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Tax 1040 Ez

Tax 1040 ez Publication 80 - Main Content Table of Contents Introduction 1. Tax 1040 ez Employer Identification Number (EIN) 2. Tax 1040 ez Who Are Employees?Tests. Tax 1040 ez Business Owned and Operated by Spouses Farm Crew Leaders 3. Tax 1040 ez Employee's Social Security Number (SSN)Registering for SSNVS. Tax 1040 ez 4. Tax 1040 ez Wages and Other CompensationFringe Benefits 5. Tax 1040 ez TipsOrdering rule. Tax 1040 ez 6. Tax 1040 ez Social Security and Medicare Taxes for FarmworkersThe $150 Test or the $2,500 Test 7. Tax 1040 ez How To Figure Social Security and Medicare TaxesHousehold and agricultural employers. Tax 1040 ez 8. Tax 1040 ez Depositing TaxesPayment with Return When To Deposit How To Deposit Deposit Penalties 9. Tax 1040 ez Employer's ReturnsReporting Adjustments to Form 941-SS, 944-SS, 944, or 943 Current Period Adjustments Prior Period Adjustments 10. Tax 1040 ez Wage and Tax StatementsWaiver. Tax 1040 ez 11. Tax 1040 ez Federal Unemployment (FUTA) Tax—U. Tax 1040 ez S. Tax 1040 ez Virgin Islands Employers Only How To Get Tax Help Introduction This publication is for employers whose principal place of business is in the U. Tax 1040 ez S. Tax 1040 ez Virgin Islands, Guam, American Samoa, or the Commonwealth of the Northern Mariana Islands, or who have employees who are subject to income tax withholding for any of these jurisdictions. Tax 1040 ez Employers and employees in these areas are generally subject to social security and Medicare taxes under the Federal Insurance Contributions Act (FICA). Tax 1040 ez See section 6 and section 7 for more information. Tax 1040 ez This publication summarizes employer responsibilities to collect, pay, and report these taxes. Tax 1040 ez Whenever the term “United States” is used in this publication, it includes U. Tax 1040 ez S. Tax 1040 ez Virgin Islands, Guam, American Samoa, and the Commonwealth of the Northern Mariana Islands. Tax 1040 ez This publication also provides employers in the U. Tax 1040 ez S. Tax 1040 ez Virgin Islands with a summary of their responsibilities in connection with the tax under the Federal Unemployment Tax Act, known as FUTA tax. Tax 1040 ez See section 11 for more information. Tax 1040 ez Except as shown in the table in section 12, social security, Medicare, and FUTA taxes apply to every employer who pays taxable wages to employees or who has employees who report tips. Tax 1040 ez This publication does not include information relating to the self-employment tax (for social security and Medicare of self-employed persons). Tax 1040 ez See Publication 570, Tax Guide for Individuals With Income From U. Tax 1040 ez S. Tax 1040 ez Possessions, if you need this information. Tax 1040 ez This publication also does not include information relating to income tax withholding. Tax 1040 ez In U. Tax 1040 ez S. Tax 1040 ez Virgin Islands, Guam, American Samoa, and the Commonwealth of the Northern Mariana Islands, contact your local tax department for information about income tax withholding. Tax 1040 ez See Publication 15 (Circular E), for information on U. Tax 1040 ez S. Tax 1040 ez federal income tax withholding. Tax 1040 ez Comments and suggestions. Tax 1040 ez   We welcome your comments about this publication and your suggestions for future editions. Tax 1040 ez   You can write to us at the following address: Internal Revenue Service Tax Forms and Publications Division 1111 Constitution Ave. Tax 1040 ez NW, IR-6526 Washington, DC 20224   We respond to many letters by telephone. Tax 1040 ez Therefore, it would be helpful if you would include your daytime phone number, including the area code, in your correspondence. Tax 1040 ez    You can also send us comments from www. Tax 1040 ez irs. Tax 1040 ez gov/formspubs. Tax 1040 ez Click on More Information and then click on Comment on Tax Forms and Publications. Tax 1040 ez   Although we cannot respond individually to each comment received, we do appreciate your feedback and will consider your comments as we revise our tax forms, instructions, and publications. Tax 1040 ez 1. Tax 1040 ez Employer Identification Number (EIN) An employer identification number (EIN) is a nine-digit number that the IRS issues. Tax 1040 ez Its format is 00-0000000. Tax 1040 ez It is used to identify the tax accounts of employers and certain other organizations and entities that have no employees. Tax 1040 ez Use your EIN on all of the items that you send to the IRS and SSA for your business. Tax 1040 ez If you do not have an EIN, you may apply for one online. Tax 1040 ez Go to IRS. Tax 1040 ez gov and click on the Apply for an EIN Online link under Tools. Tax 1040 ez You may also apply for an EIN by calling 1-800-829-4933, (U. Tax 1040 ez S. Tax 1040 ez Virgin Islands only) or 267-941-1099 (toll call), or you can fax or mail Form SS-4, Application for Employer Identification Number, to the IRS. Tax 1040 ez Do not use a social security number (SSN) in place of an EIN. Tax 1040 ez If you do not have an EIN by the time a return is due, file a paper return and enter “Applied For” and the date that you applied for it in the space shown for the number. Tax 1040 ez If you took over another employer's business, do not use that employer's EIN. Tax 1040 ez You should have only one EIN. Tax 1040 ez If you have more than one, write to the IRS office where you file your returns using the “without a payment” address in the Instructions for Form 941-SS, Instructions for Form 944, or Instructions for Form 943. Tax 1040 ez Or call the IRS Business & Specialty Tax Line at 1-800-829-4933 (U. Tax 1040 ez S. Tax 1040 ez Virgin Islands only) or 267-941-1000 (toll call). Tax 1040 ez Persons who are deaf, hard of hearing, or have a speech disability (TDD/TTY users) in the U. Tax 1040 ez S. Tax 1040 ez Virgin Islands may call 1-800-829-4059. Tax 1040 ez The IRS will tell you which EIN to use. Tax 1040 ez For more information, see Publication 1635, Employer Identification Number: Understanding Your EIN, or Publication 583, Starting a Business and Keeping Records. Tax 1040 ez 2. Tax 1040 ez Who Are Employees? Generally, employees are defined either under common law or under special statutes for certain situations. Tax 1040 ez See Publication 15-A, Employer's Supplemental Tax Guide, for details on statutory employees and nonemployees. Tax 1040 ez Employee status under common law. Tax 1040 ez   Generally, a worker who performs services for you is your employee if you can control what will be done and how it will be done. Tax 1040 ez This is so even when you give the employee freedom of action. Tax 1040 ez What matters is that you have the right to control the details of how the services are performed. Tax 1040 ez See Publication 15-A for more information on how to determine whether an individual providing services is an independent contractor or an employee. Tax 1040 ez    Generally, people in business for themselves are not employees. Tax 1040 ez For example, doctors, lawyers, veterinarians, and others in an independent trade in which they offer their services to the public are usually not employees. Tax 1040 ez However, if the business is incorporated, corporate officers who work in the business are employees of the corporation. Tax 1040 ez   If an employer-employee relationship exists, it does not matter what it is called. Tax 1040 ez The employee may be called an agent or independent contractor. Tax 1040 ez It also does not matter how payments are measured or paid, what they are called, or if the employee works full or part time. Tax 1040 ez Statutory employees. Tax 1040 ez   There are also some special definitions of employees for social security, Medicare, and FUTA taxes. Tax 1040 ez   While the following persons may not be common law employees, they are considered employees for social security and Medicare purposes if the conditions under Tests , discussed later, are met. Tax 1040 ez a. Tax 1040 ez   An agent (or commission) driver who delivers food or beverages (other than milk) or picks up and delivers laundry or dry cleaning for someone else. Tax 1040 ez b. Tax 1040 ez   A full-time life insurance salesperson who sells primarily for one company. Tax 1040 ez c. Tax 1040 ez   A homeworker who works by the guidelines of the person for whom the work is done, with materials furnished by and returned to that person or to someone that person designates. Tax 1040 ez d. Tax 1040 ez   A traveling or city salesperson (other than an agent-driver or commission-driver) who works full time (except for sideline sales activities) for one firm or person getting orders from customers. Tax 1040 ez The orders must be for merchandise for resale or supplies for use in the customer's business. Tax 1040 ez The customers must be retailers, wholesalers, contractors, or operators of hotels, restaurants, or other businesses dealing with food or lodging. Tax 1040 ez Tests. Tax 1040 ez   Withhold social security and Medicare taxes from statutory employees' wages if all three of the following tests apply. Tax 1040 ez The service contract states or implies that almost all of the services are to be performed personally by them. Tax 1040 ez They have little or no investment in the equipment and property used to perform the services (other than an investment in transportation facilities). Tax 1040 ez The services are performed on a continuing basis for the same payer. Tax 1040 ez Persons in a or d, earlier, are also employees for FUTA tax purposes if tests 1 through 3 are met (U. Tax 1040 ez S. Tax 1040 ez Virgin Islands only). Tax 1040 ez   Publication 15-A gives examples of the employer-employee relationship. Tax 1040 ez Statutory nonemployees. Tax 1040 ez   Certain direct sellers, qualified real estate agents, and certain companion sitters are, by law, considered nonemployees. Tax 1040 ez They are generally treated as self-employed for employment tax purposes. Tax 1040 ez See Publication 15-A for details. Tax 1040 ez H-2A agricultural workers. Tax 1040 ez   On Form W-2, do not check box 13 (Statutory employee) as H-2A workers are not statutory employees. Tax 1040 ez Treating employees as nonemployees. Tax 1040 ez   If you incorrectly treated an employee as a nonemployee and did not withhold social security and Medicare taxes, you will be liable for the taxes. Tax 1040 ez See Treating employees as nonemployees in section 2 of Publication 15 (Circular E), for details on Internal Revenue Code section 3509, which may apply. Tax 1040 ez IRS help. Tax 1040 ez   If you want the IRS to determine if a worker is an employee, file Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding. Tax 1040 ez Voluntary Classification Settlement Program (VCSP). Tax 1040 ez   Employers who are currently treating their workers (or a class or group of workers) as independent contractors or other nonemployees and want to voluntarily reclassify their workers as employees for future tax periods may be eligible to participate in the VCSP if certain requirements are met. Tax 1040 ez To apply, use Form 8952, Application for Voluntary Classification Settlement Program (VCSP). Tax 1040 ez For more information, visit IRS. Tax 1040 ez gov and enter “VCSP” in the search box. Tax 1040 ez Business Owned and Operated by Spouses If you and your spouse jointly own and operate a business and share in the profits and losses, you are partners in a partnership, whether or not you have a formal partnership agreement. Tax 1040 ez See Publication 541, Partnerships, for more details. Tax 1040 ez The partnership is considered the employer of any employees, and is liable for any employment taxes due on wages paid to its employees. Tax 1040 ez Exception—Qualified Joint Venture. Tax 1040 ez   If you and your spouse materially participate as the only members of a jointly owned and operated business, and you file a joint Form 1040, U. Tax 1040 ez S. Tax 1040 ez Individual Income Tax Return, or joint Form 1040-SS, U. Tax 1040 ez S. Tax 1040 ez Self-Employment Tax Return—U. Tax 1040 ez S. Tax 1040 ez Virgin Islands, Guam, American Samoa, the Commonwealth of the Northern Mariana Islands, or Puerto Rico, you can make a joint election to be taxed as a qualified joint venture instead of a partnership. Tax 1040 ez See the Instructions for Schedule C (Form 1040) or the Instructions for Form 1040-SS. Tax 1040 ez Spouses electing qualified joint venture status are treated as sole proprietors for federal tax purposes. Tax 1040 ez Either of the sole proprietor spouses may report and pay the employment taxes due on wages paid to the employees, using the EIN of that spouse’s sole proprietorship. Tax 1040 ez For more information on qualified joint ventures, visit IRS. Tax 1040 ez gov and enter “qualified joint venture” in the search box. Tax 1040 ez Farm Crew Leaders You are an employer of farmworkers if you are a crew leader. Tax 1040 ez A crew leader is a person who furnishes and pays (either on his or her own behalf or on behalf of the farm operator) workers to do farmwork for the farm operator. Tax 1040 ez If there is no written agreement between you and the farm operator stating that you are his or her employee, and if you pay the workers (either for yourself or for the farm operator), then you are a crew leader. Tax 1040 ez 3. Tax 1040 ez Employee's Social Security Number (SSN) An employee's social security number (SSN) consists of nine digits separated as follows: 000-00-0000. Tax 1040 ez You must get each employee's name and SSN and enter them on Form W-2AS, W-2CM, W-2GU, or W-2VI. Tax 1040 ez If you do not report the employee's correct name and SSN, you may owe a penalty unless you have reasonable cause. Tax 1040 ez See Publication 1586, Reasonable Cause Regulations and Requirements for Missing and Incorrect Name/TINs, for information on the requirement to solicit the employee's SSN. Tax 1040 ez Employee's social security card. Tax 1040 ez   You should ask the employee to show you his or her social security card. Tax 1040 ez The employee may show the card if it is available. Tax 1040 ez Do not accept a social security card that says “Not valid for employment. Tax 1040 ez ” A social security number issued with this legend does not permit employment. Tax 1040 ez You may, but you are not required to, photocopy the social security card if the employee provides it. Tax 1040 ez If an employee does not have a social security card or needs a new one, the employee should apply for one on Form SS-5 and submit the necessary documentation. Tax 1040 ez The employee must complete and sign Form SS-5; it cannot be filed by the employer. Tax 1040 ez You may be asked to supply a letter to accompany Form SS-5 if the employee has exceeded his or her yearly or lifetime limit for the number of replacement cards allowed. Tax 1040 ez If your employee has applied for an SSN but has not received the card before you must file your Form W-2 reports, and you are filing your reports on paper, enter “Applied For” in box d. Tax 1040 ez Enter all zeroes in the SSN field if filing electronically. Tax 1040 ez When the employee receives the SSN, file Copy A of Form W-2c with SSA to show the employee's SSN. Tax 1040 ez Correctly record the employee's name and SSN. Tax 1040 ez   Record the name and number of each employee as they appear on his or her social security card. Tax 1040 ez If the name is not correct as shown on the card (for example, because of marriage or divorce), the employee should request a corrected card from the SSA. Tax 1040 ez Continue to use the old name until the employee shows you the replacement social security card with the corrected name. Tax 1040 ez   If the SSA issues the employee a replacement card after a name change, or a new card with a different social security number after a change in alien work status, file a Form W-2c to correct the name/SSN reported on the most recently filed Form W-2AS, W-2CM, W-2GU, or W-2VI. Tax 1040 ez It is not necessary to correct other years if the previous name and SSN were used for years before the most recent Form W-2. Tax 1040 ez Where to get and file social security number application forms. Tax 1040 ez    U. Tax 1040 ez S. Tax 1040 ez Virgin Islands—U. Tax 1040 ez S. Tax 1040 ez Social Security Administration, 8000 Nisky Center, First Floor, Suite 2, St. Tax 1040 ez Thomas, VI 00802. Tax 1040 ez  Guam—U. Tax 1040 ez S. Tax 1040 ez Social Security Administration, 655 Harmon Loop Road, Suite 300, Dededo, GU 96929. Tax 1040 ez  American Samoa—U. Tax 1040 ez S. Tax 1040 ez Social Security Administration, Pago Plaza, Suite 117, Pago Pago, AS 96799. Tax 1040 ez  Commonwealth of the Northern Mariana Islands—U. Tax 1040 ez S. Tax 1040 ez Social Security Administration, MH Building, Suite 201, Saipan, MP 96950. Tax 1040 ez Verification of social security numbers. Tax 1040 ez   Employers and authorized reporting agents can use the Social Security Number Verification Service (SSNVS) to instantly verify up to 10 names and SSNs (per screen) at a time, or submit an electronic file of up to 250,000 names and SSNs and usually receive the results the next business day. Tax 1040 ez Visit www. Tax 1040 ez socialsecurity. Tax 1040 ez gov/employer/ssnv. Tax 1040 ez htm for more information. Tax 1040 ez Registering for SSNVS. Tax 1040 ez   You must register online and receive authorization from your employer to use SSNVS. Tax 1040 ez To register, visit SSA's website at www. Tax 1040 ez ssa. Tax 1040 ez gov/employer and click on the Business Services Online link. Tax 1040 ez Follow the registration instructions to obtain a user identification (ID) and password. Tax 1040 ez You will need to provide the following information about yourself and your company. Tax 1040 ez Name. Tax 1040 ez SSN. Tax 1040 ez Date of birth. Tax 1040 ez Type of employer. Tax 1040 ez EIN. Tax 1040 ez Company name, address, and telephone number. Tax 1040 ez Email address. Tax 1040 ez   When you have completed the online registration process, SSA will mail a one-time activation code to your employer. Tax 1040 ez You must enter the activation code online to use SSNVS. Tax 1040 ez 4. Tax 1040 ez Wages and Other Compensation Generally, all wages are subject to social security and Medicare tax (and FUTA tax for U. Tax 1040 ez S. Tax 1040 ez Virgin Islands employers). Tax 1040 ez However, wages subject to social security tax and FUTA tax are limited by a wage base amount that you pay to each employee for the year. Tax 1040 ez The wage base for social security tax is $117,000 for 2014. Tax 1040 ez After you pay $117,000 to an employee in 2014, including tips, do not withhold social security tax on any amount that you later pay to the employee for the year. Tax 1040 ez The wage base for FUTA tax is $7,000 for 2014. Tax 1040 ez All wages are subject to Medicare tax. Tax 1040 ez The wages may be in cash or in other forms, such as an automobile for personal use. Tax 1040 ez Wages include salaries, vacation allowances, bonuses, commissions, and fringe benefits. Tax 1040 ez It does not matter how payments are measured or paid. Tax 1040 ez See the table in section 12 for exceptions to social security, Medicare, and FUTA taxes on wages. Tax 1040 ez See section 5 and section 6 for a discussion of how the rules apply to tips and farmworkers. Tax 1040 ez Social security and Medicare taxes apply to most payments of sick pay, including payments by third parties such as insurance companies. Tax 1040 ez Special rules apply to the reporting of third-party sick pay. Tax 1040 ez For details, see Publication 15-A. Tax 1040 ez Determine the value of noncash pay (such as goods, lodging, and meals) by its fair market value. Tax 1040 ez However, see Fringe Benefits , later in this section. Tax 1040 ez Except for farmworkers and household employees, this kind of pay may be subject to social security, Medicare, and FUTA taxes. Tax 1040 ez Back pay, including retroactive wage increases (but not amounts paid as liquidated damages), is taxed as ordinary wages in the year paid. Tax 1040 ez For information on reporting back pay to the Social Security Administration, see Publication 957, Reporting Back Pay and Special Wage Payments to the Social Security Administration. Tax 1040 ez Travel and business expenses. Tax 1040 ez   Payments to your employee for travel and other necessary expenses of your business generally are included in taxable wages if (a) your employee is not required to or does not substantiate timely those expenses to you with receipts or other documentation, or (b) you advance an amount to your employee for business expenses and your employee is not required to or does not return timely any amount that he or she does not substantiate. Tax 1040 ez Sick pay. Tax 1040 ez   In general, sick pay is any amount that you pay, under a plan that you take part in, to an employee because of sickness or injury. Tax 1040 ez These amounts are sometimes paid by a third party, such as an insurance company. Tax 1040 ez In either case, these payments are subject to social security and Medicare taxes (and FUTA tax for U. Tax 1040 ez S. Tax 1040 ez Virgin Islands employers). Tax 1040 ez Sick pay becomes exempt from these taxes after the end of 6 calendar months after the calendar month the employee last worked for the employer. Tax 1040 ez Publication 15-A explains the employment tax rules that apply to sick pay, disability benefits, and similar payments to employees. Tax 1040 ez Fringe Benefits Generally, fringe benefits are includible in the gross income of an employee and are subject to employment taxes. Tax 1040 ez Examples of fringe benefits include the use of an automobile, aircraft flights that you provide, free or discounted commercial airline flights, vacations, discounts on property or services, memberships in country clubs or other social clubs, and tickets to entertainment or sporting events. Tax 1040 ez In general, the amount included in the employee's income is the excess of the fair market value of the benefit over the sum of any amount paid for it by the employee and any amount excluded by law. Tax 1040 ez For more information, see Publication 15-B, Employer's Tax Guide to Fringe Benefits. Tax 1040 ez When fringe benefits are treated as paid. Tax 1040 ez   You can choose to treat certain noncash fringe benefits (including personal use of an automobile provided by you) as paid by the pay period, quarter, or on any other basis that you choose, but they must be treated as paid at least annually. Tax 1040 ez You do not have to make a formal choice of payment dates or notify the IRS. Tax 1040 ez You do not have to use the same basis for all employees. Tax 1040 ez You may change methods as often as you like, as long as all benefits provided in a calendar year are treated as paid no later than December 31 of the calendar year. Tax 1040 ez However, see Special accounting rule for fringe benefits provided during November and December , later in this section. Tax 1040 ez   You can treat the value of a single taxable noncash fringe benefit as paid on one or more dates in the same calendar year, even if the employee gets the entire benefit at one time. Tax 1040 ez However, once you elect the payment dates, you must report the taxes on your return in the same tax period in which you treated them as paid. Tax 1040 ez This election does not apply to a fringe benefit where real property or investment personal property is transferred. Tax 1040 ez Withholding social security and Medicare taxes on fringe benefits. Tax 1040 ez   You add the value of fringe benefits to regular wages for a payroll period and figure social security and Medicare taxes on the total. Tax 1040 ez   If you withhold less than the required amount of social security and Medicare taxes from the employee in a calendar year but report and pay the proper amount, you may recover the taxes from the employee. Tax 1040 ez Depositing taxes on fringe benefits. Tax 1040 ez   Once you choose payment dates for taxable noncash fringe benefits, you must deposit taxes in the same deposit period that you treat the fringe benefits as paid. Tax 1040 ez You may make a reasonable estimate of the value of the fringe benefits. Tax 1040 ez In general, the value of taxable noncash fringe benefits provided in a calendar year must be determined by January 31 of the following year. Tax 1040 ez   You may claim a refund of overpayments or elect to have any overpayment applied to the next employment tax return. Tax 1040 ez If deposits are underpaid, see Deposit Penalties in section 8. Tax 1040 ez Valuation of vehicles provided to employees. Tax 1040 ez    If you provide a vehicle to your employees, you may either determine the actual value of the benefit for the entire calendar year, taking into account the business use of the vehicle, or consider the entire use for the calendar year as personal and include 100% of the value of the vehicle in the employee's income. Tax 1040 ez For reporting information to employees, see the box 14 instructions in the General Instructions for Forms W-2 and W-3. Tax 1040 ez Special accounting rule for fringe benefits provided during November and December. Tax 1040 ez   You may choose to treat the value of taxable noncash fringe benefits provided during November and December as paid in the next year. Tax 1040 ez However, this applies only to those benefits that you actually provided during November and December, not to those you merely treated as paid during those months. Tax 1040 ez   If you use this rule, you must notify each affected employee between the time of the employee's last paycheck of the calendar year and at or near the time that you give the employee Form W-2AS, W-2CM, W-2GU, or W-2VI. Tax 1040 ez If you use the special accounting rule, your employee must also use it for the same period that you use it. Tax 1040 ez You cannot use this rule for a fringe benefit of real property or tangible or intangible real property of a kind normally held for investment that is transferred to your employee. Tax 1040 ez 5. Tax 1040 ez Tips Tips that your employee receives from customers are generally subject to social security and Medicare withholding. Tax 1040 ez Your employee must report cash tips to you by the 10th of the month after the month that the tips are received. Tax 1040 ez The report should include tips you paid over to the employee for charge customers, tips the employee received directly from customers, and tips received from other employees under any tip-sharing arrangement. Tax 1040 ez Both directly and indirectly tipped employees must report tips to you. Tax 1040 ez The report should not include tips that the employee paid out to other employees. Tax 1040 ez No report is required for months when tips are less than $20. Tax 1040 ez Your employees report tips on Form 4070, Employee's Report of Tips to Employer, or on a similar statement. Tax 1040 ez They may also use Form 4070A, Employee's Daily Record of Tips, to keep a record of their tips. Tax 1040 ez Both forms are included in Publication 1244, Employee's Daily Record of Tips and Report to Employer, available at IRS. Tax 1040 ez gov. Tax 1040 ez The statement must be signed by the employee and must include: The employee's name, address, and SSN, Your name and address, The month or period that the report covers, and The total tips received during the month or period. Tax 1040 ez You are permitted to establish a system for electronic tip reporting by employees. Tax 1040 ez See Regulations section 31. Tax 1040 ez 6053-1(d). Tax 1040 ez Collecting taxes on tips. Tax 1040 ez   You must collect the employee social security and Medicare taxes on the employee's tips. Tax 1040 ez You can also collect these taxes from the employee's wages or from other funds that he or she makes available. Tax 1040 ez Stop collecting the employee social security tax when his or her total wages and tips for 2014 reach $117,000. Tax 1040 ez Collect the employee Medicare tax for the whole year on all wages and tips. Tax 1040 ez   You are responsible for the employer social security tax on wages and tips until the wages (including tips) reach the wage base limit. Tax 1040 ez You are responsible for the employer Medicare tax for the whole year on all wages and tips. Tax 1040 ez File Form 941-SS (or Form 944) to report withholding and employer taxes on tips. Tax 1040 ez The withholding rules for withholding an employee's share of Medicare tax on tips also apply to withholding the Additional Medicare Tax once wages and tips exceed $200,000 in the calendar year. Tax 1040 ez Ordering rule. Tax 1040 ez   If, by the 10th of the month after the month you received an employee's report on tips, you do not have enough employee funds available to deduct the employee social security and Medicare tax on tips, you no longer have to collect it and are not liable for it. Tax 1040 ez Reporting tips. Tax 1040 ez   Report tips and any collected and uncollected social security in boxes 1, 5, 7, and 12 on Forms W-2AS, W-2CM, W-2GU, or W-2VI and on Form 941-SS, lines 5b, 5c, and 5d (Form 944, lines 4b, 4c, and 4d). Tax 1040 ez Do not include any uncollected Additional Medicare Tax in box 12 of Form W-2. Tax 1040 ez Report an adjustment on Form 941-SS, line 9 (Form 944, line 6), for the uncollected social security and Medicare taxes. Tax 1040 ez The table in section 12 shows how tips are treated for FUTA tax purposes. Tax 1040 ez   Revenue Ruling 2012-18 provides guidance for employers regarding social security and Medicare taxes imposed on tips, including information on the reporting of the employer share of social security and Medicare taxes under section 3121(q), the difference between tips and service charges, and the section 45B credit. Tax 1040 ez See Revenue Ruling 2012-18, 2012-26 I. Tax 1040 ez R. Tax 1040 ez B. Tax 1040 ez 1032, available at www. Tax 1040 ez irs. Tax 1040 ez gov/irb/2012-26_IRB/ar07. Tax 1040 ez html. Tax 1040 ez 6. Tax 1040 ez Social Security and Medicare Taxes for Farmworkers The tests described below apply only to services that are defined as agricultural labor (farmwork). Tax 1040 ez In general, you are an employer of farmworkers if your employees: Raise or harvest agricultural or horticultural products on your farm (including the raising and feeding of livestock); Work in connection with the operation, management, conservation, improvement, or maintenance of your farm and its tools and equipment; Provide services relating to salvaging timber, or clearing land of brush and other debris, left by a hurricane (also known as hurricane labor); Handle, process, or package any agricultural or horticultural commodity if you produced over half of the commodity (for a group of up to 20 unincorporated operators, all of the commodity); or Do work for you related to cotton ginning, turpentine, gum resin products, or the operation and maintenance of irrigation facilities. Tax 1040 ez For this purpose, the term “farm” includes stock, dairy, poultry, fruit, fur-bearing animal, and truck farms, as well as plantations, ranches, nurseries, ranges, greenhouses or other similar structures used primarily for the raising of agricultural or horticultural commodities, and orchards. Tax 1040 ez Farmwork does not include reselling activities that do not involve any substantial activity of raising agricultural or horticultural commodities, such as a retail store or a greenhouse used primarily for display or storage. Tax 1040 ez A “share farmer” working for you is not your employee. Tax 1040 ez However, the share farmer may be subject to self-employment tax. Tax 1040 ez In general, share farming is an arrangement in which certain commodity products are shared between the farmer and the owner (or tenant) of the land. Tax 1040 ez For details, see Regulations section 31. Tax 1040 ez 3121(b)(16)-1. Tax 1040 ez The $150 Test or the $2,500 Test All cash wages that you pay to any employee for farmwork are subject to social security and Medicare taxes if either of the following two tests is met. Tax 1040 ez You pay cash wages to the employee of $150 or more in a year (count all cash wages paid on a time, piecework, or other basis) for farmwork. Tax 1040 ez The $150 test applies separately to each farmworker that you employ. Tax 1040 ez If you employ a family of workers, each member is treated separately. Tax 1040 ez Do not count wages paid by other employers. Tax 1040 ez The total that you pay for farmwork (cash and noncash) to all of your employees is $2,500 or more during the year. Tax 1040 ez Exceptions. Tax 1040 ez   The $150 and $2,500 tests do not apply to wages that you pay to a farmworker who receives less than $150 in annual cash wages and the wages are not subject to social security and Medicare taxes even if you pay $2,500 or more in that year to all of your farmworkers if the farmworker: Is employed in agriculture as a hand-harvest laborer, Is paid piece rates in an operation that is usually paid on a piece-rate basis in the region of employment, Commutes daily from his or her home to the farm, and Had been employed in agriculture less than 13 weeks in the preceding calendar year. Tax 1040 ez   Amounts that you pay to these seasonal farmworkers, however, count toward the $2,500-or-more test to determine whether wages that you pay to other farmworkers are subject to social security and Medicare taxes. Tax 1040 ez 7. Tax 1040 ez How To Figure Social Security and Medicare Taxes The tax rate for social security is 6. Tax 1040 ez 2% (amount withheld) each for the employer and employee (12. Tax 1040 ez 4% total). Tax 1040 ez The social security wage base limit is $117,000. Tax 1040 ez The tax rate for Medicare is 1. Tax 1040 ez 45% (amount withheld) each for the employee and employer (2. Tax 1040 ez 9% total). Tax 1040 ez There is no wage base limit for Medicare tax; all covered wages are subject to Medicare tax. Tax 1040 ez Multiply each wage payment by these percentages to figure the tax to withhold from employees. Tax 1040 ez Employers report both the employee and employer shares on Forms 941-SS, 944, or Form 943 (farm employment). Tax 1040 ez See section 5 for information on tips. Tax 1040 ez Additional Medicare Tax withholding. Tax 1040 ez   In addition to withholding Medicare tax at 1. Tax 1040 ez 45%, you must withhold a 0. Tax 1040 ez 9% Additional Medicare Tax from wages you pay to an employee in excess of $200,000 in a calendar year. Tax 1040 ez You are required to begin withholding Additional Medicare Tax in the pay period in which you pay wages in excess of $200,000 to an employee and continue to withhold it each pay period until the end of the calendar year. Tax 1040 ez Additional Medicare Tax is only imposed on the employee. Tax 1040 ez There is no employer share of Additional Medicare Tax. Tax 1040 ez All wages that are subject to Medicare tax are subject to Additional Medicare Tax withholding if paid in excess of the $200,000 withholding threshold. Tax 1040 ez   For more information on what wages are subject to Medicare tax, see the chart Special Rules for Various Types of Employment and Payments in section 12. Tax 1040 ez For more information on Additional Medicare Tax, visit IRS. Tax 1040 ez gov and enter “Additional Medicare Tax” in the search box. Tax 1040 ez Deducting the tax. Tax 1040 ez   Deduct the employee tax from each wage payment. Tax 1040 ez If you are not sure that the wages that you pay to a farmworker during the year will be taxable, you may either deduct the tax when you make the payments or wait until the $2,500 test or the $150 test explained in section 6 has been met. Tax 1040 ez Employee's portion of taxes paid by employer. Tax 1040 ez   If you pay your employee's social security and Medicare taxes without deducting them from the employee's pay, you must include the amount of the payments in the employee's wages for social security and Medicare taxes. Tax 1040 ez This increase in the employee's wage payment for your payment of the employee's social security and Medicare taxes is also subject to employee social security and Medicare taxes. Tax 1040 ez This again increases the amount of the additional taxes that you must pay. Tax 1040 ez Household and agricultural employers. Tax 1040 ez   This discussion does not apply to household and agricultural employers. Tax 1040 ez If you pay a household or agricultural employee's social security and Medicare taxes, these payments must be included in the employee's wages. Tax 1040 ez However, this wage increase due to the tax payments is not subject to social security or Medicare taxes as discussed in this section. Tax 1040 ez See Publication 15-A for details. Tax 1040 ez Sick pay payments. Tax 1040 ez   Social security and Medicare taxes apply to most payments of sick pay, including payments made by third parties such as insurance companies. Tax 1040 ez For details on third-party payers of sick pay, see Publication 15-A. Tax 1040 ez 8. Tax 1040 ez Depositing Taxes You must deposit social security and Medicare taxes if your tax liability (Form 941-SS, line 10; Form 944, line 7; or Form 943, line 11) is $2,500 or more for the tax return period. Tax 1040 ez You must make the deposit by electronic funds transfer. Tax 1040 ez For more information about electronic funds transfers, see How To Deposit , later in this section. Tax 1040 ez Payment with Return $2,500 rule. Tax 1040 ez   Instead of making deposits during the current quarter, you can pay your total Form 941-SS tax liability when you timely file Form 941-SS if: Your total Form 941-SS tax liability for either the current quarter or the preceding quarter is less than $2,500 and You do not incur a $100,000 next-day deposit obligation during the current quarter. Tax 1040 ez   If you are not sure your total liability for the current quarter will be less than $2,500, (and your liability for the preceding quarter was not less than $2,500), make deposits using the semiweekly or monthly rules so you won't be subject to failure to deposit penalties. Tax 1040 ez Employers who have been notified to file Form 944 can pay their tax liability due for the fourth quarter with Form 944, if their fourth quarter tax liability is less than $2,500. Tax 1040 ez Employers must have deposited any tax liability due for the first, second, and third quarters, according to the deposit rules, in order to avoid failure-to-deposit penalties for deposits due during those quarters. Tax 1040 ez Only monthly schedule depositors are allowed to make an Accuracy of Deposits Rule payment with the return. Tax 1040 ez Semiweekly schedule depositors must timely deposit the amount. Tax 1040 ez See Accuracy of Deposits Rule and How To Deposit, later in this section. Tax 1040 ez When To Deposit Under the rules discussed below, the only difference between farm and nonfarm workers' employment tax deposit rules is the lookback period. Tax 1040 ez Therefore, farm and nonfarm workers are discussed together except where noted. Tax 1040 ez Depending on your total taxes reported during a lookback period (discussed later), you are either a monthly schedule depositor or a semiweekly schedule depositor. Tax 1040 ez The terms “monthly schedule depositor” and “semiweekly schedule depositor” do not refer to how often you pay your employees or how often you are required to make deposits. Tax 1040 ez The terms identify which set of rules that you must follow when a tax liability arises (for example, when you have a payday). Tax 1040 ez You will need to determine your deposit schedule for a calendar year based on the total employment taxes reported on Forms 941-SS, line 10; Form 944, line 7; or Form 943, line 9, for your lookback period (defined below). Tax 1040 ez If you filed both Forms 941-SS and 941 during the lookback period, combine the tax liabilities for these returns for purposes of determining your deposit schedule. Tax 1040 ez Determine your deposit schedule for Form 943 separately from Forms 941-SS and 941. Tax 1040 ez Lookback period for employers of nonfarm workers. Tax 1040 ez   The lookback period for Form 941-SS (or Form 941) consists of four quarters beginning July 1 of the second preceding year and ending June 30 of the prior year. Tax 1040 ez These four quarters are your lookback period even if you did not report any taxes for any of the quarters. Tax 1040 ez For 2014, the lookback period is July 1, 2012, through June 30, 2013. Tax 1040 ez    Table 1. Tax 1040 ez Lookback Period for Calendar Year 2014 Lookback Period July 1, 2012 Oct. Tax 1040 ez 1, 2012 Jan. Tax 1040 ez 1, 2013 Apr. Tax 1040 ez 1, 2013 through through through through Sep. Tax 1040 ez 30, 2012 Dec. Tax 1040 ez 31, 2012 Mar. Tax 1040 ez 31, 2013 June 30, 2013    The lookback period for Form 944 is the second calendar year preceding the current calendar year. Tax 1040 ez For example, the lookback period for calendar year 2014 is calendar year 2012. Tax 1040 ez In addition, for employers who filed Form 944 for 2012 or for 2013 and will file Form 941-SS (or Form 941) for 2014, the lookback period for 2014 is the second calendar year preceding the current calendar year, that is, 2012. Tax 1040 ez Lookback period for employers of farmworkers. Tax 1040 ez   The lookback period for Form 943 is the second calendar year preceding the current calendar year. Tax 1040 ez The lookback period for calendar year 2014 is calendar year 2012. Tax 1040 ez Adjustments to lookback period taxes. Tax 1040 ez   To determine your taxes for the lookback period, use only the tax that you reported on the original returns (Forms 941-SS, 943, or 944). Tax 1040 ez Do not include any adjustments shown on Form 941-X, 943-X, or 944-X. Tax 1040 ez Example. Tax 1040 ez   An employer originally reported total taxes of $45,000 for the lookback period. Tax 1040 ez The employer discovered during January 2014 that the tax reported during the lookback period was understated by $10,000 and corrected this error by filing Form 941-X. Tax 1040 ez The employer is a monthly schedule depositor for 2014 because the lookback period tax liabilities are based on the amounts originally reported, and they were $50,000 or less. Tax 1040 ez Deposit Period The term “deposit period” refers to the period during which tax liabilities are accumulated for each required deposit due date. Tax 1040 ez For monthly schedule depositors, the deposit period is a calendar month. Tax 1040 ez The deposit periods for semiweekly schedule depositors are Wednesday through Friday and Saturday through Tuesday. Tax 1040 ez Monthly Deposit Schedule If your total tax reported for the lookback period is $50,000 or less, you are a monthly schedule depositor for the current year. Tax 1040 ez You must deposit taxes on wage payments made during a calendar month by the 15th day of the following month. Tax 1040 ez New employers. Tax 1040 ez   Your tax liability for any quarter in the lookback period before the date you started or acquired your business is considered to be zero. Tax 1040 ez Therefore, you are a monthly schedule depositor for the first calendar year of your business (but see the $100,000 Next-Day Deposit Rule , later in this section). Tax 1040 ez Semiweekly Deposit Schedule If your total tax reported for the lookback period is more than $50,000, you are a semiweekly schedule depositor for the current year. Tax 1040 ez If you are a semiweekly schedule depositor, you must deposit on Wednesday and/or Friday, depending on what day of the week that you make wage payments, as follows. Tax 1040 ez Deposit taxes on wage payments made on Wednesday, Thursday, and/or Friday by the following Wednesday. Tax 1040 ez Deposit taxes on wage payments made on Saturday, Sunday, Monday, and/or Tuesday by the following Friday. Tax 1040 ez Semiweekly depositors are generally not required to deposit twice a week if their payments were in the same semiweekly period unless the $100,000 Next-Day Deposit Rule , discussed later in this section, applies. Tax 1040 ez For example, if you made a payment on both Wednesday and Friday and incurred taxes of $10,000 for each pay date, deposit the $20,000 on the following Wednesday. Tax 1040 ez If you made no additional payments on Saturday through Tuesday, no deposit is due on Friday. Tax 1040 ez Semiweekly deposit period spanning two quarters. Tax 1040 ez   If you have more than one pay date during a semiweekly period and the pay dates fall in different calendar quarters, you will need to make separate deposits for the separate liabilities. Tax 1040 ez Example. Tax 1040 ez   If you have a pay date on Monday, March 31, 2014 (first quarter), and another pay date on Tuesday, April 1, 2014 (second quarter), two separate deposits will be required even though the pay dates fall within the same semiweekly period. Tax 1040 ez Both deposits will be due on Friday, April 4, 2014 (3 business days from the end of the semiweekly deposit period). Tax 1040 ez Examples of Monthly and Semiweekly Schedules Employers of nonfarm workers. Tax 1040 ez   Rose Co. Tax 1040 ez reported Form 941-SS taxes as follows: 2013 Lookback Period 3rd Quarter 2011 $12,000 4th Quarter 2011 12,000 1st Quarter 2012 12,000 2nd Quarter 2012 12,000   $48,000 2014 Lookback Period 3rd Quarter 2012 $12,000 4th Quarter 2012 12,000 1st Quarter 2013 12,000 2nd Quarter 2013 15,000   $51,000 Rose Co. Tax 1040 ez is a monthly schedule depositor for 2013 because its taxes for the four quarters in its lookback period ($48,000 for the 3rd quarter of 2011 through the 2nd quarter of 2012) were not more than $50,000. Tax 1040 ez However, for 2014, Rose Co. Tax 1040 ez is a semiweekly schedule depositor because the total taxes for the four quarters in its lookback period ($51,000 for the 3rd quarter of 2012 through the 2nd quarter of 2013) exceeded $50,000. Tax 1040 ez Employers of farmworkers. Tax 1040 ez   Red Co. Tax 1040 ez reported taxes on its 2012 Form 943, line 9, of $48,000. Tax 1040 ez On its 2013 Form 943, line 11, it reported taxes of $60,000. Tax 1040 ez   Red Co. Tax 1040 ez is a monthly schedule depositor for 2014 because its taxes for its lookback period ($48,000 for calendar year 2012) were not more than $50,000. Tax 1040 ez However, for 2015, Red Co. Tax 1040 ez is a semiweekly schedule depositor because the total taxes for its lookback period ($60,000 for calendar year 2013) exceeded $50,000. Tax 1040 ez New agricultural employers. Tax 1040 ez   New agricultural employers filing Form 943 are monthly schedule depositors for the first and second calendar years of their business because their taxes for the lookback period (2 years) are considered to be zero. Tax 1040 ez However, see the $100,000 Next-Day Deposit Rule , later in this section. Tax 1040 ez Deposits on Business Days Only If a deposit due date falls on a day that is not a business day, the deposit is considered timely if it is made by the close of the next business day. Tax 1040 ez A business day is any day other than a Saturday, Sunday, or legal holiday. Tax 1040 ez For example, if a deposit is required to be made on Friday, but Friday is a legal holiday, the deposit is considered timely if it is made by the following Monday (if Monday is a business day). Tax 1040 ez Semiweekly schedule depositors have at least 3 business days to make a deposit. Tax 1040 ez If any of the 3 weekdays after the end of a semiweekly period is a legal holiday, you will have an additional day for each day that is a legal holiday to make the required deposit. Tax 1040 ez For example, if a semiweekly schedule depositor accumulated taxes for payments made on Friday and the following Monday is a legal holiday, the deposit normally due on Wednesday may be made on Thursday (this allows 3 business days to make the deposit). Tax 1040 ez Legal holiday. Tax 1040 ez   The term “legal holiday” means any legal holiday in the District of Columbia. Tax 1040 ez Legal holidays for 2014 are listed below. Tax 1040 ez January 1—New Year's Day January 20—Birthday of Martin Luther King, Jr. Tax 1040 ez February 17—Washington's Birthday April 16—District of Columbia Emancipation Day May 26—Memorial Day July 4—Independence Day September 1—Labor Day October 13—Columbus Day November 11—Veterans Day November 27—Thanksgiving Day December 25—Christmas Day Application of Monthly and Semiweekly Schedules The following examples illustrate the procedure for determining the deposit date under the two different deposit schedules. Tax 1040 ez Monthly schedule example. Tax 1040 ez   Spruce Co. Tax 1040 ez is a monthly schedule depositor with seasonal employees. Tax 1040 ez It paid wages each Friday during August but did not pay any wages during September. Tax 1040 ez Under the monthly deposit schedule, Spruce Co. Tax 1040 ez must deposit the combined tax liabilities for the four August paydays by September 15. Tax 1040 ez Spruce Co. Tax 1040 ez does not have a deposit requirement for September (due by October 15) because no wages were paid and, therefore, it did not have a tax liability for September. Tax 1040 ez Semiweekly schedule example. Tax 1040 ez   Green, Inc. Tax 1040 ez is a semiweekly schedule depositor and pays wages once each month on the last Friday of the month. Tax 1040 ez Although Green, Inc. Tax 1040 ez , has a semiweekly deposit schedule, it will deposit just once a month because it pays wages only once a month. Tax 1040 ez The deposit, however, will be made under the semiweekly deposit schedule as follows: Green, Inc. Tax 1040 ez ’s tax liability for the April 25, 2014 (Friday), payday must be deposited by April 30, 2014 (Wednesday). Tax 1040 ez Under the semiweekly deposit schedule, liabilities for wages paid on Wednesday through Friday must be deposited by the following Wednesday. Tax 1040 ez $100,000 Next-Day Deposit Rule If you accumulate taxes of $100,000 or more on any day during a deposit period, you must deposit by the close of the next business day, whether you are a monthly or a semiweekly schedule depositor. Tax 1040 ez For purposes of the $100,000 rule, do not continue accumulating taxes after the end of a deposit period. Tax 1040 ez For example, if a semiweekly schedule depositor has accumulated taxes of $95,000 on Tuesday and $10,000 on Wednesday, the $100,000 next-day deposit rule does not apply because the $10,000 is accumulated in the next deposit period. Tax 1040 ez Thus, $95,000 must be deposited by Friday and $10,000 must be deposited by the following Wednesday. Tax 1040 ez However, once you accumulate at least $100,000 in a deposit period, stop accumulating at the end of that day and begin to accumulate anew on the next day. Tax 1040 ez For example, Fir Co. Tax 1040 ez is a semiweekly schedule depositor. Tax 1040 ez On Monday, Fir Co. Tax 1040 ez accumulates taxes of $110,000 and must deposit on Tuesday, the next business day. Tax 1040 ez On Tuesday, Fir Co. Tax 1040 ez accumulates additional taxes of $30,000. Tax 1040 ez Because the $30,000 is not added to the previous $110,000 and is less than $100,000, Fir Co. Tax 1040 ez does not have to deposit the $30,000 until Friday (following the semiweekly deposit schedule). Tax 1040 ez If you are a monthly schedule depositor and you accumulate a $100,000 tax liability on any day during a month, you become a semiweekly schedule depositor on the next day and remain so for the remainder of the calendar year and for the following calendar year. Tax 1040 ez Example. Tax 1040 ez   Elm, Inc. Tax 1040 ez started its business on May 1, 2014. Tax 1040 ez On May 8, it paid wages for the first time and accumulated a tax liability of $40,000. Tax 1040 ez On Friday, May 9, Elm, Inc. Tax 1040 ez paid wages and accumulated a liability of $60,000, making its accumulated Form 941-SS tax liability total $100,000. Tax 1040 ez Elm, Inc. Tax 1040 ez must deposit $100,000 by Monday, May 12, the next business day. Tax 1040 ez Because this was the first year of its business, the tax liability for its lookback period is considered to be zero, and it would be a monthly schedule depositor based on the lookback rules. Tax 1040 ez However, because Elm, Inc. Tax 1040 ez accumulated $100,000 on May 9, it became a semiweekly schedule depositor on May 10. Tax 1040 ez It will be a semiweekly schedule depositor for the remainder of 2014 and for 2015. Tax 1040 ez Accuracy of Deposits Rule You are required to deposit 100% of your tax liability on or before the deposit due date. Tax 1040 ez However, penalties will not be applied for depositing less than 100% if both of the following conditions are met. Tax 1040 ez Any deposit shortfall does not exceed the greater of $100 or 2% of the amount of taxes otherwise required to be deposited, and The deposit shortfall is paid or deposited by the shortfall makeup date as described below. Tax 1040 ez Makeup date for deposit shortfall: Monthly schedule depositor. Tax 1040 ez Deposit or pay the shortfall by the due date of your Form 941-SS, 944, or 943 for the period in which the shortfall occurred. Tax 1040 ez You may pay the shortfall with your return even if the amount is $2,500 or more. Tax 1040 ez Semiweekly schedule depositor. Tax 1040 ez Deposit by the earlier of: The first Wednesday or Friday (whichever comes first) that comes on or after the 15th of the month following the month in which the shortfall occurred, or The return due date for the period in which the shortfall occurred. Tax 1040 ez For example, if a semiweekly schedule depositor filing Form 941-SS has a deposit shortfall during July 2014, the shortfall makeup date is August 15, 2014 (Friday). Tax 1040 ez However, if the shortfall occurred on the required April 2 (Wednesday), deposit date for a March 28 (Friday) pay date, the return due date for the March 28 pay date (April 30) would come before the May 16 (Friday) shortfall makeup date. Tax 1040 ez In this case, the shortfall must be deposited by April 30, 2014. Tax 1040 ez Employers of Both Farm and Nonfarm Workers If you employ both farm and nonfarm workers, you must treat employment taxes for the farmworkers (Form 943 taxes) separately from employment taxes for the nonfarm workers (Form 941-SS or 944 taxes). Tax 1040 ez Form 943 taxes and Form 941-SS (or Form 944) taxes are not combined for purposes of applying any of the deposit rules. Tax 1040 ez If a deposit is due, deposit the Form 941-SS (or Form 944) taxes and Form 943 taxes separately, as discussed next. Tax 1040 ez How To Deposit You must deposit employment taxes by electronic funds transfer. Tax 1040 ez See Payment with Return , earlier in this section, for exceptions explaining when taxes may be paid with the tax return instead of being deposited. Tax 1040 ez Electronic deposit requirement. Tax 1040 ez   You must use electronic funds transfer to make all federal tax deposits (such as deposits of employment tax, excise tax, and corporate income tax). Tax 1040 ez Generally, electronic fund transfers are made using the Electronic Federal Tax Payment System (EFTPS). Tax 1040 ez If you do not want to use EFTPS, you can arrange for your tax professional, financial institution, payroll service, or other trusted third party to make electronic deposits on your behalf. Tax 1040 ez   EFTPS is a free service provided by the Department of the Treasury. Tax 1040 ez To get more information or to enroll in EFTPS, call 1-800-555-4477 (U. Tax 1040 ez S. Tax 1040 ez Virgin Islands only) or 303-967-5916 (toll call). Tax 1040 ez You can also visit the EFTPS website at www. Tax 1040 ez eftps. Tax 1040 ez gov. Tax 1040 ez Additional information about EFTPS is also available in Publication 966. Tax 1040 ez When you receive your EIN. Tax 1040 ez   If you are a new employer that indicated a federal tax obligation when requesting an EIN, you will be pre-enrolled in EFTPS. Tax 1040 ez You will receive information about Express Enrollment in your Employer Identification Number (EIN) Package and an additional mailing containing your EFTPS personal identification number (PIN) and instructions for activating your PIN. Tax 1040 ez Follow the steps in your “How to Activate Your Enrollment” brochure to activate your enrollment and begin making your payroll tax deposits. Tax 1040 ez If you outsource any of your payroll and related tax duties to a third party payer, such as a payroll service provider or reporting agent, be sure to tell them about your EFTPS enrollment. Tax 1040 ez Deposit record. Tax 1040 ez   For your records, an Electronic Funds Transfer (EFT) Trace Number will be provided with each successful payment. Tax 1040 ez The number can be used as a receipt or to trace the payment. Tax 1040 ez Depositing on time. Tax 1040 ez   For deposits made by EFTPS to be on time, you must initiate the deposit by 8 p. Tax 1040 ez m. Tax 1040 ez Eastern time the day before the date the deposit is due. Tax 1040 ez If you use a third party to make deposits on your behalf, they may have different cutoff times. Tax 1040 ez Same-day payment option. Tax 1040 ez   If you fail to initiate a deposit transaction on EFTPS by 8 p. Tax 1040 ez m. Tax 1040 ez Eastern time the day before the date a deposit is due, you can still make your deposit on time by using the Federal Tax Application (FTA). Tax 1040 ez To use the same-day payment method, you will need to make arrangements with your financial institution ahead of time. Tax 1040 ez Please check with your financial institution regarding availability, deadlines, and costs. Tax 1040 ez Your financial institution may charge you a fee for payments made this way. Tax 1040 ez To learn more about the information you will need to provide your financial institution to make a same-day wire payment, please visit www. Tax 1040 ez eftps. Tax 1040 ez gov to download the Same-Day Payment Worksheet. Tax 1040 ez How to claim credit for overpayments. Tax 1040 ez   If you deposited more than the right amount of taxes for a tax period, you can choose on Form 941-SS, 941, 944, or 943 for that tax period to have the overpayment refunded or applied as a credit to your next return. Tax 1040 ez Do not ask EFTPS to request a refund from the IRS for you. Tax 1040 ez Deposit Penalties Penalties may apply if you do not make required deposits on time or if you make deposits of less than the required amount. Tax 1040 ez The penalties do not apply if any failure to make a proper and timely deposit was due to reasonable cause and not to willful neglect. Tax 1040 ez The IRS may also waive penalties if you inadvertently fail to deposit in the first quarter that a deposit is due, or the first quarter during which your frequency of deposits changed, if you timely filed your employment tax return. Tax 1040 ez For amounts not properly or timely deposited, the penalty rates are as follows. Tax 1040 ez 2% - Deposits made 1 to 5 days late. Tax 1040 ez 5% - Deposits made 6 to 15 days late. Tax 1040 ez 10% - Deposits made 16 or more days late. Tax 1040 ez Also applies to amounts paid within 10 days of the date of the first notice that the IRS sent asking for the tax due. Tax 1040 ez 10% - Amounts (that should have been deposited) paid directly to the IRS or paid with your tax return (but see Payment with Return , earlier in this section, for exceptions). Tax 1040 ez 15% - Amounts still unpaid more than 10 days after the date of the first notice that the IRS sent asking for the tax due or the day on which you received notice and demand for immediate payment, whichever is earlier. Tax 1040 ez Late deposit penalty amounts are determined using calendar days, starting from the due date of the liability. Tax 1040 ez Special rule for former Form 944 filers. Tax 1040 ez    If you filed Form 944 for the prior year and must file Forms 941-SS for the current year because your employment tax liability for the prior year exceeded the Form 944 eligibility requirement ($1,000 or less), the failure-to-deposit penalty will not apply to a late deposit of employment taxes for the first month of the current year if the taxes are deposited in full by March 15 of the current year. Tax 1040 ez Order in which deposits are applied. Tax 1040 ez   Deposits generally are applied to the most recent tax liability within the return period (quarter or year). Tax 1040 ez However, if you receive a failure-to-deposit penalty notice, you may designate how your payment is to be applied in order to minimize the amount of the penalty, if you do so within 90 days of the date of the notice. Tax 1040 ez Follow the instructions on the penalty notice that you received. Tax 1040 ez For more information on designating deposits, see Revenue Procedure 2001-58. Tax 1040 ez You can find Revenue Procedure 2001-58 on page 579 of Internal Revenue Bulletin 2001-50 at www. Tax 1040 ez irs. Tax 1040 ez gov/pub/irs-irbs/irb01-50. Tax 1040 ez pdf. Tax 1040 ez Example. Tax 1040 ez Cedar, Inc. Tax 1040 ez is required to make a deposit of $1,000 on July 15 and $1,500 on August 15. Tax 1040 ez It does not make the deposit on July 15. Tax 1040 ez On August 15, Cedar, Inc. Tax 1040 ez deposits $2,000. Tax 1040 ez Under the deposits rule, which applies deposits to the most recent tax liability, $1,500 of the deposit is applied to the August 15 deposit and the remaining $500 is applied to the July deposit. Tax 1040 ez Accordingly, $500 of the July 15 liability remains undeposited. Tax 1040 ez The penalty on this underdeposit will apply as explained earlier. Tax 1040 ez Trust fund recovery penalty. Tax 1040 ez   If federal income, social security, or Medicare taxes that must be withheld are not withheld or are not deposited or paid to the United States Treasury, the trust fund recovery penalty may apply. Tax 1040 ez The penalty is the full amount of the unpaid trust fund tax. Tax 1040 ez This penalty may apply to you if these unpaid taxes cannot be immediately collected from the employer or business. Tax 1040 ez   The trust fund recovery penalty may be imposed on all persons who are determined by the IRS to be responsible for collecting, accounting for, and paying over these taxes, and who acted willfully in not doing so. Tax 1040 ez   A responsible person can be an officer or employee of a corporation, a partner or employee of a partnership, an accountant, a volunteer director/trustee, or an employee of a sole proprietorship, or any other person or entity that is responsible for collecting, accounting for, and paying over trust fund taxes. Tax 1040 ez A responsible person also may include one who signs checks for the business or otherwise has authority to cause the spending of business funds. Tax 1040 ez    Willfully means voluntarily, consciously, and intentionally. Tax 1040 ez A responsible person acts willfully if the person knows the required actions of collecting, accounting for or paying over trust fund taxes are not taking place, or recklessly disregards obvious and known risks to the government's right to receive trust fund taxes. Tax 1040 ez “Averaged” failure-to-deposit penalty. Tax 1040 ez   The IRS may assess an “averaged” failure-to-deposit (FTD) penalty of 2% to 10% if you are a monthly schedule depositor and did not properly complete Form 941-SS, line 14, when your tax liability shown on Form 941-SS, line 10, was $2,500 or more. Tax 1040 ez IRS may also assess this penalty of 2% to 10% if you are a semiweekly schedule depositor and your tax liability shown on Form 941-SS, line 10, was $2,500 or more and you did any of the following. Tax 1040 ez Completed Form 941-SS, line 14, instead of Schedule B (Form 941). Tax 1040 ez Failed to attach a properly completed Schedule B (Form 941). Tax 1040 ez Completed Schedule B (Form 941) incorrectly, for example, by entering tax deposits instead of tax liabilities in the numbered spaces. Tax 1040 ez   The IRS figures the penalty by allocating your total tax liability shown on Form 941-SS, line 10, equally throughout the tax period. Tax 1040 ez Your deposits and payments may not be counted as timely because IRS does not know the actual dates of your tax liabilities. Tax 1040 ez   You can avoid the penalty by reviewing your return before filing it. Tax 1040 ez Follow these steps before filing your Form 941-SS. Tax 1040 ez If you are a monthly schedule depositor, report your tax liabilities (not your deposits) in the monthly entry spaces on Form 941-SS, line 14. Tax 1040 ez If you are a semiweekly schedule depositor, report your tax liabilities (not your deposits) on Schedule B (Form 941) in the lines that represent the dates you paid your employees. Tax 1040 ez Verify that your total liability shown on Form 941-SS, line 14, or the bottom of Schedule B (Form 941) equals your tax liability shown on Form 941-SS,  line 10. Tax 1040 ez Do not show negative amounts on Form 941-SS, line 14, or Schedule B (Form 941). Tax 1040 ez For prior period errors, do not adjust your tax liabilities reported on your current Form 941-SS, line 14, or on Schedule B (Form 941). Tax 1040 ez Instead, file an adjusted return (Form 941-X (if you are adjusting a previously filed Form 941-SS) or Form 944-X (if you are adjusting a previously filed Form 944-SS or 944)) if you are also adjusting your tax liability. Tax 1040 ez If you are only adjusting your deposits in response to a failure-to-deposit penalty notice, see the Instructions for Schedule B (Form 941) (if you previously filed Form 941-SS) or the Instructions for Form 944-X (if you previously filed Form 944-SS or 944). Tax 1040 ez If you filed Form 944 for 2013 and line 7 was $2,500 or more, you were required to complete Form 944, lines 13a–13m, or attach Form 945-A, Annual Record of Federal Tax Liability. Tax 1040 ez If you failed to complete lines 13a–13m, or failed to attach Form 945-A, whichever was required, IRS may assess an “averaged” failure-to-deposit (FTD) penalty. Tax 1040 ez 9. Tax 1040 ez Employer's Returns General instructions. Tax 1040 ez   File Forms 941-SS (or Form 944) for nonfarm workers and Form 943 for farmworkers. Tax 1040 ez (U. Tax 1040 ez S. Tax 1040 ez Virgin Islands employers may be required to file Form 940 for the combined wages of nonfarm workers and farmworkers. Tax 1040 ez ) Employers with employees subject to U. Tax 1040 ez S. Tax 1040 ez income tax withholding. Tax 1040 ez   If you have both employees who are subject to U. Tax 1040 ez S. Tax 1040 ez income tax withholding and employees who are not subject to U. Tax 1040 ez S. Tax 1040 ez income tax withholding, you must file only Form 941 (or Form 944) and include all your employees’ wages on that form. Tax 1040 ez Nonfarm employers. Tax 1040 ez   File Form 941-SS for the calendar quarter in which you first pay wages for nonfarm workers and for each quarter thereafter unless you are a seasonal employer or file a final return. Tax 1040 ez Due dates for each quarter of the calendar year are as follows. Tax 1040 ez Quarter Due Jan. Tax 1040 ez , Feb. Tax 1040 ez , Mar. Tax 1040 ez Apr. Tax 1040 ez 30 Apr. Tax 1040 ez , May, June July 31 July, Aug. Tax 1040 ez , Sept. Tax 1040 ez Oct. Tax 1040 ez 31 Oct. Tax 1040 ez , Nov. Tax 1040 ez , Dec. Tax 1040 ez Jan. Tax 1040 ez 31   However, if you deposited all taxes when due for the quarter, you have 10 additional days from the due dates to file the return. Tax 1040 ez If the due date for filing your return falls on a Saturday, Sunday, or legal holiday, you may file on the next business day. Tax 1040 ez   If you closed your business or stopped paying wages and do not have to file returns in the future, check the box on line 15 of your final Form 941-SS and show the date final wages were paid. Tax 1040 ez Form 944. Tax 1040 ez   If IRS notified you to file Form 944, file your 2013 Form 944 by January 31, 2014, or by February 10, 2014 (if you deposited all taxes when due). Tax 1040 ez Household employers reporting social security and Medicare taxes. Tax 1040 ez   If you are a sole proprietor and file Forms 941-SS (or Form 944) for business employees, you may include taxes for household employees on your Forms 941-SS (or Form 944). Tax 1040 ez Otherwise, report social security and Medicare taxes for household employees on Schedule H (Form 1040), Household Employment Taxes. Tax 1040 ez See Publication 926, Household Employer's Tax Guide, for more information. Tax 1040 ez Employers of farmworkers. Tax 1040 ez   Every employer of farmworkers must file a Form 943 for each calendar year beginning with the first year the employer pays $2,500 or more for farmwork or employs a farmworker who meets the $150 test described in section 6. Tax 1040 ez   File a Form 943 each year for all taxable wages paid for farmwork. Tax 1040 ez You may report household workers in a private home on a farm operated for profit on Form 943. Tax 1040 ez Do not report wages for farmworkers on Form 941-SS or 944. Tax 1040 ez   Send Form 943 to the IRS by January 31 of the following year. Tax 1040 ez Send it with payment of any taxes due that you are not required to deposit. Tax 1040 ez If you deposited all taxes when due, you have 10 additional days to file. Tax 1040 ez Penalties. Tax 1040 ez   For each whole or part month that a return is not filed when required (disregarding any extensions of the filing deadline), there is a failure-to-file penalty of 5% of the unpaid tax due with that return. Tax 1040 ez The maximum penalty is generally 25% of the tax due. Tax 1040 ez Also, for each whole or part month that the tax is paid late (disregarding any extensions of the payment deadline), there is a failure-to-pay penalty of 0. Tax 1040 ez 5% per month of the amount of tax. Tax 1040 ez For individual filers only, the failure-to-pay penalty is reduced from 0. Tax 1040 ez 5% per month to 0. Tax 1040 ez 25% per month if an installment agreement is in effect. Tax 1040 ez You must have filed your return on or before the due date of the return to qualify for the reduced penalty. Tax 1040 ez The maximum amount of the failure-to-pay penalty is also 25% of the tax due. Tax 1040 ez If both penalties apply in any month, the failure-to-file penalty is reduced by the amount of the failure-to-pay penalty. Tax 1040 ez The penalties will not be charged if you have a reasonable cause for failing to file or pay. Tax 1040 ez If you receive a penalty notice, you can provide an explanation of why you believe reasonable cause exists. Tax 1040 ez Reporting Adjustments to Form 941-SS, 944-SS, 944, or 943 Current Period Adjustments Make current period adjustments for fractions of cents, sick pay, tips, and group-term life insurance on your Form 941-SS, 944, or 943. Tax 1040 ez See the Instructions for Form 941-SS, Instructions for Form 944, or Instructions for Form 943 for information on how to report these adjustments. Tax 1040 ez Prior Period Adjustments Forms for prior period adjustments. Tax 1040 ez   Use Form 941-X or Form 944-X to make a correction after you discover an error on a previously filed Form 941 or Form 944. Tax 1040 ez There are also Forms 943-X, 945-X, and CT-1X to report corrections on the corresponding returns. Tax 1040 ez Form 941-X and Form 944-X also replace Form 843, Claim for Refund and Request for Abatement, for employers to request a refund or abatement of overreported employment taxes. Tax 1040 ez Continue to use Form 843 when requesting a refund or abatement of assessed interest or penalties. Tax 1040 ez See Revenue Ruling 2009-39, 2009-52 I. Tax 1040 ez R. Tax 1040 ez B. Tax 1040 ez 951, for examples of how the interest-free adjustment and claim for refund rules apply in 10 different situations. Tax 1040 ez You can find Revenue Ruling 2009-39, at www. Tax 1040 ez irs. Tax 1040 ez gov/irb/2009-52_IRB/ar14. Tax 1040 ez html. Tax 1040 ez Background. Tax 1040 ez   Treasury Decision 9405 changed the process for making interest-free adjustments to employment taxes reported on Forms 941-SS, 943, 944-SS, and 944, and for filing a claim for refund of employment taxes. Tax 1040 ez Treasury Decision 9405, 2008-32 I. Tax 1040 ez R. Tax 1040 ez B. Tax 1040 ez 293, is available at www. Tax 1040 ez irs. Tax 1040 ez gov/irb/2008-32_IRB/ar13. Tax 1040 ez html. Tax 1040 ez You will use the adjustment process if you underreported employment taxes and are making a payment, or if you overreported employment taxes and will be applying the credit to the Form 941-SS, 943, or 944 period during which you file Forms 941-X, 943-X, or 944-X, respectively. Tax 1040 ez You will use the claim process if you overreported employment taxes and are requesting a refund or abatement of the overreported amount. Tax 1040 ez We use the terms “correct” and “corrections” to include interest-free adjustments under sections 6205 and 6413, and claims for refund and abatement under sections 6402, 6414, and 6404 of the Internal Revenue Code. Tax 1040 ez Correcting employment taxes. Tax 1040 ez   When you discover an error on a previously filed Form 941-SS, 943, 944-SS, or 944, you must: Correct that error using Form 941-X, Form 943-X, or Form 944-X, File a separate Form 941-X, Form 943-X, or Form 944-X for
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The Tax 1040 Ez

Tax 1040 ez Publication 925 - Main Content Table of Contents Passive Activity LimitsWho Must Use These Rules? Passive Activity Loss Passive Activity Credit Publicly Traded Partnership Excess Farm Loss Passive Activities Activities That Are Not Passive Activities Passive Activity Income and Deductions Grouping Your Activities Recharacterization of Passive Income Dispositions How To Report Your Passive Activity Loss Comprehensive ExampleGeneral Information At-Risk LimitsWho Is Affected? Activities Covered by the At-Risk Rules At-Risk Amounts Amounts Not At Risk Reductions of Amounts At Risk Recapture Rule How To Get Tax HelpLow Income Taxpayer Clinics Passive Activity Limits Who Must Use These Rules? The passive activity rules apply to: Individuals, Estates, Trusts (other than grantor trusts), Personal service corporations, and Closely held corporations. Tax 1040 ez Even though the rules do not apply to grantor trusts, partnerships, and S corporations directly, they do apply to the owners of these entities. Tax 1040 ez For information about personal service corporations and closely held corporations, including definitions and how the passive activity rules apply to these corporations, see Form 8810 and its instructions. Tax 1040 ez Before applying the passive activity limits, you must first determine the amount of the deductions disallowed under the basis, excess farm loss, or at-risk rules. Tax 1040 ez See Passive Activity Deductions, later. Tax 1040 ez Passive Activity Loss Generally, the passive activity loss for the tax year is not allowed. Tax 1040 ez However, there is a special allowance under which some or all of your passive activity loss may be allowed. Tax 1040 ez See Special $25,000 allowance , later. Tax 1040 ez Definition of passive activity loss. Tax 1040 ez    Generally, your passive activity loss for the tax year is the excess of your passive activity deductions over your passive activity gross income. Tax 1040 ez See Passive Activity Income and Deductions , later. Tax 1040 ez   For a closely held corporation, the passive activity loss is the excess of passive activity deductions over the sum of passive activity gross income and net active income. Tax 1040 ez For details on net active income, see the Instructions for Form 8810. Tax 1040 ez For the definition of passive activity gross income, see Passive Activity Income , later. Tax 1040 ez For the definition of passive activity deductions, see Passive Activity Deductions , later. Tax 1040 ez Identification of Disallowed Passive Activity Deductions If all or a part of your passive activity loss is disallowed for the tax year, you may need to allocate the disallowed passive activity loss among different passive activities and among different deductions within a passive activity. Tax 1040 ez Allocation of disallowed passive activity loss among activities. Tax 1040 ez   If all or any part of your passive activity loss is disallowed for the tax year, a ratable portion of the loss (if any) from each of your passive activities is disallowed. Tax 1040 ez The ratable portion of a loss from an activity is computed by multiplying the passive activity loss that is disallowed for the tax year by the fraction obtained by dividing: The loss from the activity for the tax year; by The sum of the losses for the tax year from all activities having losses for the tax year. Tax 1040 ez Use Worksheet 5 of Form 8582 to figure the ratable portion of the loss from each activity that is disallowed. Tax 1040 ez Loss from an activity. Tax 1040 ez   The term “loss from an activity” means: The amount by which the passive activity deductions (defined later) from the activity for the tax year exceed the passive activity gross income (defined later) from the activity for the tax year; reduced by Any part of such amount that is allowed under the Special $25,000 Allowance , later. Tax 1040 ez   If your passive activity gross income from significant participation passive activities (defined later) for the tax year is more than your passive activity deductions from those activities for the tax year, those activities shall be treated, solely for purposes of figuring your loss from the activity, as a single activity that does not have a loss for such taxable year. Tax 1040 ez See Significant Participation Passive Activities , later. Tax 1040 ez Example. Tax 1040 ez John Pine holds interests in three passive activities, A, B, and C. Tax 1040 ez The gross income and deductions from these activities for the taxable year are as follows:   A B C Total Gross income $7,000 $4,000 $12,000 $23,000 Deductions (16,000) (20,000) (8,000) (44,000)           Net income (loss) ($9,000) ($16,000) $4,000 ($21,000)   John Pine’s $21,000 passive activity loss for the taxable year is disallowed. Tax 1040 ez Therefore, a ratable portion of the losses from activities A and B is disallowed. Tax 1040 ez He figures the disallowed portion of each loss as follows: A: $21,000 x $9,000/$25,000 $7,560 B: $21,000 x $16,000/$25,000 13,440     Total $21,000 Allocation within loss activities. Tax 1040 ez   If all or any part of your loss from an activity is disallowed under Allocation of disallowed passive activity loss among activities for the tax year, a ratable portion of each of your passive activity deductions (defined later), other than an excluded deduction (defined below) from such activity is disallowed. Tax 1040 ez The ratable portion of a passive activity deduction is the amount of the disallowed portion of the loss from the activity for the tax year multiplied by the fraction obtained by dividing: The amount of such deduction; by The sum of all of your passive activity deductions (other than excluded deductions) from that activity from the tax year. Tax 1040 ez Excluded deductions. Tax 1040 ez    “Excluded deduction” means any passive activity deduction that is taken into account in computing your net income from an item of property for a taxable year in which an amount of the taxpayer's gross income from such item of property is treated as not from a passive activity. Tax 1040 ez See Recharacterization of Passive Income , later. Tax 1040 ez Separately identified deductions. Tax 1040 ez   In identifying the deductions from an activity that are disallowed, you do not need to account separately for a deduction unless such deduction may, if separately taken into account, result in an income tax liability for any tax year different from that which would result were such deduction not taken into account separately. Tax 1040 ez   Use Form 8582, Worksheet 7, for any activity if you have passive activity deductions for that activity that must be separately identified. Tax 1040 ez   Deductions that must be accounted for separately include (but are not limited to) the following deductions. Tax 1040 ez Deductions that arise in a rental real estate activity in tax years in which you actively participate in such activity. Tax 1040 ez See Active participation , later. Tax 1040 ez Deductions that arise in a rental real estate activity in tax years in which you do not actively participate in such activity. Tax 1040 ez See Active participation , later. Tax 1040 ez Losses from sales or exchanges of capital assets. Tax 1040 ez Section 1231 losses. Tax 1040 ez See Section 1231 Gains and Losses in Publication 544, Sales and Other Disposition of Assets, for more information. Tax 1040 ez Carryover of Disallowed Deductions In the case of an activity with respect to which any deductions or credits are disallowed for a taxable year (the loss activity), the disallowed deductions are allocated among your activities for the next tax year in a manner that reasonably reflects the extent to which each activity continues the loss activity. Tax 1040 ez The disallowed deductions or credits allocated to an activity under the preceding sentence are treated as deductions or credits from the activity for the next tax year. Tax 1040 ez For more information, see Regulations section 1. Tax 1040 ez 469-1(f)(4). Tax 1040 ez Passive Activity Credit Generally, the passive activity credit for the tax year is disallowed. Tax 1040 ez The passive activity credit is the amount by which the sum of all your credits subject to the passive activity rules exceed your regular tax liability allocable to all passive activities for the tax year. Tax 1040 ez Credits that are included in figuring the general business credit are subject to the passive activity rules. Tax 1040 ez See the Instructions for Form 8582-CR for more information. Tax 1040 ez Publicly Traded Partnership You must apply the rules in this part separately to your income or loss from a passive activity held through a publicly traded partnership (PTP). Tax 1040 ez You also must apply the limit on passive activity credits separately to your credits from a passive activity held through a PTP. Tax 1040 ez You can offset deductions from passive activities of a PTP only against income or gain from passive activities of the same PTP. Tax 1040 ez Likewise, you can offset credits from passive activities of a PTP only against the tax on the net passive income from the same PTP. Tax 1040 ez This separate treatment rule also applies to a regulated investment company holding an interest in a PTP for the items attributable to that interest. Tax 1040 ez For more information on how to apply the passive activity loss rules to PTPs, and on how to apply the limit on passive activity credits to PTPs, see Publicly Traded Partnerships (PTPs) in the Instructions for Forms 8582 and 8582-CR, respectively. Tax 1040 ez Excess Farm Loss If you receive an applicable subsidy for any tax year and you have an excess farm loss for the tax year, special rules apply. Tax 1040 ez These rules do not apply to C corporations. Tax 1040 ez For information, see the Instructions for Schedule F (Form 1040), Profit or Loss From Farming. Tax 1040 ez Passive Activities There are two kinds of passive activities. Tax 1040 ez Trade or business activities in which you do not materially participate during the year. Tax 1040 ez Rental activities, even if you do materially participate in them, unless you are a real estate professional. Tax 1040 ez Material participation in a trade or business is discussed later, under Activities That Are Not Passive Activities . Tax 1040 ez Treatment of former passive activities. Tax 1040 ez   A former passive activity is an activity that was a passive activity in any earlier tax year, but is not a passive activity in the current tax year. Tax 1040 ez You can deduct a prior year's unallowed loss from the activity up to the amount of your current year net income from the activity. Tax 1040 ez Treat any remaining prior year unallowed loss like you treat any other passive loss. Tax 1040 ez   In addition, any prior year unallowed passive activity credits from a former passive activity offset the allocable part of your current year tax liability. Tax 1040 ez The allocable part of your current year tax liability is that part of this year's tax liability that is allocable to the current year net income from the former passive activity. Tax 1040 ez You figure this after you reduce your net income from the activity by any prior year unallowed loss from that activity (but not below zero). Tax 1040 ez Trade or Business Activities A trade or business activity is an activity that: Involves the conduct of a trade or business (that is, deductions would be allowable under section 162 of the Internal Revenue Code if other limitations, such as the passive activity rules, did not apply), Is conducted in anticipation of starting a trade or business, or Involves research or experimental expenditures that are deductible under Internal Revenue Code section 174 (or that would be deductible if you chose to deduct rather than capitalize them). Tax 1040 ez A trade or business activity does not include a rental activity or the rental of property that is incidental to an activity of holding the property for investment. Tax 1040 ez You generally report trade or business activities on Schedule C, C-EZ, F, or in Part II or III of Schedule E. Tax 1040 ez Rental Activities A rental activity is a passive activity even if you materially participated in that activity, unless you materially participated as a real estate professional. Tax 1040 ez See Real Estate Professional under Activities That Are Not Passive Activities, later. Tax 1040 ez An activity is a rental activity if tangible property (real or personal) is used by customers or held for use by customers, and the gross income (or expected gross income) from the activity represents amounts paid (or to be paid) mainly for the use of the property. Tax 1040 ez It does not matter whether the use is under a lease, a service contract, or some other arrangement. Tax 1040 ez Exceptions. Tax 1040 ez   Your activity is not a rental activity if any of the following apply. Tax 1040 ez The average period of customer use of the property is 7 days or less. Tax 1040 ez You figure the average period of customer use by dividing the total number of days in all rental periods by the number of rentals during the tax year. Tax 1040 ez If the activity involves renting more than one class of property, multiply the average period of customer use of each class by a fraction. Tax 1040 ez The numerator of the fraction is the gross rental income from that class of property and the denominator is the activity's total gross rental income. Tax 1040 ez The activity's average period of customer use will equal the sum of the amounts for each class. Tax 1040 ez The average period of customer use of the property, as figured in (1) above, is 30 days or less and you provide significant personal services with the rentals. Tax 1040 ez Significant personal services include only services performed by individuals. Tax 1040 ez To determine if personal services are significant, all relevant facts and circumstances are taken into consideration, including the frequency of the services, the type and amount of labor required to perform the services, and the value of the services relative to the amount charged for use of the property. Tax 1040 ez Significant personal services do not include the following. Tax 1040 ez Services needed to permit the lawful use of the property, Services to repair or improve property that would extend its useful life for a period substantially longer than the average rental, and Services that are similar to those commonly provided with long-term rentals of real estate, such as cleaning and maintenance of common areas or routine repairs. Tax 1040 ez You provide extraordinary personal services in making the rental property available for customer use. Tax 1040 ez Services are extraordinary personal services if they are performed by individuals and the customers' use of the property is incidental to their receipt of the services. Tax 1040 ez The rental is incidental to a nonrental activity. Tax 1040 ez The rental of property is incidental to an activity of holding property for investment if the main purpose of holding the property is to realize a gain from its appreciation and the gross rental income from the property is less than 2% of the smaller of the property's unadjusted basis or fair market value. Tax 1040 ez The unadjusted basis of property is its cost not reduced by depreciation or any other basis adjustment. Tax 1040 ez The rental of property is incidental to a trade or business activity if all of the following apply. Tax 1040 ez You own an interest in the trade or business activity during the year. Tax 1040 ez The rental property was used mainly in that trade or business activity during the current year, or during at least 2 of the 5 preceding tax years. Tax 1040 ez Your gross rental income from the property is less than 2% of the smaller of its unadjusted basis or fair market value. Tax 1040 ez Lodging provided to an employee or the employee's spouse or dependents is incidental to the activity or activities in which the employee performs services if the lodging is furnished for the employer's convenience. Tax 1040 ez You customarily make the rental property available during defined business hours for nonexclusive use by various customers. Tax 1040 ez You provide the property for use in a nonrental activity in your capacity as an owner of an interest in the partnership, S corporation, or joint venture conducting that activity. Tax 1040 ez    If you meet any of the exceptions listed above, see the instructions for Form 8582 for information about how to report any income or loss from the activity. Tax 1040 ez Special $25,000 allowance. Tax 1040 ez   If you or your spouse actively participated in a passive rental real estate activity, the amount of the passive activity loss that is disallowed is decreased and you therefore can deduct up to $25,000 of loss from the activity from your nonpassive income. Tax 1040 ez This special allowance is an exception to the general rule disallowing the passive activity loss. Tax 1040 ez Similarly, you can offset credits from the activity against the tax on up to $25,000 of nonpassive income after taking into account any losses allowed under this exception. Tax 1040 ez   If you are married, filing a separate return, and lived apart from your spouse for the entire tax year, your special allowance cannot be more than $12,500. Tax 1040 ez If you lived with your spouse at any time during the year and are filing a separate return, you cannot use the special allowance to reduce your nonpassive income or tax on nonpassive income. Tax 1040 ez   The maximum special allowance is reduced if your modified adjusted gross income exceeds certain amounts. Tax 1040 ez See Phaseout rule , later. Tax 1040 ez Example. Tax 1040 ez Kate, a single taxpayer, has $70,000 in wages, $15,000 income from a limited partnership, a $26,000 loss from rental real estate activities in which she actively participated, and is not subject to the modified adjusted gross income phaseout rule. Tax 1040 ez She can use $15,000 of her $26,000 loss to offset her $15,000 passive income from the partnership. Tax 1040 ez She actively participated in her rental real estate activities, so she can use the remaining $11,000 rental real estate loss to offset $11,000 of her nonpassive income (wages). Tax 1040 ez Commercial revitalization deduction (CRD). Tax 1040 ez   The special allowance must first be applied to losses from rental real estate activities figured without the CRD. Tax 1040 ez Any remaining part of the special allowance is available for the CRD from the rental real estate activities and is not subject to the active participation rules or the phaseout based on modified adjusted gross income. Tax 1040 ez You cannot claim a CRD for a building placed in service after December 31, 2009. Tax 1040 ez Active participation. Tax 1040 ez   Active participation is not the same as material participation (defined later). Tax 1040 ez Active participation is a less stringent standard than material participation. Tax 1040 ez For example, you may be treated as actively participating if you make management decisions in a significant and bona fide sense. Tax 1040 ez Management decisions that count as active participation include approving new tenants, deciding on rental terms, approving expenditures, and similar decisions. Tax 1040 ez   Only individuals can actively participate in rental real estate activities. Tax 1040 ez However, a decedent's estate is treated as actively participating for its tax years ending less than 2 years after the decedent's death, if the decedent would have satisfied the active participation requirement for the activity for the tax year the decedent died. Tax 1040 ez   A decedent's qualified revocable trust can also be treated as actively participating if both the trustee and the executor (if any) of the estate choose to treat the trust as part of the estate. Tax 1040 ez The choice applies to tax years ending after the decedent's death and before: 2 years after the decedent's death if no estate tax return is required, or 6 months after the estate tax liability is finally determined if an estate tax return is required. Tax 1040 ez   The choice is irrevocable and cannot be made later than the due date for the estate's first income tax return (including any extensions). Tax 1040 ez   Limited partners are not treated as actively participating in a partnership's rental real estate activities. Tax 1040 ez   You are not treated as actively participating in a rental real estate activity unless your interest in the activity (including your spouse's interest) was at least 10% (by value) of all interests in the activity throughout the year. Tax 1040 ez   Active participation is not required to take the low-income housing credit, the rehabilitation investment credit, or CRD from rental real estate activities. Tax 1040 ez Example. Tax 1040 ez Mike, a single taxpayer, had the following income and loss during the tax year: Salary $42,300 Dividends 300 Interest 1,400 Rental loss (4,000) The rental loss came from a house Mike owned. Tax 1040 ez He advertised and rented the house to the current tenant himself. Tax 1040 ez He also collected the rents and did the repairs or hired someone to do them. Tax 1040 ez Even though the rental loss is a loss from a passive activity, Mike can use the entire $4,000 loss to offset his other income because he actively participated. Tax 1040 ez Phaseout rule. Tax 1040 ez   The maximum special allowance of $25,000 ($12,500 for married individuals filing separate returns and living apart at all times during the year) is reduced by 50% of the amount of your modified adjusted gross income that is more than $100,000 ($50,000 if you are married filing separately). Tax 1040 ez If your modified adjusted gross income is $150,000 or more ($75,000 or more if you are married filing separately), you generally cannot use the special allowance. Tax 1040 ez    Modified adjusted gross income for this purpose is your adjusted gross income figured without the following. Tax 1040 ez Taxable social security and tier 1 railroad retirement benefits. Tax 1040 ez Deductible contributions to individual retirement accounts (IRAs) and section 501(c)(18) pension plans. Tax 1040 ez The exclusion from income of interest from qualified U. Tax 1040 ez S. Tax 1040 ez savings bonds used to pay qualified higher education expenses. Tax 1040 ez The exclusion from income of amounts received from an employer's adoption assistance program. Tax 1040 ez Passive activity income or loss included on Form 8582. Tax 1040 ez Any rental real estate loss allowed because you materially participated in the rental activity as a Real Estate Professional (as discussed later, under Activities That Are Not Passive Activities). Tax 1040 ez Any overall loss from a publicly traded partnership (see Publicly Traded Partnerships (PTPs) in the instructions for Form 8582). Tax 1040 ez The deduction for the employer-equivalent portion of self-employment tax. Tax 1040 ez The deduction for domestic production activities. Tax 1040 ez The deduction allowed for interest on student loans. Tax 1040 ez The deduction for qualified tuition and related expenses. Tax 1040 ez Example. Tax 1040 ez During 2013, John was unmarried and was not a real estate professional. Tax 1040 ez For 2013, he had $120,000 in salary and a $31,000 loss from his rental real estate activities in which he actively participated. Tax 1040 ez His modified adjusted gross income is $120,000. Tax 1040 ez When he files his 2013 return, he can deduct only $15,000 of his passive activity loss. Tax 1040 ez He must carry over the remaining $16,000 passive activity loss to 2014. Tax 1040 ez He figures his deduction and carryover as follows: Adjusted gross income, modified as required $120,000       Minus amount not subject to phaseout 100,000 Amount subject to phaseout rule $20,000 Multiply by 50% × 50% Required reduction to special allowance $10,000 Maximum special allowance $25,000 Minus required reduction (see above) 10,000 Adjusted special allowance $15,000 Passive loss from rental real estate $31,000 Deduction allowable/Adjusted  special allowance (see above) 15,000       Amount that must be carried forward $16,000 Exceptions to the phaseout rules. Tax 1040 ez   A higher phaseout range applies to rehabilitation investment credits from rental real estate activities. Tax 1040 ez For those credits, the phaseout of the $25,000 special allowance starts when your modified adjusted gross income exceeds $200,000 ($100,000 if you are a married individual filing a separate return and living apart at all times during the year). Tax 1040 ez   There is no phaseout of the $25,000 special allowance for low-income housing credits or for the CRD. Tax 1040 ez Ordering rules. Tax 1040 ez   If you have more than one of the exceptions to the phaseout rules in the same tax year, you must apply the $25,000 phaseout against your passive activity losses and credits in the following order. Tax 1040 ez The portion of passive activity losses not attributable to the CRD. Tax 1040 ez The portion of passive activity losses attributable to the CRD. Tax 1040 ez The portion of passive activity credits attributable to credits other than the rehabilitation and low-income housing credits. Tax 1040 ez The portion of passive activity credits attributable to the rehabilitation credit. Tax 1040 ez The portion of passive activity credits attributable to the low-income housing credit. Tax 1040 ez Activities That Are Not Passive Activities The following are not passive activities. Tax 1040 ez Trade or business activities in which you materially participated for the tax year. Tax 1040 ez A working interest in an oil or gas well which you hold directly or through an entity that does not limit your liability (such as a general partner interest in a partnership). Tax 1040 ez It does not matter whether you materially participated in the activity for the tax year. Tax 1040 ez However, if your liability was limited for part of the year (for example, you converted your general partner interest to a limited partner interest during the year) and you had a net loss from the well for the year, some of your income and deductions from the working interest may be treated as passive activity gross income and passive activity deductions. Tax 1040 ez  See Temporary Regulations section 1. Tax 1040 ez 469-1T(e)(4)(ii). Tax 1040 ez The rental of a dwelling unit that you also used for personal purposes during the year for more than the greater of 14 days or 10% of the number of days during the year that the home was rented at a fair rental. Tax 1040 ez An activity of trading personal property for the account of those who own interests in the activity. Tax 1040 ez See Temporary Regulations section 1. Tax 1040 ez 469-1T(e)(6). Tax 1040 ez Rental real estate activities in which you materially participated as a real estate professional. Tax 1040 ez See Real Estate Professional , later. Tax 1040 ez You should not enter income and losses from these activities on Form 8582. Tax 1040 ez Instead, enter them on the forms or schedules you would normally use. Tax 1040 ez Material Participation A trade or business activity is not a passive activity if you materially participated in the activity. Tax 1040 ez Material participation tests. Tax 1040 ez    You materially participated in a trade or business activity for a tax year if you satisfy any of the following tests. Tax 1040 ez You participated in the activity for more than 500 hours. Tax 1040 ez Your participation was substantially all the participation in the activity of all individuals for the tax year, including the participation of individuals who did not own any interest in the activity. Tax 1040 ez You participated in the activity for more than 100 hours during the tax year, and you participated at least as much as any other individual (including individuals who did not own any interest in the activity) for the year. Tax 1040 ez The activity is a significant participation activity, and you participated in all significant participation activities for more than 500 hours. Tax 1040 ez A significant participation activity is any trade or business activity in which you participated for more than 100 hours during the year and in which you did not materially participate under any of the material participation tests, other than this test. Tax 1040 ez See Significant Participation Passive Activities , under Recharacterization of Passive Income, later. Tax 1040 ez You materially participated in the activity for any 5 (whether or not consecutive) of the 10 immediately preceding tax years. Tax 1040 ez The activity is a personal service activity in which you materially participated for any 3 (whether or not consecutive) preceding tax years. Tax 1040 ez An activity is a personal service activity if it involves the performance of personal services in the fields of health (including veterinary services), law, engineering, architecture, accounting, actuarial science, performing arts, consulting, or any other trade or business in which capital is not a material income-producing factor. Tax 1040 ez Based on all the facts and circumstances, you participated in the activity on a regular, continuous, and substantial basis during the year. Tax 1040 ez   You did not materially participate in the activity under test (7) if you participated in the activity for 100 hours or less during the year. Tax 1040 ez Your participation in managing the activity does not count in determining whether you materially participated under this test if: Any person other than you received compensation for managing the activity, or Any individual spent more hours during the tax year managing the activity than you did (regardless of whether the individual was compensated for the management services). Tax 1040 ez Participation. Tax 1040 ez   In general, any work you do in connection with an activity in which you own an interest is treated as participation in the activity. Tax 1040 ez Work not usually performed by owners. Tax 1040 ez   You do not treat the work you do in connection with an activity as participation in the activity if both of the following are true. Tax 1040 ez The work is not work that is customarily done by the owner of that type of activity. Tax 1040 ez One of your main reasons for doing the work is to avoid the disallowance of any loss or credit from the activity under the passive activity rules. Tax 1040 ez Participation as an investor. Tax 1040 ez   You do not treat the work you do in your capacity as an investor in an activity as participation unless you are directly involved in the day-to-day management or operations of the activity. Tax 1040 ez Work you do as an investor includes: Studying and reviewing financial statements or reports on operations of the activity, Preparing or compiling summaries or analyses of the finances or operations of the activity for your own use, and Monitoring the finances or operations of the activity in a nonmanagerial capacity. Tax 1040 ez Spouse's participation. Tax 1040 ez   Your participation in an activity includes your spouse's participation. Tax 1040 ez This applies even if your spouse did not own any interest in the activity and you and your spouse do not file a joint return for the year. Tax 1040 ez Proof of participation. Tax 1040 ez You can use any reasonable method to prove your participation in an activity for the year. Tax 1040 ez You do not have to keep contemporaneous daily time reports, logs, or similar documents if you can establish your participation in some other way. Tax 1040 ez For example, you can show the services you performed and the approximate number of hours spent by using an appointment book, calendar, or narrative summary. Tax 1040 ez Limited partners. Tax 1040 ez   If you owned an activity as a limited partner, you generally are not treated as materially participating in the activity. Tax 1040 ez However, you are treated as materially participating in the activity if you met test (1), (5), or (6) under Material participation tests , discussed earlier, for the tax year. Tax 1040 ez   You are not treated as a limited partner, however, if you also were a general partner in the partnership at all times during the partnership's tax year ending with or within your tax year (or, if shorter, during that part of the partnership's tax year in which you directly or indirectly owned your limited partner interest). Tax 1040 ez Retired or disabled farmer and surviving spouse of a farmer. Tax 1040 ez   If you are a retired or disabled farmer, you are treated as materially participating in a farming activity if you materially participated for 5 or more of the 8 years before your retirement or disability. Tax 1040 ez Similarly, if you are a surviving spouse of a farmer, you are treated as materially participating in a farming activity if the real property used in the activity meets the estate tax rules for special valuation of farm property passed from a qualifying decedent, and you actively manage the farm. Tax 1040 ez Corporations. Tax 1040 ez   A closely held corporation or a personal service corporation is treated as materially participating in an activity only if one or more shareholders holding more than 50% by value of the outstanding stock of the corporation materially participate in the activity. Tax 1040 ez   A closely held corporation can also satisfy the material participation standard by meeting the first two requirements for the qualifying business exception from the at-risk limits. Tax 1040 ez See Special exception for qualified corporations under Activities Covered by the At-Risk Rules, later. Tax 1040 ez Real Estate Professional Generally, rental activities are passive activities even if you materially participated in them. Tax 1040 ez However, if you qualified as a real estate professional, rental real estate activities in which you materially participated are not passive activities. Tax 1040 ez For this purpose, each interest you have in a rental real estate activity is a separate activity, unless you choose to treat all interests in rental real estate activities as one activity. Tax 1040 ez See the Instructions for Schedule E (Form 1040), Supplemental Income and Loss, for information about making this choice. Tax 1040 ez If you qualified as a real estate professional for 2013, report income or losses from rental real estate activities in which you materially participated as nonpassive income or losses, and complete line 43 of Schedule E (Form 1040). Tax 1040 ez If you also have an unallowed loss from these activities from an earlier year when you did not qualify, see Treatment of former passive activities under Passive Activities, earlier. Tax 1040 ez Qualifications. Tax 1040 ez   You qualified as a real estate professional for the year if you met both of the following requirements. Tax 1040 ez More than half of the personal services you performed in all trades or businesses during the tax year were performed in real property trades or businesses in which you materially participated. Tax 1040 ez You performed more than 750 hours of services during the tax year in real property trades or businesses in which you materially participated. Tax 1040 ez   Do not count personal services you performed as an employee in real property trades or businesses unless you were a 5% owner of your employer. Tax 1040 ez You were a 5% owner if you owned (or are considered to have owned) more than 5% of your employer's outstanding stock, outstanding voting stock, or capital or profits interest. Tax 1040 ez   If you file a joint return, do not count your spouse's personal services to determine whether you met the preceding requirements. Tax 1040 ez However, you can count your spouse's participation in an activity in determining if you materially participated. Tax 1040 ez Real property trades or businesses. Tax 1040 ez   A real property trade or business is a trade or business that does any of the following with real property. Tax 1040 ez Develops or redevelops it. Tax 1040 ez Constructs or reconstructs it. Tax 1040 ez Acquires it. Tax 1040 ez Converts it. Tax 1040 ez Rents or leases it. Tax 1040 ez Operates or manages it. Tax 1040 ez Brokers it. Tax 1040 ez Closely held corporations. Tax 1040 ez   A closely held corporation can qualify as a real estate professional if more than 50% of the gross receipts for its tax year came from real property trades or businesses in which it materially participated. Tax 1040 ez Passive Activity Income and Deductions In figuring your net income or loss from a passive activity, take into account only passive activity income and passive activity deductions. Tax 1040 ez Self-charged interest. Tax 1040 ez   Certain self-charged interest income or deductions may be treated as passive activity gross income or passive activity deductions if the loan proceeds are used in a passive activity. Tax 1040 ez   Generally, self-charged interest income and deductions result from loans between you and a partnership or S corporation in which you had a direct or indirect ownership interest. Tax 1040 ez This includes both loans you made to the partnership or S corporation and loans the partnership or S corporation made to you. Tax 1040 ez   It also includes loans from one partnership or S corporation to another partnership or S corporation if each owner in the borrowing entity has the same proportional ownership interest in the lending entity. Tax 1040 ez    Exception. Tax 1040 ez The self-charged interest rules do not apply to your interest in a partnership or S corporation if the entity made an election under Regulations section 1. Tax 1040 ez 469-7(g) to avoid the application of these rules. Tax 1040 ez For more details on the self-charged interest rules, see Regulations section 1. Tax 1040 ez 469-7. Tax 1040 ez Passive Activity Income Passive activity income includes all income from passive activities and generally includes gain from disposition of an interest in a passive activity or property used in a passive activity. Tax 1040 ez Passive activity income does not include the following items. Tax 1040 ez Income from an activity that is not a passive activity. Tax 1040 ez These activities are discussed under Activities That Are Not Passive Activities , earlier. Tax 1040 ez Portfolio income. Tax 1040 ez This includes interest, dividends, annuities, and royalties not derived in the ordinary course of a trade or business. Tax 1040 ez It includes gain or loss from the disposition of property that produces these types of income or that is held for investment. Tax 1040 ez The exclusion for portfolio income does not apply to self-charged interest treated as passive activity income. Tax 1040 ez For more information on self-charged interest, see Self-charged interest , earlier. Tax 1040 ez Personal service income. Tax 1040 ez This includes salaries, wages, commissions, self-employment income from trade or business activities in which you materially participated, deferred compensation, taxable social security and other retirement benefits, and payments from partnerships to partners for personal services. Tax 1040 ez Income from positive section 481 adjustments allocated to activities other than passive activities. Tax 1040 ez (Section 481 adjustments are adjustments that must be made due to changes in your accounting method. Tax 1040 ez ) Income or gain from investments of working capital. Tax 1040 ez Income from an oil or gas property if you treated any loss from a working interest in the property for any tax year beginning after 1986 as a nonpassive loss, as discussed in item (2) under Activities That Are Not Passive Activities , earlier. Tax 1040 ez This also applies to income from other oil and gas property the basis of which is determined wholly or partly by the basis of the property in the preceding sentence. Tax 1040 ez Any income from intangible property, such as a patent, copyright, or literary, musical, or artistic composition, if your personal efforts significantly contributed to the creation of the property. Tax 1040 ez Any other income that must be treated as nonpassive income. Tax 1040 ez See Recharacterization of Passive Income , later. Tax 1040 ez Overall gain from any interest in a publicly traded partnership. Tax 1040 ez See Publicly Traded Partnerships (PTPs) in the instructions for Form 8582. Tax 1040 ez State, local, and foreign income tax refunds. Tax 1040 ez Income from a covenant not to compete. Tax 1040 ez Reimbursement of a casualty or theft loss included in gross income to recover all or part of a prior year loss deduction, if the loss deduction was not a passive activity deduction. Tax 1040 ez Alaska Permanent Fund dividends. Tax 1040 ez Cancellation of debt income, if at the time the debt is discharged the debt is not allocated to passive activities under the interest expense allocation rules. Tax 1040 ez See chapter 4 of Publication 535, Business Expenses, for information about the rules for allocating interest. Tax 1040 ez Disposition of property interests. Tax 1040 ez   Gain on the disposition of an interest in property generally is passive activity income if, at the time of the disposition, the property was used in an activity that was a passive activity in the year of disposition. Tax 1040 ez The gain generally is not passive activity income if, at the time of disposition, the property was used in an activity that was not a passive activity in the year of disposition. Tax 1040 ez An exception to this general rule may apply if you previously used the property in a different activity. Tax 1040 ez Exception for more than one use in the preceding 12 months. Tax 1040 ez   If you used the property in more than one activity during the 12-month period before its disposition, you must allocate the gain between the activities on a basis that reasonably reflects the property's use during that period. Tax 1040 ez Any gain allocated to a passive activity is passive activity income. Tax 1040 ez   For this purpose, an allocation of the gain solely to the activity in which the property was mainly used during that period reasonably reflects the property's use if the fair market value of your interest in the property is not more than the lesser of: $10,000, or 10% of the total of the fair market value of your interest in the property and the fair market value of all other property used in that activity immediately before the disposition. Tax 1040 ez Exception for substantially appreciated property. Tax 1040 ez   The gain is passive activity income if the fair market value of the property at disposition was more than 120% of its adjusted basis and either of the following conditions applies. Tax 1040 ez You used the property in a passive activity for 20% of the time you held your interest in the property. Tax 1040 ez You used the property in a passive activity for the entire 24-month period before its disposition. Tax 1040 ez If neither condition applies, the gain is not passive activity income. Tax 1040 ez However, it is treated as portfolio income only if you held the property for investment for more than half of the time you held it in nonpassive activities. Tax 1040 ez   For this purpose, treat property you held through a corporation (other than an S corporation) or other entity whose owners receive only portfolio income as property held in a nonpassive activity and as property held for investment. Tax 1040 ez Also, treat the date you agree to transfer your interest for a fixed or determinable amount as the disposition date. Tax 1040 ez   If you used the property in more than one activity during the 12-month period before its disposition, this exception applies only to the part of the gain allocated to a passive activity under the rules described in the preceding discussion. Tax 1040 ez Disposition of property converted to inventory. Tax 1040 ez   If you disposed of property that you had converted to inventory from its use in another activity (for example, you sold condominium units you previously held for use in a rental activity), a special rule may apply. Tax 1040 ez Under this rule, you disregard the property's use as inventory and treat it as if it were still used in that other activity at the time of disposition. Tax 1040 ez This rule applies only if you meet all of the following conditions. Tax 1040 ez At the time of disposition, you held your interest in the property in a dealing activity (an activity that involves holding the property or similar property mainly for sale to customers in the ordinary course of a trade or business). Tax 1040 ez Your other activities included a nondealing activity (an activity that does not involve holding similar property for sale to customers in the ordinary course of a trade or business) in which you used the property for more than 80% of the period you held it. Tax 1040 ez You did not acquire or hold your interest in the property for the main purpose of selling it to customers in the ordinary course of a trade or business. Tax 1040 ez Passive Activity Deductions Generally, a deduction is a passive activity deduction for a taxable year if and only if such deduction either: Arises in connection with the conduct of an activity that is a passive activity for the tax year; or Is treated as a deduction from an activity for the tax year because it was disallowed by the passive activity rules in the preceding year and carried forward to the tax year. Tax 1040 ez For purposes of item (1), above, an item of deduction arises in the taxable year in which the item would be allowable as a deduction under the taxpayer's method of accounting if taxable income for all taxable years were determined without regard to the passive activity rules and without regard to the basis, excess farm loss, and at-risk limits. Tax 1040 ez See Coordination with other limitations on deductions that apply before the passive activity rules , later. Tax 1040 ez Passive activity deductions generally include losses from dispositions of property used in a passive activity at the time of the disposition and losses from a disposition of less than your entire interest in a passive activity. Tax 1040 ez Exceptions. Tax 1040 ez   Passive activity deductions do not include the following items. Tax 1040 ez Deductions for expenses (other than interest expense) that are clearly and directly allocable to portfolio income. Tax 1040 ez Qualified home mortgage interest, capitalized interest expenses, and other interest expenses (other than self-charged interest) properly allocable to passive activities. Tax 1040 ez For more information on self-charged interest, see Self-charged interest under Passive Activity Income and Deductions, earlier. Tax 1040 ez Losses from dispositions of property that produce portfolio income or property held for investment. Tax 1040 ez State, local, and foreign income taxes. Tax 1040 ez Miscellaneous itemized deductions that may be disallowed because of the 2%-of-adjusted-gross-income limit. Tax 1040 ez Charitable contribution deductions. Tax 1040 ez Net operating loss deductions. Tax 1040 ez Percentage depletion carryovers for oil and gas wells. Tax 1040 ez Capital loss carrybacks and carryovers. Tax 1040 ez Items of deduction from a passive activity that are disallowed under the limits on deductions that apply before the passive activity rules. Tax 1040 ez See Coordination with other limitations on deductions that apply before the passive activity rules , later. Tax 1040 ez Deductions and losses that would have been allowed for tax years beginning before 1987 but for basis or at-risk limits. Tax 1040 ez Net negative section 481 adjustments allocated to activities other than passive activities. Tax 1040 ez (Section 481 adjustments are adjustments required due to changes in accounting methods. Tax 1040 ez ) Casualty and theft losses, unless losses similar in cause and severity recur regularly in the activity. Tax 1040 ez The deduction for the employer-equivalent portion of self-employment tax. Tax 1040 ez Coordination with other limitations on deductions that apply before the passive activity rules. Tax 1040 ez   An item of deduction from a passive activity that is disallowed for a tax year under the basis or at-risk limitations is not a passive activity deduction for the tax year. Tax 1040 ez The following sections provide rules for figuring the extent to which items of deduction from a passive activity are disallowed for a tax year under the basis or at-risk limitations. Tax 1040 ez Proration of deductions disallowed under basis limitations. Tax 1040 ez   If any amount of your distributive share of a partnership's loss for the tax year is disallowed under the basis limitation, a ratable portion of your distributive share of each item of deduction or loss of the partnership is disallowed for the tax year. Tax 1040 ez For this purpose, the ratable portion of an item of deduction or loss is the amount of such item multiplied by the fraction obtained by dividing: The amount of your distributive share of partnership loss that is disallowed for the taxable year; by The sum of your distributive shares of all items of deduction and loss of the partnership for the tax year. Tax 1040 ez   If any amount of your pro rata share of an S corporation's loss for the tax year is disallowed under the basis limitation, a ratable portion of your pro rata share of each item of deduction or loss of the S corporation is disallowed for the tax year. Tax 1040 ez For this purpose, the ratable portion of an item of deduction or loss is the amount of such item multiplied by the fraction obtained by dividing: The amount of your share of S corporation loss that is disallowed for the tax year; by The sum of your pro rata shares of all items of deduction and loss of the corporation for the tax year. Tax 1040 ez Proration of deductions disallowed under at-risk limitation. Tax 1040 ez   If any amount of your loss from an activity (as defined in Activities Covered by the At-Risk Rules , later) is disallowed under the at-risk rules for the tax year, a ratable portion of each item of deduction or loss from the activity is disallowed for the tax year. Tax 1040 ez For this purpose, the ratable portion of an item of deduction or loss is the amount of such item multiplied by the fraction obtained by dividing: The amount of the loss from the activity that is disallowed for the tax year; by The sum of all deductions from the activity for the taxable year. Tax 1040 ez Coordination of basis and at-risk limitations. Tax 1040 ez   The portion of any item of deduction or loss that is disallowed for the tax year under the basis limitations is not taken into account for the taxable year in determining the loss from an activity (as defined in Activities Covered by the At-Risk Rules , later) for purposes of applying the at-risk rules. Tax 1040 ez Separately identified items of deduction and loss. Tax 1040 ez   In identifying the items of deduction and loss from an activity that are not disallowed under the basis and at-risk limitations (and that therefore may be treated as passive activity deductions), you need not account separately for any item of deduction or loss unless such item may, if separately taken into account, result in an income tax liability different from that which would result were such item of deduction or loss taken into account separately. Tax 1040 ez   Items of deduction or loss that must be accounted for separately include (but are not limited to) items of deduction or loss that: Are attributable to separate activities. Tax 1040 ez See Grouping Your Activities , later. Tax 1040 ez Arise in a rental real estate activity in tax years in which you actively participate in such activity; Arise in a rental real estate activity in taxable years in which you do not actively participate in such activity; Arose in a taxable year beginning before 1987 and were not allowed for such taxable year under the basis or at-risk limitations; Are taken into account under section 613A(d) (relating to limitations on certain depletion deductions); Are taken into account under section 1211 (relating to the limitation on capital losses); Are taken into account under section 1231 (relating to property used in a trade or business and involuntary conversions). Tax 1040 ez See Section 1231 Gains and Losses in Publication 544 for more information. Tax 1040 ez Are attributable to pre-enactment interests in activities. Tax 1040 ez See Regulations section 1. Tax 1040 ez 469-11T(c). Tax 1040 ez Grouping Your Activities You can treat one or more trade or business activities, or rental activities, as a single activity if those activities form an appropriate economic unit for measuring gain or loss under the passive activity rules. Tax 1040 ez Grouping is important for a number of reasons. Tax 1040 ez If you group two activities into one larger activity, you need only show material participation in the activity as a whole. Tax 1040 ez But if the two activities are separate, you must show material participation in each one. Tax 1040 ez On the other hand, if you group two activities into one larger activity and you dispose of one of the two, then you have disposed of only part of your entire interest in the activity. Tax 1040 ez But if the two activities are separate and you dispose of one of them, then you have disposed of your entire interest in that activity. Tax 1040 ez Grouping can also be important in determining whether you meet the 10% ownership requirement for actively participating in a rental real estate activity. Tax 1040 ez Appropriate Economic Units Generally, to determine if activities form an appropriate economic unit, you must consider all the relevant facts and circumstances. Tax 1040 ez You can use any reasonable method of applying the relevant facts and circumstances in grouping activities. Tax 1040 ez The following factors have the greatest weight in determining whether activities form an appropriate economic unit. Tax 1040 ez All of the factors do not have to apply to treat more than one activity as a single activity. Tax 1040 ez The factors that you should consider are: The similarities and differences in the types of trades or businesses, The extent of common control, The extent of common ownership, The geographical location, and The interdependencies between or among activities, which may include the extent to which the activities: Buy or sell goods between or among themselves, Involve products or services that are generally provided together, Have the same customers, Have the same employees, or Use a single set of books and records to account for the activities. Tax 1040 ez Example 1. Tax 1040 ez John Jackson owns a bakery and a movie theater at a shopping mall in Baltimore and a bakery and movie theater in Philadelphia. Tax 1040 ez Based on all the relevant facts and circumstances, there may be more than one reasonable method for grouping John's activities. Tax 1040 ez For example, John may be able to group the movie theaters and the bakeries into: One activity, A movie theater activity and a bakery activity, A Baltimore activity and a Philadelphia activity, or Four separate activities. Tax 1040 ez Example 2. Tax 1040 ez Betty is a partner in ABC partnership, which sells nonfood items to grocery stores. Tax 1040 ez Betty is also a partner in DEF (a trucking business). Tax 1040 ez ABC and DEF are under common control. Tax 1040 ez The main part of DEF's business is transporting goods for ABC. Tax 1040 ez DEF is the only trucking business in which Betty is involved. Tax 1040 ez Based on the rules of this section, Betty treats ABC's wholesale activity and DEF's trucking activity as a single activity. Tax 1040 ez Consistency and disclosure requirement. Tax 1040 ez   Generally, when you group activities into appropriate economic units, you may not regroup those activities in a later tax year. Tax 1040 ez You must meet any disclosure requirements of the IRS when you first group your activities and when you add or dispose of any activities in your groupings. Tax 1040 ez   However, if the original grouping is clearly inappropriate or there is a material change in the facts and circumstances that makes the original grouping clearly inappropriate, you must regroup the activities and comply with any disclosure requirements of the IRS. Tax 1040 ez   See Disclosure Requirement , later. Tax 1040 ez Regrouping by the IRS. Tax 1040 ez   If any of the activities resulting from your grouping is not an appropriate economic unit and one of the primary purposes of your grouping (or failure to regroup) is to avoid the passive activity rules, the IRS may regroup your activities. Tax 1040 ez Rental activities. Tax 1040 ez   In general, you cannot group a rental activity with a trade or business activity. Tax 1040 ez However, you can group them together if the activities form an appropriate economic unit and: The rental activity is insubstantial in relation to the trade or business activity, The trade or business activity is insubstantial in relation to the rental activity, or Each owner of the trade or business activity has the same ownership interest in the rental activity, in which case the part of the rental activity that involves the rental of items of property for use in the trade or business activity may be grouped with the trade or business activity. Tax 1040 ez Example. Tax 1040 ez Herbert and Wilma are married and file a joint return. Tax 1040 ez Healthy Food, an S corporation, is a grocery store business. Tax 1040 ez Herbert is Healthy Food's only shareholder. Tax 1040 ez Plum Tower, an S corporation, owns and rents out the building. Tax 1040 ez Wilma is Plum Tower's only shareholder. Tax 1040 ez Plum Tower rents part of its building to Healthy Food. Tax 1040 ez Plum Tower's grocery store rental business and Healthy Food's grocery business are not insubstantial in relation to each other. Tax 1040 ez Herbert and Wilma file a joint return, so they are treated as one taxpayer for purposes of the passive activity rules. Tax 1040 ez The same owner (Herbert and Wilma) owns both Healthy Food and Plum Tower with the same ownership interest (100% in each). Tax 1040 ez If the grouping forms an appropriate economic unit, as discussed earlier, Herbert and Wilma can group Plum Tower's grocery store rental and Healthy Food's grocery business into a single trade or business activity. Tax 1040 ez Grouping of real and personal property rentals. Tax 1040 ez   In general, you cannot treat an activity involving the rental of real property and an activity involving the rental of personal property as a single activity. Tax 1040 ez However, you can treat them as a single activity if you provide the personal property in connection with the real property or the real property in connection with the personal property. Tax 1040 ez Certain activities may not be grouped. Tax 1040 ez   In general, if you own an interest as a limited partner or a limited entrepreneur in one of the following activities, you may not group that activity with any other activity in another type of business. Tax 1040 ez Holding, producing, or distributing motion picture films or video tapes. Tax 1040 ez Farming. Tax 1040 ez Leasing any section 1245 property (as defined in section 1245(a)(3) of the Internal Revenue Code). Tax 1040 ez For a list of section 1245 property, see Section 1245 property under Activities Covered by the At-Risk Rules , later. Tax 1040 ez Exploring for, or exploiting, oil and gas resources. Tax 1040 ez Exploring for, or exploiting, geothermal deposits. Tax 1040 ez   If you own an interest as a limited partner or a limited entrepreneur in an activity described in the list above, you may group that activity with another activity in the same type of business if the grouping forms an appropriate economic unit as discussed earlier. Tax 1040 ez Limited entrepreneur. Tax 1040 ez   A limited entrepreneur is a person who: Has an interest in an enterprise other than as a limited partner, and Does not actively participate in the management of the enterprise. Tax 1040 ez Activities conducted through another entity. Tax 1040 ez   A personal service corporation, closely held corporation, partnership, or S corporation must group its activities using the rules discussed in this section. Tax 1040 ez Once the entity groups its activities, you, as the partner or shareholder of the entity, may group those activities (following the rules of this section): With each other, With activities conducted directly by you, or With activities conducted through other entities. Tax 1040 ez    You may not treat activities grouped together by the entity as separate activities. Tax 1040 ez Personal service and closely held corporations. Tax 1040 ez   You may group an activity conducted through a personal service or closely held corporation with your other activities only to determine whether you materially or significantly participated in those other activities. Tax 1040 ez See Material Participation , earlier, and Significant Participation Passive Activities , later. Tax 1040 ez Publicly traded partnership (PTP). Tax 1040 ez   You may not group activities conducted through a PTP with any other activity, including an activity conducted through another PTP. Tax 1040 ez Partial dispositions. Tax 1040 ez   If you dispose of substantially all of an activity during your tax year, you may treat the part disposed of as a separate activity. Tax 1040 ez However, you can do this only if you can show with reasonable certainty: The amount of deductions and credits disallowed in prior years under the passive activity rules that is allocable to the part of the activity disposed of, and The amount of gross income and any other deductions and credits for the current tax year that is allocable to the part of the activity disposed of. Tax 1040 ez Disclosure Requirement For tax years beginning after January 24, 2010, the following disclosure requirements for groupings apply. Tax 1040 ez You are required to report certain changes to your groupings that occur during the tax year to the IRS. Tax 1040 ez If you fail to report these changes, each trade or business activity or rental activity will be treated as a separate activity. Tax 1040 ez You will be considered to have made a timely disclosure if you filed all affected income tax returns consistent with the claimed grouping and make the required disclosure on the income tax return for the year in which you first discovered the failure to disclose. Tax 1040 ez If the IRS discovered the failure to disclose, you must have reasonable cause for not making the required disclosure. Tax 1040 ez New grouping. Tax 1040 ez   You must file a written statement with your original income tax return for the first tax year in which two or more activities are originally grouped into a single activity. Tax 1040 ez The statement must provide the names, addresses, and employer identification numbers (EINs), if applicable, for the activities being grouped as a single activity. Tax 1040 ez In addition, the statement must contain a declaration that the grouped activities make up an appropriate economic unit for the measurement of gain or loss under the passive activity rules. Tax 1040 ez Addition to an existing grouping. Tax 1040 ez   You must file a written statement with your original income tax return for the tax year in which you add a new activity to an existing group. Tax 1040 ez The statement must provide the name, address, and EIN, if applicable, for the activity that is being added and for the activities in the existing group. Tax 1040 ez In addition, the statement must contain a declaration that the activities make up an appropriate economic unit for the measurement of gain or loss under the passive activity rules. Tax 1040 ez Regrouping. Tax 1040 ez   You must file a written statement with your original income tax return for the tax year in which you regroup the activities. Tax 1040 ez The statement must provide the names, addresses, and EINs, if applicable, for the activities that are being regrouped. Tax 1040 ez If two or more activities are being regrouped into a single activity, the statement must contain a declaration that the regrouped activities make up an appropriate economic unit for the measurement of gain or loss under the passive activity rules. Tax 1040 ez In addition, the statement must contain an explanation of the material change in the facts and circumstances that made the original grouping clearly inappropriate. Tax 1040 ez Groupings by partnerships and S corporations. Tax 1040 ez   Partnerships and S corporations are not subject to the rules for new grouping, addition to an existing grouping, or regrouping. Tax 1040 ez Instead, they must comply with the disclosure instructions for grouping activities provided in their Form 1065, U. Tax 1040 ez S. Tax 1040 ez Return of Partnership Income, or Form 1120S, U. Tax 1040 ez S. Tax 1040 ez Income Tax Return for an S Corporation, whichever is applicable. Tax 1040 ez   The partner or shareholder is not required to make a separate disclosure of the groupings disclosed by the entity unless the partner or shareholder: Groups together any of the activities that the entity does not group together, Groups the entity's activities with activities conducted directly by the partner or shareholder, or Groups an entity's activities with activities conducted through another entity. Tax 1040 ez   A partner or shareholder may not treat activities grouped together by the entity as separate activities. Tax 1040 ez Recharacterization of Passive Income Net income from the following passive activities may have to be recharacterized and excluded from passive activity income. Tax 1040 ez Significant participation passive activities, Rental of property when less than 30% of the unadjusted basis of the property is subject to depreciation, Equity-financed lending activities, Rental of property incidental to development activities, Rental of property to nonpassive activities, and Licensing of intangible property by  pass-through entities. Tax 1040 ez If you are engaged in or have an interest in one of these activities during the tax year (either directly or through a partnership or an S corporation), combine the income and losses from the activity to determine if you have a net loss or net income from that activity. Tax 1040 ez If the result is a net loss, treat the income and losses the same as any other income or losses from that type of passive activity (trade or business activity or rental activity). Tax 1040 ez If the result is net income, do not enter any of the income or losses from the activity or property on Form 8582 or its worksheets. Tax 1040 ez Instead, enter income or losses on the form and schedules you normally use. Tax 1040 ez However, see Significant Participation Passive Activities , later, if the activity is a significant participation passive activity and you also have a net loss from a different significant participation passive activity. Tax 1040 ez Limit on recharacterized passive income. Tax 1040 ez   The total amount that you treat as nonpassive income under the rules described later in this discussion for significant participation passive activities, rental of nondepreciable property, and equity-financed lending activities cannot exceed the greatest amount that you treat as nonpassive income under any one of these rules. Tax 1040 ez Investment income and investment expense. Tax 1040 ez   To figure your investment interest expense limitation on Form 4952, treat as investment income any net passive income recharacterized as nonpassive income from rental of nondepreciable property, equity-financed lending activity, or licensing of intangible property by a pass-through entity. Tax 1040 ez Significant Participation Passive Activities A significant participation passive activity is any trade or business activity in which you participated for more than 100 hours during the tax year but did not materially participate. Tax 1040 ez If your gross income from all significant participation passive activities is more than your deductions from those activities, a part of your net income from each significant participation passive activity is treated as nonpassive income. Tax 1040 ez Corporations. Tax 1040 ez   An activity of a personal service corporation or closely held corporation is a significant participation passive activity if both of the following statements are true. Tax 1040 ez The corporation is not treated as materially participating in the activity for the year. Tax 1040 ez One or more individuals, each of whom is treated as significantly participating in the activity, directly or indirectly hold (in total) more than 50% (by value) of the corporation's outstanding stock. Tax 1040 ez Worksheet A. Tax 1040 ez   Complete Worksheet A. Tax 1040 ez Significant Participation Passive Activities , below, if you have income or losses from any significant participation activity. Tax 1040 ez Begin by entering the name of each activity in the left column. Tax 1040 ez Column (a). Tax 1040 ez   Enter the number of hours you participated in each activity and total the column. Tax 1040 ez   If the total is more than 500, do not complete Worksheet A or B. Tax 1040 ez None of the activities are passive activities because you satisfy test 4 for material participation. Tax 1040 ez (See Material participation tests , earlier. Tax 1040 ez ) Report all the income and losses from these activities on the forms and schedules you normally use. Tax 1040 ez Do not include the income and losses on Form 8582. Tax 1040 ez Column (b). Tax 1040 ez   Enter the net loss, if any, from the activity. Tax 1040 ez Net loss from an activity means either: The activity's current year net loss (if any) plus prior year unallowed losses (if any), or The excess of prior year unallowed losses over the current year net income (if any). Tax 1040 ez Enter -0- here if the prior year unallowed loss is the same as the current year net income. Tax 1040 ez Column (c). Tax 1040 ez   Enter net income (if any) from the activity. Tax 1040 ez Net income means the excess of the current year's net income from the activity over any prior year unallowed losses from the activity. Tax 1040 ez Column (d). Tax 1040 ez   Combine amounts in the Totals row for columns (b) and (c) and enter the total net income or net loss in the Totals row of column (d). Tax 1040 ez If column (d) is a net loss, skip Worksheet B, Significant Participation Activities With Net Income. Tax 1040 ez Include the income and losses in Worksheet 3 of Form 8582 (or Worksheet 2 in the Form 88