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The Www Statetaxforms

Www statetaxforms 2. Www statetaxforms   Possession Source Income Table of Contents Types of IncomeCompensation for Labor or Personal Services Investment Income Sales or Other Dispositions of Property Scholarships, Fellowships, Grants, Prizes, and Awards Effectively Connected Income In order to determine where to file your return and which form(s) you need to complete, you must determine the source of each item of income you received during the tax year. Www statetaxforms Income you received from sources within, or that was effectively connected with the conduct of a trade or business within, the relevant possession must be identified separately from U. Www statetaxforms S. Www statetaxforms or foreign source income. Www statetaxforms This chapter discusses the rules for determining if the source of your income is from: American Samoa, The Commonwealth of the Northern Mariana Islands (CNMI), The Commonwealth of Puerto Rico (Puerto Rico), Guam, or The U. Www statetaxforms S. Www statetaxforms Virgin Islands (USVI). Www statetaxforms Generally, the same rules that apply for determining U. Www statetaxforms S. Www statetaxforms source income also apply for determining possession source income. Www statetaxforms However, there are some important exceptions to these rules. Www statetaxforms Both the general rules and the exceptions are discussed in this chapter. Www statetaxforms U. Www statetaxforms S. Www statetaxforms income rule. Www statetaxforms   This rule states that income is not possession source income if, under the rules of Internal Revenue Code sections 861–865, it is treated as income: From sources within the United States, or Effectively connected with the conduct of a trade or business within the United States. Www statetaxforms Table 2-1 shows the general rules for determining whether income is from sources within the United States. Www statetaxforms Table 2-1. Www statetaxforms General Rules for Determining U. Www statetaxforms S. Www statetaxforms Source of Income Item of Income Factor Determining Source Salaries, wages, and other compensation for labor or personal services Where labor or services performed Pensions Contributions: Where services were performed that earned the pension Investment earnings: Where pension trust is located Interest Residence of payer Dividends Where corporation created or organized Rents Location of property Royalties:   Natural resources Location of property Patents, copyrights, etc. Www statetaxforms Where property is used Sale of business inventory—purchased Where sold Sale of business inventory—produced Allocation if produced and sold in different locations Sale of real property Location of property Sale of personal property Seller's tax home (but see Special Rules for Gains From Dispositions of Certain Property , later, for exceptions) Sale of natural resources Allocation based on fair market value of product at export terminal. Www statetaxforms For more information, see Regulations section 1. Www statetaxforms 863-1(b). Www statetaxforms Types of Income This section looks at the most common types of income received by individuals, and the rules for determining the source of the income. Www statetaxforms Generally, the same rules shown in Table 2-1 are used to determine if you have possession source income. Www statetaxforms Compensation for Labor or Personal Services Income from labor or personal services includes wages, salaries, commissions, fees, per diem allowances, employee allowances and bonuses, and fringe benefits. Www statetaxforms It also includes income earned by sole proprietors and general partners from providing personal services in the course of their trade or business. Www statetaxforms Services performed wholly within a relevant possession. Www statetaxforms   Generally, all pay you receive for services performed in a relevant possession is considered to be from sources within that possession. Www statetaxforms However, there is an exception for income earned as a member of the U. Www statetaxforms S. Www statetaxforms Armed Forces or a civilian spouse. Www statetaxforms U. Www statetaxforms S. Www statetaxforms Armed Forces. Www statetaxforms   If you are a bona fide resident of a relevant possession, your military service pay will be sourced in that possession even if you perform the services in the United States or another possession. Www statetaxforms However, if you are not a bona fide resident of a possession, your military service pay will be income from the  United States even if you perform services in a possession. Www statetaxforms Civilian spouse of active duty member of the U. Www statetaxforms S. Www statetaxforms Armed Forces. Www statetaxforms   If you are a bona fide resident of a U. Www statetaxforms S. Www statetaxforms possession and choose to keep that possession as your tax residence under MSRRA when relocating with your servicemember spouse under military orders, the source of income for your labor or personal services is considered to be that possession. Www statetaxforms Likewise, if your tax residence is in one of the 50 states or the District of Columbia before relocating and you choose to keep it as your tax residence, the source of income for services performed in any of the U. Www statetaxforms S. Www statetaxforms possessions is considered to be the United States and, specifically, your state of residence or the District of Columbia. Www statetaxforms Services performed partly inside and partly outside a relevant possession. Www statetaxforms   If you are an employee and receive compensation for labor or personal services performed both inside and outside the relevant possession, special rules apply in determining the source of the compensation. Www statetaxforms Compensation (other than certain fringe benefits) is sourced on a time basis. Www statetaxforms Certain fringe benefits (such as housing and education) are sourced on a geographical basis. Www statetaxforms   Or, you may be permitted to use an alternative basis to determine the source of compensation. Www statetaxforms See Alternative basis , later. Www statetaxforms   If you are self-employed, determine the source of your income for labor or personal services from self-employment on the basis that most correctly reflects the proper source of that income under the facts and circumstances of your particular case. Www statetaxforms In many cases, the facts and circumstances will call for an apportionment on a time basis as explained next. Www statetaxforms Time basis. Www statetaxforms   Use a time basis to figure your compensation for labor or personal services from the relevant possession (other than the fringe benefits discussed later). Www statetaxforms Do this by multiplying your total compensation (other than the fringe benefits discussed later) by the following fraction:   Number of days you performed  services in the relevant  possession during the year     Total number of days you  performed services during the year           You can use a unit of time less than a day in the above fraction, if appropriate. Www statetaxforms The time period for which the income is made does not have to be a year. Www statetaxforms Instead, you can use another distinct, separate, and continuous time period if you can establish to the satisfaction of the IRS that this other period is more appropriate. Www statetaxforms Example. Www statetaxforms In 2013, you worked in your employer's office in the United States for 60 days and in the Puerto Rico office for 180 days, earning a total of $80,000 for the year. Www statetaxforms Your Puerto Rico source income is $60,000, figured as follows. Www statetaxforms       180 days 240 days × $80,000 = $60,000                 Multi-year compensation. Www statetaxforms   The source of multi-year compensation is generally determined on a time basis over the period to which the compensation is attributable. Www statetaxforms Multi-year compensation is compensation that is included in your income in 1 tax year but is attributable to a period that includes 2 or more tax years. Www statetaxforms You determine the period to which the income is attributable based on the facts and circumstances of your case. Www statetaxforms For more information on multi-year compensation, see Treasury Decision (T. Www statetaxforms D. Www statetaxforms ) 9212 and Regulations section 1. Www statetaxforms 861-4, 2005-35 I. Www statetaxforms R. Www statetaxforms B. Www statetaxforms 429, available at www. Www statetaxforms irs. Www statetaxforms gov/irb/2005-35_IRB/ar14. Www statetaxforms html. Www statetaxforms Certain fringe benefits sourced on a geographical basis. Www statetaxforms   If you received any of the following fringe benefits as compensation for labor or services performed as an employee partly inside and partly outside a relevant possession, you must source that income on a geographical basis. Www statetaxforms Housing. Www statetaxforms Education. Www statetaxforms Local transportation. Www statetaxforms Tax reimbursement. Www statetaxforms Hazardous or hardship duty pay. Www statetaxforms Moving expense reimbursement. Www statetaxforms For information on determining the source of the fringe benefits listed above, see Regulations section 1. Www statetaxforms 861-4. Www statetaxforms Alternative basis. Www statetaxforms   You can determine the source of your compensation under an alternative basis if you establish to the satisfaction of the IRS that, under the facts and circumstances of your case, the alternative basis more properly determines the source of your income than the time or geographical basis. Www statetaxforms If you use an alternative basis, you must keep (and have available for inspection) records to document why the alternative basis more properly determines the source of your income. Www statetaxforms De minimis exception. Www statetaxforms   There is an exception to the rule for determining the source of income earned in a possession. Www statetaxforms Generally, you will not have income from a possession if during a tax year you: Are a U. Www statetaxforms S. Www statetaxforms citizen or resident, Are not a bona fide resident of that possession, Are not employed by or under contract with an individual, partnership, or corporation that is engaged in a trade or business in that possession, Temporarily perform services in that possession for 90 days or less, and Earned $3,000 or less from such services. Www statetaxforms This exception began with income earned during your 2008 tax year. Www statetaxforms Pensions. Www statetaxforms   Generally, pension income has two components: contributions to the pension plan and the earnings accrued from investing those contributions. Www statetaxforms The contribution portion is sourced according to where services were performed that earned the pension. Www statetaxforms The investment earnings portion is sourced according to the location of the pension trust. Www statetaxforms Example. Www statetaxforms You are a U. Www statetaxforms S. Www statetaxforms citizen who worked in Puerto Rico for a U. Www statetaxforms S. Www statetaxforms company. Www statetaxforms All services were performed in Puerto Rico. Www statetaxforms Upon retirement you remained in Puerto Rico and began receiving your pension from the U. Www statetaxforms S. Www statetaxforms pension trust of your employer. Www statetaxforms Distributions from the U. Www statetaxforms S. Www statetaxforms pension trust must be allocated between (1) contributions, which are Puerto Rico source income, and (2) investment earnings, which are U. Www statetaxforms S. Www statetaxforms source income. Www statetaxforms Investment Income This category includes such income as interest, dividends, rents, and royalties. Www statetaxforms Interest income. Www statetaxforms   The source of interest income is generally determined by the residence of the payer. Www statetaxforms Interest paid by corporations created or organized in a relevant possession (possession corporation) or by individuals who are bona fide residents of a relevant possession is considered income from sources within that possession. Www statetaxforms   However, there is an exception to this rule if you are a bona fide resident of a relevant possession, receive interest from a corporation created or organized in that possession, and are a shareholder of that corporation who owns, directly or indirectly, at least 10% of the total voting stock of the corporation. Www statetaxforms See Regulations section 1. Www statetaxforms 937-2(i) for more information. Www statetaxforms Dividends. Www statetaxforms   Generally, dividends paid by a corporation created or organized in a relevant possession will be considered income from sources within that possession. Www statetaxforms There are additional rules for bona fide residents of a relevant possession who receive dividend income from possession corporations, and who own, directly or indirectly, at least 10% of the voting stock of the corporation. Www statetaxforms For more information, see Regulations section 1. Www statetaxforms 937-2(g). Www statetaxforms Rental income. Www statetaxforms   Rents from property located in a relevant possession are treated as income from sources within that possession. Www statetaxforms Royalties. Www statetaxforms   Royalties from natural resources located in a relevant possession are considered income from sources within that possession. Www statetaxforms   Also considered possession source income are royalties received for the use of, or for the privilege of using, in a relevant possession, patents, copyrights, secret processes and formulas, goodwill, trademarks, trade brands, franchises, and other like property. Www statetaxforms Sales or Other Dispositions of Property The source rules for sales or other dispositions of property are varied. Www statetaxforms The most common situations are discussed below. Www statetaxforms Real property. Www statetaxforms   Real property includes land and buildings, and generally anything built on, growing on, or attached to land. Www statetaxforms The location of the property generally determines the source of income from the sale. Www statetaxforms For example, if you are a bona fide resident of Guam and sell your home that is located in Guam, the gain on the sale is sourced in Guam. Www statetaxforms If, however, the home you sold was located in the United States, the gain is U. Www statetaxforms S. Www statetaxforms source income. Www statetaxforms Personal property. Www statetaxforms   The term “personal property” refers to property (such as machinery, equipment, or furniture) that is not real property. Www statetaxforms Generally, gain (or loss) from the sale or other disposition is sourced according to the seller's tax home. Www statetaxforms If personal property is sold by a bona fide resident of a relevant possession, the gain (or loss) from the sale is treated as sourced within that possession. Www statetaxforms   This rule does not apply to the sale of inventory, intangible property, depreciable personal property, or property sold through a foreign office or fixed place of business. Www statetaxforms The rules applying to sales of inventory are discussed below. Www statetaxforms For information on sales of the other types of property mentioned, see Internal Revenue Code section 865. Www statetaxforms Inventory. Www statetaxforms   Your inventory is personal property that is stock in trade or that is held primarily for sale to customers in the ordinary course of your trade or business. Www statetaxforms The source of income from the sale of inventory depends on whether the inventory was purchased or produced. Www statetaxforms Purchased. Www statetaxforms   Income from the sale of inventory that you purchased is sourced where you sell the property. Www statetaxforms Generally, this is where title to the property passes to the buyer. Www statetaxforms Produced. Www statetaxforms   Income from the sale of inventory that you produced in a relevant possession and sold outside that possession (or vice versa) is sourced based on an allocation. Www statetaxforms For information on making the allocation, see Regulations section 1. Www statetaxforms 863-3(f). Www statetaxforms Special Rules for Gains From Dispositions of Certain Property There are special rules for gains from dispositions of certain investment property (for example, stocks, bonds, debt instruments, diamonds, and gold) owned by a U. Www statetaxforms S. Www statetaxforms citizen or resident alien prior to becoming a bona fide resident of a possession. Www statetaxforms You are subject to these special rules if you meet both of the following conditions. Www statetaxforms For the tax year for which the source of the gain must be determined, you are a bona fide resident of the relevant possession. Www statetaxforms For any of the 10 years preceding that year, you were a citizen or resident alien of the United States (other than a bona fide resident of the relevant possession). Www statetaxforms If you meet these conditions, gains from the disposition of this property will not be treated as income from sources within the relevant possession for purposes of the Internal Revenue Code. Www statetaxforms Accordingly, bona fide residents of American Samoa and Puerto Rico, for example, may not exclude the gain on their U. Www statetaxforms S. Www statetaxforms tax return. Www statetaxforms (See chapter 3 for additional filing information. Www statetaxforms ) With respect to the CNMI, Guam, and the USVI, the gain from the disposition of this property will not meet the requirements for certain tax rules that may allow bona fide residents of those possessions to reduce or obtain a rebate of taxes on income from sources within the relevant possessions. Www statetaxforms These rules apply to dispositions after April 11, 2005. Www statetaxforms For details, see Regulations section 1. Www statetaxforms 937-2(f)(1) and Examples 1 and 2 of section 1. Www statetaxforms 937-2(k). Www statetaxforms Example 1. Www statetaxforms In 2007, Cheryl Jones, a U. Www statetaxforms S. Www statetaxforms citizen, lived in the United States and paid $1,000 for 100 shares of stock in the Rose Corporation, a U. Www statetaxforms S. Www statetaxforms corporation listed on the New York Stock Exchange. Www statetaxforms On March 1, 2010, she moved to Puerto Rico and changed her tax home to Puerto Rico on the same date. Www statetaxforms Cheryl satisfied the presence test in 2010 and, under the year-of-move exception, she was considered a bona fide resident of Puerto Rico for the rest of 2010. Www statetaxforms On March 1, 2010, the closing value of Cheryl's stock in the Rose Corporation was $2,000. Www statetaxforms On January 5, 2013, while still a bona fide resident of Puerto Rico, Cheryl sold all her Rose Corporation stock for $7,000. Www statetaxforms Under the earlier rules, none of Cheryl's $6,000 gain will be treated as income from sources within Puerto Rico. Www statetaxforms The source rules discussed in the preceding paragraphs supplement, and may apply in conjunction with, an existing special rule. Www statetaxforms This existing special rule applies if you are a U. Www statetaxforms S. Www statetaxforms citizen or resident alien who becomes a bona fide resident of American Samoa, the CNMI, or Guam, and who has gain from the disposition of certain U. Www statetaxforms S. Www statetaxforms assets during the 10-year period beginning when you became a bona fide resident. Www statetaxforms The gain is U. Www statetaxforms S. Www statetaxforms source income that generally is subject to U. Www statetaxforms S. Www statetaxforms tax if the property is either (1) located in the United States; (2) stock issued by a U. Www statetaxforms S. Www statetaxforms corporation or a debt obligation of a U. Www statetaxforms S. Www statetaxforms person or of the United States, a state (or political subdivision), or the District of Columbia; or (3) property that has a basis in whole or in part by reference to property described in (1) or (2). Www statetaxforms See chapter 3 for filing information. Www statetaxforms Special election. Www statetaxforms   For dispositions after April 11, 2005, you can choose to treat the part of gain (or loss) attributable to the time you held the property while a bona fide resident of the relevant possession (the possession holding period) as gain (or loss) from sources within that possession. Www statetaxforms Make the election by reporting the gain attributable to the possession holding period on your income tax return for the year of disposition. Www statetaxforms This election overrides both of the special rules discussed earlier. Www statetaxforms   There are two methods for figuring the gain for the possession holding period, one for marketable securities and another for other types of investment property. Www statetaxforms Marketable securities. Www statetaxforms   Marketable securities are those actively traded on an established financial market, such as stock in a publicly held corporation. Www statetaxforms Under the special election, allocate the gain (or loss) by figuring the appreciation separately for your possession and U. Www statetaxforms S. Www statetaxforms holding periods. Www statetaxforms   Your possession holding period begins on the first day you do not have a tax home outside the relevant possession. Www statetaxforms The gain (or loss) attributable to the possession holding period is the difference in fair market value of the security at the close of the market on the first and last days of this holding period. Www statetaxforms This is your gain (or loss) that is treated as being from sources within the relevant possession. Www statetaxforms If you were a bona fide resident of the relevant possession for more than one continuous period, combine the gains (or losses) from each possession holding period. Www statetaxforms Example 2. Www statetaxforms Assume the same facts as in Example 1, except that Cheryl makes the special election to allocate the gain between her U. Www statetaxforms S. Www statetaxforms and possession holding periods. Www statetaxforms Cheryl's possession holding period began March 1, 2010, the date her tax home changed to Puerto Rico. Www statetaxforms Therefore, the portion of gain attributable to her possession holding period is $5,000 ($7,000 sale price – $2,000 closing value on first day of the possession holding period). Www statetaxforms By reporting $5,000 of her $6,000 gain as Puerto Rico source income on her 2013 Puerto Rico tax return (and the remainder as non-Puerto Rico source income), Cheryl elects to treat that amount as Puerto Rico source income. Www statetaxforms Other personal property. Www statetaxforms   For personal property other than marketable securities, use a time-based allocation. Www statetaxforms Figure the gain (or loss) attributable to the possession holding period by multiplying your total gain (or loss) by the following fraction. Www statetaxforms      Number of days in the  possession holding period     Total number of days  in your holding period         The result is your gain (or loss) that is treated as being from sources within the relevant possession. Www statetaxforms Example 3. Www statetaxforms In addition to the stock in Rose Corporation, Cheryl acquired a 5% interest in the Alder Partnership on January 1, 2009. Www statetaxforms On March 1, 2010, when she established bona fide residency in Puerto Rico, her partnership interest was not considered a marketable security. Www statetaxforms On September 16, 2013, while still a bona fide resident of Puerto Rico, Cheryl sold her interest in Alder Partnership for a $100,000 gain. Www statetaxforms She had owned the interest for a total of 1,720 days. Www statetaxforms Cheryl's possession holding period (from March 1, 2010, through September 16, 2013) is 1,296 days. Www statetaxforms The portion of her gain attributable to Puerto Rico is $75,349 ($100,000 x (1,296 Puerto Rico days ÷ 1,720 total days)). Www statetaxforms By reporting $75,349 of her $100,000 gain as Puerto Rico source income on her 2013 Puerto Rico tax return (and the remainder as non-Puerto Rico source income), Cheryl elects to treat that amount as Puerto Rico source income. Www statetaxforms Scholarships, Fellowships, Grants, Prizes, and Awards The source of these types of income is generally the residence of the payer, regardless of who actually disburses the funds. Www statetaxforms Therefore, in order to be possession source income, the payer must be a resident of the relevant possession, such as an individual who is a bona fide resident or a corporation created or organized in that possession. Www statetaxforms These rules do not apply to amounts paid as salary or other compensation for services. Www statetaxforms See Compensation for Labor or Personal Services, earlier in this chapter, for the source rules that apply. Www statetaxforms Effectively Connected Income In limited circumstances, some kinds of income from sources outside the relevant possession must be treated as effectively connected with a trade or business in that possession. Www statetaxforms These circumstances are listed below. Www statetaxforms You have an office or other fixed place of business in the relevant possession to which the income can be attributed. Www statetaxforms That office or place of business is a material factor in producing the income. Www statetaxforms The income is produced in the ordinary course of the trade or business carried on through that office or other fixed place of business. Www statetaxforms An office or other fixed place of business is a material factor if it significantly contributes to, and is an essential economic element in, the earning of the income. Www statetaxforms The three kinds of income from sources outside the relevant possession to which these rules apply are the following. Www statetaxforms Rents and royalties for the use of, or for the privilege of using, intangible personal property located outside the relevant possession or from any interest in such property. Www statetaxforms Included are rents or royalties for the use of, or for the privilege of using, outside the relevant possession, patents, copyrights, secret processes and formulas, goodwill, trademarks, trade brands, franchises, and similar properties if the rents or royalties are from the active conduct of a trade or business in the relevant possession. Www statetaxforms Dividends or interest from the active conduct of a banking, financing, or similar business in the relevant possession. Www statetaxforms Income, gain, or loss from the sale or exchange outside the relevant possession, through the office or other fixed place of business in the relevant possession, of: Stock in trade, Property that would be included in inventory if on hand at the end of the tax year, or Property held primarily for sale to customers in the ordinary course of business. Www statetaxforms Item (3) will not apply if you sold the property for use, consumption, or disposition outside the relevant possession and an office or other fixed place of business in a foreign country was a material factor in the sale. Www statetaxforms Example. Www statetaxforms Marcy Jackson is a bona fide resident of American Samoa. Www statetaxforms Her business, which she conducts from an office in American Samoa, is developing and selling specialized computer software. Www statetaxforms A software purchaser will frequently pay Marcy an additional amount to install the software on the purchaser's operating system and to ensure that the software is functioning properly. Www statetaxforms Marcy installs the software at the purchaser's place of business, which may be in American Samoa, in the United States, or in another country. Www statetaxforms The income from selling the software is effectively connected with the conduct of Marcy's business in American Samoa, even though the product's destination may be outside the possession. Www statetaxforms However, the compensation she receives for installing the software (personal services) outside of American Samoa is not effectively connected with the conduct of her business in the possession—the income is sourced where she performs the services. Www statetaxforms Prev  Up  Next   Home   More Online Publications