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Federal Income Tax Amendment

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Federal Income Tax Amendment

Federal income tax amendment 10. Federal income tax amendment   Retirement Plans, Pensions, and Annuities Table of Contents What's New Reminder IntroductionThe General Rule. Federal income tax amendment Individual retirement arrangements (IRAs). Federal income tax amendment Civil service retirement benefits. Federal income tax amendment Useful Items - You may want to see: General InformationIn-plan rollovers to designated Roth accounts. Federal income tax amendment How To Report Cost (Investment in the Contract) Taxation of Periodic PaymentsExclusion limited to cost. Federal income tax amendment Exclusion not limited to cost. Federal income tax amendment Simplified Method Taxation of Nonperiodic PaymentsLump-Sum Distributions RolloversIn-plan rollovers to designated Roth accounts. Federal income tax amendment Special Additional TaxesTax on Early Distributions Tax on Excess Accumulation Survivors and Beneficiaries What's New For purposes of the Net Investment Income Tax (NIIT), net investment income does not include distributions from a qualified retirement plan (for example, 401(a), 403(a), 403(b), 408, 408A, or 457(b) plans). Federal income tax amendment However, these distributions are taken into account when determining the modified adjusted gross income threshold. Federal income tax amendment Distributions from a nonqualified retirement plan are included in net investment income. Federal income tax amendment See Form 8960, Net Investment Income Tax - Individuals, Estates, and Trusts, and its instructions for more information. Federal income tax amendment Reminder Starting in 2013, the American Taxpayer Relief Act of 2012 expanded the rules for in-plan Roth rollovers to include more taxpayers. Federal income tax amendment For more information, see Designated Roth accounts discussed later. Federal income tax amendment Introduction This chapter discusses the tax treatment of distributions you receive from: An employee pension or annuity from a qualified plan, A disability retirement, and A purchased commercial annuity. Federal income tax amendment What is not covered in this chapter. Federal income tax amendment   The following topics are not discussed in this chapter. Federal income tax amendment The General Rule. Federal income tax amendment   This is the method generally used to determine the tax treatment of pension and annuity income from nonqualified plans (including commercial annuities). Federal income tax amendment For a qualified plan, you generally cannot use the General Rule unless your annuity starting date is before November 19, 1996. Federal income tax amendment For more information about the General Rule, see Publication 939, General Rule for Pensions and Annuities. Federal income tax amendment Individual retirement arrangements (IRAs). Federal income tax amendment   Information on the tax treatment of amounts you receive from an IRA is in chapter 17. Federal income tax amendment Civil service retirement benefits. Federal income tax amendment    If you are retired from the federal government (regular, phased, or disability retirement), see Publication 721, Tax Guide to U. Federal income tax amendment S. Federal income tax amendment Civil Service Retirement Benefits. Federal income tax amendment Publication 721 also covers the information that you need if you are the survivor or beneficiary of a federal employee or retiree who died. Federal income tax amendment Useful Items - You may want to see: Publication 575 Pension and Annuity Income 721 Tax Guide to U. Federal income tax amendment S. Federal income tax amendment Civil Service Retirement Benefits 939 General Rule for Pensions and Annuities Form (and Instructions) W-4P Withholding Certificate for Pension or Annuity Payments 1099-R Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. Federal income tax amendment 4972 Tax on Lump-Sum Distributions 5329 Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts General Information Designated Roth accounts. Federal income tax amendment   A designated Roth account is a separate account created under a qualified Roth contribution program to which participants may elect to have part or all of their elective deferrals to a 401(k), 403(b), or 457(b) plan designated as Roth contributions. Federal income tax amendment Elective deferrals that are designated as Roth contributions are included in your income. Federal income tax amendment However, qualified distributions are not included in your income. Federal income tax amendment See Publication 575 for more information. Federal income tax amendment In-plan rollovers to designated Roth accounts. Federal income tax amendment   If you are a participant in a 401(k), 403(b), or 457(b) plan, your plan may permit you to roll over amounts in those plans to a designated Roth account within the same plan. Federal income tax amendment The rollover of any untaxed amounts must be included in income. Federal income tax amendment See Publication 575 for more information. Federal income tax amendment More than one program. Federal income tax amendment   If you receive benefits from more than one program under a single trust or plan of your employer, such as a pension plan and a profit-sharing plan, you may have to figure the taxable part of each pension or annuity contract separately. Federal income tax amendment Your former employer or the plan administrator should be able to tell you if you have more than one pension or annuity contract. Federal income tax amendment Section 457 deferred compensation plans. Federal income tax amendment    If you work for a state or local government or for a tax-exempt organization, you may be able to participate in a section 457 deferred compensation plan. Federal income tax amendment If your plan is an eligible plan, you are not taxed currently on pay that is deferred under the plan or on any earnings from the plan's investment of the deferred pay. Federal income tax amendment You are generally taxed on amounts deferred in an eligible state or local government plan only when they are distributed from the plan. Federal income tax amendment You are taxed on amounts deferred in an eligible tax-exempt organization plan when they are distributed or otherwise made available to you. Federal income tax amendment   Your 457(b) plan may have a designated Roth account option. Federal income tax amendment If so, you may be able to roll over amounts to the designated Roth account or make contributions. Federal income tax amendment Elective deferrals to a designated Roth account are included in your income. Federal income tax amendment Qualified distributions from a designated Roth account are not subject to tax. Federal income tax amendment   This chapter covers the tax treatment of benefits under eligible section 457 plans, but it does not cover the treatment of deferrals. Federal income tax amendment For information on deferrals under section 457 plans, see Retirement Plan Contributions under Employee Compensation in Publication 525, Taxable and Nontaxable Income. Federal income tax amendment   For general information on these deferred compensation plans, see Section 457 Deferred Compensation Plans in Publication 575. Federal income tax amendment Disability pensions. Federal income tax amendment   If you retired on disability, you generally must include in income any disability pension you receive under a plan that is paid for by your employer. Federal income tax amendment You must report your taxable disability payments as wages on line 7 of Form 1040 or Form 1040A until you reach minimum retirement age. Federal income tax amendment Minimum retirement age generally is the age at which you can first receive a pension or annuity if you are not disabled. Federal income tax amendment    You may be entitled to a tax credit if you were permanently and totally disabled when you retired. Federal income tax amendment For information on the credit for the elderly or the disabled, see chapter 33. Federal income tax amendment   Beginning on the day after you reach minimum retirement age, payments you receive are taxable as a pension or annuity. Federal income tax amendment Report the payments on Form 1040, lines 16a and 16b, or on Form 1040A, lines 12a and 12b. Federal income tax amendment    Disability payments for injuries incurred as a direct result of a terrorist attack directed against the United States (or its allies) are not included in income. Federal income tax amendment For more information about payments to survivors of terrorist attacks, see Publication 3920, Tax Relief for Victims of Terrorist Attacks. Federal income tax amendment   For more information on how to report disability pensions, including military and certain government disability pensions, see chapter 5. Federal income tax amendment Retired public safety officers. Federal income tax amendment   An eligible retired public safety officer can elect to exclude from income distributions of up to $3,000 made directly from a government retirement plan to the provider of accident, health, or long-term disability insurance. Federal income tax amendment See Insurance Premiums for Retired Public Safety Officers in Publication 575 for more information. Federal income tax amendment Railroad retirement benefits. Federal income tax amendment   Part of any railroad retirement benefits you receive is treated for tax purposes as social security benefits, and part is treated as an employee pension. Federal income tax amendment For information about railroad retirement benefits treated as social security benefits, see Publication 915, Social Security and Equivalent Railroad Retirement Benefits. Federal income tax amendment For information about railroad retirement benefits treated as an employee pension, see Railroad Retirement Benefits in Publication 575. Federal income tax amendment Withholding and estimated tax. Federal income tax amendment   The payer of your pension, profit-sharing, stock bonus, annuity, or deferred compensation plan will withhold income tax on the taxable parts of amounts paid to you. Federal income tax amendment You can tell the payer how much to withhold, or not to withhold, by filing Form W-4P. Federal income tax amendment If you choose not to have tax withheld, or you do not have enough tax withheld, you may have to pay estimated tax. Federal income tax amendment   If you receive an eligible rollover distribution, you cannot choose not to have tax withheld. Federal income tax amendment Generally, 20% will be withheld, but no tax will be withheld on a direct rollover of an eligible rollover distribution. Federal income tax amendment See Direct rollover option under Rollovers, later. Federal income tax amendment   For more information, see Pensions and Annuities under Tax Withholding for 2014 in chapter 4. Federal income tax amendment Qualified plans for self-employed individuals. Federal income tax amendment   Qualified plans set up by self-employed individuals are sometimes called Keogh or H. Federal income tax amendment R. Federal income tax amendment 10 plans. Federal income tax amendment Qualified plans can be set up by sole proprietors, partnerships (but not a partner), and corporations. Federal income tax amendment They can cover self-employed persons, such as the sole proprietor or partners, as well as regular (common-law) employees. Federal income tax amendment    Distributions from a qualified plan are usually fully taxable because most recipients have no cost basis. Federal income tax amendment If you have an investment (cost) in the plan, however, your pension or annuity payments from a qualified plan are taxed under the Simplified Method. Federal income tax amendment For more information about qualified plans, see Publication 560, Retirement Plans for Small Business. Federal income tax amendment Purchased annuities. Federal income tax amendment   If you receive pension or annuity payments from a privately purchased annuity contract from a commercial organization, such as an insurance company, you generally must use the General Rule to figure the tax-free part of each annuity payment. Federal income tax amendment For more information about the General Rule, get Publication 939. Federal income tax amendment Also, see Variable Annuities in Publication 575 for the special provisions that apply to these annuity contracts. Federal income tax amendment Loans. Federal income tax amendment   If you borrow money from your retirement plan, you must treat the loan as a nonperiodic distribution from the plan unless certain exceptions apply. Federal income tax amendment This treatment also applies to any loan under a contract purchased under your retirement plan, and to the value of any part of your interest in the plan or contract that you pledge or assign. Federal income tax amendment This means that you must include in income all or part of the amount borrowed. Federal income tax amendment Even if you do not have to treat the loan as a nonperiodic distribution, you may not be able to deduct the interest on the loan in some situations. Federal income tax amendment For details, see Loans Treated as Distributions in Publication 575. Federal income tax amendment For information on the deductibility of interest, see chapter 23. Federal income tax amendment Tax-free exchange. Federal income tax amendment   No gain or loss is recognized on an exchange of an annuity contract for another annuity contract if the insured or annuitant remains the same. Federal income tax amendment However, if an annuity contract is exchanged for a life insurance or endowment contract, any gain due to interest accumulated on the contract is ordinary income. Federal income tax amendment See Transfers of Annuity Contracts in Publication 575 for more information about exchanges of annuity contracts. Federal income tax amendment How To Report If you file Form 1040, report your total annuity on line 16a and the taxable part on line 16b. Federal income tax amendment If your pension or annuity is fully taxable, enter it on line 16b; do not make an entry on line 16a. Federal income tax amendment If you file Form 1040A, report your total annuity on line 12a and the taxable part on line 12b. Federal income tax amendment If your pension or annuity is fully taxable, enter it on line 12b; do not make an entry on line 12a. Federal income tax amendment More than one annuity. Federal income tax amendment   If you receive more than one annuity and at least one of them is not fully taxable, enter the total amount received from all annuities on Form 1040, line 16a, or Form 1040A, line 12a, and enter the taxable part on Form 1040, line 16b, or Form 1040A, line 12b. Federal income tax amendment If all the annuities you receive are fully taxable, enter the total of all of them on Form 1040, line 16b, or Form 1040A, line 12b. Federal income tax amendment Joint return. Federal income tax amendment   If you file a joint return and you and your spouse each receive one or more pensions or annuities, report the total of the pensions and annuities on Form 1040, line 16a, or Form 1040A, line 12a, and report the taxable part on Form 1040, line 16b, or Form 1040A, line 12b. Federal income tax amendment Cost (Investment in the Contract) Before you can figure how much, if any, of a distribution from your pension or annuity plan is taxable, you must determine your cost (your investment in the contract) in the pension or annuity. Federal income tax amendment Your total cost in the plan includes the total premiums, contributions, or other amounts you paid. Federal income tax amendment This includes the amounts your employer contributed that were taxable to you when paid. Federal income tax amendment Cost does not include any amounts you deducted or were excluded from your income. Federal income tax amendment From this total cost, subtract any refunds of premiums, rebates, dividends, unrepaid loans that were not included in your income, or other tax-free amounts that you received by the later of the annuity starting date or the date on which you received your first payment. Federal income tax amendment Your annuity starting date is the later of the first day of the first period for which you received a payment or the date the plan's obligations became fixed. Federal income tax amendment Designated Roth accounts. Federal income tax amendment   Your cost in these accounts is your designated Roth contributions that were included in your income as wages subject to applicable withholding requirements. Federal income tax amendment Your cost will also include any in-plan Roth rollovers you included in income. Federal income tax amendment Foreign employment contributions. Federal income tax amendment   If you worked in a foreign country and contributions were made to your retirement plan, special rules apply in determining your cost. Federal income tax amendment See Foreign employment contributions under Cost (Investment in the Contract) in Publication 575. Federal income tax amendment Taxation of Periodic Payments Fully taxable payments. Federal income tax amendment   Generally, if you did not pay any part of the cost of your employee pension or annuity and your employer did not withhold part of the cost from your pay while you worked, the amounts you receive each year are fully taxable. Federal income tax amendment You must report them on your income tax return. Federal income tax amendment Partly taxable payments. Federal income tax amendment   If you paid part of the cost of your pension or annuity, you are not taxed on the part of the pension or annuity you receive that represents a return of your cost. Federal income tax amendment The rest of the amount you receive is generally taxable. Federal income tax amendment You figure the tax-free part of the payment using either the Simplified Method or the General Rule. Federal income tax amendment Your annuity starting date and whether or not your plan is qualified determine which method you must or may use. Federal income tax amendment   If your annuity starting date is after November 18, 1996, and your payments are from a qualified plan, you must use the Simplified Method. Federal income tax amendment Generally, you must use the General Rule if your annuity is paid under a nonqualified plan, and you cannot use this method if your annuity is paid under a qualified plan. Federal income tax amendment   If you had more than one partly taxable pension or annuity, figure the tax-free part and the taxable part of each separately. Federal income tax amendment   If your annuity is paid under a qualified plan and your annuity starting date is after July 1, 1986, and before November 19, 1996, you could have chosen to use either the General Rule or the Simplified Method. Federal income tax amendment Exclusion limit. Federal income tax amendment   Your annuity starting date determines the total amount of annuity payments that you can exclude from your taxable income over the years. Federal income tax amendment Once your annuity starting date is determined, it does not change. Federal income tax amendment If you calculate the taxable portion of your annuity payments using the simplified method worksheet, the annuity starting date determines the recovery period for your cost. Federal income tax amendment That recovery period begins on your annuity starting date and is not affected by the date you first complete the worksheet. Federal income tax amendment Exclusion limited to cost. Federal income tax amendment   If your annuity starting date is after 1986, the total amount of annuity income that you can exclude over the years as a recovery of the cost cannot exceed your total cost. Federal income tax amendment Any unrecovered cost at your (or the last annuitant's) death is allowed as a miscellaneous itemized deduction on the final return of the decedent. Federal income tax amendment This deduction is not subject to the 2%-of-adjusted-gross-income limit. Federal income tax amendment Exclusion not limited to cost. Federal income tax amendment   If your annuity starting date is before 1987, you can continue to take your monthly exclusion for as long as you receive your annuity. Federal income tax amendment If you chose a joint and survivor annuity, your survivor can continue to take the survivor's exclusion figured as of the annuity starting date. Federal income tax amendment The total exclusion may be more than your cost. Federal income tax amendment Simplified Method Under the Simplified Method, you figure the tax-free part of each annuity payment by dividing your cost by the total number of anticipated monthly payments. Federal income tax amendment For an annuity that is payable for the lives of the annuitants, this number is based on the annuitants' ages on the annuity starting date and is determined from a table. Federal income tax amendment For any other annuity, this number is the number of monthly annuity payments under the contract. Federal income tax amendment Who must use the Simplified Method. Federal income tax amendment   You must use the Simplified Method if your annuity starting date is after November 18, 1996, and you both: Receive pension or annuity payments from a qualified employee plan, qualified employee annuity, or a tax-sheltered annuity (403(b)) plan, and On your annuity starting date, you were either under age 75, or entitled to less than 5 years of guaranteed payments. Federal income tax amendment Guaranteed payments. Federal income tax amendment   Your annuity contract provides guaranteed payments if a minimum number of payments or a minimum amount (for example, the amount of your investment) is payable even if you and any survivor annuitant do not live to receive the minimum. Federal income tax amendment If the minimum amount is less than the total amount of the payments you are to receive, barring death, during the first 5 years after payments begin (figured by ignoring any payment increases), you are entitled to less than 5 years of guaranteed payments. Federal income tax amendment How to use the Simplified Method. Federal income tax amendment    Complete the Simplified Method Worksheet in Publication 575 to figure your taxable annuity for 2013. Federal income tax amendment Single-life annuity. Federal income tax amendment    If your annuity is payable for your life alone, use Table 1 at the bottom of the worksheet to determine the total number of expected monthly payments. Federal income tax amendment Enter on line 3 the number shown for your age at the annuity starting date. Federal income tax amendment Multiple-lives annuity. Federal income tax amendment   If your annuity is payable for the lives of more than one annuitant, use Table 2 at the bottom of the worksheet to determine the total number of expected monthly payments. Federal income tax amendment Enter on line 3 the number shown for the combined ages of you and the youngest survivor annuitant at the annuity starting date. Federal income tax amendment   However, if your annuity starting date is before 1998, do not use Table 2 and do not combine the annuitants' ages. Federal income tax amendment Instead you must use Table 1 and enter on line 3 the number shown for the primary annuitant's age on the annuity starting date. Federal income tax amendment    Be sure to keep a copy of the completed worksheet; it will help you figure your taxable annuity next year. Federal income tax amendment Example. Federal income tax amendment Bill Smith, age 65, began receiving retirement benefits in 2013, under a joint and survivor annuity. Federal income tax amendment Bill's annuity starting date is January 1, 2013. Federal income tax amendment The benefits are to be paid for the joint lives of Bill and his wife Kathy, age 65. Federal income tax amendment Bill had contributed $31,000 to a qualified plan and had received no distributions before the annuity starting date. Federal income tax amendment Bill is to receive a retirement benefit of $1,200 a month, and Kathy is to receive a monthly survivor benefit of $600 upon Bill's death. Federal income tax amendment Bill must use the Simplified Method to figure his taxable annuity because his payments are from a qualified plan and he is under age 75. Federal income tax amendment Because his annuity is payable over the lives of more than one annuitant, he uses his and Kathy's combined ages and Table 2 at the bottom of the worksheet in completing line 3 of the worksheet. Federal income tax amendment His completed worksheet is shown in Worksheet 10-A. Federal income tax amendment Bill's tax-free monthly amount is $100 ($31,000 ÷ 310) as shown on line 4 of the worksheet. Federal income tax amendment Upon Bill's death, if Bill has not recovered the full $31,000 investment, Kathy will also exclude $100 from her $600 monthly payment. Federal income tax amendment The full amount of any annuity payments received after 310 payments are paid must be included in gross income. Federal income tax amendment If Bill and Kathy die before 310 payments are made, a miscellaneous itemized deduction will be allowed for the unrecovered cost on the final income tax return of the last to die. Federal income tax amendment This deduction is not subject to the 2%-of-adjusted- gross-income limit. Federal income tax amendment Worksheet 10-A. Federal income tax amendment Simplified Method Worksheet for Bill Smith 1. Federal income tax amendment Enter the total pension or annuity payments received this year. Federal income tax amendment Also, add this amount to the total for Form 1040, line 16a, or Form 1040A, line 12a 1. Federal income tax amendment 14,400 2. Federal income tax amendment Enter your cost in the plan (contract) at the annuity starting date plus any death benefit exclusion*. Federal income tax amendment See Cost (Investment in the Contract) , earlier 2. Federal income tax amendment 31,000       Note: If your annuity starting date was before this year and you completed this worksheet last year, skip line 3 and enter the amount from line 4 of last year's worksheet on line 4 below (even if the amount of your pension or annuity has changed). Federal income tax amendment Otherwise, go to line 3. Federal income tax amendment         3. Federal income tax amendment Enter the appropriate number from Table 1 below. Federal income tax amendment But if your annuity starting date was after 1997 and the payments are for your life and that of your beneficiary, enter the appropriate number from Table 2 below 3. Federal income tax amendment 310     4. Federal income tax amendment Divide line 2 by the number on line 3 4. Federal income tax amendment 100     5. Federal income tax amendment Multiply line 4 by the number of months for which this year's payments were made. Federal income tax amendment If your annuity starting date was before 1987, enter this amount on line 8 below and skip lines 6, 7, 10, and 11. Federal income tax amendment Otherwise, go to line 6 5. Federal income tax amendment 1,200     6. Federal income tax amendment Enter any amounts previously recovered tax free in years after 1986. Federal income tax amendment This is the amount shown on line 10 of your worksheet for last year 6. Federal income tax amendment -0-     7. Federal income tax amendment Subtract line 6 from line 2 7. Federal income tax amendment 31,000     8. Federal income tax amendment Enter the smaller of line 5 or line 7 8. Federal income tax amendment 1,200 9. Federal income tax amendment Taxable amount for year. Federal income tax amendment Subtract line 8 from line 1. Federal income tax amendment Enter the result, but not less than zero. Federal income tax amendment Also, add this amount to the total for Form 1040, line 16b, or Form 1040A, line 12b 9. Federal income tax amendment 13,200   Note: If your Form 1099-R shows a larger taxable amount, use the amount figured on this line instead. Federal income tax amendment If you are a retired public safety officer, see Insurance Premiums for Retired Public Safety Officers in Publication 575 before entering an amount on your tax return. Federal income tax amendment     10. Federal income tax amendment Was your annuity starting date before 1987? □ Yes. Federal income tax amendment STOP. Federal income tax amendment Do not complete the rest of this worksheet. Federal income tax amendment  ☑ No. Federal income tax amendment Add lines 6 and 8. Federal income tax amendment This is the amount you have recovered tax free through 2013. Federal income tax amendment You will need this number if you need to fill out this worksheet next year 10. Federal income tax amendment 1,200 11. Federal income tax amendment Balance of cost to be recovered. Federal income tax amendment Subtract line 10 from line 2. Federal income tax amendment If zero, you will not have to complete this worksheet next year. Federal income tax amendment The payments you receive next year will generally be fully taxable 11. Federal income tax amendment 29,800 TABLE 1 FOR LINE 3 ABOVE   AND your annuity starting date was— IF the age at annuity starting date was. Federal income tax amendment . Federal income tax amendment . Federal income tax amendment before November 19, 1996, enter on line 3. Federal income tax amendment . Federal income tax amendment . Federal income tax amendment after November 18, 1996, enter on line 3. Federal income tax amendment . Federal income tax amendment . Federal income tax amendment 55 or under 300 360 56–60 260 310 61–65 240 260 66–70 170 210 71 or older 120 160 TABLE 2 FOR LINE 3 ABOVE IF the combined ages at annuity starting date were. Federal income tax amendment . Federal income tax amendment . Federal income tax amendment   THEN enter on line 3. Federal income tax amendment . Federal income tax amendment . Federal income tax amendment 110 or under   410 111–120   360 121–130   310 131–140   260 141 or older   210 * A death benefit exclusion (up to $5,000) applied to certain benefits received by employees who died before August 21, 1996. Federal income tax amendment Who must use the General Rule. Federal income tax amendment   You must use the General Rule if you receive pension or annuity payments from: A nonqualified plan (such as a private annuity, a purchased commercial annuity, or a nonqualified employee plan), or A qualified plan if you are age 75 or older on your annuity starting date and your annuity payments are guaranteed for at least 5 years. Federal income tax amendment Annuity starting before November 19, 1996. Federal income tax amendment   If your annuity starting date is after July 1, 1986, and before November 19, 1996, you had to use the General Rule for either circumstance just described. Federal income tax amendment You also had to use it for any fixed-period annuity. Federal income tax amendment If you did not have to use the General Rule, you could have chosen to use it. Federal income tax amendment If your annuity starting date is before July 2, 1986, you had to use the General Rule unless you could use the Three-Year Rule. Federal income tax amendment   If you had to use the General Rule (or chose to use it), you must continue to use it each year that you recover your cost. Federal income tax amendment Who cannot use the General Rule. Federal income tax amendment   You cannot use the General Rule if you receive your pension or annuity from a qualified plan and none of the circumstances described in the preceding discussions apply to you. Federal income tax amendment See Who must use the Simplified Method , earlier. Federal income tax amendment More information. Federal income tax amendment   For complete information on using the General Rule, including the actuarial tables you need, see Publication 939. Federal income tax amendment Taxation of Nonperiodic Payments Nonperiodic distributions are also known as amounts not received as an annuity. Federal income tax amendment They include all payments other than periodic payments and corrective distributions. Federal income tax amendment Examples of nonperiodic payments are cash withdrawals, distributions of current earnings, certain loans, and the value of annuity contracts transferred without full and adequate consideration. Federal income tax amendment Corrective distributions of excess plan contributions. Federal income tax amendment   Generally, if the contributions made for you during the year to certain retirement plans exceed certain limits, the excess is taxable to you. Federal income tax amendment To correct an excess, your plan may distribute it to you (along with any income earned on the excess). Federal income tax amendment For information on plan contribution limits and how to report corrective distributions of excess contributions, see Retirement Plan Contributions under Employee Compensation in Publication 525. Federal income tax amendment Figuring the taxable amount of nonperiodic payments. Federal income tax amendment   How you figure the taxable amount of a nonperiodic distribution depends on whether it is made before the annuity starting date, or on or after the annuity starting date. Federal income tax amendment If it is made before the annuity starting date, its tax treatment also depends on whether it is made under a qualified or nonqualified plan. Federal income tax amendment If it is made under a nonqualified plan, its tax treatment depends on whether it fully discharges the contract, is received under certain life insurance or endowment contracts, or is allocable to an investment you made before August 14, 1982. Federal income tax amendment Annuity starting date. Federal income tax amendment   The annuity starting date is either the first day of the first period for which you receive an annuity payment under the contract or the date on which the obligation under the contract becomes fixed, whichever is later. Federal income tax amendment Distribution on or after annuity starting date. Federal income tax amendment   If you receive a nonperiodic payment from your annuity contract on or after the annuity starting date, you generally must include all of the payment in gross income. Federal income tax amendment Distribution before annuity starting date. Federal income tax amendment   If you receive a nonperiodic distribution before the annuity starting date from a qualified retirement plan, you generally can allocate only part of it to the cost of the contract. Federal income tax amendment You exclude from your gross income the part that you allocate to the cost. Federal income tax amendment You include the remainder in your gross income. Federal income tax amendment   If you receive a nonperiodic distribution before the annuity starting date from a plan other than a qualified retirement plan (nonqualified plan), it is allocated first to earnings (the taxable part) and then to the cost of the contract (the tax-free part). Federal income tax amendment This allocation rule applies, for example, to a commercial annuity contract you bought directly from the issuer. Federal income tax amendment    Distributions from nonqualified plans are subject to the net investment income tax. Federal income tax amendment See the Instructions for Form 8960. Federal income tax amendment   For more information, see Figuring the Taxable Amount under Taxation of Nonperiodic Payments in Publication 575. Federal income tax amendment Lump-Sum Distributions This section on lump-sum distributions only applies if the plan participant was born before January 2, 1936. Federal income tax amendment If the plan participant was born after January 1, 1936, the taxable amount of this nonperiodic payment is reported as discussed earlier. Federal income tax amendment A lump-sum distribution is the distribution or payment in one tax year of a plan participant's entire balance from all of the employer's qualified plans of one kind (for example, pension, profit-sharing, or stock bonus plans). Federal income tax amendment A distribution from a nonqualified plan (such as a privately purchased commercial annuity or a section 457 deferred compensation plan of a state or local government or tax-exempt organization) cannot qualify as a lump-sum distribution. Federal income tax amendment The participant's entire balance from a plan does not include certain forfeited amounts. Federal income tax amendment It also does not include any deductible voluntary employee contributions allowed by the plan after 1981 and before 1987. Federal income tax amendment For more information about distributions that do not qualify as lump-sum distributions, see Distributions that do not qualify under Lump-Sum Distributions in Publication 575. Federal income tax amendment If you receive a lump-sum distribution from a qualified employee plan or qualified employee annuity and the plan participant was born before January 2, 1936, you may be able to elect optional methods of figuring the tax on the distribution. Federal income tax amendment The part from active participation in the plan before 1974 may qualify as capital gain subject to a 20% tax rate. Federal income tax amendment The part from participation after 1973 (and any part from participation before 1974 that you do not report as capital gain) is ordinary income. Federal income tax amendment You may be able to use the 10-year tax option, discussed later, to figure tax on the ordinary income part. Federal income tax amendment Use Form 4972 to figure the separate tax on a lump-sum distribution using the optional methods. Federal income tax amendment The tax figured on Form 4972 is added to the regular tax figured on your other income. Federal income tax amendment This may result in a smaller tax than you would pay by including the taxable amount of the distribution as ordinary income in figuring your regular tax. Federal income tax amendment How to treat the distribution. Federal income tax amendment   If you receive a lump-sum distribution, you may have the following options for how you treat the taxable part. Federal income tax amendment Report the part of the distribution from participation before 1974 as a capital gain (if you qualify) and the part from participation after 1973 as ordinary income. Federal income tax amendment Report the part of the distribution from participation before 1974 as a capital gain (if you qualify) and use the 10-year tax option to figure the tax on the part from participation after 1973 (if you qualify). Federal income tax amendment Use the 10-year tax option to figure the tax on the total taxable amount (if you qualify). Federal income tax amendment Roll over all or part of the distribution. Federal income tax amendment See Rollovers , later. Federal income tax amendment No tax is currently due on the part rolled over. Federal income tax amendment Report any part not rolled over as ordinary income. Federal income tax amendment Report the entire taxable part of the distribution as ordinary income on your tax return. Federal income tax amendment   The first three options are explained in the following discussions. Federal income tax amendment Electing optional lump-sum treatment. Federal income tax amendment   You can choose to use the 10-year tax option or capital gain treatment only once after 1986 for any plan participant. Federal income tax amendment If you make this choice, you cannot use either of these optional treatments for any future distributions for the participant. Federal income tax amendment Taxable and tax-free parts of the distribution. Federal income tax amendment    The taxable part of a lump-sum distribution is the employer's contributions and income earned on your account. Federal income tax amendment You may recover your cost in the lump sum and any net unrealized appreciation (NUA) in employer securities tax free. Federal income tax amendment Cost. Federal income tax amendment   In general, your cost is the total of: The plan participant's nondeductible contributions to the plan, The plan participant's taxable costs of any life insurance contract distributed, Any employer contributions that were taxable to the plan participant, and Repayments of any loans that were taxable to the plan participant. Federal income tax amendment You must reduce this cost by amounts previously distributed tax free. Federal income tax amendment Net unrealized appreciation (NUA). Federal income tax amendment   The NUA in employer securities (box 6 of Form 1099-R) received as part of a lump-sum distribution is generally tax free until you sell or exchange the securities. Federal income tax amendment (For more information, see Distributions of employer securities under Taxation of Nonperiodic Payments in Publication 575. Federal income tax amendment ) Capital Gain Treatment Capital gain treatment applies only to the taxable part of a lump-sum distribution resulting from participation in the plan before 1974. Federal income tax amendment The amount treated as capital gain is taxed at a 20% rate. Federal income tax amendment You can elect this treatment only once for any plan participant, and only if the plan participant was born before January 2, 1936. Federal income tax amendment Complete Part II of Form 4972 to choose the 20% capital gain election. Federal income tax amendment For more information, see Capital Gain Treatment under Lump-Sum Distributions in Publication 575. Federal income tax amendment 10-Year Tax Option The 10-year tax option is a special formula used to figure a separate tax on the ordinary income part of a lump-sum distribution. Federal income tax amendment You pay the tax only once, for the year in which you receive the distribution, not over the next 10 years. Federal income tax amendment You can elect this treatment only once for any plan participant, and only if the plan participant was born before January 2, 1936. Federal income tax amendment The ordinary income part of the distribution is the amount shown in box 2a of the Form 1099-R given to you by the payer, minus the amount, if any, shown in box 3. Federal income tax amendment You also can treat the capital gain part of the distribution (box 3 of Form 1099-R) as ordinary income for the 10-year tax option if you do not choose capital gain treatment for that part. Federal income tax amendment Complete Part III of Form 4972 to choose the 10-year tax option. Federal income tax amendment You must use the special Tax Rate Schedule shown in the instructions for Part III to figure the tax. Federal income tax amendment Publication 575 illustrates how to complete Form 4972 to figure the separate tax. Federal income tax amendment Rollovers If you withdraw cash or other assets from a qualified retirement plan in an eligible rollover distribution, you can defer tax on the distribution by rolling it over to another qualified retirement plan or a traditional IRA. Federal income tax amendment For this purpose, the following plans are qualified retirement plans. Federal income tax amendment A qualified employee plan. Federal income tax amendment A qualified employee annuity. Federal income tax amendment A tax-sheltered annuity plan (403(b) plan). Federal income tax amendment An eligible state or local government section 457 deferred compensation plan. Federal income tax amendment Eligible rollover distributions. Federal income tax amendment   Generally, an eligible rollover distribution is any distribution of all or any part of the balance to your credit in a qualified retirement plan. Federal income tax amendment For information about exceptions to eligible rollover distributions, see Publication 575. Federal income tax amendment Rollover of nontaxable amounts. Federal income tax amendment   You may be able to roll over the nontaxable part of a distribution (such as your after-tax contributions) made to another qualified retirement plan that is a qualified employee plan or a 403(b) plan, or to a traditional or Roth IRA. Federal income tax amendment The transfer must be made either through a direct rollover to a qualified plan or 403(b) plan that separately accounts for the taxable and nontaxable parts of the rollover or through a rollover to a traditional or Roth IRA. Federal income tax amendment   If you roll over only part of a distribution that includes both taxable and nontaxable amounts, the amount you roll over is treated as coming first from the taxable part of the distribution. Federal income tax amendment   Any after-tax contributions that you roll over into your traditional IRA become part of your basis (cost) in your IRAs. Federal income tax amendment To recover your basis when you take distributions from your IRA, you must complete Form 8606 for the year of the distribution. Federal income tax amendment For more information, see the Form 8606 instructions. Federal income tax amendment Direct rollover option. Federal income tax amendment   You can choose to have any part or all of an eligible rollover distribution paid directly to another qualified retirement plan that accepts rollover distributions or to a traditional or Roth IRA. Federal income tax amendment If you choose the direct rollover option, or have an automatic rollover, no tax will be withheld from any part of the distribution that is directly paid to the trustee of the other plan. Federal income tax amendment Payment to you option. Federal income tax amendment   If an eligible rollover distribution is paid to you, 20% generally will be withheld for income tax. Federal income tax amendment However, the full amount is treated as distributed to you even though you actually receive only 80%. Federal income tax amendment You generally must include in income any part (including the part withheld) that you do not roll over within 60 days to another qualified retirement plan or to a traditional or Roth IRA. Federal income tax amendment (See Pensions and Annuities under Tax Withholding for 2014 in chapter 4. Federal income tax amendment )    If you decide to roll over an amount equal to the distribution before withholding, your contribution to the new plan or IRA must include other money (for example, from savings or amounts borrowed) to replace the amount withheld. Federal income tax amendment Time for making rollover. Federal income tax amendment   You generally must complete the rollover of an eligible rollover distribution paid to you by the 60th day following the day on which you receive the distribution from your employer's plan. Federal income tax amendment (If an amount distributed to you becomes a frozen deposit in a financial institution during the 60-day period after you receive it, the rollover period is extended for the period during which the distribution is in a frozen deposit in a financial institution. Federal income tax amendment )   The IRS may waive the 60-day requirement where the failure to do so would be against equity or good conscience, such as in the event of a casualty, disaster, or other event beyond your reasonable control. Federal income tax amendment   The administrator of a qualified plan must give you a written explanation of your distribution options within a reasonable period of time before making an eligible rollover distribution. Federal income tax amendment Qualified domestic relations order (QDRO). Federal income tax amendment   You may be able to roll over tax free all or part of a distribution from a qualified retirement plan that you receive under a QDRO. Federal income tax amendment If you receive the distribution as an employee's spouse or former spouse (not as a nonspousal beneficiary), the rollover rules apply to you as if you were the employee. Federal income tax amendment You can roll over the distribution from the plan into a traditional IRA or to another eligible retirement plan. Federal income tax amendment See Rollovers in Publication 575 for more information on benefits received under a QDRO. Federal income tax amendment Rollover by surviving spouse. Federal income tax amendment   You may be able to roll over tax free all or part of a distribution from a qualified retirement plan you receive as the surviving spouse of a deceased employee. Federal income tax amendment The rollover rules apply to you as if you were the employee. Federal income tax amendment You can roll over a distribution into a qualified retirement plan or a traditional or Roth IRA. Federal income tax amendment For a rollover to a Roth IRA, see Rollovers to Roth IRAs , later. Federal income tax amendment    A distribution paid to a beneficiary other than the employee's surviving spouse is generally not an eligible rollover distribution. Federal income tax amendment However, see Rollovers by nonspouse beneficiary next. Federal income tax amendment Rollovers by nonspouse beneficiary. Federal income tax amendment   If you are a designated beneficiary (other than a surviving spouse) of a deceased employee, you may be able to roll over tax free all or a portion of a distribution you receive from an eligible retirement plan of the employee. Federal income tax amendment The distribution must be a direct trustee-to-trustee transfer to your traditional or Roth IRA that was set up to receive the distribution. Federal income tax amendment The transfer will be treated as an eligible rollover distribution and the receiving plan will be treated as an inherited IRA. Federal income tax amendment For information on inherited IRAs, see What if You Inherit an IRA? in chapter 1 of Publication 590, Individual Retirement Arrangements (IRAs). Federal income tax amendment Retirement bonds. Federal income tax amendment   If you redeem retirement bonds purchased under a qualified bond purchase plan, you can roll over the proceeds that exceed your basis tax free into an IRA (as discussed in Publication 590) or a qualified employer plan. Federal income tax amendment Designated Roth accounts. Federal income tax amendment   You can roll over an eligible rollover distribution from a designated Roth account into another designated Roth account or a Roth IRA. Federal income tax amendment If you want to roll over the part of the distribution that is not included in income, you must make a direct rollover of the entire distribution or you can roll over the entire amount (or any portion) to a Roth IRA. Federal income tax amendment For more information on rollovers from designated Roth accounts, see Rollovers in Publication 575. Federal income tax amendment In-plan rollovers to designated Roth accounts. Federal income tax amendment   If you are a plan participant in a 401(k), 403(b), or 457(b) plan, your plan may permit you to roll over amounts in those plans to a designated Roth account within the same plan. Federal income tax amendment The rollover of any untaxed amounts must be included in income. Federal income tax amendment See Designated Roth accounts under Rollovers in Publication 575 for more information. Federal income tax amendment Rollovers to Roth IRAs. Federal income tax amendment   You can roll over distributions directly from a qualified retirement plan (other than a designated Roth account) to a Roth IRA. Federal income tax amendment   You must include in your gross income distributions from a qualified retirement plan (other than a designated Roth account) that you would have had to include in income if you had not rolled them over into a Roth IRA. Federal income tax amendment You do not include in gross income any part of a distribution from a qualified retirement plan that is a return of contributions to the plan that were taxable to you when paid. Federal income tax amendment In addition, the 10% tax on early distributions does not apply. Federal income tax amendment More information. Federal income tax amendment   For more information on the rules for rolling over distributions, see Rollovers in Publication 575. Federal income tax amendment Special Additional Taxes To discourage the use of pension funds for purposes other than normal retirement, the law imposes additional taxes on early distributions of those funds and on failures to withdraw the funds timely. Federal income tax amendment Ordinarily, you will not be subject to these taxes if you roll over all early distributions you receive, as explained earlier, and begin drawing out the funds at a normal retirement age, in reasonable amounts over your life expectancy. Federal income tax amendment These special additional taxes are the taxes on: Early distributions, and Excess accumulation (not receiving minimum distributions). Federal income tax amendment These taxes are discussed in the following sections. Federal income tax amendment If you must pay either of these taxes, report them on Form 5329. Federal income tax amendment However, you do not have to file Form 5329 if you owe only the tax on early distributions and your Form 1099-R correctly shows a “1” in box 7. Federal income tax amendment Instead, enter 10% of the taxable part of the distribution on Form 1040, line 58 and write “No” under the heading “Other Taxes” to the left of line 58. Federal income tax amendment Even if you do not owe any of these taxes, you may have to complete Form 5329 and attach it to your Form 1040. Federal income tax amendment This applies if you meet an exception to the tax on early distributions but box 7 of your Form 1099-R does not indicate an exception. Federal income tax amendment Tax on Early Distributions Most distributions (both periodic and nonperiodic) from qualified retirement plans and nonqualified annuity contracts made to you before you reach age 59½ are subject to an additional tax of 10%. Federal income tax amendment This tax applies to the part of the distribution that you must include in gross income. Federal income tax amendment For this purpose, a qualified retirement plan is: A qualified employee plan, A qualified employee annuity plan, A tax-sheltered annuity plan, or An eligible state or local government section 457 deferred compensation plan (to the extent that any distribution is attributable to amounts the plan received in a direct transfer or rollover from one of the other plans listed here or an IRA). Federal income tax amendment 5% rate on certain early distributions from deferred annuity contracts. Federal income tax amendment   If an early withdrawal from a deferred annuity is otherwise subject to the 10% additional tax, a 5% rate may apply instead. Federal income tax amendment A 5% rate applies to distributions under a written election providing a specific schedule for the distribution of your interest in the contract if, as of March 1, 1986, you had begun receiving payments under the election. Federal income tax amendment On line 4 of Form 5329, multiply the line 3 amount by 5% instead of 10%. Federal income tax amendment Attach an explanation to your return. Federal income tax amendment Distributions from Roth IRAs allocable to a rollover from an eligible retirement plan within the 5-year period. Federal income tax amendment   If, within the 5-year period starting with the first day of your tax year in which you rolled over an amount from an eligible retirement plan to a Roth IRA, you take a distribution from the Roth IRA, you may have to pay the additional 10% tax on early distributions. Federal income tax amendment You generally must pay the 10% additional tax on any amount attributable to the part of the rollover that you had to include in income. Federal income tax amendment The additional tax is figured on Form 5329. Federal income tax amendment For more information, see Form 5329 and its instructions. Federal income tax amendment For information on qualified distributions from Roth IRAs, see Additional Tax on Early Distributions in chapter 2 of Publication 590. Federal income tax amendment Distributions from designated Roth accounts allocable to in-plan Roth rollovers within the 5-year period. Federal income tax amendment   If, within the 5-year period starting with the first day of your tax year in which you rolled over an amount from a 401(k), 403(b), or 457(b) plan to a designated Roth account, you take a distribution from the designated Roth account, you may have to pay the additional 10% tax on early distributions. Federal income tax amendment You generally must pay the 10% additional tax on any amount attributable to the part of the in-plan rollover that you had to include in income. Federal income tax amendment The additional tax is figured on Form 5329. Federal income tax amendment For more information, see Form 5329 and its instructions. Federal income tax amendment For information on qualified distributions from designated Roth accounts, see Designated Roth accounts under Taxation of Periodic Payments in Publication 575. Federal income tax amendment Exceptions to tax. Federal income tax amendment    Certain early distributions are excepted from the early distribution tax. Federal income tax amendment If the payer knows that an exception applies to your early distribution, distribution code “2,” “3,” or “4” should be shown in box 7 of your Form 1099-R and you do not have to report the distribution on Form 5329. Federal income tax amendment If an exception applies but distribution code “1” (early distribution, no known exception) is shown in box 7, you must file Form 5329. Federal income tax amendment Enter the taxable amount of the distribution shown in box 2a of your Form 1099-R on line 1 of Form 5329. Federal income tax amendment On line 2, enter the amount that can be excluded and the exception number shown in the Form 5329 instructions. Federal income tax amendment    If distribution code “1” is incorrectly shown on your Form 1099-R for a distribution received when you were age 59½ or older, include that distribution on Form 5329. Federal income tax amendment Enter exception number “12” on line 2. Federal income tax amendment General exceptions. Federal income tax amendment   The tax does not apply to distributions that are: Made as part of a series of substantially equal periodic payments (made at least annually) for your life (or life expectancy) or the joint lives (or joint life expectancies) of you and your designated beneficiary (if from a qualified retirement plan, the payments must begin after your separation from service), Made because you are totally and permanently disabled, or Made on or after the death of the plan participant or contract holder. Federal income tax amendment Additional exceptions for qualified retirement plans. Federal income tax amendment   The tax does not apply to distributions that are: From a qualified retirement plan (other than an IRA) after your separation from service in or after the year you reached age 55 (age 50 for qualified public safety employees), From a qualified retirement plan (other than an IRA) to an alternate payee under a qualified domestic relations order, From a qualified retirement plan to the extent you have deductible medical expenses that exceed 10% (or 7. Federal income tax amendment 5% if you or your spouse are age 65 or older) of your adjusted gross income, whether or not you itemize your deductions for the year, From an employer plan under a written election that provides a specific schedule for distribution of your entire interest if, as of March 1, 1986, you had separated from service and had begun receiving payments under the election, From an employee stock ownership plan for dividends on employer securities held by the plan, From a qualified retirement plan due to an IRS levy of the plan, From elective deferral accounts under 401(k) or 403(b) plans or similar arrangements that are qualified reservist distributions, or Phased retirement annuity payments made to federal employees. Federal income tax amendment See Pub. Federal income tax amendment 721 for more information on the phased retirement program. Federal income tax amendment Qualified public safety employees. Federal income tax amendment   If you are a qualified public safety employee, distributions made from a governmental defined benefit pension plan are not subject to the additional tax on early distributions. Federal income tax amendment You are a qualified public safety employee if you provide police protection, firefighting services, or emergency medical services for a state or municipality, and you separated from service in or after the year you attained age 50. Federal income tax amendment Qualified reservist distributions. Federal income tax amendment   A qualified reservist distribution is not subject to the additional tax on early distributions. Federal income tax amendment A qualified reservist distribution is a distribution (a) from elective deferrals under a section 401(k) or 403(b) plan, or a similar arrangement, (b) to an individual ordered or called to active duty (because he or she is a member of a reserve component) for a period of more than 179 days or for an indefinite period, and (c) made during the period beginning on the date of the order or call and ending at the close of the active duty period. Federal income tax amendment You must have been ordered or called to active duty after September 11, 2001. Federal income tax amendment For more information, see Qualified reservist distributions under Special Additional Taxes in Publication 575. Federal income tax amendment Additional exceptions for nonqualified annuity contracts. Federal income tax amendment   The tax does not apply to distributions from: A deferred annuity contract to the extent allocable to investment in the contract before August 14, 1982, A deferred annuity contract under a qualified personal injury settlement, A deferred annuity contract purchased by your employer upon termination of a qualified employee plan or qualified employee annuity plan and held by your employer until your separation from service, or An immediate annuity contract (a single premium contract providing substantially equal annuity payments that start within 1 year from the date of purchase and are paid at least annually). Federal income tax amendment Tax on Excess Accumulation To make sure that most of your retirement benefits are paid to you during your lifetime, rather than to your beneficiaries after your death, the payments that you receive from qualified retirement plans must begin no later than your required beginning date (defined later). Federal income tax amendment The payments each year cannot be less than the required minimum distribution. Federal income tax amendment Required distributions not made. Federal income tax amendment   If the actual distributions to you in any year are less than the minimum required distribution for that year, you are subject to an additional tax. Federal income tax amendment The tax equals 50% of the part of the required minimum distribution that was not distributed. Federal income tax amendment   For this purpose, a qualified retirement plan includes: A qualified employee plan, A qualified employee annuity plan, An eligible section 457 deferred compensation plan, or A tax-sheltered annuity plan (403(b) plan)(for benefits accruing after 1986). Federal income tax amendment Waiver. Federal income tax amendment   The tax may be waived if you establish that the shortfall in distributions was due to reasonable error and that reasonable steps are being taken to remedy the shortfall. Federal income tax amendment See the Instructions for Form 5329 for the procedure to follow if you believe you qualify for a waiver of this tax. Federal income tax amendment State insurer delinquency proceedings. Federal income tax amendment   You might not receive the minimum distribution because assets are invested in a contract issued by an insurance company in state insurer delinquency proceedings. Federal income tax amendment If your payments are reduced below the minimum due to these proceedings, you should contact your plan administrator. Federal income tax amendment Under certain conditions, you will not have to pay the 50% excise tax. Federal income tax amendment Required beginning date. Federal income tax amendment   Unless the rule for 5% owners applies, you generally must begin to receive distributions from your qualified retirement plan by April 1 of the year that follows the later of: The calendar year in which you reach age 70½, or The calendar year in which you retire from employment with the employer maintaining the plan. Federal income tax amendment However, your plan may require you to begin to receive distributions by April 1 of the year that follows the year in which you reach age 70½, even if you have not retired. Federal income tax amendment   If you reached age 70½ in 2013, you may be required to receive your first distribution by April 1, 2014. Federal income tax amendment Your required distribution then must be made for 2014 by December 31, 2014. Federal income tax amendment 5% owners. Federal income tax amendment   If you are a 5% owner, you must begin to receive distributions by April 1 of the year that follows the calendar year in which you reach age 70½. Federal income tax amendment   You are a 5% owner if, for the plan year ending in the calendar year in which you reach age 70½, you own (or are considered to own under section 318 of the Internal Revenue Code) more than 5% of the outstanding stock (or more than 5% of the total voting power of all stock) of the employer, or more than 5% of the capital or profits interest in the employer. Federal income tax amendment Age 70½. Federal income tax amendment   You reach age 70½ on the date that is 6 calendar months after the date of your 70th birthday. Federal income tax amendment   For example, if you are retired and your 70th birthday was on June 30, 2013, you were age 70½ on December 30, 2013. Federal income tax amendment If your 70th birthday was on July 1, 2013, you reached age 70½ on January 1, 2014. Federal income tax amendment Required distributions. Federal income tax amendment   By the required beginning date, as explained earlier, you must either: Receive your entire interest in the plan (for a tax-sheltered annuity, your entire benefit accruing after 1986), or Begin receiving periodic distributions in annual amounts calculated to distribute your entire interest (for a tax-sheltered annuity, your entire benefit accruing after 1986) over your life or life expectancy or over the joint lives or joint life expectancies of you and a designated beneficiary (or over a shorter period). Federal income tax amendment Additional information. Federal income tax amendment   For more information on this rule, see Tax on Excess Accumulation in Publication 575. Federal income tax amendment Form 5329. Federal income tax amendment   You must file Form 5329 if you owe tax because you did not receive a minimum required distribution from your qualified retirement plan. Federal income tax amendment Survivors and Beneficiaries Generally, a survivor or beneficiary reports pension or annuity income in the same way the plan participant would have. Federal income tax amendment However, some special rules apply. Federal income tax amendment See Publication 575 for more information. Federal income tax amendment Survivors of employees. Federal income tax amendment   If you are entitled to receive a survivor annuity on the death of an employee who died, you can exclude part of each annuity payment as a tax-free recovery of the employee's investment in the contract. Federal income tax amendment You must figure the taxable and tax-free parts of your annuity payments using the method that applies as if you were the employee. Federal income tax amendment Survivors of retirees. Federal income tax amendment   If you receive benefits as a survivor under a joint and survivor annuity, include those benefits in income in the same way the retiree would have included them in income. Federal income tax amendment If you receive a survivor annuity because of the death of a retiree who had reported the annuity under the Three-Year Rule and recovered all of the cost tax free, your survivor payments are fully taxable. Federal income tax amendment    If the retiree was reporting the annuity payments under the General Rule, you must apply the same exclusion percentage to your initial survivor annuity payment called for in the contract. Federal income tax amendment The resulting tax-free amount will then remain fixed. Federal income tax amendment Any increases in the survivor annuity are fully taxable. Federal income tax amendment    If the retiree was reporting the annuity payments under the Simplified Method, the part of each payment that is tax free is the same as the tax-free amount figured by the retiree at the annuity starting date. Federal income tax amendment This amount remains fixed even if the annuity payments are increased or decreased. Federal income tax amendment See Simplified Method , earlier. Federal income tax amendment   In any case, if the annuity starting date is after 1986, the total exclusion over the years cannot be more than the cost. Federal income tax amendment Estate tax deduction. Federal income tax amendment   If your annuity was a joint and survivor annuity that was included in the decedent's estate, an estate tax may have been paid on it. Federal income tax amendment You can deduct the part of the total estate tax that was based on the annuity. Federal income tax amendment The deceased annuitant must have died after the annuity starting date. Federal income tax amendment (For details, see section 1. Federal income tax amendment 691(d)-1 of the regulations. Federal income tax amendment ) Deduct it in equal amounts over your remaining life expectancy. Federal income tax amendment   If the decedent died before the annuity starting date of a deferred annuity contract and you receive a death benefit under that contract, the amount you receive (either in a lump sum or as periodic payments) in excess of the decedent's cost is included in your gross income as income in respect of a decedent for which you may be able to claim an estate tax deduction. Federal income tax amendment   You can take the estate tax deduction as an itemized deduction on Schedule A, Form 1040. Federal income tax amendment This deduction is not subject to the 2%-of-adjusted-gross-income limit on miscellaneous deductions. Federal income tax amendment See Publication 559, Survivors, Executors, and Administrators, for more information on the estate tax deduction. Federal income tax amendment Prev  Up  Next   Home   More Online Publications
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Morris K. Udall and Stewart L. Udall Foundation

The Morris K. Udall and Stewart L. Udall Foundation, through the U.S. Institute for Environmental Conflict Resolution, provides assessment, mediation, and other services to resolve environmental conflicts. The Foundation also supports a variety of educational opportunities in the area of environmental policy.

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Website: Morris K. Udall and Stewart L. Udall Foundation

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The Federal Income Tax Amendment

Federal income tax amendment Publication 542 - Main Content Table of Contents Businesses Taxed as CorporationsPersonal services. Federal income tax amendment Employee-owners. Federal income tax amendment Other rules. Federal income tax amendment Other rules. Federal income tax amendment Property Exchanged for StockNonqualified preferred stock. Federal income tax amendment Liabilities. Federal income tax amendment Election to reduce basis. Federal income tax amendment Capital Contributions Filing and Paying Income TaxesIncome Tax Return Penalties Estimated Tax U. Federal income tax amendment S. Federal income tax amendment Real Property Interest Accounting MethodsSection 481(a) adjustment. Federal income tax amendment Accounting Periods Recordkeeping Income, Deductions, and Special ProvisionsCosts of Going Into Business Related Persons Income From Qualifying Shipping Activities Election to Expense Qualified Refinery Property Deduction to Comply With EPA Sulfur Regulations Energy-Efficient Commercial Building Property Deduction Corporate Preference Items Dividends-Received Deduction Extraordinary Dividends Below-Market Loans Charitable Contributions Capital Losses Net Operating Losses At-Risk Limits Passive Activity Limits Figuring TaxTax Rate Schedule Alternative Minimum Tax (AMT) Credits Recapture Taxes Accumulated Earnings Tax Distributions to ShareholdersMoney or Property Distributions Distributions of Stock or Stock Rights Constructive Distributions Reporting Dividends and Other Distributions How To Get Tax Help Businesses Taxed as Corporations The rules you must use to determine whether a business is taxed as a corporation changed for businesses formed after 1996. Federal income tax amendment Business formed before 1997. Federal income tax amendment   A business formed before 1997 and taxed as a corporation under the old rules will generally continue to be taxed as a corporation. Federal income tax amendment Business formed after 1996. Federal income tax amendment   The following businesses formed after 1996 are taxed as corporations. Federal income tax amendment A business formed under a federal or state law that refers to it as a corporation, body corporate, or body politic. Federal income tax amendment A business formed under a state law that refers to it as a joint-stock company or joint-stock association. Federal income tax amendment An insurance company. Federal income tax amendment Certain banks. Federal income tax amendment A business wholly owned by a state or local government. Federal income tax amendment A business specifically required to be taxed as a corporation by the Internal Revenue Code (for example, certain publicly traded partnerships). Federal income tax amendment Certain foreign businesses. Federal income tax amendment Any other business that elects to be taxed as a corporation. Federal income tax amendment For example, a limited liability company (LLC) can elect to be treated as an association taxable as a corporation by filing Form 8832, Entity Classification Election. Federal income tax amendment For more information about LLCs, see Publication 3402, Taxation of Limited Liability Companies. Federal income tax amendment S corporations. Federal income tax amendment   Some corporations may meet the qualifications for electing to be S corporations. Federal income tax amendment For information on S corporations, see the instructions for Form 1120S, U. Federal income tax amendment S. Federal income tax amendment Income Tax Return for an S Corporation. Federal income tax amendment Personal service corporations. Federal income tax amendment   A corporation is a personal service corporation if it meets all of the following requirements. Federal income tax amendment Its principal activity during the “testing period” is performing personal services (defined later). Federal income tax amendment Generally, the testing period for any tax year is the prior tax year. Federal income tax amendment If the corporation has just been formed, the testing period begins on the first day of its tax year and ends on the earlier of: The last day of its tax year, or The last day of the calendar year in which its tax year begins. Federal income tax amendment Its employee-owners substantially perform the services in (1), above. Federal income tax amendment This requirement is met if more than 20% of the corporation's compensation cost for its activities of performing personal services during the testing period is for personal services performed by employee-owners. Federal income tax amendment Its employee-owners own more than 10% of the fair market value of its outstanding stock on the last day of the testing period. Federal income tax amendment Personal services. Federal income tax amendment   Personal services include any activity performed in the fields of accounting, actuarial science, architecture, consulting, engineering, health (including veterinary services), law, and the performing arts. Federal income tax amendment Employee-owners. Federal income tax amendment   A person is an employee-owner of a personal service corporation if both of the following apply. Federal income tax amendment He or she is an employee of the corporation or performs personal services for, or on behalf of, the corporation (even if he or she is an independent contractor for other purposes) on any day of the testing period. Federal income tax amendment He or she owns any stock in the corporation at any time during the testing period. Federal income tax amendment Other rules. Federal income tax amendment   For other rules that apply to personal service corporations see Accounting Periods, later. Federal income tax amendment Closely held corporations. Federal income tax amendment   A corporation is closely held if all of the following apply. Federal income tax amendment It is not a personal service corporation. Federal income tax amendment At any time during the last half of the tax year, more than 50% of the value of its outstanding stock is, directly or indirectly, owned by or for five or fewer individuals. Federal income tax amendment “Individual” includes certain trusts and private foundations. Federal income tax amendment Other rules. Federal income tax amendment   For the at-risk rules that apply to closely held corporations, seeAt-Risk Limits, later. Federal income tax amendment Property Exchanged for Stock If you transfer property (or money and property) to a corporation in exchange for stock in that corporation (other than nonqualified preferred stock, described later), and immediately afterward you are in control of the corporation, the exchange is usually not taxable. Federal income tax amendment This rule applies both to individuals and to groups who transfer property to a corporation. Federal income tax amendment It also applies whether the corporation is being formed or is already operating. Federal income tax amendment It does not apply in the following situations. Federal income tax amendment The corporation is an investment company. Federal income tax amendment You transfer the property in a bankruptcy or similar proceeding in exchange for stock used to pay creditors. Federal income tax amendment The stock is received in exchange for the corporation's debt (other than a security) or for interest on the corporation's debt (including a security) that accrued while you held the debt. Federal income tax amendment Both the corporation and any person involved in a nontaxable exchange of property for stock must attach to their income tax returns a complete statement of all facts pertinent to the exchange. Federal income tax amendment For more information, see section 1. Federal income tax amendment 351-3 of the Regulations. Federal income tax amendment Control of a corporation. Federal income tax amendment   To be in control of a corporation, you or your group of transferors must own, immediately after the exchange, at least 80% of the total combined voting power of all classes of stock entitled to vote and at least 80% of the outstanding shares of each class of nonvoting stock. Federal income tax amendment Example 1. Federal income tax amendment You and Bill Jones buy property for $100,000. Federal income tax amendment You both organize a corporation when the property has a fair market value of $300,000. Federal income tax amendment You transfer the property to the corporation for all its authorized capital stock, which has a par value of $300,000. Federal income tax amendment No gain is recognized by you, Bill, or the corporation. Federal income tax amendment Example 2. Federal income tax amendment You and Bill transfer the property with a basis of $100,000 to a corporation in exchange for stock with a fair market value of $300,000. Federal income tax amendment This represents only 75% of each class of stock of the corporation. Federal income tax amendment The other 25% was already issued to someone else. Federal income tax amendment You and Bill recognize a taxable gain of $200,000 on the transaction. Federal income tax amendment Services rendered. Federal income tax amendment   The term property does not include services rendered or to be rendered to the issuing corporation. Federal income tax amendment The value of stock received for services is income to the recipient. Federal income tax amendment Example. Federal income tax amendment You transfer property worth $35,000 and render services valued at $3,000 to a corporation in exchange for stock valued at $38,000. Federal income tax amendment Right after the exchange, you own 85% of the outstanding stock. Federal income tax amendment No gain is recognized on the exchange of property. Federal income tax amendment However, you recognize ordinary income of $3,000 as payment for services you rendered to the corporation. Federal income tax amendment Property of relatively small value. Federal income tax amendment   The term property does not include property of a relatively small value when it is compared to the value of stock and securities already owned or to be received for services by the transferor if the main purpose of the transfer is to qualify for the nonrecognition of gain or loss by other transferors. Federal income tax amendment   Property transferred will not be considered to be of relatively small value if its fair market value is at least 10% of the fair market value of the stock and securities already owned or to be received for services by the transferor. Federal income tax amendment Stock received in disproportion to property transferred. Federal income tax amendment   If a group of transferors exchange property for corporate stock, each transferor does not have to receive stock in proportion to his or her interest in the property transferred. Federal income tax amendment If a disproportionate transfer takes place, it will be treated for tax purposes in accordance with its true nature. Federal income tax amendment It may be treated as if the stock were first received in proportion and then some of it used to make gifts, pay compensation for services, or satisfy the transferor's obligations. Federal income tax amendment Money or other property received. Federal income tax amendment   If, in an otherwise nontaxable exchange of property for corporate stock, you also receive money or property other than stock, you may have to recognize gain. Federal income tax amendment You must recognize gain only up to the amount of money plus the fair market value of the other property you receive. Federal income tax amendment The rules for figuring the recognized gain in this situation generally follow those for a partially nontaxable exchange discussed in Publication 544 under Like-Kind Exchanges. Federal income tax amendment If the property you give up includes depreciable property, the recognized gain may have to be reported as ordinary income from depreciation. Federal income tax amendment See chapter 3 of Publication 544. Federal income tax amendment No loss is recognized. Federal income tax amendment Nonqualified preferred stock. Federal income tax amendment   Nonqualified preferred stock is treated as property other than stock. Federal income tax amendment Generally, it is preferred stock with any of the following features. Federal income tax amendment The holder has the right to require the issuer or a related person to redeem or buy the stock. Federal income tax amendment The issuer or a related person is required to redeem or buy the stock. Federal income tax amendment The issuer or a related person has the right to redeem or buy the stock and, on the issue date, it is more likely than not that the right will be exercised. Federal income tax amendment The dividend rate on the stock varies with reference to interest rates, commodity prices, or similar indices. Federal income tax amendment For a detailed definition of nonqualified preferred stock, see section 351(g)(2) of the Internal Revenue Code. Federal income tax amendment Liabilities. Federal income tax amendment   If the corporation assumes your liabilities, the exchange generally is not treated as if you received money or other property. Federal income tax amendment There are two exceptions to this treatment. Federal income tax amendment If the liabilities the corporation assumes are more than your adjusted basis in the property you transfer, gain is recognized up to the difference. Federal income tax amendment However, if the liabilities assumed give rise to a deduction when paid, such as a trade account payable or interest, no gain is recognized. Federal income tax amendment If there is no good business reason for the corporation to assume your liabilities, or if your main purpose in the exchange is to avoid federal income tax, the assumption is treated as if you received money in the amount of the liabilities. Federal income tax amendment For more information on the assumption of liabilities, see section 357(d) of the Internal Revenue Code. Federal income tax amendment Example. Federal income tax amendment You transfer property to a corporation for stock. Federal income tax amendment Immediately after the transfer, you control the corporation. Federal income tax amendment You also receive $10,000 in the exchange. Federal income tax amendment Your adjusted basis in the transferred property is $20,000. Federal income tax amendment The stock you receive has a fair market value (FMV) of $16,000. Federal income tax amendment The corporation also assumes a $5,000 mortgage on the property for which you are personally liable. Federal income tax amendment Gain is realized as follows. Federal income tax amendment FMV of stock received $16,000 Cash received 10,000 Liability assumed by corporation 5,000 Total received $31,000 Minus: Adjusted basis of property transferred 20,000 Realized gain $11,000   The liability assumed is not treated as money or other property. Federal income tax amendment The recognized gain is limited to $10,000, the cash received. Federal income tax amendment Loss on exchange. Federal income tax amendment   If you have a loss from an exchange and own, directly or indirectly, more than 50% of the corporation's stock, you cannot deduct the loss. Federal income tax amendment For more information, see Nondeductible Loss under Sales and Exchanges Between Related Persons in chapter 2 of Publication 544. Federal income tax amendment Basis of stock or other property received. Federal income tax amendment   The basis of the stock you receive is generally the adjusted basis of the property you transfer. Federal income tax amendment Increase this amount by any amount treated as a dividend, plus any gain recognized on the exchange. Federal income tax amendment Decrease this amount by any cash you received, the fair market value of any other property you received, and any loss recognized on the exchange. Federal income tax amendment Also decrease this amount by the amount of any liability the corporation or another party to the exchange assumed from you, unless payment of the liability gives rise to a deduction when paid. Federal income tax amendment    Further decreases may be required when the corporation or another party to the exchange assumes from you a liability that gives rise to a deduction when paid, if the basis of the stock would otherwise be higher than its fair market value on the date of the exchange. Federal income tax amendment This rule does not apply if the entity assuming the liability acquired either substantially all of the assets or the trade or business with which the liability is associated. Federal income tax amendment The basis of any other property you receive is its fair market value on the date of the trade. Federal income tax amendment Basis of property transferred. Federal income tax amendment   A corporation that receives property from you in exchange for its stock generally has the same basis you had in the property, increased by any gain you recognized on the exchange. Federal income tax amendment However, the increase for the gain recognized may be limited. Federal income tax amendment For more information, see section 362 of the Internal Revenue Code. Federal income tax amendment Election to reduce basis. Federal income tax amendment   In a section 351 transaction, if the adjusted basis of the property transferred exceeds the property's fair market value, the transferor and transferee may make an irrevocable election to treat the basis of the stock received by the transferor as having a basis equal to the fair market value of the property transferred. Federal income tax amendment The transferor and transferee make this election by attaching a statement to their tax returns filed by the due date (including extensions) for the tax year in which the transaction occurred. Federal income tax amendment However, if the transferor makes the election by including the certification provided in Notice 2005-70, 2005-41, I. Federal income tax amendment R. Federal income tax amendment B. Federal income tax amendment 694, on or with its tax return filed by the due date (including extensions), then no election need be made by the transferee. Federal income tax amendment    For more information on making this election, see section 362(e)(2)(C) of the Internal Revenue Code, and Notice 2005-70. Federal income tax amendment Capital Contributions This section explains the tax treatment of contributions from shareholders and nonshareholders. Federal income tax amendment Paid-in capital. Federal income tax amendment   Contributions to the capital of a corporation, whether or not by shareholders, are paid-in capital. Federal income tax amendment These contributions are not taxable to the corporation. Federal income tax amendment Basis. Federal income tax amendment   The corporation's basis of property contributed to capital by a shareholder is the same as the basis the shareholder had in the property, increased by any gain the shareholder recognized on the exchange. Federal income tax amendment However, the increase for the gain recognized may be limited. Federal income tax amendment For more information, see Basis of property transferred, above, and section 362 of the Internal Revenue Code. Federal income tax amendment   The basis of property contributed to capital by a person other than a shareholder is zero. Federal income tax amendment   If a corporation receives a cash contribution from a person other than a shareholder, the corporation must reduce the basis of any property acquired with the contribution during the 12-month period beginning on the day it received the contribution by the amount of the contribution. Federal income tax amendment If the amount contributed is more than the cost of the property acquired, then reduce, but not below zero, the basis of the other properties held by the corporation on the last day of the 12-month period in the following order. Federal income tax amendment Depreciable property. Federal income tax amendment Amortizable property. Federal income tax amendment Property subject to cost depletion but not to percentage depletion. Federal income tax amendment All other remaining properties. Federal income tax amendment   Reduce the basis of property in each category to zero before going on to the next category. Federal income tax amendment   There may be more than one piece of property in each category. Federal income tax amendment Base the reduction of the basis of each property on the following ratio:   Basis of each piece of property   Bases of all properties (within that category) If the corporation wishes to make this adjustment in some other way, it must get IRS approval. Federal income tax amendment The corporation files a request for approval with its income tax return for the tax year in which it receives the contribution. Federal income tax amendment Filing and Paying Income Taxes The federal income tax is a pay-as-you-go tax. Federal income tax amendment A corporation generally must make estimated tax payments as it earns or receives income during its tax year. Federal income tax amendment After the end of the year, the corporation must file an income tax return. Federal income tax amendment This section will help you determine when and how to pay and file corporate income taxes. Federal income tax amendment For certain corporations affected by Presidentially declared disasters such as hurricanes, the due dates for filing returns, paying taxes, and performing other time-sensitive acts may be extended. Federal income tax amendment The IRS may also forgive the interest and penalties on any underpaid tax for the length of any extension. Federal income tax amendment For more information, visit www. Federal income tax amendment irs. Federal income tax amendment gov/newsroom/article/0,,id=108362. Federal income tax amendment 00. Federal income tax amendment Income Tax Return This section will help you determine when and how to report a corporation's income tax. Federal income tax amendment Who must file. Federal income tax amendment   Unless exempt under section 501 of the Internal Revenue Code, all domestic corporations in existence for any part of a tax year (including corporations in bankruptcy) must file an income tax return whether or not they have taxable income. Federal income tax amendment Which form to file. Federal income tax amendment   A corporation generally must file Form 1120, U. Federal income tax amendment S. Federal income tax amendment Corporation Income Tax Return, to report its income, gains, losses, deductions, credits, and to figure its income tax liability. Federal income tax amendment Certain organizations and entities must file special returns. Federal income tax amendment For more information, see Special Returns for Certain Organizations, in the Instructions for Form 1120. Federal income tax amendment Electronic filing. Federal income tax amendment   Corporations can generally electronically file (e-file) Form 1120 and certain related forms, schedules, and attachments. Federal income tax amendment Certain corporations with total assets of $10 million or more, that file at least 250 returns a year must e-file Form 1120. Federal income tax amendment However, in certain instances, these corporations can request a waiver. Federal income tax amendment For more information regarding electronic filing, visit www. Federal income tax amendment irs. Federal income tax amendment gov/efile. Federal income tax amendment When to file. Federal income tax amendment   Generally, a corporation must file its income tax return by the 15th day of the 3rd month after the end of its tax year. Federal income tax amendment A new corporation filing a short-period return must generally file by the 15th day of the 3rd month after the short period ends. Federal income tax amendment A corporation that has dissolved must generally file by the 15th day of the 3rd month after the date it dissolved. Federal income tax amendment Example 1. Federal income tax amendment A corporation's tax year ends December 31. Federal income tax amendment It must file its income tax return by March 15th. Federal income tax amendment Example 2. Federal income tax amendment A corporation's tax year ends June 30. Federal income tax amendment It must file its income tax return by September 15th. Federal income tax amendment   If the due date falls on a Saturday, Sunday, or legal holiday, the due date is extended to the next business day. Federal income tax amendment Extension of time to file. Federal income tax amendment   File Form 7004, Application for Automatic Extension of Time To File Certain Business Income Tax, Information and Other Returns, to request an extension of time to file a corporation income tax return. Federal income tax amendment The IRS will grant the extension if you complete the form properly, file it, and pay any tax due by the original due date for the return. Federal income tax amendment   Form 7004 does not extend the time for paying the tax due on the return. Federal income tax amendment Interest, and possibly penalties, will be charged on any part of the final tax due not shown as a balance due on Form 7004. Federal income tax amendment The interest is figured from the original due date of the return to the date of payment. Federal income tax amendment   For more information, see the instructions for Form 7004. Federal income tax amendment How to pay your taxes. Federal income tax amendment   A corporation must pay its tax due in full no later than the 15th day of the 3rd month after the end of its tax year. Federal income tax amendment Electronic Federal Tax Payment System (EFTPS). Federal income tax amendment   Corporations generally must use EFTPS to make deposits of all tax liabilities (including social security, Medicare, withheld income, excise, and corporate income taxes). Federal income tax amendment For more information on EFTPS and enrollment, visit www. Federal income tax amendment eftps. Federal income tax amendment gov or call 1-800-555-4477. Federal income tax amendment Also see Publication 966, The Secure Way to Pay Your Federal Taxes. Federal income tax amendment Note. Federal income tax amendment Forms 8109 and 8109-B, Federal Tax Deposit Coupon, can no longer be used to make federal tax deposits. Federal income tax amendment Penalties Generally, if the corporation receives a notice about interest and penalties after it files its return, send the IRS an explanation and we will determine if the corporation meets reasonable-cause criteria. Federal income tax amendment Do not attach an explanation when the corporation's return is filed. Federal income tax amendment See the instructions for your income tax return. Federal income tax amendment Late filing of return. Federal income tax amendment    A corporation that does not file its tax return by the due date, including extensions, may be penalized 5% of the unpaid tax for each month or part of a month the return is late, up to a maximum of 25% of the unpaid tax. Federal income tax amendment If the corporation is charged a penalty for late payment of tax (discussed next) for the same period of time, the penalty for late filing is reduced by the amount of the penalty for late payment. Federal income tax amendment The minimum penalty for a return that is over 60 days late is the smaller of the tax due or $100. Federal income tax amendment The penalty will not be imposed if the corporation can show the failure to file on time was due to a reasonable cause. Federal income tax amendment Late payment of tax. Federal income tax amendment    A corporation that does not pay the tax when due may be penalized ½ of 1% of the unpaid tax for each month or part of a month the tax is not paid, up to a maximum of 25% of the unpaid tax. Federal income tax amendment The penalty will not be imposed if the corporation can show that the failure to pay on time was due to a reasonable cause. Federal income tax amendment Trust fund recovery penalty. Federal income tax amendment   If income, social security, and Medicare taxes that a corporation must withhold from employee wages are not withheld or are not deposited or paid to the United States Treasury, the trust fund recovery penalty may apply. Federal income tax amendment The penalty is the full amount of the unpaid trust fund tax. Federal income tax amendment This penalty may apply to you if these unpaid taxes cannot be immediately collected from the business. Federal income tax amendment   The trust fund recovery penalty may be imposed on all persons who are determined by the IRS to be responsible for collecting, accounting for, and paying these taxes, and who acted willfully in not doing so. Federal income tax amendment   A responsible person can be an officer or employee of a corporation, an accountant, or a volunteer director/trustee. Federal income tax amendment A responsible person also may include one who signs checks for the corporation or otherwise has authority to cause the spending of business funds. Federal income tax amendment   Willfully means voluntarily, consciously, and intentionally. Federal income tax amendment A responsible person acts willfully if the person knows the required actions are not taking place. Federal income tax amendment   For more information on withholding and paying these taxes, see Publication 15 (Circular E), Employer's Tax Guide, and Publication 51, (Circular A), Agricultural Employer's Tax Guide. Federal income tax amendment Other penalties. Federal income tax amendment   Other penalties can be imposed for negligence, substantial understatement of tax, reportable transaction understatements, and fraud. Federal income tax amendment See sections 6662, 6662A, and 6663 of the Internal Revenue Code. Federal income tax amendment Estimated Tax Generally, a corporation must make installment payments if it expects its estimated tax for the year to be $500 or more. Federal income tax amendment If the corporation does not pay the installments when they are due, it could be subject to an underpayment penalty. Federal income tax amendment This section will explain how to avoid this penalty. Federal income tax amendment When to pay estimated tax. Federal income tax amendment   Installment payments are due by the 15th day of the 4th, 6th, 9th, and 12th months of the corporation's tax year. Federal income tax amendment Example 1. Federal income tax amendment Your corporation's tax year ends December 31. Federal income tax amendment Installment payments are due on April 15, June 15, September 15, and December 15. Federal income tax amendment Example 2. Federal income tax amendment Your corporation's tax year ends June 30. Federal income tax amendment Installment payments are due on October 15, December 15, March 15, and June 15. Federal income tax amendment   If any due date falls on a Saturday, Sunday, or legal holiday, the installment is due on the next business day. Federal income tax amendment How to figure each required installment. Federal income tax amendment   Use Form 1120-W, Estimated Tax for Corporations, as a worksheet to figure each required installment of estimated tax. Federal income tax amendment You will generally use one of the following two methods to figure each required installment. Federal income tax amendment You should use the method that yields the smallest installment payments. Federal income tax amendment Note. Federal income tax amendment In these discussions, “return” generally refers to the corporation's original return. Federal income tax amendment However, an amended return is considered the original return if it is filed by the due date (including extensions) of the original return. Federal income tax amendment Method 1. Federal income tax amendment   Each required installment is 25% of the income tax the corporation will show on its return for the current year. Federal income tax amendment Method 2. Federal income tax amendment   Each required installment is 25% of the income tax shown on the corporation's return for the previous year. Federal income tax amendment   To use Method 2: The corporation must have filed a return for the previous year, The return must have been for a full 12 months, and The return must have shown a positive tax liability (not zero). Federal income tax amendment Also, if the corporation is a large corporation, it can use Method 2 to figure the first installment only. Federal income tax amendment   See the Instructions for Form 1120-W, for the definition of a large corporation and other special rules for large corporations. Federal income tax amendment Other methods. Federal income tax amendment   If a corporation's income is expected to vary during the year because, for example, its business is seasonal, it may be able to lower the amount of one or more required installments by using one or both of the following methods. Federal income tax amendment The annualized income installment method. Federal income tax amendment The adjusted seasonal installment method. Federal income tax amendment Use Schedule A of Form 1120-W to determine if using one or both of these methods will lower the amount of any required installments. Federal income tax amendment Refiguring required installments. Federal income tax amendment   If after the corporation figures and deposits its estimated tax it finds that its tax liability for the year will be more or less than originally estimated, it may have to refigure its required installments to see if an underpayment penalty may apply. Federal income tax amendment An immediate catchup payment should be made to reduce any penalty resulting from the underpayment of any earlier installments. Federal income tax amendment Underpayment penalty. Federal income tax amendment   If the corporation does not pay a required installment of estimated tax by its due date, it may be subject to a penalty. Federal income tax amendment The penalty is figured separately for each installment due date. Federal income tax amendment The corporation may owe a penalty for an earlier due date, even if it paid enough tax later to make up the underpayment. Federal income tax amendment This is true even if the corporation is due a refund when its return is filed. Federal income tax amendment Form 2220. Federal income tax amendment   Use Form 2220, Underpayment of Estimated Tax by Corporations, to determine if a corporation is subject to the penalty for underpayment of estimated tax and to figure the amount of the penalty. Federal income tax amendment   If the corporation is charged a penalty, the amount of the penalty depends on the following three factors. Federal income tax amendment The amount of the underpayment. Federal income tax amendment The period during which the underpayment was due and unpaid. Federal income tax amendment The interest rate for underpayments published quarterly by the IRS in the Internal Revenue Bulletin. Federal income tax amendment   A corporation generally does not have to file Form 2220 with its income tax return because the IRS will figure any penalty and bill the corporation. Federal income tax amendment However, even if the corporation does not owe a penalty, complete and attach the form to the corporation's tax return if any of the following apply. Federal income tax amendment The annualized income installment method was used to figure any required installment. Federal income tax amendment The adjusted seasonal installment method was used to figure any required installment. Federal income tax amendment The corporation is a large corporation figuring its first required installment based on the prior year's tax. Federal income tax amendment How to pay estimated tax. Federal income tax amendment   A corporation is generally required to use EFTPS to pay its taxes. Federal income tax amendment See Electronic Federal Tax Payment System (EFTPS), earlier. Federal income tax amendment Also see the Instructions for Form 1120-W. Federal income tax amendment Quick refund of overpayments. Federal income tax amendment   A corporation that has overpaid its estimated tax for the tax year may be able to apply for a quick refund. Federal income tax amendment Use Form 4466, Corporation Application for Quick Refund of Overpayment of Estimated Tax, to apply for a quick refund of an overpayment of estimated tax. Federal income tax amendment A corporation can apply for a quick refund if the overpayment is: At least 10% of its expected tax liability, and At least $500. Federal income tax amendment Use Form 4466 to figure the corporation's expected tax liability and the overpayment of estimated tax. Federal income tax amendment File Form 4466 before the 16th day of the 3rd month after the end of the tax year, but before the corporation files its income tax return. Federal income tax amendment Do not file Form 4466 before the end of the corporation's tax year. Federal income tax amendment An extension of time to file the corporation's income tax return will not extend the time for filing Form 4466. Federal income tax amendment The IRS will act on the form within 45 days from the date you file it. Federal income tax amendment U. Federal income tax amendment S. Federal income tax amendment Real Property Interest If a domestic corporation acquires a U. Federal income tax amendment S. Federal income tax amendment real property interest from a foreign person or firm, the corporation may have to withhold tax on the amount it pays for the property. Federal income tax amendment The amount paid includes cash, the fair market value of other property, and any assumed liability. Federal income tax amendment If a domestic corporation distributes a U. Federal income tax amendment S. Federal income tax amendment real property interest to a foreign person or firm, it may have to withhold tax on the fair market value of the property. Federal income tax amendment A corporation that fails to withhold may be liable for the tax, and any penalties and interest that apply. Federal income tax amendment For more information, see section 1445 of the Internal Revenue Code; Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities; Form 8288, U. Federal income tax amendment S. Federal income tax amendment Withholding Tax Return for Dispositions by Foreign Persons of U. Federal income tax amendment S. Federal income tax amendment Real Property Interests; and Form 8288-A, Statement of Withholding on Dispositions by Foreign Persons of U. Federal income tax amendment S. Federal income tax amendment Real Property Interests. Federal income tax amendment Accounting Methods An accounting method is a set of rules used to determine when and how income and expenses are reported. Federal income tax amendment Taxable income should be determined using the method of accounting regularly used in keeping the corporation's books and records. Federal income tax amendment In all cases, the method used must clearly show taxable income. Federal income tax amendment Generally, permissible methods include: Cash, Accrual, or Any other method authorized by the Internal Revenue Code. Federal income tax amendment Accrual method. Federal income tax amendment   Generally, a corporation (other than a qualified personal service corporation) must use the accrual method of accounting if its average annual gross receipts exceed $5 million. Federal income tax amendment A corporation engaged in farming operations also must use the accrual method. Federal income tax amendment   If inventories are required, the accrual method generally must be used for sales and purchases of merchandise. Federal income tax amendment However, qualifying taxpayers and eligible businesses of qualifying small business taxpayers are excepted from using the accrual method for eligible trades or businesses and may account for inventoriable items as materials and supplies that are not incidental. Federal income tax amendment   Under the accrual method, an amount is includable in income when: All the events have occurred that fix the right to receive the income, which is the earliest of the date: The required performance takes place, Payment is due, or Payment is received; and The amount can be determined with reasonable accuracy. Federal income tax amendment   Generally, an accrual basis taxpayer can deduct accrued expenses in the tax year when: All events that determine the liability have occurred, The amount of the liability can be figured with reasonable accuracy, and Economic performance takes place with respect to the expense. Federal income tax amendment   There are exceptions to the economic performance rule for certain items, including recurring expenses. Federal income tax amendment See section 461(h) of the Internal Revenue Code and the related regulations for the rules for determining when economic performance takes place. Federal income tax amendment Nonaccrual experience method. Federal income tax amendment   Accrual method corporations are not required to maintain accruals for certain amounts from the performance of services that, on the basis of their experience, will not be collected, if: The services are in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, or consulting; or The corporation's average annual gross receipts for the 3 prior tax years does not exceed $5 million. Federal income tax amendment   This provision does not apply if interest is required to be paid on the amount or if there is any penalty for failure to pay the amount timely. Federal income tax amendment Percentage of completion method. Federal income tax amendment   Long-term contracts (except for certain real property construction contracts) must generally be accounted for using the percentage of completion method described in section 460 of the Internal Revenue Code. Federal income tax amendment Mark-to-market accounting method. Federal income tax amendment   Generally, dealers in securities must use the mark-to-market accounting method described in section 475 of the Internal Revenue Code. Federal income tax amendment Under this method any security held by a dealer as inventory must be included in inventory at its FMV. Federal income tax amendment Any security not held as inventory at the close of the tax year is treated as sold at its FMV on the last business day of the tax year. Federal income tax amendment Any gain or loss must be taken into account in determining gross income. Federal income tax amendment The gain or loss taken into account is treated as ordinary gain or loss. Federal income tax amendment   Dealers in commodities and traders in securities and commodities can elect to use the mark-to-market accounting method. Federal income tax amendment Change in accounting method. Federal income tax amendment   A corporation can change its method of accounting used to report taxable income (for income as a whole or for the treatment of any material item). Federal income tax amendment The corporation must file Form 3115, Application for Change in Accounting Method. Federal income tax amendment For more information, see Form 3115 and Publication 538. Federal income tax amendment Section 481(a) adjustment. Federal income tax amendment   The corporation may have to make an adjustment under section 481(a) of the Internal Revenue Code to prevent amounts of income or expense from being duplicated or omitted. Federal income tax amendment The section 481(a) adjustment period is generally 1 year for a net negative adjustment and 4 years for a net positive adjustment. Federal income tax amendment However, a corporation can elect to use a 1-year adjustment period if the net section 481(a) adjustment for the change is less than $25,000. Federal income tax amendment The corporation must complete the appropriate lines of Form 3115 to make the election. Federal income tax amendment See the Instructions for Form 3115. Federal income tax amendment Accounting Periods A corporation must figure its taxable income on the basis of a tax year. Federal income tax amendment A tax year is the annual accounting period a corporation uses to keep its records and report its income and expenses. Federal income tax amendment Generally, corporations can use either a calendar year or a fiscal year as its tax year. Federal income tax amendment Unless special rules apply, a corporation generally adopts a tax year by filing its first federal income tax return using that tax year. Federal income tax amendment For more information, see Publication 538. Federal income tax amendment Personal service corporation. Federal income tax amendment   A personal service corporation must use a calendar year as its tax year unless: It elects to use a 52–53 week tax year that ends with reference to the calendar year; It can establish a business purpose for a different tax year and obtains approval of the IRS. Federal income tax amendment See Form 1128, Application To Adopt, Change, or Retain a Tax Year, and Publication 538; or It elects under section 444 of the Internal Revenue Code to have a tax year other than a calendar year. Federal income tax amendment Use Form 8716, Election to Have a Tax Year Other Than a Required Tax Year, to make the election. Federal income tax amendment   If a personal service corporation makes a section 444 election, its deduction for certain amounts paid to employee-owners may be limited. Federal income tax amendment See Schedule H (Form 1120), Section 280H Limitations for a Personal Service Corporation (PSC), to figure the maximum deduction. Federal income tax amendment Change of tax year. Federal income tax amendment   Generally, a corporation must get the consent of the IRS before changing its tax year by filing Form 1128. Federal income tax amendment However, under certain conditions, a corporation can change its tax year without getting the consent. Federal income tax amendment For more information, see Form 1128 and Publication 538. Federal income tax amendment Recordkeeping A corporation should keep its records for as long as they may be needed for the administration of any provision of the Internal Revenue Code. Federal income tax amendment Usually records that support items of income, deductions, or credits on the return must be kept for 3 years from the date the return is due or filed, whichever is later. Federal income tax amendment Keep records that verify the corporation's basis in property for as long as they are needed to figure the basis of the original or replacement property. Federal income tax amendment The corporation should keep copies of all filed returns. Federal income tax amendment They help in preparing future and amended returns and in the calculation of earnings and profits. Federal income tax amendment Income, Deductions, and Special Provisions Rules on income and deductions that apply to individuals also apply, for the most part, to corporations. Federal income tax amendment However, the following special provisions apply only to corporations. Federal income tax amendment Costs of Going Into Business When you go into business, treat all costs you incur to get your business started as capital expenses. Federal income tax amendment However, a corporation can elect to deduct a limited amount of start-up or organizational costs. Federal income tax amendment Any costs not deducted can be amortized. Federal income tax amendment Start-up costs are costs for creating an active trade or business or investigating the creation or acquisition of an active trade or business. Federal income tax amendment Organizational costs are the direct costs of creating the corporation. Federal income tax amendment For more information on deducting or amortizing start-up and organizational costs, see the instructions for your income tax return. Federal income tax amendment Also see, Publication 535, chapter 7, Costs You Can Deduct or Capitalize, and chapter 8, Amortization. Federal income tax amendment Related Persons A corporation that uses an accrual method of accounting cannot deduct business expenses and interest owed to a related person who uses the cash method of accounting until the corporation makes the payment and the corresponding amount is includible in the related person's gross income. Federal income tax amendment Determine the relationship, for this rule, as of the end of the tax year for which the expense or interest would otherwise be deductible. Federal income tax amendment If a deduction is denied, the rule will continue to apply even if the corporation's relationship with the person ends before the expense or interest is includible in the gross income of that person. Federal income tax amendment These rules also deny the deduction of losses on the sale or exchange of property between related persons. Federal income tax amendment Related persons. Federal income tax amendment   For purposes of this rule, the following persons are related to a corporation. Federal income tax amendment Another corporation, that is a member of the same controlled group (as defined in section 267(f) of the Internal Revenue Code). Federal income tax amendment An individual who owns, directly or indirectly, more than 50% of the value of the outstanding stock of the corporation. Federal income tax amendment A trust fiduciary, when the trust or the grantor of the trust owns, directly or indirectly, more than 50% in value of the outstanding stock of the corporation. Federal income tax amendment An S corporation, if the same persons own more than 50% in value of the outstanding stock of each corporation. Federal income tax amendment A partnership, if the same persons own more than 50% in value of the outstanding stock of the corporation and more than 50% of the capital or profits interest in the partnership. Federal income tax amendment Any employee-owner, if the corporation is a personal service corporation (see Personal service corporation, earlier), regardless of the amount of stock owned by the employee-owner. Federal income tax amendment Ownership of stock. Federal income tax amendment   To determine whether an individual directly or indirectly owns any of the outstanding stock of a corporation, the following apply. Federal income tax amendment Stock owned, directly or indirectly, by or for a corporation, partnership, estate, or trust, is treated as being owned proportionately by or for its shareholders, partners, or beneficiaries. Federal income tax amendment An individual is treated as owning the stock owned, directly or indirectly, by or for the individual's family. Federal income tax amendment Family includes only brothers and sisters (including half brothers and half sisters), a spouse, ancestors, and lineal descendants. Federal income tax amendment Any individual owning (other than by applying (2), above) stock in a corporation, is treated as also owning the stock owned directly or indirectly by that individual's partner. Federal income tax amendment To apply (1), (2), or (3), above, stock constructively owned by a person under (1) is treated as actually owned by that person. Federal income tax amendment But stock constructively owned by an individual under (2) or (3) is not treated as actually owned by the individual for applying either (2) or (3) to make another person the constructive owner of that stock. Federal income tax amendment Reallocation of income and deductions. Federal income tax amendment   Where it is necessary to clearly show income or prevent tax evasion, the IRS can reallocate gross income, deductions, credits, or allowances between two or more organizations, trades, or businesses owned or controlled directly, or indirectly, by the same interests. Federal income tax amendment Complete liquidations. Federal income tax amendment   The disallowance of losses from the sale or exchange of property between related persons does not apply to liquidating distributions. Federal income tax amendment More information. Federal income tax amendment   For more information about the related person rules, see Publication 544. Federal income tax amendment Income From Qualifying Shipping Activities A corporation may make an election to be taxed on its notional shipping income at the highest corporate tax rate. Federal income tax amendment If a corporation makes this election it may exclude income from qualifying shipping activities from gross income. Federal income tax amendment Also if the election is made, the corporation generally may not claim any loss, deduction, or credit with respect to qualifying shipping activities. Federal income tax amendment A corporation making this election may also elect to defer gain on the disposition of a qualifying vessel. Federal income tax amendment A corporation uses Form 8902, Alternative Tax on Qualifying Shipping Activities, to make the election and figure the alternative tax. Federal income tax amendment For more information regarding the election, see Form 8902. Federal income tax amendment Election to Expense Qualified Refinery Property A corporation can make an irrevocable election on its tax return filed by the due date (including extensions) to deduct 50% of the cost of qualified refinery property (defined in section 179C(c) of the Internal Revenue Code), placed in service before January 1, 2014. Federal income tax amendment The deduction is allowed for the year in which the property is placed in service. Federal income tax amendment A subchapter T cooperative can make an irrevocable election on its return by the due date (including extensions) to allocate this deduction to its owners based on their ownership interest. Federal income tax amendment For more information, see section 179C of the Internal Revenue Code and the related Regulations. Federal income tax amendment Deduction to Comply With EPA Sulfur Regulations A small business refiner can make an irrevocable election on its tax return filed by the due date (including extensions) to deduct up to 75% of qualified costs paid or incurred to comply with the Highway Diesel Fuel Sulfur Control Requirements of the Environmental Protection Agency (EPA). Federal income tax amendment A subchapter T cooperative can make an irrevocable election on its return filed by the due date (including extensions) to allocate the deduction to its owners based on their ownership interest. Federal income tax amendment For more information, see sections 45H and 179B of the Internal Revenue Code and the related Regulations. Federal income tax amendment Energy-Efficient Commercial Building Property Deduction A corporation can claim a deduction for costs associated with energy-efficient commercial building property, placed in service before January 1, 2014. Federal income tax amendment In order to qualify for the deduction: The costs must be associated with depreciable or amortizable property in a Standard 90. Federal income tax amendment 1-2001 domestic building; The property must be either a part of the interior lighting system, the heating, cooling, ventilation and hot water system, or the building envelope (defined in section 179D(c)(1)(C) of the Internal Revenue Code); and The property must be installed as part of a plan to reduce the total annual energy and power costs of the building by 50% or more. Federal income tax amendment The deduction is limited to $1. Federal income tax amendment 80 per square foot of the building less the total amount of deductions taken for this property in prior tax years. Federal income tax amendment Other rules and limitations apply. Federal income tax amendment The corporation must reduce the basis of any property by any deduction taken. Federal income tax amendment The deduction is subject to recapture if the corporation fails to fully implement an energy savings plan. Federal income tax amendment For more information, see section 179D of the Internal Revenue Code. Federal income tax amendment Also see Notice 2006-52, 2006-26 I. Federal income tax amendment R. Federal income tax amendment B. Federal income tax amendment 1175, clarified and amplified by Notice 2008-40, 2008-14 I. Federal income tax amendment R. Federal income tax amendment B. Federal income tax amendment 725, and any successor. Federal income tax amendment Corporate Preference Items A corporation must make special adjustments to certain items before it takes them into account in determining its taxable income. Federal income tax amendment These items are known as corporate preference items and they include the following. Federal income tax amendment Gain on the disposition of section 1250 property. Federal income tax amendment For more information, see section 1250 Property under Depreciation Recapture in chapter 3 of Publication 544. Federal income tax amendment Percentage depletion for iron ore and coal (including lignite). Federal income tax amendment For more information, see Mines and Geothermal Deposits under Mineral Property in chapter 9 of Publication 535. Federal income tax amendment Amortization of pollution control facilities. Federal income tax amendment For more information, see Pollution Control Facilities in chapter 8 of Publication 535 and section 291(a)(5) of the Internal Revenue Code. Federal income tax amendment Mineral exploration and development costs. Federal income tax amendment For more information, see Exploration Costs and Development Costs in chapter 7 of Publication 535. Federal income tax amendment For more information on corporate preference items, see section 291 of the Internal Revenue Code. Federal income tax amendment Dividends-Received Deduction A corporation can deduct a percentage of certain dividends received during its tax year. Federal income tax amendment This section discusses the general rules that apply. Federal income tax amendment The deduction is figured on Form 1120, Schedule C, or the applicable schedule of your income tax return. Federal income tax amendment For more information, see the Instructions for Form 1120, or the instructions for your applicable income tax return. Federal income tax amendment Dividends from domestic corporations. Federal income tax amendment   A corporation can deduct, within certain limits, 70% of the dividends received if the corporation receiving the dividend owns less than 20% of the corporation distributing the dividend. Federal income tax amendment If the corporation owns 20% or more of the distributing corporation's stock, it can, subject to certain limits, deduct 80% of the dividends received. Federal income tax amendment Ownership. Federal income tax amendment   Determine ownership, for these rules, by the amount of voting power and value of the paying corporation's stock (other than certain preferred stock) the receiving corporation owns. Federal income tax amendment Small business investment companies. Federal income tax amendment   Small business investment companies can deduct 100% of the dividends received from taxable domestic corporations. Federal income tax amendment Dividends from regulated investment companies. Federal income tax amendment   Regulated investment company dividends received are subject to certain limits. Federal income tax amendment Capital gain dividends received from a regulated investment company do not qualify for the deduction. Federal income tax amendment For more information, see section 854 of the Internal Revenue Code. Federal income tax amendment No deduction allowed for certain dividends. Federal income tax amendment   Corporations cannot take a deduction for dividends received from the following entities. Federal income tax amendment A real estate investment trust (REIT). Federal income tax amendment A corporation exempt from tax under section 501 or 521 of the Internal Revenue Code either for the tax year of the distribution or the preceding tax year. Federal income tax amendment A corporation whose stock was held less than 46 days during the 91-day period beginning 45 days before the stock became ex-dividend with respect to the dividend. Federal income tax amendment Ex-dividend means the holder has no rights to the dividend. Federal income tax amendment A corporation whose preferred stock was held less than 91 days during the 181-day period beginning 90 days before the stock became ex-dividend with respect to the dividend if the dividends received are for a period or periods totaling more than 366 days. Federal income tax amendment Any corporation, if your corporation is under an obligation (pursuant to a short sale or otherwise) to make related payments with respect to positions in substantially similar or related property. Federal income tax amendment Dividends on deposits. Federal income tax amendment   Dividends on deposits or withdrawable accounts in domestic building and loan associations, mutual savings banks, cooperative banks, and similar organizations are interest, not dividends. Federal income tax amendment They do not qualify for this deduction. Federal income tax amendment Limit on deduction for dividends. Federal income tax amendment   The total deduction for dividends received or accrued is generally limited (in the following order) to: 80% of the difference between taxable income and the 100% deduction allowed for dividends received from affiliated corporations, or by a small business investment company, for dividends received or accrued from 20%-owned corporations, then 70% of the difference between taxable income and the 100% deduction allowed for dividends received from affiliated corporations, or by a small business investment company, for dividends received or accrued from less-than-20%-owned corporations (reducing taxable income by the total dividends received from 20%-owned corporations). Federal income tax amendment Figuring the limit. Federal income tax amendment   In figuring the limit, determine taxable income without the following items. Federal income tax amendment The net operating loss deduction. Federal income tax amendment The domestic production activities deduction. Federal income tax amendment The deduction for dividends received. Federal income tax amendment Any adjustment due to the nontaxable part of an extraordinary dividend (see Extraordinary Dividends, below). Federal income tax amendment Any capital loss carryback to the tax year. Federal income tax amendment Effect of net operating loss. Federal income tax amendment   If a corporation has a net operating loss (NOL) for a tax year, the limit of 80% (or 70%) of taxable income does not apply. Federal income tax amendment To determine whether a corporation has an NOL, figure the dividends-received deduction without the 80% (or 70%) of taxable income limit. Federal income tax amendment Example 1. Federal income tax amendment A corporation loses $25,000 from operations. Federal income tax amendment It receives $100,000 in dividends from a 20%-owned corporation. Federal income tax amendment Its taxable income is $75,000 ($100,000 – $25,000) before the deduction for dividends received. Federal income tax amendment If it claims the full dividends-received deduction of $80,000 ($100,000 × 80%) and combines it with an operations loss of $25,000, it will have an NOL of ($5,000). Federal income tax amendment Therefore, the 80% of taxable income limit does not apply. Federal income tax amendment The corporation can deduct the full $80,000. Federal income tax amendment Example 2. Federal income tax amendment Assume the same facts as in Example 1, except that the corporation only loses $15,000 from operations. Federal income tax amendment Its taxable income is $85,000 before the deduction for dividends received. Federal income tax amendment After claiming the dividends-received deduction of $80,000 ($100,000 × 80%), its taxable income is $5,000. Federal income tax amendment Because the corporation will not have an NOL after applying a full dividends-received deduction, its allowable dividends-received deduction is limited to 80% of its taxable income, or $68,000 ($85,000 × 80%). Federal income tax amendment Extraordinary Dividends If a corporation receives an extraordinary dividend on stock held 2 years or less before the dividend announcement date, it generally must reduce its basis in the stock by the nontaxed part of the dividend. Federal income tax amendment The nontaxed part is any dividends-received deduction allowable for the dividends. Federal income tax amendment Extraordinary dividend. Federal income tax amendment   An extraordinary dividend is any dividend on stock that equals or exceeds a certain percentage of the corporation's adjusted basis in the stock. Federal income tax amendment The percentages are: 5% for stock preferred as to dividends, or 10% for other stock. Federal income tax amendment Treat all dividends received that have ex-dividend dates within an 85-consecutive-day period as one dividend. Federal income tax amendment Treat all dividends received that have ex-dividend dates within a 365-consecutive-day period as extraordinary dividends if the total of the dividends exceeds 20% of the corporation's adjusted basis in the stock. Federal income tax amendment Disqualified preferred stock. Federal income tax amendment   Any dividend on disqualified preferred stock is treated as an extraordinary dividend regardless of the period of time the corporation held the stock. Federal income tax amendment   Disqualified preferred stock is any stock preferred as to dividends if any of the following apply. Federal income tax amendment The stock when issued has a dividend rate that declines (or can reasonably be expected to decline) in the future. Federal income tax amendment The issue price of the stock exceeds its liquidation rights or stated redemption price. Federal income tax amendment The stock is otherwise structured to avoid the rules for extraordinary dividends and to enable corporate shareholders to reduce tax through a combination of dividends-received deductions and loss on the disposition of the stock. Federal income tax amendment   These rules apply to stock issued after July 10, 1989, unless it was issued under a written binding contract in effect on that date, and thereafter, before the issuance of the stock. Federal income tax amendment More information. Federal income tax amendment   For more information on extraordinary dividends, see section 1059 of the Internal Revenue Code. Federal income tax amendment Below-Market Loans If a corporation receives a below-market loan and uses the proceeds for its trade or business, it may be able to deduct the forgone interest. Federal income tax amendment A below-market loan is a loan on which no interest is charged or on which interest is charged at a rate below the applicable federal rate. Federal income tax amendment A below-market loan generally is treated as an arm's-length transaction in which the borrower is considered as having received both the following: A loan in exchange for a note that requires payment of interest at the applicable federal rate, and An additional payment in an amount equal to the forgone interest. Federal income tax amendment Treat the additional payment as a gift, dividend, contribution to capital, payment of compensation, or other payment, depending on the substance of the transaction. Federal income tax amendment Foregone interest. Federal income tax amendment   For any period, forgone interest is equal to: The interest that would be payable for that period if interest accrued on the loan at the applicable federal rate and was payable annually on December 31, minus Any interest actually payable on the loan for the period. Federal income tax amendment See Below-market loans, in chapter 4 of Publication 535 for more information. Federal income tax amendment Charitable Contributions A corporation can claim a limited deduction for charitable contributions made in cash or other property. Federal income tax amendment The contribution is deductible if made to, or for the use of, a qualified organization. Federal income tax amendment For more information on qualified organizations, see Publication 526, Charitable Contributions. Federal income tax amendment Also see, Exempt Organizations Select Check (EO Select Check) at www. Federal income tax amendment irs. Federal income tax amendment gov/charities, the on-line search tool for finding information on organizations eligible to receive tax-deductible contributions. Federal income tax amendment Note. Federal income tax amendment You cannot take a deduction if any of the net earnings of an organization receiving contributions benefit any private shareholder or individual. Federal income tax amendment Cash method corporation. Federal income tax amendment   A corporation using the cash method of accounting deducts contributions in the tax year paid. Federal income tax amendment Accrual method corporation. Federal income tax amendment   A corporation using an accrual method of accounting can choose to deduct unpaid contributions for the tax year the board of directors authorizes them if it pays them by the 15th day of the 3rd month after the close of that tax year. Federal income tax amendment Make the choice by reporting the contribution on the corporation's return for the tax year. Federal income tax amendment A declaration stating that the board of directors adopted the resolution during the tax year must accompany the return. Federal income tax amendment The declaration must include the date the resolution was adopted. Federal income tax amendment Limitations on deduction. Federal income tax amendment   A corporation cannot deduct charitable contributions that exceed 10% of its taxable income for the tax year. Federal income tax amendment Figure taxable income for this purpose without the following. Federal income tax amendment The deduction for charitable contributions. Federal income tax amendment The dividends-received deduction. Federal income tax amendment The deduction allowed under section 249 of the Internal Revenue Code. Federal income tax amendment The domestic production activities deduction. Federal income tax amendment Any net operating loss carryback to the tax year. Federal income tax amendment Any capital loss carryback to the tax year. Federal income tax amendment Farmers and ranchers. Federal income tax amendment    Corporations that are farmers and ranchers should see section 170(b)(2) of the Internal Revenue Code for special rules that may affect the deduction limit. Federal income tax amendment Carryover of excess contributions. Federal income tax amendment   You can carry over, within certain limits, to each of the subsequent 5 years any charitable contributions made during the current year that exceed the 10% limit. Federal income tax amendment You lose any excess not used within that period. Federal income tax amendment For example, if a corporation has a carryover of excess contributions paid in 2010 and it does not use all the excess on its return for 2011, it can carry any excess over to 2012, 2013, 2014, and 2015, if applicable. Federal income tax amendment Any excess not used in 2015 is lost. Federal income tax amendment Do not deduct a carryover of excess contributions in the carryover year until after you deduct contributions made in that year (subject to the 10% limit). Federal income tax amendment You cannot deduct a carryover of excess contributions to the extent it increases a net operating loss carryover. Federal income tax amendment Cash contributions. Federal income tax amendment   A corporation must maintain a record of any contribution of cash, check, or other monetary contribution, regardless of the amount. Federal income tax amendment The record can be a bank record, receipt, letter, or other written communication from the donee indicating the name of the organization, the date of the contribution, and the amount of the contribution. Federal income tax amendment Keep the record of the contribution with the other corporate records. Federal income tax amendment Do not attach the records to the corporation's return. Federal income tax amendment For more information on cash contributions, see Publication 526. Federal income tax amendment Gifts of $250 or more. Federal income tax amendment   Generally, no deduction is allowed for any contribution of $250 or more unless the corporation gets a written acknowledgement from the donee organization. Federal income tax amendment The acknowledgement should show the amount of cash contributed, a description of the property contributed, and either gives a description and a good faith estimate of the value of any goods or services provided in return for the contribution or states that no goods or services were provided in return for the contribution. Federal income tax amendment The acknowledgement should be received by the due date (including extensions) of the return, or, if earlier, the date the return was filed. Federal income tax amendment Keep the acknowledgement with other corporate records. Federal income tax amendment Do not attach the acknowledgement to the return. Federal income tax amendment Contributions of property other than cash. Federal income tax amendment   If a corporation (other than a closely-held or a personal service corporation) claims a deduction of more than $500 for contributions of property other than cash, a schedule describing the property and the method used to determine its fair market value must be attached to the corporation's return. Federal income tax amendment In addition the corporation should keep a record of: The approximate date and manner of acquisition of the donated property and The cost or other basis of the donated property held by the donor for less than 12 months prior to contribution. Federal income tax amendment   Closely held and personal service corporations must complete and attach Form 8283, Noncash Charitable Contributions, to their returns if they claim a deduction of more than $500 for non-cash contributions. Federal income tax amendment For all other corporations, if the deduction claimed for donated property exceeds $5,000, complete Form 8283 and attach it to the corporation's return. Federal income tax amendment   A corporation must obtain a qualified appraisal for all deductions of property claimed in excess of $5,000. Federal income tax amendment A qualified appraisal is not required for the donation of cash, publicly traded securities, inventory, and any qualified vehicles sold by a donee organization without any significant intervening use or material improvement. Federal income tax amendment The appraisal should be maintained with other corporate records and only attached to the corporation's return when the deduction claimed exceeds $500,000; $20,000 for donated art work. Federal income tax amendment   See Form 8283 for more information. Federal income tax amendment Qualified conservation contributions. Federal income tax amendment   If a corporation makes a qualified conservation contribution, the corporation must provide information regarding the legal interest being donated, the fair market value of the underlying property before and after the donation, and a description of the conservation purpose for which the property will be used. Federal income tax amendment For more information, see section 170(h) of the Internal Revenue Code. Federal income tax amendment Contributions of used vehicles. Federal income tax amendment   A corporation is allowed a deduction for the contribution of used motor vehicles, boats, and airplanes. Federal income tax amendment The deduction is limited, and other special rules apply. Federal income tax amendment For more information, see Publication 526. Federal income tax amendment Reduction for contributions of certain property. Federal income tax amendment   For a charitable contribution of property, the corporation must reduce the contribution by the sum of: The ordinary income and short-term capital gain that would have resulted if the property were sold at its FMV and For certain contributions, the long-term capital gain that would have resulted if the property were sold at its FMV. Federal income tax amendment   The reduction for the long-term capital gain applies to: Contributions of tangible personal property for use by an exempt organization for a purpose or function unrelated to the basis for its exemption; Contributions of any property to or for the use of certain private foundations except for stock for which market quotations are readily available; and Contributions of any patent, certain copyrights, trademark, trade name, trade secret, know-how, software (that is a section 197 intangible), or similar property, or applications or registrations of such property. Federal income tax amendment Larger deduction. Federal income tax amendment   A corporation (other than an S corporation) may be able to claim a deduction equal to the lesser of (a) the basis of the donated inventory or property plus one-half of the inventory or property's appreciation (gain if the donated inventory or property was sold at fair market value on the date of the donation), or (b) two times basis of the donated inventory or property. Federal income tax amendment This deduction may be allowed for certain contributions of: Certain inventory and other property made to a donee organization and used solely for the care of the ill, the needy, and infants. Federal income tax amendment Scientific property constructed by the corporation (other than an S corporation, personal holding company, or personal service corporation) and donated no later than 2 years after substantial completion of the construction. Federal income tax amendment The property must be donated to a qualified organization and its original use must be by the donee for research, experimentation, or research training within the United States in the area of physical or biological science. Federal income tax amendment Computer technology and equipment acquired or constructed and donated no later than 3 years after either acquisition or substantial completion of construction to an educational organization for educational purposes within the United States. Federal income tax amendment Contributions to organizations conducting lobbying activities. Federal income tax amendment   Contributions made to an organization that conducts lobbying activities are not deductible if: The lobbying activities relate to matters of direct financial interest to the donor's trade or business and The principal purpose of the contribution was to avoid federal income tax by obtaining a deduction for activities that would have been nondeductible under the lobbying expense rules if conducted directly by the donor. Federal income tax amendment More information. Federal income tax amendment   For more information on charitable contributions, including substantiation and recordkeeping requirements, see section 170 of the Internal Revenue Code, the related regulations, and Publication 526. Federal income tax amendment Capital Losses A corporation can deduct capital losses only up to the amount of its capital gains. Federal income tax amendment In other words, if a corporation has an excess capital loss, it cannot deduct the loss in the current tax year. Federal income tax amendment Instead, it carries the loss to other tax years and deducts it from any net capital gains that occur in those years. Federal income tax amendment A capital loss is carried to other years in the following order. Federal income tax amendment 3 years prior to the loss year. Federal income tax amendment 2 years prior to the loss year. Federal income tax amendment 1 year prior to the loss year. Federal income tax amendment Any loss remaining is carried forward for 5 years. Federal income tax amendment When you carry a net capital loss to another tax year, treat it as a short-term loss. Federal income tax amendment It does not retain its original identity as long term or short term. Federal income tax amendment Example. Federal income tax amendment A calendar year corporation has a net short-term capital gain of $3,000 and a net long-term capital loss of $9,000. Federal income tax amendment The short-term gain offsets some of the long-term loss, leaving a net capital loss of $6,000. Federal income tax amendment The corporation treats this $6,000 as a short-term loss when carried back or forward. Federal income tax amendment The corporation carries the $6,000 short-term loss back 3 years. Federal income tax amendment In year 1, the corporation had a net short-term capital gain of $8,000 and a net long-term capital gain of $5,000. Federal income tax amendment It subtracts the $6,000 short-term loss first from the net short-term gain. Federal income tax amendment This results in a net capital gain for year 1 of $7,000. Federal income tax amendment This consists of a net short-term capital gain of $2,000 ($8,000 − $6,000) and a net long-term capital gain of $5,000. Federal income tax amendment S corporation status. Federal income tax amendment   A corporation may not carry a capital loss from, or to, a year for which it is an S corporation. Federal income tax amendment Rules for carryover and carryback. Federal income tax amendment   When carrying a capital loss from one year to another, the following rules apply. Federal income tax amendment When figuring the current year's net capital loss, you cannot combine it with a capital loss carried from another year. Federal income tax amendment In other words, you can carry capital losses only to years that would otherwise have a total net capital gain. Federal income tax amendment If you carry capital losses from 2 or more years to the same year, deduct the loss from the earliest year first. Federal income tax amendment You cannot use a capital loss carried from another year to produce or increase a net operating loss in the year to which you carry it back. Federal income tax amendment Refunds. Federal income tax amendment   When you carry back a capital loss to an earlier tax year, refigure your tax for that year. Federal income tax amendment If your corrected tax is less than the tax you originally owed, use either Form 1139, Corporate Application for Tentative Refund, or Form 1120X, Amended U. Federal income tax amendment S. Federal income tax amendment Corporation Income Tax Return, to apply for a refund. Federal income tax amendment Form 1139. Federal income tax amendment    A corporation can get a refund faster by using Form 1139. Federal income tax amendment It cannot file Form 1139 before filing the return for the corporation's capital loss year, but it must file Form 1139 no later than 1 year after the year it sustains the capital loss. Federal income tax amendment Form 1120X. Federal income tax amendment   If the corporation does not file Form 1139, it must file Form 1120X to apply for a refund. Federal income tax amendment The corporation must file the Form 1120X within 3 years of the due date, includin