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Tax Form 1040 Ez

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Tax Form 1040 Ez

Tax form 1040 ez 4. Tax form 1040 ez   Qualified Plans Table of Contents Topics - This chapter discusses: Useful Items - You may want to see: Kinds of PlansDefined Contribution Plan Defined Benefit Plan Qualification RulesEarly retirement. Tax form 1040 ez Loan secured by benefits. Tax form 1040 ez Waiver of survivor benefits. Tax form 1040 ez Waiver of 30-day waiting period before annuity starting date. Tax form 1040 ez Involuntary cash-out of benefits not more than dollar limit. Tax form 1040 ez Exception for certain loans. Tax form 1040 ez Exception for QDRO. Tax form 1040 ez SIMPLE and safe harbor 401(k) plan exception. Tax form 1040 ez Setting Up a Qualified PlanAdopting a Written Plan Investing Plan Assets Minimum Funding RequirementDue dates. Tax form 1040 ez Installment percentage. Tax form 1040 ez Extended period for making contributions. Tax form 1040 ez ContributionsEmployer Contributions Employee Contributions When Contributions Are Considered Made Employer DeductionDeduction Limits Deduction Limit for Self-Employed Individuals Where To Deduct Contributions Carryover of Excess Contributions Excise Tax for Nondeductible (Excess) Contributions Elective Deferrals (401(k) Plans)Limit on Elective Deferrals Automatic Enrollment Treatment of Excess Deferrals Qualified Roth Contribution ProgramElective Deferrals Qualified Distributions Reporting Requirements DistributionsRequired Distributions Distributions From 401(k) Plans Tax Treatment of Distributions Tax on Early Distributions Tax on Excess Benefits Excise Tax on Reversion of Plan Assets Notification of Significant Benefit Accrual Reduction Prohibited TransactionsTax on Prohibited Transactions Reporting RequirementsOne-participant plan. Tax form 1040 ez Caution: Form 5500-EZ not required. Tax form 1040 ez Form 5500. Tax form 1040 ez Electronic filing of Forms 5500 and 5500-SF. Tax form 1040 ez Topics - This chapter discusses: Kinds of plans Qualification rules Setting up a qualified plan Minimum funding requirement Contributions Employer deduction Elective deferrals (401(k) plans) Qualified Roth contribution program Distributions Prohibited transactions Reporting requirements Useful Items - You may want to see: Publications 575 Pension and Annuity Income 590 Individual Retirement Arrangements (IRAs) 3066 Have you had your Check-up this year? for Retirement Plans 3998 Choosing A Retirement Solution for Your Small Business 4222 401(k) Plans for Small Businesses 4530 Designated Roth Accounts under a 401(k), 403(b), or governmental 457(b) plans 4531 401(k) Plan Checklist 4674 Automatic Enrollment 401(k) Plans for Small Businesses 4806 Profit Sharing Plans for Small Businesses Forms (and Instructions) www. Tax form 1040 ez dol. Tax form 1040 ez gov/ebsa/pdf/2013-5500. Tax form 1040 ez pdf www. Tax form 1040 ez dol. Tax form 1040 ez gov/ebsa/pdf/2013-5500-SF. Tax form 1040 ez pdf W-2 Wage and Tax Statement Schedule K-1 (Form 1065) Partner's Share of Income, Deductions, Credits, etc. Tax form 1040 ez 1099-R Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. Tax form 1040 ez 1040 U. Tax form 1040 ez S. Tax form 1040 ez Individual Income Tax Return Schedule C (Form 1040) Profit or Loss From Business Schedule F (Form 1040) Profit or Loss From Farming 5300 Application for Determination for Employee Benefit Plan 5310 Application for Determination for Terminating Plan 5329 Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts 5330 Return of Excise Taxes Related to Employee Benefit Plans 5500 Annual Return/Report of Employee Benefit Plan. Tax form 1040 ez For copies of this form, go to: 5500-EZ Annual Return of One-Participant (Owners and Their Spouses) Retirement Plan 5500-SF Short Form Annual Return/Report of Small Employee Benefit Plan. Tax form 1040 ez For copies of this form, go to: 8717 User Fee for Employee Plan Determination Letter Request 8880 Credit for Qualified Retirement Savings Contributions 8881 Credit for Small Employer Pension Plan Startup Costs 8955-SSA Annual Registration Statement Identifying Separated Participants With Deferred Vested Benefits These qualified retirement plans set up by self-employed individuals are sometimes called Keogh or H. Tax form 1040 ez R. Tax form 1040 ez 10 plans. Tax form 1040 ez A sole proprietor or a partnership can set up one of these plans. Tax form 1040 ez A common-law employee or a partner cannot set up one of these plans. Tax form 1040 ez The plans described here can also be set up and maintained by employers that are corporations. Tax form 1040 ez All the rules discussed here apply to corporations except where specifically limited to the self-employed. Tax form 1040 ez The plan must be for the exclusive benefit of employees or their beneficiaries. Tax form 1040 ez These qualified plans can include coverage for a self-employed individual. Tax form 1040 ez As an employer, you can usually deduct, subject to limits, contributions you make to a qualified plan, including those made for your own retirement. Tax form 1040 ez The contributions (and earnings and gains on them) are generally tax free until distributed by the plan. Tax form 1040 ez Kinds of Plans There are two basic kinds of qualified plans—defined contribution plans and defined benefit plans—and different rules apply to each. Tax form 1040 ez You can have more than one qualified plan, but your contributions to all the plans must not total more than the overall limits discussed under Contributions and Employer Deduction, later. Tax form 1040 ez Defined Contribution Plan A defined contribution plan provides an individual account for each participant in the plan. Tax form 1040 ez It provides benefits to a participant largely based on the amount contributed to that participant's account. Tax form 1040 ez Benefits are also affected by any income, expenses, gains, losses, and forfeitures of other accounts that may be allocated to an account. Tax form 1040 ez A defined contribution plan can be either a profit-sharing plan or a money purchase pension plan. Tax form 1040 ez Profit-sharing plan. Tax form 1040 ez   Although it is called a “profit-sharing plan,” you do not actually have to make a business profit for the year in order to make a contribution (except for yourself if you are self-employed as discussed under Self-employed Individual, later). Tax form 1040 ez A profit-sharing plan can be set up to allow for discretionary employer contributions, meaning the amount contributed each year to the plan is not fixed. Tax form 1040 ez An employer may even make no contribution to the plan for a given year. Tax form 1040 ez   The plan must provide a definite formula for allocating the contribution among the participants and for distributing the accumulated funds to the employees after they reach a certain age, after a fixed number of years, or upon certain other occurrences. Tax form 1040 ez   In general, you can be more flexible in making contributions to a profit-sharing plan than to a money purchase pension plan (discussed next) or a defined benefit plan (discussed later). Tax form 1040 ez Money purchase pension plan. Tax form 1040 ez   Contributions to a money purchase pension plan are fixed and are not based on your business profits. Tax form 1040 ez For example, if the plan requires that contributions be 10% of the participants' compensation without regard to whether you have profits (or the self-employed person has earned income), the plan is a money purchase pension plan. Tax form 1040 ez This applies even though the compensation of a self-employed individual as a participant is based on earned income derived from business profits. Tax form 1040 ez Defined Benefit Plan A defined benefit plan is any plan that is not a defined contribution plan. Tax form 1040 ez Contributions to a defined benefit plan are based on what is needed to provide definitely determinable benefits to plan participants. Tax form 1040 ez Actuarial assumptions and computations are required to figure these contributions. Tax form 1040 ez Generally, you will need continuing professional help to have a defined benefit plan. Tax form 1040 ez Qualification Rules To qualify for the tax benefits available to qualified plans, a plan must meet certain requirements (qualification rules) of the tax law. Tax form 1040 ez Generally, unless you write your own plan, the financial institution that provided your plan will take the continuing responsibility for meeting qualification rules that are later changed. Tax form 1040 ez The following is a brief overview of important qualification rules that generally have not yet been discussed. Tax form 1040 ez It is not intended to be all-inclusive. Tax form 1040 ez See Setting Up a Qualified Plan , later. Tax form 1040 ez Generally, the following qualification rules also apply to a SIMPLE 401(k) retirement plan. Tax form 1040 ez A SIMPLE 401(k) plan is, however, not subject to the top-heavy plan rules and nondiscrimination rules if the plan satisfies the provisions discussed in chapter 3 under SIMPLE 401(k) Plan. Tax form 1040 ez Plan assets must not be diverted. Tax form 1040 ez   Your plan must make it impossible for its assets to be used for, or diverted to, purposes other than the benefit of employees and their beneficiaries. Tax form 1040 ez As a general rule, the assets cannot be diverted to the employer. Tax form 1040 ez Minimum coverage requirement must be met. Tax form 1040 ez   To be a qualified plan, a defined benefit plan must benefit at least the lesser of the following. Tax form 1040 ez 50 employees, or The greater of: 40% of all employees, or Two employees. Tax form 1040 ez If there is only one employee, the plan must benefit that employee. Tax form 1040 ez Contributions or benefits must not discriminate. Tax form 1040 ez   Under the plan, contributions or benefits to be provided must not discriminate in favor of highly compensated employees. Tax form 1040 ez Contributions and benefits must not be more than certain limits. Tax form 1040 ez   Your plan must not provide for contributions or benefits that are more than certain limits. Tax form 1040 ez The limits apply to the annual contributions and other additions to the account of a participant in a defined contribution plan and to the annual benefit payable to a participant in a defined benefit plan. Tax form 1040 ez These limits are discussed later in this chapter under Contributions. Tax form 1040 ez Minimum vesting standard must be met. Tax form 1040 ez   Your plan must satisfy certain requirements regarding when benefits vest. Tax form 1040 ez A benefit is vested (you have a fixed right to it) when it becomes nonforfeitable. Tax form 1040 ez A benefit is nonforfeitable if it cannot be lost upon the happening, or failure to happen, of any event. Tax form 1040 ez Special rules apply to forfeited benefit amounts. Tax form 1040 ez In defined contribution plans, forfeitures can be allocated to the accounts of remaining participants in a nondiscriminatory way, or they can be used to reduce your contributions. Tax form 1040 ez   Forfeitures under a defined benefit plan cannot be used to increase the benefits any employee would otherwise receive under the plan. Tax form 1040 ez Forfeitures must be used instead to reduce employer contributions. Tax form 1040 ez Participation. Tax form 1040 ez   In general, an employee must be allowed to participate in your plan if he or she meets both the following requirements. Tax form 1040 ez Has reached age 21. Tax form 1040 ez Has at least 1 year of service (2 years if the plan is not a 401(k) plan and provides that after not more than 2 years of service the employee has a nonforfeitable right to all his or her accrued benefit). Tax form 1040 ez A plan cannot exclude an employee because he or she has reached a specified age. Tax form 1040 ez Leased employee. Tax form 1040 ez   A leased employee, defined in chapter 1, who performs services for you (recipient of the services) is treated as your employee for certain plan qualification rules. Tax form 1040 ez These rules include those in all the following areas. Tax form 1040 ez Nondiscrimination in coverage, contributions, and benefits. Tax form 1040 ez Minimum age and service requirements. Tax form 1040 ez Vesting. Tax form 1040 ez Limits on contributions and benefits. Tax form 1040 ez Top-heavy plan requirements. Tax form 1040 ez Contributions or benefits provided by the leasing organization for services performed for you are treated as provided by you. Tax form 1040 ez Benefit payment must begin when required. Tax form 1040 ez   Your plan must provide that, unless the participant chooses otherwise, the payment of benefits to the participant must begin within 60 days after the close of the latest of the following periods. Tax form 1040 ez The plan year in which the participant reaches the earlier of age 65 or the normal retirement age specified in the plan. Tax form 1040 ez The plan year in which the 10th anniversary of the year in which the participant began participating in the plan occurs. Tax form 1040 ez The plan year in which the participant separates from service. Tax form 1040 ez Early retirement. Tax form 1040 ez   Your plan can provide for payment of retirement benefits before the normal retirement age. Tax form 1040 ez If your plan offers an early retirement benefit, a participant who separates from service before satisfying the early retirement age requirement is entitled to that benefit if he or she meets both the following requirements. Tax form 1040 ez Satisfies the service requirement for the early retirement benefit. Tax form 1040 ez Separates from service with a nonforfeitable right to an accrued benefit. Tax form 1040 ez The benefit, which may be actuarially reduced, is payable when the early retirement age requirement is met. Tax form 1040 ez Required minimum distributions. Tax form 1040 ez   Special rules require minimum annual distributions from qualified plans, generally beginning after age  70½. Tax form 1040 ez See Required Distributions , under Distributions, later. Tax form 1040 ez Survivor benefits. Tax form 1040 ez   Defined benefit and money purchase pension plans must provide automatic survivor benefits in both the following forms. Tax form 1040 ez A qualified joint and survivor annuity for a vested participant who does not die before the annuity starting date. Tax form 1040 ez A qualified pre-retirement survivor annuity for a vested participant who dies before the annuity starting date and who has a surviving spouse. Tax form 1040 ez   The automatic survivor benefit also applies to any participant under a profit-sharing plan unless all the following conditions are met. Tax form 1040 ez The participant does not choose benefits in the form of a life annuity. Tax form 1040 ez The plan pays the full vested account balance to the participant's surviving spouse (or other beneficiary if the surviving spouse consents or if there is no surviving spouse) if the participant dies. Tax form 1040 ez The plan is not a direct or indirect transferee of a plan that must provide automatic survivor benefits. Tax form 1040 ez Loan secured by benefits. Tax form 1040 ez   If automatic survivor benefits are required for a spouse under a plan, he or she must consent to a loan that uses as security the accrued benefits in the plan. Tax form 1040 ez Waiver of survivor benefits. Tax form 1040 ez   Each plan participant may be permitted to waive the joint and survivor annuity or the pre-retirement survivor annuity (or both), but only if the participant has the written consent of the spouse. Tax form 1040 ez The plan also must allow the participant to withdraw the waiver. Tax form 1040 ez The spouse's consent must be witnessed by a plan representative or notary public. Tax form 1040 ez Waiver of 30-day waiting period before annuity starting date. Tax form 1040 ez    A plan may permit a participant to waive (with spousal consent) the 30-day minimum waiting period after a written explanation of the terms and conditions of a joint and survivor annuity is provided to each participant. Tax form 1040 ez   The waiver is allowed only if the distribution begins more than 7 days after the written explanation is provided. Tax form 1040 ez Involuntary cash-out of benefits not more than dollar limit. Tax form 1040 ez   A plan may provide for the immediate distribution of the participant's benefit under the plan if the present value of the benefit is not greater than $5,000. Tax form 1040 ez   However, the distribution cannot be made after the annuity starting date unless the participant and the spouse or surviving spouse of a participant who died (if automatic survivor benefits are required for a spouse under the plan) consents in writing to the distribution. Tax form 1040 ez If the present value is greater than $5,000, the plan must have the written consent of the participant and the spouse or surviving spouse (if automatic survivor benefits are required for a spouse under the plan) for any immediate distribution of the benefit. Tax form 1040 ez   Benefits attributable to rollover contributions and earnings on them can be ignored in determining the present value of these benefits. Tax form 1040 ez   A plan must provide for the automatic rollover of any cash-out distribution of more than $1,000 to an individual retirement account or annuity, unless the participant chooses otherwise. Tax form 1040 ez A section 402(f) notice must be sent prior to an involuntary cash-out of an eligible rollover distribution. Tax form 1040 ez See Section 402(f) Notice under Distributions, later, for more details. Tax form 1040 ez Consolidation, merger, or transfer of assets or liabilities. Tax form 1040 ez   Your plan must provide that, in the case of any merger or consolidation with, or transfer of assets or liabilities to, any other plan, each participant would (if the plan then terminated) receive a benefit equal to or more than the benefit he or she would have been entitled to just before the merger, etc. Tax form 1040 ez (if the plan had then terminated). Tax form 1040 ez Benefits must not be assigned or alienated. Tax form 1040 ez   Your plan must provide that a participant's or beneficiary's benefits under the plan cannot be taken away by any legal or equitable proceeding except as provided below or pursuant to certain judgements or settlements against the participant for violations of plan rules. Tax form 1040 ez Exception for certain loans. Tax form 1040 ez   A loan from the plan (not from a third party) to a participant or beneficiary is not treated as an assignment or alienation if the loan is secured by the participant's accrued nonforfeitable benefit and is exempt from the tax on prohibited transactions under section 4975(d)(1) or would be exempt if the participant were a disqualified person. Tax form 1040 ez A disqualified person is defined later in this chapter under Prohibited Transactions. Tax form 1040 ez Exception for QDRO. Tax form 1040 ez   Compliance with a QDRO (qualified domestic relations order) does not result in a prohibited assignment or alienation of benefits. Tax form 1040 ez   Payments to an alternate payee under a QDRO before the participant attains age 59½ are not subject to the 10% additional tax that would otherwise apply under certain circumstances. Tax form 1040 ez Benefits distributed to an alternate payee under a QDRO can be rolled over tax free to an individual retirement account or to an individual retirement annuity. Tax form 1040 ez No benefit reduction for social security increases. Tax form 1040 ez   Your plan must not permit a benefit reduction for a post-separation increase in the social security benefit level or wage base for any participant or beneficiary who is receiving benefits under your plan, or who is separated from service and has nonforfeitable rights to benefits. Tax form 1040 ez This rule also applies to plans supplementing the benefits provided by other federal or state laws. Tax form 1040 ez Elective deferrals must be limited. Tax form 1040 ez   If your plan provides for elective deferrals, it must limit those deferrals to the amount in effect for that particular year. Tax form 1040 ez See Limit on Elective Deferrals later in this chapter. Tax form 1040 ez Top-heavy plan requirements. Tax form 1040 ez   A top-heavy plan is one that mainly favors partners, sole proprietors, and other key employees. Tax form 1040 ez   A plan is top-heavy for a plan year if, for the preceding plan year, the total value of accrued benefits or account balances of key employees is more than 60% of the total value of accrued benefits or account balances of all employees. Tax form 1040 ez Additional requirements apply to a top-heavy plan primarily to provide minimum benefits or contributions for non-key employees covered by the plan. Tax form 1040 ez   Most qualified plans, whether or not top-heavy, must contain provisions that meet the top-heavy requirements and will take effect in plan years in which the plans are top-heavy. Tax form 1040 ez These qualification requirements for top-heavy plans are explained in section 416 and its regulations. Tax form 1040 ez SIMPLE and safe harbor 401(k) plan exception. Tax form 1040 ez   The top-heavy plan requirements do not apply to SIMPLE 401(k) plans, discussed earlier in chapter 3, or to safe harbor 401(k) plans that consist solely of safe harbor contributions, discussed later in this chapter. Tax form 1040 ez QACAs (discussed later) also are not subject to top-heavy requirements. Tax form 1040 ez Setting Up a Qualified Plan There are two basic steps in setting up a qualified plan. Tax form 1040 ez First you adopt a written plan. Tax form 1040 ez Then you invest the plan assets. Tax form 1040 ez You, the employer, are responsible for setting up and maintaining the plan. Tax form 1040 ez If you are self-employed, it is not necessary to have employees besides yourself to sponsor and set up a qualified plan. Tax form 1040 ez If you have employees, see Participation, under Qualification Rules, earlier. Tax form 1040 ez Set-up deadline. Tax form 1040 ez   To take a deduction for contributions for a tax year, your plan must be set up (adopted) by the last day of that year (December 31 for calendar-year employers). Tax form 1040 ez Credit for startup costs. Tax form 1040 ez   You may be able to claim a tax credit for part of the ordinary and necessary costs of starting a qualified plan that first became effective in 2013. Tax form 1040 ez For more information, see Credit for startup costs under Reminders, earlier. Tax form 1040 ez Adopting a Written Plan You must adopt a written plan. Tax form 1040 ez The plan can be an IRS-approved master or prototype plan offered by a sponsoring organization. Tax form 1040 ez Or it can be an individually designed plan. Tax form 1040 ez Written plan requirement. Tax form 1040 ez   To qualify, the plan you set up must be in writing and must be communicated to your employees. Tax form 1040 ez The plan's provisions must be stated in the plan. Tax form 1040 ez It is not sufficient for the plan to merely refer to a requirement of the Internal Revenue Code. Tax form 1040 ez Master or prototype plans. Tax form 1040 ez   Most qualified plans follow a standard form of plan (a master or prototype plan) approved by the IRS. Tax form 1040 ez Master and prototype plans are plans made available by plan providers for adoption by employers (including self-employed individuals). Tax form 1040 ez Under a master plan, a single trust or custodial account is established, as part of the plan, for the joint use of all adopting employers. Tax form 1040 ez Under a prototype plan, a separate trust or custodial account is established for each employer. Tax form 1040 ez Plan providers. Tax form 1040 ez   The following organizations generally can provide IRS-approved master or prototype plans. Tax form 1040 ez Banks (including some savings and loan associations and federally insured credit unions). Tax form 1040 ez Trade or professional organizations. Tax form 1040 ez Insurance companies. Tax form 1040 ez Mutual funds. Tax form 1040 ez Individually designed plan. Tax form 1040 ez   If you prefer, you can set up an individually designed plan to meet specific needs. Tax form 1040 ez Although advance IRS approval is not required, you can apply for approval by paying a fee and requesting a determination letter. Tax form 1040 ez You may need professional help for this. Tax form 1040 ez See Rev. Tax form 1040 ez Proc. Tax form 1040 ez 2014-6, 2014-1 I. Tax form 1040 ez R. Tax form 1040 ez B. Tax form 1040 ez 198, available at www. Tax form 1040 ez irs. Tax form 1040 ez gov/irb/2014-1_IRB/ar10. Tax form 1040 ez html, as annually updated, that may help you decide whether to apply for approval. Tax form 1040 ez Internal Revenue Bulletins are available on the IRS website at IRS. Tax form 1040 ez gov They are also available at most IRS offices and at certain libraries. Tax form 1040 ez User fee. Tax form 1040 ez   The fee mentioned earlier for requesting a determination letter does not apply to employers who have 100 or fewer employees who received at least $5,000 of compensation from the employer for the preceding year. Tax form 1040 ez At least one of them must be a non-highly compensated employee participating in the plan. Tax form 1040 ez The fee does not apply to requests made by the later of the following dates. Tax form 1040 ez The end of the 5th plan year the plan is in effect. Tax form 1040 ez The end of any remedial amendment period for the plan that begins within the first 5 plan years. Tax form 1040 ez The request cannot be made by the sponsor of a prototype or similar plan the sponsor intends to market to participating employers. Tax form 1040 ez   For more information about whether the user fee applies, see Rev. Tax form 1040 ez Proc. Tax form 1040 ez 2014-8, 2014-1 I. Tax form 1040 ez R. Tax form 1040 ez B. Tax form 1040 ez 242, available at www. Tax form 1040 ez irs. Tax form 1040 ez gov/irb/2014-1_IRB/ar12. Tax form 1040 ez html, as may be annually updated; Notice 2003-49, 2003-32 I. Tax form 1040 ez R. Tax form 1040 ez B. Tax form 1040 ez 294, available at www. Tax form 1040 ez irs. Tax form 1040 ez gov/irb/2003-32_IRB/ar13. Tax form 1040 ez html; and Notice 2011-86, 2011-45 I. Tax form 1040 ez R. Tax form 1040 ez B. Tax form 1040 ez 698, available at www. Tax form 1040 ez irs. Tax form 1040 ez gov/irb/2011-45_IRB/ar11. Tax form 1040 ez html. Tax form 1040 ez Investing Plan Assets In setting up a qualified plan, you arrange how the plan's funds will be used to build its assets. Tax form 1040 ez You can establish a trust or custodial account to invest the funds. Tax form 1040 ez You, the trust, or the custodial account can buy an annuity contract from an insurance company. Tax form 1040 ez Life insurance can be included only if it is incidental to the retirement benefits. Tax form 1040 ez You set up a trust by a legal instrument (written document). Tax form 1040 ez You may need professional help to do this. Tax form 1040 ez You can set up a custodial account with a bank, savings and loan association, credit union, or other person who can act as the plan trustee. Tax form 1040 ez You do not need a trust or custodial account, although you can have one, to invest the plan's funds in annuity contracts or face-amount certificates. Tax form 1040 ez If anyone other than a trustee holds them, however, the contracts or certificates must state they are not transferable. Tax form 1040 ez Other plan requirements. Tax form 1040 ez   For information on other important plan requirements, see Qualification Rules , earlier in this chapter. Tax form 1040 ez Minimum Funding Requirement In general, if your plan is a money purchase pension plan or a defined benefit plan, you must actually pay enough into the plan to satisfy the minimum funding standard for each year. Tax form 1040 ez Determining the amount needed to satisfy the minimum funding standard for a defined benefit plan is complicated, and you should seek professional help in order to meet these contribution requirements. Tax form 1040 ez For information on this funding requirement, see section 412 and its regulations. Tax form 1040 ez Quarterly installments of required contributions. Tax form 1040 ez   If your plan is a defined benefit plan subject to the minimum funding requirements, you generally must make quarterly installment payments of the required contributions. Tax form 1040 ez If you do not pay the full installments timely, you may have to pay interest on any underpayment for the period of the underpayment. Tax form 1040 ez Due dates. Tax form 1040 ez   The due dates for the installments are 15 days after the end of each quarter. Tax form 1040 ez For a calendar-year plan, the installments are due April 15, July 15, October 15, and January 15 (of the following year). Tax form 1040 ez Installment percentage. Tax form 1040 ez   Each quarterly installment must be 25% of the required annual payment. Tax form 1040 ez Extended period for making contributions. Tax form 1040 ez   Additional contributions required to satisfy the minimum funding requirement for a plan year will be considered timely if made by 8½ months after the end of that year. Tax form 1040 ez Contributions A qualified plan is generally funded by your contributions. Tax form 1040 ez However, employees participating in the plan may be permitted to make contributions, and you may be permitted to make contributions on your own behalf. Tax form 1040 ez See Employee Contributions and Elective Deferrals later. Tax form 1040 ez Contributions deadline. Tax form 1040 ez   You can make deductible contributions for a tax year up to the due date of your return (plus extensions) for that year. Tax form 1040 ez Self-employed individual. Tax form 1040 ez   You can make contributions on behalf of yourself only if you have net earnings (compensation) from self-employment in the trade or business for which the plan was set up. Tax form 1040 ez Your net earnings must be from your personal services, not from your investments. Tax form 1040 ez If you have a net loss from self-employment, you cannot make contributions for yourself for the year, even if you can contribute for common-law employees based on their compensation. Tax form 1040 ez Employer Contributions There are certain limits on the contributions and other annual additions you can make each year for plan participants. Tax form 1040 ez There are also limits on the amount you can deduct. Tax form 1040 ez See Deduction Limits , later. Tax form 1040 ez Limits on Contributions and Benefits Your plan must provide that contributions or benefits cannot exceed certain limits. Tax form 1040 ez The limits differ depending on whether your plan is a defined contribution plan or a defined benefit plan. Tax form 1040 ez Defined benefit plan. Tax form 1040 ez   For 2013, the annual benefit for a participant under a defined benefit plan cannot exceed the lesser of the following amounts. Tax form 1040 ez 100% of the participant's average compensation for his or her highest 3 consecutive calendar years. Tax form 1040 ez $205,000 ($210,000 for 2014). Tax form 1040 ez Defined contribution plan. Tax form 1040 ez   For 2013, a defined contribution plan's annual contributions and other additions (excluding earnings) to the account of a participant cannot exceed the lesser of the following amounts. Tax form 1040 ez 100% of the participant's compensation. Tax form 1040 ez $51,000 ($52,000 for 2014). Tax form 1040 ez   Catch-up contributions (discussed later under Limit on Elective Deferrals) are not subject to the above limit. Tax form 1040 ez Employee Contributions Participants may be permitted to make nondeductible contributions to a plan in addition to your contributions. Tax form 1040 ez Even though these employee contributions are not deductible, the earnings on them are tax free until distributed in later years. Tax form 1040 ez Also, these contributions must satisfy the actual contribution percentage (ACP) test of section 401(m)(2), a nondiscrimination test that applies to employee contributions and matching contributions. Tax form 1040 ez See Regulations sections 1. Tax form 1040 ez 401(k)-2 and 1. Tax form 1040 ez 401(m)-2 for further guidance relating to the nondiscrimination rules under sections 401(k) and 401(m). Tax form 1040 ez When Contributions Are Considered Made You generally apply your plan contributions to the year in which you make them. Tax form 1040 ez But you can apply them to the previous year if all the following requirements are met. Tax form 1040 ez You make them by the due date of your tax return for the previous year (plus extensions). Tax form 1040 ez The plan was established by the end of the previous year. Tax form 1040 ez The plan treats the contributions as though it had received them on the last day of the previous year. Tax form 1040 ez You do either of the following. Tax form 1040 ez You specify in writing to the plan administrator or trustee that the contributions apply to the previous year. Tax form 1040 ez You deduct the contributions on your tax return for the previous year. Tax form 1040 ez A partnership shows contributions for partners on Form 1065. Tax form 1040 ez Employer's promissory note. Tax form 1040 ez   Your promissory note made out to the plan is not a payment that qualifies for the deduction. Tax form 1040 ez Also, issuing this note is a prohibited transaction subject to tax. Tax form 1040 ez See Prohibited Transactions , later. Tax form 1040 ez Employer Deduction You can usually deduct, subject to limits, contributions you make to a qualified plan, including those made for your own retirement. Tax form 1040 ez The contributions (and earnings and gains on them) are generally tax free until distributed by the plan. Tax form 1040 ez Deduction Limits The deduction limit for your contributions to a qualified plan depends on the kind of plan you have. Tax form 1040 ez Defined contribution plans. Tax form 1040 ez   The deduction for contributions to a defined contribution plan (profit-sharing plan or money purchase pension plan) cannot be more than 25% of the compensation paid (or accrued) during the year to your eligible employees participating in the plan. Tax form 1040 ez If you are self-employed, you must reduce this limit in figuring the deduction for contributions you make for your own account. Tax form 1040 ez See Deduction Limit for Self-Employed Individuals , later. Tax form 1040 ez   When figuring the deduction limit, the following rules apply. Tax form 1040 ez Elective deferrals (discussed later) are not subject to the limit. Tax form 1040 ez Compensation includes elective deferrals. Tax form 1040 ez The maximum compensation that can be taken into account for each employee in 2013 is $255,000 ($260,000 for 2014). Tax form 1040 ez Defined benefit plans. Tax form 1040 ez   The deduction for contributions to a defined benefit plan is based on actuarial assumptions and computations. Tax form 1040 ez Consequently, an actuary must figure your deduction limit. Tax form 1040 ez    In figuring the deduction for contributions, you cannot take into account any contributions or benefits that are more than the limits discussed earlier under Limits on Contributions and Benefits, earlier. Tax form 1040 ez Table 4–1. Tax form 1040 ez Carryover of Excess Contributions Illustrated—Profit-Sharing Plan (000's omitted) Year Participants' compensation Participants' share of required contribution (10% of annual profit) Deductible  limit for current year (25% of compensation) Contribution Excess contribution carryover used1 Total  deduction including carryovers Excess contribution carryover available at end of year 2010 $1,000 $100 $250 $100 $ 0 $100 $ 0 2011 400 165 100 165 0 100 65 2012 500 100 125 100 25 125 40 2013 600 100 150 100 40 140 0  1There were no carryovers from years before 2010. Tax form 1040 ez Deduction Limit for Self-Employed Individuals If you make contributions for yourself, you need to make a special computation to figure your maximum deduction for these contributions. Tax form 1040 ez Compensation is your net earnings from self-employment, defined in chapter 1. Tax form 1040 ez This definition takes into account both the following items. Tax form 1040 ez The deduction for the deductible part of your self-employment tax. Tax form 1040 ez The deduction for contributions on your behalf to the plan. Tax form 1040 ez The deduction for your own contributions and your net earnings depend on each other. Tax form 1040 ez For this reason, you determine the deduction for your own contributions indirectly by reducing the contribution rate called for in your plan. Tax form 1040 ez To do this, use either the Rate Table for Self-Employed or the Rate Worksheet for Self-Employed in chapter 5. Tax form 1040 ez Then figure your maximum deduction by using the Deduction Worksheet for Self-Employed in chapter 5. Tax form 1040 ez Where To Deduct Contributions Deduct the contributions you make for your common-law employees on your tax return. Tax form 1040 ez For example, sole proprietors deduct them on Schedule C (Form 1040) or Schedule F (Form 1040); partnerships deduct them on Form 1065; and corporations deduct them on Form 1120, or Form 1120S. Tax form 1040 ez Sole proprietors and partners deduct contributions for themselves on line 28 of Form 1040. Tax form 1040 ez (If you are a partner, contributions for yourself are shown on the Schedule K-1 (Form 1065) you get from the partnership. Tax form 1040 ez ) Carryover of Excess Contributions If you contribute more to the plans than you can deduct for the year, you can carry over and deduct the difference in later years, combined with your contributions for those years. Tax form 1040 ez Your combined deduction in a later year is limited to 25% of the participating employees' compensation for that year. Tax form 1040 ez For purposes of this limit, a SEP is treated as a profit-sharing (defined contribution) plan. Tax form 1040 ez However, this percentage limit must be reduced to figure your maximum deduction for contributions you make for yourself. Tax form 1040 ez See Deduction Limit for Self-Employed Individuals, earlier. Tax form 1040 ez The amount you carry over and deduct may be subject to the excise tax discussed next. Tax form 1040 ez Table 4-1, earlier, illustrates the carryover of excess contributions to a profit-sharing plan. Tax form 1040 ez Excise Tax for Nondeductible (Excess) Contributions If you contribute more than your deduction limit to a retirement plan, you have made nondeductible contributions and you may be liable for an excise tax. Tax form 1040 ez In general, a 10% excise tax applies to nondeductible contributions made to qualified pension and profit-sharing plans and to SEPs. Tax form 1040 ez Special rule for self-employed individuals. Tax form 1040 ez   The 10% excise tax does not apply to any contribution made to meet the minimum funding requirements in a money purchase pension plan or a defined benefit plan. Tax form 1040 ez Even if that contribution is more than your earned income from the trade or business for which the plan is set up, the difference is not subject to this excise tax. Tax form 1040 ez See Minimum Funding Requirement , earlier. Tax form 1040 ez Reporting the tax. Tax form 1040 ez   You must report the tax on your nondeductible contributions on Form 5330. Tax form 1040 ez Form 5330 includes a computation of the tax. Tax form 1040 ez See the separate instructions for completing the form. Tax form 1040 ez Elective Deferrals (401(k) Plans) Your qualified plan can include a cash or deferred arrangement under which participants can choose to have you contribute part of their before-tax compensation to the plan rather than receive the compensation in cash. Tax form 1040 ez A plan with this type of arrangement is popularly known as a “401(k) plan. Tax form 1040 ez ” (As a self-employed individual participating in the plan, you can contribute part of your before-tax net earnings from the business. Tax form 1040 ez ) This contribution is called an “elective deferral” because participants choose (elect) to defer receipt of the money. Tax form 1040 ez In general, a qualified plan can include a cash or deferred arrangement only if the qualified plan is one of the following plans. Tax form 1040 ez A profit-sharing plan. Tax form 1040 ez A money purchase pension plan in existence on June 27, 1974, that included a salary reduction arrangement on that date. Tax form 1040 ez Partnership. Tax form 1040 ez   A partnership can have a 401(k) plan. Tax form 1040 ez Restriction on conditions of participation. Tax form 1040 ez   The plan cannot require, as a condition of participation, that an employee complete more than 1 year of service. Tax form 1040 ez Matching contributions. Tax form 1040 ez   If your plan permits, you can make matching contributions for an employee who makes an elective deferral to your 401(k) plan. Tax form 1040 ez For example, the plan might provide that you will contribute 50 cents for each dollar your participating employees choose to defer under your 401(k) plan. Tax form 1040 ez Matching contributions are generally subject to the ACP test discussed earlier under Employee Contributions. Tax form 1040 ez Nonelective contributions. Tax form 1040 ez   You can also make contributions (other than matching contributions) for your participating employees without giving them the choice to take cash instead. Tax form 1040 ez These are called nonelective contributions. Tax form 1040 ez Employee compensation limit. Tax form 1040 ez   No more than $255,000 of the employee's compensation can be taken into account when figuring contributions other than elective deferrals in 2013. Tax form 1040 ez This limit is $260,000 in 2014. Tax form 1040 ez SIMPLE 401(k) plan. Tax form 1040 ez   If you had 100 or fewer employees who earned $5,000 or more in compensation during the preceding year, you may be able to set up a SIMPLE 401(k) plan. Tax form 1040 ez A SIMPLE 401(k) plan is not subject to the nondiscrimination and top-heavy plan requirements discussed earlier under Qualification Rules. Tax form 1040 ez For details about SIMPLE 401(k) plans, see SIMPLE 401(k) Plan in chapter 3. Tax form 1040 ez Distributions. Tax form 1040 ez   Certain rules apply to distributions from 401(k) plans. Tax form 1040 ez See Distributions From 401(k) Plans , later. Tax form 1040 ez Limit on Elective Deferrals There is a limit on the amount an employee can defer each year under these plans. Tax form 1040 ez This limit applies without regard to community property laws. Tax form 1040 ez Your plan must provide that your employees cannot defer more than the limit that applies for a particular year. Tax form 1040 ez For 2013 and 2014, the basic limit on elective deferrals is $17,500. Tax form 1040 ez This limit applies to all salary reduction contributions and elective deferrals. Tax form 1040 ez If, in conjunction with other plans, the deferral limit is exceeded, the difference is included in the employee's gross income. Tax form 1040 ez Catch-up contributions. Tax form 1040 ez   A 401(k) plan can permit participants who are age 50 or over at the end of the calendar year to also make catch-up contributions. Tax form 1040 ez The catch-up contribution limit for 2013 and 2014 is $5,500. Tax form 1040 ez Elective deferrals are not treated as catch-up contributions for 2013 until they exceed the $17,500 limit, the actual deferral percentage (ADP) test limit of section 401(k)(3), or the plan limit (if any). Tax form 1040 ez However, the catch-up contribution a participant can make for a year cannot exceed the lesser of the following amounts. Tax form 1040 ez The catch-up contribution limit. Tax form 1040 ez The excess of the participant's compensation over the elective deferrals that are not catch-up contributions. Tax form 1040 ez Treatment of contributions. Tax form 1040 ez   Your contributions to your own 401(k) plan are generally deductible by you for the year they are contributed to the plan. Tax form 1040 ez Matching or nonelective contributions made to the plan are also deductible by you in the year of contribution. Tax form 1040 ez Your employees' elective deferrals other than designated Roth contributions are tax free until distributed from the plan. Tax form 1040 ez Elective deferrals are included in wages for social security, Medicare, and federal unemployment (FUTA) tax. Tax form 1040 ez Forfeiture. Tax form 1040 ez   Employees have a nonforfeitable right at all times to their accrued benefit attributable to elective deferrals. Tax form 1040 ez Reporting on Form W-2. Tax form 1040 ez   Do not include elective deferrals in the “Wages, tips, other compensation” box of Form W-2. Tax form 1040 ez You must, however, include them in the “Social security wages” and “Medicare wages and tips” boxes. Tax form 1040 ez You must also include them in box 12. Tax form 1040 ez Mark the “Retirement plan” checkbox in box 13. Tax form 1040 ez For more information, see the Form W-2 instructions. Tax form 1040 ez Automatic Enrollment Your 401(k) plan can have an automatic enrollment feature. Tax form 1040 ez Under this feature, you can automatically reduce an employee's pay by a fixed percentage and contribute that amount to the 401(k) plan on his or her behalf unless the employee affirmatively chooses not to have his or her pay reduced or chooses to have it reduced by a different percentage. Tax form 1040 ez These contributions are elective deferrals. Tax form 1040 ez An automatic enrollment feature will encourage employees' saving for retirement and will help your plan pass nondiscrimination testing (if applicable). Tax form 1040 ez For more information, see Publication 4674, Automatic Enrollment 401(k) Plans for Small Businesses. Tax form 1040 ez Eligible automatic contribution arrangement. Tax form 1040 ez   Under an eligible automatic contribution arrangement (EACA), a participant is treated as having elected to have the employer make contributions in an amount equal to a uniform percentage of compensation. Tax form 1040 ez This automatic election will remain in place until the participant specifically elects not to have such deferral percentage made (or elects a different percentage). Tax form 1040 ez There is no required deferral percentage. Tax form 1040 ez Withdrawals. Tax form 1040 ez   Under an EACA, you may allow participants to withdraw their automatic contributions to the plan if certain conditions are met. Tax form 1040 ez The participant must elect the withdrawal no later than 90 days after the date of the first elective contributions under the EACA. Tax form 1040 ez The participant must withdraw the entire amount of EACA default contributions, including any earnings thereon. Tax form 1040 ez   If the plan allows withdrawals under the EACA, the amount of the withdrawal other than the amount of any designated Roth contributions must be included in the employee's gross income for the tax year in which the distribution is made. Tax form 1040 ez The additional 10% tax on early distributions will not apply to the distribution. Tax form 1040 ez Notice requirement. Tax form 1040 ez   Under an EACA, employees must be given written notice of the terms of the EACA within a reasonable period of time before each plan year. Tax form 1040 ez The notice must be written in a manner calculated to be understood by the average employee and be sufficiently accurate and comprehensive in order to apprise the employee of his or her rights and obligations under the EACA. Tax form 1040 ez The notice must include an explanation of the employee's right to elect not to have elective contributions made on his or her behalf, or to elect a different percentage, and the employee must be given a reasonable period of time after receipt of the notice before the first elective contribution is made. Tax form 1040 ez The notice also must explain how contributions will be invested in the absence of an investment election by the employee. Tax form 1040 ez Qualified automatic contribution arrangement. Tax form 1040 ez    A qualified automatic contribution arrangement (QACA) is a type of safe harbor plan. Tax form 1040 ez It contains an automatic enrollment feature, and mandatory employer contributions are required. Tax form 1040 ez If your plan includes a QACA, it will not be subject to the ADP test (discussed later) nor the top-heavy requirements (discussed earlier). Tax form 1040 ez Additionally, your plan will not be subject to the actual contribution percentage (ACP) test if certain additional requirements are met. Tax form 1040 ez Under a QACA, each employee who is eligible to participate in the plan will be treated as having elected to make elective deferral contributions equal to a certain default percentage of compensation. Tax form 1040 ez In order to not have default elective deferrals made, an employee must make an affirmative election specifying a deferral percentage (including zero, if desired). Tax form 1040 ez If an employee does not make an affirmative election, the default deferral percentage must meet the following conditions. Tax form 1040 ez It must be applied uniformly. Tax form 1040 ez It must not exceed 10%. Tax form 1040 ez It must be at least 3% in the first plan year it applies to an employee and through the end of the following year. Tax form 1040 ez It must increase to at least 4% in the following plan year. Tax form 1040 ez It must increase to at least 5% in the following plan year. Tax form 1040 ez It must increase to at least 6% in subsequent plan years. Tax form 1040 ez Matching or nonelective contributions. Tax form 1040 ez   Under the terms of the QACA, you must make either matching or nonelective contributions according to the following terms. Tax form 1040 ez Matching contributions. Tax form 1040 ez You must make matching contributions on behalf of each non-highly compensated employee in the following amounts. Tax form 1040 ez An amount equal to 100% of elective deferrals, up to 1% of compensation. Tax form 1040 ez An amount equal to 50% of elective deferrals, from 1% up to 6% of compensation. Tax form 1040 ez Other formulas may be used as long as they are at least as favorable to non-highly compensated employees. Tax form 1040 ez The rate of matching contributions for highly compensated employees, including yourself, must not exceed the rates for non-highly compensated employees. Tax form 1040 ez Nonelective contributions. Tax form 1040 ez You must make nonelective contributions on behalf of every non-highly compensated employee eligible to participate in the plan, regardless of whether they elected to participate, in an amount equal to at least 3% of their compensation. Tax form 1040 ez Vesting requirements. Tax form 1040 ez   All accrued benefits attributed to matching or nonelective contributions under the QACA must be 100% vested for all employees who complete 2 years of service. Tax form 1040 ez These contributions are subject to special withdrawal restrictions, discussed later. Tax form 1040 ez Notice requirements. Tax form 1040 ez   Each employee eligible to participate in the QACA must receive written notice of their rights and obligations under the QACA, within a reasonable period before each plan year. Tax form 1040 ez The notice must be written in a manner calculated to be understood by the average employee, and it must be accurate and comprehensive. Tax form 1040 ez The notice must explain their right to elect not to have elective contributions made on their behalf, or to have contributions made at a different percentage than the default percentage. Tax form 1040 ez Additionally, the notice must explain how contributions will be invested in the absence of any investment election by the employee. Tax form 1040 ez The employee must have a reasonable period of time after receiving the notice to make such contribution and investment elections prior to the first contributions under the QACA. Tax form 1040 ez Treatment of Excess Deferrals If the total of an employee's deferrals is more than the limit for 2013, the employee can have the difference (called an excess deferral) paid out of any of the plans that permit these distributions. Tax form 1040 ez He or she must notify the plan by April 15, 2014 (or an earlier date specified in the plan), of the amount to be paid from each plan. Tax form 1040 ez The plan must then pay the employee that amount, plus earnings on the amount through the end of 2013, by April 15, 2014. Tax form 1040 ez Excess withdrawn by April 15. Tax form 1040 ez   If the employee takes out the excess deferral by April 15, 2014, it is not reported again by including it in the employee's gross income for 2014. Tax form 1040 ez However, any income earned in 2013 on the excess deferral taken out is taxable in the tax year in which it is taken out. Tax form 1040 ez The distribution is not subject to the additional 10% tax on early distributions. Tax form 1040 ez   If the employee takes out part of the excess deferral and the income on it, the distribution is treated as made proportionately from the excess deferral and the income. Tax form 1040 ez   Even if the employee takes out the excess deferral by April 15, the amount will be considered for purposes of nondiscrimination testing requirements of the plan, unless the distributed amount is for a non-highly compensated employee who participates in only one employer's 401(k) plan or plans. Tax form 1040 ez Excess not withdrawn by April 15. Tax form 1040 ez   If the employee does not take out the excess deferral by April 15, 2014, the excess, though taxable in 2013, is not included in the employee's cost basis in figuring the taxable amount of any eventual distributions under the plan. Tax form 1040 ez In effect, an excess deferral left in the plan is taxed twice, once when contributed and again when distributed. Tax form 1040 ez Also, if the employee's excess deferral is allowed to stay in the plan and the employee participates in no other employer's plan, the plan can be disqualified. Tax form 1040 ez Reporting corrective distributions on Form 1099-R. Tax form 1040 ez   Report corrective distributions of excess deferrals (including any earnings) on Form 1099-R. Tax form 1040 ez For specific information about reporting corrective distributions, see the Instructions for Forms 1099-R and 5498. Tax form 1040 ez Tax on excess contributions of highly compensated employees. Tax form 1040 ez   The law provides tests to detect discrimination in a plan. Tax form 1040 ez If tests, such as the actual deferral percentage test (ADP test) (see section 401(k)(3)) and the actual contribution percentage test (ACP test) (see section 401(m)(2)), show that contributions for highly compensated employees are more than the test limits for these contributions, the employer may have to pay a 10% excise tax. Tax form 1040 ez Report the tax on Form 5330. Tax form 1040 ez The ADP test does not apply to a safe harbor 401(k) plan (discussed next) nor to a QACA. Tax form 1040 ez Also, the ACP test does not apply to these plans if certain additional requirements are met. Tax form 1040 ez   The tax for the year is 10% of the excess contributions for the plan year ending in your tax year. Tax form 1040 ez Excess contributions are elective deferrals, employee contributions, or employer matching or nonelective contributions that are more than the amount permitted under the ADP test or the ACP test. Tax form 1040 ez   See Regulations sections 1. Tax form 1040 ez 401(k)-2 and 1. Tax form 1040 ez 401(m)-2 for further guidance relating to the nondiscrimination rules under sections 401(k) and 401(m). Tax form 1040 ez    If the plan fails the ADP or ACP testing, and the failure is not corrected by the end of the next plan year, the plan can be disqualified. Tax form 1040 ez Safe harbor 401(k) plan. Tax form 1040 ez If you meet the requirements for a safe harbor 401(k) plan, you do not have to satisfy the ADP test, nor the ACP test, if certain additional requirements are met. Tax form 1040 ez For your plan to be a safe harbor plan, you must meet the following conditions. Tax form 1040 ez Matching or nonelective contributions. Tax form 1040 ez You must make matching or nonelective contributions according to one of the following formulas. Tax form 1040 ez Matching contributions. Tax form 1040 ez You must make matching contributions according to the following rules. Tax form 1040 ez You must contribute an amount equal to 100% of each non-highly compensated employee's elective deferrals, up to 3% of compensation. Tax form 1040 ez You must contribute an amount equal to 50% of each non-highly compensated employee's elective deferrals, from 3% up to 5% of compensation. Tax form 1040 ez The rate of matching contributions for highly compensated employees, including yourself, must not exceed the rates for non-highly compensated employees. Tax form 1040 ez Nonelective contributions. Tax form 1040 ez You must make nonelective contributions, without regard to whether the employee made elective deferrals, on behalf of all non-highly compensated employees eligible to participate in the plan, equal to at least 3% of the employee's compensation. Tax form 1040 ez These mandatory matching and nonelective contributions must be immediately 100% vested and are subject to special withdrawal restrictions. Tax form 1040 ez Notice requirement. Tax form 1040 ez You must give eligible employees written notice of their rights and obligations with regard to contributions under the plan, within a reasonable period before the plan year. Tax form 1040 ez The other requirements for a 401(k) plan, including withdrawal and vesting rules, must also be met for your plan to qualify as a safe harbor 401(k) plan. Tax form 1040 ez Qualified Roth Contribution Program Under this program an eligible employee can designate all or a portion of his or her elective deferrals as after-tax Roth contributions. Tax form 1040 ez Elective deferrals designated as Roth contributions must be maintained in a separate Roth account. Tax form 1040 ez However, unlike other elective deferrals, designated Roth contributions are not excluded from employees' gross income, but qualified distributions from a Roth account are excluded from employees' gross income. Tax form 1040 ez Elective Deferrals Under a qualified Roth contribution program, the amount of elective deferrals that an employee may designate as a Roth contribution is limited to the maximum amount of elective deferrals excludable from gross income for the year (for 2013 and 2014, $17,500 if under age 50 and $23,000 if age 50 or over) less the total amount of the employee's elective deferrals not designated as Roth contributions. Tax form 1040 ez Designated Roth deferrals are treated the same as pre-tax elective deferrals for most purposes, including: The annual individual elective deferral limit (total of all designated Roth contributions and traditional, pre-tax elective deferrals) of $17,500 for 2013 and 2014, with an additional $5,500 if age 50 or over for 2013 and 2014, Determining the maximum employee and employer annual contributions of the lesser of 100% of compensation or $51,000 for 2013 ($52,000 for 2014), Nondiscrimination testing, Required distributions, and Elective deferrals not taken into account for purposes of deduction limits. Tax form 1040 ez Qualified Distributions A qualified distribution is a distribution that is made after the employee's nonexclusion period and: On or after the employee attains age   59½, On account of the employee's being disabled, or On or after the employee's death. Tax form 1040 ez An employee's nonexclusion period for a plan is the 5-tax-year period beginning with the earlier of the following tax years. Tax form 1040 ez The first tax year in which the employee made a contribution to his or her Roth account in the plan, or If a rollover contribution was made to the employee's designated Roth account from a designated Roth account previously established for the employee under another plan, then the first tax year the employee made a designated Roth contribution to the previously established account. Tax form 1040 ez Rollover. Tax form 1040 ez   Beginning September 28, 2010, a rollover from another account can be made to a designated Roth account in the same plan. Tax form 1040 ez For additional information on these in-plan Roth rollovers, see Notice 2010-84, 2010-51 I. Tax form 1040 ez R. Tax form 1040 ez B. Tax form 1040 ez 872, available at www. Tax form 1040 ez irs. Tax form 1040 ez gov/irb/2010-51_IRB/ar11. Tax form 1040 ez html, and Notice 2013-74. Tax form 1040 ez A distribution from a designated Roth account can only be rolled over to another designated Roth account or a Roth IRA. Tax form 1040 ez Rollover amounts do not apply toward the annual deferral limit. Tax form 1040 ez Reporting Requirements You must report a contribution to a Roth account on Form W-2 and a distribution from a Roth account on Form 1099-R. Tax form 1040 ez See the Form W-2 and 1099-R instructions for detailed information. Tax form 1040 ez Distributions Amounts paid to plan participants from a qualified plan are called distributions. Tax form 1040 ez Distributions may be nonperiodic, such as lump-sum distributions, or periodic, such as annuity payments. Tax form 1040 ez Also, certain loans may be treated as distributions. Tax form 1040 ez See Loans Treated as Distributions in Publication 575. Tax form 1040 ez Required Distributions A qualified plan must provide that each participant will either: Receive his or her entire interest (benefits) in the plan by the required beginning date (defined later), or Begin receiving regular periodic distributions by the required beginning date in annual amounts calculated to distribute the participant's entire interest (benefits) over his or her life expectancy or over the joint life expectancy of the participant and the designated beneficiary (or over a shorter period). Tax form 1040 ez These distribution rules apply individually to each qualified plan. Tax form 1040 ez You cannot satisfy the requirement for one plan by taking a distribution from another. Tax form 1040 ez The plan must provide that these rules override any inconsistent distribution options previously offered. Tax form 1040 ez Minimum distribution. Tax form 1040 ez   If the account balance of a qualified plan participant is to be distributed (other than as an annuity), the plan administrator must figure the minimum amount required to be distributed each distribution calendar year. Tax form 1040 ez This minimum is figured by dividing the account balance by the applicable life expectancy. Tax form 1040 ez The plan administrator can use the life expectancy tables in Appendix C of Publication 590 for this purpose. Tax form 1040 ez For more information on figuring the minimum distribution, see Tax on Excess Accumulation in Publication 575. Tax form 1040 ez Required beginning date. Tax form 1040 ez   Generally, each participant must receive his or her entire benefits in the plan or begin to receive periodic distributions of benefits from the plan by the required beginning date. Tax form 1040 ez   A participant must begin to receive distributions from his or her qualified retirement plan by April 1 of the first year after the later of the following years. Tax form 1040 ez Calendar year in which he or she reaches age 70½. Tax form 1040 ez Calendar year in which he or she retires from employment with the employer maintaining the plan. Tax form 1040 ez However, the plan may require the participant to begin receiving distributions by April 1 of the year after the participant reaches age 70½ even if the participant has not retired. Tax form 1040 ez   If the participant is a 5% owner of the employer maintaining the plan, the participant must begin receiving distributions by April 1 of the first year after the calendar year in which the participant reached age 70½. Tax form 1040 ez For more information, see Tax on Excess Accumulation in Publication 575. Tax form 1040 ez Distributions after the starting year. Tax form 1040 ez   The distribution required to be made by April 1 is treated as a distribution for the starting year. Tax form 1040 ez (The starting year is the year in which the participant meets (1) or (2) above, whichever applies. Tax form 1040 ez ) After the starting year, the participant must receive the required distribution for each year by December 31 of that year. Tax form 1040 ez If no distribution is made in the starting year, required distributions for 2 years must be made in the next year (one by April 1 and one by December 31). Tax form 1040 ez Distributions after participant's death. Tax form 1040 ez   See Publication 575 for the special rules covering distributions made after the death of a participant. Tax form 1040 ez Distributions From 401(k) Plans Generally, distributions cannot be made until one of the following occurs. Tax form 1040 ez The employee retires, dies, becomes disabled, or otherwise severs employment. Tax form 1040 ez The plan ends and no other defined contribution plan is established or continued. Tax form 1040 ez In the case of a 401(k) plan that is part of a profit-sharing plan, the employee reaches age 59½ or suffers financial hardship. Tax form 1040 ez For the rules on hardship distributions, including the limits on them, see Regulations section 1. Tax form 1040 ez 401(k)-1(d). Tax form 1040 ez The employee becomes eligible for a qualified reservist distribution (defined next). Tax form 1040 ez Certain distributions listed above may be subject to the tax on early distributions discussed later. Tax form 1040 ez Qualified reservist distributions. Tax form 1040 ez   A qualified reservist distribution is a distribution from an IRA or an elective deferral account made after September 11, 2001, to a military reservist or a member of the National Guard who has been called to active duty for at least 180 days or for an indefinite period. Tax form 1040 ez All or part of a qualified reservist distribution can be recontributed to an IRA. Tax form 1040 ez The additional 10% tax on early distributions does not apply to a qualified reservist distribution. Tax form 1040 ez Tax Treatment of Distributions Distributions from a qualified plan minus a prorated part of any cost basis are subject to income tax in the year they are distributed. Tax form 1040 ez Since most recipients have no cost basis, a distribution is generally fully taxable. Tax form 1040 ez An exception is a distribution that is properly rolled over as discussed under Rollover, next. Tax form 1040 ez The tax treatment of distributions depends on whether they are made periodically over several years or life (periodic distributions) or are nonperiodic distributions. Tax form 1040 ez See Taxation of Periodic Payments and Taxation of Nonperiodic Payments in Publication 575 for a detailed description of how distributions are taxed, including the 10-year tax option or capital gain treatment of a lump-sum distribution. Tax form 1040 ez Note. Tax form 1040 ez A recipient of a distribution from a designated Roth account will have a cost basis since designated Roth contributions are made on an after-tax basis. Tax form 1040 ez Also, a distribution from a designated Roth account is entirely tax-free if certain conditions are met. Tax form 1040 ez See Qualified distributions under Qualified Roth Contribution Program, earlier. Tax form 1040 ez Rollover. Tax form 1040 ez   The recipient of an eligible rollover distribution from a qualified plan can defer the tax on it by rolling it over into a traditional IRA or another eligible retirement plan. Tax form 1040 ez However, it may be subject to withholding as discussed under Withholding requirement, later. Tax form 1040 ez A rollover can also be made to a Roth IRA, in which case, any previously untaxed amounts are includible in gross income unless the rollover is from a designated Roth account. Tax form 1040 ez Eligible rollover distribution. Tax form 1040 ez   This is a distribution of all or any part of an employee's balance in a qualified retirement plan that is not any of the following. Tax form 1040 ez A required minimum distribution. Tax form 1040 ez See Required Distributions , earlier. Tax form 1040 ez Any of a series of substantially equal payments made at least once a year over any of the following periods. Tax form 1040 ez The employee's life or life expectancy. Tax form 1040 ez The joint lives or life expectancies of the employee and beneficiary. Tax form 1040 ez A period of 10 years or longer. Tax form 1040 ez A hardship distribution. Tax form 1040 ez The portion of a distribution that represents the return of an employee's nondeductible contributions to the plan. Tax form 1040 ez See Employee Contributions , earlier, and Rollover of nontaxable amounts, next. Tax form 1040 ez Loans treated as distributions. Tax form 1040 ez Dividends on employer securities. Tax form 1040 ez The cost of any life insurance coverage provided under a qualified retirement plan. Tax form 1040 ez Similar items designated by the IRS in published guidance. Tax form 1040 ez See, for example, the Instructions for Forms 1099-R and 5498. Tax form 1040 ez Rollover of nontaxable amounts. Tax form 1040 ez   You may be able to roll over the nontaxable part of a distribution to another qualified retirement plan or a section 403(b) plan, or to an IRA. Tax form 1040 ez If the rollover is to a qualified retirement plan or a section 403(b) plan that separately accounts for the taxable and nontaxable parts of the rollover, the transfer must be made through a direct (trustee-to-trustee) rollover. Tax form 1040 ez If the rollover is to an IRA, the transfer can be made by any rollover method. Tax form 1040 ez Note. Tax form 1040 ez A distribution from a designated Roth account can be rolled over to another designated Roth account or to a Roth IRA. Tax form 1040 ez If the rollover is to a Roth IRA, it can be rolled over by any rollover method, but if the rollover is to another designated Roth account, it must be rolled over directly (trustee-to-trustee). Tax form 1040 ez More information. Tax form 1040 ez   For more information about rollovers, see Rollovers in Pubs. Tax form 1040 ez 575 and 590. Tax form 1040 ez Withholding requirement. Tax form 1040 ez   If, during a year, a qualified plan pays to a participant one or more eligible rollover distributions (defined earlier) that are reasonably expected to total $200 or more, the payor must withhold 20% of the taxable portion of each distribution for federal income tax. Tax form 1040 ez Exceptions. Tax form 1040 ez   If, instead of having the distribution paid to him or her, the participant chooses to have the plan pay it directly to an IRA or another eligible retirement plan (a direct rollover), no withholding is required. Tax form 1040 ez   If the distribution is not an eligible rollover distribution, defined earlier, the 20% withholding requirement does not apply. Tax form 1040 ez Other withholding rules apply to distributions that are not eligible rollover distributions, such as long-term periodic distributions and required distributions (periodic or nonperiodic). Tax form 1040 ez However, the participant can choose not to have tax withheld from these distributions. Tax form 1040 ez If the participant does not make this choice, the following withholding rules apply. Tax form 1040 ez For periodic distributions, withholding is based on their treatment as wages. Tax form 1040 ez For nonperiodic distributions, 10% of the taxable part is withheld. Tax form 1040 ez Estimated tax payments. Tax form 1040 ez   If no income tax is withheld or not enough tax is withheld, the recipient of a distribution may have to make estimated tax payments. Tax form 1040 ez For more information, see Withholding Tax and Estimated Tax in Publication 575. Tax form 1040 ez Section 402(f) Notice. Tax form 1040 ez   If a distribution is an eligible rollover distribution, as defined earlier, you must provide a written notice to the recipient that explains the following rules regarding such distributions. Tax form 1040 ez That the distribution may be directly transferred to an eligible retirement plan and information about which distributions are eligible for this direct transfer. Tax form 1040 ez That tax will be withheld from the distribution if it is not directly transferred to an eligible retirement plan. Tax form 1040 ez That the distribution will not be subject to tax if transferred to an eligible retirement plan within 60 days after the date the recipient receives the distribution. Tax form 1040 ez Certain other rules that may be applicable. Tax form 1040 ez   Notice 2009-68, 2009-39 I. Tax form 1040 ez R. Tax form 1040 ez B. Tax form 1040 ez 423, available at www. Tax form 1040 ez irs. Tax form 1040 ez gov/irb/2009-39_IRB/ar14. Tax form 1040 ez html, contains two updated safe harbor section 402(f) notices that plan administrators may provide recipients of eligible rollover distributions. Tax form 1040 ez If the plan allows in-plan Roth rollovers, the 402(f) notice must be amended to reflect this. Tax form 1040 ez Notice 2010-84 contains guidance on how to modify a 402(f) notice for in-plan Roth rollovers. Tax form 1040 ez Timing of notice. Tax form 1040 ez   The notice generally must be provided no less than 30 days and no more than 180 days before the date of a distribution. Tax form 1040 ez Method of notice. Tax form 1040 ez   The written notice must be provided individually to each distributee of an eligible rollover distribution. Tax form 1040 ez Posting of the notice is not sufficient. Tax form 1040 ez However, the written requirement may be satisfied through the use of electronic media if certain additional conditions are met. Tax form 1040 ez See Regulations section 1. Tax form 1040 ez 401(a)-21. Tax form 1040 ez Tax on failure to give notice. Tax form 1040 ez   Failure to give a 402(f) notice will result in a tax of $100 for each failure, with a total not exceeding $50,000 per calendar year. Tax form 1040 ez The tax will not be imposed if it is shown that such failure is due to reasonable cause and not to willful neglect. Tax form 1040 ez Tax on Early Distributions If a distribution is made to an employee under the plan before he or she reaches age 59½, the employee may have to pay a 10% additional tax on the distribution. Tax form 1040 ez This tax applies to the amount received that the employee must include in income. Tax form 1040 ez Exceptions. Tax form 1040 ez   The 10% tax will not apply if distributions before age 59½ are made in any of the following circumstances. Tax form 1040 ez Made to a beneficiary (or to the estate of the employee) on or after the death of the employee. Tax form 1040 ez Made due to the employee having a qualifying disability. Tax form 1040 ez Made as part of a series of substantially equal periodic payments beginning after separation from service and made at least annually for the life or life expectancy of the employee or the joint lives or life expectancies of the employee and his or her designated beneficiary. Tax form 1040 ez (The payments under this exception, except in the case of death or disability, must continue for at least 5 years or until the employee reaches age 59½, whichever is the longer period. Tax form 1040 ez ) Made to an employee after separation from service if the separation occurred during o
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The Tax Form 1040 Ez

Tax form 1040 ez 1. Tax form 1040 ez   Deducting Business Expenses Table of Contents What's New Introduction Topics - This chapter discusses: Useful Items - You may want to see: What Can I Deduct?Cost of Goods Sold Capital Expenses Capital versus Deductible Expenses Personal versus Business Expenses How Much Can I Deduct?Not-for-profit limits. Tax form 1040 ez At-risk limits. Tax form 1040 ez Passive activities. Tax form 1040 ez Net operating loss. Tax form 1040 ez When Can I Deduct an Expense?Economic performance. Tax form 1040 ez Not-for-Profit ActivitiesGross Income Limit on Deductions What's New Optional safe harbor method to determine the business use of a home deduction. Tax form 1040 ez  Beginning in 2013, you can use the optional safe harbor method to determine the deduction for the business use of your home. Tax form 1040 ez See Optional safe harbor method under Business use of your home , later. Tax form 1040 ez Introduction This chapter covers the general rules for deducting business expenses. Tax form 1040 ez Business expenses are the costs of carrying on a trade or business, and they are usually deductible if the business is operated to make a profit. Tax form 1040 ez Topics - This chapter discusses: What you can deduct How much you can deduct When you can deduct Not-for-profit activities Useful Items - You may want to see: Publication 334 Tax Guide for Small Business 463 Travel, Entertainment, Gift, and Car Expenses 525 Taxable and Nontaxable Income 529 Miscellaneous Deductions 536 Net Operating Losses (NOLs) for Individuals, Estates, and Trusts 538 Accounting Periods and Methods 542 Corporations 547 Casualties, Disasters, and Thefts 587 Business Use of Your Home 925 Passive Activity and At-Risk Rules 936 Home Mortgage Interest Deduction 946 How To Depreciate Property Form (and Instructions) Sch A (Form 1040) Itemized Deductions 5213 Election To Postpone Determination as To Whether the Presumption Applies That an Activity Is Engaged in for Profit See chapter 12 for information about getting publications and forms. Tax form 1040 ez What Can I Deduct? To be deductible, a business expense must be both ordinary and necessary. Tax form 1040 ez An ordinary expense is one that is common and accepted in your industry. Tax form 1040 ez A necessary expense is one that is helpful and appropriate for your trade or business. Tax form 1040 ez An expense does not have to be indispensable to be considered necessary. Tax form 1040 ez Even though an expense may be ordinary and necessary, you may not be allowed to deduct the expense in the year you paid or incurred it. Tax form 1040 ez In some cases you may not be allowed to deduct the expense at all. Tax form 1040 ez Therefore, it is important to distinguish usual business expenses from expenses that include the following. Tax form 1040 ez The expenses used to figure cost of goods sold, Capital expenses, and Personal expenses. Tax form 1040 ez Cost of Goods Sold If your business manufactures products or purchases them for resale, you generally must value inventory at the beginning and end of each tax year to determine your cost of goods sold. Tax form 1040 ez Some of your business expenses may be included in figuring cost of goods sold. Tax form 1040 ez Cost of goods sold is deducted from your gross receipts to figure your gross profit for the year. Tax form 1040 ez If you include an expense in the cost of goods sold, you cannot deduct it again as a business expense. Tax form 1040 ez The following are types of expenses that go into figuring cost of goods sold. Tax form 1040 ez The cost of products or raw materials, including freight. Tax form 1040 ez Storage. Tax form 1040 ez Direct labor (including contributions to pension or annuity plans) for workers who produce the products. Tax form 1040 ez Factory overhead. Tax form 1040 ez Under the uniform capitalization rules, you must capitalize the direct costs and part of the indirect costs for certain production or resale activities. Tax form 1040 ez Indirect costs include rent, interest, taxes, storage, purchasing, processing, repackaging, handling, and administrative costs. Tax form 1040 ez This rule does not apply to personal property you acquire for resale if your average annual gross receipts (or those of your predecessor) for the preceding 3 tax years are not more than $10 million. Tax form 1040 ez For more information, see the following sources. Tax form 1040 ez Cost of goods sold—chapter 6 of Publication 334. Tax form 1040 ez Inventories—Publication 538. Tax form 1040 ez Uniform capitalization rules—Publication 538 and section 263A of the Internal Revenue Code and the related regulations. Tax form 1040 ez Capital Expenses You must capitalize, rather than deduct, some costs. Tax form 1040 ez These costs are a part of your investment in your business and are called “capital expenses. Tax form 1040 ez ” Capital expenses are considered assets in your business. Tax form 1040 ez In general, you capitalize three types of costs. Tax form 1040 ez Business start-up costs (See Tip below). Tax form 1040 ez Business assets. Tax form 1040 ez Improvements. Tax form 1040 ez You can elect to deduct or amortize certain business start-up costs. Tax form 1040 ez See chapters 7 and 8. Tax form 1040 ez Cost recovery. Tax form 1040 ez   Although you generally cannot take a current deduction for a capital expense, you may be able to recover the amount you spend through depreciation, amortization, or depletion. Tax form 1040 ez These recovery methods allow you to deduct part of your cost each year. Tax form 1040 ez In this way, you are able to recover your capital expense. Tax form 1040 ez See Amortization (chapter 8) and Depletion (chapter 9) in this publication. Tax form 1040 ez A taxpayer can elect to deduct a portion of the costs of certain depreciable property as a section 179 deduction. Tax form 1040 ez A greater portion of these costs can be deducted if the property is qualified disaster assistance property. Tax form 1040 ez See Publication 946 for details. Tax form 1040 ez Going Into Business The costs of getting started in business, before you actually begin business operations, are capital expenses. Tax form 1040 ez These costs may include expenses for advertising, travel, or wages for training employees. Tax form 1040 ez If you go into business. Tax form 1040 ez   When you go into business, treat all costs you had to get your business started as capital expenses. Tax form 1040 ez   Usually you recover costs for a particular asset through depreciation. Tax form 1040 ez Generally, you cannot recover other costs until you sell the business or otherwise go out of business. Tax form 1040 ez However, you can choose to amortize certain costs for setting up your business. Tax form 1040 ez See Starting a Business in chapter 8 for more information on business start-up costs. Tax form 1040 ez If your attempt to go into business is unsuccessful. Tax form 1040 ez   If you are an individual and your attempt to go into business is not successful, the expenses you had in trying to establish yourself in business fall into two categories. Tax form 1040 ez The costs you had before making a decision to acquire or begin a specific business. Tax form 1040 ez These costs are personal and nondeductible. Tax form 1040 ez They include any costs incurred during a general search for, or preliminary investigation of, a business or investment possibility. Tax form 1040 ez The costs you had in your attempt to acquire or begin a specific business. Tax form 1040 ez These costs are capital expenses and you can deduct them as a capital loss. Tax form 1040 ez   If you are a corporation and your attempt to go into a new trade or business is not successful, you may be able to deduct all investigatory costs as a loss. Tax form 1040 ez   The costs of any assets acquired during your unsuccessful attempt to go into business are a part of your basis in the assets. Tax form 1040 ez You cannot take a deduction for these costs. Tax form 1040 ez You will recover the costs of these assets when you dispose of them. Tax form 1040 ez Business Assets There are many different kinds of business assets; for example, land, buildings, machinery, furniture, trucks, patents, and franchise rights. Tax form 1040 ez You must fully capitalize the cost of these assets, including freight and installation charges. Tax form 1040 ez Certain property you produce for use in your trade or business must be capitalized under the uniform capitalization rules. Tax form 1040 ez See Regulations section 1. Tax form 1040 ez 263A-2 for information on these rules. Tax form 1040 ez Improvements Improvements are generally major expenditures. Tax form 1040 ez Some examples are: new electric wiring, a new roof, a new floor, new plumbing, bricking up windows to strengthen a wall, and lighting improvements. Tax form 1040 ez The costs of making improvements to a business asset are capital expenses if the improvements add to the value of the asset, appreciably lengthen the time you can use it, or adapt it to a different use. Tax form 1040 ez Beginning in 2014, you must capitalize as improvements costs that are for the betterment of a unit of property, restore the unit of property, or adapt the unit of property to a new or different use. Tax form 1040 ez Temporary regulations allow you to capitalize costs meeting the above criteria for tax years beginning after 2011. Tax form 1040 ez However, you can currently deduct repairs that keep your property in a normal efficient operating condition as a business expense. Tax form 1040 ez Treat as repairs amounts paid to replace parts of a machine that only keep it in a normal operating condition. Tax form 1040 ez Restoration plan. Tax form 1040 ez   Capitalize the cost of reconditioning, improving, or altering your property as part of a general restoration plan to make it suitable for your business. Tax form 1040 ez This applies even if some of the work would by itself be classified as repairs. Tax form 1040 ez Capital versus Deductible Expenses To help you distinguish between capital and deductible expenses, different examples are given below. Tax form 1040 ez Motor vehicles. Tax form 1040 ez   You usually capitalize the cost of a motor vehicle you use in your business. Tax form 1040 ez You can recover its cost through annual deductions for depreciation. Tax form 1040 ez   There are dollar limits on the depreciation you can claim each year on passenger automobiles used in your business. Tax form 1040 ez See Publication 463. Tax form 1040 ez   Generally, repairs you make to your business vehicle are currently deductible. Tax form 1040 ez However, amounts you pay to recondition and overhaul a business vehicle are capital expenses and are recovered through depreciation. Tax form 1040 ez Roads and driveways. Tax form 1040 ez    The cost of building a private road on your business property and the cost of replacing a gravel driveway with a concrete one are capital expenses you may be able to depreciate. Tax form 1040 ez The cost of maintaining a private road on your business property is a deductible expense. Tax form 1040 ez Tools. Tax form 1040 ez   Unless the uniform capitalization rules apply, amounts spent for tools used in your business are deductible expenses if the tools have a life expectancy of less than 1 year or their cost is minor. Tax form 1040 ez Machinery parts. Tax form 1040 ez   Unless the uniform capitalization rules apply, the cost of replacing short-lived parts of a machine to keep it in good working condition, but not add to its life, is a deductible expense. Tax form 1040 ez Heating equipment. Tax form 1040 ez   The cost of changing from one heating system to another is a capital expense. Tax form 1040 ez Personal versus Business Expenses Generally, you cannot deduct personal, living, or family expenses. Tax form 1040 ez However, if you have an expense for something that is used partly for business and partly for personal purposes, divide the total cost between the business and personal parts. Tax form 1040 ez You can deduct the business part. Tax form 1040 ez For example, if you borrow money and use 70% of it for business and the other 30% for a family vacation, you generally can deduct 70% of the interest as a business expense. Tax form 1040 ez The remaining 30% is personal interest and generally is not deductible. Tax form 1040 ez See chapter 4 for information on deducting interest and the allocation rules. Tax form 1040 ez Business use of your home. Tax form 1040 ez   If you use part of your home for business, you may be able to deduct expenses for the business use of your home. Tax form 1040 ez These expenses may include mortgage interest, insurance, utilities, repairs, and depreciation. Tax form 1040 ez   To qualify to claim expenses for the business use of your home, you must meet both of the following tests. Tax form 1040 ez The business part of your home must be used exclusively and regularly for your trade or business. Tax form 1040 ez The business part of your home must be: Your principal place of business, or A place where you meet or deal with patients, clients, or customers in the normal course of your trade or business, or A separate structure (not attached to your home) used in connection with your trade or business. Tax form 1040 ez   You generally do not have to meet the exclusive use test for the part of your home that you regularly use either for the storage of inventory or product samples, or as a daycare facility. Tax form 1040 ez   Your home office qualifies as your principal place of business if you meet the following requirements. Tax form 1040 ez You use the office exclusively and regularly for administrative or management activities of your trade or business. Tax form 1040 ez You have no other fixed location where you conduct substantial administrative or management activities of your trade or business. Tax form 1040 ez   If you have more than one business location, determine your principal place of business based on the following factors. Tax form 1040 ez The relative importance of the activities performed at each location. Tax form 1040 ez If the relative importance factor does not determine your principal place of business, consider the time spent at each location. Tax form 1040 ez Optional safe harbor method. Tax form 1040 ez   Beginning in 2013, individual taxpayers can use the optional safe harbor method to determine the amount of deductible expenses attributable to certain business use of a residence during the tax year. Tax form 1040 ez This method is an alternative to the calculation, allocation, and substantiation of actual expenses. Tax form 1040 ez   The deduction under the optional method is limited to $1,500 per year based on $5 a square foot for up to 300 square feet. Tax form 1040 ez Under this method, you claim your allowable mortgage interest, real estate taxes, and casualty losses on the home as itemized deductions on Schedule A (Form 1040). Tax form 1040 ez You are not required to allocate these deductions between personal and business use, as is required under the regular method. Tax form 1040 ez If you use the optional method, you cannot depreciate the portion of your home used in a trade or business. Tax form 1040 ez   Business expenses unrelated to the home, such as advertising, supplies, and wages paid to employees, are still fully deductible. Tax form 1040 ez All of the requirements discussed earlier under Business use of your home still apply. Tax form 1040 ez   For more information on the deduction for business use of your home, including the optional safe harbor method, see Publication 587. Tax form 1040 ez    If you were entitled to deduct depreciation on the part of your home used for business, you cannot exclude the part of the gain from the sale of your home that equals any depreciation you deducted (or could have deducted) for periods after May 6, 1997. Tax form 1040 ez Business use of your car. Tax form 1040 ez   If you use your car exclusively in your business, you can deduct car expenses. Tax form 1040 ez If you use your car for both business and personal purposes, you must divide your expenses based on actual mileage. Tax form 1040 ez Generally, commuting expenses between your home and your business location, within the area of your tax home, are not deductible. Tax form 1040 ez   You can deduct actual car expenses, which include depreciation (or lease payments), gas and oil, tires, repairs, tune-ups, insurance, and registration fees. Tax form 1040 ez Or, instead of figuring the business part of these actual expenses, you may be able to use the standard mileage rate to figure your deduction. Tax form 1040 ez Beginning in 2013, the standard mileage rate is 56. Tax form 1040 ez 5 cents per mile. Tax form 1040 ez   If you are self-employed, you can also deduct the business part of interest on your car loan, state and local personal property tax on the car, parking fees, and tolls, whether or not you claim the standard mileage rate. Tax form 1040 ez   For more information on car expenses and the rules for using the standard mileage rate, see Publication 463. Tax form 1040 ez How Much Can I Deduct? Generally, you can deduct the full amount of a business expense if it meets the criteria of ordinary and necessary and it is not a capital expense. Tax form 1040 ez Recovery of amount deducted (tax benefit rule). Tax form 1040 ez   If you recover part of an expense in the same tax year in which you would have claimed a deduction, reduce your current year expense by the amount of the recovery. Tax form 1040 ez If you have a recovery in a later year, include the recovered amount in income in that year. Tax form 1040 ez However, if part of the deduction for the expense did not reduce your tax, you do not have to include that part of the recovered amount in income. Tax form 1040 ez   For more information on recoveries and the tax benefit rule, see Publication 525. Tax form 1040 ez Payments in kind. Tax form 1040 ez   If you provide services to pay a business expense, the amount you can deduct is limited to your out-of-pocket costs. Tax form 1040 ez You cannot deduct the cost of your own labor. Tax form 1040 ez   Similarly, if you pay a business expense in goods or other property, you can deduct only what the property costs you. Tax form 1040 ez If these costs are included in the cost of goods sold, do not deduct them again as a business expense. Tax form 1040 ez Limits on losses. Tax form 1040 ez   If your deductions for an investment or business activity are more than the income it brings in, you have a loss. Tax form 1040 ez There may be limits on how much of the loss you can deduct. Tax form 1040 ez Not-for-profit limits. Tax form 1040 ez   If you carry on your business activity without the intention of making a profit, you cannot use a loss from it to offset other income. Tax form 1040 ez See Not-for-Profit Activities , later. Tax form 1040 ez At-risk limits. Tax form 1040 ez   Generally, a deductible loss from a trade or business or other income-producing activity is limited to the investment you have “at risk” in the activity. Tax form 1040 ez You are at risk in any activity for the following. Tax form 1040 ez The money and adjusted basis of property you contribute to the activity. Tax form 1040 ez Amounts you borrow for use in the activity if: You are personally liable for repayment, or You pledge property (other than property used in the activity) as security for the loan. Tax form 1040 ez For more information, see Publication 925. Tax form 1040 ez Passive activities. Tax form 1040 ez   Generally, you are in a passive activity if you have a trade or business activity in which you do not materially participate, or a rental activity. Tax form 1040 ez In general, deductions for losses from passive activities only offset income from passive activities. Tax form 1040 ez You cannot use any excess deductions to offset other income. Tax form 1040 ez In addition, passive activity credits can only offset the tax on net passive income. Tax form 1040 ez Any excess loss or credits are carried over to later years. Tax form 1040 ez Suspended passive losses are fully deductible in the year you completely dispose of the activity. Tax form 1040 ez For more information, see Publication 925. Tax form 1040 ez Net operating loss. Tax form 1040 ez   If your deductions are more than your income for the year, you may have a “net operating loss. Tax form 1040 ez ” You can use a net operating loss to lower your taxes in other years. Tax form 1040 ez See Publication 536 for more information. Tax form 1040 ez   See Publication 542 for information about net operating losses of corporations. Tax form 1040 ez When Can I Deduct an Expense? When you can deduct an expense depends on your accounting method. Tax form 1040 ez An accounting method is a set of rules used to determine when and how income and expenses are reported. Tax form 1040 ez The two basic methods are the cash method and the accrual method. Tax form 1040 ez Whichever method you choose must clearly reflect income. Tax form 1040 ez For more information on accounting methods, see Publication 538. Tax form 1040 ez Cash method. Tax form 1040 ez   Under the cash method of accounting, you generally deduct business expenses in the tax year you pay them. Tax form 1040 ez Accrual method. Tax form 1040 ez   Under an accrual method of accounting, you generally deduct business expenses when both of the following apply. Tax form 1040 ez The all-events test has been met. Tax form 1040 ez The test is met when: All events have occurred that fix the fact of liability, and The liability can be determined with reasonable accuracy. Tax form 1040 ez Economic performance has occurred. Tax form 1040 ez Economic performance. Tax form 1040 ez   You generally cannot deduct or capitalize a business expense until economic performance occurs. Tax form 1040 ez If your expense is for property or services provided to you, or for your use of property, economic performance occurs as the property or services are provided, or the property is used. Tax form 1040 ez If your expense is for property or services you provide to others, economic performance occurs as you provide the property or services. Tax form 1040 ez Example. Tax form 1040 ez Your tax year is the calendar year. Tax form 1040 ez In December 2013, the Field Plumbing Company did some repair work at your place of business and sent you a bill for $600. Tax form 1040 ez You paid it by check in January 2014. Tax form 1040 ez If you use the accrual method of accounting, deduct the $600 on your tax return for 2013 because all events have occurred to “fix” the fact of liability (in this case the work was completed), the liability can be determined, and economic performance occurred in that year. Tax form 1040 ez If you use the cash method of accounting, deduct the expense on your 2014 return. Tax form 1040 ez Prepayment. Tax form 1040 ez   You generally cannot deduct expenses in advance, even if you pay them in advance. Tax form 1040 ez This rule applies to both the cash and accrual methods. Tax form 1040 ez It applies to prepaid interest, prepaid insurance premiums, and any other expense paid far enough in advance to, in effect, create an asset with a useful life extending substantially beyond the end of the current tax year. Tax form 1040 ez Example. Tax form 1040 ez In 2013, you sign a 10-year lease and immediately pay your rent for the first 3 years. Tax form 1040 ez Even though you paid the rent for 2013, 2014, and 2015, you can only deduct the rent for 2013 on your 2013 tax return. Tax form 1040 ez You can deduct the rent for 2014 and 2015 on your tax returns for those years. Tax form 1040 ez Contested liability. Tax form 1040 ez   Under the cash method, you can deduct a contested liability only in the year you pay the liability. Tax form 1040 ez Under the accrual method, you can deduct contested liabilities such as taxes (except foreign or U. Tax form 1040 ez S. Tax form 1040 ez possession income, war profits, and excess profits taxes) either in the tax year you pay the liability (or transfer money or other property to satisfy the obligation) or in the tax year you settle the contest. Tax form 1040 ez However, to take the deduction in the year of payment or transfer, you must meet certain conditions. Tax form 1040 ez See Regulations section 1. Tax form 1040 ez 461-2. Tax form 1040 ez Related person. Tax form 1040 ez   Under an accrual method of accounting, you generally deduct expenses when you incur them, even if you have not yet paid them. Tax form 1040 ez However, if you and the person you owe are related and that person uses the cash method of accounting, you must pay the expense before you can deduct it. Tax form 1040 ez Your deduction is allowed when the amount is includible in income by the related cash method payee. Tax form 1040 ez See Related Persons in Publication 538. Tax form 1040 ez Not-for-Profit Activities If you do not carry on your business or investment activity to make a profit, you cannot use a loss from the activity to offset other income. Tax form 1040 ez Activities you do as a hobby, or mainly for sport or recreation, are often not entered into for profit. Tax form 1040 ez The limit on not-for-profit losses applies to individuals, partnerships, estates, trusts, and S corporations. Tax form 1040 ez It does not apply to corporations other than S corporations. Tax form 1040 ez In determining whether you are carrying on an activity for profit, several factors are taken into account. Tax form 1040 ez No one factor alone is decisive. Tax form 1040 ez Among the factors to consider are whether: You carry on the activity in a businesslike manner, The time and effort you put into the activity indicate you intend to make it profitable, You depend on the income for your livelihood, Your losses are due to circumstances beyond your control (or are normal in the start-up phase of your type of business), You change your methods of operation in an attempt to improve profitability, You (or your advisors) have the knowledge needed to carry on the activity as a successful business, You were successful in making a profit in similar activities in the past, The activity makes a profit in some years, and You can expect to make a future profit from the appreciation of the assets used in the activity. Tax form 1040 ez Presumption of profit. Tax form 1040 ez   An activity is presumed carried on for profit if it produced a profit in at least 3 of the last 5 tax years, including the current year. Tax form 1040 ez Activities that consist primarily of breeding, training, showing, or racing horses are presumed carried on for profit if they produced a profit in at least 2 of the last 7 tax years, including the current year. Tax form 1040 ez The activity must be substantially the same for each year within this period. Tax form 1040 ez You have a profit when the gross income from an activity exceeds the deductions. Tax form 1040 ez   If a taxpayer dies before the end of the 5-year (or 7-year) period, the “test” period ends on the date of the taxpayer's death. Tax form 1040 ez   If your business or investment activity passes this 3- (or 2-) years-of-profit test, the IRS will presume it is carried on for profit. Tax form 1040 ez This means the limits discussed here will not apply. Tax form 1040 ez You can take all your business deductions from the activity, even for the years that you have a loss. Tax form 1040 ez You can rely on this presumption unless the IRS later shows it to be invalid. Tax form 1040 ez Using the presumption later. Tax form 1040 ez   If you are starting an activity and do not have 3 (or 2) years showing a profit, you can elect to have the presumption made after you have the 5 (or 7) years of experience allowed by the test. Tax form 1040 ez   You can elect to do this by filing Form 5213. Tax form 1040 ez Filing this form postpones any determination that your activity is not carried on for profit until 5 (or 7) years have passed since you started the activity. Tax form 1040 ez   The benefit gained by making this election is that the IRS will not immediately question whether your activity is engaged in for profit. Tax form 1040 ez Accordingly, it will not restrict your deductions. Tax form 1040 ez Rather, you will gain time to earn a profit in the required number of years. Tax form 1040 ez If you show 3 (or 2) years of profit at the end of this period, your deductions are not limited under these rules. Tax form 1040 ez If you do not have 3 (or 2) years of profit, the limit can be applied retroactively to any year with a loss in the 5-year (or 7-year) period. Tax form 1040 ez   Filing Form 5213 automatically extends the period of limitations on any year in the 5-year (or 7-year) period to 2 years after the due date of the return for the last year of the period. Tax form 1040 ez The period is extended only for deductions of the activity and any related deductions that might be affected. Tax form 1040 ez    You must file Form 5213 within 3 years after the due date of your return (determined without extensions) for the year in which you first carried on the activity, or, if earlier, within 60 days after receiving written notice from the Internal Revenue Service proposing to disallow deductions attributable to the activity. Tax form 1040 ez Gross Income Gross income from a not-for-profit activity includes the total of all gains from the sale, exchange, or other disposition of property, and all other gross receipts derived from the activity. Tax form 1040 ez Gross income from the activity also includes capital gains and rents received for the use of property which is held in connection with the activity. Tax form 1040 ez You can determine gross income from any not-for-profit activity by subtracting the cost of goods sold from your gross receipts. Tax form 1040 ez However, if you determine gross income by subtracting cost of goods sold from gross receipts, you must do so consistently, and in a manner that follows generally accepted methods of accounting. Tax form 1040 ez Limit on Deductions If your activity is not carried on for profit, take deductions in the following order and only to the extent stated in the three categories. Tax form 1040 ez If you are an individual, these deductions may be taken only if you itemize. Tax form 1040 ez These deductions may be taken on Schedule A (Form 1040). Tax form 1040 ez Category 1. Tax form 1040 ez   Deductions you can take for personal as well as for business activities are allowed in full. Tax form 1040 ez For individuals, all nonbusiness deductions, such as those for home mortgage interest, taxes, and casualty losses, belong in this category. Tax form 1040 ez Deduct them on the appropriate lines of Schedule A (Form 1040). Tax form 1040 ez For tax years beginning after December 31, 2008, you can deduct a casualty loss on property you own for personal use only to the extent it is more than $500 and exceeds 10% of your adjusted gross income (AGI). Tax form 1040 ez The 10% AGI limitation does not apply to net disaster losses resulting from federally declared disasters in 2008 and 2009, and individuals are allowed to claim the net disaster losses even if they do not itemize their deductions. Tax form 1040 ez The reduction amount returns to $100 for tax years beginning after December 31, 2009. Tax form 1040 ez See Publication 547 for more information on casualty losses. Tax form 1040 ez For the limits that apply to home mortgage interest, see Publication 936. Tax form 1040 ez Category 2. Tax form 1040 ez   Deductions that do not result in an adjustment to the basis of property are allowed next, but only to the extent your gross income from the activity is more than your deductions under the first category. Tax form 1040 ez Most business deductions, such as those for advertising, insurance premiums, interest, utilities, and wages, belong in this category. Tax form 1040 ez Category 3. Tax form 1040 ez   Business deductions that decrease the basis of property are allowed last, but only to the extent the gross income from the activity exceeds the deductions you take under the first two categories. Tax form 1040 ez Deductions for depreciation, amortization, and the part of a casualty loss an individual could not deduct in category (1) belong in this category. Tax form 1040 ez Where more than one asset is involved, allocate depreciation and these other deductions proportionally. Tax form 1040 ez    Individuals must claim the amounts in categories (2) and (3) as miscellaneous deductions on Schedule A (Form 1040). Tax form 1040 ez They are subject to the 2%-of-adjusted-gross-income limit. Tax form 1040 ez See Publication 529 for information on this limit. Tax form 1040 ez Example. Tax form 1040 ez Adriana is engaged in a not-for-profit activity. Tax form 1040 ez The income and expenses of the activity are as follows. Tax form 1040 ez Gross income $3,200 Subtract:     Real estate taxes $700   Home mortgage interest 900   Insurance 400   Utilities 700   Maintenance 200   Depreciation on an automobile 600   Depreciation on a machine 200 3,700 Loss $(500)   Adriana must limit her deductions to $3,200, the gross income she earned from the activity. Tax form 1040 ez The limit is reached in category (3), as follows. Tax form 1040 ez Limit on deduction $3,200 Category 1: Taxes and interest $1,600   Category 2: Insurance, utilities, and maintenance 1,300 2,900 Available for Category 3 $ 300   The $800 of depreciation is allocated between the automobile and machine as follows. Tax form 1040 ez $600 $800 x $300 = $225 depreciation for the automobile             $200 $800 x $300 = $75 depreciation for the machine The basis of each asset is reduced accordingly. Tax form 1040 ez Adriana includes the $3,200 of gross income on line 21 (other income) of Form 1040. Tax form 1040 ez The $1,600 for category (1) is deductible in full on the appropriate lines for taxes and interest on Schedule A (Form 1040). Tax form 1040 ez Adriana deducts the remaining $1,600 ($1,300 for category (2) and $300 for category (3)) as other miscellaneous deductions on Schedule A (Form 1040) subject to the 2%-of-adjusted-gross-income limit. Tax form 1040 ez Partnerships and S corporations. Tax form 1040 ez   If a partnership or S corporation carries on a not-for-profit activity, these limits apply at the partnership or S corporation level. Tax form 1040 ez They are reflected in the individual shareholder's or partner's distributive shares. Tax form 1040 ez More than one activity. Tax form 1040 ez   If you have several undertakings, each may be a separate activity or several undertakings may be combined. Tax form 1040 ez The following are the most significant facts and circumstances in making this determination. Tax form 1040 ez The degree of organizational and economic interrelationship of various undertakings. Tax form 1040 ez The business purpose that is (or might be) served by carrying on the various undertakings separately or together in a business or investment setting. Tax form 1040 ez The similarity of the undertakings. Tax form 1040 ez   The IRS will generally accept your characterization if it is supported by facts and circumstances. Tax form 1040 ez    If you are carrying on two or more different activities, keep the deductions and income from each one separate. Tax form 1040 ez Figure separately whether each is a not-for-profit activity. Tax form 1040 ez Then figure the limit on deductions and losses separately for each activity that is not for profit. Tax form 1040 ez Prev  Up  Next   Home   More Online Publications