2003 DISASTER

LOSSES KIT

HELP FROM THE IRS

Department of the Treasury Publication 2194B (Rev. 9-2003)

Internal Revenue Service Catalog Number 31161M

www.irs.gov

FOR BUSINESSES
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Table of Contents 

Introduction 

Publication 3932, Casualty Losses – Document List ................................................................5 

Form 4506, Request for Copy or Transcript of Tax Form .........................................................7 

Publication 584B, Business Casualty, Disaster, and Theft Loss Workbook..............................9 

Publication 547, Casualties, Disasters and Thefts..................................................................17 

Form 4684 and instructions, Casualties and Thefts................................................................33 

Publication 551, Basis of Assets ............................................................................................39 

Publication 536, Net Operation Losses (NOLs) for Individuals, Estates, and Trust.................51 

Forms 1120X and Instructions, Amended U.S. Individual Income Tax Return........................71 

Form 8822, Change of Address .............................................................................................75 
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Disaster Losses Kit for Businesses 

Introduction 

If your business was affected this year by a major disaster or emergency in your 

area, this Disaster Losses Kit can help you claim unreimbursed casualty losses on 

property that was destroyed by a natural disaster. The Kit contains tax forms 

needed to claim a casualty loss. 

To qualify for disaster loans and grants from other federal agencies, you must 

have filed all required federal tax returns. IRS understands that many of your tax 

records may have been lost or destroyed. We can provide copies or transcripts of 

your previously filed tax returns free of charge when you submit Form 4506, 

Request for Copy or Transcript of Tax Form, included in the Disaster Kit. Just write 

the name of the county where your property was located and a brief description of 

the incident (i.e.; Hurricane Dennis) at the top of the form. 

If you need additional forms or publications, there are several ways you can obtain 

them. You can download forms from www.irs.gov or IRS will fax forms to you when 

you dial 703-368-9694 from your fax machine and follow the directions of the 

prompts. You can also order forms or publications at no cost by calling 1-800-829-

3676. If you need additional tax assistance, please call 1-800-829-1040. 

Note: If you in the business of farming, call 1-800-829-3676 to order the Farmer’s 

Tax Guide (Publication 225). In addition to general information, the Farmer’s Tax 

Guide explains how to report sales impacted by weather-related conditions and 

how to report income from crop insurance payments or other types of disasterrelated payments. 
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CASUALTY LOSSES - DOCUMENT LIST

If you need assistance in preparing your returns, the IRS will help you.

Department of the Treasury

Internal Revenue Service

IRS

Publication 3932

Catalog Number 32903Y

●

If you are able to provide any of the following information, it will assist the IRS in

calculating your casualty loss:

Complete list of personal and non-real

estate items lost in the disaster.

Publication 584, Casualty, Disaster, and

Theft Loss Workbook (Personal-Use

Property) and Publication 584B,

Business Casualty, Disaster, and Theft

Loss Workbook, will assist you in

compiling these items. You may also use

the lists prepared by FEMA and add the

additional Fair Market Value information.

If available, bring copies of your federal

tax returns for the last three years.

●

If you claimed a casualty loss on your

last year’s return or any prior year

return, please bring a copy of the

amended returns or any other

documentation, if available.

●

Insurance reimbursement

documentation, if applicable.

All types of Federal Emergency

Management Agency’s reimbursement

documentation, if applicable.

All Small Business Administration

appraisals, if applicable

●

The fair market value of your home and

real estate before the casualty

Any contractor estimates and repairs or

replacement costs to damaged property

If you previously elected the standard

deduction, bring copies of your prior

state tax withholdings, real property

taxes, personal property, home

mortgage interest and charitable

contributions paid in the prior year

Securing copies of previously filed returns, providing W-2 or Form 1099 data, expediting

current year return processing, expediting issuance of replacement checks, delaying

notices, and waiving penalties are also helpful services IRS can provide, if needed.

●

●

●

●

●

www.irs.gov

Make Disaster Tax Relief Filing Easy
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Form 4506 Request for Copy or Transcript of Tax Form

(Rev. May 1997) OMB No. 1545-0429 Read instructions before completing this form.

Department of the Treasury

Internal Revenue Service Type or print clearly. Request may be rejected if the form is incomplete or illegible.

Note: Do not use this form to get tax account information. Instead, see instructions below.

First social security number on tax form or

employer identification number (see instructions)

1a Name shown on tax form. If a joint return, enter the name shown first. 1b

2a If a joint return, spouse’s name shown on tax form 2b Second social security number on tax form

3 Current name, address (including apt., room, or suite no.), city, state, and ZIP code

Tax period(s) (year or period ended date). If more than four, see

instructions.

9

Complete only if line 8d is checked.

Amount due:

12

6 If we cannot find a record of your tax form and you want the payment refunded to the third party, check here 

a Cost for each period $ 23.00

b Number of tax periods requested on line 11

c Total cost. Multiply line 12a by line 12b $

Check only one box to show what you want. There is no charge for items 8a, b, and c:

Copy of tax form and all attachments (including Form(s) W-2, schedules, or other forms). The charge is $23 for each period requested.

Form(s) W-2 information (see instructions).

Telephone number of requester

Please

Sign

Here

( )

Signature. See instructions. If other than taxpayer, attach authorization document. Date Best time to call

Title (if line 1a above is a corporation, partnership, estate, or trust)

Instructions

(Continued on back)

Cat. No. 41721E Form 4506 (Rev. 5-97)





If copy of form or a tax return transcript is to be mailed to someone else, enter the third party’s name and address

If name in third party’s records differs from line 1a above, enter that name here (see instructions) 

5

Tax form number (Form 1040, 1040A, 941, etc.)

7

Full payment must accompany your request. Make check

or money order payable to “Internal Revenue Service.”

Note: If these copies must be certified for court or administrative proceedings, see instructions and check here 

For Privacy Act and Paperwork Reduction Act Notice, see back of form.

b

d

10

a Tax return transcript of Form 1040 series filed during the current calendar year and the 3 prior calendar years (see instructions).

Small Business Administration Department of Education Department of Veterans Affairs Financial institution

If this request is to meet a requirement of one of the following, check all boxes that apply.

8

Verification of nonfiling.

c

Caution: Before signing, make sure all items are complete and the form is dated.

Spouse’s signature Date

TRY A TAX RETURN

TRANSCRIPT (see line

8a instructions)

Section references are to the Internal

Revenue Code.

TIP: If you had your tax form filled in by a

paid preparer, check first to see if you can

get a copy from the preparer. This may save

you both time and money.

Purpose of Form.—Use Form 4506 to get a

tax return transcript, verification that you did

not file a Federal tax return, Form W-2

information, or a copy of a tax form. Allow 6

weeks after you file a tax form before you

request a copy of it or a transcript. For W-2

Do not use this form to request Forms

1099 or tax account information. See this

page for details on how to get these items.

Note: Form 4506 must be received by the

IRS within 60 calendar days after the date you

signed and dated the request.

How Long Will It Take?—You can get a tax

return transcript or verification of nonfiling

within 7 to 10 workdays after the IRS receives

your request. It can take up to 60 calendar

Forms 1099.—If you need a copy of a Form

1099, contact the payer. If the payer cannot

help you, call or visit the IRS to get Form

1099 information.

Tax Account Information.—If you need a

statement of your tax account showing any

later changes that you or the IRS made to the

original return, request tax account

information. Tax account information lists

4 Address, (including apt., room, or suite no.), city, state, and ZIP code shown on the last return filed if different from line 3

11

I declare that I am either the taxpayer whose name is shown on line 1a or 2a, or a person authorized to obtain the tax information requested. I am

aware that based upon this form, the IRS will release the tax information requested to any party shown on line 5. The IRS has no control over what

that party does with the information.

information, wait 13 months after the end of

the year in which the wages were earned. For

example, wait until Feb. 1999 to request W-2

information for wages earned in 1997.

days to get a copy of a tax form or W-2

information. To avoid any delay, be sure to

furnish all the information asked for on Form

4506.
Form 4506 (Rev. 5-97) Page 2

Where To File.—Mail Form 4506 with the

correct total payment attached, if required, to

the Internal Revenue Service Center for the

place where you lived when the requested tax

form was filed.

Line 11.—Enter the year(s) of the tax form or

tax return transcript you want. For fiscal-year

filers or requests for quarterly tax forms, enter

the date the period ended; for example,

3/31/96, 6/30/96, etc. If you need more than

four different tax periods, use additional

Forms 4506. Tax forms filed 6 or more years

ago may not be available for making copies.

However, tax account information is generally

still available for these periods.

Note: You must use a separate form for each

service center from which you are requesting

a copy of your tax form or tax return

transcript.

If you lived in: Use this address:

1040 Waverly Ave.

Photocopy Unit

Stop 532

Holtsville, NY 11742

New Jersey, New York

(New York City and

counties of Nassau,

Rockland, Suffolk, and

Westchester)

310 Lowell St.

Photocopy Unit

Stop 679

Andover, MA 01810

New York (all other

counties), Connecticut,

Maine, Massachusetts,

New Hampshire,

Rhode Island, Vermont

Line 12c.—Write your SSN or EIN and “Form

4506 Request” on your check or money

order. If we cannot fill your request, we will

refund your payment.

4800 Buford Hwy.

Photocopy Unit

Stop 91

Doraville, GA 30362

Florida, Georgia,

South Carolina

Signature.—Requests for copies of tax forms

or tax return transcripts to be sent to a third

party must be signed by the person whose

name is shown on line 1a or by a person

authorized to receive the requested

information.

P.O. Box 145500

Photocopy Unit

Stop 521

Cincinnati, OH 45250

Indiana, Kentucky,

Michigan, Ohio,

West Virginia

Line 5.—If you want someone else to receive

the tax form or tax return transcript (such as

a CPA, an enrolled agent, a scholarship

board, or a mortgage lender), enter the name

and address of the individual. If we cannot

find a record of your tax form, we will notify

the third party directly that we cannot fill the

request.

3651 South Interregional

Hwy.

Photocopy Unit

Stop 6716

Austin, TX 73301

Kansas, New Mexico,

Oklahoma, Texas

P.O. Box 9941

Photocopy Unit

Stop 6734

Ogden, UT 84409

Alaska, Arizona, California

(counties of Alpine,

Amador, Butte,

Calaveras, Colusa,

Contra Costa, Del Norte,

El Dorado, Glenn,

Humboldt, Lake, Lassen,

Marin, Mendocino,

Modoc, Napa, Nevada,

Placer, Plumas,

Sacramento, San Joaquin,

Shasta, Sierra, Siskiyou,

Solano, Sonoma, Sutter,

Tehama, Trinity, Yolo,

and Yuba), Colorado,

Idaho, Montana,

Nebraska, Nevada,

North Dakota, Oregon,

South Dakota, Utah,

Washington, Wyoming

Copies of tax forms or tax return transcripts

for a jointly filed return may be furnished to

either the husband or the wife. Only one

signature is required. However, see the line

8c instructions. Sign Form 4506 exactly as

your name appeared on the original tax form.

If you changed your name, also sign your

current name.

Line 7.—Enter the name of the client,

student, or applicant if it is different from the

name shown on line 1a. For example, the

name on line 1a may be the parent of a

student applying for financial aid. In this case,

you would enter the student’s name on line 7

so the scholarship board can associate the

tax form or tax return transcript with their file. For a corporation, the signature of the

president of the corporation, or any principal

officer and the secretary, or the principal

officer and another officer are generally

required. For more details on who may obtain

tax information on corporations, partnerships,

estates, and trusts, see section 6103.

5045 E. Butler Avenue

Photocopy Unit

Stop 52180

Fresno, CA 93888

California (all other

counties), Hawaii

If you are not the taxpayer shown on line

1a, you must attach your authorization to

receive a copy of the requested tax form or

tax return transcript. You may attach a copy

of the authorization document if the original

has already been filed with the IRS. This will

generally be a power of attorney (Form

2848), or other authorization, such as Form

8821, or evidence of entitlement (for Title 11

Bankruptcy or Receivership Proceedings). If

the taxpayer is deceased, you must send

Letters Testamentary or other evidence to

establish that you are authorized to act for

the taxpayer’s estate.

Illinois, Iowa, Minnesota,

Missouri, Wisconsin

2306 E. Bannister Road

Photocopy Unit

Stop 6700, Annex 1

Kansas City, MO 64999

Alabama, Arkansas,

Louisiana, Mississippi,

North Carolina,

Tennessee

P.O. Box 30309

Photocopy Unit

Stop 46

Memphis, TN 38130

Delaware,

District of Columbia,

Maryland, Pennsylvania,

Virginia, a foreign

country, or A.P.O. or

F.P.O address

11601 Roosevelt Blvd.

Photocopy Unit

DP 536

Philadelphia, PA 19255

If you have comments concerning the

accuracy of these time estimates or

suggestions for making this form simpler, we

would be happy to hear from you. You can

write to the Tax Forms Committee, Western

Area Distribution Center, Rancho Cordova,

CA 95743-0001. DO NOT send the form to

this address. Instead, see Where To File on

this page.

Privacy Act and Paperwork Reduction Act

Notice.—We ask for the information on this

form to establish your right to gain access to

your tax form or transcript under the Internal

Revenue Code, including sections 6103 and

6109. We need it to gain access to your tax

form or transcript in our files and properly

respond to your request. If you do not furnish

the information, we will not be able to fill your

request. We may give the information to the

Department of Justice or other appropriate

law enforcement official, as provided by law.

The time needed to complete and file this

form will vary depending on individual

circumstances. The estimated average time

is: Recordkeeping, 13 min.; Learning about

the law or the form, 7 min.; Preparing the

form, 26 min.; and Copying, assembling,

and sending the form to the IRS, 17 min.

Printed on recycled paper

Note: If you do not complete line 1b and, if

applicable, line 2b, there may be a delay in

processing your request.

Line 8a.—If you want a tax return transcript,

check this box. Also, on line 10 enter the tax

form number and on line 11 enter the tax

period for which you want the transcript.

A tax return transcript is available only for

returns in the 1040 series (Form 1040, Form

1040A, 1040EZ, etc.). It shows most line

items from the original return, including

accompanying forms and schedules. In many

cases, a transcript will meet the requirement

of any lending institution such as a financial

institution, the Department of Education, or

the Small Business Administration. It may

also be used to verify that you did not claim

any itemized deductions for a residence.

Note: A tax return transcript does not reflect

any changes you or the IRS made to the

original return. If you want a statement of your

tax account with the changes, see Tax

Account Information on page 1.

Line 8b.—Check this box only if you want

proof from the IRS that you did not file a

return for the year. Also, on line 11 enter the

tax period for which you want verification of

nonfiling.

Line 8c.—If you want only Form(s) W-2

information, check this box. Also, on line 10

enter “Form(s) W-2 only” and on line 11 enter

the tax period for which you want the

information.

You may receive a copy of your actual

Form W-2 or a transcript of the information,

depending on how your employer filed the

form. However, state withholding information

is not shown on a transcript. If you have filed

your tax return for the year the wages were

earned, you can get a copy of the actual

Form W-2 by requesting a complete copy of

your return and paying the required fee.

Contact your employer if you have lost your

current year’s Form W-2 or have not received

it by the time you are ready to prepare your

tax return.

Note: If you are requesting information about

your spouse’s Form W-2, your spouse must

sign Form 4506.

Line 8d.—If you want a certified copy of a

tax form for court or administrative

proceedings, check the box to the right of

line 8d. It will take at least 60 days to process

your request.

You are not required to provide the

information requested on a form that is

subject to the Paperwork Reduction Act

unless the form displays a valid OMB control

number. Books or records relating to a form

or its instructions must be retained as long as

their contents may become material in the

administration of any Internal Revenue law.

Generally, tax returns and return information

are confidential, as required by section 6103.

Line 2b.—If requesting a copy or transcript of

a joint tax form, enter the second SSN shown

on the tax form.

Line 1b.—Enter your employer identification

number (EIN) only if you are requesting a

copy of a business tax form. Otherwise,

enter the first social security number (SSN)

shown on the tax form.

To request tax account information, write or

visit an IRS office or call the IRS at the

number listed in your telephone directory.

If you want your tax account information

sent to a third party, complete Form 8821,

Tax Information Authorization. You may get

this form by phone (call 1-800-829-3676) or

on the Internet (at http://www.irs.ustreas.gov).

certain items from your return, including any

later changes.
Publication 584-B Introduction

(March 2001) This workbook is designed to help you figure Cat. No. 31749K your loss on business and income-producing Department property in the event of a disaster, casualty, or of the theft. It contains schedules to help you figure the Treasury Business loss to your office furniture and fixtures, informaInternal tion systems, motor vehicles, office supplies,

Revenue buildings, and equipment. These schedules,

Service Casualty, however, are for your information only. You

must complete Form 4684, Casualties and

Thefts, to report your loss. Disaster, and

Theft Loss How To Use This

Workbook Workbook You can use this workbook by following these

five steps.

1) Read Publication 547 to learn about the

tax rules for casualties, disasters, and

thefts.

2) Know the definitions of adjusted basis

and fair market value, discussed below.

3) Fill out Schedules 1 through 6.

4) Read the instructions for Form 4684.

5) Fill out Form 4684 using the information

you entered in Schedules 1 through 6.

Use the following chart to find out how you

use these schedules to fill out Form 4684.

And enter it on

Take what’s in... Form 4684...

Column 1 ..................... Line 19

Column 2 ..................... Line 19

Column 3 ..................... Line 19

Column 4 ..................... Line 20

Column 5 ..................... Line 21

Column 6 ..................... Line 23

Column 7 ..................... Line 24

Column 8 ..................... Line 25

Column 9 ..................... Line 26

Column 10 ..................... Line 27

Adjusted basis. Adjusted basis usually

means original cost plus improvements, minus

depreciation allowed or allowable (including any

section 179 expense deduction), amortization,

depletion, etc. If you did not acquire the property

by purchasing it, your basis is determined as

discussed in Publication 551, Basis of Assets.

Fair market value.

Fair market value is the price for which you

could sell your property to a willing buyer, when

neither of you has to sell or buy and both of you

know all the relevant facts. When filling out

Schedules 1 through 6, you need to know the

fair market value of the property immediately

before and immediately after the disaster or casualty.

Deduction limits. If your casualty or theft loss

involved a home you used for business or rented

out, your deductible loss may be limited. See the

instructions for Section B of Form 4684. If the

casualty or theft loss involved property used in a

passive activity, see Form 8582, Passive Activity Loss Limitations, and its instructions.

The casualty and theft loss deduction for

employee property, when added to your job ex-
penses and most other miscellaneous itemized is displayed and then print the completed Walk-in. You can walk in to many post

deductions on Schedule A (Form 1040), must form. offices, libraries, and IRS offices to pick

be reduced by 2% of your adjusted gross in- up certain forms, instructions, and pub- • Tax Info For You to view Internal Revenue come. Employee property is property used in lications. Also, some libraries and IRS offices Bulletins published in the last few years. performing services as an employee. have:

• Tax Regs in English to search regulations • An extensive collection of products avail- and the Internal Revenue Code (under able to print from a CD-ROM or photocopy United States Code (USC)). from reproducible proofs. How To Get • Digital Dispatch and IRS Local News Net • The Internal Revenue Code, regulations, (both located under Tax Info For Busi- Tax Help Internal Revenue Bulletins, and Cumula- ness) to receive our electronic newsletters tive Bulletins available for research pur- on hot tax issues and news. You can get help with unresolved tax issues, poses.

order free publications and forms, ask tax ques- • Small Business Corner (located under Tax

tions, and get more information from the IRS in Info For Business) to get information on Mail. You can send your order for several ways. By selecting the method that is starting and operating a small business. forms, instructions, and publications to best for you, you will have quick and easy ac- You can also reach us with your computer using the Distribution Center nearest to you cess to tax help. File Transfer Protocol at ftp.irs.gov. and receive a response within 10 workdays after

your request is received. Find the address that Contacting your Taxpayer Advocate. If you applies to your part of the country. have attempted to deal with an IRS problem TaxFax Service. Using the phone atunsuccessfully, you should contact your Tax- tached to your fax machine, you can • Western part of U.S.:

payer Advocate. receive forms and instructions by call- Western Area Distribution Center

The Taxpayer Advocate represents your in- ing 703–368–9694. Follow the directions from Rancho Cordova, CA 95743–0001

terests and concerns within the IRS by protect- the prompts. When you order forms, enter the • Central part of U.S.: ing your rights and resolving problems that have catalog number for the form you need. The items Central Area Distribution Center not been fixed through normal channels. While you request will be faxed to you. P.O. Box 8903 Taxpayer Advocates cannot change the tax law Bloomington, IL 61702–8903 or make a technical tax decision, they can clear Phone. Many services are available by

up problems that resulted from previous con- phone. • Eastern part of U.S. and foreign

tacts and ensure that your case is given a com- addresses:

plete and impartial review. Eastern Area Distribution Center • Ordering forms, instructions, and publica- To contact your Taxpayer Advocate: P.O. Box 85074 tions. Call 1–800–829–3676 to order cur- Richmond, VA 23261–5074 • Call the Taxpayer Advocate at rent and prior year forms, instructions, and

1–877–777–4778. publications.

CD-ROM. You can order IRS Publica- • Call the IRS at 1–800–829–1040. • Asking tax questions. Call the IRS with tion 1796, Federal Tax Products on your tax questions at 1–800–829–1040. • Call, write, or fax the Taxpayer Advocate CD-ROM, and obtain:

office in your area. • TTY/TDD equipment. If you have access • Current tax forms, instructions, and publi- to TTY/TDD equipment, call 1–800–829– • Call 1–800–829–4059 if you are a TTY/ cations. 4059 to ask tax questions or to order TDD user. forms and publications. • Prior-year tax forms, instructions, and publications. For more information, see Publication 1546, • TeleTax topics. Call 1–800–829–4477 to

The Taxpayer Advocate Service of the IRS. listen to pre-recorded messages covering • Popular tax forms which may be filled in

various tax topics. electronically, printed out for submission,

Free tax services. To find out what services and saved for recordkeeping.

are available, get Publication 910, Guide to Free Evaluating the quality of our telephone ser- • Internal Revenue Bulletins. Tax Services. It contains a list of free tax publi- vices. To ensure that IRS representatives give cations and an index of tax topics. It also de- accurate, courteous, and professional answers, The CD-ROM can be purchased from Na- scribes other free tax information services, we evaluate the quality of our telephone ser- tional Technical Information Service (NTIS) by including tax education and assistance pro- vices in several ways. calling 1–877–233–6767 or on the Internet at grams and a list of TeleTax topics. www.irs.gov/cdorders. The first release is • A second IRS representative sometimes Personal computer. With your per- available in mid-December and the final release monitors live telephone calls. That person sonal computer and modem, you can is available in late January. only evaluates the IRS assistor and does access the IRS on the Internet at IRS Publication 3207, Small Business Re- not keep a record of any taxpayer’s name www.irs.gov. While visiting our web site, you source Guide, is an interactive CD-ROM that or tax identification number. can select: contains information important to small busi-

• We sometimes record telephone calls to nesses. It is available in mid-February. You can • Frequently Asked Tax Questions (located evaluate IRS assistors objectively. We get one free copy by calling 1–800–829–3676 under Taxpayer Help & Ed) to find an- hold these recordings no longer than one or visiting the IRS web site at www.irs.gov/ swers to questions you may have. week and use them only to measure the prod/bus_info/sm_bus/sm bus-cd.html.

• Forms & Pubs to download forms and quality of assistance.

publications or search for forms and publi- • We value our customers’ opinions. cations by topic or keyword. Throughout this year, we will be surveying

• Fill-in Forms (located under Forms & our customers for their opinions on our

Pubs) to enter information while the form service.

Page 2
Schedule 1. Office Furniture and Fixtures

(1)

Item

(2)

No.

of

items

(3)

Date

acquired

(4)

Cost or

adjusted

basis

Chairs

Desks

File cabinets

Sofas

Bookcases

Books

Lamps

Tables

1

If column (5) is greater than column (4), you have a gain. Skip columns (6) through (10).

(5)

Insurance

or other

reimbursement and

any

salvage

value1

(6)

Fair

market

value

before

casualty

or theft

(7)

Fair

market

value

after

casualty

or theft

(8)

Decrease

in fair

market

value

(9)

Smaller

of

column

(4) or

column

(8)2

(10)

Casualty/

Theft

Loss

(Column

(9) minus

column

(5))

Partitions

2

If the property was completely destroyed or stolen, enter in column (9) the amount from column (4).

Page 3
Schedule 2. Information Systems

Computers

Printers

Monitors

Keyboards

Mouse

Surge

protectors

Modems

Card readers

Card punches

Magnetic

tape

feeds

Optical

character

readers

Tape

cassettes

Fax machines

Card

terminals

Collators

Tape drives

Disc drives

Disc files

(1)

Item

(2)

No.

of

items

(3)

Date

acquired

(4)

Cost or

adjusted

basis

1

If column (5) is greater than column (4), you have a gain. Skip columns (6) through (10).

(5)

Insurance

or other

reimbursement and

any

salvage

value1

(6)

Fair

market

value

before

casualty

or theft

(7)

Fair

market

value

after

casualty

or theft

(8)

Decrease

in fair

market

value

(9)

Smaller

of

column

(4) or

column

(8)2

(10)

Casualty/

Theft

Loss

(Column

(9) minus

column

(5))

2

If the property was completely destroyed or stolen, enter in column (9) the amount from column (4).

Page 4
Schedule 3. Motor Vehicles

Automobiles

Trucks

Vans

Tractor units

(over the

road)

Trailers and

trailermounted

containers

(1)

Item

(2)

No.

of

items

(3)

Date

acquired

(4)

Cost or

adjusted

basis

1

If column (5) is greater than column (4), you have a gain. Skip columns (6) through (10).

(5)

Insurance

or other

reimbursement and

any

salvage

value1

(6)

Fair

market

value

before

casualty

or theft

(7)

Fair

market

value

after

casualty

or theft

(8)

Decrease

in fair

market

value

(9)

Smaller

of

column

(4) or

column

(8)2

(10)

Casualty/

Theft

Loss

(Column

(9) minus

column

(5))

2

If the property was completely destroyed or stolen, enter in column (9) the amount from column (4).

Page 5
Schedule 4. Office Supplies

Pens

Pencils

Paper

Paperclips

Staplers

Staples

Rulers

Tape

Scissors

Hole

punchers

Calendars

File folders

Envelopes

Stamp pads

Glue

Correction

fluid

(1)

Item

(2)

No.

of

items

(3)

Date

acquired

(4)

Cost or

adjusted

basis

1

If column (5) is greater than column (4), you have a gain. Skip columns (6) through (10).

(5)

Insurance

or other

reimbursement and

any

salvage

value1

(6)

Fair

market

value

before

casualty

or theft

(7)

Fair

market

value

after

casualty

or theft

(8)

Decrease

in fair

market

value

(9)

Smaller

of

column

(4) or

column

(8)2

(10)

Casualty/

Theft

Loss

(Column

(9) minus

column

(5))

2

If the property was completely destroyed or stolen, enter in column (9) the amount from column (4).

Page 6
Schedule 5. Building, Components, and Land

Generators

Air

conditioning

units

Heating

units

Fans

Lighting

systems

Plumbing

systems

Central air

conditioning

Fence

Heating

system

Landscaping

Roof

Wall-to-wall

carpet

(1)

Item

(2)

No.

of

items

(3)

Date

acquired

(4)

Cost or

adjusted

basis

1

If column (5) is greater than column (4), you have a gain. Skip columns (6) through (10).

(5)

Insurance

or other

reimbursement and

any

salvage

value1

(6)

Fair

market

value

before

casualty

or theft

(7)

Fair

market

value

after

casualty

or theft

(8)

Decrease

in fair

market

value

(9)

Smaller

of

column

(4) or

column

(8)2

(10)

Casualty/

Theft

Loss

(Column

(9) minus

column

(5))

2

If the property was completely destroyed or stolen, enter in column (9) the amount from column (4).

Building

Bushes

Page 7
Schedule 6. Equipment

Clocks

DVDs

Microwave

ovens

Paper

shredders

Radios

Safes

Telephones

Televisions

(1)

Item

(2)

No.

of

items

(3)

Date

acquired

(4)

Cost or

adjusted

basis

1

If column (5) is greater than column (4), you have a gain. Skip columns (6) through (10).

(5)

Insurance

or other

reimbursement and

any

salvage

value1

(6)

Fair

market

value

before

casualty

or theft

(7)

Fair

market

value

after

casualty

or theft

(8)

Decrease

in fair

market

value

(9)

Smaller

of

column

(4) or

column

(8)2

(10)

Casualty/

Theft

Loss

(Column

(9) minus

column

(5))

2

If the property was completely destroyed or stolen, enter in column (9) the amount from column (4).

Accounting

machines

Calculators

Copiers

Duplicating

equipment

Typewriters

Page 8
Publication 547

Cat. No. 15090K Contents

Department Important Reminder ............... 1

of the

Treasury Casualties, Introduction ..................... 1

Internal Casualty ....................... 2

Revenue Disasters, Service Theft .......................... 2

and Thefts Loss on Deposits ................. 2

Proof of Loss .................... 3

Figuring a Loss .................. 3 For use in preparing

Deduction Limits ................. 6

2003 Returns Figuring a Gain .................. 9

When To Report Gains and

Losses ..................... 11

Disaster Area Losses .............. 11

How To Report Gains and Losses ..... 13

How To Get Tax Help .............. 14

Index .......................... 16

Important Reminder

Photographs of missing children. The Internal Revenue Service is a proud partner with the

National Center for Missing and Exploited Children. Photographs of missing children selected

by the Center may appear in this publication on

pages that would otherwise be blank. You can

help bring these children home by looking at the

photographs and calling 1–800–THE–LOST

(1–800–843–5678) if you recognize a child.

Introduction

This publication explains the tax treatment of

casualties, thefts, and losses on deposits. A

casualty occurs when your property is damaged as a result of a disaster such as a storm,

fire, car accident, or similar event. A theft occurs

when someone steals your property. A loss on

deposits occurs when your financial institution

becomes insolvent or bankrupt.

This publication discusses the following topics.

• Definitions of a casualty, theft, and loss on

deposits.

• How to figure the amount of your gain or

loss. Get forms and other information • How to treat insurance and other reim- faster and easier by: bursements you receive.

• The deduction limits. Internet • www.irs.gov or FTP • ftp.irs.gov • When and how to report a casualty or

FAX theft. • 703–368–9694 (from your fax machine) • The special rules for disaster area losses.
Forms to file. When you have a casualty or water damage to rugs and drapes caused

theft, you have to file Form 4684. You will also Casualty by the bursting of a water heater does

have to file one or more of the following forms. qualify as a casualty.

A casualty is the damage, destruction, or loss of • Schedule A (Form 1040). • Most losses of property caused by property resulting from an identifiable event that droughts. To be deductible, a drought-re- • Schedule D (Form 1040). is sudden, unexpected, or unusual. lated loss generally must be incurred in a

• Form 4797. • A sudden event is one that is swift, not trade or business or in a transaction engradual or progressive. tered into for profit. For details on which form to use, see How To

Report Gains and Losses, later. • An unexpected event is one that is ordi- • Termite or moth damage.

narily unanticipated and unintended.

Condemnations. For information on condem- • The damage or destruction of trees,

nations of property, see • An unusual event is one that is not a shrubs, or other plants by a fungus, dis- Involuntary Conversions day-to-day occurrence and that is not typi- ease, insects, worms, or similar pests. in chapter 1 of Publication 544. cal of the activity in which you were en- However, a sudden destruction due to an

gaged. Workbooks for casualties and thefts. Publi- unexpected or unusual infestation of beetcation 584 is available to help you make a list of les or other insects may result in a casuyour stolen or damaged personal-use property Deductible losses. Deductible casualty alty loss.

and figure your loss. It includes schedules to losses can result from a number of different

help you figure the loss on your home and its causes, including the following.

contents, and your motor vehicles. • Car accidents (but see Nondeductible Publication 584B is available to help you losses, next, for exceptions). Theft make a list of your stolen or damaged business

or income-producing property and figure your • Earthquakes. A theft is the taking and removing of money or loss. • Fires (but see Nondeductible losses, next, property with the intent to deprive the owner of it. for exceptions). The taking of property must be illegal under the Comments and suggestions. We welcome • Floods. law of the state where it occurred and it must your comments about this publication and your have been done with criminal intent. suggestions for future editions. • Government-ordered demolition or relocaYou can e-mail us at Theft includes the taking of money or prop- *taxforms@irs.gov. tion of a home that is unsafe to use bePlease put “Publications Comment” on the sub- erty by the following means. cause of a disaster as discussed under

ject line. Disaster Area Losses, later. • Blackmail.

You can write to us at the following address: • Mine cave-ins. • Burglary.

Internal Revenue Service • Shipwrecks. • Embezzlement.

Individual Forms and Publications Branch • Sonic booms. • Extortion. SE:W:CAR:MP:T:I

1111 Constitution Ave. NW • Storms, including hurricanes and torna- • Kidnapping for ransom. Washington, DC 20224 does. • Larceny. • Terrorist attacks. • Robbery. We respond to many letters by telephone. • Vandalism.

Therefore, it would be helpful if you would in- The taking of money or property through fraud or • Volcanic eruptions. clude your daytime phone number, including the misrepresentation is theft if it is illegal under

area code, in your correspondence. state or local law.

Nondeductible losses. A casualty loss is not

Useful Items deductible if the damage or destruction is Mislaid or lost property. The simple disapYou may want to see: caused by the following. pearance of money or property is not a theft.

However, an accidental loss or disappearance • Accidentally breaking articles such as Publication of property can qualify as a casualty if it results glassware or china under normal condi- from an identifiable event that is sudden, unex- ❏ 523 Selling Your Home tions.

pected, or unusual. Sudden, unexpected, and

❏ 525 Taxable and Nontaxable Income • A family pet. unusual events were defined earlier.

❏ 550 Investment Income and Expenses • A fire if you willfully set it, or pay someone Example. A car door is accidentally else to set it. ❏ 551 Basis of Assets slammed on your hand, breaking the setting of • A car accident if your willful negligence or ❏ your diamond ring. The diamond falls from the 584 Casualty, Disaster, and Theft Loss willful act caused it. The same is true if the Workbook (Personal-Use Property) ring and is never found. The loss of the diamond willful act or willful negligence of someone is a casualty. ❏ 584B Business Casualty, Disaster, and acting for you caused the accident.

Theft Loss Workbook • Progressive deterioration (explained next).

Form (and Instructions) Progressive deterioration. Loss of prop- Loss on Deposits ❏ Schedule A (Form 1040) Itemized erty due to progressive deterioration is not deDeductions ductible as a casualty loss. This is because the A loss on deposits can occur when a bank, credit

damage results from a steadily operating cause union, or other financial institution becomes in- ❏ Schedule D (Form 1040) Capital Gains or a normal process, rather than from a sudden solvent or bankrupt. If you incurred this type of and Losses event. The following are examples of damage loss, you can choose one of the following ways ❏ 4684 Casualties and Thefts due to progressive deterioration. to deduct the loss.

❏ 4797 Sales of Business Property • The steady weakening of a building due to • As a casualty loss. normal wind and weather conditions. See How To Get Tax Help near the end of • As an ordinary loss. this publication for information about getting • The deterioration and damage to a water

publications and forms. heater that bursts. However, the rust and • As a nonbusiness bad debt.

Page 2
Table 1. Reporting Loss on Deposits Business or income-producing property.

If you have business or income-producing propIF you choose to report the loss as a(n)... THEN report it on... erty, such as rental property, and it is stolen or

completely destroyed, the decrease in FMV is casualty loss Form 4684 and Schedule A not considered. Your loss is figured as follows: (Form 1040).

ordinary loss Schedule A (Form 1040). Your adjusted basis in the property

MINUS nonbusiness bad debt Schedule D (Form 1040).

Any salvage value

MINUS The loss you can deduct as an ordinary loss is • That the loss was a direct result of the

limited to $20,000 ($10,000 if you are married casualty. Any insurance or other reimbursement you

filing separately) reduced by any expected state receive or expect to receive • That you were the owner of the property, insurance proceeds. You cannot claim an ordi- or if you leased the property from some- Loss of inventory. There are two ways you nary loss if any part of the deposit is federally one else, that you were contractually liable can deduct a casualty or theft loss of inventory, insured.

to the owner for the damage. including items you hold for sale to customers.

Casualty loss or ordinary loss. You can One way is to deduct the loss through the • Whether a claim for reimbursement exists

choose to deduct a loss on deposits as a casu- increase in the cost of goods sold by properly for which there is a reasonable expecta- alty loss or as an ordinary loss for any year in reporting your opening and closing inventories. tion of recovery. which you can reasonably estimate how much of Do not claim this loss again as a casualty or theft

your deposits you have lost in an insolvent or loss. If you take the loss through the increase in

bankrupt financial institution. The choice gener- Theft loss proof. For a theft loss, you should the cost of goods sold, include any insurance or

ally is made on the return you file for that year be able to show all the following. other reimbursement you receive for the loss in

and applies to all your losses on deposits for the gross income. • When you discovered that your property year in that particular financial institution. If you The other way is to deduct the loss sepa- was missing. treat the loss as a casualty or ordinary loss, you rately. If you deduct it separately, eliminate the

cannot treat the same amount of the loss as a • That your property was stolen. affected inventory items from the cost of goods

nonbusiness bad debt when it actually becomes sold by making a downward adjustment to open- • That you were the owner of the property. worthless. However, you can take a nonbusi- ing inventory or purchases. Reduce the loss by

ness bad debt deduction for any amount of loss • Whether a claim for reimbursement exists the reimbursement you received. Do not include

that is more than the estimated amount you for which there is a reasonable expecta- the reimbursement in gross income. If you do

deducted as a casualty or ordinary loss. Once tion of recovery. not receive the reimbursement by the end of the

you make the choice, you cannot change it with- year, you may not claim a loss to the extent you

out permission from the Internal Revenue Serv- have a reasonable prospect of recovery. It is important that you have records ice. that will prove your deduction. If you do Leased property. If you are liable for casuNonbusiness bad debt. If you do not choose not have the actual records to support alty damage to property you lease, your loss is RECORDS

to deduct the loss as a casualty loss or as an your deduction, you can use other satisfactory the amount you must pay to repair the property

ordinary loss, you must wait until the year the evidence to support your deduction. minus any insurance or other reimbursement

actual loss is determined and deduct the loss as you receive or expect to receive.

a nonbusiness bad debt in that year. Separate computations. Generally, if a sinHow to report. The kind of deduction you Figuring a Loss gle casualty or theft involves more than one item

choose for your loss on deposits determines of property, you must figure the loss on each

how you report your loss. See Table 1. item separately. Then combine the losses to To determine your deduction for a casualty or determine the total loss from that casualty or theft loss, you must first figure your loss. More information. For more information, see theft.

Special Treatment for Losses on Deposits in Amount of loss. Figure the amount of your Exception for personal-use real property. Insolvent or Bankrupt Financial Institutions in

In figuring a casualty loss on personal-use real loss using the following steps. the instructions for Form 4684.

property, the entire property (including any imDeducted loss recovered. If you recover an 1) Determine your adjusted basis in the provements, such as buildings, trees, and

amount you deducted as a loss in an earlier property before the casualty or theft. shrubs) is treated as one item. Figure the loss

year, you may have to include the amount recov- using the smaller of the following. 2) Determine the decrease in fair market ered in your income for the year of recovery. If value (FMV) of the property as a result of • The decrease in FMV of the entire prop- any part of the original deduction did not reduce the casualty or theft. erty. your tax in the earlier year, you do not have to

include that part of the recovery in your income. 3) From the smaller of the amounts you de- • The adjusted basis of the entire property.

For more information, see Recoveries in Publi- termined in (1) and (2), subtract any insurcation 525. ance or other reimbursement you See Real property under Figuring the Deducreceived or expect to receive. tion, later.

For personal-use property and property used in

performing services as an employee, apply the Decrease in Proof of Loss deduction limits, discussed later, to determine Fair Market Value

the amount of your deductible loss. To deduct a casualty or theft loss, you must be Fair market value (FMV) is the price for which

able to show that there was a casualty or theft. Gain from reimbursement. If your reim- you could sell your property to a willing buyer

You also must be able to support the amount bursement is more than your adjusted basis in when neither of you has to sell or buy and both of

you take as a deduction. the property, you have a gain. This is true even if you know all the relevant facts.

the decrease in the FMV of the property is The decrease in FMV used to figure the Casualty loss proof. For a casualty loss, you smaller than your adjusted basis. If you have a amount of a casualty or theft loss is the differ- should be able to show all the following. gain, you may have to pay tax on it, or you may ence between the property’s fair market value

• The type of casualty (car accident, fire, immediately before and immediately after the be able to postpone reporting the gain. See

storm, etc.) and when it occurred. casualty or theft. Figuring a Gain, later.

Page 3
FMV of stolen property. The FMV of property cleaning up or of making repairs after a casualty Replacement cost. The cost of replacing stoimmediately after a theft is considered to be zero as a measure of the decrease in FMV if you len or destroyed property is not part of a casualty

since you no longer have the property. meet all the following conditions. or theft loss.

Example. Several years ago, you pur- • The repairs are actually made. Example. You bought a new chair 4 years

chased silver dollars at face value for $150. This • The repairs are necessary to bring the ago for $300. In April, a fire destroyed the chair.

is your adjusted basis in the property. Your silver property back to its condition before the You estimate that it would cost $500 to replace

dollars were stolen this year. The FMV of the casualty. it. If you had sold the chair before the fire, you coins was $1,000 just before they were stolen, estimate that you could have received only $100 • The amount spent for repairs is not exces- and insurance did not cover them. Your theft for it because it was 4 years old. The chair was sive. loss is $150. not insured. Your loss is $100, the FMV of the

Recovered stolen property. Recovered sto- • The repairs take care of the damage only. chair before the fire. It is not $500, the replacement cost. len property is your property that was stolen and • The value of the property after the repairs

later returned to you. If you recovered property is not, due to the repairs, more than the

after you had already taken a theft loss deduc- Sentimental value. Do not consider senti- value of the property before the casualty.

tion, you must refigure your loss using the mental value when determining your loss. If a

smaller of the property’s adjusted basis (ex- Landscaping. The cost of restoring land- family portrait, heirloom, or keepsake is damplained later) or the decrease in FMV from the scaping to its original condition after a casualty aged, destroyed, or stolen, you must base your

time just before it was stolen until the time it was may indicate the decrease in FMV. You may be loss only on its FMV.

recovered. Use this amount to refigure your total able to measure your loss by what you spend on

loss for the year in which the loss was deducted. the following. Decline in market value of property in or near

If your refigured loss is less than the loss you casualty area. A decrease in the value of your

deducted, you generally have to report the dif- • Removing destroyed or damaged trees property because it is in or near an area that and shrubs, minus any salvage you re- ference as income in the recovery year. But suffered a casualty, or that might again suffer a ceive. report the difference only up to the amount of the casualty, is not to be taken into consideration. loss that reduced your tax. For more information • Pruning and other measures taken to pre- You have a loss only for actual casualty damage on the amount to report, see Recoveries in Pub- serve damaged trees and shrubs. to your property. However, if your home is in a lication 525. federally declared disaster area, see Disaster • Replanting necessary to restore the prop- Area Losses, later. erty to its approximate value before the

Figuring Decrease in FMV — Items casualty. Costs of photographs and appraisals. Pho- To Consider tographs taken after a casualty will be helpful in Car value. Books issued by various automo- To figure the decrease in FMV because of a establishing the condition and value of the prop- bile organizations that list your car may be useful casualty or theft, you generally need a compe- erty after it was damaged. Photographs showing in figuring the value of your car. You can use the tent appraisal. However, other measures also the condition of the property after it was re- books’ retail values and modify them by factors can be used to establish certain decreases. See paired, restored, or replaced may also be help- such as the mileage and condition of your car to Appraisal and Cost of cleaning up or making ful. figure its value. The prices are not official, but repairs, next. Appraisals are used to figure the decrease in they may be useful in determining value and FMV because of a casualty or theft. See Ap- Appraisal. An appraisal to determine the dif- suggesting relative prices for comparison with

current sales and offerings in your area. If your praisal, earlier, under Figuring Decrease in FMV ference between the FMV of the property immecar is not listed in the books, determine its value — Items to Consider, for information about ap- diately before a casualty or theft and

praisals. immediately afterwards should be made by a from other sources. A dealer’s offer for your car

competent appraiser. The appraiser must rec- as a trade-in on a new car is not usually a The costs of photographs and appraisals

ognize the effects of any general market decline measure of its true value. used as evidence of the value and condition of

that may occur along with the casualty. This property damaged as a result of a casualty are

information is needed to limit any deduction to not a part of the loss. They are expenses in

the actual loss resulting from damage to the Figuring Decrease in FMV — Items determining your tax liability. You can claim

property. Not To Consider these costs as a miscellaneous itemized deducSeveral factors are important in evaluating tion subject to the 2%-of-adjusted-gross-income You generally should not consider the following the accuracy of an appraisal, including the fol- limit on Schedule A (Form 1040). items when attempting to establish the decrease lowing. in FMV of your property. • The appraiser’s familiarity with your prop- Adjusted Basis

erty before and after the casualty or theft. Cost of protection. The cost of protecting The measure of your investment in the property • The appraiser’s knowledge of sales of your property against a casualty or theft is not you own is its basis. For property you buy, your comparable property in the area. part of a casualty or theft loss. The amount you basis is usually its cost to you. For property you spend on insurance or to board up your house • The appraiser’s knowledge of conditions in acquire in some other way, such as inheriting it, against a storm is not part of your loss. If the the area of the casualty. receiving it as a gift, or getting it in a nontaxable property is business property, these expenses exchange, you must figure your basis in another • The appraiser’s method of appraisal. are deductible as business expenses.

way, as explained in Publication 551. If you make permanent improvements to

your property to protect it against a casualty or You may be able to use an appraisal Adjustments to basis. While you own the theft, add the cost of these improvements to that you used to get a federal loan (or a property, various events may take place that your basis in the property. An example would be federal loan guarantee) as the result of

TIP

change your basis. Some events, such as addi- the cost of a dike to prevent flooding. a Presidentially declared disaster to establish tions or permanent improvements to the prop- the amount of your disaster loss. For more infor- Related expenses. The incidental expenses erty, increase basis. Others, such as earlier mation on disasters, see Disaster Area Losses, due to a casualty or theft, such as expenses for casualty losses and depreciation deductions, later. the treatment of personal injuries, for temporary decrease basis. When you add the increases to

Cost of cleaning up or making repairs. The housing, or for a rental car, are not part of your the basis and subtract the decreases from the

cost of repairing damaged property is not part of casualty or theft loss. However, they may be basis, the result is your adjusted basis. See

a casualty loss. Neither is the cost of cleaning up deductible as business expenses if the dam- Publication 551 for more information on figuring

after a casualty. But you can use the cost of the basis of your property. aged or stolen property is business property.

Page 4
Example. Your home was damaged by a or, if later, for the year you receive the taxable Insurance and

hurricane. Relatives and neighbors made cash part of the insurance payment. Other Reimbursements gifts to you that were excludable from your income. You used part of the cash gifts to pay for Example. Your main home was destroyed If you receive an insurance or other type of repairs to your home. There were no limits or by a tornado in August 2001. You regained use reimbursement, you must subtract the reim- restrictions on how you could use the cash gifts. of your home in November 2002. The insurance bursement when you figure your loss. You do It was an excludable gift, so the money you payments you received in 2001 and 2002 were not have a casualty or theft loss to the extent you received and used to pay for repairs to your $1,500 more than the temporary increase in are reimbursed.

home does not reduce your casualty loss on the your living expenses during those years. You If you expect to be reimbursed for part or all damaged home. include this amount in income on your 2002 of your loss, you must subtract the expected Form 1040. If, in 2003, you receive further pay- reimbursement when you figure your loss. You Insurance payments for living expenses. ments to cover the living expenses you had in must reduce your loss even if you do not receive You do not reduce your casualty loss by insur- 2001 and 2002, you must include those pay- payment until a later tax year. See Reimburse- ance payments you receive to cover living ex- ments in income on your 2003 Form 1040. ment Received After Deducting Loss, later. penses in either of the following situations. Disaster relief. Food, medical supplies, and

Failure to file a claim for reimbursement. If • You lose the use of your main home be- other forms of assistance you receive do not

your property is covered by insurance, you must cause of a casualty. reduce your casualty loss, unless they are

file a timely insurance claim for reimbursement replacements for lost or destroyed property. • Government authorities do not allow you of your loss. Otherwise, you cannot deduct this access to your main home because of a Qualified disaster relief payments you loss as a casualty or theft. receive for expenses you incurred as a casualty or threat of one. The portion of the loss usually not covered by result of a Presidentially declared disTIP

insurance (for example, a deductible) is not sub- Inclusion in income. If these insurance aster, are not taxable income to you. For more

ject to this rule. information, see Qualified disaster relief pay- payments are more than the temporary increase

ments under Disaster Area Losses, later. in your living expenses, you must include the Example. You have a car insurance policy Disaster unemployment assistance pay- excess in your income. Report this amount on with a $500 deductible. Because your insurance ments are unemployment benefits that are tax- line 21 of Form 1040. did not cover the first $500 of an auto collision, able. A temporary increase in your living expenses the $500 would be deductible (subject to the Generally, disaster relief grants received is the difference between the actual living ex- $100 and 10% rules, discussed later). This is under the Disaster Relief and Emergency Assis- penses you and your family incurred during the true, even if you do not file an insurance claim, tance Act are not included in your income. See period you could not use your home and your because your insurance policy would never Disaster relief grants, later, under Disaster Area normal living expenses for that period. Actual have reimbursed you for the deductible. Losses. living expenses are the reasonable and necessary expenses incurred because of the loss of

your main home. Generally, these expenses in- Types of Reimbursements Reimbursement Received After clude the amounts you pay for the following. Deducting Loss The most common type of reimbursement is an • Renting suitable housing. insurance payment for your stolen or damaged If you figured your casualty or theft loss using property. Other types of reimbursements are • Transportation. the amount of your expected reimbursement,

discussed next. Also see the Instructions for you may have to adjust your tax return for the tax • Food. Form 4684. year in which you get your actual reimburse- • Utilities. ment. This section explains the adjustment you

Employer’s emergency disaster fund. If you may have to make. • Miscellaneous services. receive money from your employer’s emergency

Normal living expenses consist of these same Actual reimbursement less than expected. disaster fund and you must use that money to

expenses that you would have incurred but did If you later receive less reimbursement than you rehabilitate or replace property on which you are

not because of the casualty or the threat of one. expected, include that difference as a loss with claiming a casualty loss deduction, you must your other losses (if any) on your return for the take that money into consideration in computing Example. As a result of a fire, you vacated year in which you can reasonably expect no the casualty loss deduction. Take into consider- your apartment for a month and moved to a more reimbursement. ation only the amount you used to replace your motel. You normally pay $525 a month for rent. destroyed or damaged property. None was charged for the month the apartment Example. Your personal car had a FMV of

was vacated. Your motel rent for this month was $2,000 when it was destroyed in a collision with Example. Your home was extensively dam- $1,200. You normally pay $200 a month for another car in 2002. The accident was due to the aged by a tornado. Your loss after reimburse- negligence of the other driver. At the end of ment from your insurance company was food. Your food expenses for the month you

lived in the motel were $400. You received 2002, there was a reasonable prospect that the $10,000. Your employer set up a disaster relief $1,100 from your insurance company to cover owner of the other car would reimburse you in fund for its employees. Employees receiving your living expenses. You determine the pay- full. You did not have a deductible loss in 2002. money from the fund had to use it to rehabilitate ment you must include in income as follows. In January 2003, the court awards you a or replace their damaged or destroyed property. judgment of $2,000. However, in July it be- You received $4,000 from the fund and spent 1) Insurance payment for living comes apparent that you will be unable to collect the entire amount on repairs to your home. In expenses .................. $1,100 any amount from the other driver. Since this is figuring your casualty loss, you must reduce 2) Actual expenses during the your only casualty or theft loss, you can deduct your unreimbursed loss ($10,000) by the $4,000 month you are unable to use the loss in 2003 that is figured by applying the you received from your employer’s fund. Your your home because of the fire $1,600 deduction limits (discussed later). casualty loss before applying the deduction lim- 3) Normal living expenses . . . . 725 its (discussed later) is $6,000. 4) Temporary increase in Actual reimbursement more than expected.

living expenses: Subtract line 3 If you later receive more reimbursement than

Cash gifts. If you receive excludable cash from line 2 . . . . . . . . . . . . . . . . . . 875 you expected, after you have claimed a deducgifts as a disaster victim and there are no limits 5) Amount of payment includible in tion for the loss, you may have to include the

on how you can use the money, you do not income: Subtract line 4 from line 1 . . $ 225 extra reimbursement in your income for the year

reduce your casualty loss by these excludable you receive it. However, if any part of the original

cash gifts. This applies even if you use the Tax year of inclusion. You include the tax- deduction did not reduce your tax for the earlier

money to pay for repairs to property damaged in able part of the insurance payment in income for year, do not include that part of the reimbursethe disaster. the year you regain the use of your main home ment in your income. You do not refigure your

Page 5
Table 2. Deduction Limit Rules for Personal-Use and Employee Property

$100 Rule 10% Rule 2% Rule

General Application You must reduce each casualty or You must reduce your total You must reduce your total

theft loss by $100 when figuring casualty or theft loss by 10% of casualty or theft loss by 2% of

your deduction. Apply this rule to your adjusted gross income. your adjusted gross income.

personal-use property after you Apply this rule to personal-use Apply this rule to property you

have figured the amount of your property after you reduce each used in performing services as an

loss. loss by $100 (the $100 rule). employee after you have figured

the amount of your loss and

added it to your job expenses

and most other miscellaneous

itemized deductions.

Single Event Apply this rule only once, even if Apply this rule only once, even if Apply this rule only once, even if

many pieces of property are many pieces of property are many pieces of property are

affected. affected. affected.

More Than One Event Apply to the loss from each event. Apply to the total of all your Apply to the total of all your

losses from all events. losses from all events.

More Than One Person— Apply separately to each person. Apply separately to each person. Apply separately to each person.

With Loss From the

 Same Event

 (other than a married couple

 filing jointly)

Married Couple— Filing

 With Loss From the Joint Apply as if you were one person. Apply as if you were one person. Apply as if you were one person.

 Same Event Return

Filing

Separate Apply separately to each spouse. Apply separately to each spouse. Apply separately to each spouse.

Return

More Than One Owner Apply separately to each owner of Apply separately to each owner Apply separately to each owner

(other than a married jointly owned property. of jointly owned property. of jointly owned property.

couple filing jointly)

tax for the year you claimed the deduction. See collision insurance. Your insurance company 2% Rule

Recoveries in Publication 525 to find out how agreed to reimburse you for the rest of the dammuch extra reimbursement to include in income. age. Because you expected a reimbursement The casualty and theft loss deduction for emfrom the insurance company, you did not have a ployee property, when added to your job exExample. In 2002, a hurricane destroyed casualty loss deduction in 2003. penses and most other miscellaneous itemized

your motorboat. Your loss was $3,000, and you deductions on Schedule A (Form 1040), must be Due to the $100 rule, you cannot deduct the estimated that your insurance would cover reduced by 2% of your adjusted gross income. $100 you paid as the deductible. When you $2,500 of it. You did not itemize deductions on Employee property is property used in perform- receive the $850 from the insurance company in your 2002 return, so you could not deduct the ing services as an employee. 2004, do not report it as income. loss. When the insurance company reimburses

you for the loss, you do not report any of the $100 Rule reimbursement as income. This is true even if it

is for the full $3,000 because you did not deduct After you have figured your casualty or theft loss

the loss on your 2002 return. The loss did not Deduction Limits on personal-use property, as discussed earlier,

reduce your tax. you must reduce that loss by $100. This reducAfter you have figured your casualty or theft tion applies to each total casualty or theft loss. It If the total of all the reimbursements loss, you must figure how much of the loss you does not matter how many pieces of property you receive is more than your adjusted can deduct. are involved in an event. Only a single $100 basis in the destroyed or stolen prop- CAUTION

!

reduction applies. erty, you will have a gain on the casualty or The deduction for casualty and theft losses

theft. If you have already taken a deduction for a of employee property and personal-use property Example. You have $250 deductible colli- loss and you receive the reimbursement in a is limited. A loss on employee property is subject sion insurance on your car. The car is damaged later year, you may have to include the gain in to the 2% rule, discussed next. A loss on prop- in a collision. The insurance company pays you your income for the later year. Include the gain erty you own for your personal use is subject to for the damage minus the $250 deductible. The as ordinary income up to the amount of your the $100 and 10% rules, discussed later. The amount of the casualty loss is based solely on deduction that reduced your tax for the earlier 2%, $100, and 10% rules are also summarized the deductible. The casualty loss is $150 ($250 year. You may be able to postpone reporting any in Table 2. − $100) because the first $100 of a casualty loss remaining gain as explained under Postpone- Losses on business property (other than em- on personal-use property is not deductible. ment of Gain, later.

ployee property) and income-producing prop- Single event. Generally, events closely re- erty are not subject to these rules. However, if Actual reimbursement same as expected. If lated in origin cause a single casualty. It is a your casualty or theft loss involved a home you you receive exactly the reimbursement you ex- single casualty when the damage is from two or

pected to receive, you do not have any amount used for business or rented out, your deductible more closely related causes, such as wind and loss may be limited. See the instructions for to include in your income or any loss to deduct. flood damage caused by the same storm. A

Section B of Form 4684. If the casualty or theft single casualty may also damage two or more

Example. In December 2003, you had a col- loss involved property used in a passive activity, pieces of property, such as a hailstorm that

lision while driving your personal car. Repairs to see Form 8582, Passive Activity Loss Limita- damages both your home and your car parked in

the car cost $950. You had $100 deductible tions, and its instructions. your driveway.

Page 6
Example 1. A thunderstorm destroyed your your deduction on the entire loss on a separate More than one owner. If two or more individupleasure boat. You also lost some boating return. Each of you must reduce the loss by als (other than husband and wife filing a joint

equipment in the storm. Your loss was $5,000 $100. return) have a loss on property that is owned

on the boat and $1,200 on the equipment. Your jointly, the 10% rule applies separately to each.

insurance company reimbursed you $4,500 for More than one owner. If two or more individuthe damage to your boat. You had no insurance als (other than a husband and wife filing a joint Gains and losses. If you have casualty or coverage on the equipment. Your casualty loss return) have a loss on property jointly owned, the theft gains as well as losses to personal-use is from a single event and the $100 rule applies $100 rule applies separately to each. For exam- property, you must compare your total gains to once. Figure your loss before applying the 10% ple, if two sisters live together in a home they your total losses. Do this after you have reduced rule (discussed later) as follows. own jointly and they have a casualty loss on the each loss by any reimbursements and by $100 home, the $100 rule applies separately to each but before you have reduced the losses by 10% Boat Equipment sister. of your adjusted gross income.

1. Loss ............ $5,000 $1,200 Casualty or theft gains do not include 2. Subtract insurance . . 4,500 –0– 10% Rule gains you choose to postpone. See 3. Loss after

Postponement of Gain, later. reimbursement . . . . . $ 500 $1,200 CAUTION

!

You must reduce the total of all your casualty or

theft losses on personal-use property by 10% of 4. Total loss .............. $1,700 Losses more than gains. If your losses are your adjusted gross income. Apply this rule after 5. Subtract $100 . . . . . . . . . . . 100 more than your recognized gains, subtract your you reduce each loss by $100. If you have both 6. Loss before 10% rule ..... $1,600 gains from your losses and reduce the result by gains and losses from casualties or thefts, see 10% of your adjusted gross income. The rest, if Gains and losses, later in this discussion.

Example 2. Thieves broke into your home in any, is your deductible loss from personal-use

January and stole a ring and a fur coat. You had property. Example. In June, you discovered that your a loss of $200 on the ring and $700 on the coat. house had been burglarized. Your loss after This is a single theft. The $100 rule applies to Example. Your theft loss after reducing it by insurance reimbursement was $2,000. Your ad- the total $900 loss. reimbursements and by $100 is $2,700. Your justed gross income for the year you discovered casualty gain is $700. Your loss is more than the theft is $29,500. Figure your theft loss as Example 3. In September, hurricane winds your gain, so you must reduce your $2,000 net follows.

blew the roof off your home. Flood waters loss ($2,700 − $700) by 10% of your adjusted

caused by the hurricane further damaged your 1. Loss after insurance gross income. ......... $2,000

home and destroyed your furniture and personal 2. Subtract $100 . . . . . . . . . . . . . 100 Gains more than losses. If your recog- car. This is considered a single casualty. The 3. Loss after $100 rule ......... $1,900 nized gains are more than your losses, subtract $100 rule is applied to your total loss from the 4. Subtract 10% of $29,500 AGI . . . $2,950 your losses from your gains. The difference is flood waters and the wind. 5. Theft loss deduction ........ $ -0- treated as a capital gain and must be reported

More than one loss. If you have more than You do not have a theft loss deduction be- on Schedule D (Form 1040). The 10% rule does

one casualty or theft loss during your tax year, cause your loss ($1,900) is less than 10% of not apply to your gains.

you must reduce each loss by $100. your adjusted gross income ($2,950).

Example. Your theft loss is $600 after reExample. Your family car was damaged in More than one loss. ducing it by reimbursements and by $100. Your If you have more than

an accident in January. Your loss after the insur- one casualty or theft loss during your tax year, casualty gain is $1,600. Because your gain is

ance reimbursement was $75. In February, your reduce each loss by any reimbursement and by more than your loss, you must report the $1,000

car was damaged in another accident. This time $100. Then you must reduce the total of all your net gain ($1,600 − $600) on Schedule D.

your loss after the insurance reimbursement losses by 10% of your adjusted gross income. More information. For information on how was $90. Apply the $100 rule to each separate to figure recognized gains, see Figuring a Gain, casualty loss. Since neither accident resulted in Example. In March, you had a car accident later. a loss of over $100, you are not entitled to any that totally destroyed your car. You did not have

deduction for these accidents. collision insurance on your car, so you did not

receive any insurance reimbursement. Your Figuring the Deduction

More than one person. If two or more individ- loss on the car was $1,200. In November, a fire Generally, you must figure your loss separately uals (other than a husband and wife filing a joint damaged your basement and totally destroyed for each item stolen, damaged, or destroyed. return) have losses from the same casualty or the furniture, washer, dryer, and other items you

theft, the $100 rule applies separately to each However, a special rule applies to real property had stored there. Your loss on the basement

you own for personal use. individual. items after reimbursement was $1,700. Your

adjusted gross income for the year that the acciExample. A fire damaged your house and dent and fire occurred is $25,000. You figure Real property. In figuring a loss to real estate

also damaged the personal property of your your casualty loss deduction as follows. you own for personal use, all improvements

house guest. You must reduce your loss by (such as buildings and ornamental trees and the

$100. Your house guest must reduce his or her Car Basement land containing the improvements) are considloss by $100. ered together. 1. Loss ............ $1,200 $1,700

Married taxpayers. If you and your spouse 2. Subtract $100 per Example 1. In June, a fire destroyed your file a joint return, you are treated as one individ- incident . . . . . . . . . 100 100

lakeside cottage, which cost $144,800 (includ- ual in applying the $100 rule. It does not matter 3. Loss after $100 rule $1,100 $1,600 ing $14,500 for the land) several years ago. whether you own the property jointly or sepa- 4. Total loss ............... $2,700 (Your land was not damaged.) This was your rately. 5. Subtract 10% of $25,000 AGI . . 2,500 only casualty or theft loss for the year. The FMV If you and your spouse have a casualty or 6. Casualty loss deduction .... $ 200 of the property immediately before the fire was theft loss and you file separate returns, each of $180,000 ($145,000 for the cottage and $35,000 you must reduce your loss by $100. This is true

even if you own the property jointly. If one Married taxpayers. If you and your spouse for the land). The FMV immediately after the fire

spouse owns the property, only that spouse can file a joint return, you are treated as one individ- was $35,000 (value of the land). You collected

ual in applying the 10% rule. It does not matter if $130,000 from the insurance company. Your figure a loss deduction on a separate return.

If the casualty or theft loss is on property you you own the property jointly or separately. adjusted gross income for the year the fire ocown as tenants by the entirety, each of you can If you file separate returns, the 10% rule curred is $80,000. Your deduction for the casufigure your deduction on only one-half of the loss applies to each return on which a loss is alty loss is $6,700, figured in the following

on separate returns. Neither of you can figure claimed. manner.

Page 7
1. Adjusted basis of the entire 6. Subtract insurance ........ 50,000 5. Loss (smaller of line 1 or line 4) $16,800 property (cost in this example) $144,800 7. Loss on real property after 6. Subtract insurance . . . . . . . . –0– 2. FMV of entire property reimbursement ........... $20,000 7. Loss after reimbursement .... $16,800 before fire .............. $180,000 8. Subtract $100 . . . . . . . . . . . . 100 8. Loss on furnishings ........ $600 3. FMV of entire property after fire 35,000 9. Loss after $100 rule ........ $16,700 9. Subtract insurance . . . . . . . . -0- 4. Decrease in FMV of entire 10. Subtract 10% of $70,000 AGI 7,000 10. Loss on furnishings after property (line 2 − line 3) ..... $145,000 11. Casualty loss deduction ... $ 9,700 reimbursement ........... $600

5. Loss (smaller of line 1 or line 4) $144,800 11. Total loss (line 7 plus line 10) $20,600 6. Subtract insurance ........ 130,000 Example 2. In June, you were involved in an 12. Subtract $100 . . . . . . . . . . . . 100 7. Loss after reimbursement .... $14,800 auto accident that totally destroyed your per- 13. Loss after $100 rule ........ $20,500 8. Subtract $100 . . . . . . . . . . . . 100 sonal car and your antique pocket watch. You 14. Subtract 10% of $65,000 AGI 6,500 9. Loss after $100 rule ........ $14,700 had bought the car for $30,000. The FMV of the 15. Casualty loss deduction ... $ 14,000 10. Subtract 10% of $80,000 AGI 8,000 car just before the accident was $17,500. Its 11. Casualty loss deduction ... $ 6,700 FMV just after the accident was $180 (scrap

value). Your insurance company reimbursed Property used partly for business and partly Example 2. You bought your home a few you $16,000. for personal purposes. When property is years ago. You paid $150,000 ($10,000 for the Your watch was not insured. You had pur- used partly for personal purposes and partly for land and $140,000 for the house). You also chased it for $250. Its FMV just before the acci- business or income-producing purposes, the spent an additional $2,000 for landscaping. This dent was $500. Your adjusted gross income for casualty or theft loss deduction must be figured year a fire destroyed your home. The fire also the year the accident occurred is $97,000. Your separately for the personal-use portion and for damaged the shrubbery and trees in your yard. casualty loss deduction is zero, figured as fol- the business or income-producing portion. You The fire was your only casualty or theft loss this lows. must figure each loss separately because the year. Competent appraisers valued the property Car Watch losses attributed to these two uses are figured in as a whole at $175,000 before the fire, but only 1. Adjusted basis (cost) . . . $30,000 $250 two different ways. When figuring each loss, $50,000 after the fire. Shortly after the fire, the allocate the total cost or basis, the FMV before insurance company paid you $95,000 for the 2. FMV before accident . . . $17,500 $500 and after the casualty or theft loss, and the loss. Your adjusted gross income for this year is 3. FMV after accident . . . . 180 -0- insurance or other reimbursement between the $70,000. You figure your casualty loss deduc- 4. Decrease in FMV (line 2 − business and personal use of the property. The tion as follows. line 3) ............. $17,320 $500 $100 rule and the 10% rule apply only to the

1. Adjusted basis of the entire 5. Loss (smaller of line 1 or casualty or theft loss on the personal-use porproperty (cost of land, building, line 4) ............. $17,320 $250 tion of the property. and landscaping) ......... $152,000 6. Subtract insurance .... 16,000 -0-

2. FMV of entire property 7. Loss after reimbursement $1,320 $250 Example. You own a building that you con- before fire .............. $175,000 8. Total loss ................. $1,570 structed on leased land. You use half of the

3. FMV of entire property after fire 50,000 9. Subtract $100 . . . . . . . . . . . . . . 100 building for your business and you live in the 4. Decrease in FMV of entire 10. Loss after $100 rule .......... $1,470 other half. The cost of the building was property (line 2 − line 3) $125,000 11. Subtract 10% of $97,000 AGI . . . 9,700 $400,000. You made no further improvements

5. Loss (smaller of line 1 or line 4) $125,000 or additions to it. 12. Casualty loss deduction ...... $ -0-

6. Subtract insurance ........ 95,000 A flood in March damaged the entire build- 7. Loss after reimbursement .... $30,000

8. Subtract $100 ing. The FMV of the building was $380,000 im- . . . . . . . . . . . . 100 Both real and personal properties. When a

9. Loss after $100 rule ........ $29,900 mediately before the flood and $320,000 casualty involves both real and personal proper- 10. Subtract 10% of $70,000 AGI 7,000 afterwards. Your insurance company reim- ties, you must figure the loss separately for each 11. Casualty loss deduction ... $ 22,900 bursed you $40,000 for the flood damage. De- type of property. However, you apply a single preciation on the business part of the building $100 reduction to the total loss. Then, you apply before the flood totaled $24,000. Your adjusted the 10% rule to figure the casualty loss deduc- Personal property. Personal property is gen- gross income for the year the flood occurred is tion.

erally any property that is not real property. If $125,000.

your personal property is stolen or is damaged Example. In July, a hurricane damaged You have a deductible business casualty or destroyed by a casualty, you must figure your your home, which cost you $164,000 including loss of $10,000. You do not have a deductible loss separately for each item of property. Then land. The FMV of the property (both building and personal casualty loss because of the 10% rule. combine these separate losses to figure the total land) immediately before the storm was You figure your loss as follows. loss. Reduce the total loss by $100 and 10% of $170,000 and its FMV immediately after the your adjusted gross income to figure the loss storm was $100,000. Your household furnish- Business Personal deduction. ings were also damaged. You separately figured Part Part

the loss on each damaged household item and Example 1. In August, a storm destroyed 1. Cost (total arrived at a total loss of $600. your pleasure boat, which cost $18,500. This $400,000) ...... $200,000 $200,000

was your only casualty or theft loss for the year. You collected $50,000 from the insurance 2. Subtract

depreciation ..... 24,000 -0- Its FMV immediately before the storm was company for the damage to your home, but your 3. Adjusted basis . . . $176,000 $200,000 $17,000. You had no insurance, but were able to household furnishings were not insured. Your 4. FMV before flood salvage the motor of the boat and sell it for $200. adjusted gross income for the year the hurricane (total $380,000) . . $190,000 $190,000 Your adjusted gross income for the year the occurred is $65,000. You figure your casualty 5. FMV after flood casualty occurred is $70,000. loss deduction from the hurricane in the follow- (total $320,000) . . 160,000 160,000 ing manner. Although the motor was sold separately, it is 6. Decrease in FMV

part of the boat and not a separate item of 1. Adjusted basis of real property (line 4 − line 5) . . . $30,000 $30,000

property. You figure your casualty loss deduc- (cost in this example) ....... $164,000 7. Loss (smaller of line

tion as follows. 2. FMV of real property before 3 or line 6) ...... $30,000 $30,000

hurricane ............... $170,000 8. Subtract insurance 20,000 20,000 1. Adjusted basis (cost in this 3. FMV of real property after 9. Loss after example) ............... $18,500 hurricane ............... 100,000 reimbursement . . . $10,000 $10,000

2. FMV before storm ......... $17,000 4. Decrease in FMV of real 10. Subtract $100 on

3. FMV after storm . . . . . . . . . . 200 property (line 2 − line 3) ..... $70,000 personal-use

4. Decrease in FMV 5. Loss on real property (smaller property . . . . . . . -0- 100

(line 2 − line 3) ........... $16,800 of line 1 or line 4) ......... $70,000 11. Loss after $100 rule $10,000 $9,900

Page 8
12. Subtract 10% of Postponement of Gain lowed for replacing the destroyed or stolen prop-

$125,000 AGI on erty.

personal-use Do not report a gain if you receive reimburse- Related persons. Under this rule, related property . . . . . . . -0- 12,500 ment in the form of property similar or related in persons include, for example, a corporation and 13. Deductible service or use to the destroyed or stolen prop- business loss ... $10,000 an individual who owns more than 50% of its erty. Your basis in the new property is generally 14. Deductible outstanding stock and two partnerships in which the same as your adjusted basis in the property personal loss ... $ -0- the same C corporations own more than 50% of it replaces. the capital or profits interests. For more informa- You must ordinarily report the gain on your tion on related persons, see Nondeductible Loss

stolen or destroyed property if you receive under Sales and Exchanges Between Related money or unlike property as reimbursement. Persons in chapter 2 of Publication 544. Figuring a Gain However, you can choose to postpone reporting

the gain if you purchase property that is similar Death of a taxpayer. If a taxpayer dies after If you receive an insurance payment or other or related in service or use to the stolen or having a gain but before buying replacement reimbursement that is more than your adjusted destroyed property within a specified replace- property, the gain must be reported for the year basis in the destroyed, damaged, or stolen prop- ment period, discussed later. You also can in which the decedent realized the gain. The erty, you have a gain from the casualty or theft. choose to postpone reporting the gain if you executor of the estate or the person succeeding Your gain is figured as follows. purchase a controlling interest (at least 80%) in to the funds from the casualty or theft cannot a corporation owning property that is similar or • The amount you receive (discussed next), postpone reporting the gain by buying replace- related in service or use to the property. See minus ment property. Controlling interest in a corporation, later.

• Your adjusted basis in the property at the If you have a gain on damaged property, you

time of the casualty or theft. See Adjusted can postpone reporting the gain if you spend the Replacement Property Basis, earlier, for information on adjusted reimbursement to restore the property.

basis. To postpone reporting all the gain, the cost of You must buy replacement property for the speyour replacement property must be at least as cific purpose of replacing your destroyed or stoEven if the decrease in FMV of your property much as the reimbursement you receive. If the len property. Property you acquire as a gift or

is smaller than the adjusted basis of your prop- cost of the replacement property is less than the inheritance does not qualify.

erty, use your adjusted basis to figure the gain. reimbursement, you must include the gain in You do not have to use the same funds you

your income up to the amount of the unspent receive as reimbursement for your old property Amount you receive. The amount you re- reimbursement. to acquire the replacement property. If you ceive includes any money plus the value of any spend the money you receive from the insur- property you receive minus any expenses you Example. In 1970, you bought an ocean- ance company for other purposes, and borrow have in obtaining reimbursement. It also in- front cottage for your personal use at a cost of money to buy replacement property, you can still cludes any reimbursement used to pay off a $18,000. You made no further improvements or postpone reporting the gain if you meet the other mortgage or other lien on the damaged, de- additions to it. When a storm destroyed the cot- requirements. stroyed, or stolen property. tage this January, the cottage was worth

$250,000. You received $146,000 from the in- Advance payment. If you pay a contractor in Example. A hurricane destroyed your per- surance company in March. You had a gain of advance to replace your destroyed or stolen sonal residence and the insurance company $128,000 ($146,000 − $18,000). property, you are not considered to have bought awarded you $145,000. You received $140,000 You spent $144,000 to rebuild the cottage. replacement property unless it is finished before in cash. The remaining $5,000 was paid directly Since this is less than the insurance proceeds the end of the replacement period. See Re- to the holder of a mortgage on the property. The received, you must include $2,000 ($146,000 − placement Period, later. amount you received includes the $5,000 reim- $144,000) in your income. bursement paid on the mortgage. Similar or related in service or use. Re- Buying replacement property from a related Main home destroyed. If you have a gain placement property must be similar or related in person. You cannot postpone reporting a gain because your main home was destroyed, you service or use to the property it replaces. from a casualty or theft if you buy the replace- generally can exclude the gain from your income ment property from a related person (discussed Timber loss. Standing timber you bought as if you had sold or exchanged your home. You later). This rule applies to the following taxpay- with the proceeds from the sale of timber may be able to exclude up to $250,000 of the ers. downed by a casualty (such as high winds, gain (up to $500,000 if married filing jointly). For earthquakes, or volcanic eruptions) qualifies as information on this exclusion, see Publication 1) C corporations. replacement property. If you bought the stand- 523. If your gain is more than the amount you ing timber within the specified replacement pe- can exclude, but you buy replacement property, 2) Partnerships in which more than 50% of riod, you can postpone reporting the gain. you may be able to postpone reporting the ex- the capital or profits interest is owned by C

cess gain. See Postponement of Gain, corporations. Owner-user. If you are an owner-user, simi- later.

lar or related in service or use means that re- 3) All others (including individuals, partner- Reporting a gain. You generally must report placement property must function in the same ships — other than those in (2) — and S your gain as income in the year you receive the way as the property it replaces. corporations) if the total realized gain for reimbursement. However, you do not have to the tax year on all destroyed or stolen report your gain if you meet certain require- Example. Your home was destroyed by fire properties on which there are realized ments and choose to postpone reporting the and you invested the insurance proceeds in a gains is more than $100,000. gain according to the rules explained under grocery store. Your replacement property is not

Postponement of Gain, next. For casualties and thefts described in (3) above, similar or related in service or use to the deFor information on how to report a gain, see gains cannot be offset by any losses when de- stroyed property. To be similar or related in

How To Report Gains and Losses, later. termining whether the total gain is more than service or use, your replacement property must

$100,000. If the property is owned by a partner- also be used by you as your home. If you have a casualty or theft gain on ship, the $100,000 limit applies to the partner- personal-use property that you choose Main home in disaster area. Special rules ship and each partner. If the property is owned CAUTION to postpone reporting (as explained apply to replacement property related to the

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by an S corporation, the $100,000 limit applies next) and you also have another casualty or theft damage or destruction of your main home (or its to the S corporation and each shareholder. loss on personal-use property, do not consider contents) if located in a federally declared disasthe gain you are postponing when figuring your Exception. This rule does not apply if the ter area. For more information, see Gains Realcasualty or theft loss deduction. See 10% Rule related person acquired the property from an ized on Homes in Disaster Areas in the

under Deduction Limits, earlier. unrelated person within the period of time al- instructions for Form 4684.

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Table 3. When To Deduct a Loss Replacement Period

IF you have a loss... THEN deduct it in the year... To postpone reporting your gain, you must buy

replacement property within a specified period from a casualty the loss occurred. of time. This is the replacement period.

The replacement period begins on the date in a Presidentially declared the disaster occurred or the year immediately

disaster area before the disaster. your property was damaged, destroyed, or stolen.

from a theft the theft was discovered. The replacement period ends 2 years after

the close of the first tax year in which any part of on a deposit treated as a: your gain is realized. • casualty • a reasonable estimate can be made.

• bad debt • deposits are totally worthless. Example. You are a calendar year tax- • ordinary loss • a reasonable estimate can be made.

payer. While you were on vacation, a valuable

piece of antique furniture that cost $2,200 was

Owner-investor. stolen from your home. You discovered the theft If you are an owner-inves- ration at the time you acquired control must be when you return home on August 10, 2003. Your tor, similar or related in service or use means reduced by the amount of your postponed gain, insurance company investigated the theft and that any replacement property must have a simi- if any. You are not required to reduce the ad- did not settle your claim until January 2, 2004, lar relationship of services or uses to you as the justed bases of the corporation’s properties be- when they paid you $3,000. You first realized a property it replaces. You decide this by deter- low your adjusted basis in the corporation’s

mining all the following. gain from the reimbursement for the theft during stock (determined after reduction by the amount 2004, so you have until December 31, 2006, to of your postponed gain). • Whether the properties are of similar serv- replace the property. Allocate this reduction to the following clas- ice to you. ses of property in the order shown below. Main home in disaster area. For your main • The nature of the business risks con- home (or its contents) located in a Presidentially nected with the properties. 1) Property that is similar or related in service declared disaster area, the replacement period or use to the destroyed or stolen property. • What the properties demand of you in the ends 4 years after the close of the first tax year in

way of management, service, and rela- 2) Depreciable property not reduced in (1). which any part of your gain is realized. See

tions to your tenants. Disaster Area Losses, later.

3) All other property.

Example. You are a calendar year tax- Example. You owned land and a building If two or more properties fall in the same class, payer. A hurricane destroyed your home in Sep- allocate the reduction to each property in pro- you rented to a manufacturing company. The tember 2003. In December 2003, the insurance building was destroyed by fire. During the re- portion to the adjusted bases of all the properties company paid you $3,000 more than the ad- placement period, you had a new building con- in that class. The reduced basis of any single justed basis of your home. The area in which structed. You rented out the new building for use property cannot be less than zero. your home is located is not a Presidentially de- as a wholesale grocery warehouse. Because clared disaster area. You first realized a gain the replacement property is also rental property, Main home replaced. If your gain from the from the reimbursement for the casualty in 2003, the two properties are considered similar or re- reimbursement you receive because of the de- so you have until December 31, 2005, to replace lated in service or use if there is a similarity in all struction of your main home is more than the the property. If your home had been in a Pre- the following areas. amount you can exclude from your income (see sidentially declared disaster area, you would Main home destroyed under Figuring a Gain, • Your management activities. have until December 31, 2007, to replace the earlier), you can postpone reporting the excess property. • The amount and kind of services you pro- gain by buying replacement property that is simivide to your tenants. lar or related in service or use. To postpone Property in the New York Liberty Zone. For

reporting all the excess gain, the replacement • The nature of your business risks con- property located in the New York Liberty Zone property must cost at least as much as the nected with the properties. that was damaged or destroyed as a result of the amount you received because of the destruction September 11, 2001, terrorist attacks, the reBusiness or income-producing property minus the excluded gain. placement period ends 5 years after the close of

located in a Presidentially declared disaster Also, if you postpone reporting any part of the first tax year in which any part of your gain is

area. If your destroyed business or your gain under these rules, you are treated as realized. This 5-year replacement period applies

income-producing property was located in a having owned and used the replacement prop- only if substantially all of the use of the replacePresidentially declared disaster area, any tangi- erty as your main home for the period you ment property is in the City of New York, New

ble replacement property you acquire for use in owned and used the destroyed property as your York.

any business is treated as similar or related in main home. Area defined. The New York Liberty Zone service or use to the destroyed property. For is the area located on or south of Canal Street, more information, see Disaster Area Losses, Basis of replacement property. You must East Broadway (east of its intersection with Ca- later. reduce the basis of your replacement property nal Street), or Grand Street (east of its intersec- (its cost) by the amount of postponed gain. In tion with East Broadway) in the Borough of Controlling interest in a corporation. You this way, tax on the gain is postponed until you Manhattan in the City of New York, New York. can replace property by acquiring a controlling dispose of the replacement property. interest in a corporation that owns property simi- Extension. You may get an extension of the lar or related in service or use to your damaged, Example. A fire destroyed your rental home replacement period if you apply to the director of destroyed, or stolen property. You can postpone that you never lived in. The insurance company the Internal Revenue Service for your area. Your reporting your entire gain if the cost of the stock reimbursed you $67,000 for the property, which application must contain all the details about the that gives you a controlling interest is at least as had an adjusted basis of $62,000. You had a need for the extension. You should make the much as the amount received (reimbursement) gain of $5,000 from the casualty. If you have application before the end of the replacement for your property. You have a controlling interest another rental home constructed for $110,000 period. if you own stock having at least 80% of the within the replacement period, you can post- However, you can file an application within a combined voting power of all classes of voting pone reporting the gain. You will have rein- reasonable time after the replacement period stock and at least 80% of the total number of vested all the reimbursement (including your ends if you have a good reason for the delay. An shares of all other classes of stock. entire gain) in the new rental home. Your basis extension may be granted if you can show that

Basis adjustment to corporation’s prop- for the new rental home will be $105,000 there is reasonable cause for not making the

erty. The basis of property held by the corpo- replacement within the regular period. ($110,000 cost − $5,000 postponed gain).

Page 10
Ordinarily, requests for extensions are not ment property, you can (within the replacement later year. (However, see Disaster Area Losses,

made or granted until near the end of the re- period) substitute the new qualified replacement later, for an exception.)

placement period or the extended replacement property. Theft loss. You generally can deduct theft period. Extensions are usually limited to a period losses only in the year you discover your prop- of not more than 1 year. The high market value Amended return. You must file an amended

erty was stolen. You must be able to show there or scarcity of replacement property is not suffi- return (individuals use Form 1040X) for the tax was a theft, but you do not have to know when cient grounds for granting an extension. If your year of the gain in either of the following situa- the theft occurred. However, you should show replacement property is being constructed and tions.

when you discovered that your property was you clearly show that the construction cannot be • You do not acquire replacement property missing. completed within the replacement period, you within the required replacement period may be granted an extension of the period. Loss on deposits. If your loss is a loss on plus extensions. On this amended return, deposits at an insolvent or bankrupt financial you must report the gain and pay any ad- institution, see Loss on Deposits, earlier. ditional tax due. How To Postpone a Gain Lessee’s loss. If you lease property from • You acquire replacement property within

You postpone reporting your gain from a casu- someone else, you can deduct a loss on the the required replacement period plus exalty or theft by reporting your choice on your tax property in the year your liability for the loss is tensions, but at a cost less than the

return for the year you have the gain. You have fixed. This is true even if the loss occurred or the amount you receive for the casualty or liability was paid in a different year. You are not the gain in the year you receive insurance pro- theft. On this amended return, you must

ceeds or other reimbursements that result in a entitled to a deduction until your liability under report the portion of the gain that cannot

gain. the lease can be determined with reasonable be postponed and pay any additional tax

If a partnership or a corporation owns the accuracy. Your liability can be determined when due.

stolen or destroyed property, only the partner- a claim for recovery is settled, adjudicated, or

ship or corporation can choose to postpone re- abandoned.

Three-year limit. The period for assessing tax porting the gain. on any gain ends 3 years after the date you

Required statement. You should attach a notify the director of the Internal Revenue Servstatement to your return for the year you have ice for your area of any of the following. Disaster Area Losses the gain. This statement should include the fol- • You replaced the property. lowing. This section discusses the special rules that • You do not intend to replace the property. • The date and details of the casualty or apply to Presidentially declared disaster area

theft. • You did not replace the property within the losses. It contains information on when you can

replacement period. deduct your loss, how to claim your loss, how to • The insurance or other reimbursement you treat your home in a disaster area, and what tax received from the casualty or theft. deadlines may be postponed. It also lists Fed- Changing your mind. You can change your • How you figured the gain. eral Emergency Management Agency (FEMA) mind about whether to report or to postpone phone numbers. (See Contacting the Federal reporting your gain at any time before the end of Replacement property acquired before re- Emergency Management Agency (FEMA), the replacement period. turn filed. If you acquire replacement property later.)

before you file your return for the year you have A Presidentially declared disaster is a dis- Example. Your property was stolen in 2002. the gain, your statement should also include aster that occurred in an area declared by the Your insurance company reimbursed you detailed information about all of the following. President to be eligible for federal assistance $10,000, of which $5,000 was a gain. You re- under the Disaster Relief and Emergency Assis- • The replacement property. ported the $5,000 gain on your return for 2002 tance Act. (the year you realized the gain) and paid the tax • The postponed gain. due. In 2003 you bought replacement property. A list of the areas warranting assis-

• The basis adjustment that reflects the Your replacement property cost $9,000. Since tance under the Act for 2003 is availpostponed gain. you reinvested all but $1,000 of your reimburse- able at the Federal Emergency

TIP

ment, you can now postpone reporting $4,000 Management Agency (FEMA) web site at • Any gain you are reporting as income. ($5,000 − $1,000) of your gain. www.fema.gov.

To postpone reporting your gain, file an Replacement property acquired after re- When to deduct the loss. If you have a casu- amended return for 2002 using Form 1040X. turn filed. If you intend to acquire replacement alty loss from a disaster that occurred in a Pre- You should attach an explanation showing that property after you file your return for the year in sidentially declared disaster area, you can you previously reported the entire gain from the which you have the gain, your statement should choose to deduct that loss on your return or theft but you now want to report only the part of also state that you are choosing to replace the amended return for the tax year immediately the gain ($1,000) equal to the part of the reim- property within the required replacement period. preceding the tax year in which the disaster bursement not spent for replacement property. You should then attach another statement to happened. If you make this choice, the loss is

your return for the year in which you acquire the treated as having occurred in the preceding

replacement property. This statement should year.

contain detailed information on the replacement When To Report Claiming a qualifying disaster loss on property. the previous year’s return may result in If you acquire part of your replacement prop- Gains and Losses a lower tax for that year, often producTIP

erty in one year and part in another year, you ing or increasing a cash refund. must make a statement for each year. The state- If you receive an insurance or other reimburse- If you do not choose to deduct your loss on ment should contain detailed information on the

ment that is more than your adjusted basis in the your return for the earlier year, deduct it on your replacement property bought in that year. destroyed or stolen property, you have a gain return for the year in which the disaster ocSubstituting replacement property. Once from the casualty or theft. You must include this curred.

you have acquired qualified replacement prop- gain in your income in the year you receive the

erty that you designate as replacement property reimbursement, unless you choose to postpone Example. You are a calendar year taxin a statement attached to your tax return, you payer. A flood damaged your home this June. reporting the gain as explained earlier.

cannot later substitute other qualified replace- The flood damaged or destroyed a considerable

ment property. This is true even if you acquire Casualty loss. Generally, you can deduct a amount of property in your town. The President

the other property within the replacement pe- casualty loss only in the tax year in which the declared the area that includes your town a

riod. However, if you discover that the original casualty occurred. This is true even if you do not federal disaster area as a result of the flood. You

replacement property was not qualified replace- repair or replace the damaged property until a can choose to deduct the flood loss on your

Page 11
home on last year’s tax return. (See How to How to report the loss on Form 1040X. • The due date (without extensions) for filing deduct your loss in the preceding year, later.) You should adjust your deductions on Form your income tax return for the tax year in 1040X. The instructions for Form 1040X show Disaster loss to inventory. If your inven- which the disaster actually occurred. how to do this. Explain the reasons for your tory loss is from a disaster in an area declared • The due date (with extensions) for filing adjustment and attach Form 4684 to show how by the President of the United States to be you figured your loss. See Figuring a Loss, ear- the return for the preceding tax year. eligible for federal assistance, you may choose lier. to deduct the loss on your return or amended If the damaged or destroyed property was return for the immediately preceding year. How- Example. If you are a calendar year tax- nonbusiness property or employee property and ever, decrease your opening inventory for the payer, you ordinarily have until April 15, 2004, to you did not itemize your deductions on your year of the loss so that the loss will not be amend your 2002 tax return to claim a casualty original return, you must first determine whether reported again in inventories. loss that occurred during 2003. the casualty loss deduction now makes it advanRevoking your choice. You can revoke tageous for you to itemize. It is advantageous to Home made unsafe by disaster. If your itemize if the total of the casualty loss deduction your choice within 90 days after making it by home is located in a Presidentially declared dis- and any other itemized deductions is more than returning to the Internal Revenue Service any aster area, your state or local government may your standard deduction. If you itemize, attach refund or credit you received from making the order you to tear it down or move it because it is Schedule A (Form 1040) and Form 4684 to your choice. However, if you revoke your choice no longer safe to live in because of the disaster. amended return. Fill out Form 1040X to refigure before receiving a refund, you must return the If this happens, treat the loss in value as a your tax on the rest of the form to find your refund within 30 days after receiving it for the casualty loss from a disaster. Your state or local refund. revocation to be effective. government must issue the order for you to tear Records. You should keep the records that down or move the home within 120 days after Figuring the loss deduction. You must fig- support your loss deduction. You do not have to the area is declared a disaster area. ure the loss under the usual rules for casualty attach them to the amended return. Figure your loss in the same way as for losses, as if it occurred in the year preceding the

casualty losses of personal-use property. (See disaster. Federal loan canceled. If part of your federal Figuring a Loss, earlier.) In determining the de- disaster loan was canceled under the Disaster

crease in FMV, use the value of your home Example. A disaster damaged your home Relief and Emergency Assistance Act, it is con- before you move it or tear it down as its FMV and destroyed your furniture. This was your only sidered to be reimbursement for the loss. The

after the casualty. casualty loss for the year. The President later cancellation reduces your casualty loss deducUnsafe home. Your home will be consid- declared the area to be eligible for federal assis- tion.

ered unsafe only if both of the following apply. tance. The cost of your home and land was Disaster relief grants. Do not include $134,000. The FMV immediately before the dis- • Your home is substantially more danger- post-disaster relief grants received under the aster was $147,500 and the FMV immediately ous after the disaster than it was before Disaster Relief and Emergency Assistance Act afterward was $100,000. You separately figured the disaster. in your income if the grant payments are made the loss on each item of furniture (see Figuring to help you meet necessary expenses or serious • The danger is from a substantially in- the Deduction, earlier) and arrived at a total loss needs for medical, dental, housing, personal creased risk of future destruction from the for furniture of $3,000. Your insurance did not property, transportation, or funeral expenses. disaster. cover this type of casualty loss, and you expect Do not deduct casualty losses or medical ex- no reimbursement for either your home or your penses to the extent they are specifically reim- You do not have a casualty loss if your home furniture. bursed by these disaster relief grants. is unsafe due to dangerous conditions existing You choose to amend your previous year’s Unemployment assistance payments under the before the disaster. (For example, your house is return to claim your casualty loss for the disas- Act are taxable unemployment compensation. located in an area known for severe storms.) ter. Your adjusted gross income on your previ- This is true even if your home is condemned. Qualified disaster relief payments. Qualified ous year’s return was $71,000. You figure your disaster relief payments are not included in the casualty loss as follows: Example. Due to a severe storm, the Presi- income of individuals to the extent any expenses

dent declared the county you live in a federal Furnish- compensated by these payments is not otherdisaster area. Although your home has only mi- House ings wise compensated for by insurance or other

nor damage from the storm, a month later the reimbursement. These payments are not sub- 1. Cost ............ $134,000 $10,000 county issues a demolition order. This order is ject to income tax, self-employment tax, or embased on a finding that your home is unsafe due 2. FMV before disaster $147,500 $8,000 ployment taxes (social security, Medicare, and

to nearby mud slides caused by the storm. The 3. FMV after disaster . . 100,000 5,000 federal unemployment taxes). No withholding

loss in your home’s value because the mud 4. Decrease in FMV applies to these payments.

slides made it unsafe is treated as a casualty (line 2 − line 3) ..... $47,500 $3,000 Qualified disaster relief payments include

loss from a disaster. The loss in value is the 5. Smaller of line 1 or payments you receive (regardless of the source)

difference between your home’s FMV immedi- line 4 ........... $47,500 $3,000 for the following expenses.

ately before the disaster and immediately after 6. Subtract estimated • Reasonable and necessary personal, fam- the disaster. insurance . . . . . . . . –0– –0–

7. Loss after ily, living, or funeral expenses incurred as

reimbursement . . . . . $ 47,500 $3,000 a result of a Presidentially declared disas- How to deduct your loss in the preceding ter. year. If you choose to deduct your loss on your 8. Total loss ............... $50,500

return or amended return for the tax year imme- 9. Subtract $100 . . . . . . . . . . . . 100 • Reasonable and necessary expenses indiately preceding the tax year in which the disas- 10. Loss after $100 rule ........ $50,400 curred for the repair or rehabilitation of a

ter happened, include a statement saying that 11. Subtract 10% of personal residence due to a Presidentially

you are making that choice. The statement can $71,000 AGI ............. 7,100 declared disaster. (A personal residence

be made on the return or can be filed with the 12. Amount of casualty loss can be a rented residence or one you

return. The statement should specify the date or deduction ............... $43,300 own.)

dates of the disaster and the city, town, county, • Reasonable and necessary expenses in- and state where the damaged or destroyed Claiming a disaster loss on an amended curred for the repair or replacement of the property was located at the time of the disaster. return. If you have already filed your return for contents of a personal residence due to a

Time limit for making choice. You must the preceding year, you can claim a disaster loss Presidentially declared disaster.

make this choice to take your casualty loss for against that year’s income by filing an amended

the disaster in the preceding year by the later of return. Individuals file an amended return on Qualified disaster relief payments also include

the following dates. Form 1040X. amounts paid to those affected by the disaster

Page 12
by a federal, state, or local government in con- has decided to postpone tax deadlines for up to Property held more than 1 year. If your

nection with a Presidentially declared disaster. 1 year. losses from business and income-producing

property are more than gains from these types Qualified disaster relief payments do Abatement of interest and penalties. The of property, combine your losses from business not include: IRS may abate the interest and penalties on property (other than property used in performing underpaid income tax for the length of any post- CAUTION

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services as an employee) with total gains from ponement of tax deadlines. • Insurance or other reimbursements for ex- business and income-producing property. Repenses, or port the net gain or loss as an ordinary gain or Contacting the Federal loss on Form 4797. If you are not otherwise • Income replacement payments, such as Emergency Management required to file Form 4797, only enter the net payments of lost wages, lost business in- Agency (FEMA) gain or loss on your tax return on the line identi- come, or unemployment compensation. fied as from Form 4797. Next to that line, write

If you need to contact FEMA for general informa- “Form 4684.” Individuals deduct any loss of Special rules for main home in a disaster tion, call 202–566–1600 (not a toll-free call) or income-producing property and property used in area. Special rules regarding gains may apply visit its web site at www.fema.gov. performing services as an employee on Sched- to insurance proceeds you receive because of If you live in an area that was declared a ule A (Form 1040). Partnerships and S corpora- the damage or destruction of your main home disaster area by the President, you can get infor- tions should see Form 4684 to find out where to (whether owned or rented) or its contents. For a mation from FEMA by calling the following report these gains and losses. discussion of these rules, see Gains Realized

phone numbers. These numbers are only acti- If losses from business and income-produc- on Homes in Disaster Areas in the instructions

vated after a Presidentially declared disaster. ing property are less than or equal to gains for Form 4684. from these types of property, report the net • 1–800–621–3362. amount on Form 4797. You may also have to Postponed Tax Deadlines • 1–800–462–7585, if you are a TTY/TDD report the gain on Schedule D depending on

user. whether you have other transactions. Partner- The IRS may postpone for up to 1 year certain ships and S corporations should see Form 4684 tax deadlines of taxpayers who are affected by a to find out where to report these gains and Presidentially declared disaster. The tax dead- losses. lines the IRS may postpone include those for

filing income and employment tax returns, pay- How To Report Depreciable property. If the damaged or

ing income and employment taxes, and making stolen property was depreciable property held

contributions to a traditional IRA or Roth IRA. Gains and Losses more than 1 year, you may have to treat all or

If any tax deadline is postponed, the IRS will part of the gain as ordinary income to the extent

publicize the postponement in your area and How you report gains and losses depends on of depreciation allowed or allowable. You figure

publish a news release, revenue ruling, revenue whether the property was business, income-pro- the ordinary income part of the gain in Part III of

procedure, notice, announcement, or other gui- ducing, or personal-use property. Form 4797. See Depreciation Recapture in

dance in the Internal Revenue Bulletin (IRB). chapter 3 of Publication 544 for more informa- Personal-use property. If you have a loss, tion about the recapture rule. Who is eligible. If the IRS postpones a tax use both of the following.

deadline, the following taxpayers are eligible for

the postponement. • Form 4684. Adjustments to Basis

• Schedule A (Form 1040), Itemized Deduc- • Any individual whose main home is lo- If you have a casualty or theft loss, you must tions. cated in a covered disaster area (defined decrease your basis in the property by any insurlater). ance or other reimbursement you receive and by If you have a gain, report it on both of the any deductible loss. The result is your adjusted • Any business entity or sole proprietor following. basis in the property. whose principal place of business is lo- • Form 4684. You must increase your basis in the property cated in a covered disaster area.

by the amount you spend on repairs that sub- • Schedule D (Form 1040), Capital Gains • Any individual who is a relief worker affili- stantially prolong the life of the property, in- and Losses. ated with a recognized government or phil- crease its value, or adapt it to a different use. To

anthropic organization and who is make this determination, compare the repaired

assisting in a covered disaster area. Business and income-producing property. property to the property before the casualty. See

Use Form 4684 to report your gains and losses. Adjusted Basis in Publication 551 for more infor- • Any individual, business entity, or sole You will also have to report the gains and losses mation on adjustments to basis. proprietor whose records are needed to on other forms as explained next. meet a postponed deadline, provided

those records are maintained in a covered Property held 1 year or less. Individuals If Deductions Are

disaster area. The main home or principal report losses from income-producing property More Than Income

place of business does not have to be and property used in performing services as an

located in the covered disaster area. employee on Schedule A (Form 1040). Gains If your casualty or theft loss deduction causes

from business and income-producing property your deductions for the year to be more than • Any estate or trust that has tax records are combined with losses from business prop- your income for the year, you may have a net necessary to meet a postponed tax dead- erty (other than property used in performing operating loss (NOL). You can use an NOL to line, provided those records are main- services as an employee) and the net gain or lower your tax in an earlier year, allowing you to tained in a covered disaster area. loss is reported on Form 4797. If you are not get a refund for tax you already paid. Or, you can

• The spouse on a joint return with a tax- otherwise required to file Form 4797, only enter use it to lower your tax in a later year. You do not

payer who is eligible for postponements. the net gain or loss on your tax return on the line have to be in business to have an NOL from a

identified as from Form 4797. Next to that line, casualty or theft loss. For more information, see • Any other person determined by the IRS write “Form 4684.” Partnerships and S corpora- Publication 536, Net Operating Losses (NOLs) to be affected by a Presidentially declared tions should see the Form 4684 instructions to for Individuals, Estates, and Trusts. disaster. find out where to report these gains and losses.

Covered disaster area. This is an area of a

Presidentially declared disaster in which the IRS

Page 13
• Figure your withholding allowances using we use several methods to evaluate the quality

How To Get Tax Help our Form W-4 calculator. of our telephone services. One method is for a

second IRS representative to sometimes listen • Send us comments or request help by

You can get help with unresolved tax issues, in on or record telephone calls. Another is to ask e-mail.

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cess to tax help. are available on a walk-in basis. a small business.

Contacting your Taxpayer Advocate. If you You can also reach us using File Transfer • Products. You can walk in to many post

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The Taxpayer Advocate independently rep- requested forms and instructions 24 stores, copy centers, city and county govresents your interests and concerns within the hours a day, 7 days a week, by fax. ernment offices, credit unions, and office

IRS by protecting your rights and resolving Just call 703–368–9694 from your fax ma- supply stores have a collection of products problems that have not been fixed through nor- chine. Follow the directions from the prompts. available to print from a CD-ROM or pho- mal channels. While Taxpayer Advocates can- When you order forms, enter the catalog num- tocopy from reproducible proofs. Also, not change the tax law or make a technical tax ber for the form you need. The items you request some IRS offices and libraries have the decision, they can clear up problems that re- will be faxed to you. Internal Revenue Code, regulations, Inter- sulted from previous contacts and ensure that For help with transmission problems, call nal Revenue Bulletins, and Cumulative your case is given a complete and impartial 703–487–4608. Bulletins available for research purposes. review.

To contact your Taxpayer Advocate: • Services. You can walk in to your local Long-distance charges may apply. Taxpayer Assistance Center every busi- • Call the Taxpayer Advocate toll free at Phone. Many services are available by ness day to ask tax questions or get help 1–877–777–4778. phone. with a tax problem. An employee can ex-

• Call, write, or fax the Taxpayer Advocate plain IRS letters, request adjustments to

office in your area. your account, or help you set up a pay- • Ordering forms, instructions, and publica- ment plan. You can set up an appointment tions. Call 1–800–829–3676 to order • Call 1–800–829–4059 if you are a current-year forms, instructions, and publi- by calling your local Center and, at the TTY/TDD user. cations and prior-year forms and instruc- prompt, leaving a message requesting

• Visit the web site at www.irs.gov/advo- tions. You should receive your order within Everyday Tax Solutions help. A represencate. 10 days. tative will call you back within 2 business

days to schedule an in-person appoint- • Asking tax questions. Call the IRS with For more information, see Publication 1546, ment at your convenience. To find the your tax questions at 1–800–829–1040. The Taxpayer Advocate Service of the IRS. number, go to www.irs.gov or look in the

• Solving problems. You can get phone book under “United States GovernFree tax services. To find out what services face-to-face help solving tax problems ment, Internal Revenue Service.”

are available, get Publication 910, Guide to Free every business day in IRS Taxpayer AsTax Services. It contains a list of free tax publi- sistance Centers. An employee can ex- Mail. You can send your order for

cations and an index of tax topics. It also de- plain IRS letters, request adjustments to forms, instructions, and publications to

scribes other free tax information services, your account, or help you set up a pay- the Distribution Center nearest to you

including tax education and assistance pro- ment plan. Call your local Taxpayer Assis- and receive a response within 10 workdays after

grams and a list of TeleTax topics. tance Center for an appointment. To find your request is received. Use the address that

the number, go to www.irs.gov or look in applies to your part of the country. Internet. You can access the IRS web the phone book under “United States Gov- site 24 hours a day, 7 days a week at • Western part of U.S.: ernment, Internal Revenue Service.” www.irs.gov to: Western Area Distribution Center • TTY/TDD equipment. If you have access Rancho Cordova, CA 95743–0001 • E-file. Access commercial tax preparation to TTY/TDD equipment, call and e-file services available for free to eli- • Central part of U.S.: 1–800–829–4059 to ask tax or account gible taxpayers. Central Area Distribution Center questions or to order forms and publica- P.O. Box 8903 • Check the amount of advance child tax tions.

credit payments you received in 2003. Bloomington, IL 61702–8903 • TeleTax topics. Call 1–800–829–4477 to

• Check the status of your 2003 refund. listen to pre-recorded messages covering • Eastern part of U.S. and foreign

Click on “Where’s My Refund” and then on various tax topics. addresses:

Eastern Area Distribution Center “Go Get My Refund Status.” Be sure to • Refund information. If you would like to wait at least 6 weeks from the date you P.O. Box 85074 check the status of your 2003 refund, call filed your return (3 weeks if you filed elec- Richmond, VA 23261–5074 1–800–829–4477 for automated refund tronically) and have your 2003 tax return information and follow the recorded in- available because you will need to know CD-ROM for tax products. You can structions or call 1–800–829–1954. Be your filing status and the exact whole dol- order IRS Publication 1796, Federal sure to wait at least 6 weeks from the date lar amount of your refund. Tax Products on CD-ROM, and obtain: you filed your return (3 weeks if you filed

• Download forms, instructions, and publica- electronically) and have your 2003 tax re- • Current-year forms, instructions, and pubtions. turn available because you will need to lications.

know your filing status and the exact • Order IRS products on-line. • Prior-year forms and instructions. whole dollar amount of your refund.

• See answers to frequently asked tax ques- • Frequently requested tax forms that may

tions. be filled in electronically, printed out for Evaluating the quality of our telephone serv- submission, and saved for recordkeeping. • Search publications on-line by topic or ices. To ensure that IRS representatives give

keyword. accurate, courteous, and professional answers, • Internal Revenue Bulletins.

Page 14
Buy the CD-ROM from National Technical In- business. This handy, interactive CD contains sign of the CD makes finding information easy

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ary.

CD-ROM for small businesses. IRS

Publication 3207, Small Business Resource Guide, is a must for every small

business owner or any taxpayer about to start a

Page 15
To help us develop a more useful index, please let us know if you have ideas for index entries. Index See “Comments and Suggestions” in the “Introduction” for the ways you can reach us.

A I 10% rule .............. 7 Publications (See Tax help)

Accidents .............. 2 2% rule ............... 6 Insurance .............. 5

Adjusted basis Disaster area losses: ........... 4 Interest abatement . . . . . . . 13 R

Adjustments to basis Federal loan canceled . . . . 12 . . . . 4, 13 Inventory loss ........... 3 Recovered stolen Form 1040X . . . . . . . . . . 12 Appraisal .............. 4 property .............. 4 Home made unsafe . . . . . . 12 Appraisal fee ............ 4 L Reimbursements: How to deduct in preceding Assistance (See Tax help) Claims for ............. 5

year . . . . . . . . . . . . . . 12 Landscaping ............ 4

Insurance ............. 5 Main home rules . . . . . . . . 13 Leased property ......... 3 Other ................ 5 B Qualified disaster relief Limits on deduction ....... 6 Payments not considered . . . 5 Bank deposit losses ....... 2 payments . . . . . . . . . . . 12 Loss on deposits ......... 2 Repair costs ............ 4 Basis: Losses: Disaster relief grants . . . . . 12

Replacement period Adjustments to . . . . . . . . 4, 13 Casualty .............. 2 extension . . . . . . . . . . . . 10 Replacement property . . . . 10 E Deposits in banks, etc. .... 2

Reporting gains and losses: Business or Disaster area . . . . . . . . . . 11 Employee property (See also How to . . . . . . . . . . . . . . 13 income-producing How to figure ........... 3 Deduction limits, 2% Reimbursements ........ 5 property .............. 3 How to report . . . . . . . . . . 13 rule) ................. 6

Business purposes, property Net operating loss . . . . . . . 13

used partly for ......... 8 Nondeductible .......... 2 S

F Reimbursements ........ 5 Suggestions for Fair market value (FMV): Theft ................ 2 publication ............ 2 C Defined ............... 3

Car accidents ........... 2 Measuring decrease in .... 3

Car, fair market value of .... 4 M T FEMA . . . . . . . . . . . . . . . . 13

Casualties and thefts, More information (See Tax help) Tax deadline Figuring the loss postponement . . . . . . . . 13 lessee’s loss . . . . . . . . . 11 deduction ............. 7

Casualty: N Tax help . . . . . . . . . . . . . . 14 Form:

Defined ............... 2 Net operating loss (NOL) . . 13 Taxpayer Advocate . . . . . . 14 1040X . . . . . . . . . . . . . . 11

Figuring a loss .......... 3 Nondeductible losses Theft: 4684 . . . . . . . . . . . . . . . 13 ...... 2

Mislaid or lost property .... 2 Defined ............... 2 4797 . . . . . . . . . . . . . . . 13

Proof of loss ........... 3 Figuring a loss .......... 3 Free tax services . . . . . . . . 14 P When to report . . . . . . . . . 11 Mislaid or lost property .... 2

Payments for living Casualty and theft Proof of loss ........... 3

workbooks ............ 2 G expenses ............. 5 When to report . . . . . . . . . 11

Gains: Penalty abatement . . . . . . . 13 Clean up costs ........... 4 TTY/TDD information . . . . . 14

Figuring .............. 9 Personal purposes, property Comments on publication . . . 2 How to postpone . . . . . . 9, 11 used partly for ......... 8 Cost: V How to report . . . . . . . . . 9, 13 Photographs ............ 4 Clean up .............. 4 Vandalism .............. 2 Losses: . . . . . . . . . . . . . . 11 Postponement of gain: Landscaping ........... 4

Protection ............. 4 When to report . . . . . . . . . 11 Amended return . . . . . . . . 11 ■

Grants, disaster relief . . . . . 12 Replacement period . . . . . 10 Repair ............... 4

Replacement property ..... 9 Replacement ........... 4

H Presidentially declared

disaster . . . . . . . . . . . . . 11 D Help (See Tax help)

Proof of loss ............ 3

Deduction limits: Protection costs ......... 4 $100 rule ............. 6

Page 16
OMB No. 1545-0177 Casualties and Thefts

Form 4684 See separate instructions.

Attach to your tax return. Department of the Treasury

Internal Revenue Service

Attachment

Use a separate Form 4684 for each casualty or theft. Sequence No. 26

Name(s) shown on tax return Identifying number

SECTION A—Personal Use Property (Use this section to report casualties and thefts of property not used in a trade

or business or for income-producing purposes.)

1 Description of properties (show type, location, and date acquired for each property). Use a separate line for each property lost or damaged

from the same casualty or theft.

Property A

Property B

Property C

Property D

Properties

A D B C

Cost or other basis of each property 2 2

Insurance or other reimbursement (whether or not

you filed a claim) (see instructions)

3

3

Note: If line 2 is more than line 3, skip line 4.

Gain from casualty or theft. If line 3 is more than

line 2, enter the difference here and skip lines 5

through 9 for that column. See instructions if line 3

includes insurance or other reimbursement you did

not claim, or you received payment for your loss in

a later tax year

4

4

5 5 Fair market value before casualty or theft

6 Fair market value after casualty or theft 6

7 Subtract line 6 from line 5 7

8 Enter the smaller of line 2 or line 7 8

9

Subtract line 3 from line 8. If zero or less,

enter -0-

9

10 Casualty or theft loss. Add the amounts on line 9 in columns A through D 10

11 Enter the smaller of line 10 or $100 11

12 Subtract line 11 from line 10 12

Caution: Use only one Form 4684 for lines 13 through 18.

13 Add the amounts on line 12 of all Forms 4684 13

14 Add the amounts on line 4 of all Forms 4684 14

15

15

16 If line 14 is less than line 13, enter the difference 16

17 Enter 10% of your adjusted gross income from Form 1040, line 35. Estates and trusts, see instructions 17

Subtract line 17 from line 16. If zero or less, enter -0-. Also enter the result on Schedule A (Form 1040), line 19.

Estates and trusts, enter the result on the “Other deductions” line of your tax return

18

18

For Paperwork Reduction Act Notice, see page 4 of the instructions. Form 4684 (2003)

● If line 14 is more than line 13, enter the difference here and on Schedule D. Do not

complete the rest of this section (see instructions).

● If line 14 is less than line 13, enter -0- here and go to line 16.

● If line 14 is equal to line 13, enter -0- here. Do not complete the rest of this section.

Cat. No. 12997O



2003
Form 4684 (2003) Page 2

Name(s) shown on tax return. Do not enter name and identifying number if shown on other side. Identifying number

SECTION B—Business and Income-Producing Property

Casualty or Theft Gain or Loss (Use a separate Part l for each casualty or theft.)

19 Description of properties (show type, location, and date acquired for each property). Use a separate line for each property lost or damaged from the same casualty or theft.

Property A

Property B

Property C

Property D

Properties

A B C D

20 Cost or adjusted basis of each property 20

Insurance or other reimbursement (whether or not

you filed a claim). See the instructions for line 3

21

21

Note: If line 20 is more than line 21, skip line 22.

Gain from casualty or theft. If line 21 is more than line

20, enter the difference here and on line 29 or line 34,

column (c), except as provided in the instructions for

line 33. Also, skip lines 23 through 27 for that column.

See the instructions for line 4 if line 21 includes

insurance or other reimbursement you did not claim, or

you received payment for your loss in a later tax year

22

22

Fair market value before casualty or theft 23 23

24 Fair market value after casualty or theft 24

25 Subtract line 24 from line 23 25

26 Enter the smaller of line 20 or line 25 26

Note: If the property was totally destroyed by

casualty or lost from theft, enter on line 26

the amount from line 20.

27 Subtract line 21 from line 26. If zero or less, enter -0- 27

28 Casualty or theft loss. Add the amounts on line 27. Enter the total here and on line 29 or line 34 (see instructions) 28

Summary of Gains and Losses (from separate Parts l) (b) Losses from casualties or thefts (c) Gains from

casualties or thefts

includible in income

(i) Trade, business,

rental or royalty

property

(ii) Incomeproducing and

employee property

(a) Identify casualty or theft

Casualty or Theft of Property Held One Year or Less

29

30 Totals. Add the amounts on line 29 30

31 Combine line 30, columns (b)(i) and (c). Enter the net gain or (loss) here and on Form 4797, line 14. If Form 4797

is not otherwise required, see instructions 31

32 Enter the amount from line 30, column (b)(ii) here. Individuals, enter the amount from income-producing property

on Schedule A (Form 1040), line 27, and enter the amount from property used as an employee on Schedule A

(Form 1040), line 22. Estates and trusts, partnerships, and S corporations, see instructions 32

Casualty or Theft of Property Held More Than One Year

33 Casualty or theft gains from Form 4797, line 32 33

34

35 35 Total losses. Add amounts on line 34, columns (b)(i) and (b)(ii)

36 Total gains. Add lines 33 and 34, column (c) 36

37 Add amounts on line 35, columns (b)(i) and (b)(ii) 37

Note: Partnerships, enter the amount from line 38a, 38b, or line 39 on Form 1065, Schedule K, line 7.

S corporations, enter the amount from line 38a or 38b on Form 1120S, Schedule K, line 6.

38 If the loss on line 37 is more than the gain on line 36:

a Combine line 35, column (b)(i) and line 36, and enter the net gain or (loss) here. Partnerships (except electing

large partnerships) and S corporations, see the note below. All others, enter this amount on Form 4797,

line 14. If Form 4797 is not otherwise required, see instructions 38a

b Enter the amount from line 35, column (b)(ii) here. Individuals, enter the amount from income-producing property on

Schedule A (Form 1040), line 27, and enter the amount from property used as an employee on Schedule A (Form 1040),

line 22. Estates and trusts, enter on the “Other deductions” line of your tax return. Partnerships (except electing large

partnerships) and S corporations, see the note below. Electing large partnerships, enter on Form 1065-B, Part II, line 11 38b

If the loss on line 37 is less than or equal to the gain on line 36, combine lines 36 and 37 and enter here. Partnerships

(except electing large partnerships), see the note below. All others, enter this amount on Form 4797, line 3, column (g)

and the net post-May 5 gain or (loss), if applicable, in column (h)

39

39

( )

( )

( )

( )

( )

( )

( )

( )

( )

( )

( )( )

Part I

Part II

Printed on recycled paper Form 4684 (2003)

Attachment Sequence No. 26
Department of the Treasury 2003 Internal Revenue Service

Instructions for Form 4684

Casualties and Thefts

Section references are to the Internal Revenue Code.

General Instructions treated as similar or related in service 1400L(h)) that was converted because

or use to property held for use in a of the September 11, 2001, terrorist

trade or business or for investment if: attacks, special rules may apply. See

Purpose of Form • The property you are replacing was Gains Realized on Property in the

damaged or destroyed in a disaster and New York Liberty Zone on page 2. Use Form 4684 to report gains and • The area in which the property was losses from casualties and thefts.

Attach Form 4684 to your tax return. damaged or destroyed was declared by When To Deduct a Loss the President of the United States to Deduct the part of your casualty or theft warrant Federal assistance because of Losses You May Deduct loss that is not reimbursable in the tax that disaster. You may deduct losses from fire, storm, year the casualty occurred or the theft Generally, you must recognize the was discovered. However, a disaster shipwreck, or other casualty, or theft gain if you receive unlike property or (for example, larceny, embezzlement, loss and a loss from deposits in money as reimbursement. But you and robbery). insolvent or bankrupt financial generally can choose to postpone all or institutions may be treated differently. If your property is covered by part of the gain if, within 2 years of the See Disaster Losses below and insurance, you must file a timely end of the first tax year in which any Special Treatment for Losses on insurance claim for reimbursement of part of the gain is realized, you Deposits in Insolvent or Bankrupt your loss. Otherwise, you cannot purchase: Financial Institutions on page 2. deduct the loss as a casualty or theft • Property similar or related in service

or use to the damaged, destroyed, or If you are not sure whether part of loss. However, the part of the loss that

is not covered by insurance is still stolen property or your casualty or theft loss will be

deductible. • A controlling interest (at least 80%) in reimbursed, do not deduct that part

a corporation owning such property. until the tax year when you become Related expenses. The related To postpone all of the gain, the cost reasonably certain that it will not be expenses you have due to a casualty or of the replacement property must be reimbursed. theft, such as expenses for the

treatment of personal injuries or for the equal to or more than the If you are reimbursed for a loss you

rental of a car, are not deductible as reimbursement you received for your deducted in an earlier year, include the property. If the cost of the replacement casualty or theft losses. reimbursement in your income in the property is less than the reimbursement year you received it, but only to the Costs for protection against future received, you must recognize the gain extent the deduction reduced your tax casualties are not deductible but should to the extent the reimbursement in an earlier year. be capitalized as permanent exceeds the cost of the replacement improvements. An example would be See Pub. 547 for special rules on property. the cost of a levee to stop flooding. when to deduct losses from casualties

If the replacement property or stock and thefts to leased property.

Losses You May Not is acquired from a related person, gain

generally cannot be postponed by: Disaster Losses Deduct • Corporations (other than S A disaster loss is a loss that occurred in corporations); • Money or property misplaced or lost. an area determined by the President of • Partnerships more than 50% owned • Breakage of china, glassware, the United States to warrant Federal by one or more corporations (other than furniture, and similar items under disaster assistance. S corporations); or normal conditions.

• Progressive damage to property • All other taxpayers, unless the You may elect to deduct a disaster

(buildings, clothes, trees, etc.) caused aggregate realized gains on the loss in the tax year immediately prior to

by termites, moths, other insects, or involuntarily converted property are the tax year in which the disaster

disease. $100,000 or less for the tax year. This occurred as long as the loss would

rule applies to partnerships and S otherwise be allowed as a deduction in

Gain on Reimbursement corporations at both the entity and the tax year it occurred.

partner or shareholder level. This election must be made by filing If the amount you receive in insurance For details, see section 1033(i). your return or amended return for the or other reimbursement is more than For details on how to postpone the prior year, and claiming your disaster the cost or other basis of the property, gain, see Pub. 547, Casualties, loss on it, by the later of: you have a gain. If you have a gain, Disasters, and Thefts. • The due date for filing your original you may have to pay tax on it, or you

may be able to postpone the gain. return (without extensions) for the tax If your main home was located in a year in which the disaster actually Do not report the gain on damaged, Presidentially declared disaster area, occurred or destroyed, or stolen property if you and that home or any of its contents • The due date for filing your original receive property that is similar or were damaged or destroyed due to the return (including extensions) for the tax related to it in service or use. Your disaster, special rules apply. See Gains year immediately prior to the tax year in basis in the new property is the same Realized on Homes in Disaster Areas which the disaster actually occurred. as your basis in the old property. on page 2. You may revoke your election within

Any tangible replacement property If you had property in the New York 90 days after making it by returning to

held for use in a trade or business is Liberty Zone (as defined in section the IRS any refund or credit you

Cat. No. 12998Z
received from the election. If you and substantially all of the use of the • A casualty loss to personal use

revoke your election before receiving a replacement property is in the city of property on Form 4684 or

refund, you must repay the refund New York, New York. • An ordinary loss (miscellaneous

within 30 days after receiving it. itemized deduction) on line 22 of Example. Your main home and its

contents were completely destroyed in Schedule A (Form 1040), Itemized On the return on which you claim the 2003 by a fire in a Presidentially Deductions. The maximum amount you disaster loss, specify the date(s) of the declared disaster area. In 2003, you can claim is $20,000 ($10,000 if you disaster and the city, town, county, and are married filing separately). Your state in which the damaged or received insurance proceeds of

$200,000 for the home, $25,000 for deduction is reduced by any expected destroyed property was located. unscheduled personal property in your state insurance proceeds and is subject Note: To determine the amount to home, $5,000 for jewelry, and $10,000 to the 2% limit.

deduct for a disaster loss, you must for a stamp collection. The jewelry and If you elect, you can wait until the take into account as reimbursements year of final determination of the actual stamp collection were kept in your any benefits you received from Federal home and were scheduled property on loss and treat that amount as a

or state programs to restore your nonbusiness bad debt. A nonbusiness your insurance policy. No gain is property. recognized on the $25,000 you bad debt is deducted on Schedule D

If your home was located in a received for the unscheduled personal (Form 1040), Capital Gains and

disaster area and your state or local property. If you reinvest the remaining Losses, as a short-term capital loss.

government ordered you to tear it down proceeds of $215,000 in a replacement If you are a 1% or more owner or an

or move it because it was no longer home, any type of replacement officer of the financial institution, or are

safe to use as a home, the loss in value contents (whether scheduled or related to any such owner or officer,

because it is no longer safe is treated unscheduled), or both, you can elect to you cannot deduct the loss as a

as a disaster loss. The order for you to postpone any gain on your home, casualty loss or as an ordinary loss.

tear down or move the home must have jewelry, or stamp collection. If you See Pub. 550, Investment Income and

been issued within 120 days after the reinvest less than $215,000, any gain is Expenses, for the definition of “related.”

area was officially declared a disaster recognized only to the extent $215,000 You cannot elect the ordinary loss area. exceeds the amount you reinvest in a deduction if any part of the deposits replacement home, any type of For purposes of figuring the disaster related to the loss is federally insured. replacement contents (whether loss, use the value of your home before If you elect to deduct the loss as a scheduled or unscheduled), or both. To you moved it or tore it down as its fair casualty loss or as an ordinary loss and postpone gain, you must purchase the market value (FMV) after the casualty. you have more than one account in the replacement property before 2008. same financial institution, you must Your basis in the replacement property Gains Realized on include all your accounts. Once you equals its cost decreased by the make the election, you cannot change it Homes in Disaster Areas amount of any postponed gain. without permission from the IRS. For details on how to postpone gain, The following rules apply if your main To elect to deduct the loss as a see Pub. 547. home was located in an area declared casualty loss, complete Form 4684 as by the President of the United States to follows: On line 1, enter the name of

warrant Federal assistance as the Gains Realized on the financial institution and write

result of a disaster, and the home or Property in the New York “Insolvent Financial Institution.” Skip any of its contents were damaged or lines 2 through 9. Enter the amount of destroyed due to the disaster. These Liberty Zone the loss on line 10, and complete the

rules also apply to renters who receive rest of Section A. If you choose to postpone any gain on insurance proceeds for damaged or property located in the New York If, in a later year, you recover an destroyed property in a rented home Liberty Zone (as defined in section amount you deducted as a loss, you that is their main home. 1400L(h)) that was converted because may have to include in your income the • No gain is recognized on any of the terrorist attacks on September amount recovered for that year. For insurance proceeds received for 11, 2001, the period in which you must details, see Recoveries in Pub. 525, unscheduled personal property that purchase replacement property may be Taxable and Nontaxable Income. was part of the contents of the home. extended until 5 years after the end of • Any other insurance proceeds you the first tax year in which any part of receive for the home or its contents is

treated as received for a single item of the gain is realized. However, the

5-year period applies only if Specific Instructions property, and any replacement property substantially all of the use of the you purchase that is similar or related replacement property is in the city of Which Sections To in service or use to the home or its New York, New York. In all other cases, contents is treated as similar or related the normal replacement period rules Complete in service or use to that single item of apply. Use Section A to figure casualty or property. Therefore, you can choose to theft gains and losses for property that For details on how to postpone gain, recognize gain only to the extent the is not used in a trade or business or for see Pub. 547. insurance proceeds treated as received income-producing purposes. for that single item of property exceed Special Treatment for Nonbusiness casualty or theft losses the cost of the replacement property. are deductible only to the extent that • If you choose to postpone any gain Losses on Deposits in the amount of each separate casualty from the receipt of insurance or other loss is more than $100 and the total reimbursement for your main home or Insolvent or Bankrupt amount of all losses during the year is any of its contents, the period in which Financial Institutions more than 10% of adjusted gross you must purchase replacement income (line 35 of Form 1040). property is extended until 4 years after If you are an individual who incurred a Use Section B to figure casualty or the end of the first tax year in which any loss from a deposit in a bank, credit

part of the gain is realized. However, union, or other financial institution theft gains and losses for property that

is used in a trade or business or for the 4-year period is extended to 5 years because it became insolvent or income-producing purposes. if your main home or any of its contents bankrupt and you can reasonably

were located in the New York Liberty estimate your loss, you can elect to If property is used partly in a trade or

Zone (as defined in section 1400L(h)) deduct the loss as: business and partly for personal

-2-
purposes, such as a personal home are able to collect, minus lawyers’ fees determining FMV are important

with a rental unit, figure the personal and other necessary expenses, is a elements in proving your loss.

part in Section A and the business part reimbursement. The appraised value of property in Section B. • You accept repairs, restoration, or immediately after the casualty must be cleanup services provided by relief Section A—Personal Use adjusted (increased) for the effects of agencies, it is considered a any general market decline that may Property reimbursement. occur at the same time as the casualty • A bonding company pays you for a Use a separate column for lines 1 or theft. For example, the value of all theft loss, the payment is also through 9 to show each item lost or nearby property may become considered a reimbursement. damaged from a single casualty or depressed because it is in an area theft. If more than four items were lost Lump-sum reimbursement. If you where such occurrences are

or damaged, use additional sheets have a casualty or theft loss of several commonplace. This general decline in following the format of lines 1 through assets at the same time and you market value is not part of the 9. receive a lump-sum reimbursement, property’s decrease in FMV as a result you must divide the amount you receive Use a separate Form 4684 through of the casualty or theft. among the assets according to the line 12 for each casualty or theft FMV of each asset at the time of the Replacement cost or the cost of involving property not used in a trade or loss. repairs is not necessarily FMV. business or for income-producing Grants, gifts, and other payments. However, you may be able to use the purposes. Grants and other payments you receive cost of repairs to the damaged property Do not include any loss previously as evidence of loss in value if: to help you after a casualty are deducted on an estate tax return. considered reimbursements only if they • The repairs are necessary to restore

must be used specifically to repair or the property to the condition it was in If you are liable for casualty or theft immediately before the casualty; losses to property you lease from replace your property. Such payments

will reduce your casualty loss • The amount spent for repairs is not someone else, see Pub. 547.

deduction. If there are no conditions on excessive; Line 2 how you have to use the money you • The repairs only correct the damage

Cost or other basis usually means receive, it is not a reimbursement. caused by the casualty; and

original cost plus improvements. • The value of the property after the Use and occupancy insurance. If

Subtract any postponed gain from the repairs is not, as a result of the repairs, insurance reimburses you for your loss sale of a previous main home. Special more than the value of the property of business income, it does not reduce immediately before the casualty. rules apply to property received as a your casualty or theft loss. The gift or inheritance. See Pub. 551, To figure a casualty loss to real Basis reimbursement is income, and is taxed of Assets, for details. estate not used in a trade, business, or in the same manner as your business for income-producing purposes, income. Line 3 measure the decrease in value of the

Enter on this line the amount of Line 4 property as a whole. All improvements,

insurance or other reimbursement you such as buildings, trees, and shrubs, If you are entitled to an insurance received or expect to receive for each payment or other reimbursement for are considered together as one item.

property. Include your insurance any part of a casualty or theft loss but Figure the loss separately for other

coverage whether or not you are filing a you choose not to file a claim for the items. For example, figure the loss

claim for reimbursement. For example, separately for each piece of furniture. loss, you cannot realize a gain from your car worth $2,000 is totally that payment or reimbursement. destroyed in a collision. You are Therefore, figure the gain on line 4 by Line 15

insured with a $500 deductible, but subtracting your cost or other basis in If line 14 is more than line 13:

decide not to report it to your insurance the property (line 2) only from the • Combine your short-term gains with company because you are afraid the amount of reimbursement you actually your short-term losses and enter the insurance company will cancel your received. Enter the result on line 4, but net short-term gain or (loss) on policy. In this case, enter $1,500 on this do not enter less than zero. Schedule D (Form 1040), line 4, column

line. (f). Also enter the amount, if any, of net If you filed a claim for reimbursement short-term post-May 5 gain or (loss) on If you expect to be reimbursed but but did not receive it until after the year Schedule D (Form 1040), line 4, column have not yet received payment, you of the casualty or theft, include the gain

must still enter the expected (g). Estates and trusts enter these in your income in the year you received amounts on Schedule D (Form 1041), reimbursement from the loss. If, in a the reimbursement. line 2, columns (f) and (g), respectively. later tax year, you determine with Lines 5 and 6 • Combine your long-term gains with reasonable certainty that you will not be Fair market value (FMV) is the price at your long-term losses and enter the net reimbursed for all or part of the loss,

you can deduct for that year the which the property would be sold long-term gain or (loss) on Schedule D

between a willing buyer and a willing (Form 1040), line 11, column (f). Also amount of the loss that is not

seller, each having knowledge of the enter the amount, if any, of net reimbursed.

relevant facts. The difference between long-term post-May 5 gain or (loss) on Types of reimbursements. Insurance the FMV immediately before the Schedule D (Form 1040), line 11, is the most common way to be casualty or theft and the FMV column (g). Estates and trusts enter reimbursed for a casualty or theft loss, immediately after represents the these amounts on Schedule D (Form but if: decrease in FMV because of the 1041), line 7, columns (f) and (g), • Part of a Federal disaster loan under casualty or theft. respectively. the Disaster Relief Act is forgiven, the The FMV of property after a theft is The holding period for long-term part you do not have to pay back is gains and losses is more than 1 year. zero if the property is not recovered. considered a reimbursement. For short-term gains and losses, it is 1 • The person who leases your property FMV is generally determined by a year or less. To figure the holding must make repairs or must repay you competent appraisal. The appraiser’s period, begin counting on the day after for any part of a loss, the repayment knowledge of sales of comparable you received the property and include and the cost of the repairs are property about the same time as the the day the casualty or theft occurred. considered reimbursements. casualty or theft, knowledge of your

• A court awards you damages for a property before and after the See Schedule D for the definition of

casualty or theft loss, the amount you occurrence, and the methods of post-May 5 gain or (loss).

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Line 17 Line 21 Part II, line 11. S corporations, enter on

Form 1120S, Schedule K, line 10. Next Estates and trusts figure adjusted gross See the instructions for line 3. to that line, write “Form 4684.” income in the same way as individuals, Line 22 except that the costs of administration Line 33

are allowed in figuring adjusted gross See the instructions for line 4. If you had a casualty or theft gain from income. Lines 23 and 24 certain trade, business, or

Section B—Business and See the instructions for lines 5 and 6 for income-producing property held more

details on determining FMV. than 1 year, you may have to recapture Income-Producing Property Loss on each item figured part or all of the gain as ordinary Use a separate column of Part I, lines separately. Unlike a casualty loss to income. See the instructions for Form

19 through 27, to show each item lost 4797, Part III, for more information on personal use real estate, in which all or damaged from a single casualty or the types of property subject to improvements are considered one item, theft. If more than four items were lost recapture. If recapture applies, a casualty loss to business or or damaged, use additional sheets complete Form 4797, Part III, and this income-producing property must be following the format of Part I, lines 19 line, instead of Form 4684, line 34. figured separately for each item. For through 27. example, if casualty damage occurs to Line 38a Use a separate Section B, Part I, of both a building and to trees on the Taxpayers, other than partnerships and Form 4684 for each casualty or theft same piece of real estate, measure the S corporations, if Form 4797 is not involving property used in a trade or loss separately for the building and for otherwise required, enter the amount business or for income-producing the trees. from this line on page 1 of your tax purposes. Use one Section B, Part II, to

combine all Sections B, Part I. Line 28 return, on the line identified as from

Form 4797. Next to that line, write For details on the treatment of If the amount on line 28 includes losses “Form 4684.” casualties or thefts to business or on property held 1 year or less, and

income-producing property, including losses on property held for more than 1

rules on the loss of inventory through year, you must allocate the amount Paperwork Reduction Act Notice.

casualty or theft, see Pub. 547. between lines 29 and 34 according to We ask for the information on this form

how long you held each property. Enter to carry out the Internal Revenue laws If you had a casualty or theft loss on line 29 all gains and losses on of the United States. You are required involving a home you used for business property held 1 year or less. Enter on to give us the information. We need it to or rented out, your deductible loss may line 34 all gains and losses on property ensure that you are complying with be limited. First, complete Form 4684,

Section B, lines 19 through 26. If the held more than 1 year, except as these laws and to allow us to figure and provided in the instructions for line 33. collect the right amount of tax. loss involved a home used for a

business for which you are filing Part II, Column (a) You are not required to provide the

Schedule C (Form 1040), Profit or Use a separate line for each casualty or information requested on a form that is

Loss From Business, figure your subject to the Paperwork Reduction Act theft. deductible casualty or theft loss on unless the form displays a valid OMB

Form 8829, Expenses for Business Part II, Column (b)(i) control number. Books or records

Use of Your Home. Enter on line 27 of Enter the part of line 28 from trade, relating to a form or its instructions

Form 4684 the deductible loss from line business, rental, or royalty property must be retained as long as their

33 of Form 8829, and write “See Form (other than property you used in contents may become material in the

8829” above line 27. For a home you performing services as an employee). administration of any Internal Revenue

rented out or used for a business for law. Generally, tax returns and return Part II, Column (b)(ii) which you are not filing Schedule C information are confidential, as required

(Form 1040), see section 280A(c)(5) to Enter the part of line 28 from by section 6103.

figure your deductible loss. Attach a income-producing property and from The time needed to complete and statement showing your computation of property you used in performing file this form will vary depending on services as an employee. the deductible loss, enter that amount individual circumstances. The

on line 27, and write “See attached Income-producing property is property estimated average time is: statement” above line 27. held for investment, such as stocks,

notes, bonds, gold, silver, vacant lots, Recordkeeping . . . . . . . . 1 hr., 58 min.

and works of art. Note: A gain or loss from a casualty or Learning about the law or

Line 31 the form . . . . . . . . . . . . . 26 min. theft of property used in a passive

activity is not taken into account in If Form 4797, Sales of Business Preparing the form . . . . . 1 hr., 4 min. determining the loss from a passive Property, is not otherwise required, activity unless losses similar in cause Copying, assembling, enter the amount from this line on page and severity recur regularly in the and sending the form to 1 of your tax return, on the line activity. See Form 8582, Passive the IRS . . . . . . . . . . . . . . 34 min. identified as from Form 4797. Next to

Activity Loss Limitations, and its that line, write “Form 4684.” If you have comments concerning instructions for details. Line 32 the accuracy of these time estimates or

Line 20 Estates and trusts, enter on the “Other suggestions for making this form

simpler, we would be happy to hear Cost or adjusted basis usually means deductions” line of your tax return. from you. See the instructions for the original cost plus improvements, minus Partnerships (except electing large tax return with which this form is filed. depreciation allowed or allowable partnerships), enter on Form 1065,

(including any section 179 expense Schedule K, line 11. Electing large

deduction), amortization, depletion, etc. partnerships, enter on Form 1065-B,

Special rules apply to property received

as a gift or inheritance. See Pub. 551

for details.

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Printed on recycled paper
Publication 551 Contents (Rev. May 2002)

Cat. No. 15094C Important Reminder ...............

1 Department

of the Introduction .....................

1 Treasury Basis of Internal Cost Basis ...................... 2

Revenue Stocks and Bonds ..............

2

Service Assets Real Property .................

2

Business Assets ...............3

Allocating the Basis .............4

Adjusted Basis ..................4

Increases to Basis ..............4

Decreases to Basis .............5

Basis Other Than Cost .............6

Property Received for Services ......6

Taxable Exchanges .............7

Nontaxable Exchanges ...........7

Like-Kind Exchanges ............7

Property Transferred From a

Spouse ...................8

Property Received as a Gift ........8

Inherited Property ..............9

Property Changed to Business or

Rental Use ................ 10

How To Get Tax Help .............. 10

Glossary ....................... 11

Index .......................... 12

Important Reminder

Assets held on January 1, 2001. If you made

the election to treat an asset as sold and then

reacquired on January 1, 2001 (January 2,

2001, for readily tradable stock), and you hold

the asset for more than 5 years from that date,

any future gain on the asset is eligible for an

18% (instead of 20%) capital gains tax rate. If

you made the election, your basis in the reacquired asset is its closing market price (for readily tradable stock) or fair market value (for any

other capital asset or property used in a trade or

business) on the date you reacquired it.

Introduction

Basis is the amount of your investment in property for tax purposes. Use the basis of property

to figure depreciation, amortization, depletion,

and casualty losses. Also use it to figure gain or

loss on the sale or other disposition of property.

You must keep accurate records of all items that

affect the basis of property so you can make

these computations.

This publication is divided into the following

sections. • Cost Basis • Adjusted Basis • Basis Other Than Cost

The basis of property you buy is usually its

cost. You may also have to capitalize (add to
basis) certain other costs related to buying or you acquired first. For more information about

producing the property. Cost Basis identifying securities you sell, see Stocks and

Bonds under Basis of Investment Property in Your original basis in property is adjusted Terms you may need to know chapter 4 of Publication 550. (increased or decreased) by certain events. If (see Glossary): you make improvements to the property, in- Mutual fund shares. If you sell mutual fund crease your basis. If you take deductions for shares acquired at different times and prices, depreciation or casualty losses, reduce your ba- Business assets you can choose to use an average basis. For sis. Real property more information, see Average Basis in PublicaYou cannot determine your basis in some tion 564. Unstated interest

assets by cost. This includes property you receive as a gift or inheritance. It also applies to Real Property

property received in an involuntary conversion The basis of property you buy is usually its cost. If you buy real property, certain fees and other and certain other circumstances. The cost is the amount you pay in cash, debt expenses become part of your cost basis in the obligations, other property, or services. Your property. cost also includes amounts you pay for the fol- Comments and suggestions. We welcome lowing items. your comments about this publication and your Real estate taxes. If you pay real estate taxes • Sales tax. suggestions for future editions. the seller owed on real property you bought, and

• Freight. the seller did not reimburse you, treat those You can e-mail us while visiting our web site taxes as part of your basis. You cannot deduct at www.irs.gov. • Installation and testing. them as taxes.

You can write to us at the following address: • Excise taxes. If you reimburse the seller for taxes the seller

paid for you, you can usually deduct that amount • Legal and accounting fees (when they Internal Revenue Service as an expense in the year of purchase. Do not must be capitalized). Technical Publications Branch include that amount in the basis of the property.

W:CAR:MP:FP:P • Revenue stamps. If you did not reimburse the seller, you must

reduce your basis by the amount of those taxes. 1111 Constitution Ave. NW • Recording fees.

Washington, DC 20224 • Real estate taxes (if assumed for the Settlement costs. You can include in the baseller). sis of property you buy the settlement fees and

We respond to many letters by telephone. closing costs for buying the property. You cannot include fees and costs for getting a loan on Therefore, it would be helpful if you would in- You may also have to capitalize certain other the property. (A fee for buying property is a cost clude your daytime phone number, including the costs related to buying or producing property. that must be paid even if you bought the prop- area code, in your correspondence. erty for cash.) Loans with low or no interest. If you buy The following items are some of the settle- Useful Items property on a time-payment plan that charges ment fees or closing costs you can include in the little or no interest, the basis of your property is You may want to see: basis of your property. your stated purchase price, minus the amount

considered to be unstated interest. You gener- • Abstract fees (abstract of title fees). Publication ally have unstated interest if your interest rate is • Charges for installing utility services. ❏ 463 Travel, Entertainment, Gift, and Car less than the applicable federal rate. See the

Expenses discussion of unstated interest in Publication • Legal fees (including title search and prep- 537. aration of the sales contract and deed). ❏ 523 Selling Your Home

Purchase of a business. When you purchase • Recording fees. ❏ 525 Taxable and Nontaxable Income a trade or business, you generally purchase all • Surveys. ❏ 527 Residential Rental Property assets used in the business operations, such as

land, buildings, and machinery. Allocate the • Transfer taxes. ❏ 530 Tax Information for First-Time price among the various assets including any Homeowners • Owner’s title insurance. section 197 intangibles. See Allocating the Ba-

❏ 535 Business Expenses sis, later. • Any amounts the seller owes that you

agree to pay, such as back taxes or inter- ❏ 537 Installment Sales Stocks and Bonds est, recording or mortgage fees, charges

❏ 544 Sales and Other Dispositions of for improvements or repairs, and sales

Assets The basis of stocks or bonds you buy is gener- commissions.

ally the purchase price plus any costs of ❏ 550 Investment Income and Expenses purchase, such as commissions and recording Settlement costs do not include amounts

❏ 559 Survivors, Executors, and or transfer fees. If you get stocks or bonds other placed in escrow for the future payment of items

Administrators than by purchase, your basis is usually deter- such as taxes and insurance.

mined by the fair market value (FMV) or the The following items are some settlement ❏ 564 Mutual Fund Distributions previous owner’s adjusted the basis of stock. fees and closing costs you cannot include in the

You must adjust the basis of stocks for cer- ❏ 587 Business Use of Your Home basis of the property. tain events that occur after purchase. See

❏ 946 How To Depreciate Property Stocks and Bonds in chapter 4 of Publication 1) Fire insurance premiums.

550 for more information on the basis of stock.

Form (and Instructions) 2) Rent for occupancy of the property before

Identifying stock or bonds sold. If you can closing. ❏ 706-A United States Additional Estate adequately identify the shares of stock or the 3) Charges for utilities or other services re- Tax Return bonds you sold, their basis is the cost or other lated to occupancy of the property before

❏ basis of the particular shares of stock or bonds. 8594 Asset Acquisition Statement closing. If you buy and sell securities at various times in See How To Get Tax Help near the end of varying quantities and you cannot adequately 4) Charges connected with getting a loan.

this publication for information about getting identify the shares you sell, the basis of the The following are examples of these

publications and forms. securities you sell is the basis of the securities charges.

Page 2
a) Points (discount points, loan origination Do not deduct these expenses. You must capi- Under the uniform capitalization rules, you

fees). talize them (include them in the asset’s basis). must capitalize all direct costs and an allocable

Also, reduce your basis by any work opportunity part of most indirect costs you incur due to your b) Mortgage insurance premiums. credit, welfare-to-work credit, Indian employ- production or resale activities. The term capitalc) Loan assumption fees. ment credit, or empowerment zone employment ize means to include certain expenses in the

credit allowable on the wages you pay in (1), basis of property you produce or in your inven- d) Cost of a credit report. above. For information about these credits, see tory costs rather than deduct them as a current

e) Fees for an appraisal required by a Publication 954, Tax Incentives for Empower- expense. You recover these costs through delender. ment Zones and Other Distressed Communi- ductions for depreciation, amortization, or cost

ties. of goods sold when you use, sell, or otherwise

5) Fees for refinancing a mortgage. dispose of the property.

Do not include the value of your own Any cost you cannot use to figure your taxa- If these costs relate to business property, items labor, or any other labor you did not ble income for any tax year is not subject to the (1) through (3) are deductible as business ex- pay for, in the basis of any property you uniform capitalization rules. CAUTION

!

penses. Items (4) and (5) must be capitalized construct. as costs of getting a loan and can be deducted Example. If you incur a business meal ex- over the period of the loan. pense for which your deduction would be limited Business Assets to 50% of the cost of the meal, that amount is Points. If you pay points to obtain a loan (in- subject to the uniform capitalization rules. The cluding a mortgage, second mortgage, line of Terms you may need to know nondeductible part of the cost is not subject to credit, or a home equity loan), do not add the (see Glossary): the uniform capitalization rules. points to the basis of the related property. Generally, you deduct the points over the term of the More information. For more information Amortization loan. For more information on how to deduct about these rules, see the regulations under

points, see Points in chapter 5 of Publication Capitalization section 263A of the Internal Revenue Code and

535. Publication 538, Accounting Periods and Meth- Depletion ods. Points on home mortgage. Special rules Depreciation may apply to points you and the seller pay when Exceptions. The following are not subject to you obtain a mortgage to purchase your main Fair market value the uniform capitalization rules. home. If certain requirements are met, you can Going concern value deduct the points in full for the year in which they 1) Property you produce that you do not use

are paid. Reduce the basis of your home by any Goodwill in your trade, business, or activity conseller-paid points. For more information, see ducted for profit. Intangible property Points in Publication 936, Home Mortgage Inter- 2) Qualified creative expenses you pay or in- est Deduction. Personal property cur as a free-lance (self-employed) writer,

Assumption of mortgage. Recapture photographer, or artist that are otherwise If you buy prop- deductible on your tax return. erty and assume (or buy subject to) an existing Section 179 deduction

mortgage on the property, your basis includes 3) Property you produce under a long-term Section 197 intangibles the amount you pay for the property plus the contract, except for certain home construc- amount to be paid on the mortgage. Tangible property tion contracts.

Example. 4) Research and experimental expenses al- If you buy a building for $20,000

cash and assume a mortgage of $80,000 on it, If you purchase property to use in your business, lowable as a deduction under section 174

your basis is $100,000. of the Internal Revenue Code. your basis is usually its actual cost to you. If you

construct, create, or otherwise produce prop- 5) Costs for personal property acquired for Constructing assets. If you build property or erty, you must capitalize the costs as your basis. resale if your (or your predecessor’s) aver- have assets built for you, your expenses for this In certain circumstances, you may be subject to age annual gross receipts for the 3 previ- construction are part of your basis. Some of the uniform capitalization rules, next. ous tax years do not exceed $10 million. these expenses include the following items.

For other exceptions to the uniform capitaliza- • Cost of the land. Uniform Capitalization Rules tion rules, see section 1.263A-1(b) of the regula-

• Cost of labor and materials. tions.

The uniform capitalization rules specify the For information on the special rules that ap- • Architect’s fees. costs you add to basis in certain circumstances. ply to costs incurred in the business of farming,

• Building permit charges. see chapter 7 of Publication 225, Farmer’s Tax

Activities subject to the rules. You must use Guide. • Payments to contractors. the uniform capitalization rules if you do any of

the following in your trade or business or activity • Payments for rental equipment. carried on for profit. Intangible Assets • Inspection fees. • Produce real or tangible personal property Intangible assets include goodwill, patents, In addition, if you own a business and use your for use in the business or activity. copyrights, trademarks, trade names, and employees, material, and equipment to build an franchises. The basis of an intangible asset is asset, your basis would also include the follow- • Produce real or tangible personal property usually the cost to buy or create it. If you acquire for sale to customers. ing costs. multiple assets, for example a going business • Acquire property for resale. 1) Employee wages paid for the construction for a lump sum, see Allocating the Basis, later, to

work. figure the basis of the individual assets. The You produce property if you construct, build, basis of certain intangibles can be amortized. 2) Depreciation on equipment you own while install, manufacture, develop, improve, create, See chapter 9 of Publication 535 for information it is used in the construction. raise, or grow the property. Treat property pro- on the amortization of these costs.

duced for you under a contract as produced by 3) Operating and maintenance costs for you up to the amount you pay or costs you Patents. The basis of a patent you get for an equipment used in the construction. otherwise incur for the property. Tangible per- invention is the cost of development, such as

4) The cost of business supplies and materi- sonal property includes films, sound recordings, research and experimental expenditures, drawals used in the construction. video tapes, books, or similar property. ings, working models, and attorneys’ and govPage 3
ernmental fees. If you deduct the research and Agreement. The buyer and seller may enter cost for common improvements. See Revenue

experimental expenditures as current business into a written agreement as to the allocation of Procedure 92–29 for more information, includexpenses, you cannot include them in the basis any consideration or the fair market value (FMV) ing an explanation of the procedures for getting

of the patent. The value of the inventor’s time of any of the assets. This agreement is binding consent from the IRS.

spent on an invention is not part of the basis. on both parties unless the IRS determines the Use of erroneous cost basis. If you made amounts are not appropriate. Copyrights. If you are an author, the basis of a mistake in figuring the cost basis of subdivided

a copyright will usually be the cost of getting the Reporting requirement. Both the buyer and lots sold in previous years, you cannot correct

copyright plus copyright fees, attorneys’ fees, seller involved in the sale of business assets the mistake for years for which the statute of

clerical assistance, and the cost of plates that must report to the IRS the allocation of the sales limitations (generally 3 tax years) has expired.

price among section 197 intangibles and the Figure the basis of any remaining lots by allocat- remain in your possession. Do not include the

value of your time as the author, or any other other business assets. Use Form 8594 to pro- ing the correct original cost basis of the entire

person’s time you did not pay for. vide this information. The buyer and seller tract among the original lots.

should each attach Form 8594 to their federal

Franchises, trademarks, and trade names. income tax return for the year in which the sale Example. You bought a tract of land to

If you buy a franchise, trademark, or trade name, occurred. which you assigned a cost of $15,000. You subthe basis is its cost, unless you can deduct your divided the land into 15 building lots of equal

payments as a business expense. More information. See Sale of a Business in size and equitably divided your basis so that chapter 2 of Publication 544 for more informa- each lot had a basis of $1,000. You treated the

tion. Allocating the Basis sale of each lot as a separate transaction and

figured gain or loss separately on each sale.

If you buy multiple assets for a lump sum, allo- Several years later you determine that your

cate the amount you pay among the assets you Land and Buildings original basis in the tract was $22,500 and not

receive. You must make this allocation to figure $15,000. You sold eight lots using $8,000 of If you buy buildings and the land on which they your basis for depreciation and gain or loss on a basis in years for which the statute of limitations stand for a lump sum, allocate the basis of the later disposition of any of these assets. See has expired. You now can take $1,500 of basis property among the land and the buildings so Trade or Business Acquired, later. into account for figuring gain or loss only on the you can figure the depreciation allowable on the sale of each of the remaining seven lots buildings. ($22,500 basis divided among all 15 lots). You Figure the basis of each asset by multiplying Group of Assets Acquired cannot refigure the basis of the eight lots sold in the lump sum by a fraction. The numerator is the tax years barred by the statute of limitations. If you buy multiple assets for a lump sum, you FMV of that asset and the denominator is the

and the seller may agree to a specific allocation FMV of the whole property at the time of

of the purchase price among the assets in the purchase. If you are not certain of the FMV of the

land and buildings, you can allocate the basis sales contract. If this allocation is based on the

value of each asset and you and the seller have based on their assessed values for real estate Adjusted Basis

adverse tax interests, the allocation generally tax purposes.

Before figuring gain or loss on a sale, exchange, will be accepted. However, see Trade or Busi- Demolition of building. Add demolition costs or other disposition of property or figuring allow- ness Acquired, next. and other losses incurred for the demolition of able depreciation, depletion, or amortization, any building to the basis of the land on which the you must usually make certain adjustments to demolished building was located. Do not claim the basis of the property. The result of these Trade or Business Acquired the costs as a current deduction. adjustments to the basis is the adjusted basis.

If you acquire a trade or business, allocate the Modification of building. A modification of

consideration paid to the various assets ac- a building will not be treated as a demolition if Increases to Basis

quired. Generally, reduce the consideration paid the following conditions are satisfied.

by any cash and general deposit accounts (in- Increase the basis of any property by all items • 75 percent or more of the existing external cluding checking and savings accounts) re- properly added to a capital account. These in- walls of the building are retained in place ceived. Allocate the remaining consideration to clude the cost of any improvements having a as internal or external walls. the other business assets received in proportion useful life of more than 1 year.

to (but not more than) their fair market value in • 75 percent or more of the existing internal Rehabilitation expenses also increase basis.

the following order. structural framework of the building is re- However, you must subtract any rehabilitation

tained in place. credit allowed for these expenses before you 1) Certificates of deposit, U.S. Government add them to your basis. If you have to recapture securities, foreign currency, and actively If the building is a certified historic structure, any of the credit, increase your basis by the traded personal property, including stock the modification must also be part of a certified recaptured amount. and securities. rehabilitation. If you make additions or improvements to

2) Accounts receivable, other debt instru- If these conditions are met, add the costs of business property, keep separate accounts for

ments, and assets you mark to market at the modifications to the basis of the building. them. Also, you must depreciate the basis of

each according to the depreciation rules that least annually for federal income tax pur- Subdivided lots. If you buy a tract of land and poses. would apply to the underlying property if you had subdivide it, you must determine the basis of placed it in service at the same time you placed 3) Property of a kind that would properly be each lot. This is necessary because you must the addition or improvement in service. For more included in inventory if on hand at the end figure the gain or loss on the sale of each individ- information, see Publication 946. of the tax year or property held primarily ual lot. As a result, you do not recover your The following items increase the basis of for sale to customers in the ordinary entire cost in the tract until you have sold all of property. course of business. the lots.

To determine the basis of an individual lot, • The cost of extending utility service lines 4) All other assets except section 197 in- multiply the total cost of the tract by a fraction. to the property. tangibles, goodwill, and going concern The numerator is the FMV of the lot and the value. • Impact fees. denominator is the FMV of the entire tract.

5) Section 197 intangibles except goodwill • Legal fees, such as the cost of defending Future improvement costs. If you are a and going concern value. and perfecting title. developer and sell subdivided lots before the

6) Goodwill and going concern value development work is completed, you can (with • Legal fees for obtaining a decrease in an

(whether or not they qualify as section 197 IRS consent) include in the basis of the proper- assessment levied against property to pay

intangibles). ties sold an allocation of the estimated future for local improvements.

Page 4
Table 1. Examples of Increases and Decreases to Basis Casualties and Thefts

If you have a casualty or theft loss, decrease the Increases to Basis Decreases to Basis

basis in your property by any insurance or other Capital improvements: Exclusion from income of subsidies for energy reimbursement and by any deductible loss not Putting an addition on your home conservation measures covered by insurance. Replacing an entire roof

 Paving your driveway Casualty or theft loss deductions and insurance You must increase your basis in the property

 Installing central air conditioning reimbursements by the amount you spend on repairs that sub- Rewiring your home stantially prolong the life of the property, in- Credit for qualified electric vehicles crease its value, or adapt it to a different use. To

Assessments for local improvements: Section 179 deduction make this determination, compare the repaired Water connections property to the property before the casualty. For Sidewalks Deduction for clean-fuel vehicles and clean-fuel more information on casualty and theft losses, Roads vehicle refueling property see Publication 547, Casualties, Disasters, and Casualty losses: Depreciation Thefts. Restoring damaged property

Nontaxable corporate distributions

Legal fees: Easements

 Cost of defending and perfecting a title

The amount you receive for granting an ease- Zoning costs ment is generally considered to be a sale of an

interest in real property. It reduces the basis of

• Zoning costs. • Costs of establishing, maintaining, or in- the affected part of the property. If the amount

creasing the circulation of a newspaper or received is more than the basis of the part of the • The capitalized value of a redeemable other periodical. property affected by the easement, reduce your ground rent. basis in that part to zero and treat the excess as • Cost of removing architectural and trans- a recognized gain. portation barriers to people with disabilities Assessments for and the elderly. If you claim the disabled Local Improvements access credit, you must reduce the Credit for Qualified Electric amount you deduct or capitalize by the Increase the basis of property by assessments amount of the credit. Vehicles for items such as paving roads and building

ditches that increase the value of the property If you claim the credit for a qualified electric For more information about deducting or capi- assessed. Do not deduct them as taxes. How- vehicle, you must reduce your basis in that vehi- talizing costs, see chapter 8 in Publication 535. ever, you can deduct as taxes charges for main- cle by the maximum credit allowable even if the tenance, repairs, or interest charges related to Decreases to Basis credit allowed is less than that maximum the improvements. amount. For information on this credit, see chapExample. Your city changes the street in The following items reduce the basis of property. ter 12 in Publication 535.

front of your store into an enclosed pedestrian • Section 179 deduction.

mall and assesses you and other affected landowners for the cost of the conversion. Add the • Deduction for clean-fuel vehicles and re- Gas-Guzzler Tax

fueling property. assessment to your property’s basis. In this ex- Decrease the basis in your car by the gas-guz- ample, the assessment is a depreciable asset. • Nontaxable corporate distributions. zler (fuel economy) tax if you begin using the car

• Deductions previously allowed (or allowa- within 1 year of the date of its first sale for

Deducting vs. Capitalizing Costs ble) for amortization, depreciation, and de- ultimate use. This rule also applies to someone

pletion. who later buys the car and begins using it not

Do not add to your basis costs you can deduct more than 1 year after the original sale for ulti- • Exclusion of subsidies for energy conser- as current expenses. For example, amounts vation measures. mate use. If the car is imported, the one-year paid for incidental repairs or maintenance that period begins on the date of entry or withdrawal are deductible as business expenses cannot be • Credit for qualified electric vehicles. of the car from the warehouse if that date is later added to basis. However, you can choose either • Postponed gain from sale of home. than the date of the first sale for ultimate use. to deduct or to capitalize certain other costs. If

you capitalize these costs, include them in your • Investment credit (part or all) taken.

basis. If you deduct them, do not include them in • Casualty and theft losses and insurance Section 179 Deduction your basis. (See Uniform Capitalization Rules, reimbursements. earlier.) If you take the section 179 deduction for all or • Certain canceled debt excluded from in- The costs you can choose to deduct or to part of the cost of qualifying business property, come. capitalize include the following. decrease the basis of the property by the deduc-

• Rebates from a manufacturer or seller. tion. For more information about the section 179 • Carrying charges, such as interest and deduction, see Publication 946. taxes, that you pay to own property, ex- • Easements.

cept carrying charges that must be capital- • Gas-guzzler tax. ized under the uniform capitalization rules. Deduction for Clean-Fuel Vehicles • Tax credit or refund for buying a • Research and experimentation costs. diesel-powered highway vehicle. and Refueling Property

• Intangible drilling and development costs • Adoption tax benefits. If you take the deduction for clean-fuel vehicles for oil, gas, and geothermal wells. or clean-fuel vehicle refueling property, de- • Credit for employer-provided child care. • Exploration costs for new mineral depos- crease the basis of the property by the amount

its. Some of these items are discussed next. of the deduction. For more information about

• Mining development costs for a new min- these deductions, see chapter 12 in Publication

eral deposit. 535.

Page 5
Exclusion of Subsidies for Energy property. However, in situation (3), you must The basis of the land, $10,325, remains unConservation Measures reduce the basis of your depreciable property by changed. It is not affected by any of the above

the excluded amount. adjustments.

You can exclude from gross income any subsidy For more information about canceled debt in

you received from a public utility company for a bankruptcy case or during insolvency, see the purchase or installation of any energy con- Publication 908, Bankruptcy Tax Guide. For servation measure for a dwelling unit. Reduce more information about canceled debt that is Basis Other Than Cost the basis of the property for which you received qualified farm debt, see chapter 4 in Publication the subsidy by the excluded amount. For more 225. For more information about qualified real There are many times when you cannot use cost information on this subsidy, see Publication 525. property business debt, see chapter 5 in Publi- as basis. In these cases, the fair market value or

cation 334, Tax Guide for Small Business. the adjusted basis of property may be used.

Adjusted basis is discussed earlier. Depreciation

Postponed Gain From Sale of Fair market value (FMV). FMV is the price at Decrease the basis of property by the deprecia- Home which property would change hands between a tion you deducted, or could have deducted, on buyer and a seller, neither having to buy or sell, your tax returns under the method of deprecia- If you postponed gain from the sale of your main and both having reasonable knowledge of all tion you chose. If you took less depreciation than home before May 7, 1997, you must reduce the necessary facts. Sales of similar property on or you could have under the method chosen, de- basis of your new home by the postponed gain. about the same date may be helpful in figuring crease the basis by the amount you could have For more information on the rules for the sale of the property’s FMV. taken under that method. If you did not take a a home, see Publication 523. depreciation deduction, reduce the basis by the

full amount of the depreciation you could have Property Received

taken. for Services Adoption Tax Benefits Unless a timely election is made not to deduct the special depreciation allowance for prop- If you receive property for services, include the If you claim an adoption credit for the cost of erty placed in service after September 10, 2001, property’s FMV in income. The amount you in- improvements you added to the basis of your decrease the property’s basis by the special clude in income becomes your basis. If the ser- home, decrease the basis of your home by the depreciation allowance you deducted or could vices were performed for a price agreed on credit allowed. This also applies to amounts you have deducted. beforehand, it will be accepted as the FMV of the received under an employer’s adoption assis- property if there is no evidence to the contrary. If you deducted more depreciation than you tance program and excluded from income. For should have, decrease your basis by the amount more information on these benefits, see Publica- equal to the depreciation you should have de- tion 968, Tax Benefits for Adoption. Bargain Purchases ducted plus the part of the excess depreciation

you deducted that actually reduced your tax A bargain purchase is a purchase of an item for liability for the year. Employer-Provided Child Care less than its FMV. If, as compensation for ser- In decreasing your basis for depreciation, vices, you purchase goods or other property at take into account the amount deducted on your If you are an employer, you can claim the less than FMV, include the difference between tax returns as depreciation and any depreciation employer-provided child care credit on amounts the purchase price and the property’s FMV in capitalized under the uniform capitalization you paid or incurred to acquire, construct, reha- your income. Your basis in the property is its rules. bilitate, or expand property used as part of your FMV (your purchase price plus the amount you For information on figuring depreciation, see qualified child care facility. You must reduce include in income). Publication 946. your basis in that property by the credit claimed. If the difference between your purchase If you are claiming depreciation on a busi- price and the FMV represents a qualified em- ness vehicle, see Publication 463. If the car is Example ployee discount, do not include the difference in not used more than 50% for business during the income. However, your basis in the property is tax year, you may have to recapture excess In January 1997, you paid $80,000 for real prop- still its FMV. See Employee Discounts in Publidepreciation. Include the excess depreciation in erty to be used as a factory. You also paid cation 15–B, Employer’s Tax Guide to Fringe your gross income and add it to your basis in the commissions of $2,000 and title search and le- Benefits. property. For information on the computation of gal fees of $600. You allocated the total cost of

excess depreciation, see chapter 4 in Publica- $82,600 between the land and the building—

tion 463. $10,325 for the land and $72,275 for the build- Restricted Property ing. Immediately you spent $20,000 in remodeling the building before you placed it in service. If you receive property for your services and the

Canceled Debt Excluded You were allowed depreciation of $14,526 for property is subject to certain restrictions, your

From Income the years 1997 through 2001. In 2000 you had a basis in the property is its FMV when it becomes

$5,000 casualty loss from a fire that was not substantially vested unless you make the elec- If a debt you owe is canceled or forgiven, other covered by insurance on the building. You tion discussed later. Property becomes substan- than as a gift or bequest, you generally must claimed a deduction for this loss. You spent tially vested when your rights in the property or include the canceled amount in your gross in- $5,500 to repair the fire damages and extend the the rights of any person to whom you transfer come for tax purposes. A debt includes any useful life of the building. The adjusted basis of the property are not subject to a substantial risk indebtedness for which you are liable or which of forfeiture. the building on January 1, 2002, is figured as attaches to property you hold. follows: There is substantial risk of forfeiture when

You can exclude canceled debt from income the rights to full enjoyment of the property de- in the following situations. Original cost of building including pend on the future performance of substantial

fees and commissions ......... $72,275 services by any person. 1) Debt canceled in a bankruptcy case or Adjustments to basis: When the property becomes substantially when you are insolvent. Add: vested, include the FMV, less any amount you Improvements ............ 20,000 2) Qualified farm debt. paid for the property, in income. Repair of fire damages ...... 5,500

3) Qualified real property business debt (pro- $97,775 Example. Your employer gives you stock vided you are not a C corporation). Subtract: for services performed under the condition that Depreciation ....... $14,526 If you exclude from income canceled debt under you will have to return the stock unless you Deducted casualty loss 5,000 19,526 situation (1) or (2), you may have to reduce the complete 5 years of service. The stock is under

basis of your depreciable and nondepreciable a substantial risk of forfeiture and is not substan- Adjusted basis on January 1, 2002 $78,249

Page 6
tially vested when you receive it. You do not Money or property not similar or related. If To qualify as a like-kind exchange, you must

report any income until you have completed the you receive money or property not similar or hold for business or investment purposes both

5 years of service that satisfy the condition. related in service or use to the converted prop- the property you transfer and the property you

erty, and you buy replacement property similar receive. There must also be an exchange of

Fair market value. Figure the FMV of property or related in service or use to the converted like-kind property. For more information, see

you received without considering any restriction property, the basis of the new property is its cost Like-Kind Exchanges in Publication 544.

except one that by its terms will never end. decreased by the gain not recognized on the The basis of the property you receive is the conversion. same as the basis of the property you gave up. Example. You received stock from your employer for services you performed. If you want to Example. The state condemned your prop- Example. You exchange real estate (ad- sell the stock while you are still employed, you erty. The property had an adjusted basis of justed basis $50,000, FMV $80,000) held for must sell the stock to your employer at book $26,000 and the state paid you $31,000 for it. investment for other real estate (FMV $80,000) value. At your retirement or death, you or your You realized a gain of $5,000 ($31,000 − held for investment. Your basis in the new prop- estate must offer to sell the stock to your em- $26,000). You bought replacement property erty is the same as the basis of the old ployer at its book value. This is a restriction that similar in use to the converted property for ($50,000). by its terms will never end and you must con- $29,000. You recognize a gain of $2,000

sider it when you figure the FMV. ($31,000 − $29,000), the unspent part of the Exchange expenses. Exchange expenses payment from the state. Your gain not recog- are generally the closing costs you pay. They Election. You can choose to include in your nized is $3,000, the difference between the include such items as brokerage commissions, gross income the FMV of the property at the time $5,000 realized gain and the $2,000 recognized attorney fees, deed preparation fees, etc. Add of transfer, less any amount you paid for it. If you gain. The basis of the new property is figured as them to the basis of the like-kind property re- make this choice, the substantially vested rules follows: ceived. do not apply. Your basis is the amount you paid

plus the amount you included in income. Cost of replacement property ...... $29,000

Minus: Gain not recognized ....... 3,000 Property plus cash. If you trade property in a See the discussion of Restricted Property in

like-kind exchange and also pay money, the Publication 525 for more information. Basis of the replacement property $26,000 basis of the property received is the basis of the

property you gave up increased by the money Taxable Exchanges Allocating the basis. you paid. If you buy more than

A taxable exchange is one in which the gain is one piece of replacement property, allocate your

basis among the properties based on their re- Example. You trade in a truck (adjusted ba- taxable or the loss is deductible. A taxable gain spective costs. sis $3,000) for another truck (FMV $7,500) and or deductible loss is also known as a recognized pay $4,000. Your basis in the new truck is gain or loss. If you receive property in exchange Example. The state in the previous exam- $7,000 (the $3,000 basis of the old truck plus the for other property in a taxable exchange, the ple condemned your unimproved real property $4,000 paid). basis of property you receive is usually its FMV and the replacement property you bought was at the time of the exchange. A taxable exchange

occurs when you receive cash or property not improved real property with both land and build- Special rules for related persons. If a

ings. Allocate the replacement property’s like-kind exchange takes place directly or indi- similar or related in use to the property ex- $26,000 basis between land and buildings rectly between related persons and either party changed. based on their respective costs. disposes of the property within 2 years after the

Example. You trade a tract of farm land with exchange, the exchange no longer qualifies for

an adjusted basis of $3,000 for a tractor that has More information. For more information like-kind exchange treatment. Each person

an FMV of $6,000. You must report a taxable about condemnations, see Involuntary Conver- must report any gain or loss not recognized on

gain of $3,000 for the land. The tractor has a sions in Publication 544. For more information the original exchange. Each person reports it on

basis of $6,000. about casualty and theft losses, see Publication the tax return filed for the year in which the later

547. disposition occurs. If this rule applies, the basis

of the property received in the original exchange

Involuntary Conversions Nontaxable Exchanges will be its fair market value.

These rules generally do not apply to the If you receive property as a result of an involun- Terms you may need to know following kinds of property dispositions. tary conversion, such as a casualty, theft, or (see Glossary): condemnation, you can figure the basis of the 1) Dispositions due to the death of either re- replacement property you receive using the ba- Intangible property lated person. sis of the converted property.

Like-kind property 2) Involuntary conversions.

Similar or related property. If you receive Personal property 3) Dispositions in which neither the original replacement property similar or related in ser- exchange nor the subsequent disposition vice or use to the converted property, the re- Real property had as a main purpose the avoidance of placement property’s basis is the old property’s Tangible property federal income tax. basis on the date of the conversion. However,

make the following adjustments. Related persons. Generally, related per1) Decrease the basis by the following. A nontaxable exchange is an exchange in which sons are ancestors, lineal descendants, brothyou are not taxed on any gain and you cannot ers and sisters (whole or half), and a spouse.

a) Any loss you recognize on the conver- deduct any loss. If you receive property in a For other related persons (for example, two sion. nontaxable exchange, its basis is usually the corporations, an individual and a corporation, a same as the basis of the property you trans- b) Any money you receive that you do not grantor and fiduciary, etc.), see Nondeductible ferred. A nontaxable gain or loss is also known spend on similar property. Loss in chapter 2 of Publication 544. as an unrecognized gain or loss.

2) Increase the basis by the following. Exchange of business property. ExchangLike-Kind Exchanges ing the assets of one business for the assets of a) Any gain you recognize on the conver- another business is a multiple property ex- sion. The exchange of property for the same kind of change. For information on figuring basis, see

b) Any cost of acquiring the replacement property is the most common type of nontaxable Multiple Property Exchanges in chapter 1 of

property. exchange. Publication 544.

Page 7
Partially Nontaxable Exchange Allocate the total basis of $15,500 first to the the same as your basis for figuring a gain or loss

unlike property — the truck ($3,000). This is the on its sale.

A partially nontaxable exchange is an exchange truck’s FMV. The rest ($12,500) is the basis of For information on figuring your basis for in which you receive unlike property or money in the real estate. depreciation, see Publication 463. addition to like property. The basis of the property you receive is the same as the basis of the Property Transferred property you gave up, with the following adjust- Sale and Purchase

ments. From a Spouse

If you sell property and buy similar property in The basis of property transferred to you or trans- 1) Decrease the basis by the following two mutually dependent transactions, you may

have to treat the sale and purchase as a single ferred in trust for your benefit by your spouse (or amounts.

nontaxable exchange. former spouse if the transfer is incident to dia) Any money you receive. vorce), is the same as your spouse’s adjusted

Example. You are a salesperson and you basis. However, adjust your basis for any gain b) Any loss you recognize on the ex- use one of your cars 100% for business. You recognized by your spouse or former spouse on change. have used this car in your sales activities for 2 property transferred in trust. This rule applies

years and have depreciated it. Your adjusted only to a transfer of property in trust in which the 2) Increase the basis by the following basis in the car is $22,600 and its FMV is liabilities assumed, plus the liabilities to which amounts. $23,100. You are interested in a new car, which the property is subject, are more than the adsells for $28,000. If you trade your old car and justed basis of the property transferred. a) Any additional costs you incur.

pay $4,900 for the new one, your basis for de- If the property transferred to you is a series b) Any gain you recognize on the ex- preciation for the new car would be $27,500 E, series EE, or series I United States savings change. ($4,900 plus the $22,600 basis of your old car). bond, the transferor must include in income the

However, you want a higher basis for depreciat- interest accrued to the date of transfer. Your

If the other party to the exchange assumes ing the new car, so you agree to pay the dealer basis in the bond immediately after the transfer your liabilities, treat the debt assumption as $28,000 for the new car if he will pay you is equal to the transferor’s basis increased by money you received in the exchange. $23,100 for your old car. Because the two trans- the interest income includible in the transferor’s

actions are dependent on each other, you are income. For more information on these bonds, Example. You traded a truck (adjusted ba- treated as having exchanged your old car for the see Publication 550. sis $6,000) for a new truck (FMV $5,200) and new one and paid $4,900 ($28,000 − $23,100). At the time of the transfer, the transferor $1,000 cash. You realized a gain of $200 Your basis for depreciating the new car is must give you the records necessary to deter- ($6,200 − $6,000). This is the FMV of the truck $27,500, the same as if you traded the old car. mine the adjusted basis and holding period of received plus the cash minus the adjusted basis the property as of the date of transfer. of the truck you traded ($5,200 + $1,000 – For more information, see Publication 504, $6,000). You include all the gain in income (rec- Partial Business Use of Property Divorced or Separated Individuals. ognized gain) because the gain is less than the

cash received. Your basis in the new truck is: If you have property used partly for business and

partly for personal use, and you exchange it in a Property

Adjusted basis of old truck ........ $6,000 nontaxable exchange for property to be used Received as a Gift

Minus: Cash received (adjustment wholly or partly in your business, the basis of the 1(a)) ..................... 1,000 property you receive is figured as if you had To figure the basis of property you receive as a

$5,000 exchanged two properties. The first is an ex- gift, you must know its adjusted basis (defined Plus: Gain recognized (adjustment change of like-kind property. The second is earlier) to the donor just before it was given to 2(b)) . . . . . . . . . . . . . . . . . . . . . 200 personal-use property on which gain is recog- you, its FMV at the time it was given to you, and

Basis of new truck nized and loss is not recognized. any gift tax paid on it. ............ $5,200

First, figure your adjusted basis in the property as if you transferred two separate proper- Allocation of basis. Allocate the basis first to ties. Figure the adjusted basis of each part of the FMV Less Than

the unlike property, other than money, up to its property by taking into account any adjustments Donor’s Adjusted Basis FMV on the date of the exchange. The rest is the to basis. Deduct the depreciation you took or basis of the like property. If the FMV of the property at the time of the gift is could have taken from the adjusted basis of the less than the donor’s adjusted basis, your basis business part. Then figure the amount realized Example. You had an adjusted basis of depends on whether you have a gain or a loss for your property and allocate it to the business $15,000 in real estate you held for investment. when you dispose of the property. Your basis for and nonbusiness parts of the property. You exchanged it for other real estate to be held figuring gain is the same as the donor’s adjusted The business part of the property is permit- for investment with an FMV of $12,500, a truck basis plus or minus any required adjustment to ted to be exchanged tax free. However, you with an FMV of $3,000, and $1,000 cash. The basis while you held the property. Your basis for must recognize any gain from the exchange of truck is unlike property. You realized a gain of figuring loss is its FMV when you received the the nonbusiness part. You are deemed to have $1,500 ($16,500 − $15,000). This is the FMV of gift plus or minus any required adjustment to received, in exchange for the nonbusiness part, the real estate received plus the FMV of the basis while you held the property (see Adjusted an amount equal to its FMV on the date of the truck received plus the cash minus the adjusted Basis, earlier). exchange. The basis of the property you ac- basis of the real estate you traded ($12,500 + If you use the donor’s adjusted basis for quired is the total basis of the property trans- $3,000 + $1,000 – $15,000). You include in figuring a gain and get a loss, and then use the ferred (adjusted to the date of the exchange), income (recognize) all $1,500 of the gain be- FMV for figuring a loss and have a gain, you increased by any gain recognized on the non- cause it is less than the FMV of the unlike prop- have neither gain nor loss on the sale or disposi- business part. erty plus the cash received. Your basis in the tion of the property.

properties you received is figured as follows. If the nonbusiness part of the property

transferred is your main home, you Example. You received an acre of land as a

Adjusted basis of real estate may qualify to exclude from income all gift. At the time of the gift, the land had an FMV

TIP

transferred ................ $15,000 or part of the gain on that part. For more informa- of $8,000. The donor’s adjusted basis was Minus: Cash received (adjustment tion, see Publication 523. $10,000. After you received the land, no events 1(a)) .................... 1,000 occurred to increase or decrease your basis. If $14,000 Trade of car used partly in business. If you you sell the land for $12,000, you will have a Plus: Gain recognized (adjustment trade in a car you used partly in your business $2,000 gain because you must use the donor’s 2(b)) .................... 1,500 for another car you will use in your business, adjusted basis ($10,000) at the time of the gift as

Total basis of properties received $15,500 your basis for depreciation of the new car is not your basis to figure gain. If you sell the land for

Page 8
$7,000, you will have a $1,000 loss because you $50,000 (half of the $100,000 FMV). The basis Fair market value ............ $50,000

must use the FMV ($8,000) at the time of the gift Minus: Adjusted basis ......... 20,000 of the other half to your spouse’s heirs is also

as your basis to figure a loss. Net increase in value ......... $30,000 $50,000.

If the sales price is between $8,000 and Gift tax paid ............... $9,000 For more information on community prop- $10,000, you have neither gain nor loss. For Multiplied by ($30,000 ÷ $39,000) .77 erty, see Publication 555, Community Property. Gift tax due to net increase in value $6,930 instance, if the sales price was $9,000 and you Adjusted basis of property to your tried to figure a gain using the donor’s adjusted mother ................. 20,000 basis ($10,000), you would get a $1,000 loss. If Property Held by Surviving Tenant Your basis in the property ..... $26,930 you then tried to figure a loss using the FMV

($8,000), you would get a $1,000 gain. The following example explains the rule for the

basis of property held by a surviving tenant in Business property. If you hold the gift as Inherited Property joint tenancy or tenancy by the entirety. business property, your basis for figuring any Your basis in property you inherit from a dece- depreciation, depletion, or amortization deduc- dent is generally one of the following. Example. John and Jim owned, as joint te- tion is the same as the donor’s adjusted basis nants with right of survivorship, business prop- plus or minus any required adjustments to basis 1) The FMV of the property at the date of the erty they purchased for $30,000. John furnished while you hold the property. individual’s death. two-thirds of the purchase price and Jim furnished one-third. Depreciation deductions al- 2) The FMV on the alternate valuation date if FMV Equal to or More Than lowed before John’s death were $12,000. Under the personal representative for the estate Donor’s Adjusted Basis local law, each had a half interest in the income chooses to use alternate valuation. For infrom the property. At the date of John’s death, formation on the alternate valuation date, If the FMV of the property is equal to or greater the property had an FMV of $60,000, two-thirds see the instructions for Form 706. than the donor’s adjusted basis, your basis is the of which is includable in John’s estate. Jim

donor’s adjusted basis at the time you received 3) The value under the special-use valuation figures his basis in the property at the date of the gift. Increase your basis by all or part of any method for real property used in farming or John’s death as follows: gift tax paid, depending on the date of the gift. a closely held business if chosen for estate

Also, for figuring gain or loss from a sale or tax purposes. This method is discussed Interest Jim bought with his other disposition of the property, or for figuring later. own funds—1

/3 of $30,000

depreciation, depletion, or amortization deduc- cost ............... $10,000 4) The decedent’s adjusted basis in land to tions on business property, you must increase or Interest Jim received on the extent of the value excluded from the decrease your basis by any required adjust- John’s death—2

/3 of decedent’s taxable estate as a qualified ments to basis while you held the property. See $60,000 FMV ......... 40,000 $50,000 conservation easement. For information on Adjusted Basis, earlier. Minus: 1

/2 of $12,000 depreciation a qualified conservation easement, see the before John’s death ........... 6,000 Gift received before 1977. If you received a instructions to Form 706.

gift before 1977, increase your basis in the gift Jim’s basis at the date of John’s

(the donor’s adjusted basis) by any gift tax paid If a federal estate tax return does not have to death .................... $44,000

be filed, your basis in the inherited property is its on it. However, do not increase your basis above appraised value at the date of death for state If Jim had not contributed any part of the the FMV of the gift at the time it was given to you. inheritance or transmission taxes. purchase price, his basis at the date of John’s

death would be $54,000. This is figured by sub- Example 1. You were given a house in 1976

with an FMV of $21,000. The donor’s adjusted Appreciated property. The above rule does tracting from the $60,000 FMV, the $6,000 debasis was $20,000. The donor paid a gift tax of not apply to appreciated property you receive preciation allocated to Jim’s half interest before

the date of death. $500. Your basis is $20,500, the donor’s ad- from a decedent if you or your spouse originally

justed basis plus the gift tax paid. gave the property to the decedent within 1 year If under local law Jim had no interest in the

before the decedent’s death. Your basis in this income from the property and he contributed no

Example 2. If, in Example 1, the gift tax paid property is the same as the decedent’s adjusted part of the purchase price, his basis at John’s

had been $1,500, your basis would be $21,000. basis in the property immediately before his or death would be $60,000, the FMV of the propThis is the donor’s adjusted basis plus the gift her death, rather than its FMV. Appreciated erty. tax paid, limited to the FMV of the house at the property is any property whose FMV on the day

time you received the gift. it was given to the decedent is more than its

Gift received after 1976. adjusted basis. Qualified Joint Interest If you received a gift

after 1976, increase your basis in the gift (the Include one-half of the value of a qualified joint donor’s adjusted basis) by the part of the gift tax Community Property interest in the decedent’s gross estate. It does paid on it that is due to the net increase in value not matter how much each spouse contributed of the gift. Figure the increase by multiplying the In community property states (Arizona, Califor- to the purchase price. Also, it does not matter gift tax paid by a fraction. The numerator of the nia, Idaho, Louisiana, Nevada, New Mexico, which spouse dies first. fraction is the net increase in value of the gift and Texas, Washington, and Wisconsin), husband the denominator is the amount of the gift. A qualified joint interest is any interest in and wife are each usually considered to own half The net increase in value of the gift is the property held by husband and wife as either of the community property. When either spouse FMV of the gift less the donor’s adjusted basis. the following. dies, the total value of the community property, The amount of the gift is its value for gift tax even the part belonging to the surviving spouse, • Tenants by the entirety. purposes after reduction by any annual exclu- generally becomes the basis of the entire prop- sion and marital or charitable deduction that • Joint tenants with right of survivorship if erty. For this rule to apply, at least half the value applies to the gift. For information on the gift tax, husband and wife are the only joint te- of the community property interest must be in- see Publication 950, Introduction to Estate and nants. cludable in the decedent’s gross estate, whether Gift Taxes.

or not the estate must file a return.

For example, you and your spouse owned Basis. As the surviving spouse, your basis in Example. In 2002, you received a gift of

community property that had a basis of $80,000. property you owned with your spouse as a quali- property from your mother that had an FMV of

$50,000. Her adjusted basis was $20,000. The When your spouse died, half the FMV of the fied joint interest is the cost of your half of the

amount of the gift for gift tax purposes was community interest was includible in your property with certain adjustments. Decrease the

$39,000 ($50,000 minus the $11,000 annual spouse’s estate. The FMV of the community cost by any deductions allowed to you for depreexclusion). She paid a gift tax of $9,000. Your interest was $100,000. The basis of your half of ciation and depletion. Increase the reduced cost

basis, $26,930, is figured as follows: by your basis in the half you inherited. the property after the death of your spouse is

Page 9
Farm or Closely Held Business Basis for depreciation. The basis for depre- unsuccessfully, you should contact your Taxciation is the lesser of the following amounts. payer Advocate.

Under certain conditions, when a person dies The Taxpayer Advocate represents your inthe executor or personal representative of that • The FMV of the property on the date of the terests and concerns within the IRS by protectperson’s estate can choose to value the quali- change. ing your rights and resolving problems that have

fied real property on other than its FMV. If so, the • Your adjusted basis on the date of the not been fixed through normal channels. While

executor or personal representative values the change. Taxpayer Advocates cannot change the tax law

qualified real property based on its use as a farm or make a technical tax decision, they can clear

or its use in a closely held business. If the execu- up problems that resulted from previous con- Example. Several years ago you paid tor or personal representative chooses this tacts and ensure that your case is given a commethod of valuation for estate tax purposes, that $160,000 to have your home built on a lot that plete and impartial review. cost $25,000. You paid $20,000 for permanent value is the basis of the property for the heirs. To contact your Taxpayer Advocate:

Qualified heirs should be able to get the neces- improvements to the house and claimed a

$2,000 casualty loss deduction for damage to • Call the Taxpayer Advocate at sary value from the executor or personal repre- 1–877–777–4778. the house before changing the property to rental sentative of the estate.

use last year. Because land is not depreciable, • Call the IRS at 1–800–829–1040.

you include only the cost of the house when Special-use valuation. If you are a qualified figuring the basis for depreciation. • Call, write, or fax the Taxpayer Advocate heir who received special-use valuation prop- Your adjusted basis in the house when you office in your area. erty, your basis in the property is the estate’s or

trust’s basis in that property immediately before changed its use was $178,000 ($160,000 + • Call 1–800–829–4059 if you are a

the distribution. Increase your basis by any gain $20,000 − $2,000). On the same date, your TTY/TDD user.

property had an FMV of $180,000, of which recognized by the estate or trust because of

post-death appreciation. Post-death apprecia- $15,000 was for the land and $165,000 was for For more information, see Publication 1546,

the house. The basis for figuring depreciation on The Taxpayer Advocate Service of the IRS. tion is the property’s FMV on the date of distribu- the house is its FMV on the date of change tion minus the property’s FMV either on the date ($165,000) because it is less than your adjusted Free tax services. To find out what services of the individual’s death or the alternate valuabasis ($178,000). are available, get Publication 910, Guide to Free tion date. Figure all FMVs without regard to the Tax Services. It contains a list of free tax publi- special-use valuation. Sale of property. If you later sell or dispose of cations and an index of tax topics. It also de- You can elect to increase your basis in property changed to business or rental use, the scribes other free tax information services, special-use valuation property if it becomes sub- basis of the property you use will depend on including tax education and assistance pro- ject to the additional estate tax. This tax is as- whether you are figuring gain or loss. grams and a list of TeleTax topics. sessed if, within 10 years after the death of the

decedent, you transfer the property to a person Gain. The basis for figuring a gain is your Personal computer. With your perwho is not a member of your family or the prop- adjusted basis when you sell the property. sonal computer and modem, you can

access the IRS on the Internet at erty stops being used as a farm or in a closely

Example. Assume the same facts as in the www.irs.gov. While visiting our web site, you held business.

previous example except that you sell the prop- can: To increase your basis in the property, you

must make an irrevocable election and pay in- erty at a gain after being allowed depreciation • Find answers to questions you may have. deductions of $37,500. Your adjusted basis for terest on the additional estate tax figured from • Download forms and publications or figuring gain is $165,500 ($178,000 + $25,000 the date 9 months after the decedent’s death

(land) − $37,500). search for forms and publications by topic until the date of the payment of the additional or keyword. estate tax. If you meet these requirements, in- Loss. Figure the basis for a loss starting

crease your basis in the property to its FMV on with the smaller of your adjusted basis or the • View forms that may be filled in electronithe date of the decedent’s death or the alternate FMV of the property at the time of the change to cally, print the completed form, and then

valuation date. The increase in your basis is business or rental use. Then adjust this amount save the form for recordkeeping.

considered to have occurred immediately before for the period after the change in the property’s • View Internal Revenue Bulletins published the event that results in the additional estate tax. use, as discussed earlier under Adjusted Basis, in the last few years. You make the election by filing with Form to arrive at a basis for loss.

706-A a statement that does all of the following. • Search regulations and the Internal ReveExample. Assume the same facts as in the nue Code.

1) Contains your name, address, and tax- previous example, except that you sell the prop- • Receive our electronic newsletters on hot payer identification number and those of erty at a loss after being allowed depreciation tax issues and news. the estate. deductions of $37,500. In this case, you would

start with the FMV on the date of the change to • Get information on starting and operating 2) Identifies the election as an election under a small business. rental use ($180,000) because it is less than the section 1016(c) of the Internal Revenue adjusted basis of $203,000 ($178,000 + Code. You can also reach us with your computer $25,000) on that date. Reduce that amount

3) Specifies the property for which the elec- using File Transfer Protocol at ftp.irs.gov. ($180,000) by the depreciation deductions to

tion is made. arrive at a basis for loss of $142,500 ($180,000 TaxFax Service. Using the phone at- − $37,500). 4) Provides any additional information re- tached to your fax machine, you can quired by the Form 706-A instructions. receive forms and instructions by callFor more information, see the instructions to ing 703–368–9694. Follow the directions from

Form 706 and Form 706-A. the prompts. When you order forms, enter the How To Get Tax Help catalog number for the form you need. The items

Property Changed to you request will be faxed to you. You can get help with unresolved tax issues, For help with transmission problems, call the Business or Rental Use order free publications and forms, ask tax ques- FedWorld Help Desk at 703–487–4608. tions, and get more information from the IRS in

If you hold property for personal use and then several ways. By selecting the method that is Phone. Many services are available by change it to business use or use it to produce best for you, you will have quick and easy ac- phone. rent, you must figure its basis for depreciation. cess to tax help.

An example of changing property held for personal use to business use would be renting out Contacting your Taxpayer Advocate. If you • Ordering forms, instructions, and publicayour former main home. have attempted to deal with an IRS problem tions. Call 1–800–829–3676 to order curPage 10
rent and prior year forms, instructions, and only evaluates the IRS assistor and does • Prior-year tax forms and instructions.

publications. not keep a record of any taxpayer’s name • Popular tax forms that may be filled in or tax identification number. • Asking tax questions. Call the IRS with electronically, printed out for submission,

your tax questions at 1–800–829–1040. • We sometimes record telephone calls to and saved for recordkeeping.

evaluate IRS assistors objectively. We • TTY/TDD equipment. If you have access • Internal Revenue Bulletins. hold these recordings no longer than one to TTY/TDD equipment, call 1–800–829– week and use them only to measure the 4059 to ask tax questions or to order The CD-ROM can be purchased from Na- quality of assistance. forms and publications. tional Technical Information Service (NTIS) by

• We value our customers’ opinions. calling 1–877–233–6767 or on the Internet at • TeleTax topics. Call 1–800–829–4477 to Throughout this year, we will be surveying www.irs.gov. The first release is available in listen to pre-recorded messages covering our customers for their opinions on our mid-December and the final release is available various tax topics. service. in late January.

IRS Publication 3207, Small Business ReEvaluating the quality of our telephone ser- source Guide, is an interactive CD-ROM that CD-ROM. You can order IRS Publica- vices. To ensure that IRS representatives contains information important to small busi- tion 1796, Federal Tax Products on give accurate, courteous, and professional an- nesses. It is available in mid-February. You can CD-ROM, and obtain: swers, we evaluate the quality of our telephone get a free copy by calling 1–800–829–3676 or

services in several ways. • Current tax forms, instructions, and publi- visiting the IRS web site at www.irs.gov.

cations. • A second IRS representative sometimes

monitors live telephone calls. That person

Glossary

The definitions in this glossary the extraction and sale of the min- expected continued customer pa- Section 179 deduction: This is a

are the meanings of the terms as erals or the cutting of the timber. special deduction allowed against tronage due to its name, reputaused in this publication. The same tion, or any other factor. the cost of certain property pur- Depreciation: Ratable deduction chased for use in the active con- term used in another publication

may have a slightly different mean- allowed over a number of years to Intangible property: Property duct of a trade or business.

recover your basis in property that that cannot be perceived by the ing. is used more than one year for senses such as goodwill, patents, Section 197 intangibles: CerAmortization: A ratable deduc- business or income producing pur- tain intangibles held in connection copyrights, etc.

poses. with the conduct of a trade or busi- tion for the cost of certain intangible Like-kind property: Items of ness or an activity entered into for property over the period specified Fair market value (FMV): FMV property with the same nature or profit, including goodwill, going by law. Examples of costs that can is the price at which property would character. The grade or quality of concern value, patents, copyrights, be amortized are goodwill, agree- change hands between a buyer the properties does not matter. Ex- formulas, franchises, trademarks, ment not to compete, and research and a seller, neither having to buy amples are two vacant plots of and trade names. and mining exploration costs. or sell, and both having reasonable land.

knowledge of all necessary facts. Tangible property: This is prop- Business assets: Property used Personal property: Property, erty that can be seen or touched, in the conduct of a trade or busi- Going concern value: Going such as machinery, equipment, or such as furniture and buildings. ness, such as business machinery concern value is the additional furniture, that is not real property.

and office furniture. value that attaches to property be- Unstated interest: The part of

cause the property is an integral the sales price treated as interest Real property: Land and generCapitalization: Adding costs, part of an ongoing business activ- when an installment contract pro- ally anything erected on, growing

such as improvements, to the basis ity. It includes value based on the vides for little or no interest. on, or attached to land, for examof assets. ability of a business to continue to ple, a building.

function and generate income even Depletion: Yearly deduction al- Recapture: Amount of deprecia- though there is a change in owner- lowed to recover your investment in tion or section 179 deduction that ship. minerals in place or standing tim- must be reported as ordinary inber. To take the deduction, you Goodwill: Goodwill is the value come when property is sold at a

must have the right to income from of a trade or business based on gain.

■

Page 11
Index

A Comments .............. 2 Group of assets acquired .... 4 Publications (See Tax help)

Adjusted basis: Community property ........ 9

Adoption tax benefits ...... 6 Constructing assets ........ 3 H R

Assessment for local Copyrights .............. 4 Help (See Tax help) Real estate taxes .......... 2

improvements ......... 5 Cost basis: Real property ............ 2 Canceled debt .......... 6 Allocating basis ......... 4

Casualty and theft losses . . . 5 I Assumption of mortgage . . . 3 Clean-fuel vehicle refueling Inherited property ......... 9 S Capitalized costs . . . . . . 3, 5

property ............. 5 Intangible assets .......... 3 Settlement costs (fees) ...... 2 Loans, low or no interest . . . 2 Clean-fuel vehicles ....... 5 Real estate taxes ........ 2 Involuntary exchanges ...... 7 Special-use valuation . . . . . . 10

Credit for qualified electric Real property ........... 2 Spouse, property transferred

vehicles ............. 5 Settlement costs (fees) .... 2 L from ................. 8

Decreases to ........... 5 Stocks and bonds ......... 2 Land and buildings ......... 4 Depreciation ........... 6 D Subdivided lots ........... 4 Easements Loans, low or no interest ..... 2 ............ 5

Decreases to basis Suggestions ............. 2 Employer-provided child ........ 5

care ............... 6 Demolition of building ....... 4 M

Example .............. 6 Depreciation ............. 6 More information (See Tax help) T

Gain from sale of home .... 6 Tax help . . . . . . . . . . . . . . . 10

Gas-guzzler tax ......... 5 E Taxable exchanges ........ 7

Increases to ............ 4 N

Easements Taxpayer Advocate . . . . . . . 10

Section 179 deduction .............. 5 Nontaxable exchanges: ..... 5

Employer-provided child care . . 6 Trade or business acquired . . . 4 Subsidies for energy Like-kind .............. 7

Exchanges: Trademarks and trade conservation .......... 6 Partial ................ 8 names ............... 4 Involuntary ............ 7 Adoption tax benefits ....... 6

Like-kind .............. 7 Trading property (see Allocating basis ........... 4 P Nontaxable ............ 7 Exchanges) ............ 7

Assistance (See Tax help) Partially nontaxable Partial business use of TTY/TDD information . . . . . . 10

Assumption of mortgage ..... 3 exchanges ............ 8 property ............. 8

Patents ................ 3 Taxable .............. 7 U B Points ................. 3

Uniform capitalization rules: Property changed to Business acquired ......... 4 F Activities subject to the business use . . . . . . . . . . 10 Business assets .......... 3 Fair market value .......... 6 rules ............... 3 Property received as a gift .... 8 Businesses exchanged ...... 7 Franchises .............. 4 Exceptions ............ 3

Property received for services: Free tax services . . . . . . . . . 10 Bargain purchases ....... 6 ■

C Fair market value ........ 6

Canceled debt ............ 6 G Restricted property ....... 6

Casualty and theft losses .... 5 Gain from sale of home ..... 6 Property transferred from a

Change to business use . . . . 10 Gifts, property received ...... 8 spouse ............... 8

Page 12
Publication 536

Cat. No. 46569U Contents

Department Important Change ................ 1

of the

Treasury Net Operating Important Reminder ............... 1

Internal Introduction ..................... 1

Revenue Losses (NOLs) Service NOL Steps ...................... 2

for How To Figure an NOL ............. 2

Illustrated Schedule A

(Form 1045) ............... 3

Individuals, When To Use an NOL .............. 3

Estates, and How To Claim an NOL Deduction ...... 7

Deducting a Carryback ........... 7

Deducting a Carryforward ......... 8

Trusts Change in Marital Status .......... 8

Change in Filing Status ........... 8

Illustrated Form 1045 ............ 9

For use in preparing How To Figure an NOL Carryover ..... 11

Illustrated Schedule B 2003 Returns (Form 1045) ............... 11

NOL Carryover From 2003 to 2004 ..... 14

Worksheet Instructions ........... 14

How To Get Tax Help .............. 17

Index .......................... 18

Important Change

Change in carryback period for NOLs. The

temporary 5-year carryback period for net operating losses (NOLs) incurred in 2001 and 2002

no longer applies. NOLs incurred in 2003 are

carried back 2 or, if eligible, 3 tax years. For

more information, see When To Use an NOL,

later.

Important Reminder

Photographs of missing children. The Internal Revenue Service is a proud partner with the

National Center for Missing and Exploited Children. Photographs of missing children selected

by the Center may appear in this publication on

pages that would otherwise be blank. You can

help bring these children home by looking at the

photographs and calling 1–800–THE–LOST

(1–800–843–5678) if you recognize a child.

Get forms and other information Introduction

faster and easier by: If your deductions for the year are more than

your income for the year, you may have a net Internet • www.irs.gov or FTP • ftp.irs.gov operating loss (NOL). An NOL year is the year

in which an NOL occurs. You can use an NOL by FAX • 703–368–9694 (from your fax machine) deducting it from your income in another year or

years.
What this publication covers. This publica- emptions for dependents. An estate or trust

tion discusses NOLs for individuals, estates, NOL Steps cannot deduct its exemption amount. Your entry

and trusts. It covers: on this line is the total amount you deducted for

Follow Steps 1 through 5 to figure and use your exemptions. • How to figure an NOL, NOL. Nonbusiness deductions (line 9). Enter • When to use an NOL, Step 1. Complete your tax return for the year. on line 9 deductions that are not connected to

• How to claim an NOL deduction, and You may have an NOL if a negative figure ap- your trade or business or your employment. Expears on the line below: amples of deductions not related to your trade or • How to figure an NOL carryover. business are:

Individuals — line 38 of Form 1040. To have an NOL, your loss must generally be • Alimony, caused by deductions from your: Estates and trusts — line 22 of Form 1041. • Contributions to an IRA or other self-em-

• Trade or business, ployed retirement plan, If the amount on that line is not negative,

stop here — you do not have an NOL. • Work as an employee, • Itemized deductions (except for casualty

Step 2. Determine whether you have an NOL and theft losses and any employee busi- • Casualty and theft losses,

and its amount. See How To Figure an NOL, ness expenses), and

• Moving expenses, or later. If you do not have an NOL, stop here. • The standard deduction (if you do not

• Rental property. itemize your deductions). Step 3. Decide whether to carry the NOL back

to a past year or to waive the carryback period A loss from operating a business is the most Do not enter business deductions on line 9. and instead carry the NOL forward to a future common reason for an NOL. These are deductions that are connected to your year. See When To Use an NOL, later.

Partnerships and S corporations generally trade or business. They include the following.

cannot use an NOL. However, partners or Step 4. Deduct the NOL in the carryback or

carryforward year. See How To Claim an NOL • State income tax on business profits. shareholders can use their separate shares of

the partnership’s or S corporation’s business Deduction, later. If your NOL deduction is equal • Moving expenses. income and business deductions to figure their to or less than your taxable income without the

deduction, stop here — you have used up your • The deduction of one-half of your self-em- individual NOLs.

NOL. ployment tax or your deduction for

What is not covered in this publication? self-employed health insurance. Step 5. Determine the amount of your unused The following topics are not covered in this publi- NOL. See How To Figure an NOL Carryover, • Rental losses.

cation. later. Carry over the unused NOL to the next • Loss on the sale or exchange of business

• Bankruptcies. See Publication 908, Bank- carryback or carryforward year and begin again real estate or depreciable property. at Step 4. ruptcy Tax Guide. • Your share of a business loss from a part-

• NOLs of Corporations. See Publication Note. nership or S corporation. If your NOL deduction includes more 542, Corporations. than one NOL amount, apply Step 5 separately • Ordinary loss on the sale or exchange of to each NOL amount, starting with the amount • Specified liability losses. See the instruc- stock in a small business corporation or a from the earliest year. tions for Form 1045, Application for Tenta- small business investment company.

tive Refund. • If you itemize your deductions, casualty

and theft losses (even if they involve non- Comments and suggestions. We welcome How To Figure an NOL business property) and employee busi- your comments about this publication and your ness expenses (such as union dues, suggestions for future editions. If your deductions for the year are more than uniforms, tools, education expenses, and

You can e-mail us while visiting our web site your income for the year, you may have an NOL. travel and transportation expenses).

at *taxforms@irs.gov. Please put “Publications There are rules that limit what you can de- Comment” on the subject line. • Loss on the sale of accounts receivable (if duct when figuring an NOL. In general, the fol- you use an accrual method of accounting). You can write to us at the following address: lowing items are not allowed when figuring an

NOL. • Interest and litigation expenses on state

Internal Revenue Service and federal income taxes related to your • Any deduction for personal exemptions. Individual Forms and Publications Branch business.

SE:W:CAR:MP:T:I • Capital losses in excess of capital gains. • Unrecovered investment in a pension or 1111 Constitution Ave. NW • The section 1202 exclusion of 50% of the annuity claimed on a decedent’s final re- Washington, DC 20224 gain from the sale or exchange of qualified turn.

small business stock. • Payment by a federal employee to buy We respond to many letters by telephone. • Nonbusiness deductions in excess of non- back sick leave used in an earlier year. Therefore, it would be helpful if you would in- business income.

clude your daytime phone number, including the Nonbusiness income (line 10). Enter on

area code, in your correspondence. • Net operating loss deduction. line 10 only income that is not related to your

trade or business or your employment. For ex- Useful Items Schedule A (Form 1045). Use Schedule A ample, enter your annuity income, dividends,

You may want to see: (Form 1045) to figure an NOL. The following and interest on investments. Also, include your discussion explains Schedule A and includes an share of nonbusiness income from partnerships

Form (and Instructions) illustrated example. and S corporations. First, complete lines 1–3 of Schedule A, ❏ 1040X Amended U.S. Individual Income Do not include on line 10 the income you using amounts from your return. If line 3 is a Tax Return receive from your trade or business or your negative amount, you may have an NOL. employment. This includes salaries and wages, ❏ 1045 Application for Tentative Refund Next, complete the rest of Schedule A to self-employment income, and your share of figure your NOL. See How To Get Tax Help near the end of business income from partnerships and S corthis publication for information about getting Deduction for exemptions (line 4). You can- porations. Also, do not include rental income or

these forms. not deduct your personal exemption or your ex- ordinary gain from the sale or other disposition

Page 2
of business real estate or depreciable business The following items are not allowed on Farming business. A farming business is a

property. Schedule A (Form 1045). trade or business involving cultivation of land,

raising or harvesting of any agricultural or hortiAdjustment for section 1202 exclusion (line Nonbusiness net short-term capital cultural commodity, operating a nursery or sod

20). Enter on line 20 any gain you excluded loss ........................ $1,000 farm, raising or harvesting of trees bearing fruit,

under section 1202 on the sale or exchange of Nonbusiness deductions nuts, or other crops, or ornamental trees. The

qualified small business stock. (standard deduction, $4,750) minus raising, shearing, feeding, caring for, training nonbusiness income (interest, $425) . . 4,325 and management of animals is also considered Adjustments for capital losses (lines 22–25). Deduction for personal exemption .... 3,050 a farming business. The amount deductible for capital losses is lim- Total adjustments to net loss $8,375 A farming business does not include contract ited based on whether the losses are business harvesting of an agricultural or horticultural com- capital losses or nonbusiness capital losses. modity grown or raised by someone else. It also Therefore, Glenn’s NOL for 2003 is figured Nonbusiness capital losses. You can de- does not include a business in which you merely as follows:

duct your nonbusiness capital losses (line 5) buy or sell plants or animals grown or raised by

only up to the amount of your nonbusiness capi- someone else. Glenn’s total 2003 income ....... $3,650

tal gains without regard to any section 1202 Less: Waiving the 5-year carryback. You can exclusion (line 6). If your nonbusiness capital Glenn’s original 2003 choose to treat a farming loss as if it were not a losses are more than your nonbusiness capital total deductions ...... $13,800 farming loss. If you make this choice, the car- gains without regard to any section 1202 exclu- Reduced by the ryback period will be 2 years. To make this sion, you cannot deduct the excess. disallowed items ...... − 8,375 − 5,425 choice, attach a statement to your 2003 income Glenn’s NOL for 2003 .......... $1,775 Business capital losses. You can deduct tax return filed on or before the due date (includyour business capital losses (line 14) only up to ing extensions) that you are choosing to treat

the total of: any 2003 farming losses as if they were not

farming losses under section 172(i)(3) of the • Your nonbusiness capital gains that are When To Use an NOL Internal Revenue Code. If you do not make this more than the total of your nonbusiness election on your timely filed return, you have capital losses and excess nonbusiness until 6 months after the due date of the return Generally, if you have an NOL for a tax year deductions (line 13), and (excluding extensions) to make the choice by ending in 2003, you must carry back the entire • Your total business capital gains without filing an amended return. Attach a statement to amount of the NOL to the 2 tax years before the regard to any section 1202 exclusion (line your amended return and write “Filed pursuant NOL year (the carryback period), and then carry 15). to section 301.9100–2” at the top of the state- forward any remaining NOL for up to 20 years ment. Send your amended return to the same after the NOL year (the carryforward period). address that you filed your original return. Once NOLs from other years (line 26). You cannot You can, however, choose not to carry back an you make this choice, it is irrevocable. deduct any NOL carryovers or carrybacks from NOL and only carry it forward. See Waiving the

other years. Enter the total amount of your NOL Carryback Period, later. You cannot deduct any Note. If you choose not to carryback any of deduction for losses from other years. part of the NOL remaining after the 20-year your farming loss, you need to attach a state- carryforward period. ment to your 2003 income tax return clearly Illustrated Schedule A (Form identifying what carryback or carrybacks are be- NOL year. This is the year in which the NOL 1045) ing completely waived and stating that you are occurred. waiving them under sections 172(b)(3) and

The following example illustrates how to figure 172(i)(3) of the Internal Revenue Code. This

an NOL. It includes filled-in pages 1 and 2 of Exceptions to 2-Year choice, once made, is also irrevocable. See

Form 1040 and Schedule A (Form 1045). Carryback Rule Waiving the Carryback Period, next.

Example. Glenn Johnson is in the retail re- Eligible losses and farming losses, defined be- Waiving the Carryback cord business. He is single and has the following low, qualify for longer carryback periods.

income and deductions on his Form 1040 for Period

2003. Eligible loss. The carryback period for eligible You can choose not to carry back your NOL. If losses is 3 years. An eligible loss is any part of you make this choice, then you can use your INCOME an NOL that: NOL only in the 20-year carryforward period.

Wages from part-time job ........ $1,225 • (This choice means you also choose not to carry Is from a casualty or theft, or Interest on savings . . . . . . . . . . . . . 425 back any alternative tax NOL.)

Net long-term capital gain on sale of • Is attributable to a Presidentially declared To make this choice, attach a statement to real estate used in business ....... 2,000 disaster for a qualified small business. your original return filed by the due date (includGlenn’s total income $3,650 ing extensions) for the NOL year. This statement Qualified small business. A qualified small must show that you are choosing to waive the business is a sole proprietorship or a partner- DEDUCTIONS carryback period under section 172(b)(3) of the ship that has average annual gross receipts Internal Revenue Code. Net loss from business (gross income (reduced by returns and allowances) of $5 mil- If you filed your return timely but did not file of $67,000 minus expenses of lion or less during the 3-year period ending with the statement with it, you must file the statement $72,000) ................... $5,000 the tax year of the NOL. If the business did not Net short-term capital loss with an amended return for the NOL year within exist for this entire 3-year period, use the period on sale of stock ............... 1,000 6 months of the due date of your original return the business was in existence. Standard deduction ............ 4,750 (excluding extensions). Write “Filed pursuant to

Personal exemption ............ 3,050 section 301.9100–2” at the top of the statement. Farming loss. The carryback period for a Once you elect to waive the carryback pe- Glenn’s total deductions $13,800 farming loss is 5 years. A farming loss is the riod, it is irrevocable. If you choose to waive the smaller of: carryback period for more than one NOL, you

Glenn’s deductions exceed his income by must make a separate choice and attach a sepa- 1) The amount which would be the NOL for $10,150 ($13,800 − $3,650). However, to figure rate statement for each NOL year. the tax year if only income and deductions whether he has an NOL, certain deductions are attributable to farming businesses were not allowed. He uses Schedule A (Form 1045) to Note. There was a one-time exception to taken into account, or figure his NOL. See the illustrated Schedule A the irrevocable waiver rule. If you previously

(Form 1045), later. 2) The NOL for the tax year. elected to waive the carryback period for an

Page 3
Glenn M. Johnson

5603 E. Main Street

Anytown, VA 20000

765 00 4321



1,225

425

(5,000)

1,000 *

(2,350)

(2,350)





1

1

* Net capital gain ($2,000 gain less $1,000 loss)

Department of the Treasury—Internal Revenue Service 1040 U.S. Individual Income Tax Return

For the year Jan. 1–Dec. 31, 2003, or other tax year beginning , 2003, ending , 20 OMB No. 1545-0074

Your first name and initial Last name Your social security number

(See

instructions

on page 19.)

L

A

B

E

L

H

E

R

E

If a joint return, spouse’s first name and initial Last name Spouse’s social security number

Use the IRS

label.

Otherwise,

please print

or type.

Home address (number and street). If you have a P.O. box, see page 19. Apt. no.

City, town or post office, state, and ZIP code. If you have a foreign address, see page 19.

Presidential

Election Campaign

1 Single

Filing Status 2 Married filing jointly (even if only one had income)

Check only

one box.

3

Qualifying widow(er) with dependent child. (See page 20.)

6a Yourself. If your parent (or someone else) can claim you as a dependent on his or her tax

Exemptions return, do not check box 6a

b Spouse

(4) if qualifying

child for child tax

credit (see page 21)

c Dependents: (2) Dependent’s

social security number

(3) Dependent’s

relationship to (1) First name Last name you

If more than five

dependents,

see page 21.

d Total number of exemptions claimed

7 Wages, salaries, tips, etc. Attach Form(s) W-2 7

Income 8a Taxable interest. Attach Schedule B if required 8a

b Tax-exempt interest. Do not include on line 8a 8b Attach

Forms W-2 and

W-2G here.

Also attach

Form(s) 1099-R

if tax was

withheld.

9a Ordinary dividends. Attach Schedule B if required 9a

10 Taxable refunds, credits, or offsets of state and local income taxes (see page 23) 10

11 Alimony received 11

12 Business income or (loss). Attach Schedule C or C-EZ 12

Enclose, but do

not attach, any

payment. Also,

please use

Form 1040-V.

13a Capital gain or (loss). Attach Schedule D if required. If not required, check here 13a

14 Other gains or (losses). Attach Form 4797 14

15a IRA distributions 15a 15b b Taxable amount (see page 25)

16a Pensions and annuities 16a b Taxable amount (see page 25) 16b

17 Rental real estate, royalties, partnerships, S corporations, trusts, etc. Attach Schedule E 17

18 Farm income or (loss). Attach Schedule F 18

19 Unemployment compensation 19

20a Social security benefits 20a b Taxable amount (see page 27) 20b

21 21

22 Add the amounts in the far right column for lines 7 through 21. This is your total income 22

IRA deduction (see page 29) 24

23

26

25

One-half of self-employment tax. Attach Schedule SE

27

Self-employed health insurance deduction (see page 33)

26

28

27

Self-employed SEP, SIMPLE, and qualified plans

29

28

Penalty on early withdrawal of savings

30

29

Alimony paid b Recipient’s SSN 

Add lines 23 through 32a 33

30

Subtract line 33 from line 22. This is your adjusted gross income 

31

Adjusted

Gross

Income

34

If you did not

get a W-2,

see page 22. Form

Married filing separately. Enter spouse’s SSN above

and full name here. 

Cat. No. 11320B





Label

Form 1040 (2003)

IRS Use Only—Do not write or staple in this space.

Head of household (with qualifying person). (See page 20.) If

the qualifying person is a child but not your dependent, enter

this child’s name here. 

Other income. List type and amount (see page 27)

Moving expenses. Attach Form 3903

24

25

For Disclosure, Privacy Act, and Paperwork Reduction Act Notice, see page 77.

No. of boxes

checked on

6a and 6b

No. of children

on 6c who:

Dependents on 6c

not entered above

Add numbers

on lines

above 

● lived with you

● did not live with

you due to divorce

or separation

(see page 21)

32a 32a

Student loan interest deduction (see page 31)

31

33

  Important!

Yes No

Note. Checking “Yes” will not change your tax or reduce your refund.

Do you, or your spouse if filing a joint return, want $3 to go to this fund? 

You must enter

your SSN(s) above.

No Yes

You Spouse

(See page 19.)

(99)

Tuition and fees deduction (see page 32)

34

4

5

Educator expenses (see page 29) 23

2003

b Qualified dividends (see page 23) 9b

b If box on 13a is checked, enter post-May 5 capital gain distributions 13b

Page 4
(2,350)

4,750

(7,100)

3,050

-0-

Glenn M. Johnson 2-5-2004 Self-employed

Itemized deductions (from Schedule A) or your standard deduction (see left margin)

Add lines 61 through 67. These are your total payments 

Form 1040 (2003) Page 2

35 Amount from line 34 (adjusted gross income) 35

Check

if:

36a

Tax and

Credits

36a

Single or

Married filing

separately,

$4,750

If you are married filing separately and your spouse itemizes deductions, or

you were a dual-status alien, see page 34 and check here 

b

36b

37 37

38 Subtract line 37 from line 35 38

39

If line 35 is $104,625 or less, multiply $3,050 by the total number of exemptions claimed on

line 6d. If line 35 is over $104,625, see the worksheet on page 35

39

40 Taxable income. Subtract line 39 from line 38. If line 39 is more than line 38, enter -0- 40

41 41

45

46

51

Education credits. Attach Form 8863

44

49

Other credits. Check applicable box(es):

48

53

54

Add lines 44 through 52. These are your total credits

48

Subtract line 53 from line 43. If line 53 is more than line 43, enter -0- 

53

Self-employment tax. Attach Schedule SE

54

Other

Taxes

55

69

Social security and Medicare tax on tip income not reported to employer. Attach Form 4137

Tax on qualified plans, including IRAs, and other tax-favored accounts. Attach Form 5329 if required 57

56

58

Add lines 54 through 59. This is your total tax 

59 59

61 Federal income tax withheld from Forms W-2 and 1099 61

62 2003 estimated tax payments and amount applied from 2002 return 62

Payments

63

Amount paid with request for extension to file (see page 56) 66

65

Excess social security and tier 1 RRTA tax withheld (see page 56) 64

66

68

67 Other payments from:

70a 70a

71 71

If line 68 is more than line 60, subtract line 60 from line 68. This is the amount you overpaid

72 72

Amount of line 69 you want refunded to you 

Refund

73

Amount of line 69 you want applied to your 2004 estimated tax 

Estimated tax penalty (see page 58)

Under penalties of perjury, I declare that I have examined this return and accompanying schedules and statements, and to the best of my knowledge and

belief, they are true, correct, and complete. Declaration of preparer (other than taxpayer) is based on all information of which preparer has any knowledge.

73

You were born before January 2, 1939, Blind.

Spouse was born before January 2, 1939, Blind.

a Form 3800

b Form 8801 c Specify

a Form 2439 b Form 4136

57

Household employment taxes. Attach Schedule H

58

67

Amount

You Owe

Sign

Here Your signature Date

Keep a copy

for your

records.

Spouse’s signature. If a joint return, both must sign. Date

Date Preparer’s SSN or PTIN Preparer’s

signature Check if

self-employed

Paid

Preparer’s

Use Only Firm’s name (or

yours if self-employed),

address, and ZIP code

EIN

Phone no.







Your occupation

Tax (see page 36). Check if any tax is from:

Amount you owe. Subtract line 68 from line 60. For details on how to pay, see page 57 

b

Direct deposit?

See page 56

and fill in 70b,

70c, and 70d.

Routing number

Account number

c Checking Savings

a Form(s) 8814 Form 4972

b

d





68

47

44

Retirement savings contributions credit. Attach Form 8880

55

56

Advance earned income credit payments from Form(s) W-2

69



Child tax credit (see page 40)

Credits from:

47

51

49

Additional child tax credit. Attach Form 8812

64

65

Head of

household,

$7,000

Married filing

jointly or

Qualifying

widow(er),

$9,500

Standard

Deduction

for—

Joint return?

See page 20.

Daytime phone number

( )

Earned income credit (EIC)

Credit for the elderly or the disabled. Attach Schedule R

42

43

45

Alternative minimum tax (see page 38). Attach Form 6251

Add lines 41 and 42 

Credit for child and dependent care expenses. Attach Form 2441

46

If you have a

qualifying

child, attach

Schedule EIC.

42

43

63

Spouse’s occupation

( )

Form 1040 (2003)

● People who

checked any

box on line

36a or 36b or who can be

claimed as a

dependent,

see page 34.

● All others:

Designee’s

name 

Do you want to allow another person to discuss this return with the IRS (see page 58)? Third Party

Designee Phone

no. ( )

Yes. Complete the following. No

Personal identification

number (PIN) 

52

Foreign tax credit. Attach Form 1116 if required

52

a Form 8396 b Form 8859

50 Adoption credit. Attach Form 8839 50

60 60

Type:

c Form 8885

Total boxes  checked 

Page 5
Proof as of

October 29, 2003

(subject to change)

(2,350)

4,750

3,050

7,800

(10,150)

3,050

1,000

1,000

-0-

4,750

425

425

4,325

-0-

2,000

2,000

-0-

1,000

-0-

-0-

(1,775)

1,000

Form 1045 (2003) Page 2

Schedule A—NOL (see page 5 of the instructions)

1

Adjusted gross income from your 2003 Form 1040, line 35. Estates and

trusts, skip lines 1 and 2

1

2 Deductions:

2a

Enter the amount from your 2003 Form 1040,

line 37

a

2b

b Enter your deduction for exemptions from your

2003 Form 1040, line 39

c Add lines 2a and 2b 2c

3

Subtract line 2c from line 1. Estates and trusts, enter taxable income increased by the sum of the

charitable deduction and income distribution deduction

3

Note: If line 3 is zero or more, do not complete the rest of the schedule. You do not have an

NOL.

Deduction for exemptions from line 2b above. Estates and trusts, enter the exemption amount from

tax return

4

4

Total nonbusiness capital losses before limitation. Enter as a positive

number

5

5

6

Total nonbusiness capital gains (without regard to any section 1202

exclusion)

6

7 If line 5 is more than line 6, enter the difference; otherwise, enter -0- 7

If line 6 is more than line 5, enter the difference;

otherwise, enter -0-

8

8

9 Nonbusiness deductions (see page 5 of the instructions) 9

Nonbusiness income other than capital gains.

(see page 5 of the instructions)

10

10

11 Add lines 8 and 10 11

12 If line 9 is more than line 11, enter the difference; otherwise, enter -0- 12

If line 11 is more than line 9, enter the difference;

otherwise, enter -0-. But do not enter more than

line 8

13

13

14 14 Total business capital losses before limitation. Enter as a positive number

15

15 Total business capital gains (without regard to

any section 1202 exclusion)

16 Add lines 13 and 15 16

17 Subtract line 16 from line 14. If zero or less, enter -0- 17

18 18

19

19

25

22

23

NOL. Combine lines 3, 4, 12, 20, 24, 25, and 26. If the result is less than zero, enter it here and

on page 1, line 1a. If the result is zero or more, you do not have an NOL

NOL deduction for losses from other years. Enter as a positive number 26

Add lines 7 and 17

If line 21 is more than line 22, enter the difference; otherwise, enter -0-

25

26

27

Enter the loss, if any, from line 17a of Schedule D (Form 1040). (Estates

and trusts, enter the loss, if any, from line 16, column (3), of Schedule D

(Form 1041).) Enter as a positive number. If you do not have a loss on

that line (and do not have a section 1202 exclusion), skip lines 19 through

24 and enter on line 25 the amount from line 18

Subtract line 20 from line 19. If zero or less, enter -0-

20

21

22

23

20

Enter the loss, if any, from line 18 of Schedule D (Form 1040). (Estates

and trusts, enter the loss, if any, from line 17 of Schedule D (Form 1041).)

Enter as a positive number

Section 1202 exclusion. Enter as a positive number

21

Subtract line 23 from line 18. If zero or less, enter -0-

27

24 If line 22 is more than line 21, enter the difference; otherwise, enter -0- 24

Form 1045 (2003)

Page 6
NOL for any tax year ending in 2001 or 2002, NOL carryover using Schedule B (Form 1045),

you had until October 31, 2002 to revoke the discussed later. How To Claim

waiver.

an NOL Deduction Refiguring your tax. To refigure your total tax If you do not file this statement on time, liability for a carryback year, first refigure your you cannot waive the carryback period. If you have not already carried the NOL to an adjusted gross income for that year. (On Form CAUTION

!

1045, use lines 10 through 12 and the After earlier year, your NOL deduction is the total

NOL. If you carried the NOL to an earlier year, carryback column for the applicable carryback

year.) Use your adjusted gross income after your NOL deduction is the NOL minus the applying the NOL deduction to refigure income How to Carry an NOL Back amount you used in the earlier year or years. or deduction items that are based on, or limited or Forward If you carry more than one NOL to the same to, a percentage of your adjusted gross income. year, your NOL deduction is the total of these Refigure the following items. carrybacks and carryovers. If you choose to carry back the NOL, you must

first carry the entire NOL to the earliest car- 1) The special allowance for passive activity ryback year. If your NOL is not used up, you can NOL more than taxable income. If your NOL losses from rental real estate activities.

carry the rest to the next earliest carryback year, is more than the taxable income of the year you

and so on. carry it to (figured before deducting the NOL), 2) Taxable social security and tier 1 railroad

you generally will have an NOL carryover to the retirement benefits. If you do not use up the NOL in the carryback next year. See How To Figure an NOL Carry- years, carry forward what remains of it to the 20 3) IRA deductions. tax years following the NOL year. Start by carry- over, later, to determine how much NOL you

have used and how much you carry to the next 4) Student loan interest deduction. ing it to the first tax year after the NOL year. If

year. you do not use it up, carry the unused part to the 5) Excludable savings bond interest. next year. Continue to carry any unused part of

the NOL forward until the NOL is used up or you Deducting a Carryback 6) Excludable employer-provided adoption

benefits. complete the 20-year carryforward period.

If you carry back your NOL, you can use either If more than one of these items apply, Example 1. You started your business as a Form 1045 or Form 1040X. You can get your refigure them in the order listed above, using sole proprietor in 2003 and had a $42,000 NOL refund faster by using Form 1045, but you have your adjusted gross income after applying the for the year. No part of the NOL qualifies for the a shorter time to file it. You can use Form 1045 NOL deduction and any previous item. (On line 3-year or 5-year carryback. You begin using to apply an NOL to all carryback years. If you 10 of Form 1045, using the “After carryback” your NOL in 2001, the second year before the use Form 1040X, you must use a separate Form column, enter your adjusted gross income after NOL year, as shown in the following chart. 1040X for each carryback year to which you applying the above refigured items but without apply the NOL. the NOL deduction. Enter your NOL deduction Carryback/ Unused Estates and trusts not filing Form 1045 must on line 11.) Year Carryover Loss file an amended Form 1041 (instead of Form Next, refigure your taxable income. (On 1040X) for each carryback year to which NOLs 2001 ............ $42,000 $40,000 Form 1045, use lines 13 through 16 and the are applied. Use a copy of the appropriate year’s “After carryback” column.) Use your refigured 2002 ............ 40,000 37,000 Form 1041, check the Amended return box, adjusted gross income (line 12 of Form 1045,

2003 (NOL year) and follow the Form 1041 instructions for .... using the “After carryback” column) to refigure

2004 ............ 37,000 31,500 amended returns. Include the NOL deduction certain deductions and other items that are

2005 with other deductions not subject to the 2% limit ............ 31,500 22,500 based on, or limited to, a percentage of your 2006 ............ 22,500 12,700 (line 15a). Also, see the special procedures for adjusted gross income. Refigure the following 2007 ............ 12,700 4,000 filing an amended return due to an NOL car- items.

2008 ............ 4,000 –0– ryback, explained under Form 1040X, later.

• The itemized deduction for medical ex- If your loss were larger, you could carry it Form 1045. You can apply for a quick refund penses. forward until the year 2023. If you still had an by filing Form 1045. This form results in a tenta- unused 2003 carryforward after the year 2023, • The itemized deduction for casualty tive adjustment of tax in the carryback year. See you could not deduct it. losses. the Form 1045 illustrated at the end of this discussion. • Miscellaneous itemized deductions subject Example 2. Assume the same facts as in If the IRS refunds or credits an amount to you to the 2% limit. Example 1, except that $4,000 of the NOL is from Form 1045 and later determines that the attributable to a casualty loss and this loss quali- • The overall limit on itemized deductions. refund or credit is too much, the IRS may assess fies for a 3-year carryback period. You begin and collect the excess immediately. • The phaseout of the deduction for exemp- using the $4,000 in 2000. As shown in the fol- Generally, you must file Form 1045 on or tions. lowing chart, $3,000 of this NOL is used in 2000. after the date you file your tax return for the NOL The remaining $1,000 is carried to 2001 with the year, but not later than one year after the NOL Do not refigure the itemized deduction for $38,000 NOL that you must begin using in 2001. year. For example, if you are a calendar year charitable contributions.

taxpayer with a carryback from 2003 to 2001, Finally, use your refigured taxable income Carryback/ Unused you must file Form 1045 on or after the date you (line 16 of Form 1045, using the “After car- Year Carryover Loss file your tax return for 2003, but no later than ryback” column) to refigure your total tax liability.

2000 ............ $3,000 $1,000 December 31, 2004. Refigure your income tax, your alternative minimum tax, and any credits that are based on, or 2001 ............ 39,000 37,000 Form 1040X. If you do not file Form 1045, you limited to, the amount of tax. (On Form 1045, 2002 ............ 37,000 34,000 can file Form 1040X to get a refund of tax be- use lines 17 through 26, and the “After car- 2003 (NOL year) .... cause of an NOL carryback. File Form 1040X ryback” column.) The earned income credit, for 2004 ............ 34,000 28,500 within 3 years after the due date, including ex- example, may be affected by changes to ad- 2005 ............ 28,500 19,500 tensions, for filing the return for the NOL year. justed gross income or the amount of tax (or 2006 ............ 19,500 9,700 For example, if you are a calendar year taxpayer both) and, therefore, must be recomputed. If you 2007 ............ 9,700 1,000 and filed your 2000 return by the April 16, 2001, become eligible for a credit because of the car- 2008 .... 1,000 –0– due date, you must file a claim for refund of 1998 ryback, complete the form for that specific credit

tax because of an NOL carryback from 2000 by (such as the EIC Worksheet) for that year.

April 15, 2004. While it is necessary to refigure your income

Attach a computation of your NOL using tax, alternative minimum tax, and credits, do not

Schedule A (Form 1045) and, if it applies, your refigure your self-employment tax.

Page 7
Deducting a Carryforward (above), and substitute the joint payment or re- by Nancy’s capital gains. Mark’s share of their

fund for the refigured joint tax in step (5). $5,000 joint NOL is $1,875 ($5,000 × $1,800/

If you carry forward your NOL to a tax year after $4,800) and Nancy’s is $3,125 ($5,000 −

the NOL year, list your NOL deduction as a Change in Filing Status $1,875).

negative figure on the Other income line of Joint return in previous carryback or car- Form 1040 (line 21 for 2003). Estates and trusts If you and your spouse were married and filed a ryforward year. If only one spouse had an include an NOL deduction on Form 1041 with joint return for each year involved in figuring NOL deduction on the previous year’s joint re- other deductions not subject to the 2% limit (line NOL carrybacks and carryovers, figure the NOL turn, all of the joint carryover is that spouse’s 15a for 2003). deduction on a joint return as you would for an carryover. If both spouses had an NOL deduc- You must attach a statement that shows all individual. However, treat the NOL deduction as tion (including separate carryovers of a joint the important facts about the NOL. Your state- a joint NOL. NOL, figured as explained in the previous dis- ment should include a computation showing If you and your spouse were married and cussion), figure each spouse’s share of the joint how you figured the NOL deduction. If you de- filed separate returns for each year involved in carryover through the following steps. duct more than one NOL in the same year, your figuring NOL carrybacks and carryovers, the

statement must cover each of them. spouse who sustained the loss may take the 1) Figure each spouse’s modified taxable in- NOL deduction on a separate return. come as if he or she filed a separate re- Change in Marital Status Special rules apply for figuring the NOL car- turn. See Modified taxable income under rybacks and carryovers of married people How To Figure an NOL Carryover, later. If you and your spouse were not married to each whose filing status changes for any tax year

other in all years involved in figuring NOL car- involved in figuring an NOL carryback or carry- 2) Multiply the joint modified taxable income

rybacks and carryovers, only the spouse who over. you used to figure the joint carryover by a

had the loss can take the NOL deduction. If you fraction, the numerator of which is spouse

file a joint return, the NOL deduction is limited to Separate to joint return. If you and your A’s modified taxable income figured in (1)

the income of that spouse. spouse file a joint return for a carryback or car- and the denominator of which is the total

For example, if your marital status changes ryforward year, and were married but filed sepa- of the spouses’ modified taxable incomes

because of death or divorce, and in a later year rate returns for any of the tax years involved in figured in (1). This is spouse A’s share of

you have an NOL, you can carry back that loss figuring the NOL carryback or carryover, treat the joint modified taxable income.

only to the part of the income reported on the the separate carryback or carryover as a joint 3) Subtract the amount figured in (2) from the carryback or carryover. joint return (filed with your former spouse) that joint modified taxable income. This is was related to your taxable income. After you Joint to separate returns. spouse B’s share of the joint modified tax- deduct the NOL in the carryback year, the joint If you and your

spouse file separate returns for a carryback or able income. rates apply to the resulting taxable income. carryforward year, but filed a joint return for any 4) Reduce the amount figured in (3), but not Refund limit. If you are not married in the NOL or all of the tax years involved in figuring the below zero, by spouse B’s NOL deduction. year (or are married to a different spouse), and NOL carryover, figure each of your carryovers

separately. 5) Add the amounts figured in (2) and (4). in the carryback year you were married and filed

a joint return, your refund for the overpaid joint Joint return in NOL year. Figure each 6) Subtract the amount figured in (5) from tax may be limited. You can claim a refund for spouse’s share of the joint NOL through the spouse A’s NOL deduction. This is spouse the difference between your share of the A’s share of the joint carryover. The rest of following steps. refigured tax and your contribution toward the the joint carryover is spouse B’s share. tax paid on the joint return. The refund cannot be 1) Figure each spouse’s NOL as if he or she

more than the joint overpayment. Attach a state- filed a separate return. See How To Figure ment showing how you figured your refund. Example. Sam and Wanda filed a joint re- an NOL, earlier. If only one spouse has an turn for 2001 and separate returns for 2002 and Figuring your share of a joint tax liability. NOL, stop here. All of the joint NOL is that 2003. In 2003, Sam had an NOL of $18,000 and There are five steps for figuring your share of the spouse’s NOL. Wanda had an NOL of $2,000. They choose to refigured joint tax liability. 2) If both spouses have an NOL, multiply the carry back both NOLs 2 years to their 2001 joint

joint NOL by a fraction, the numerator of return and claim a $20,000 NOL deduction. 1) Figure your total tax as though you had which is spouse A’s NOL figured in (1) and Their joint modified taxable income (MTI) for filed as married filing separately. the denominator of which is the total of the 2001 is $15,000, and their joint NOL carryover to 2) Figure your spouse’s total tax as though spouses’ NOLs figured in (1). The result is 2002 is $5,000 ($20,000 – $15,000). Sam and your spouse had also filed as married filing spouse A’s share of the joint NOL. The Wanda each figure their separate MTI for 2001 separately. rest of the joint NOL is spouse B’s share. as if they had filed separate returns. Then they

3) Add the amounts in (1) and (2). figure their shares of the $5,000 carryover as

Example 1. Mark and Nancy are married follows.

4) Divide the amount in (1) by the amount in and file a joint return for 2003. They have an (3). NOL of $5,000. They carry the NOL back to Step 1.

Sam’s separate MTI .......... $9,000 5) Multiply the refigured tax on your joint re- 2001, a year in which Mark and Nancy filed Wanda’s separate MTI . . . . . . . . + 3,000 turn by the amount figured in (4). This is separate returns. Figured separately, Nancy’s Total MTI ................. $12,000 your share of the joint tax liability. 2003 deductions were more than her income,

and Mark’s income was more than his deduc- Step 2.

Figuring your contribution toward tax tions. Mark does not have any NOL to carry Joint MTI ................. $15,000

paid. Unless you have an agreement or clear back. Nancy can carry back the entire $5,000 Sam’s MTI ÷ total MTI

evidence of each spouse’s contributions toward NOL to her 2001 separate return. ($9,000 ÷ $12,000) ........... × .75

the payment of the joint tax liability, figure your Sam’s share of joint MTI ....... $11,250

contribution by adding the tax withheld on your Example 2. Assume the same facts as in Step 3. wages and your share of joint estimated tax Example 1, except that both Mark and Nancy Joint MTI ................. $15,000 payments or tax paid with the return. If the origi- had deductions in 2003 that were more than Sam’s share of joint MTI ....... − 11,250 nal return for the carryback year resulted in an their income. Figured separately, his NOL is Wanda’s share of joint MTI ..... $3,750 overpayment, reduce your contribution by your $1,800 and hers is $3,000. The sum of their Step 4. share of the tax refund. Figure your share of a separate NOLs ($4,800) is less than their Wanda’s share of joint MTI ..... $3,750 joint payment or refund by the same method $5,000 joint NOL because his deductions in- Wanda’s NOL deduction ....... − 2,000 used in figuring your share of the joint tax liabil- cluded a $200 net capital loss that is not allowed Wanda’s remaining share ...... $1,750 ity. Use your taxable income as originally re- in figuring his separate NOL. The loss is allowed

ported on the joint return in steps (1) and (2) in figuring their joint NOL because it was offset Step 5.

Page 8
Sam’s share of joint MTI ....... $11,250 Home mortgage Schedule A, see Illustrated Schedule A (Form

Wanda’s remaining share . . . . . . + 1,750 1045) under How To Figure an NOL, earlier.) interest . . . . . . . . + 5,000

Joint MTI to be offset ......... $13,000 She enters the $10,000 NOL from line 27 of Total itemized deductions .... −14,000

Schedule A on line 1a of Form 1045. Less: Step 6. Exemption ............... − 2,900 Sam’s NOL deduction ......... $18,000 Martha completes lines 10 through 26, using 2001 Taxable income after Joint MTI to be offset ......... − 13,000 the “Before carryback” column under the column carryback ................ $23,100 Sam’s carryover to 2001 ....... $5,000 for the second preceding tax year ended 12/31/

01 on page 1 of Form 1045 using the following Martha then completes lines 10 through 26, Joint carryover to 2001 ........ $5,000

Sam’s carryover ............ − 5,000 amounts from her 2001 return. using the “After carryback” column under the

Wanda’s carryover to 2001 ..... $–0– column for the second preceding tax year ended 2001 Adjusted gross income . . . $50,000 12/31/01. On line 11, Martha enters her $10,000 Wanda’s $2,000 NOL deduction offsets Itemized deductions: NOL deduction. Her new adjusted gross income $2,000 of her $3,750 share of the joint modified Medical expenses on line 12, is $40,000 ($50,000 − $10,000). To taxable income and is completely used up. She [$6,000 − ($50,000 complete line 13, she must refigure her medical has no carryover to 2002. Sam’s $18,000 NOL × 7.5%)] ....... $2,250 expense deduction using her new adjusted deduction offsets all of his $11,250 share of joint State income tax . . + 2,000 gross income. Her refigured medical expense modified taxable income and the remaining Real estate tax . . . + 4,000 deduction is $3,000 [$6,000 − ($40,000 × $1,750 of Wanda’s share. His carryover to 2002 Home mortgage 7.5%)]. This increases her total deductions to interest . . . . . . . . + 5,000 is $5,000. $14,000 [$13,250 + ($3,000 − $2,250)]. Total itemized deductions .... $13,250

Exemption ............... $2,900 Martha uses her refigured taxable income Illustrated Form 1045 Income tax ............... $5,934 ($23,100) from line 16, and the tax tables in her

Self-employment tax ......... $6,120 2001 Form 1040 instructions to find her income The following example illustrates how to use Martha refigures her taxable income for 2001 tax. She enters the new amount, $3,469, on line Form 1045 to claim an NOL deduction in a after carrying back her 2003 NOL as follows: 17, and her new total tax liability, $9,589, on line carryback year. It includes a filled-in page 1 of 26. Form 1045. 2001 Adjusted gross income . . . $50,000 Martha used up her $10,000 NOL in 2001 so Less: Example. Martha Sanders is a self-em- she does not complete a column for the first NOL from 2003 ............ −10,000 ployed contractor. Martha’s 2003 deductions preceding tax year ended 12/31/2002. The de- 2001 Adjusted gross income after are more than her 2003 income because of a crease in tax because of her NOL deduction carryback ................ $40,000 business loss. She uses Form 1045 to carry (line 28) is $2,465. Less:

back her NOL 2 years and claim an NOL deduc- Martha files Form 1045 after filing her 2003 Itemized deductions:

tion in 2001. (See the filled-in Form 1045 on Medical expenses return, but no later than December 31, 2004.

page 10.) Her filing status in both years was [$6,000 − ($40,000 She mails it to the Internal Revenue Service

single. × 7.5%)] ....... $3,000 Center where she filed her 2003 return and

Martha figures her 2003 NOL on Schedule A, State income tax . . + 2,000 attaches a copy of her 2003 return (including the

Form 1045 (not shown). (For an example using Real estate tax . . . + 4,000 applicable forms and schedules). 

Page 9
Proof as of

October 29, 2003

(subject to change)

Martha Sanders

9876 Holly Street

Yardley, PA 19067

123-00-4567

041 123-4567

$10,000

3-5-2004



50,000

50,000

13,250

36,750

2,900

33,850

5,934

5,934

6,120

12,221

2,465

50,000

10,000

40,000

14,000

26,000

2,900

23,100

3,469

3,469

6,120

9,589

4-10-2004





12-31-01

Martha Sanders

12-31-02 2nd 1st

5,934 3,469

Application for Tentative Refund OMB No. 1545-0098

Form 1045 See separate instructions.

Do not attach to your income tax return—mail in a separate envelope. Department of the Treasury

Internal Revenue Service For use by individuals, estates, or trusts.

Name(s) shown on return Social security or employer identification number

Number, street, and apt. or suite no. If a P.O. box, see page 2 of the instructions. Spouse’s social security number (SSN)

Type or print

City, town or post office, state, and ZIP code. If a foreign address, see page 2 of the instructions. Daytime phone number

( )

1 This application is Net operating loss (NOL) (Sch. A, line 27, page 2) Unused general business credit

filed to carry back: $ $

For the calendar year 2003, or other tax year Date tax return was filed

beginning , 2003, ending , 20

2a

3 If this application is for an unused credit created by another carryback, enter year of first carryback 

If you filed a joint return (or separate return) for some, but not all, of the tax years involved in figuring the carryback, list the

years and specify whether joint (J) or separate (S) return for each 

4

5 If SSN for carryback year is different from above, enter a SSN and b Year(s) 

6 If you changed your accounting period, give date permission to change was granted 

7 Have you filed a petition in Tax Court for the year(s) to which the carryback is to be applied? Yes No

8 Is any part of the decrease in tax due to a loss or credit from a tax shelter required to be registered? Yes No

preceding

tax year ended 

preceding

tax year ended 

preceding Computation of Decrease in Tax tax year ended 

After

carryback

Before

carryback

After

carryback

Before

carryback

After

carryback

Before

Note: If 1a and 1c are blank, skip lines 10 through 16. carryback

Adjusted gross income

NOL deduction after carryback (see

page 3 of the instructions)

11

12 Subtract line 11 from line 10

13 Deductions (see page 4 of the instructions)

14 Subtract line 13 from line 12

15 Exemptions (see page 4 of the instructions)

16 Taxable income. Line 14 minus line 15

Income tax. See page 5 of the

instructions and attach an explanation

17

General business credit (see page 5

of the instructions)

18

Other credits. Identify

19

Total credits. Add lines 20 and 21

20

Subtract line 22 from line 19

21

Alternative minimum tax

23

24 Self-employment tax

25 Other taxes

26 Total tax. Add lines 23 through 25

Enter the amount from the “After

carryback” column on line 26 for

each year

27

28 Decrease in tax. Line 26 minus line 27

29 Overpayment of tax due to a claim of right adjustment under section 1341(b)(1) (attach computation)

Under penalties of perjury, I declare that I have examined this application and accompanying schedules and statements, and to the best of my

knowledge and belief, they are true, correct, and complete. Sign

Here Your signature Date

Spouse’s signature. If Form 1045 is filed jointly, both must sign. Date

Name Date Preparer Other

Than Taxpayer Address 

For Disclosure, Privacy Act, and Paperwork Reduction Act Notice, see page 7 of the instructions. Form 1045 (2003)



a b

b

Cat. No. 10670A



Keep a copy of

this application

for your records.

9 If you are carrying back an NOL or net section 1256 contracts loss, did this cause the release of foreign tax credits

or the release of other credits due to the release of the foreign tax credit (see page 3 of the instructions)? Yes No

10

(see page 3 of the instructions)

Add lines 17 and 18

22

Net section 1256 contracts loss

$

c

2003

9,589

Page 10
come to zero (to less than zero, if an estate or 10 through 34 to figure her adjustment to itemHow To Figure trust), see NOL Carryover From 2003 to 2004, ized deductions. On line 6, she enters the total

later. adjustment from line 34. an NOL Carryover Line 10. Ida’s adjusted gross income for

Illustrated Schedule B (Form 2001 was $29,000.

If your NOL is more than your taxable income for 1045) Line 11. She adds lines 3 through 5 and

the year to which you carry it (figured before enters $1,000 on line 11. (This is her net capital

deducting the NOL), you may have an NOL The following example illustrates how to figure loss deduction added back, which modifies her

carryover. You must make certain modifications an NOL carryover from a carryback year. It in- adjusted gross income.)

to your taxable income to determine how much cludes a filled-in Schedule B (Form 1045). Line 12. Her modified adjusted gross income NOL you will use up in that year and how much for 2001 is now $30,000. you can carry over to the next tax year. Your Example. Ida Brown runs a small clothing Line 13. On her 2001 tax return, she de- carryover is the excess of your NOL deduction shop. In 2003, she has an NOL of $36,000 that ducted $550 as medical expenses. over your modified taxable income for the car- she carries back to 2001. She has no other Line 14. Her actual medical expenses were ryback or carryforward year. If your NOL deduc- carrybacks or carryovers to 2001. $2,725. tion includes more than one NOL, apply the Ida’s adjusted gross income in 2001 was NOLs against your modified taxable income in Line 15. She multiplies her modified ad- $29,000, consisting of her salary of $30,000 justed gross income, $30,000, by .075. She en- the same order in which you incurred them, minus a $1,000 capital loss deduction. She is ters $2,250 on line 15. starting with the earliest. single and claimed only one personal exemption Line 16. The difference between her actual Modified taxable income. Your modified tax- of $2,900. During that year, she gave $1,450 in medical expenses and the amount she is al- charitable contributions. Her medical expenses able income is your taxable income figured with lowed to deduct is $475. were $2,725. She also deducted $1,650 in taxes the following changes. and $1,125 in home mortgage interest. Line 17. The difference between her medical

1) You cannot claim an NOL deduction for Her deduction for charitable contributions deduction and her modified medical deduction is

$75. She enters this on line 17. the NOL carryover you are figuring or for was not limited because her contributions,

any later NOL. $1,450, were less than 50% of her adjusted Line 18. She enters her modified adjusted

gross income. The deduction for medical ex- gross income of $30,000 on line 18. 2) You cannot claim a deduction for capital penses was limited to expenses over 7.5% of Line 19. She had no other carrybacks to losses in excess of your capital gains. adjusted gross income (.075 × $29,000 = 2001 and enters zero on line 19. Also, you must increase your taxable income by the amount of any section 1202 $2,175; $2,725 − $2,175 = $550). The deduc- Line 20. Her modified adjusted gross income

exclusion claimed on Schedule D (Form tions for taxes and home mortgage interest were remains $30,000.

not subject to any limits. She was able to claim 1040). Line 21. Her actual contributions for 2001 $4,775 ($1,450 + $550 + $1,650 + $1,125) in were $1,450, which she enters on line 21. 3) You cannot claim a deduction for your ex- itemized deductions for 2001. She had no other Line 22. She now refigures her charitable emptions for yourself, your spouse, or de- deductions in 2001. Her taxable income for the contributions based on her modified adjusted pendents. year was $21,325. gross income. Her contributions are well below Ida’s $36,000 carryback will reduce her 2001 4) You must figure any item affected by the the 50% limit, so she enters $1,450 on line 22. taxable income to zero. She completes the col- amount of your adjusted gross income af- Line 23. The difference is zero. umn for the second preceding tax year ended ter making the changes in (1) and (2), Lines 24 through 33. Ida had no casualty 12/31/01 of Schedule B (Form 1045) to figure above, and certain other changes to your losses or deductions for miscellaneous items in how much of her NOL she uses up in 2001 and adjusted gross income that result from (1) 2001 so she leaves these lines blank. how much she can carry over to 2002. See the and (2). This includes income and deduc- illustrated Schedule B shown on page 12. Ida Line 34. She combines lines 17, 23, 28, and tion items used to figure adjusted gross does not complete the column for the first pre- 33 and enters $75 on line 34. She carries this income (for example, IRA deductions), as ceding tax year ended 12/31/02 because the figure to line 6. well as certain itemized deductions. To fig- $10,700 carryover to 2002 is completely used Line 7. Ida enters the deduction for her per- ure a charitable contribution deduction, do up that year. (See the information for line 9, sonal exemption of $2,900 for 2001. not include deductions for NOL carrybacks below.) Line 8. After combining lines 2 through 7, in the change in (1) but do include deduc- Line 1. Ida enters $36,000, her 2003 net Ida’s modified taxable income is $25,300. tions for NOL carryforwards from tax years

before the NOL year. operating loss, on line 1. Line 9. Ida figures her carryover to 2002 by

Line 2. She enters $21,325, her 2001 tax- subtracting her modified taxable income (line 8) Your taxable income as modified cannot be able income, on line 2. from her NOL deduction (line 1). She enters the less than zero. Line 3. Ida enters her net capital loss deduc- $10,700 carryover on line 9. She also enters the

Schedule B (Form 1045). You can use tion of $1,000 on line 3. $10,700 as her NOL deduction for 2002 on line

Schedule B (Form 1045) to figure your modified 11 of page 1, Form 1045, in the “After carryback” Line 5. Although Ida’s entry on line 3 moditaxable income for carryback years and your column under the column for the first preceding fies her adjusted gross income, that does not

carryover from each of those years. Do not use tax year ended 12/31/02. (For an illustrated ex- affect any other items included in her adjusted

Schedule B for a carryforward year. If your 2003 ample of page 1 of Form 1045, see gross income. Ida enters zero on line 5. Illustrated

return includes an NOL deduction from an NOL Line 6. Ida had itemized deductions and Form 1045 under How To Claim an NOL Deducyear before 2003 that reduced your taxable in- entered $1,000 on line 3, so she completes lines tion, earlier.)

Page 11
Proof as of

October 29, 2003

(subject to change)

Page 3

Schedule B—NOL Carryover (see page 6 of the instructions)

preceding

tax year ended 

preceding

tax year ended 

preceding

tax year ended 

1

2

3

5

6

7

8

9

10

11

12

14

15

16

Form 1045 (2003)

Complete one column before going to the

next column. Start with the earliest

carryback year.

NOL deduction (see page 6 of the

instructions). Enter as a positive number

Taxable income before 2003 NOL

carryback (see page 6 of the

instructions). Estates and trusts,

increase this amount by the sum of

the charitable deduction and income

distribution deduction

Net capital loss deduction (see page

6 of the instructions)

Adjustment to itemized deductions

(see page 6 of the instructions)

Deduction for exemptions. Estates

and trusts, enter exemption amount

Modified taxable income. Combine

lines 2 through 7. If zero or less,

enter -0-

NOL carryover (see page 7 of the

instructions). Subtract line 8 from line

1. If zero or less, enter -0-

Adjustment to Itemized

Deductions (Individuals Only)

Adjusted gross income before 2003

NOL carryback

Add lines 3 through 5 above

Modified adjusted gross income. Add

lines 10 and 11

Medical expenses from Sch. A (Form

1040), line 1 (or as previously adjusted)

Multiply line 12 by 7.5% (.075)

Subtract line 15 from line 14. If zero

or less, enter -0-

Medical expenses from Sch. A (Form

1040), line 4 (or as previously adjusted)

Subtract line 16 from line 13

13

17

Adjustments to adjusted gross

income (see page 6 of the

instructions)

Complete lines 10 through 34 for the

carryback year(s) for which you

itemized deductions only if line 3 or

line 4 above is more than zero.

Section 1202 exclusion. Enter as a

positive number

4

Form 1045 (2003)

12-31-01

36,000

21,325

1,000

-0-

75

2,900

25,300

10,700

29,000

1,000

30,000

550

2,725

2,250

475

75

2nd

-0-

Page 12
Proof as of

October 29, 2003

(subject to change)

12-31-01

30,000

-0-

30,000

1,450

1,450

-0-

75

2nd

● $108,450 for 1993.

34

Page 4

Schedule B—NOL Carryover ( Continued)

19

20

22

21

23

Form 1045 (2003)

Add lines 18 and 19

Refigured charitable contributions

(see page 7 of the instructions)

Charitable contributions from Sch. A

(Form 1040), line 18 (line 16 for 1993)

(or as previously adjusted)

Subtract line 22 from line 21

Casualty and theft losses from Form

4684, line 16 (or as previously adjusted)

Multiply line 18 by 10% (.10)

Subtract line 26 from line 25. If zero

or less, enter -0-

Casualty and theft losses from Form

4684, line 18 (or as previously

adjusted)

Subtract line 27 from line 24

Miscellaneous itemized deductions

from Sch. A (Form 1040), line 23 (line

21 for 1993) (or as previously

adjusted)

Multiply line 18 by 2% (.02)

Subtract line 31 from line 30. If zero

or less, enter -0-

Miscellaneous itemized deductions

from Sch. A (Form 1040), line 26 (line

24 for 1993) (or as previously

adjusted)

Subtract line 32 from line 29

25

26

27

24

28

30

31

32

29

33

preceding

tax year ended 

preceding

tax year ended 

preceding

tax year ended 

Complete one column before going to the

next column. Start with the earliest

carryback year.

Enter as a positive number any NOL

carryback from a year before 2003

that was deducted to figure line 10

on page 3

Modified adjusted gross income from

line 12 on page 3

18

● $111,800 for 1994.

● $114,700 for 1995.

● $117,950 for 1996.

● $121,200 for 1997.

Otherwise, combine lines 17, 23, 28,

and 33; enter the result here and on

line 6 (page 3)

Complete the worksheet on page 8 of

the instructions if line 18 is more than

the applicable amount shown below

(more than one-half that amount if

married filing separately for that year).

● $124,500 for 1998.

Form 1045 (2003)

● $126,600 for 1999.

● $128,950 for 2000.

● $132,950 for 2001.

● $137,300 for 2002.

1st

12-31-02

Page 13
an estate or trust (Form 1041, line 15b), modi- 1) The special allowance for passive activity NOL Carryover From fied adjusted gross income is the total of the losses from rental real estate activities. following amounts.

2003 to 2004 2) Taxable social security and tier 1 railroad • The adjusted gross income on the return. retirement benefits.

If you had an NOL deduction that reduced your • The amounts from lines 3 and 4 of the

3) IRA deduction. worksheet. taxable income on your 2003 return to zero (to

less than zero, if an estate or trust), complete 4) Student loan interest deduction. • The exemption amount from Form 1041, Table 1, Worksheet for NOL Carryover From 5) Tuition and fees deduction. line 20.

2003 to 2004. It will help you figure your NOL to

carry to 2004. Keep the worksheet for your rec- 6) Excludable savings bond interest. • The NOL deduction for the NOL year enords. tered at the top of the worksheet and for 7) Excludable employer-provided adoption later years. benefits. Worksheet Instructions To refigure the casualty and theft loss deduc- If none of these items apply to you, enter

At the top of the worksheet, enter the NOL year zero on line 5. Otherwise, increase your ad- tion of an estate or trust, modified adjusted gross

income is the total of the following amounts. for which you are figuring the carryover. justed gross income by the total of lines 3 and 4

and your NOL deduction for the NOL year en- More than one NOL. If your 2003 NOL deduc- • The adjusted gross income amount you tered at the top of the worksheet and later years. tion includes amounts for more than one loss used to figure the deduction claimed on Using this increased adjusted gross income, year, complete this worksheet only for one loss the return.

refigure the items that apply, in the order listed year. To determine which year, start with your • The amounts from lines 3 and 4 of the above. Your adjustment for each item is the earliest NOL and subtract each NOL separately worksheet. difference between the refigured amount and from your taxable income figured without the the amount included on your return. Add the NOL deduction. Complete this worksheet for the • The NOL deduction for the NOL year en- adjustments for previous items to your adjusted earliest NOL that reduces your taxable income tered at the top of the worksheet and for gross income before refiguring the next item. below zero. Your NOL carryover to 2004 is the later years. Keep a record of your computations. total of the amount on line 9 of the worksheet Enter your total adjustments for the above and all later NOL amounts. Line 10. Treat your NOL deduction for the items on line 5.

NOL year entered at the top of the worksheet Example. Your taxable income for 2003 is Line 6. Enter zero if you claimed the standard and for later years as a positive amount. Add it to $4,000 without your $9,000 NOL deduction. deduction. Otherwise, use lines 10 through 41 of your adjusted gross income. Enter the result on Your NOL deduction includes a $2,000 carry- the worksheet to figure the amount to enter on line 10.

over from 2001 and a $7,000 carryover from this line. Complete only those sections that ap- Line 19. If you had a contributions carryover 2002. Subtract your 2001 NOL of $2,000 from ply to you. from 2002 to 2003 and your NOL deduction $4,000. This gives you taxable income of Estates and trusts. Enter zero on line 6 if includes an amount from an NOL year before $2,000. Your 2001 NOL is now completely used you did not claim any miscellaneous deductions 2002, you may have to reduce your contribu- up. Subtract your $7,000 2002 NOL from on line 15b (Form 1041) or a casualty or theft tions carryover. This reduction is any adjustment $2,000. This gives you taxable income of loss. Otherwise, refigure these deductions by you made to your 2002 charitable contributions ($5,000). You now complete the worksheet for substituting modified adjusted gross income deduction when figuring your NOL carryover to your 2002 NOL. Your NOL carryover to 2004 is (see below) for adjusted gross income. Subtract 2003. Use the reduced contributions carryover the unused part of your 2002 NOL from line 9 of the recomputed deductions from those claimed to figure the amount to enter on line 19. the worksheet. on the return. Enter the result on line 6.

Line 2. Treat your NOL deduction for the NOL Modified adjusted gross income. To year entered at the top of the worksheet and refigure miscellaneous itemized deductions of later years as a positive amount. Add it to your

negative taxable income. Enter the result on line

2.

Line 5. You must refigure the following income

and deductions based on adjusted gross income.

Page 14
Table 1.

USE YOUR 2003 FORM 1040 (OR FORM 1041) TO COMPLETE THIS WORKSHEET:

For Use by Individuals, Estates, and Trusts (Keep for your records.)

See the instructions under NOL Carryover From 2003 to 2004.

1. Enter as a positive number your NOL deduction for the NOL year entered above from line 21 (Form

1040) or line 15a (Form 1041)

NOL YEAR:

2. Enter your taxable income without the NOL deduction for the NOL year entered above or later years.

(See instructions.)

3. Enter as a positive number any net capital loss deduction

4.

Enter any adjustments to your adjusted gross income (see instructions)

6.

7. Enter your deduction for exemptions from line 39 (Form 1040) or line 20 (Form 1041)

8. Modified taxable income. Combine lines 2 through 7. Enter the result (but not less than zero)

NOL carryover to 2004. Subtract line 8 from line 1. Enter the result (but not less than zero) here

and on the “other income” line of Form 1040 (or the line on Form 1041 for deductions NOT subject

to the 2% floor) in 2004

Enter your adjusted gross income without the NOL deduction for the NOL year entered above or

later years. (See instructions.)

10.

11. Combine lines 3, 4, and 5 above

Modified adjusted gross income. Combine lines 10 and 11 above

ADJUSTMENTS TO ITEMIZED DEDUCTIONS (INDIVIDUALS ONLY):

ADJUSTMENT TO MEDICAL EXPENSES:

5.

Enter any adjustments to your itemized deductions from line 37 or line 41 (see instructions)

12.

Enter your medical expenses from Schedule A (Form 1040), line 4

14.

Multiply line 12 above by 7.5% (.075)

13.

Enter your medical expenses from Schedule A (Form 1040), line 1

15.

Subtract line 15 from line 14. Enter the result (but not less than zero)

Subtract line 16 from line 13

Refigure your charitable contributions deduction using line 12 above as your adjusted gross income.

(See instructions)

Enter your charitable contributions deduction from Schedule A (Form 1040), line 18

Subtract line 19 from line 18

ADJUSTMENT TO CHARITABLE CONTRIBUTIONS:

16.

17.

18.

19.

ADJUSTMENT TO CASUALTY AND THEFT LOSSES:

Enter your casualty and theft losses from Form 4684, line 18

Multiply line 12 above by 10% (.10)

20.

21.

22. Enter your casualty and theft losses from Form 4684, line 16

Subtract line 23 from line 22. Enter the result (but not less than zero)

23.

24.

Subtract line 24 from line 21

ADJUSTMENT TO MISCELLANEOUS DEDUCTIONS:

Enter your miscellaneous deductions from Schedule A (Form 1040), line 26

Multiply line 12 above by 2% (.02)

25.

26.

27. Enter your miscellaneous deductions from Schedule A (Form 1040), line 23

Subtract line 28 from line 27. Enter the result (but not less than zero)

28.

29.

Subtract line 29 from line 26

TENTATIVE TOTAL ADJUSTMENT:

Combine lines 17, 20, 25, and 30, and enter the result here. If line 12 above is $139,500 or less

($69,750 or less if married filing separately), also enter the result on line 6 above and stop here.

Otherwise, go to line 32

31.

Worksheet for NOL Carryover From 2003 to 2004 (For an NOL Year Before 2003)*

Enter as a positive number any gain excluded on the sale or exchange of qualified small business stock

*Note: If you choose to waive the carryback period, and instead you choose to only carry your 2003 NOL forward, use Schedule A, Form 1045

to compute your 2003 NOL that will be carried over to 2004. Report your 2003 NOL from line 27, Schedule A, Form 1045 on the “other

income” line of Form 1040 or the line on Form 1041 for deductions NOT subject to the 2% floor in 2003.

9.

30.

Page 15
Table 1. (Continued)

ADJUSTMENT TO OVERALL ITEMIZED LIMIT:

Enter the amount on Schedule A (Form 1040), line 28

Add lines 16 and 24, the amount on Schedule A (Form 1040), line 13, and any gambling losses

included on Schedule A (Form 1040), line 27

32.

33.

34.

Add lines 16, 19, 24, and 29, and the amounts on Schedule A (Form 1040), lines 9, 14, and 27

35. Subtract line 34 from line 33. If the result is zero, enter the amount from line 31 on line 6 above and

stop here. Otherwise, go to line 36

Multiply line 35 by 80% (.80)

Subtract $139,500 ($69,750 if married filing separately) from the amount on line 12

Multiply line 37 by 3% (.03)

Enter the smaller of line 36 or line 38

Subtract line 39 from line 33. Enter the result (but not less than your standard deduction amount)

Subtract line 40 from line 32. Enter the result here and on line 6

36.

37.

38.

39.

40.

41.

Page 16
• Figure your withholding allowances using second IRS representative to sometimes listen

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cess to tax help. a small business. • Products. You can walk in to many post

offices, libraries, and IRS offices to pick up Contacting your Taxpayer Advocate. If you You can also reach us using File Transfer certain forms, instructions, and publica- have attempted to deal with an IRS problem Protocol at ftp.irs.gov. tions. Some IRS offices, libraries, grocery unsuccessfully, you should contact your Tax- Fax. You can get over 100 of the most stores, copy centers, city and county gov- payer Advocate. requested forms and instructions 24 ernment offices, credit unions, and office The Taxpayer Advocate independently rep- hours a day, 7 days a week, by fax. supply stores have a collection of products resents your interests and concerns within the Just call 703–368–9694 from your fax ma- available to print from a CD-ROM or pho- IRS by protecting your rights and resolving chine. Follow the directions from the prompts. problems that have not been fixed through nor- tocopy from reproducible proofs. Also, When you order forms, enter the catalog num- mal channels. While Taxpayer Advocates can- some IRS offices and libraries have the ber for the form you need. The items you request not change the tax law or make a technical tax Internal Revenue Code, regulations, Inter- will be faxed to you. decision, they can clear up problems that re- nal Revenue Bulletins, and Cumulative

sulted from previous contacts and ensure that For help with transmission problems, call Bulletins available for research purposes.

your case is given a complete and impartial 703–487–4608. • Services. You can walk in to your local review. Long-distance charges may apply. Taxpayer Assistance Center every busi- To contact your Taxpayer Advocate:

Phone. Many services are available by ness day to ask tax questions or get help

• Call the Taxpayer Advocate toll free at phone. with a tax problem. An employee can ex1–877–777–4778. plain IRS letters, request adjustments to

your account, or help you set up a pay- • Call, write, or fax the Taxpayer Advocate • Ordering forms, instructions, and publica- ment plan. You can set up an appointment office in your area. tions. Call 1–800–829–3676 to order by calling your local Center and, at the current-year forms, instructions, and publi- • Call 1–800–829–4059 if you are a prompt, leaving a message requesting cations and prior-year forms and instruc- TTY/TDD user. Everyday Tax Solutions help. A represen- tions. You should receive your order within • Visit the web site at www.irs.gov/advo- 10 days. tative will call you back within 2 business

cate. days to schedule an in-person appoint- • Asking tax questions. Call the IRS with ment at your convenience. To find the your tax questions at 1–800–829–1040. For more information, see Publication 1546, number, go to www.irs.gov or look in the

The Taxpayer Advocate Service of the IRS. • Solving problems. You can get phone book under “United States Governface-to-face help solving tax problems ment, Internal Revenue Service.”

Free tax services. To find out what services every business day in IRS Taxpayer Asare available, get Publication 910, Guide to Free sistance Centers. An employee can ex- Mail. You can send your order for Tax Services. It contains a list of free tax publi- plain IRS letters, request adjustments to forms, instructions, and publications to cations and an index of tax topics. It also de- your account, or help you set up a pay- the Distribution Center nearest to you scribes other free tax information services, ment plan. Call your local Taxpayer Assis- and receive a response within 10 workdays after including tax education and assistance pro- tance Center for an appointment. To find your request is received. Use the address that grams and a list of TeleTax topics. the number, go to www.irs.gov or look in applies to your part of the country. the phone book under “United States Gov- Internet. You can access the IRS web ernment, Internal Revenue Service.” • Western part of U.S.: site 24 hours a day, 7 days a week at Western Area Distribution Center www.irs.gov to: • TTY/TDD equipment. If you have access Rancho Cordova, CA 95743–0001 to TTY/TDD equipment, call 1–800–829– • E-file. Access commercial tax preparation 4059 to ask tax or account questions or to • Central part of U.S.: and e-file services available for free to eli- order forms and publications. Central Area Distribution Center gible taxpayers.

• TeleTax topics. Call 1–800–829–4477 to P.O. Box 8903 • Check the amount of advance child tax listen to pre-recorded messages covering Bloomington, IL 61702–8903 credit payments you received in 2003. various tax topics. • Eastern part of U.S. and foreign • Check the status of your 2003 refund. • Refund information. If you would like to addresses: Click on “Where’s My Refund” and then on check the status of your 2003 refund, call Eastern Area Distribution Center “Go Get My Refund Status.” Be sure to 1–800–829– 4477 for automated refund P.O. Box 85074 wait at least 6 weeks from the date you information and follow the recorded in- Richmond, VA 23261–5074 filed your return (3 weeks if you filed elec- structions or call 1–800–829–1954. Be tronically) and have your 2003 tax return sure to wait at least 6 weeks from the date available because you will need to know CD-ROM for tax products. You can

you filed your return (3 weeks if you filed your filing status and the exact whole dol- order IRS Publication 1796, Federal

electronically) and have your 2003 tax re- Tax Products on CD-ROM, and obtain: lar amount of your refund. turn available because you will need to

• Download forms, instructions, and publica- know your filing status and the exact • Current-year forms, instructions, and pubwhole dollar amount of your refund. lications. tions.

• Order IRS products on-line. • Prior-year forms and instructions.

Evaluating the quality of our telephone serv- • See answers to frequently asked tax ques- • Frequently requested tax forms that may ices. To ensure that IRS representatives give tions. be filled in electronically, printed out for accurate, courteous, and professional answers, submission, and saved for recordkeeping. • Search publications on-line by topic or we use several methods to evaluate the quality

keyword. of our telephone services. One method is for a • Internal Revenue Bulletins.

Page 17
Buy the CD-ROM from National Technical In- CD-ROM for small businesses. IRS how to prepare a business plan, finding financformation Service (NTIS) on the Internet at Publication 3207, Small Business Re- ing for your business, and much more. The dewww.irs.gov/cdorders for $22 (no handling source Guide, is a must for every small sign of the CD makes finding information easy

fee) or call 1–877–233–6767 toll free to buy business owner or any taxpayer about to start a and quick and incorporates file formats and

the CD-ROM for $22 (plus a $5 handling fee). business. This handy, interactive CD contains browsers that can be run on virtually any

The first release is available in early January desktop or laptop computer. all the business tax forms, instructions and puband the final release is available in late Febru- lications needed to successfully manage a busi- It is available in early April. You can get a

ary. ness. In addition, the CD provides an free copy by calling 1–800–829–3676 or by

abundance of other helpful information, such as visiting the web site at www.irs.gov/smallbiz.

To help us develop a more useful index, please let us know if you have ideas for index entries. Index See “Comments and Suggestions” in the “Introduction” for the ways you can reach us.

A Figuring an NOL: Schedule A (Form 1045) . . . 3 S

Assistance (See Tax help) Capital losses .......... 3 Schedule B (Form 1045) . . 11 Schedule A (Form 1045) .... 2

Carryover . . . . . . . . . . . . 11 Schedule B (Form 1045) . . . 11 Exemptions ............ 2 C M Steps in figuring NOL ...... 2

NOL deduction .......... 3

Carryback period ......... 3 Marital status, change in .... 8 Suggestions ............ 2 Nonbusiness income ...... 2

Carryback, waiving ....... 3 Modified taxable income . . . 11 Schedule A (Form 1045) . . . 2

Carryforward period More information (See Tax help) ....... 3 Filing status, change in .... 8 T

Carryover from 2003 to 2004: Forms and schedules: Tax help . . . . . . . . . . . . . . 17

Estates and trusts . . . . . . . 14 Form 1040X ........... 7 N Taxpayer Advocate . . . . . . 17

Worksheet instructions . . . 14 Form 1045 ............ 7 NOL more than taxable TTY/TDD information . . . . . 17

Claiming an NOL Schedule A (Form 1045) . . . 2 income ............... 7

deduction ............. 7 Schedule B (Form 1045) . . 11 NOL year . . . . . . . . . . . . . 1, 3 W Comments ............. 2 Free tax services . . . . . . . . 17 Waiving the 5-year

P carryback ............. 3

D H Publications (See Tax help) Waiving the carryback

Deducting a carryback ..... 7 Help (See Tax help) period ............... 3

Deducting a carryforward . . . 8 How to carry an NOL back or When to use an NOL Q ...... 3

forward .............. 7 Worksheet: Qualified small business . . . 3

E How to figure an NOL ...... 2 Carryover from 2003 to

2004 . . . . . . . . . . . . . . 14 Eligible loss ............ 3 R I Refiguring tax ........... 7 ■

F Illustrated forms and

schedules: Farming business ........ 3

Form 1045 ............ 9 Farming loss ............ 3

Page 18
Tax Publications for Individual Taxpayers

General Guides

Your Rights as a Taxpayer

Your Federal Income Tax (For

Individuals)

Farmer’s Tax Guide

Tax Guide for Small Business (For

Individuals Who Use Schedule C or

C-EZ)

Tax Calendars for 2004

Highlights of 2003 Tax Changes

Guide to Free Tax Services

Specialized Publications

Armed Forces’ Tax Guide

Fuel Tax Credits and Refunds

Travel, Entertainment, Gift, and Car

Expenses

Exemptions, Standard Deduction, and

Filing Information

Medical and Dental Expenses

(Including the Health Insurance Credit)

Child and Dependent Care Expenses

Divorced or Separated Individuals

Tax Withholding and Estimated Tax

Foreign Tax Credit for Individuals

U.S. Government Civilian Employees

Stationed Abroad

Social Security and Other Information

for Members of the Clergy and

Religious Workers

U.S. Tax Guide for Aliens

Moving Expenses

Selling Your Home

Credit for the Elderly or the Disabled

Taxable and Nontaxable Income

Charitable Contributions

Residential Rental Property

Commonly Used Tax Forms

Miscellaneous Deductions

Tax Information for First-Time

Homeowners

Reporting Tip Income

Self-Employment Tax

Installment Sales

Partnerships

Sales and Other Dispositions of Assets

Casualties, Disasters, and Thefts

Investment Income and Expenses

Basis of Assets

Recordkeeping for Individuals

Older Americans’ Tax Guide

Community Property

Examination of Returns, Appeal Rights,

and Claims for Refund

Survivors, Executors, and

Administrators

Determining the Value of Donated

Property

Mutual Fund Distributions

Tax Guide for Individuals With Income

From U.S. Possessions

Pension and Annuity Income

Casualty, Disaster, and Theft Loss

Workbook (Personal-Use Property)

Business Use of Your Home (Including

Use by Day-Care Providers)

Individual Retirement Arrangements

(IRAs)

Tax Highlights for U.S. Citizens and

Residents Going Abroad

What You Should Know About the

IRS Collection Process

Earned Income Credit (EIC)

Tax Guide to U.S. Civil Service

Retirement Benefits

Tax Highlights for Persons with

Disabilities

Bankruptcy Tax Guide

Direct Sellers

Social Security and Equivalent

Railroad Retirement Benefits

How Do I Adjust My Tax Withholding?

Passive Activity and At-Risk Rules

Household Employer’s Tax Guide

Tax Rules for Children and

Dependents

Home Mortgage Interest Deduction

How To Depreciate Property

Practice Before the IRS and

Power of Attorney

Introduction to Estate and Gift Taxes

The IRS Will Figure Your Tax

Per Diem Rates

Reporting Cash Payments of Over

$10,000 (Received in a Trade or

Business)

The Taxpayer Advocate Service

of the IRS

Derechos del Contribuyente

Cómo Preparar la Declaración de

Impuesto Federal

Crédito por Ingreso del Trabajo

English-Spanish Glossary of Words

and Phrases Used in Publications

Issued by the Internal Revenue

Service

U.S. Tax Treaties

Spanish Language Publications

Tax Highlights for Commercial

Fishermen

910

595

553

509

334

225

17

1

3

378

463

501

502

503

504

505

514

516

517

519

521

523

524

525

526

527

529

530

531

533

537

544

547

550

551

552

554

541

555

556

559

561

564

570

575

584

587

590

593

594

596

721

901

907

908

915

919

925

926

929

946

911

936

950

1542

967

1544

1546

596SP

1SP

850

579SP

594SP Comprendiendo el Proceso de Cobro

947

968 Tax Benefits for Adoption

Informe de Pagos en Efectivo en

Exceso de $10,000 (Recibidos en

una Ocupación o Negocio)

1544SP

See How To Get Tax Help for a variety of ways to get forms, including by computer, fax, phone,

and mail. For fax orders only, use the catalog number when ordering.

U.S. Individual Income Tax Return

Itemized Deductions & Interest and

Ordinary Dividends

Profit or Loss From Business

Net Profit From Business

Capital Gains and Losses

Supplemental Income and Loss

Earned Income Credit

Profit or Loss From Farming

Credit for the Elderly or the Disabled

Income Tax Return for Single and 

Joint Filers With No Dependents

Self-Employment Tax

U.S. Individual Income Tax Return

Interest and Ordinary Dividends for

Form 1040A Filers

Child and Dependent Care

Expenses for Form 1040A Filers

Credit for the Elderly or the 

Disabled for Form 1040A Filers

Estimated Tax for Individuals

Amended U.S. Individual Income Tax Return

Unreimbursed Employee Business

Expenses

Underpayment of Estimated Tax by

Individuals, Estates, and Trusts

Power of Attorney and Declaration of

Representative

Child and Dependent Care Expenses

Moving Expenses

Depreciation and Amortization

Application for Automatic Extension of Time

To File U.S. Individual Income Tax Return

Investment Interest Expense Deduction

Additional Taxes on Qualified Plans (Including

IRAs) and Other Tax-Favored Accounts

Alternative Minimum Tax—Individuals

Noncash Charitable Contributions

Change of Address

Expenses for Business Use of Your Home

Nondeductible IRAs

Passive Activity Loss Limitations

1040

Sch A&B

Sch C

Sch C-EZ

Sch D

Sch E

Sch EIC

Sch F

Sch H Household Employment Taxes 

Sch R

Sch SE

1040EZ

1040A

Sch 1

Sch 2

Sch 3

1040-ES

1040X

2106 Employee Business Expenses

2106-EZ

2210

2441

2848

3903

4562

4868

4952

5329

6251

8283

8582

8606

8822

8829

Form Number and Title

Catalog

Number

Sch J Farm Income Averaging

8812 Additional Child Tax Credit

8863 Education Credits

Catalog

Number

11700

20604

11744

11862

11980

12490

12906

13141

13177

13329

13600

62299

63704

63966

10644

12081

13232

25379

11320

Form Number and Title

11330

11334

14374

11338

11344

13339

11346

12187

25513

11359

11358

11327

12075

10749

12064

11329

11340

11360

See How To Get Tax Help for a variety of ways to get publications, including

by computer, phone, and mail.

970 Tax Benefits for Education

971 Innocent Spouse Relief

Sch D-1 Continuation Sheet for Schedule D 10424

972 Child Tax Credit (For Individuals Sent

Here From the Instructions for

Forms 1040, 1040A, and 8812)

Tax Guide for U.S. Citizens and

Residents Aliens Abroad

54

Net Operating Losses (NOLs) for

Individuals, Estates, and Trusts

536

Tax-Sheltered Annuity Plans (403(b)

Plans)

571

969 Medical Savings Accounts (MSAs)

9465 Installment Agreement Request 14842

Page 19
This Page Left Intentionally Blank
OMB No. 1545-0132

Form 1120X Amended U.S. Corporation

Income Tax Return

For tax year ending (Rev. December 2001)

Department of the Treasury

Internal Revenue Service



(Enter month and year.)

Name Employer identification number

Please

Type

or

Print

Number, street, and room or suite no. (If a P.O. box, see instructions.)

City or town, state, and ZIP code Telephone number (optional)

( )

Enter name and address used on original return (If same as above, write “Same.”)

Internal Revenue Service Center

where original return was filed 

Fill in Applicable Items and Use Part II To Explain Any Changes

(b) Net change —

increase or (decrease) —

explain in Part II

(a) As originally

reported or as

previously adjusted

Income and Deductions (see instructions) (c) Correct amount

1 Total income (Form 1120 or 1120-A, line 11)

2 Total deductions (total of lines 27 and 29c, Form 1120,

or lines 23 and 25c, Form 1120-A)

3 Taxable income. Subtract line 2 from line 1

4 Tax (Form 1120, line 31, or Form 1120-A, line 27)

Payments and Credits (see instructions)

5a Overpayment in prior year allowed as a credit

b Estimated tax payments

c Refund applied for on Form 4466

Subtract line 5c from the sum of lines 5a and 5b

Tax deposited with Form 7004

Credit from Form 2439

Credit for Federal tax on fuels

6 Tax deposited or paid with (or after) the filing of the original return

7 Add lines 5d through 6, column (c)

8 Overpayment, if any, as shown on original return or as later adjusted

9 Subtract line 8 from line 7

Tax Due or Overpayment (see instructions)

10 Tax due. Subtract line 9 from line 4, column (c). If paying by check, make it payable to the “United

States Treasury.” 

11 Overpayment. Subtract line 4, column (c), from line 9 

Under penalties of perjury, I declare that I have filed an original return and that I have examined this amended return, including accompanying

schedules and statements, and to the best of my knowledge and belief, this amended return is true, correct, and complete. Declaration of preparer

(other than taxpayer) is based on all information of which preparer has any knowledge.

For Paperwork Reduction Act Notice, see page 4. Cat. No. 11530Z Form 1120X (Rev. 12-2001)

Part I

d

e

f

g

12 Enter the amount of line 11 you want: Credited to 20 estimated tax 

Sign

Here

Signature of officer Date Title

Date Preparer’s SSN or PTIN Preparer’s

signature

Check if

self-employed

Paid

Preparer’s

Use Only

Firm’s name (or

yours if self-employed),

address, and ZIP code

EIN

Phone no. ( )

Refunded 

1

2

3

4

5a

b

c

d

e

f

g

6

7

8

9

10

11

12





Form 1120X (Rev. 12-2001) Page 2

Explanation of Changes to Items in Part I (Enter the line number from page 1 for the items you are

changing, and give the reason for each change. Show any computation in detail. Also, see What To Attach

on page 3 of the instructions.)

If the change is due to a net operating loss carryback, a capital loss carryback, or a general business credit carryback, see

Carryback Claims on page 3, and check here 

Part II

Form 1120X (Rev. 12-2001)
Form 1120X (Rev. 12-2001) Page 3

When To File

General Instructions

Section references are to the Internal Revenue Code

unless otherwise noted.

What To Attach

In addition, if the corporation requests a direct

deposit of a refund of $1 million or more, attach Form

8302, Direct Deposit of Tax Refund of $1 Million or

More.

Carryback Claims

Purpose of Form

Note: It often takes 3 to 4 months to process Form

1120X.

File Form 1120X only after the corporation has filed its

original return. Generally, Form 1120X must be filed

within 3 years after the date the original return was

due or 3 years after the date the corporation filed it,

whichever is later. A Form 1120X based on an NOL

carryback, a capital loss carryback, or a general

business credit carryback, generally must be filed

within 3 years after the due date (including extensions)

of the return for the tax year of the NOL, capital loss,

or unused credit. Other claims for refund must be filed

within 3 years after the date the original return was

due, 3 years after the date the corporation filed it, or 2

years after the date the tax was paid, whichever is

later.

If the corrected amount involves an item of income,

deduction, or credit that must be supported with a

schedule, statement, or form, attach the appropriate

schedule, statement, or form to Form 1120X. Include

the corporation’s name and employer identification

number on any attachments.

If the corporation’s return is being amended to include

any item (loss, credit, deduction, other tax benefit, or

income) relating to a tax shelter required to be

registered, attach Form 8271, Investor Reporting of

Tax Shelter Registration Number.

If Form 1120X is used as a carryback claim, attach

copies of Form 1120 (pages 1 and 3) or Form 1120-A

(pages 1 and 2), for both the year the loss or credit

originated and for the carryback year. Also attach any

other forms, schedules, or statements that are

necessary to support the claim, including a statement

that shows all adjustments required to figure any NOL

that was carried back. At the top of the forms or

schedules attached, write “Copy Only—Do Not

Process.”

Use Form 1120X to:

● Correct a previously filed* Form 1120 or 1120-A or

● Make certain elections after the prescribed deadline

(see Regulations section 301.9100-1 through 3).

*Use Form 1120X to correct the return as originally filed, or as later

adjusted by an amended return, a claim for refund, or an

examination.

Do not use Form

1120X to...

Apply for a quick refund

of estimated tax

Obtain a tentative

refund of taxes due to:

● A net operating loss

(NOL) carryback

● A net capital loss

carryback

● An unused general

business credit

carryback

● A claim of right

adjustment under

section 1341(b)(1)

Request IRS approval

for a change in

accounting method

Instead, use...

Form 4466, Corporation

Application for Quick

Refund of Estimated Tax

Note: Use Form 1139

only if 1 year or less has

passed since the tax

year in which the

carryback or adjustment

occurred. Otherwise,

use Form 1120X.

Form 3115, Application

for Change in

Accounting Method

Form 1139, Corporation

Application for Tentative

Refund

Private delivery services. See the instructions for the

corporation’s income tax return for information on

certain private delivery services designated by the IRS

to meet the “timely mailing as timely filing/paying” rule

for tax returns and payments.

Caution: Private delivery services cannot deliver items

to P.O. boxes. Use the U.S. Postal Service to send any

item to an IRS P.O. box address.

Information on Income, Deductions, Tax

Computation, etc.

Caution: Deductions for such items as charitable

contributions and the dividends-received deduction

may have to be refigured because of changes made to

items of income or expense.

For information on income, deductions, tax

computation, etc., see the Instructions for Forms 1120

and 1120-A for the tax year being amended.

Tax Shelters

Column (a)

Enter the amounts from the corporation’s return as

originally filed or as it was later amended. If the return

was changed or audited by the IRS, enter the amounts

as adjusted.

P.O. Box

If the post office does not deliver mail to the street

address and the corporation has a P.O. box, show the

box number instead of the street address.

Specific Instructions

Tax Year

In the space above the employer identification number,

enter the ending month and year of the calendar or

fiscal year for the tax return being amended.

Where To File

File this form at the applicable Internal Revenue

Service Center where the corporation filed its original

return.
Form 1120X (Rev. 12-2001) Page 4

Column (b)

Enter the net increase or net decrease for each line

being changed. Use parentheses around all amounts

that are decreases. Explain the increase or decrease in

Part II.

Column (c)

Lines 1 and 2. Add the increase in column (b) to the

amount in column (a) or subtract the column (b)

decrease from column (a). Enter the result in column

(c). For an item that did not change, enter the amount

from column (a) in column (c).

Line 4. Figure the new amount of tax using the taxable

income on line 3, column (c). Use Schedule J, Form

1120, or Part I, Form 1120-A, of the original return to

make the necessary tax computation.

Line 5e. Enter the amount of tax deposited with Form

7004, Application for Automatic Extension of Time To

File Corporation Income Tax Return.

Line 8. Enter the amount from the “Overpayment” line

of the original return, even if the corporation chose to

credit all or part of this amount to the next year’s

estimated tax. This amount must be considered in

preparing Form 1120X because any refund due from

the original return will be refunded separately (or

credited to estimated tax) from any additional refund

claimed on Form 1120X.

Line 10—Tax due. If the corporation does not use the

Electronic Federal Tax Payment System (EFTPS),

enclose a check with this form and make it payable to

the “United States Treasury.” Do not use the

depository method of payment.

Line 11—Overpayment. If the corporation is entitled

to a refund larger than the amount claimed on the

original return, line 11 will show only the additional

amount of overpayment. This additional amount will be

refunded separately from the amount claimed on the

original return. The IRS will figure any interest due and

include it in the refund.

Who Must Sign

If a corporate officer completes Form 1120X, the

paid preparer’s space should remain blank. Anyone

who prepares Form 1120X but does not charge the

corporation should not sign the return. Generally,

anyone who is paid to prepare the return must sign it

and fill in the “Paid Preparer’s Use Only” area. See the

Instructions for Forms 1120 and 1120-A for more

information.

Line 5g. Include on line 5g any write-in credits or

payments, such as the credit for ozone-depleting

chemicals or backup withholding.

The return must be signed and dated by:

Printed on recycled paper

Paperwork Reduction Act Notice. We ask for the

information on this form to carry out the Internal

Revenue laws of the United States. You are required to

give us the information. We need it to ensure that you

are complying with these laws and to allow us to figure

and collect the right amount of tax.

The time needed to complete and file this form will

vary depending on individual circumstances. The

estimated average time is:

Recordkeeping 13 hr., 9 min.

Learning about the law

or the form 1 hr., 14 min.

Preparing the form 3 hr., 22 min.

Copying, assembling, and

sending the form to the IRS 32 min.

If you have comments concerning the accuracy of

these time estimates or suggestions for making this

form simpler, we would be happy to hear from you.

You can write to the Tax Forms Committee, Western

Area Distribution Center, Rancho Cordova, CA

95743-0001. Do not send the form to this address.

Instead, see Where To File above.

You are not required to provide the information

requested on a form that is subject to the Paperwork

Reduction Act unless the form displays a valid OMB

control number. Books or records relating to a form or

its instructions must be retained as long as their

contents may become material in the administration of

any Internal Revenue law. Generally, tax returns and

return information are confidential, as required by

section 6103.

Line 12. Enter the amount, if any, to be applied to the

estimated tax for the next tax period. Also, enter that

tax period. No interest will be paid on this amount. The

election to apply part or all of the overpayment to the

next year’s estimated tax is irrevocable.

A receiver, trustee, or assignee must also sign and

date any return filed on behalf of a corporation.

● The president, vice president, treasurer, assistant

treasurer, chief accounting officer or

● Any other corporate officer (such as tax officer)

authorized to sign.
Change of Address Form 8822

OMB No. 1545-1163 (Rev. December 2002) Please type or print.

Department of the Treasury

Internal Revenue Service

Check all boxes this change affects:

1 Individual income tax returns (Forms 1040, 1040A, 1040EZ, TeleFile, 1040NR, etc.)

If your last return was a joint return and you are now establishing a residence separate

from the spouse with whom you filed that return, check here 

2 Gift, estate, or generation-skipping transfer tax returns (Forms 706, 709, etc.)

3a Your name (first name, initial, and last name) 3b Your social security number

4a Spouse’s name (first name, initial, and last name) 4b Spouse’s social security number

5 Prior name(s). See instructions.

6b Spouse’s old address, if different from line 6a (no., street, city or town, state, and ZIP code). If a P.O. box or foreign address, see instructions.

6a Old address (no., street, city or town, state, and ZIP code). If a P.O. box or foreign address, see instructions.

7 New address (no., street, city or town, state, and ZIP code). If a P.O. box or foreign address, see instructions.

Sign

Here

If joint return, spouse’s signature Date Title

Cat. No. 12081V Form 8822 (Rev. 12-2002)

See instructions on back. Do not attach this form to your return.

Complete This Part To Change Your Home Mailing Address

Apt. no.

Apt. no.

Complete This Part To Change Your Business Mailing Address or Business Location

Your signature Date If Part II completed, signature of owner, officer, or representative Date

Daytime telephone number of person to contact (optional) ( )

Signature

13 New mailing address (no., street, city or town, state, and ZIP code). If a P.O. box or foreign address, see instructions.

12 Old mailing address (no., street, city or town, state, and ZIP code). If a P.O. box or foreign address, see instructions.

11a Business name 11b Employer identification number

Check all boxes this change affects:

8

9

10

Employment, excise, income, and other business returns (Forms 720, 940, 940-EZ, 941, 990, 1041, 1065, 1120, etc.)

Employee plan returns (Forms 5500, 5500-EZ, etc.).









For Privacy Act and Paperwork Reduction Act Notice, see back of form.

For Forms 706 and 706-NA, enter the decedent’s name and social security number below.

Business location

14 New business location (no., street, city or town, state, and ZIP code). If a foreign address, see instructions. Room or suite no.

Room or suite no.

Room or suite no.

Part III

Part I

Part II

Apt. no.

Decedent’s name Social security number
Form 8822 (Rev. 12-2002) Page 2

Send this form to the Internal Revenue

Service Center shown next that applies to

you.

Fresno, CA 93888

Connecticut, Delaware,

District of Columbia,

Maryland, New Jersey,

Pennsylvania

IF your old home mailing

address was

in. . .

Philadelphia, PA 19255

Alabama, Arkansas, Ohio,

Tennessee, Virginia

Florida, Georgia, Mississippi,

North Carolina, South Carolina,

West Virginia

Atlanta, GA 39901

Memphis, TN 37501

New York (New York City and

counties of Nassau, Rockland,

Suffolk, and Westchester)

Illinois, Indiana, Iowa,

Kansas, Minnesota,

Missouri, Nebraska, North

Dakota, South Dakota,

Utah, Wisconsin

Kansas City, MO 64999

Holtsville, NY 00501

American Samoa Philadelphia, PA 19255

New York (all other counties),

Maine, Massachusetts, 

Michigan, New Hampshire,

Rhode Island, Vermont

Department of Revenue

and Taxation

Government of Guam

P.O. Box 23607

GMF, GU 96921

Andover, MA 05501

Guam:

Permanent residents

Guam:

Nonpermanent residents

Puerto Rico (or if excluding

income under Internal

Revenue Code section

933)

Virgin Islands:

Nonpermanent residents

Philadelphia, PA 19255

V. I. Bureau of

Internal Revenue

9601 Estate Thomas

Charlotte Amalie

St. Thomas, VI 00802

Virgin Islands:

Permanent residents

Foreign country:

U.S. citizens and those

filing Form 2555,

Form 2555-EZ, or

Form 4563

Philadelphia, PA 19255

All APO and FPO addresses

Privacy Act and Paperwork Reduction

Act Notice. We ask for the information on

this form to carry out the Internal Revenue

laws of the United States. We may give the

information to the Department of Justice

and to other Federal agencies, as provided

by law. We may give it to cities, states, the

District of Columbia, and U.S.

commonwealths or possessions to carry

out their tax laws. We may give it to

foreign governments because of tax

treaties they have with the United States.

We may also give this information to

Federal and state agencies to enforce

Federal nontax criminal laws and to

combat terrorism.

The time needed to complete and file

this form will vary depending on individual

circumstances. The estimated average time

is 16 minutes.

If you have comments concerning the

accuracy of this time estimate or

suggestions for making this form simpler,

we would be happy to hear from you. You

can write to the Tax Forms Committee,

Western Area Distribution Center, Rancho

Cordova, CA 95743-0001. Do not send the

form to this address. Instead, see Where

To File on this page.

Purpose of Form

You may use Form 8822 to notify the

Internal Revenue Service if you changed

your home or business mailing address or

your business location. If this change also

affects the mailing address for your

children who filed income tax returns,

complete and file a separate Form 8822 for

each child. If you are a representative

signing for the taxpayer, attach to Form

8822 a copy of your power of attorney.

Prior Name(s)

If you or your spouse changed your name

because of marriage, divorce, etc.,

complete line 5. Also, be sure to notify the

Social Security Administration of your

new name so that it has the same name in

its records that you have on your tax

return. This prevents delays in processing

your return and issuing refunds. It also

safeguards your future social security

benefits.

P.O. Box

Enter your box number instead of your

street address only if your post office does

not deliver mail to your street address.

Foreign Address

Enter the information in the following order:

city, province or state, and country. Follow

the country’s practice for entering the

postal code. Please do not abbreviate the

country name.

Where To File

The use of this form is voluntary.

However, if you fail to provide the Internal

Revenue Service with your current mailing

address, you may not receive a notice of

deficiency or a notice and demand for tax.

Despite the failure to receive such notices,

penalties and interest will continue to

accrue on the tax deficiencies.

THEN use this

address. . .

Printed on recycled paper

You are not required to provide the

information requested on a form that is

subject to the Paperwork Reduction Act

unless the form displays a valid OMB

control number. Books or records relating

to a form or its instructions must be

retained as long as their contents may

become material in the administration of

any Internal Revenue law. Generally, tax

returns and return information are

confidential, as required by section 6103.

Alaska, Arizona, California,

Hawaii, Idaho, Nevada, Oregon,

Washington

Addresses

Be sure to include any apartment, room, or

suite number in the space provided.

Signature

If you are completing Part II, the owner, an

officer, or a representative must sign. An

officer is the president, vice president,

treasurer, chief accounting officer, etc. A

representative is a person who has a valid

power of attorney to handle tax matters or

is otherwise authorized to sign tax returns

for the business.

Filers Who Checked the Box on

Line 1 and Completed Part I

Changing Both Home and Business

Addresses? If you are, use a separate

Form 8822 to show each change.

IF your old business address

was in. . .

Outside the United States Philadelphia, PA 19255

Connecticut, Delaware,

District of Columbia, Illinois,

Indiana, Kentucky, Maine,

Maryland, Massachusetts,

Michigan, New Hampshire,

New Jersey, New York, North

Carolina, Ohio, Pennsylvania,

Rhode Island, South Carolina,

Vermont, Virginia, West

Virginia, Wisconsin

Cincinnati, OH 45999

THEN use this

address. . .

Filers Who Checked the Box on

Line 2 or Completed Part II

Colorado, Kentucky, Louisiana,

Montana, New Mexico,

Oklahoma, Texas, Wyoming

Austin, TX 73301

Alabama, Alaska, Arizona,

Arkansas, California,

Colorado, Florida, Georgia,

Hawaii, Idaho, Iowa,

Kansas, Louisiana,

Minnesota, Mississippi,

Missouri, Montana,

Nebraska, Nevada, New

Mexico, North Dakota,

Oklahoma, Oregon, South

Dakota, Tennessee, Texas,

Utah, Washington,

Wyoming

Ogden, UT 84201

Our legal right to ask for information is

Internal Revenue Code sections 6001 and

6011, which require you to file a statement

with us for any tax for which you are liable.

Section 6109 requires that you provide

your social security number on what you

file. This is so we know who you are, and

can process your form and other papers.

If you checked the box on line

2, see Filers Who Checked

the Box on Line 2 or

Completed Part II for where to

file this form.

Dual-status aliens