-up costs include amounts paid or incurred in connection with an existing activity engaged in for profit; and for the production of income in anticipation of the activity becoming an active trade or business. Military taxes Qualifying costs. Military taxes   A start-up cost is amortizable if it meets both of the following tests. Military taxes It is a cost you could deduct if you paid or incurred it to operate an existing active trade or business (in the same field as the one you entered into). Military taxes It is a cost you pay or incur before the day your active trade or business begins. Military taxes   Start-up costs include amounts paid for the following: An analysis or survey of potential markets, products, labor supply, transportation facilities, etc. Military taxes Advertisements for the opening of the business. Military taxes Salaries and wages for employees who are being trained and their instructors. Military taxes Travel and other necessary costs for securing prospective distributors, suppliers, or customers. Military taxes Salaries and fees for executives and consultants, or for similar professional services. Military taxes Nonqualifying costs. Military taxes   Start-up costs do not include deductible interest, taxes, or research and experimental costs. Military taxes See Research and Experimental Costs , later. Military taxes Purchasing an active trade or business. Military taxes   Amortizable start-up costs for purchasing an active trade or business include only investigative costs incurred in the course of a general search for or preliminary investigation of the business. Military taxes These are costs that help you decide whether to purchase a business. Military taxes Costs you incur in an attempt to purchase a specific business are capital expenses that you cannot amortize. Military taxes Example. Military taxes On June 1st, you hired an accounting firm and a law firm to assist you in the potential purchase of XYZ, Inc. Military taxes They researched XYZ's industry and analyzed the financial projections of XYZ, Inc. Military taxes In September, the law firm prepared and submitted a letter of intent to XYZ, Inc. Military taxes The letter stated that a binding commitment would result only after a purchase agreement was signed. Military taxes The law firm and accounting firm continued to provide services including a review of XYZ's books and records and the preparation of a purchase agreement. Military taxes On October 22nd, you signed a purchase agreement with XYZ, Inc. Military taxes All amounts paid or incurred to investigate the business before October 22nd are amortizable investigative costs. Military taxes Amounts paid on or after that date relate to the attempt to purchase the business and therefore must be capitalized. Military taxes Disposition of business. Military taxes   If you completely dispose of your business before the end of the amortization period, you can deduct any remaining deferred start-up costs. Military taxes However, you can deduct these deferred start-up costs only to the extent they qualify as a loss from a business. Military taxes Costs of Organizing a Corporation Amounts paid to organize a corporation are the direct costs of creating the corporation. Military taxes Qualifying costs. Military taxes   To qualify as an organizational cost, it must be: For the creation of the corporation, Chargeable to a capital account (see chapter 1), Amortized over the life of the corporation if the corporation had a fixed life, and Incurred before the end of the first tax year in which the corporation is in business. Military taxes   A corporation using the cash method of accounting can amortize organizational costs incurred within the first tax year, even if it does not pay them in that year. Military taxes   Examples of organizational costs include: The cost of temporary directors. Military taxes The cost of organizational meetings. Military taxes State incorporation fees. Military taxes The cost of legal services. Military taxes Nonqualifying costs. Military taxes   The following items are capital expenses that cannot be amortized: Costs for issuing and selling stock or securities, such as commissions, professional fees, and printing costs. Military taxes Costs associated with the transfer of assets to the corporation. Military taxes Costs of Organizing a Partnership The costs to organize a partnership are the direct costs of creating the partnership. Military taxes Qualifying costs. Military taxes   A partnership can amortize an organizational cost only if it meets all the following tests. Military taxes It is for the creation of the partnership and not for starting or operating the partnership trade or business. Military taxes It is chargeable to a capital account (see chapter 1). Military taxes It could be amortized over the life of the partnership if the partnership had a fixed life. Military taxes It is incurred by the due date of the partnership return (excluding extensions) for the first tax year in which the partnership is in business. Military taxes However, if the partnership uses the cash method of accounting and pays the cost after the end of its first tax year, see Cash method partnership under How To Amortize, later. Military taxes It is for a type of item normally expected to benefit the partnership throughout its entire life. Military taxes   Organizational costs include the following fees. Military taxes Legal fees for services incident to the organization of the partnership, such as negotiation and preparation of the partnership agreement. Military taxes Accounting fees for services incident to the organization of the partnership. Military taxes Filing fees. Military taxes Nonqualifying costs. Military taxes   The following costs cannot be amortized. Military taxes The cost of acquiring assets for the partnership or transferring assets to the partnership. Military taxes The cost of admitting or removing partners, other than at the time the partnership is first organized. Military taxes The cost of making a contract concerning the operation of the partnership trade or business including a contract between a partner and the partnership. Military taxes The costs for issuing and marketing interests in the partnership such as brokerage, registration, and legal fees and printing costs. Military taxes These “syndication fees” are capital expenses that cannot be depreciated or amortized. Military taxes Liquidation of partnership. Military taxes   If a partnership is liquidated before the end of the amortization period, the unamortized amount of qualifying organizational costs can be deducted in the partnership's final tax year. Military taxes However, these costs can be deducted only to the extent they qualify as a loss from a business. Military taxes How To Amortize Deduct start-up and organizational costs in equal amounts over the applicable amortization period (discussed earlier). Military taxes You can choose an amortization period for start-up costs that is different from the period you choose for organizational costs, as long as both are not less than the applicable amortization period. Military taxes Once you choose an amortization period, you cannot change it. Military taxes To figure your deduction, divide your total start-up or organizational costs by the months in the amortization period. Military taxes The result is the amount you can deduct for each month. Military taxes Cash method partnership. Military taxes   A partnership using the cash method of accounting can deduct an organizational cost only if it has been paid by the end of the tax year. Military taxes However, any cost the partnership could have deducted as an organizational cost in an earlier tax year (if it had been paid that year) can be deducted in the tax year of payment. Military taxes How To Make the Election To elect to amortize start-up or organizational costs, you must complete and attach Form 4562 to your return for the first tax year you are in business. Military taxes You may also be required to attach an accompanying statement (described later) to your return. Military taxes For start-up or organizational costs paid or incurred after September 8, 2008, an accompanying statement is not required. Military taxes Generally, for start-up or organizational costs paid or incurred before September 9, 2008, and after October 22, 2004, unless you choose to apply Regulations sections 1. Military taxes 195-1, 1. Military taxes 248-1, and 1. Military taxes 709-1, you must also attach an accompanying statement to elect to amortize the costs. Military taxes If you have both start-up and organizational costs, attach a separate statement (if required) to your return for each type of cost. Military taxes See Starting a Business , earlier, for more information. Military taxes Generally, you must file the return by the due date (including any extensions). Military taxes However, if you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). Military taxes For more information, see the instructions for Part VI of Form 4562. Military taxes You can choose to forgo the election to amortize by affirmatively electing to capitalize your start-up or organizational costs on your income tax return filed by the due date (including extensions) for the tax year in which the active trade or business begins. Military taxes Note. Military taxes The election to either amortize or capitalize start-up or organizational costs is irrevocable and applies to all start-up and organizational costs that are related to the trade or business. Military taxes If your business is organized as a corporation or partnership, only the corporation or partnership can elect to amortize its start-up or organizational costs. Military taxes A shareholder or partner cannot make this election. Military taxes You, as a shareholder or partner, cannot amortize any costs you incur in setting up your corporation or partnership. Military taxes Only the corporation or partnership can amortize these costs. Military taxes However, you, as an individual, can elect to amortize costs you incur to investigate an interest in an existing partnership. Military taxes These costs qualify as business start-up costs if you acquire the partnership interest. Military taxes Start-up costs election statement. Military taxes   If you elect to amortize your start-up costs, attach a separate statement (if required) that contains the following information. Military taxes A description of the business to which the start-up costs relate. Military taxes A description of each start-up cost incurred. Military taxes The month your active business began (or was acquired). Military taxes The number of months in your amortization period (which is generally 180 months). Military taxes Filing the statement early. Military taxes   You can elect to amortize your start-up costs by filing the statement with a return for any tax year before the year your active business begins. Military taxes If you file the statement early, the election becomes effective in the month of the tax year your active business begins. Military taxes Revised statement. Military taxes   You can file a revised statement to include any start-up costs not included in your original statement. Military taxes However, you cannot include on the revised statement any cost you previously treated on your return as a cost other than a start-up cost. Military taxes You can file the revised statement with a return filed after the return on which you elected to amortize your start-up costs. Military taxes Organizational costs election statement. Military taxes   If you elect to amortize your corporation's or partnership's organizational costs, attach a separate statement (if required) that contains the following information. Military taxes A description of each cost. Military taxes The amount of each cost. Military taxes The date each cost was incurred. Military taxes The month your corporation or partnership began active business (or acquired the business). Military taxes The number of months in your amortization period (which is generally 180 months). Military taxes Partnerships. Military taxes   The statement prepared for a cash basis partnership must also indicate the amount paid before the end of the year for each cost. Military taxes   You do not need to separately list any partnership organizational cost that is less than $10. Military taxes Instead, you can list the total amount of these costs with the dates the first and last costs were incurred. Military taxes   After a partnership makes the election to amortize organizational costs, it can later file an amended return to include additional organizational costs not included in the partnership's original return and statement. Military taxes Getting a Lease If you get a lease for business property, you may recover the cost of acquiring the lease by amortizing it over the term of the lease. Military taxes The term of the lease for amortization purposes generally includes all renewal options (and any other period for which you and the lessor reasonably expect the lease to be renewed). Military taxes However, renewal periods are not included if 75% or more of the cost of acquiring the lease is for the term of the lease remaining on the acquisition date (not including any period for which you may choose to renew, extend, or continue the lease). Military taxes For more information on the costs of getting a lease, see Cost of Getting a Lease in  chapter 3. Military taxes How to amortize. Military taxes   Enter your deduction in Part VI of Form 4562 if you are deducting amortization that begins during the current year, or on the appropriate line of your tax return if you are not otherwise required to file Form 4562. Military taxes Section 197 Intangibles Generally, you may amortize the capitalized costs of “section 197 intangibles” (defined later) ratably over a 15-year period. Military taxes You must amortize these costs if you hold the section 197 intangibles in connection with your trade or business or in an activity engaged in for the production of income. Military taxes You may not be able to amortize section 197 intangibles acquired in a transaction that did not result in a significant change in ownership or use. Military taxes See Anti-Churning Rules, later. Military taxes Your amortization deduction each year is the applicable part of the intangible's adjusted basis (for purposes of determining gain), figured by amortizing it ratably over 15 years (180 months). Military taxes The 15-year period begins with the later of: The month the intangible is acquired, or The month the trade or business or activity engaged in for the production of income begins. Military taxes You cannot deduct amortization for the month you dispose of the intangible. Military taxes If you pay or incur an amount that increases the basis of an amortizable section 197 intangible after the 15-year period begins, amortize it over the remainder of the 15-year period beginning with the month the basis increase occurs. Military taxes You are not allowed any other depreciation or amortization deduction for an amortizable section 197 intangible. Military taxes Tax-exempt use property subject to a lease. Military taxes   The amortization period for any section 197 intangible leased under a lease agreement entered into after March 12, 2004, to a tax-exempt organization, governmental unit, or foreign person or entity (other than a partnership), shall not be less than 125 percent of the lease term. Military taxes Cost attributable to other property. Military taxes   The rules for section 197 intangibles do not apply to any amount that is included in determining the cost of property that is not a section 197 intangible. Military taxes For example, if the cost of computer software is not separately stated from the cost of hardware or other tangible property and you consistently treat it as part of the cost of the hardware or other tangible property, these rules do not apply. Military taxes Similarly, none of the cost of acquiring real property held for the production of rental income is considered the cost of goodwill, going concern value, or any other section 197 intangible. Military taxes Section 197 Intangibles Defined The following assets are section 197 intangibles and must be amortized over 180 months: Goodwill; Going concern value; Workforce in place; Business books and records, operating systems, or any other information base, including lists or other information concerning current or prospective customers; A patent, copyright, formula, process, design, pattern, know-how, format, or similar item; A customer-based intangible; A supplier-based intangible; Any item similar to items (3) through (7); A license, permit, or other right granted by a governmental unit or agency (including issuances and renewals); A covenant not to compete entered into in connection with the acquisition of an interest in a trade or business; Any franchise, trademark, or trade name; and A contract for the use of, or a term interest in, any item in this list. Military taxes You cannot amortize any of the intangibles listed in items (1) through (8) that you created rather than acquired unless you created them in acquiring assets that make up a trade or business or a substantial part of a trade or business. Military taxes Goodwill. Military taxes   This is the value of a trade or business based on expected continued customer patronage due to its name, reputation, or any other factor. Military taxes Going concern value. Military taxes   This is the additional value of a trade or business that attaches to property because the property is an integral part of an ongoing business activity. Military taxes It includes value based on the ability of a business to continue to function and generate income even though there is a change in ownership (but does not include any other section 197 intangible). Military taxes It also includes value based on the immediate use or availability of an acquired trade or business, such as the use of earnings during any period in which the business would not otherwise be available or operational. Military taxes Workforce in place, etc. Military taxes   This includes the composition of a workforce (for example, its experience, education, or training). Military taxes It also includes the terms and conditions of employment, whether contractual or otherwise, and any other value placed on employees or any of their attributes. Military taxes   For example, you must amortize the part of the purchase price of a business that is for the existence of a highly skilled workforce. Military taxes Also, you must amortize the cost of acquiring an existing employment contract or relationship with employees or consultants. Military taxes Business books and records, etc. Military taxes   This includes the intangible value of technical manuals, training manuals or programs, data files, and accounting or inventory control systems. Military taxes It also includes the cost of customer lists, subscription lists, insurance expirations, patient or client files, and lists of newspaper, magazine, radio, and television advertisers. Military taxes Patents, copyrights, etc. Military taxes   This includes package design, computer software, and any interest in a film, sound recording, videotape, book, or other similar property, except as discussed later under Assets That Are Not Section 197 Intangibles . Military taxes Customer-based intangible. Military taxes   This is the composition of market, market share, and any other value resulting from the future provision of goods or services because of relationships with customers in the ordinary course of business. Military taxes For example, you must amortize the part of the purchase price of a business that is for the existence of the following intangibles. Military taxes A customer base. Military taxes A circulation base. Military taxes An undeveloped market or market growth. Military taxes Insurance in force. Military taxes A mortgage servicing contract. Military taxes An investment management contract. Military taxes Any other relationship with customers involving the future provision of goods or services. Military taxes   Accounts receivable or other similar rights to income for goods or services provided to customers before the acquisition of a trade or business are not section 197 intangibles. Military taxes Supplier-based intangible. Military taxes   A supplier-based intangible is the value resulting from the future acquisitions, (through contract or other relationships with suppliers in the ordinary course of business) of goods or services that you will sell or use. Military taxes The amount you pay or incur for supplier-based intangibles includes, for example, any portion of the purchase price of an acquired trade or business that is attributable to the existence of a favorable relationship with persons providing distribution services (such as a favorable shelf or display space or a retail outlet), or the existence of favorable supply contracts. Military taxes Do not include any amount required to be paid for the goods or services to honor the terms of the agreement or other relationship. Military taxes Also, see Assets That Are Not Section 197 Intangibles below. Military taxes Government-granted license, permit, etc. Military taxes   This is any right granted by a governmental unit or an agency or instrumentality of a governmental unit. Military taxes For example, you must amortize the capitalized costs of acquiring (including issuing or renewing) a liquor license, a taxicab medallion or license, or a television or radio broadcasting license. Military taxes Covenant not to compete. Military taxes   Section 197 intangibles include a covenant not to compete (or similar arrangement) entered into in connection with the acquisition of an interest in a trade or business, or a substantial portion of a trade or business. Military taxes An interest in a trade or business includes an interest in a partnership or a corporation engaged in a trade or business. Military taxes   An arrangement that requires the former owner to perform services (or to provide property or the use of property) is not similar to a covenant not to compete to the extent the amount paid under the arrangement represents reasonable compensation for those services or for that property or its use. Military taxes Franchise, trademark, or trade name. Military taxes   A franchise, trademark, or trade name is a section 197 intangible. Military taxes You must amortize its purchase or renewal costs, other than certain contingent payments that you can deduct currently. Military taxes For information on currently deductible contingent payments, see chapter 11. Military taxes Professional sports franchise. Military taxes   A franchise engaged in professional sports and any intangible assets acquired in connection with acquiring the franchise (including player contracts) is a section 197 intangible amortizable over a 15-year period. Military taxes Contract for the use of, or a term interest in, a section 197 intangible. Military taxes   Section 197 intangibles include any right under a license, contract, or other arrangement providing for the use of any section 197 intangible. Military taxes It also includes any term interest in any section 197 intangible, whether the interest is outright or in trust. Military taxes Assets That Are Not Section 197 Intangibles The following assets are not section 197 intangibles. Military taxes Any interest in a corporation, partnership, trust, or estate. Military taxes Any interest under an existing futures contract, foreign currency contract, notional principal contract, interest rate swap, or similar financial contract. Military taxes Any interest in land. Military taxes Most computer software. Military taxes (See Computer software , later. Military taxes ) Any of the following assets not acquired in connection with the acquisition of a trade or business or a substantial part of a trade or business. Military taxes An interest in a film, sound recording, video tape, book, or similar property. Military taxes A right to receive tangible property or services under a contract or from a governmental agency. Military taxes An interest in a patent or copyright. Military taxes Certain rights that have a fixed duration or amount. Military taxes (See Rights of fixed duration or amount , later. Military taxes ) An interest under either of the following. Military taxes An existing lease or sublease of tangible property. Military taxes A debt that was in existence when the interest was acquired. Military taxes A right to service residential mortgages unless the right is acquired in connection with the acquisition of a trade or business or a substantial part of a trade or business. Military taxes Certain transaction costs incurred by parties to a corporate organization or reorganization in which any part of a gain or loss is not recognized. Military taxes Intangible property that is not amortizable under the rules for section 197 intangibles can be depreciated if it meets certain requirements. Military taxes You generally must use the straight line method over its useful life. Military taxes For certain intangibles, the depreciation period is specified in the law and regulations. Military taxes For example, the depreciation period for computer software that is not a section 197 intangible is generally 36 months. Military taxes For more information on depreciating intangible property, see Intangible Property under What Method Can You Use To Depreciate Your Property? in chapter 1 of Publication 946. Military taxes Computer software. Military taxes   Section 197 intangibles do not include the following types of computer software. Military taxes Software that meets all the following requirements. Military taxes It is, or has been, readily available for purchase by the general public. Military taxes It is subject to a nonexclusive license. Military taxes It has not been substantially modified. Military taxes This requirement is considered met if the cost of all modifications is not more than the greater of 25% of the price of the publicly available unmodified software or $2,000. Military taxes Software that is not acquired in connection with the acquisition of a trade or business or a substantial part of a trade or business. Military taxes Computer software defined. Military taxes   Computer software includes all programs designed to cause a computer to perform a desired function. Military taxes It also includes any database or similar item that is in the public domain and is incidental to the operation of qualifying software. Military taxes Rights of fixed duration or amount. Military taxes   Section 197 intangibles do not include any right under a contract or from a governmental agency if the right is acquired in the ordinary course of a trade or business (or in an activity engaged in for the production of income) but not as part of a purchase of a trade or business and either: Has a fixed life of less than 15 years, or Is of a fixed amount that, except for the rules for section 197 intangibles, would be recovered under a method similar to the unit-of-production method of cost recovery. Military taxes However, this does not apply to the following intangibles. Military taxes Goodwill. Military taxes Going concern value. Military taxes A covenant not to compete. Military taxes A franchise, trademark, or trade name. Military taxes A customer-related information base, customer-based intangible, or similar item. Military taxes Safe Harbor for Creative Property Costs If you are engaged in the trade or business of film production, you may be able to amortize the creative property costs for properties not set for production within 3 years of the first capitalized transaction. Military taxes You may amortize these costs ratably over a 15-year period beginning on the first day of the second half of the tax year in which you properly write off the costs for financial accounting purposes. Military taxes If, during the 15-year period, you dispose of the creative property rights, you must continue to amortize the costs over the remainder of the 15-year period. Military taxes Creative property costs include costs paid or incurred to acquire and develop screenplays, scripts, story outlines, motion picture production rights to books and plays, and other similar properties for purposes of potential future film development, production, and exploitation. Military taxes Amortize these costs using the rules of Revenue Procedure 2004-36. Military taxes For more information, see Revenue Procedure 2004-36, 2004-24 I. Military taxes R. Military taxes B. Military taxes 1063, available at  www. Military taxes irs. Military taxes gov/irb/2004-24_IRB/ar16. Military taxes html. Military taxes A change in the treatment of creative property costs is a change in method of accounting. Military taxes Anti-Churning Rules Anti-churning rules prevent you from amortizing most section 197 intangibles if the transaction in which you acquired them did not result in a significant change in ownership or use. Military taxes These rules apply to goodwill and going concern value, and to any other section 197 intangible that is not otherwise depreciable or amortizable. Military taxes Under the anti-churning rules, you cannot use 15-year amortization for the intangible if any of the following conditions apply. Military taxes You or a related person (defined later) held or used the intangible at any time from July 25, 1991, through August 10, 1993. Military taxes You acquired the intangible from a person who held it at any time during the period in (1) and, as part of the transaction, the user did not change. Military taxes You granted the right to use the intangible to a person (or a person related to that person) who held or used it at any time during the period in (1). Military taxes This applies only if the transaction in which you granted the right and the transaction in which you acquired the intangible are part of a series of related transactions. Military taxes See Related person , later, for more information. Military taxes Exceptions. Military taxes   The anti-churning rules do not apply in the following situations. Military taxes You acquired the intangible from a decedent and its basis was stepped up to its fair market value. Military taxes The intangible was amortizable as a section 197 intangible by the seller or transferor you acquired it from. Military taxes This exception does not apply if the transaction in which you acquired the intangible and the transaction in which the seller or transferor acquired it are part of a series of related transactions. Military taxes The gain-recognition exception, discussed later, applies. Military taxes Related person. Military taxes   For purposes of the anti-churning rules, the following are related persons. Military taxes An individual and his or her brothers, sisters, half-brothers, half-sisters, spouse, ancestors (parents, grandparents, etc. Military taxes ), and lineal descendants (children, grandchildren, etc. Military taxes ). Military taxes A corporation and an individual who owns, directly or indirectly, more than 20% of the value of the corporation's outstanding stock. Military 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 20%” is substituted for “at least 80%” in that definition and the determination is made without regard to subsections (a)(4) and (e)(3)(C) of section 1563. Military taxes (For an exception, see section 1. Military taxes 197-2(h)(6)(iv) of the regulations. Military taxes ) A trust fiduciary and a corporation if more than 20% of the value of the corporation's outstanding stock is owned, directly or indirectly, by or for the trust or grantor of the trust. Military taxes The grantor and fiduciary, and the fiduciary and beneficiary, of any trust. Military taxes The fiduciaries of two different trusts, and the fiduciaries and beneficiaries of two different trusts, if the same person is the grantor of both trusts. Military taxes The executor and beneficiary of an estate. Military taxes A tax-exempt educational or charitable organization and a person who directly or indirectly controls the organization (or whose family members control it). Military taxes A corporation and a partnership if the same persons own more than 20% of the value of the outstanding stock of the corporation and more than 20% of the capital or profits interest in the partnership. Military taxes Two S corporations, and an S corporation and a regular corporation, if the same persons own more than 20% of the value of the outstanding stock of each corporation. Military taxes Two partnerships if the same persons own, directly or indirectly, more than 20% of the capital or profits interests in both partnerships. Military taxes A partnership and a person who owns, directly or indirectly, more than 20% of the capital or profits interests in the partnership. Military taxes Two persons who are engaged in trades or businesses under common control (as described in section 41(f)(1) of the Internal Revenue Code). Military taxes When to determine relationship. Military taxes   Persons are treated as related if the relationship existed at the following time. Military taxes In the case of a single transaction, immediately before or immediately after the transaction in which the intangible was acquired. Military taxes In the case of a series of related transactions (or a series of transactions that comprise a qualified stock purchase under section 338(d)(3) of the Internal Revenue Code), immediately before the earliest transaction or immediately after the last transaction. Military taxes Ownership of stock. Military taxes   In determining whether an individual directly or indirectly owns any of the outstanding stock of a corporation, the following rules apply. Military taxes Rule 1. Military taxes   Stock 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. Military taxes Rule 2. Military taxes   An individual is considered to own the stock directly or indirectly owned by or for his or her family. Military taxes Family includes only brothers and sisters, half-brothers and half-sisters, spouse, ancestors, and lineal descendants. Military taxes Rule 3. Military taxes   An individual owning (other than by applying Rule 2) any stock in a corporation is considered to own the stock directly or indirectly owned by or for his or her partner. Military taxes Rule 4. Military taxes   For purposes of applying Rule 1, 2, or 3, treat stock constructively owned by a person under Rule 1 as actually owned by that person. Military taxes Do not treat stock constructively owned by an individual under Rule 2 or 3 as owned by the individual for reapplying Rule 2 or 3 to make another person the constructive owner of the stock. Military taxes Gain-recognition exception. Military taxes   This exception to the anti-churning rules applies if the person you acquired the intangible from (the transferor) meets both of the following requirements. Military taxes That person would not be related to you (as described under Related person , earlier) if the 20% test for ownership of stock and partnership interests were replaced by a 50% test. Military taxes That person chose to recognize gain on the disposition of the intangible and pay income tax on the gain at the highest tax rate. Military taxes See chapter 2 in Publication 544 for information on making this choice. Military taxes   If this exception applies, the anti-churning rules apply only to the amount of your adjusted basis in the intangible that is more than the gain recognized by the transferor. Military taxes Notification. Military taxes   If the person you acquired the intangible from chooses to recognize gain under the rules for this exception, that person must notify you in writing by the due date of the return on which the choice is made. Military taxes Anti-abuse rule. Military taxes   You cannot amortize any section 197 intangible acquired in a transaction for which the principal purpose was either of the following. Military taxes To avoid the requirement that the intangible be acquired after August 10, 1993. Military taxes To avoid any of the anti-churning rules. Military taxes More information. Military taxes   For more information about the anti-churning rules, including additional rules for partnerships, see Regulations section 1. Military taxes 197-2(h). Military taxes Incorrect Amount of Amortization Deducted If you later discover that you deducted an incorrect amount for amortization for a section 197 intangible in any year, you may be able to make a correction for that year by filing an amended return. Military taxes See Amended Return , next. Military taxes If you are not allowed to make the correction on an amended return, you can change your accounting method to claim the correct amortization. Military taxes See Changing Your Accounting Method , later. Military taxes Amended Return If you deducted an incorrect amount for amortization, you can file an amended return to correct the following. Military taxes A mathematical error made in any year. Military taxes A posting error made in any year. Military taxes An amortization deduction for a section 197 intangible for which you have not adopted a method of accounting. Military taxes When to file. Military taxes   If an amended return is allowed, you must file it by the later of the following dates. Military taxes 3 years from the date you filed your original return for the year in which you did not deduct the correct amount. Military taxes (A return filed early is considered filed on the due date. Military taxes ) 2 years from the time you paid your tax for that year. Military taxes Changing Your Accounting Method Generally, you must get IRS approval to change your method of accounting. Military taxes File Form 3115, Application for Change in Accounting Method, to request a change to a permissible method of accounting for amortization. Military taxes The following are examples of a change in method of accounting for amortization. Military taxes A change in the amortization method, period of recovery, or convention of an amortizable asset. Military taxes A change in the accounting for amortizable assets from a single asset account to a multiple asset account (pooling), or vice versa. Military taxes A change in the accounting for amortizable assets from one type of multiple asset account to a different type of multiple asset account. Military taxes Changes in amortization that are not a change in method of accounting include the following: A change in computing amortization in the tax year in which your use of the asset changes. Military taxes An adjustment in the useful life of an amortizable asset. Military taxes Generally, the making of a late amortization election or the revocation of a timely valid amortization election. Military taxes Any change in the placed-in-service date of an amortizable asset. Military taxes See Regulations section 1. Military taxes 446-1(e)(2)(ii)(a) for more information and examples. Military taxes Automatic approval. Military taxes   In some instances, you may be able to get automatic approval from the IRS to change your method of accounting for amortization. Military taxes For a list of automatic accounting method changes, see the Instructions for Form 3115. Military taxes Also see the Instructions for Form 3115 for more information on getting approval, automatic approval procedures, and a list of exceptions to the automatic approval process. Military taxes For more information, see Revenue Procedure 2006-12, as modified by Revenue Procedure 2006-37, and Revenue Procedure 2008-52, as amplified, clarified, and modified by Revenue Procedure 2009-39, as clarified and modified by Revenue Procedure 2011-14, as modified and amplified by Revenue Procedure 2011-22, as modified by Revenue Procedure 2012-39, or any successor. Military taxes See Revenue Procedure 2006-12, 2006-3 I. Military taxes R. Military taxes B. Military taxes 310, available at  www. Military taxes irs. Military taxes gov/irb/2006-03_IRB/ar14. Military taxes html. Military taxes  See Revenue Procedure 2006-37, 2006-38 I. Military taxes R. Military taxes B. Military taxes 499, available at  www. Military taxes irs. Military taxes gov/irb/2006-38_IRB/ar10. Military taxes html. Military taxes  See Revenue Procedure 2008-52, 2008-36 I. Military taxes R. Military taxes B. Military taxes 587, available at www. Military taxes irs. Military taxes gov/irb/2008-36_IRB/ar09. Military taxes html. Military taxes  See Revenue Procedure 2009-39, 2009-38 I. Military taxes R. Military taxes B. Military taxes 371, available at  www. Military taxes irs. Military taxes gov/irb/2009-38_IRB/ar08. Military taxes html. Military taxes  See Revenue Procedure 2011-14, 2011-4 I. Military taxes R. Military taxes B. Military taxes 330, available at  www. Military taxes irs. Military taxes gov/irb/2011-04_IRB/ar08. Military taxes html. Military taxes  See Revenue Procedure 2011-22, 2011-18 I. Military taxes R. Military taxes B. Military taxes 737, available at  www. Military taxes irs. Military taxes gov/irb/2011-18_IRB/ar08. Military taxes html. Military taxes Also, see Revenue Procedure 2012-39, 2012-41 I. Military taxes R. Military taxes B. Military taxes 470 available at www. Military taxes irs. Military taxes gov/irb/2012-41_IRB/index. Military taxes html. Military taxes Disposition of Section 197 Intangibles A section 197 intangible is treated as depreciable property used in your trade or business. Military taxes If you held the intangible for more than 1 year, any gain on its disposition, up to the amount of allowable amortization, is ordinary income (section 1245 gain). Military taxes If multiple section 197 intangibles are disposed of in a single transaction or a series of related transactions, treat all of the section 197 intangibles as if they were a single asset for purposes of determining the amount of gain that is ordinary income. Military taxes Any remaining gain, or any loss, is a section 1231 gain or loss. Military taxes If you held the intangible 1 year or less, any gain or loss on its disposition is an ordinary gain or loss. Military taxes For more information on ordinary or capital gain or loss on business property, see chapter 3 in Publication 544. Military taxes Nondeductible loss. Military taxes   You cannot deduct any loss on the disposition or worthlessness of a section 197 intangible that you acquired in the same transaction (or series of related transactions) as other section 197 intangibles you still have. Military taxes Instead, increase the adjusted basis of each remaining amortizable section 197 intangible by a proportionate part of the nondeductible loss. Military taxes Figure the increase by multiplying the nondeductible loss on the disposition of the intangible by the following fraction. Military taxes The numerator is the adjusted basis of each remaining intangible on the date of the disposition. Military taxes The denominator is the total adjusted bases of all remaining amortizable section 197 intangibles on the date of the disposition. Military taxes Covenant not to compete. Military taxes   A covenant not to compete, or similar arrangement, is not considered disposed of or worthless before you dispose of your entire interest in the trade or business for which you entered into the covenant. Military taxes Nonrecognition transfers. Military taxes   If you acquire a section 197 intangible in a nonrecognition transfer, you are treated as the transferor with respect to the part of your adjusted basis in the intangible that is not more than the transferor's adjusted basis. Military taxes You amortize this part of the adjusted basis over the intangible's remaining amortization period in the hands of the transferor. Military taxes Nonrecognition transfers include transfers to a corporation, partnership contributions and distributions, like-kind exchanges, and involuntary conversions. Military taxes   In a like-kind exchange or involuntary conversion of a section 197 intangible, you must continue to amortize the part of your adjusted basis in the acquired intangible that is not more than your adjusted basis in the exchanged or converted intangible over the remaining amortization period of the exchanged or converted intangible. Military taxes Amortize over a new 15-year period the part of your adjusted basis in the acquired intangible that is more than your adjusted basis in the exchanged or converted intangible. Military taxes Example. Military taxes You own a section 197 intangible you have amortized for 4 full years. Military taxes It has a remaining unamortized basis of $30,000. Military taxes You exchange the asset plus $10,000 for a like-kind section 197 intangible. Military taxes The nonrecognition provisions of like-kind exchanges apply. Military taxes You amortize $30,000 of the $40,000 adjusted basis of the acquired intangible over the 11 years remaining in the original 15-year amortization period for the transferred asset. Military taxes You amortize the other $10,000 of adjusted basis over a new 15-year period. Military taxes For more information, see Regulations section 1. Military taxes 197-2(g). Military taxes Reforestation Costs You can elect to deduct a limited amount of reforestation costs paid or incurred during the tax year. Military taxes See Reforestation Costs in chapter 7. Military taxes You can elect to amortize the qualifying costs that are not deducted currently over an 84-month period. Military taxes There is no limit on the amount of your amortization deduction for reforestation costs paid or incurred during the tax year. Military taxes The election to amortize reforestation costs incurred by a partnership, S corporation, or estate must be made by the partnership, corporation, or estate. Military taxes A partner, shareholder, or beneficiary cannot make that election. Military taxes A partner's or shareholder's share of amortizable costs is figured under the general rules for allocating items of income, loss, deduction, etc. Military taxes , of a partnership or S corporation. Military taxes The amortizable costs of an estate are divided between the estate and the income beneficiary based on the income of the estate allocable to each. Military taxes Qualifying costs. Military taxes   Reforestation costs are the direct costs of planting or seeding for forestation or reforestation. Military taxes Qualifying costs include only those costs you must capitalize and include in the adjusted basis of the property. Military taxes They include costs for the following items. Military taxes Site preparation. Military taxes Seeds or seedlings. Military taxes Labor. Military taxes Tools. Military taxes Depreciation on equipment used in planting and seeding. Military taxes Qualifying costs do not include costs for which the government reimburses you under a cost-sharing program, unless you include the reimbursement in your income. Military taxes Qualified timber property. Military taxes   Qualified timber property is property that contains trees in significant commercial quantities. Military taxes It can be a woodlot or other site that you own or lease. Military taxes The property qualifies only if it meets all of the following requirements. Military taxes It is located in the United States. Military taxes It is held for the growing and cutting of timber you will either use in, or sell for use in, the commercial production of timber products. Military taxes It consists of at least one acre planted with tree seedlings in the manner normally used in forestation or reforestation. Military taxes Qualified timber property does not include property on which you have planted shelter belts or ornamental trees, such as Christmas trees. Military taxes Amortization period. Military taxes   The 84-month amortization period starts on the first day of the first month of the second half of the tax year you incur the costs (July 1 for a calendar year taxpayer), regardless of the month you actually incur the costs. Military taxes You can claim amortization deductions for no more than 6 months of the first and last (eighth) tax years of the period. Military taxes Life tenant and remainderman. Military taxes   If one person holds the property for life with the remainder going to another person, the life tenant is entitled to the full amortization for qualifying reforestation costs incurred by the life tenant. Military taxes Any remainder interest in the property is ignored for amortization purposes. Military taxes Recapture. Military taxes   If you dispose of qualified timber property within 10 years after the tax year you incur qualifying reforestation expenses, report any gain as ordinary income up to the amortization you took. Military taxes See chapter 3 of Publication 544 for more information. Military taxes How to make the election. Military taxes   To elect to amortize qualifying reforestation costs, complete Part VI of Form 4562 and attach a statement that contains the following information. Military taxes A description of the costs and the dates you incurred them. Military taxes A description of the type of timber being grown and the purpose for which it is grown. Military taxes Attach a separate statement for each property for which you amortize reforestation costs. Military taxes   Generally, you must make the election on a timely filed return (including extensions) for the tax year in which you incurred the costs. Military taxes However, if you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). Military taxes Attach Form 4562 and the statement to the amended return and write “Filed pursuant to section 301. Military taxes 9100-2” on Form 4562. Military taxes File the amended return at the same address you filed the original return. Military taxes Revoking the election. Military taxes   You must get IRS approval to revoke your election to amortize qualifying reforestation costs. Military taxes Your application to revoke the election must include your name, address, the years for which your election was in effect, and your reason for revoking it. Military taxes Please provide your daytime telephone number (optional), in case we need to contact you. Military taxes You, or your duly authorized representative, must sign the application and file it at least 90 days before the due date (without extensions) for filing your income tax return for the first tax year for which your election is to end. Military taxes    Send the application to: Internal Revenue Service Associate Chief Counsel Passthroughs and Special Industries CC:PSI:6 1111 Constitution Ave. Military taxes NW, IR-5300 Washington, DC 20224 Geological and Geophysical Costs You can amortize the cost of geological and geophysical expenses paid or incurred in connection with oil and gas exploration or development within the United States. Military taxes These costs can be amortized ratably over a 24-month period beginning on the mid-point of the tax year in which the expenses were paid or incurred. Military taxes For major integrated oil companies (as defined in section 167(h)(5)), these costs must be amortized ratably over a 5-year period for costs paid or incurred after May 17, 2006 (a 7-year period for costs paid or incurred after December 19, 2007). Military taxes If you retire or abandon the property during the amortization period, no amortization deduction is allowed in the year of retirement or abandonment. Military taxes Pollution Control Facilities You can elect to amortize the cost of a certified pollution control facility over 60 months. Military taxes However, see Atmospheric pollution control facilities for an exception. Military taxes The cost of a pollution control facility that is not eligible for amortization can be depreciated under the regular rules for depreciation. Military taxes Also, you can claim a special depreciation allowance on a certified pollution control facility that is qualified property even if you elect to amortize its cost. Military taxes You must reduce its cost (amortizable basis) by the amount of any special allowance you claim. Military taxes See chapter 3 of Publication 946. Military taxes A certified pollution control facility is a new identifiable treatment facility used in connection with a plant or other property in operation before 1976, to reduce or control water or atmospheric pollution or contamination. Military taxes The facility must do so by removing, changing, disposing, storing, or preventing the creation or emission of pollutants, contaminants, wastes, or heat. Military taxes The facility must be certified by state and federal certifying authorities. Military taxes The facility must not significantly increase the output or capacity, extend the useful life, or reduce the total operating costs of the plant or other property. Military taxes Also, it must not significantly change the nature of the manufacturing or production process or facility. Military taxes The federal certifying authority will not certify your property to the extent it appears you will recover (over the property's useful life) all or part of its cost from the profit based on its operation (such as through sales of recovered wastes). Military taxes The federal certifying authority will describe the nature of the potential cost recovery. Military taxes You must then reduce the amortizable basis of the facility by this potential recovery. Military taxes New identifiable treatment facility. Military taxes   A new identifiable treatment facility is tangible depreciable property that is identifiable as a treatment facility. Military taxes It does not include a building and its structural components unless the building is exclusively a treatment facility. Military taxes Atmospheric pollution control facilities. Military taxes   Certain atmospheric pollution control facilities can be amortized over 84 months. Military taxes To qualify, the following must apply. Military taxes The facility must be acquired and placed in service after April 11, 2005. Military taxes If acquired, the original use must begin with you after April 11, 2005. Military taxes The facility must be used in connection with an electric generation plant or other property placed in operation after December 31, 1975, that is primarily coal fired. Military taxes If you construct, reconstruct, or erect the facility, only the basis attributable to the construction, reconstruction, or erection completed after April 11, 2005, qualifies. Military taxes Basis reduction for corporations. Military taxes   A corporation must reduce the amortizable basis of a pollution control facility by 20% before figuring the amortization deduction. Military taxes More information. Military taxes   For more information on the amortization of pollution control facilities, see Code sections 169 and 291(c) and the related regulations. Military taxes Research and Experimental Costs You can elect to amortize your research and experimental costs, deduct them as current business expenses, or write them off over a 10-year period (see Optional write-off method below). Military taxes If you elect to amortize these costs, deduct them in equal amounts over 60 months or more. Military taxes The amortization period begins the month you first receive an economic benefit from the costs. Military taxes For a definition of “research and experimental costs” and information on deducting them as current business expenses, see chapter 7. Military taxes Optional write-off method. Military taxes   Rather than amortize these costs or deduct them as a current expense, you have the option of deducting (writing off) research and experimental costs ratably over a 10-year period beginning with the tax year in which you incurred the costs. Military taxes For more information, see Optional Write-off of Certain Tax Preferences , later, and section 59(e) of the Internal Revenue Code. Military taxes Costs you can amortize. Military taxes   You can amortize costs chargeable to a capital account (see chapter 1) if you meet both of the following requirements. Military taxes You paid or incurred the costs in your trade or business. Military taxes You are not deducting the costs currently. Military taxes How to make the election. Military taxes   To elect to amortize research and experimental costs, complete Part VI of Form 4562 and attach it to your income tax return. Military taxes Generally, you must file the return by the due date (including extensions). Military taxes However, if you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). Military taxes Attach Form 4562 to the amended return and write “Filed pursuant to section 301. Military taxes 9100-2” on Form 4562. Military taxes File the amended return at the same address you filed the original return. Military taxes   Your election is binding for the year it is made and for all later years unless you obtain approval from the IRS to change to a different method. Military taxes Optional Write-off of Certain Tax Preferences You can elect to amortize certain tax preference items over an optional period beginning in the tax year in which you incurred the costs. Military taxes If you make this election, there is no AMT adjustment. Military taxes The applicable costs and the optional recovery periods are as follows: Circulation costs — 3 years, Intangible drilling and development costs — 60 months, Mining exploration and development costs — 10 years, and Research and experimental costs — 10 years. Military taxes How to make the election. Military taxes   To elect to amortize qualifying costs over the optional recovery period, complete Part VI of Form 4562 and attach a statement containing the following information to your return for the tax year in which the election begins: Your name, address, and taxpayer identification number; and The type of cost and the specific amount of the cost for which you are making the election. Military taxes   Generally, the election must be made on a timely filed return (including extensions) for the tax year in which you incurred the costs. Military taxes However, if you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). Military taxes Attach Form 4562 to the amended return and write “Filed pursuant to section 301. Military taxes 9100-2” on Form 4562. Military taxes File the amended return at the same address you filed the original return. Military taxes Revoking the election. Military taxes   You must obtain consent from the IRS to revoke your election. Military taxes Your request to revoke the election must be submitted to the IRS in the form of a letter ruling before the end of the tax year in which the optional recovery period ends. Military taxes The request must contain all of the information necessary to demonstrate the rare and unusual circumstances that would justify granting revocation. Military taxes If the request for revocation is approved, any unamortized costs are deductible in the year the revocation is effective. Military taxes Prev  Up  Next   Home   More Online Publications
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IRS Releases the Dirty Dozen Tax Scams for 2013

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Dirty Dozen: English | Spanish | ASL

IR-2013-33, March 26, 2013

WASHINGTON — The Internal Revenue Service today issued its annual “Dirty Dozen” list of tax scams, reminding taxpayers to use caution during tax season to protect themselves against a wide range of schemes ranging from identity theft to return preparer fraud.

The Dirty Dozen listing, compiled by the IRS each year, lists a variety of common scams taxpayers can encounter at any point during the year. But many of these schemes peak during filing season as people prepare their tax returns.

"This tax season, the IRS has stepped up its efforts to protect taxpayers from a wide range of schemes, including moving aggressively to combat identity theft and refund fraud," said IRS Acting Commissioner Steven T. Miller. "The Dirty Dozen list shows that scams come in many forms during filing season. Don't let a scam artist steal from you or talk you into doing something you will regret later."

Illegal scams can lead to significant penalties and interest and possible criminal prosecution. IRS Criminal Investigation works closely with the Department of Justice (DOJ) to shutdown scams and prosecute the criminals behind them.

The following are the Dirty Dozen tax scams for 2013:

Identity Theft

Tax fraud through the use of identity theft tops this year’s Dirty Dozen list. Identity theft occurs when someone uses your personal information such as your name, Social Security number (SSN) or other identifying information, without your permission, to commit fraud or other crimes. In many cases, an identity thief uses a legitimate taxpayer’s identity to fraudulently file a tax return and claim a refund.

Combating identity theft and refund fraud is a top priority for the IRS, and we are taking special steps to assist victims. For the 2013 tax season, the IRS has put in place a number of additional steps to prevent identity theft and detect refund fraud before it occurs. We have dramatically enhanced our systems, and we are committed to continuing to improve our prevention, detection and assistance efforts.

The IRS has a comprehensive and aggressive identity theft strategy employing a three-pronged effort focusing on fraud prevention, early detection and victim assistance. We are continually reviewing our processes and policies to ensure that we are doing everything possible to minimize identity theft incidents, to help those victimized by it and to investigate those who are committing the crimes.

The IRS continues to increase its efforts against refund fraud, which includes identity theft. During 2012, the IRS prevented the issuance of $20 billion of fraudulent refunds, including those related to identity theft, compared with $14 billion in 2011.

This January, the IRS also conducted a coordinated and highly successful identity theft enforcement sweep. The coast-to-coast effort against identity theft suspects led to 734 enforcement actions in January, including 298 indictments, informations, complaints and arrests. The effort comes on top of a growing identity theft effort that led to 2,400 other enforcement actions against identity thieves during fiscal year 2012. The Criminal Investigation unit has devoted more than 500,000 staff-hours to fighting this issue.

We know identity theft is a frustrating and complex process for victims. The IRS has 3,000 people working on identity theft related cases — more than double the number in late 2011. And we have trained 35,000 employees who work with taxpayers to help with identity theft situations.

The IRS has a special section on IRS.gov dedicated to identity theft issues, including YouTube videos, tips for taxpayers and an assistance guide. For victims, the information includes how to contact the IRS Identity Protection Specialized Unit. For other taxpayers, there are tips on how taxpayers can protect themselves against identity theft.

Taxpayers who believe they are at risk of identity theft due to lost or stolen personal information should contact the IRS immediately so the agency can take action to secure their tax account. Taxpayers can call the IRS Identity Protection Specialized Unit at 800-908-4490. More information can be found on the special identity protection page.

Phishing

Phishing is a scam typically carried out with the help of unsolicited email or a fake website that poses as a legitimate site to lure in potential victims and prompt them to provide valuable personal and financial information. Armed with this information, a criminal can commit identity theft or financial theft.

If you receive an unsolicited email that appears to be from either the IRS or an organization closely linked to the IRS, such as the Electronic Federal Tax Payment System (EFTPS), report it by sending it to phishing@irs.gov.

It is important to keep in mind the IRS does not initiate contact with taxpayers by email to request personal or financial information. This includes any type of electronic communication, such as text messages and social media channels. The IRS has information that can help you protect yourself from email scams.

Return Preparer Fraud

About 60 percent of taxpayers will use tax professionals this year to prepare their tax returns. Most return preparers provide honest service to their clients. But some unscrupulous preparers prey on unsuspecting taxpayers, and the result can be refund fraud or identity theft.

It is important to choose carefully when hiring an individual or firm to prepare your return. This year, the IRS wants to remind all taxpayers that they should use only preparers who sign the returns they prepare and enter their IRS Preparer Tax Identification Numbers (PTINs).

The IRS also has created a new web page to assist taxpayers. For tips about choosing a preparer, red flags, details on preparer qualifications and information on how and when to make a complaint, visit www.irs.gov/chooseataxpro.

Remember: Taxpayers are legally responsible for what’s on their tax return even if it is prepared by someone else. Make sure the preparer you hire is up to the task.

IRS.gov has general information on reporting tax fraud. More specifically, report abusive tax preparers to the IRS on Form 14157, Complaint: Tax Return Preparer. Download Form 14157 and fill it out or order by mail at 800-TAX FORM (800-829-3676). The form includes a return address.

Hiding Income Offshore

Over the years, numerous individuals have been identified as evading U.S. taxes by hiding income in offshore banks, brokerage accounts or nominee entities, using debit cards, credit cards or wire transfers to access the funds. Others have employed foreign trusts, employee-leasing schemes, private annuities or insurance plans for the same purpose.

The IRS uses information gained from its investigations to pursue taxpayers with undeclared accounts, as well as the banks and bankers suspected of helping clients hide their assets overseas. The IRS works closely with the Department of Justice (DOJ) to prosecute tax evasion cases.

While there are legitimate reasons for maintaining financial accounts abroad, there are reporting requirements that need to be fulfilled. U.S. taxpayers who maintain such accounts and who do not comply with reporting and disclosure requirements are breaking the law and risk significant penalties and fines, as well as the possibility of criminal prosecution.

Since 2009, 38,000 individuals have come forward voluntarily to disclose their foreign financial accounts, taking advantage of special opportunities to comply with the U.S. tax system and resolve their tax obligations. And, with new foreign account reporting requirements being phased in over the next few years, hiding income offshore will become increasingly more difficult.

At the beginning of 2012, the IRS reopened the Offshore Voluntary Disclosure Program (OVDP) following continued strong interest from taxpayers and tax practitioners after the closure of the 2011 and 2009 programs. The IRS continues working on a wide range of international tax issues and follows ongoing efforts with DOJ to pursue criminal prosecution of international tax evasion. This program will be open for an indefinite period until otherwise announced.

The IRS has collected $5.5 billion so far from people who participated in offshore voluntary disclosure programs since 2009.

“Free Money” from the IRS & Tax Scams Involving Social Security

Flyers and advertisements for free money from the IRS, suggesting that the taxpayer can file a tax return with little or no documentation, have been appearing in community churches around the country. These schemes promise refunds to people who have little or no income and normally don’t have a tax filing requirement – and are also often spread by word of mouth as unsuspecting and well-intentioned people tell their friends and relatives.

Scammers prey on low income individuals and the elderly and members of church congregations with bogus promises of free money. They build false hopes and charge people good money for bad advice including encouraging taxpayers to make fictitious claims for refunds or rebates based on false statements of entitlement to tax credits. For example, some promoters claim they can obtain for their victims, often senior citizens, a tax refund or nonexistent stimulus payment based on the American Opportunity Tax Credit, even if the victim was not enrolled in or paying for college. Con artists also falsely claim that refunds are available even if the victim went to school decades ago. In the end, the victims discover their claims are rejected. Meanwhile, the promoters are long gone. The IRS warns all taxpayers to remain vigilant.

There are also a number of tax scams involving Social Security. For example, scammers have been known to lure the unsuspecting with promises of non-existent Social Security refunds or rebates. In another situation, a taxpayer may really be due a credit or refund but uses inflated information to complete the return.

Beware: Intentional mistakes of this kind can result in a $5,000 penalty.

Impersonation of Charitable Organizations

Another long-standing type of abuse or fraud is scams that occur in the wake of significant natural disasters.

Following major disasters, it’s common for scam artists to impersonate charities to get money or private information from well-intentioned taxpayers. Scam artists can use a variety of tactics. Some scammers operating bogus charities may contact people by telephone or email to solicit money or financial information. They may even directly contact disaster victims and claim to be working for or on behalf of the IRS to help the victims file casualty loss claims and get tax refunds.

They may attempt to get personal financial information or Social Security numbers that can be used to steal the victims’ identities or financial resources. Bogus websites may solicit funds for disaster victims. As in the case of a recent disaster, Hurricane Sandy, the IRS cautions both victims of natural disasters and people wishing to make charitable donations to avoid scam artists by following these tips:

  • To help disaster victims, donate to recognized charities.
  • Be wary of charities with names that are similar to familiar or nationally known organizations. Some phony charities use names or websites that sound or look like those of respected, legitimate organizations. IRS.gov has a search feature, Exempt Organizations Select Check, which allows people to find legitimate, qualified charities to which donations may be tax-deductible.
  • Don’t give out personal financial information, such as Social Security numbers or credit card and bank account numbers and passwords, to anyone who solicits  a contribution from you. Scam artists may use this information to steal your identity and money.
  • Don’t give or send cash. For security and tax record purposes, contribute by check or credit card or another way that provides documentation of the gift.

Call the IRS toll-free disaster assistance telephone number (1-866-562-5227) if you are a disaster victim with specific questions about tax relief or disaster related tax issues.

False/Inflated Income and Expenses

Including income that was never earned, either as wages or as self-employment income in order to maximize refundable credits, is another popular scam. Claiming income you did not earn or expenses you did not pay in order to secure larger refundable credits such as the Earned Income Tax Credit could have serious repercussions. This could result in repaying the erroneous refunds, including interest and penalties, and in some cases, even prosecution.

Additionally, some taxpayers are filing excessive claims for the fuel tax credit. Farmers and other taxpayers who use fuel for off-highway business purposes may be eligible for the fuel tax credit. But other individuals have claimed the tax credit although they were not eligible. Fraud involving the fuel tax credit is considered a frivolous tax claim and can result in a penalty of $5,000.

False Form 1099 Refund Claims

In some cases, individuals have made refund claims based on the bogus theory that the federal government maintains secret accounts for U.S. citizens and that taxpayers can gain access to the accounts by issuing 1099-OID forms to the IRS. In this ongoing scam, the perpetrator files a fake information return, such as a Form 1099 Original Issue Discount (OID), to justify a false refund claim on a corresponding tax return.

Don’t fall prey to people who encourage you to claim deductions or credits to which you are not entitled or willingly allow others to use your information to file false returns. If you are a party to such schemes, you could be liable for financial penalties or even face criminal prosecution.

Frivolous Arguments

Promoters of frivolous schemes encourage taxpayers to make unreasonable and outlandish claims to avoid paying the taxes they owe. The IRS has a list of frivolous tax arguments that taxpayers should avoid. These arguments are false and have been thrown out of court. While taxpayers have the right to contest their tax liabilities in court, no one has the right to disobey the law.

Falsely Claiming Zero Wages

Filing a phony information return is an illegal way to lower the amount of taxes an individual owes. Typically, a Form 4852 (Substitute Form W-2) or a “corrected” Form 1099 is used as a way to improperly reduce taxable income to zero. The taxpayer may also submit a statement rebutting wages and taxes reported by a payer to the IRS.

Sometimes, fraudsters even include an explanation on their Form 4852 that cites statutory language on the definition of wages or may include some reference to a paying company that refuses to issue a corrected Form W-2 for fear of IRS retaliation. Taxpayers should resist any temptation to participate in any variations of this scheme. Filing this type of return may result in a $5,000 penalty.

Disguised Corporate Ownership

Third parties are improperly used to request employer identification numbers and form corporations that obscure the true ownership of the business.

These entities can be used to underreport income, claim fictitious deductions, avoid filing tax returns, participate in listed transactions and facilitate money laundering and financial crimes. The IRS is working with state authorities to identify these entities and bring the owners into compliance with the law.

Misuse of Trusts

For years, unscrupulous promoters have urged taxpayers to transfer assets into trusts. While there are legitimate uses of trusts in tax and estate planning, some highly questionable transactions promise reduction of income subject to tax, deductions for personal expenses and reduced estate or gift taxes. Such trusts rarely deliver the tax benefits promised and are used primarily as a means of avoiding income tax liability and hiding assets from creditors, including the IRS.

IRS personnel have seen an increase in the improper use of private annuity trusts and foreign trusts to shift income and deduct personal expenses. As with other arrangements, taxpayers should seek the advice of a trusted professional before entering a trust arrangement.
 

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Page Last Reviewed or Updated: 07-Mar-2014

The Military Taxes

Military taxes Publication 334 - Introductory Material Table of Contents IntroductionOrdering forms and publications. Military taxes Tax questions. Military taxes Future Developments What's New for 2013 What's New for 2014 Reminders Photographs of Missing Children Introduction The purpose of this publication is to provide general information about the federal tax laws that apply to small business owners who are sole proprietors and to statutory employees. Military taxes This publication has information on business income, expenses, and tax credits that may help you file your income tax return. Military taxes Are you self-employed?   You are self-employed if you carry on a trade or business as a sole proprietor or an independent contractor. Military taxes Sole proprietor. Military taxes   A sole proprietor is someone who owns an unincorporated business by himself or herself. Military taxes However, if you are the sole member of a domestic limited liability company (LLC), you are not a sole proprietor if you elect to treat the LLC as a corporation. Military taxes Trade or business. Military taxes    A trade or business is generally an activity carried on to make a profit. Military taxes The facts and circumstances of each case determine whether or not an activity is a trade or business. Military taxes You do not need to actually make a profit to be in a trade or business as long as you have a profit motive. Military taxes You do need to make ongoing efforts to further the interests of your business. Military taxes   You do not have to carry on regular full-time business activities to be self-employed. Military taxes Having a part-time business in addition to your regular job or business may be self-employment. Military taxes Independent contractor. Military taxes    People such as doctors, dentists, veterinarians, lawyers, accountants, contractors, subcontractors, public stenographers, or auctioneers who are in an independent trade, business, or profession in which they offer their services to the general public are generally independent contractors. Military taxes However, whether they are independent contractors or employees depends on the facts in each case. Military taxes The general rule is that an individual is an independent contractor if the payer has the right to control or to direct only the result of the work and not how it will be done. Military taxes The earnings of a person who is working as an independent contractor are subject to self-employment tax. Military taxes For more information on determining whether you are an employee or independent contractor, see Publication 15-A, Employer's Supplemental Tax Guide. Military taxes Statutory employee. Military taxes   A statutory employee has a checkmark in box 13 of his or her Form W-2, Wage and Tax Statement. Military taxes Statutory employees use Schedule C or C-EZ to report their wages and expenses. Military taxes Limited liability company (LLC). Military taxes   A limited liability company (LLC) is an entity formed under state law by filing articles of organization. Military taxes Generally, a single-member LLC is disregarded as an entity separate from its owner and reports its income and deductions on its owner's federal income tax return. Military taxes An owner who is an individual may use Schedule C or C-EZ. Military taxes Business owned and operated by spouses. Military taxes   If you and your spouse jointly own and operate an unincorporated business and share in the profits and losses, you are partners in a partnership, whether or not you have a formal partnership agreement. Military taxes Do not use Schedule C or C-EZ. Military taxes Instead, file Form 1065, U. Military taxes S. Military taxes Return of Partnership Income. Military taxes For more information, see Publication 541, Partnerships. Military taxes    Exception—Community income. Military taxes If you and your spouse wholly own an unincorporated business as community property under the community property laws of a state, foreign country, or U. Military taxes S. Military taxes possession, you can treat the business either as a sole proprietorship or a partnership. Military taxes The only states with community property laws are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. Military taxes A change in your reporting position will be treated as a conversion of the entity. Military taxes    Exception—Qualified joint venture. Military taxes If you and your spouse each materially participate as the only members of a jointly owned and operated business, and you file a joint return for the tax year, you can make a joint election to be treated as a qualified joint venture instead of a partnership for the tax year. Military taxes Making this election will allow you to avoid the complexity of Form 1065 but still give each spouse credit for social security earnings on which retirement benefits are based. Military taxes For an explanation of "material participation," see the Instructions for Schedule C, line G. Military taxes   To make this election, you must divide all items of income, gain, loss, deduction, and credit attributable to the business between you and your spouse in accordance with your respective interests in the venture. Military taxes Each of you must file a separate Schedule C or C-EZ and a separate Schedule SE. Military taxes For more information, see Qualified Joint Ventures in the Instructions for Schedule SE. Military taxes This publication does not cover the topics listed in the following table. Military taxes    IF you need information about: THEN you should see: Corporations Publication 542 Farming Publication 225 Fishermen (Capital Construction Fund)  Publication 595 Partnerships Publication 541 Passive activities Publication 925 Recordkeeping Publication 583 Rental Publication 527 S corporations Instructions for Form 1120S What you need to know. Military taxes   Table A provides a list of questions you need to answer to help you meet your federal tax obligations. Military taxes After each question is the location in this publication where you will find the related discussion. Military taxes Table A. Military taxes What You Need To Know About Federal Taxes (Note. Military taxes The following is a list of questions you may need to answer so you can fill out your federal income tax return. Military taxes Chapters are given to help you find the related discussion in this publication. Military taxes ) What must I know   Where to find the answer   What kinds of federal taxes do I have to pay? How do I pay them?   See chapter 1. Military taxes What forms must I file?   See chapter 1. Military taxes What must I do if I have employees?   See Employment Taxes in chapter 1. Military taxes Do I have to start my tax year in January, or can I start it in any other month?   See Accounting Periods in chapter 2. Military taxes What method can I use to account for my income and expenses?   See Accounting Methods in chapter 2. Military taxes What kinds of business income do I have to report on my tax return?   See chapter 5. Military taxes What kinds of business expenses can I deduct on my tax return?   See Business Expenses in chapter 8. Military taxes What kinds of expenses are not deductible as business expenses?   See Expenses You Cannot Deduct in chapter 8. Military taxes What happens if I have a business loss? Can I deduct it?   See chapter 9. Military taxes What must I do if I disposed of business property during the year?   See chapter 3. Military taxes What are my rights as a taxpayer?   See chapter 11. Military taxes Where do I go if I need help with federal tax matters?   See chapter 12. Military taxes IRS mission. Military taxes   Provide America's taxpayers top quality service by helping them understand and meet their tax responsibilities and by applying the tax law with integrity and fairness to all. Military taxes Comments and suggestions. Military taxes   We welcome your comments about this publication and your suggestions for future editions. Military taxes   You can write to us at the following address:  Internal Revenue Service Tax Forms and Publications Division 1111 Constitution Ave. Military taxes NW, IR-6526 Washington, DC 20224   We respond to many letters by telephone. Military taxes Therefore, it would be helpful if you would include your daytime phone number, including the area code, in your correspondence. Military taxes   You can send your comments from www. Military taxes irs. Military taxes gov/formspubs/. Military taxes Click on “More Information” then on “Comment on Tax Forms and Publications. Military taxes ”   Although we cannot respond individually to each comment received, we do appreciate your feedback and will consider your comments as we revise our tax products. Military taxes Ordering forms and publications. Military taxes   Visit  www. Military taxes irs. Military taxes gov/formspubs/ to download forms and publications, call 1-800-TAX-FORM (1-800-829-3676), or write to the address below and receive a response within 10 days after your request is received. Military taxes  Internal Revenue Service 1201 N. Military taxes Mitsubishi Motorway Bloomington, IL 61705-6613 Tax questions. Military taxes   If you have a tax question, check the information available on IRS. Military taxes gov or call 1-800-829-1040. Military taxes We cannot answer tax questions sent to either of the above addresses. Military taxes Future Developments For the latest information about developments related to Publication 334, such as legislation enacted after it was published, go to www. Military taxes irs. Military taxes gov/pub334. Military taxes What's New for 2013 The following are some of the tax changes for 2013. Military taxes For information on other changes, go to IRS. Military taxes gov. Military taxes Tax rates. Military taxes . Military taxes  For tax years beginning in 2013, the social security part of the self-employment tax increases to 12. Military taxes 4%. Military taxes The Medicare part of the tax remains at 2. Military taxes 9%. Military taxes As a result, the self-employment tax is 15. Military taxes 3%. Military taxes Maximum net earnings. Military taxes  The maximum net self-employment earnings subject to the social security part of the self-employment tax increases to $113,700 for 2013. Military taxes There is no maximum limit on earnings subject to the Medicare part. Military taxes Standard mileage rate. Military taxes  For 2013, the standard mileage rate for the cost of operating your car, van, pickup, or panel truck for each mile of business use is 56. Military taxes 5 cents per mile. Military taxes For more information, see Car and Truck Expenses in chapter 8. Military taxes Simplified method for business use of home deduction. Military taxes . Military taxes  The IRS now provides a simplified method to determine your expenses for business use of your home. Military taxes For more information, see Business Use of Your Home in chapter 8. Military taxes What's New for 2014 The following are some of the tax changes for 2014. Military taxes For information on other changes, go to IRS. Military taxes gov. Military taxes Standard mileage rate. Military taxes  For 2014, the standard mileage rate for the cost of operating your car, van, pickup, or panel truck for each mile of business use is 56 cents per mile. Military taxes Self-employment tax. Military taxes  The maximum net self-employment earnings subject to the social security part of the self-employment tax is $117,000 for 2014. Military taxes Reminders Accounting methods. Military taxes  Certain small business taxpayers may be eligible to adopt or change to the cash method of accounting and may not be required to account for inventories. Military taxes For more information, see Inventories in chapter 2. Military taxes Reportable transactions. Military taxes  You must file Form 8886, Reportable Transaction Disclosure Statement, to report certain transactions. Military taxes You may have to pay a penalty if you are required to file Form 8886 but do not do so. Military taxes You may also have to pay interest and penalties on any reportable transaction understatements. Military taxes Reportable transactions include: Transactions the same as or substantially similar to tax avoidance transactions identified by the IRS, Transactions offered to you under conditions of confidentiality for which you paid an advisor a minimum fee, Transactions for which you have, or a related party has, contractual protection against disallowance of the tax benefits, Transactions that result in losses of at least $2 million in any single tax year ($50,000 if from certain foreign currency transactions) or $4 million in any combination of tax years, and Transactions the same or substantially similar to one of the types of transactions the IRS has identified as a transaction of interest. Military taxes For more information, see the Instructions for Form 8886. Military taxes Photographs of Missing Children The Internal Revenue Service is a proud partner with the National Center for Missing and Exploited Children. Military taxes Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. Military taxes You can help bring these children home by looking at the photographs and calling 1-800-THE-LOST (1-800-843-5678) if you recognize a child. Military taxes Prev  Up  Next   Home   More Online Publications