Quickfinder ®

Individuals—Special Tax Situations Quickfinder® Handbook

(2015 Tax Year)

Updates for the Protecting Americans from Tax Hikes Act of 2015

Instructions: This packet contains “marked up” changes to the pages in the Individu-als—Special Tax Situations Quickfinder® Handbook that were affected by the Protect-ing Americans from Tax Hikes Act of 2015, which was enacted after the handbook was published. To update your handbook, you can make the same changes in your handbook or print the revised page and paste over the original page.

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departs early in the current tax year (that is, less than 31 days of presence in the U.S. in the current tax year) will use December 31 of the prior tax year as the taxpayer’s residency ending date. Note: A taxpayer who was a long-term resident (that is, was a lawful permanent resident for at least eight of the 15 consecutive tax years ending with the date of his termination or residency) must notify the Department of Homeland Security and file Form 8854, Initial and Annual Expatriation Statement, to terminate residency. See Expatriation Tax on Page 6-9 for more information on expatriation.Similar to the first year of residency, the taxpayer may exclude up to 10 days of actual U.S. presence in determining his residency termination date. These 10 days must be included in computing the substantial presence test. A statement must be filed with the IRS to establish the residency termination date. A sample state-ment can be found in the Election Statements on Page 1-10. The statement should be attached to the taxpayer’s return or, if the taxpayer is not required to file a return, submitted to the Internal Revenue Service Center, Austin, TX 73301-0215.Interrupted period of residence. The taxpayer is subject to tax under a special rule if he interrupts his period of U.S. residence with a period of nonresidence [IRC §7701(b)(10)]. The special rule applies if the taxpayer meets all of the following conditions:1) The taxpayer was a U.S. resident for a period that included at

least three consecutive calendar years.2) The taxpayer was a U.S. resident for at least 183 days in each

of those years.3) The taxpayer ceased to be treated as a U.S. resident.4) The taxpayer then again became a U.S. resident before the end

of the third calendar year after the end of the period described in point 1.

Under this special rule, the taxpayer is subject to tax on U.S. source gross income and gains on a net basis at the graduated rates applicable to individuals (with allowable deductions) for the period during which he was a nonresident alien, unless the taxpayer would be subject to a higher tax under the 30% tax as discussed under Full-Year Nonresident Alien below.

Example: Twyla Starr, a citizen of Austria, entered the U.S. on April 1, 2010, as a lawful permanent resident. On August 1, 2012, Twyla ceased to be a lawful permanent resident and returned to Austria. During her period of U.S. residency, she was in the U.S. for at least 183 days in each of three consecutive years (2010, 2011 and 2012). She returned to the U.S. on October 5, 2015, as a lawful permanent resident. She became a U.S. resident before the close of the third calendar year (2015) beginning after the end of her previous period of residence (August 1, 2012). Therefore, she is subject to tax under the special rule for the period of nonresidence (August 2, 2012 through October 4, 2015) if it is more than the tax that would normally apply to her as a nonresident alien.

General Tax reporTinGThe type of return a non-U.S. citizen must file depends on his status. He may have one of the four statuses listed in the Non-U.S. Citizen Tax Filing Summary table on Page 1-5.

Full-Year Nonresident AlienA full-year nonresident alien will file Form 1040NR. He will report only U.S. source income and income effectively connected with a U.S. trade or business. He must also provide details regarding the citizenship, visa type, days present in the U.S., and any tax treaty provisions he is using to his advantage. A taxpayer who is treated as a nonresident by virtue of his visa type or excluded days due to a medical condition must attach Form 8843, Statement for Exempt Individuals and Individuals With a Medical Condition. A taxpayer who is treated as a nonresident by virtue of a closer connection

to a foreign country must attach Form 8840, Closer Connection Exception Statement for Aliens.Because a nonresident alien is taxed only on U.S. source income, care must be taken in sourcing the taxpayer’s compensation based on actual work days in the U.S. Should the taxpayer receive a Form W-2, it may overstate actual wages that are includible on the taxpayer’s return. In addition, wages paid by a foreign entity that are not included on any Form W-2 may need to be included in compensation. See Part IV, All taxpayers on Page 6-7 for allocat-ing compensation and the Compensation Sourcing Schedule on Page 6-11 for a worksheet that can be used to allocate compensa-tion between foreign and U.S. sources.Income excluded. An exception to including U.S. source income paid by a foreign employer exists for a taxpayer who meets the following requirements:•Thepersonalserviceswereperformedunderacontractwitha

nonresident alien individual, foreign partnership or foreign corpora-tion, not engaged in a trade or business in the U.S. or for an office or place of business maintained in a foreign country or possession of the U.S. by a U.S. corporation, partnership, citizen or resident.

•Theserviceswereperformedwhilethetaxpay-er was a nonresident alien temporarily present in the U.S. for a period or periods of not more than 90 days during the tax year.

•The total compensation received for theseservices was $3,000 or less.

Other exceptions exist for crew members of a foreign vessel en-gaged in transportation between the U.S. and a foreign country or U.S. possession and for students and exchange visitors pres-ent in the U.S. under “F,” “J” or “Q” visas whose compensation is received from foreign employers.Special tax considerations. A nonresident alien’s U.S. source income that is not effectively connected to a trade or business is taxed at a flat tax rate with no deductions allowable. The standard tax rate is 30%. However, many tax treaties allow a lower treaty rate. See Table 1 in IRS Publication 901 for the special treaty rates.Nonresident aliens are generally not taxed on portfolio interest income from U.S. sources, as long as the income is not effectively connected with a U.S trade or business. There are some excep-tions to this rule. See IRS Publication 519.Nonresident aliens are generally not taxed on U.S. source capital gains not effectively connected with a U.S. trade or business or from the sale of U.S. real property (including long-term capital gain distributions from mutual funds). This exception does not apply if the nonresident alien was in the U.S. for more than 183 days during the tax year, but qualified as a nonresident under one of the visa or treaty exceptions. It also does not apply to short-term capital gain and interest-related dividends from mutual funds. Note: A provision exempting short-term capital gain and interest-related dividends received from mutual funds from U.S. tax unless the nonresident alien was present in the U.S. more than 183 days, applied through 2014 [IRC §871(k)]. At the time of publication, leg-islation extending the provision beyond 2014 had been proposed but not enacted. Tax preparers should watch for developments.Care should be taken in determining whether any income of the nonresident alien is exempt by virtue of a tax treaty. If any such exemption is claimed, the amount of income and the treaty provi-sion relied upon should be reported on page 5 of Form 1040NR.

Full-Year Resident AlienA full-year resident alien generally is taxed in the same manner as a U.S. citizen, and subject to the same rules and benefits. The taxpayer may file Form 1040, 1040-A or 1040-EZ, depending on his facts and circumstances.

Aliens—Resident and Nonresident

applies for 2015

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individual debTor’s Form 1040The individual generally must file income tax returns during the period of the bankruptcy proceedings.•Donotincludeontheindividual’sreturntheincome,deductions

or credits belonging to the separate bankruptcy estate.•Specialrulesmayapplytodebtcancellation.SeeDebt Cancel-

lation below.

debT CanCellaTionIf a debt is canceled or forgiven, other than as a gift or bequest, the debtor generally must include the canceled amount in gross income for tax purposes [IRC §61(a)(12)]. A debt includes any indebtedness for which the debtor is liable or which attaches to property the debtor holds. æ Practice Tip: In 2015, the IRS issued an Audit Technique Guide titled Real Estate Property Foreclosure and Cancellation of Debt that discusses the tax consequences of real property dis-posed of through foreclosure, short sale, deed in lieu of foreclosure and abandonments. It also discusses cancellation of debt income exclusions that are most commonly applicable to these types of dispositions and community property considerations. The guide is available on the IRS website.

ExclusionsThere are several exclusions from the general rule that cancellation of debt (COD) is included in gross income. However, when COD is excluded, taxpayers may have to reduce other tax attributes. See Reduction of Tax Attributes on Page 1-19.For 2015, canceled debt is excluded if any of the following apply: [IRC §108(a)(1)]1) The taxpayer is in a Title 11 bankruptcy case.2) The taxpayer is insolvent, but only to the extent of insolvency. 3) The canceled debt is qualified farm debt (debt incurred in op-

erating a farm).4) The canceled debt is qualified real property business indebted-

ness (certain debt connected with business real property).5) The canceled debt is a certain type of student loan. Expired Provision Alert: Qualified principal residence indebt-edness forgiven before 2015 was also excluded. See Cancellation of Mortgage Debt on Page 1-20 for details. Order of exclusions. If the cancellation of debt occurs in a Title 11 bankruptcy case, the bankruptcy exclusion takes precedence over the insolvency, qualified farm debt, qualified real property business indebtedness or, if available, the qualified principal resi-dence indebtedness exclusions. The qualified principal residence exclusion takes precedence over the insolvency exclusion unless otherwise elected.To the extent that the taxpayer is insolvent, the insolvency exclu-sion takes precedence over qualified farm debt or qualified real property business indebtedness exclusions. U Caution: The relief provisions do not apply to any portion of a debt relieved when property is surrendered as part of a debt restructuring or cancellation. Instead, the property transfer is treated as a sale or exchange and gain or loss is recognized. See Foreclosures and Repossessions on Page 1-20.Reacquisition of business indebtedness. Taxpayers could elect to spread certain income from debt reacquisition during 2009 and 2010 ratably over a five-year period beginning in 2014 [IRC §108(i)]. Taxpayers who made that election cannot exclude for the year of the election or any subsequent tax year the income from

the cancellation of such indebtedness based on a Title 11 bank-ruptcy case, insolvency, qualified farm indebtedness or qualified real property business indebtedness.

Bankrupt TaxpayersBankrupt taxpayers exclude all COD income from taxable gross income [IRC §108(a)(1)(A)]. Bankrupt means that the taxpayer’s discharge from debt occurs under the jurisdiction of a court in a Title 11 (of the U.S. Bankruptcy Code) case. Title 11 encompasses the federal bankruptcy statutes and includes Chapter 7 (liquidation), Chapter 11 (business reorganization), Chapter 12 (family farmer or fisherman) and Chapter 13 (adjustment of an individual’s debts) bankruptcies.

Example: Don’s sole proprietorship business failed in 2015, and he declared bankruptcy. He also owns land (free and clear) worth $300,000 that he holds for investment. In November 2015, the bankruptcy judge granted Don’s bank-ruptcy estate a discharge from $400,000 of personal indebtedness related to his failed business (in a Chapter 7 bankruptcy case). He had no assets other than the land and no other liabilities at the time of this debt discharge. Don’s bankruptcy estate can exclude the entire $400,000 from gross income under Section 108 because the debt discharge occurred in a Title 11 bankruptcy.

Insolvent TaxpayersInsolvent taxpayers exclude COD income from gross income to the extent they are insolvent before the debt discharge [IRC §108(a)(3)]. Any COD income in excess of insolvency is included in income unless another exclu-sion applies. The extent of insolvency is the excess of the taxpayer’s liabilities over the FMV of his assets immediately before the debt discharge. [IRC §108(d)(3)]When determining whether a taxpayer is insolvent or the extent of insolvency, the following rules must be considered:•Exempt assets. All assets, including assets that, by operation of

state law are exempt from creditors, must be included in deter-mining insolvency.

Court Case: Taxpayers were Texas residents who had not filed for bank-ruptcy and had over $70,000 of credit card debt canceled. Under Texas law, an individual’s residence is exempt from creditor’s claims so the taxpayers excluded their residence when computing whether they were insolvent at the time the debt was canceled.The Tax Court ruled that the taxpayers must include their residence in the solvency computation which, in this case, made them solvent at the time the debt was canceled. Therefore, the canceled credit card debt was taxable. (Quartemont, TC Summary Opinion 2007-19)

•Spouse’s separate property. A spouse’s separately-owned assets can be excluded from the determination of the insolvent spouse’s net worth, even if the couple files a joint return. (Ltr. Rul. 8920019)

•Nonrecourse debt. When computing insolvency, nonrecourse debt is treated as a liability to the extent of the FMV of the property securing the debt. Nonrecourse debt in excess of the property’s FMV is a liability to the extent it is discharged; otherwise, it is ignored. (Rev. Rul. 92-53)

Note: In the case of canceled partnership debt, insolvency is determined at the partner level [IRC §108(d)(6)]. If the partnership debt is nonrecourse, each partner treats, as a liability, an amount of the discharged excess nonrecourse debt using the same al-location that applies to the COD income. (Rev. Rul. 2012-14)

•Contingent liabilities. Before a contingent liability can be included in the insolvency computation, taxpayers must be able to prove it is more probable than not that they will be called on to pay the liability.

6) The canceled debt is qualified principal residence indebtedness.

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the attribute reductions occur on the first day of the tax year after the discharge occurs.

Cancellation of Mortgage Debt Expired Provision Alert: Taxpayers could exclude COD income arising from qualified principal residence indebtedness for loans forgiven before 2015. Unless Congress extends it, this provision will not be available for loans forgiven after 2014. This discussion is retained in the event that the provision is extended to 2015. For loans forgiven after 2006 and before 2015, taxpayers can exclude COD income from taxable gross income to the extent it arises from the cancellation of qualified principal residence indebtedness [IRC §108(a)(1)(E)]. The exclusion is limited to $2 million ($1 million for married filing separately). [IRC §108(h)(2)]Qualified principal residence indebtedness is debt that is incurred in the acquisition, construction or substantial improvement of a tax-payer’s principal residence and that is secured by that residence. It does not include home equity loans used for other purposes or second home mortgages. The basis of the taxpayer’s principal residence is reduced (but not below zero) by the amount that is excluded.If there is cancellation from a loan where only part of that loan is qualified principal residence indebtedness, the exclusion only applies to the amount of discharged debt that exceeds the part of the loan (as determined immediately before the discharge) that is not qualified principal residence indebtedness.The exclusion doesn’t apply if the discharge is on account of services performed for the lender or any other factor not directly related to a decline in the value of the residence or to the taxpayer’s financial condition.

Example: In 2014, Lois and Clark, a married joint-filing couple, lost their home in a foreclosure when the property was burdened by a $450,000 recourse mortgage, all of which qualified as acquisition indebtedness. The first $350,000 of the mortgage was paid off when the bank sold the property in the foreclosure sale. Lois and Clark came up with $30,000 to extinguish part of the remaining balance, and the lender forgave the last $70,000.Lois and Clark can exclude the $70,000 of the debt discharge income from their gross income under the principal residence indebtedness exclusion. The basis of the home is also reduced by $70,000.If the basis of the home before the foreclosure was $525,000, after subtract-ing $70,000, the basis is reduced to $455,000. Assuming the $350,000 price collected by the lender represented the home’s FMV, Lois and Clark have a $105,000 nondeductible loss on sale ($350,000 sale price – $455,000 basis).Observation: Without the principal residence indebtedness exclusion (and assuming no other exclusions apply), the taxpayers would have had to include $70,000 in gross income and their nondeductible personal loss would have been $175,000 ($350,000 – $525,000).

Reporting the COD Income ExclusionForm 982, Reduction of Tax Attributes Due to Discharge of In-debtedness (and Section 1082 Basis Adjustment), must be filed whenever COD income is excluded from gross income. The two basis reduction elections (see Basis reduction elections on Page 1-19) are made on Form 982.

Form 1099-C: Reporting Debt CancellationBanks and other financial institutions are required to report debt discharges (partial or complete) on Form 1099-C, Cancellation of Debt, if the discharge is $600 or more [IRC §6050P; Reg.

§1.6050P-1]. Debt includes any amount owed to the financial institution, including principal, interest, penalties, costs and fines.A debt is deemed canceled on the date an identifiable event oc-curs or, if earlier, the date of the actual discharge if the institution chooses to file Form 1099-C for the year of cancellation. The issuer of the Form 1099-C must show in box 6 a code describing the type of identifiable event that led to the issuance of the form. A discharge in bankruptcy under Title 11 is described with Code A.

ForeClosures and repossessionsWhen a borrower fails to make payments on a loan secured by property, the lender may foreclose on the loan or repossess the property. The foreclosure or repossession is treated as a sale or exchange from which the borrower may realize gain or loss. This is true even if the property is voluntarily returned to the lender. Note: Abandonment of property subject to debt is treated similarly to foreclosures and repossessions.æ Practice Tip: In 2015, the IRS issued an Audit Technique Guide titled Real Estate Property Foreclosure and Cancellation of Debt that discusses the tax consequences of real property dis-posed of through foreclosure, short sale, deed in lieu of foreclosure and abandonments. It also discusses cancellation of debt income exclusions that are most commonly applicable to these types of dispositions and community property considerations. The guide is available on the IRS website.

Borrower’s Gain or LossA borrower’s gain or loss from a foreclosure or repossession is computed and reported the same way as gain or loss from a sale or exchange of the property. The gain or loss is the difference between the transferred property’s adjusted basis and the amount realized.

Borrower’s COD IncomeA borrower who is personally liable on the debt (recourse debt) may have cancellation of debt (COD) income when the debt is satisfied by foreclosure or repossession. This income is separate from any gain or loss realized from the foreclosure or reposses-sion. The exceptions to COD income inclusion discussed in Debt Cancellation on Page 1-18 apply.

Borrower’s Tax Treatment—Foreclosure or RepossessionType of Debt Secured by Property

Nonrecourse Debt Recourse Debt

Description of Debt Borrower is not personally liable to repay the debt even if the value of the property used to satisfy the debt is less than the outstanding debt.

Borrower is personally liable to pay any amount of the debt not covered by the property’s value.

Reporting by Lender

Box 5 on Form 1099-A is not checked.

Box 5 on Form 1099-A is checked.

Amount realized for borrower’s gain or loss on transaction

Full amount of debt canceled by the transfer of property.

Lesser of the debt canceled or the FMV of the transferred property.

Borrower’s COD income

None. Excess of loan balance over property’s FMV (if and when forgiven by lender).1

1 The borrower may be able to exclude the COD income related to recourse debt. (See Exclusions on Page 1-18.)

2017

2015

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perCenTaGe-oF-CompleTion meThodUnless a contractor can meet the small contractor or home con-struction exemption, the revenue generated under a long-term contract must be accounted for using the percentage-of-completing method (PCM).In general, revenue earned on a contract during the tax year is calculated by multiplying the total estimated revenue that will be received from the contract by the ratio of the costs incurred on the contract through the end of the year, to the total estimated contract costs, and then subtracting any revenue recognized in previous tax years.The costs used to calculate the completion factor can be computed using two different methods: the simplified cost-to-cost method or the cost-to-cost method. Note: The cost of certain property placed in service before 2015 is recovered under the normal MACRS rules, without con-sidering any special depreciation allowance when computing the percentage of completion. [IRC §460(c)(6)]

Percentage-of-Completion FormulaAfter costs have been measured, the percentage of completion for the current year can be calculated. The formula is the same whether the simplified or “regular” cost-to-cost method is used:

Total estimated contract price× Percentage of completion (measured using an appropriate

cost method) = Gross profit to recognize– Gross profit recognized in the previous year, if any

= Current-year gross profit

Simplified Cost-to-Cost MethodPCM contractors can elect a simplified cost-to-cost method to compute revenue [IRC §460(b)(3)(A); Reg. §1.460-5(c)]. This method determines the contract’s completion factor using only:1) Direct material costs;2) Direct labor costs and3) Depreciation, amortization and cost recovery allowances on

equipment and facilities directly used to manufacture or con-struct property under the contract.

Subcontracted costs represent either direct material or direct labor costs and must be allocated to a contract under the simplified cost-to-cost method.N Observation: The simplified cost-to-cost method relieves contractors from having to compute percentage of completion based on all direct and indirect costs.

Example: Joe Garcia is a builder who started one contract with a value of $500,000 in 2015. As of December 31, 2015, Joe had incurred the following costs:

Year to Date

Estimated Total

Direct labor ................................................... $ 50,000 $ 100,000Direct materials ............................................. 200,000 250,000Depreciation/amortization ............................. 25,000 40,000Total .............................................................. $ 275,000 $ 390,000Using the simplified cost-to-cost method, this contract is 70.5128% complete ($275,000 ÷ $390,000) as of the end of the year. Therefore, Joe recognizes $352,564 ($500,000 × 70.5128%) of revenue in 2015.

Cost-to-Cost MethodUnder the cost-to-cost method, all direct and indirect costs that directly benefit a long-term contract are compared with the direct and indi-rect estimated costs for that contract to calculate the percentage of completion.Direct costs include direct materials, direct labor and subcontract expenses. There are many indirect costs that must be considered (see Comparison of Cost Allocation Methods on Page 2-12). Other costs, such as construction period interest, must also be allocated to contracts.Costs become allocable to a contract once they have been specifi-cally used in the job.An important issue involves the treatment of materials purchased for a job but not yet included in the subject matter of the contract. Tax cost accounting allows the contractor to treat the cost as incurred if the materials have been specifically purchased and dedicated to the job.A contractor can’t postpone recognizing subcontractor costs that have been incurred but not yet paid to reduce gross income under the PCM. This applies to materials, equipment and labor supplied by the subcontractor. (IRS Appeals Settlement Guideline, dated May 9, 2003)

Settling Up After CompletionA taxpayer that has not included the total contract income in gross income by the completion year (see Contract Completion on Page 2-8) includes the remainder of the total contract income in gross income for the tax year following the completion year. [Reg. §1.460-4(b)(3)]A taxpayer that incurs an allocable contract cost after the comple-tion year must account for that cost using a permissible method of accounting. [Reg. §1.460-4(b)(5)(v)]

70/30 Rule for Residential ConstructionFor a residential construction contract that does not qualify as Home Construction Contract discussed on Page 2-7 (which are exempt from the long-term contract rules), a 70/30 hybrid method can be used [IRC §460(e)(5)]. This method requires 70% of the items with respect to a contract to be taken into account under the PCM and 30% under the taxpayer’s normal accounting method.A residential construction contract is similar in definition to a home construction contract, except that dwelling unit is more broadly defined as a house or apartment used to provide living accom-modations in a building or structure (which may include more than four dwelling units), but does not include a unit in a hotel, motel, inn or other establishment where over half of the units are used on a transient basis.U Caution: Taxpayers who use the 70/30 method to compute regular tax on residential contracts must still use the 100% PCM for AMT.

Elective 10% MethodContractors can elect to defer recognition of gross profit under a long-term contract if, at tax year-end, less than 10% of the total estimated contract cost has been incurred. [IRC §460(b)(5)]•Forcontractsthatqualify,thegrossprofitcanbedeferreduntil

the 10% threshold has been met—probably the following year.•TheelectionalsoappliestocalculationsforthePCM Look-Back

Rule discussed on Page 2-10 and for AMT.•Oncemade, theelectionapplies to all contracts and canbe

revoked only with IRS permission.

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Comparison of Cost Allocation MethodsDoes the method require the cost to be capitalized?

Cost allocation method and location

of authorization

Regular cost allocation

required by Section 460(c)

Simplified cost-to-cost allowed by

Section 460(b)(3)(A)

Uniform Capitalization

Rules in Section 263A

Cost allocation in Regulation §1.460-5(d)

plus interest required by

Section 460(c)(3)

Under what revenue recognition method is the cost allocation method appropriate?

Appropriate for large contractors not exempt under

Section 460(e) that must use the PCM

An election for contractors

subject to Section 460

that use the PCM

Appropriate for manufacturers with

inventory and contracts exempt under

Section 460(f)(2)

Appropriate for small

contractors using

the CCMDirect materials Yes Yes Yes Yes

Direct labor (including subcontractors)1 Yes Yes Yes Yes

Indirect costs:• Repairs Yes No Yes Yes• Maintenance Yes No Yes Yes• Utilities Yes No Yes Yes• Rent Yes No Yes Yes• Certainindirectlabor Yes No Yes Yes• Materialsandsupplies Yes No Yes Yes• Smalltoolsandequipment Yes No Yes Yes• QCandinspection Yes No Yes Yes• Taxesotherthanincometaxes Yes No Yes Yes• Financialstatementdepreciation No No No Yes• Taxreturndepreciation2 Yes Yes Yes No• Costdepletion Yes No Yes Yes• Percentagedepletioninexcessofcost Yes No Yes No• Contractadministrativeexpense Yes No Yes Yes• Contractrelatedofficersalaries Yes No Yes Yes• Insurance(includingbonds) Yes No Yes Yes• Administrativesupportdepartments Yes No Yes3 No• Pension,profitsharing,etc.,exceptforpastservicecosts Yes No Yes No• Pastservicecosts Yes No Yes No• Directresearchanddevelopment Yes No No No• Rework,scrapandspoilage Yes No Yes No• Successfulbiddingexpense Yes No Yes No• Engineeringanddesign Yes3 No Yes No• Transportationcosts Yes No Yes Yes• Storage,handling,purchasingandrelatedcosts Yes No Yes No• Productionperiodinterest Yes No Yes Yes• Additionalcostsundercostplusorgovernmentalcontracts Yes No Yes NoDeductible period costs:• Marketing,selling,advertisinganddistribution No No No No• Unsuccessfulbiddingexpense No No No No• Noncontractrelatedgeneralandadministrative No No No No• Researchanddevelopmentnotrelatedtocontracts No No No No• LossesunderSection165,forexample,obsolescenceof

material, decline in value of assets, casualty losses, etc. No No No No• Section179expense No No No No• Depreciationonidleequipment No No No No• Incometaxes No No No No• Costsattributabletostrikes No No No No• Repairsnotassociatedwithproductionequipment No No No No1 SectionVIIIofNotice87-61andRegulationSection1.460-5(c)indicatethatpayrolltaxesondirectlaborshouldbeincludedindirectlabor.TheIRSConstructionIndustryAuditTechniqueGuideandRegulationSection1.263A-1(e)(2)(i)(B)specificallyincludepayrolltaxesandpaymentstosupplementalunemploymentbenefitplansindirectlabor costs.

2 Depreciation on certain property placed in service before 2015 is computed without any special depreciation allowance when determining the percentage-of-completion.3 The Code does not specifically list this category; however, by inference, it appears they are administrative costs that would directly benefit the contract and would, therefore,

be allocated. A reasonable allocation between contract and noncontract activities would be performed, followed by an allocation of the contract portion.

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amount exceeds the adjusted basis of the retained property, the contractor recognizes income.

Mid-Contract Changes in ContractorRegulations address the tax effect of a change in contractor that occurs during the course of a contract accounted for using a long-term contract method. The regulations apply where a long-term contract accounted for by one contractor (old contractor) using a long-term contract method is transferred to another contractor (new contractor) who is responsible for reporting income from the same contract. The regulations divide the rules for mid-contract changes into two categories, constructive completion transactions and step-in-the-shoes transactions. See Regulation Section 1.460-4(k) for details, including many examples.

Energy Efficient Home Builders CreditContractors that built new energy efficient homes in the U.S. can claim a tax credit of either $2,000 or $1,000 (depending on per-centage of reduction in energy use) per dwelling unit for homes sold after 2005 and before 2015. (IRC §45L) Expired Provision Alert: The energy efficient homes credit expired for homes sold after 2014. Unless Congress extends this provision, it will not be available for homes sold in 2015.

Domestic Production Activities Deduction (DPAD)The DPAD is 9% of the lesser of:1) Qualified production activities income

(QPAI) or 2) AGI (for individuals—taxable income for

other entities) determined without regard to the DPAD.The DPAD cannot exceed 50% of the wages paid and reported on Form W-2 by the business for the year. Only W-2 wages allocable to the eligible activity are counted. Taxpayers engaged in more than one activity will have to allocate wages between the activities, if all are not eligible activities.U Caution: The calculation of the DPAD is not optional. A tax-payer performing an eligible activity must calculate the DPAD, even if the result is zero.QPAI. To determine the net income that qualifies for the 9% de-duction, the taxpayer’s receipts must be divided into those from eligible activities (domestic production gross receipts, or DPGR) and non-DPGR. Then, the taxpayer’s expenses must be allocated between the two categories of income. The DPGR less allocable costs equals QPAI.N Observation: Although initially intended for manufacturers, the DPAD specifically applies to both construction performed within the U.S. and architectural and engineering services for U.S. construction projects.

Worker ClassificationIn the construction industry, there are significant controversies involving the treatment of workers as employees or independent contractors. Workers treated as independent contractors must be issued Form 1099s if the amount paid for the year exceeds $600. For workers treated as employees, Form W-2s must be filed. The contractor will be liable for federal income tax withholding (FITW), Social Security and Medicare (FICA) taxes on employee wages, and state and federal unemployment (FUTA) taxes.However, the classification of workers as independent contractors or employees has other ramifications for the contractor. Employ-ees generally must be covered by employer retirement plans and fringe benefit programs, whereas independent contractors can establish their own retirement plans or fringe benefit programs. The contractor may also be subject to a number of federal and state employment statutes.Preventing an IRS reclassification of independent contractors as employees. Preventing a reclassification issue from arising is not easy. However, there are steps that can be taken to minimize the likelihood that a reclassification battle will be fought. See also Kurek (TC Memo 2013-64).•Firstandforemost,thecontractormustfileForm1099sforall

payments to individuals that exceed $600 during the year. •Thecontractorshouldalsohaveeveryworkersignawrittencon-

tract spelling out the responsibilities of each party and touching on as many as possible of the 20 factors that indicate employee status. (Rev. Rul. 87-41)

•The contract should avoid using the termshired, employee, employed and similar terms when referring to the worker.

•Thecontractshouldalsosetforthspecificcompletiondatesandcontain damages clauses in case of nonperformance.

•Theworkershouldfurnishhisowntoolsandmaterials,andthecontractor should require each worker to provide a copy of his business license, liability insurance coverage and bonding.

•The contractor should structure payment on a piecework orsimilar method, avoiding hourly, weekly or monthly pay.

•The agreementmay also contain language that theworker(1) must hire and supervise any helpers or assistants, (2) can establish his own schedule as long as contract deadlines are met, (3) will not undergo training by the contractor and (4) is not providing services exclusively to the contractor. The agreement should also include detailed termination provisions that do not allow the contractor to terminate the agreement at will.

•Finally,thecontractorshouldavoidpayingtheworker’sexpenses,except as provided for in the contract. Those that are paid should be included in the worker’s contract price.

2017

4-8 2015 Tax Year | Individuals—Special Tax Situations Quickfinder® Handbook Replacement Page 1/2016 Disabled Individuals

BeneficiariesAn ABLE account may be established only for an eligible individual who is a resident of the sponsoring state or, if the individual’s state does not sponsor an ABLE program, a resident of a state contracting with the program. If an eligible individual is unable to establish an ABLE account on his own behalf, the account may be established on his behalf by his agent under a power of attorney or, if none, by his parent or legal guardian. [IRC §529A(b)(1)(C); Prop. Reg. §1.529A-2(c)]The designated beneficiary of an ABLE account is an eligible individual who established the account and is its owner. The pro-gram must limit a designated beneficiary to one ABLE account. An individual is eligible to establish an account if during the tax year:1) The individual is entitled to benefits based on blindness or dis-

ability under the Social Security disability insurance program or the Supplemental Security Income (SSI) program, and that blindness or disability occurred before the date on which the individual reached age 26 or

2) A disability certification for the individual has been filed with the IRS for the tax year. [IRC §529A(e)(1)]

Note: Conditions listed in the “List of Compassionate Allow-ances Conditions” maintained by the Social Security Administration (at www.ssa.gov/compassionateallowances/conditions.htm) are deemed to meet the requirements for filing a disability certification, if the condition was present before the date on which the individual attained age 26. [Prop. Reg. §1.529A-2(e)(3)]

ContributionsAny person may make contributions to an ABLE account. Con-tributions aren’t deductible for income tax purposes. Noncash contributions are not allowed.Annual contributions from all contributors to a designated benefi-ciary’s ABLE account are limited to that year’s annual gift tax exclu-sion amount ($14,000 for 2015) [IRC §529A(b)(2)]. Contributions in excess of the annual limit must be returned (with earnings) to the contributor on or before the due date of the designated beneficiary’s return for the year of the contribution [Prop. Reg. §1.529A-2(g)(4)]. A 6% excise tax is imposed on the designated beneficiary for excess contributions not returned in a timely manner. [IRC §4973(a)(6); Prop. Reg. §1.529A-3(e)]

DistributionsDistributions from ABLE accounts are tax free to the extent they don’t exceed the designated beneficiary’s qualified disability expenses for the year [IRC §529A(c)(1)(B)]. Qualified disability expenses are expenses incurred that relate to the blindness or disability of the designated beneficiary and are for the benefit of that designated beneficiary in maintaining or improving his health, independence or quality of life, including:•Education.•Housing.•Transportation.•Employmenttrainingandsupport.•Assistivetechnologyandpersonalsupportservices.•Health,preventionandwellnessservices.•Financialmanagementandadministrativeservices.•Legalfees.•Expensesforoversightandmonitoring.•Funeralandburialexpenses.•Otherqualifiedexpenses.

Qualified disability expenses include basic living expenses and are not limited to items for which there is a medical necessity or which solely benefit a disabled individual. [Prop. Reg. §1.529A-2(h)]

Example: Jane has a medically determined mental impairment that causes marked and severe limitations on her ability to navigate and communicate. A smart phone would enable her to navigate and communicate more safely and effectively, thereby helping her to maintain her independence and to improve her quality of life. Therefore, the expense of buying, using and maintaining a smart phone would be considered a qualified disability expense.

Distributions that exceed the qualified disability expenses for the year are included in taxable income to the extent of the earnings portion of the distribution, and that amount is generally subject to a 10% penalty tax. [IRC §529A(c)(3)(A)]æ Practice Tip: Distributions from an ABLE account will be reported by the sponsoring state on Form 1099-QA, Distributions from ABLE Accounts. Rollovers. Distributions can be rolled over tax-free within 60 days to another ABLE account for the benefit of the designated beneficiary or an eligible individual who’s a family member of the designated beneficiary. Similarly, an ABLE account’s designated beneficiary can be changed as long as the new beneficiary is an eligible individual who’s a family member of the designated ben-eficiary. [IRC §529A(c)(1)(C)]Death of beneficiary. Amounts remaining in the account after the designated beneficiary’s death go to the deceased’s estate or to a designated beneficiary. They are subject to income tax on invest-ment earnings, but not to the 10% penalty. [IRC §529A(c)(3)(B)]

CrediT For The disabledIRC Section 22 provides a tax credit for qualified low-income indi-viduals age 65 or older or who are permanently and totally disabled.

Qualified IndividualA qualified individual is a U.S. citizen or resident alien (see Tab 1) to whom either of the following applies:•Age65orolderattheendoftheyear.•Underage65attheendoftheyearandallthreeofthefollowing

statements are true:1) Retired on permanent and total disability before the end of

the tax year. 2) Received taxable disability income for the year. 3) At the beginning of the tax year, had not reached mandatory

retirement age. (Mandatory retirement age is the age set by the taxpayer’s employer at which he would have been required to retire, had he not become disabled.)

Married PersonsA married couple generally must file a joint re-turn to take the credit. However, if the spouses did not live in the same household at all times during the tax year, they can file either joint or separate returns and still take the credit.

Income LimitsThe credit is only available to low-income taxpayers whose income is below certain amounts.

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Recovery Periods for Farm Property (2015)Recovery Period (Yrs.)

Asset DescriptionGDS

(MACRS) ADSAgricultural structures (single purpose) 10 15Cattle (dairy or breeding) 5 7Cotton ginning assets 7 12Drainage facilities 15 20Farm buildings (other than single purpose structures) 20 25Farm machinery and equipment 7 10Fences (agricultural) 7 10Goats and sheep (breeding) 5 5Grain bins 7 10Hogs (breeding) 3 3Horses (age when placed in service):• Breedingandworking(12yearsorless) 7 10• Breedingandworking(morethan12years) 3 10• Racinghorses(twoyearsorless) 3 12• Racinghorses(morethantwoyears) 3 12Horticultural structures (single purpose) 10 15Tractor units (over-the-road) 3 4Trees or vines bearing fruits or nuts 10 20Truck (heavy duty, unloaded weight 13,000 lbs. or more) 5 6Truck (weight less than 13,000 lbs.) 5 5Water wells 15 201 Expired Provision Alert:Racehorsesplacedinservicein2014wereassigned

a three-year recovery period regardless of age. Tax professionals should watch for an extension of that provision to 2015.

Section 179 Deduction Expired Provision Alert: For tax years beginning in 2014, the Section 179 deduction limit was $500,000. It is possible that Con-gress will extend that provision to tax years beginning in 2015, but it had not done so at the time of publication. For tax years beginning in 2015, the Section 179 deduction limit is $25,000 (see Tab 10 in the 1040 Quickfinder® Handbook for more details).Farm property eligible for Section 179 expensing includes:•Tangible personal property (tangible property other than real

property) such as machinery and equipment, milk tanks, auto-matic feeders, barn cleaners and office equipment.

•Livestock(horses,cattle,hogs,sheep,goatsandminkandotherfur-bearing animals).

•Single-purposeagriculturalandhorticulturalstructures.•Vineyardcosts.(CCA201234024)Single-purpose agricultural structure. Building or enclosure specifically designed, constructed and used for: housing, raising and feeding a particular type of livestock (including poultry but not horses), their produce and the equipment necessary for feeding and caring. Special-purpose structures qualify if used to:•Breedchickensorhogs;•Producemilkfromdairycattleor•Producefeedercattleorpigs,broilerchickensoreggs.Single-purpose horticultural structure:1) A greenhouse specifically designed, constructed and used for

the commercial production of plants or2) A structure specifically designed, constructed and used for

commercial mushroom production.

$500,000

Farmers and Ranchers

Example #1: Kane is a sugar beet farmer who markets his beets through a nearby co-op. For the current year, Kane receives a certificate from the co-op indicating that he has been allocated $4,800 of nonqualified per-unit retains. In addition, Kane received cash of $4,250 for the redemption of prior year nonqualified per-unit retain certificates. The $4,800 certificate reporting the allocation of nonqualified per-unit retains is not currently taxable,andisnotreportedontheForm1099-PATRreceivedfromtheco-op. However, the former nonqualified per-unit retains that were cur-rently redeemed for cash in the amount of $4,250 are taxable (reported onForm1099-PATR,box5,bytheco-op).KanereportsthisincomeonSchedule F, lines 3a and 3b.Example #2: Lem is a dairy farmer who markets his milk through a co-op. Forthecurrentyear,LemreceivesaForm1099-PATRreflectingissuanceofqualified per-unit retain certificates of $5,900. Lem did not receive any current cashpaymentsontheper-unitretains.HisForm1099-PATRfromtheco-opreports $5,900 in box 3 (per-unit retain allocations). This entire amount is taxable and is reported on both lines 3a and 3b of Lem’s Schedule F.

Losses on Co-Op EquityCo-ops occasionally have suffered financial problems, failed or gone away in takeover transactions or merg-ers. A financially distressed co-op might permanently reduce the member’s equity account, issuing a notice that the account has been adjusted downward or elimi-nated. This write-off is deductible in Part II of Schedule F in the year the writedown occurs.

depreCiable properTy

Depreciating Farm PropertyProperty used in a farming business must be depreciated using the 150% declining balance (DB) method [IRC §168(b)(2)(B)]. This applies to all assets used in the business of farming, not only agricultural equipment items. Thus, all depreciable assets associ-ated with a Schedule F enterprise (including cars, computers, office fixtures, etc.) are subject to the slower 150% DB method, rather than the 200% DB method.The business of farming includes:•Raisingandharvestingcrops.•Raising, shearing, feeding, caring for, training andmanaging

animals.•Operatinganurseryorsodfarm.•Raisingorharvestingtreesbearingfruit,nutsor

other crops.•Raisingornamentaltrees. Note: The ADS method is required if a farmer elects out of UNICAP (see Electing out of farming UNICAP on Page 6-21).

Farmers Depreciation Table—Quick SummarySystem/Method Type of Property

GDS using 150% DB • Allpropertyusedinafarmingbusiness(exceptrealproperty).

• All15-and20-yearproperty.GDS using SL • Nonresidentialrealproperty.

• Treesorvinesbearingfruitornuts.ADS using SL Farm property used when an election not to apply

the uniform capitalization rules is in effect. Can also be elected.

Note: This table shows depreciation methods that typically apply to property used in farming. Other elective methods are available.

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Property that qualifies as a single-purpose agricultural or horticul-tural structure includes:•Greenhouse.•Haystorage/cattlefeedingfacility.•Integratedhograisingfacility.•Milkparlor.•Poultryhouse.

Special Depreciation Allowance Expired Provision Alert: The 50% special depreciation al-lowance expired for assets placed in service after 2014 (2015 for certain long production period property and aircraft). This discus-sion is retained in the event that the provision is extended to 2015.For assets placed in service in 2014, a 50% special depreciation al-lowance is available for assets meeting the following requirements:1) MACRS recovery period of 20 years or less and2) New assets (not used).

Vehicles Exempt From Depreciation LimitsDepreciation limits apply only to vehicles that fall under the defini-tion of a passenger automobile, defined as a four-wheeled vehicle designed for street use with an unloaded gross vehicle weight rating of 6,000 pounds or less [IRC §280F(d)(5)]. Unloaded gross vehicle weight means the curb weight of the vehicle fully equipped for service without passengers or cargo.•Few,ifany,carsfalloutsidethepassengerautomobiledefinition,

but a truck or van falls under the definition only if the loaded gross vehicle weight is 6,000 pounds or less.

•Trucksandvansarevehiclesdefinedassuchbythemanufac-turer.

Vehicle Expense SubstantiationTaxpayers must be able to prove the following items to claim a deduction for vehicle expenses: [Temp. Reg. §1.274-5T(b)(6)]1) The amount of each separate expense.2) The mileage for each business use of the vehicle.3) The date of the expense or use.4) The business reason for the expense or use.Farm vehicle exception. If an owned or leased vehicle is used during most of a normal business day directly in the business of farming, in lieu of substantiat-ing its use, the taxpayer may determine any deduction or credit for the vehicle as if the business use were 75% plus the percentage, if any, attributable to an amount included in an employee’s gross income. A taxpayer who satisfies the substantiation requirements by using the 75% rule cannot use a different method in subsequent years. The converse is also true. [Temp. Reg. §1.274-6T(b)]

losses oF CerTain Farmers limiTedIndividual taxpayers that receive any direct or counter-cyclical payment under Title I of the Food, Conservation and Energy Act of 2008, any payment elected to be received in lieu of such pay-ment or any CCC loan, are limited in terms of the deductibility of a Schedule F farming loss [IRC §461(j)(1)]. Applicable subsidy payments for this provision do not include CRP payments. The definition of a farming business for this provision is the same as that used for purposes of Schedule J farm income averaging (see Farm Income Averaging on Page 6-27), with a slightly expanded definition for specified processing activities.

Calculating the Excess Farm LossThe amount of farm loss not deductible is equal to the excess of: [IRC §461(j)(4)(A)]•Theaggregatedeductionsfortheyearattributabletothefarming

business over•Thesumoftheaggregategrossincomeorgainfortheyearat-

tributable to farming, plus a threshold amount for the tax year.The threshold amount for any year is the greater of $300,000 ($150,000 for married filing separately) or the total of net farm income for the previous five tax years. [IRC §461(j)(4)(B)]N Observation: Farm losses arising by reason of fire, storm or other casualty, or because of disease or drought, are not subject to the limitations. [IRC §461(j)(4)(D)]

Example: Kyle, a Schedule F farmer, has $1 million of net income from farm-ing in each of the five taxable years from 2010 through 2014 and incurs a $5 million Schedule F loss in 2015. The deductible farming loss in 2015 is limited to the greater of (1) $300,000 or (2) $5 million (total net farm income for the previous five taxable years). Because the threshold amount equals the farming loss for 2015, the $5 million Schedule F loss in 2015 is deductible by Kyle.Observation: If Kyle had no other income or deductions in any of the taxable years 2010 through 2014, the $5 million Schedule F loss for 2015 could be carried back under the net operating loss rules to those previous five years, reducing Kyle’s taxable income in each of the years 2010 through 2014 to zero.

Carryover of disallowed losses. Any excess farm loss disallowed in a particular year will be treated as a deduction attributable to farming in the next tax year. For calculating total net farm income for the prior five-year period, any loss that has been limited under this provision and is carried forward, is taken into account only in the year in which that loss is allowed as a deduction.

Example: Farmer Tom has $300,000 of net farm income and $700,000 of nonfarm income in 2010. Each year from 2011–2014, he has $1,000,000 of net farm income. In 2015, Tom incurs a $7,000,000 farm loss. His deductible farming loss in 2015 is limited to his threshold amount which is the greater of (1) $300,000 or (2) $4,300,000 (total net farm income for the previous five taxable years). Therefore, Tom’s farming loss will be limited to $4,300,000 in 2015, and the remaining $2,700,000 ($7,000,000 – $4,300,000) is disallowed as an excess farm loss.The2015farmlossof$4,300,000iscarriedbackunderIRCSection172(b)(1)(G) and allowed as a deduction in each of the five previous tax years. The loss will first offset the $300,000 of farm income and $700,000 of nonfarm income in 2010 to zero. Taxable income for 2011, 2012 and 2013 will also be reduced to zero. The remaining allowable farm loss of $300,000 reduces 2014 taxable income to $700,000.Tom’s excess farm loss of $2,700,000 that was disallowed in 2015 will be treated as a deduction attributable to his farming business in 2016.

Application to partnerships and S corporations. In the case of a partnership or S corporation, the limit is applied at the partner or shareholder level. Accordingly, each partner or shareholder takes into account his proportionate share of the income, gain or deduc-tion from the farming business of the partnership or S corporation, along with any applicable subsidies received by the partnership or S corporation during the taxable year. [IRC §461(j)(5)]Coordination with passive activity loss rules. The loss disal-lowance rule in IRC Section 461(j) is applied before the passive loss rules of IRC Section 469. Accordingly, even if a farm loss is not disallowed as an excess farm loss, the passive loss rules could prevent a farmer not materially participating in the farming activity from currently deducting the farm loss [IRC §461(j)(7)]. See Pas-sive Activity Losses on Page 6-30.

2015

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owned by that spouse, authority exists for reducing SE income, even within the same joint return. [Cox, 80 AFTR 2d 97-5718 (8th Cir. 1997); Rev. Rul. 74-209]æ Practice Tip: To ensure that a spouse rental arrangement is respected, it should be properly documented:•Awrittenleasebetweenthespousesshouldbeexecuted.•Actualpaymentoftherentshouldoccur,withcontrolofthefunds

remaining with the landlord-spouse.•AForm1099-MISCshouldbeissuedbythetenant-spouseto

the landlord-spouse. The property should be titled in the name of, and debt associated with it paid by, the landlord-spouse.

Machinery leasing. Rentals from personal property (such as farm machinery) are exempt from SE tax if the property is leased in conjunction with real estate. [IRC §1402(a)(1)]•TheForm1040ScheduleEinstructionsindicatethatScheduleE

is not to be used to report income and expenses from the rental of personal property, such as equipment or vehicles.

•ThetaxpayerisdirectedtouseScheduleC,“ifinthebusinessof renting personal property.”

•Totheextentarentalofpersonalpropertydoesnotrisetothelevel of a business, the IRS instructions direct that rental re-ceipts be reported on page one of Form 1040 (on line 21, “other income”). Related rental deductions are reported on line 36 of Form 1040, and the notation “PPR” (for personal property rental) is entered on the dotted line next to the amount.

Crop-share rentals (Form 4835). See Deferred Sales By Crop-Share Landlords on Page 6-18.

Commodity HedgingA farmer may enter into a commodity hedging transaction (hedge) to protect himself against the risk of unfavorable price fluctuations. The general tax rule is that futures bought to protect a business from price fluctuations are not capital assets. Thus, gains or losses from these holdings are ordinary income. See Regulation Section 1.1221-2 for the general definition of a hedging transaction.In agriculture, classification as a hedge generally requires three criteria to be met: [IRC §1256(e)(2); Pub. 225]1) The hedging contract is in commodities produced by the farmer

and within the farmer’s range of production;2) The hedging contract protects the farmer from the risk of unfa-

vorable price fluctuations (meaning that the contract secures a pricing opposite the farmer’s physical position of commodities on hand or expected to be on hand or to be purchased, so as to constitute a price hedge) and

3) The farmer meets identification requirements in his records with respect to the hedge. (Reg. §1.1221-2)

æ Practice Tip: A farmer entering into a hedge that remains open at year-end receives a Form 1099-B, Proceeds from Broker and Barter Ex-change Transactions, reflecting the year-end status of the contract. Normally, year-end unreal-ized gains or losses on open regulated futures contracts (Section 1256 contracts) are recognized and reported on Form 6781, Gains and Losses From Section 1256 Contracts and Straddles. However, hedges are exempt from this rule [IRC §1256(e)]. Thus, farmers who enter into hedges generally report gains and losses on Schedule F only when realized. To avoid IRS matching problems, each unrealized gain or loss shown on a Form 1099-B should be reported on Form 6781, but the net hedg-ing gain or loss reversed should also be entered with a description explaining the adjustment.

U Caution: If a farmer’s transaction is speculative, the contract is subject to the regular Section 1256 rules.

Net Operating Loss (NOL) CarrybacksIn general, an NOL is carried back to the two prior tax years. However, a special five-year carryback period applies for farming losses. [IRC §172(b)(1)(F)]The amount available for the special five-year farm carryback is the lesser of the NOL if (1) the amount which would be the NOL for the tax year if only income and deductions attributable to farming are considered or (2) the regular NOL for the tax year. A farming business is a trade or business involving the cultivation of land or the raising or harvesting of any agricultural or horticultural commodity. This definition includes the businesses of operating a nursery or sod farm, the raising or harvesting of trees bearing fruit, nuts, or other crops, or ornamental trees. The raising, shearing, feeding, caring for, training and management of animals is also a farming business.If a farmer entitled to a five-year NOL carryback elects to decline the privilege, the normal NOL carryback rules apply [IRC §172(b)(3)]. In some cases, a farmer might wish to decline all carryback periods, in order to carry the NOL to future tax years.

Debt CancellationFull or partial cancellation of a debt is generally considered income for tax purposes. See Debt Cancellation on Page 1-18 for excep-tions and Tab 6 in the 1040 Quickfinder® Handbook regarding a special exclusion for qualified farm indebtedness.

Qualified Conservation Contribution A qualified conservation contribution is a contribution of a qualified real property interest to a qualified organization to be used only for conservation purposes. A landowner who grants a conservation easement is eligible for a charitable contribution deduction. The allowable deduction is generally the amount by which FMV of the property drops as a result of the easement. To qualify, ease-ment rights must be granted in perpetuity and must be granted to a qualified organization such as a governmental unit or local land trust. See Publication 526 for details. Expired Provision Alert: The special rules for farmers and ranchers expired on December 31, 2014. Unless Congress ex-tends this provision, it will not be available for contributions made after 2014. This discussion is retained in the event the provision is extended to 2015.Qualified conservation contributions made by a qualified farmer or rancher in 2014 are deductible up to 100% (rather than normal 50%) of the excess of the taxpayer’s contribution base (AGI) over the amount of all other allowable contributions [IRC §170(b)(1)(E)(iv)]. A qualified farmer or rancher is a taxpayer (including certain farming corporations) whose gross income from farming was greater than one-half of the gross income for the taxpayer for the year. Gross income from farming for this purpose was the typical definition of income from raising agricultural or horticultural commodities, including livestock, but it also extended to the planting, raising or cutting of trees.For a qualified conservation contribution of agricultural property, the property interest must have included a restriction that the property remains generally available for agricultural or livestock production. Although no requirement existed that this production actually occur, the property must remain available for it.

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Differential Wage Credit for Small Business Employer Expired Provision Alert: The differential wage credit expired for payments made after 2014. Unless Congress extends it, it will not be available for 2015. This discussion is retained in the event that the credit is extended to 2015.An eligible small business (employing less than 50 employees with a written plan providing for differential payments (see Military Dif-ferential Pay on Page 7-8) may be able to claim a credit equal to 20% of up to $20,000 of differential wages paid to each qualifying employee during the tax year (IRC §45P). The credit is available for payments made after June 17, 2008 and before 2015. The employer’s salary deduction must be decreased by an amount equal to the credit.The credit is claimed on Form 8932, Credit for Employer Differ-ential Wage Payments. The credit is also reported on Form 3800, General Business Credit.

First-Time Homebuyer CreditThe first-time homebuyer credit is not available for homes pur-chased by certain members of the uniformed services and Foreign Service and certain employees of the intelligence community after 2011. See Tab 12 in the 1040 Quickfinder® Handbook for details on the credit.Generally, the credit must be recaptured if the taxpayer disposes of the residence, or the residence ceases to be the taxpayer’s principal residence, during the 36-month period beginning on the date of purchase. However, special rules apply to members of the armed forces. If a member disposes of or ceases to use a principal residence after December 31, 2008, in connection with government orders (received by the taxpayer or spouse) for qualified official extended duty service, he will be exempt from the recapture provi-sion for a residence purchased before January 1, 2009.

Tax ForGiveness oF miliTary deCedenT’s Tax liabiliTy

Tax liability can be forgiven, or if already paid, refunded, if a member dies: (IRC §692)•Whileinactiveserviceinacombatzone;•Fromwounds,diseaseorotherinjuryreceived

in a combat zone or•Fromwoundsorinjuryincurredinaterroristormilitaryaction.Tax for the year of death and possibly for earlier years can be forgiven. In addition, any unpaid tax liability at the date of death may be forgiven (does not have to be paid).If a member dies, a surviving spouse or personal representative handles duties such as filing any tax returns and claims for re-fund of withheld or estimated tax. A personal representative can be an executor, administrator or anyone who is in charge of the decedent’s assets.Joint returns. Only the decedent’s part of the joint income tax li-ability is eligible for the refund or tax forgiveness. To determine the decedent’s part, the person filing the claim must: [Reg. §1.692-1(b)]1) Figure the income tax for which the decedent would have been

liable if a separate return had been filed,2) Figure the income tax for which the spouse would have been

liable if a separate return had been filed and3) Multiply the joint tax liability by a fraction. The numerator of the

fraction is the amount in item 1 above. The denominator of the fraction is the total of items 1 and 2. This is the decedent’s tax liability that is eligible for the refund or tax forgiveness.

Residents of community property states. If the decedent’s le-gal residence was in a community property state and the spouse reported half the military pay on a separate return, the spouse can get a refund of taxes paid on his share of the pay for the years involved. The forgiveness of unpaid tax on the military pay also would apply to the half owed by the spouse for the years involved.Claims for refund. If the decedent’s tax liability is forgiven, the personal representative should file the following:•Form1040ifataxreturnhasnotbeenfiledforthetaxyear.Form

W-2 must accompany the return.•Form1040Xifataxreturnhasbeenfiled.SeparateForm1040X’s

should be filed for each year.See Publication 3 for details on what to write on the return to identify it as eligible for the forgiveness and what documents must be attached.Deadline for filing claim for refund. Generally, the period for filing a refund claim (Form 1040X) is the later of three years from the time the return was filed or two years from the time the tax was paid. However, if the death occurred in a combat zone or from wounds, disease or injury incurred in a combat zone, the deadline for filing a claim for credit or refund (Form 1040 or 1040X) is extended us-ing the rules discussed earlier in Combat Zones and Contingency Operation Extensions on Page 7-6.

Combat Zone Related ForgivenessTax liability is forgiven for an individual who: •IsamemberoftheU.S.ArmedForcesatdeathand•Dieswhileinactiveserviceinacombatzone,oratanyplace

from wounds, disease or injury incurred while in active service in a combat zone. [IRC §692(a)(1)]

Tax years. Combat zone-related forgiveness applies to the fol-lowing years:•Thetaxyeardeathoccurredand•Anyearliertaxyearendingonorafterthefirstdaythemember

served in a combat zone in active service.In addition, any unpaid taxes for years ending before the member began service in a combat zone will be forgiven and any of those taxes that are paid after the date of death will be refunded.Service outside combat zone. These rules also apply to a mem-ber serving outside the combat zone if the service:•Wasindirectsupportofmilitaryoperationsinthezoneand•Qualifiedthememberforspecialmilitarypayfordutysubjectto

hostile fire or imminent danger.Missing status. The date of death for a member who was in a missing status (missing in action or prisoner of war) is the date his name is removed from missing status for military pay purposes. This is true even if death actually occurred earlier.

Terrorist or Military Action-Related ForgivenessTax liability is forgiven for an individual who:•Isamemberatdeathand•Diesfromwoundsorinjuryincurredwhileamemberinaterrorist

or military action. [IRC §692(c)]Definition. A terrorist or military action is any terrorist activity pri-marily directed against the U.S. or its allies or any military action involving the U.S. Armed Forces and resulting from violence or aggression against the U.S. or its allies. Any multinational force in which the U.S. participates is considered an ally of the U.S.Tax years. Terrorist or military action related forgiveness applies to the following years:•Thetaxyeardeathoccurredand•Anyearliertaxyearintheperiodbeginningwithyearbeforethe

year in which the wounds or injury occurred.

2015 Tax Year | Individuals—Special Tax Situations Quickfinder® Handbook 8-5Replacement Page 1/2016Oil and Gas Investors

IDC—definition and tax treatment. IDC is any cost incurred that in itself has no salvage value and is incident to and necessary for the drilling of wells and the preparation of wells for the production of oil and gas. These costs include wages, fuel, repairs, hauling and supplies. [Reg. §1.612-4(a)]Expense. In the first year IDC is incurred, the taxpayer may elect to currently deduct IDC [IRC §263(c)]. If the election is made, the taxpayer generally must deduct IDC in all subsequent years as it is paid or incurred for all properties. However, he can still make an annual election under Section 59(e) to capitalize and amortize over 60 months some or all of the IDC incurred that year.Capitalize. If the Section 263(c) election is not made, IDC is capi-talized and recovered through cost depletion or depreciation if the cost represents physical property.A taxpayer who does not elect to expense IDC may still elect to expense IDC on nonproductive wells (dry holes). The deduction is allowable only in the year the wells are completed as dry holes [Reg. §1.612-4(b)(4)]. Even when some costs were incurred in one year and the outcome of the well is known by the time that year’s tax return is filed, the costs may not be deducted until the year the well is completed.Depreciation. A working interest owner’s share of L&WE costs is nor-mally capitalized and depreciated. However, during the drilling phase of the well, costs without any salvage value qualify as IDC and, thus, are not considered depreciable property. For many working interest owners, the majority of their depreciable costs will be incurred when a well is determined to be a producing property and pumping and storage equipment is placed in service at the well site. The operator of the well (usually not the working interest owner) determines the character of expenditures as either IDC or capitalizable L&WE. Assets used in drilling oil and gas wells (for example, drilling rigs) are generally depreciated using a five-year MACRS recovery period. Assets used during the production phase and during op-eration, such as gathering pipelines, pumps and related storage facilities, are depreciated using a seven-year MACRS recovery period. Rather than depreciate the property, however, taxpayers can elect to expense such costs under Section 179, provided the other Section 179 conditions are met.æ Practice Tip: Claiming a Section 179 deduction for L&WE can greatly simplify recordkeeping and accelerate deductions. Expired Provision Alert: Unless Congress extends it, the special (bonus) depreciation provision discussed in the following paragraph is not available for 2015. The discussion is retained in the event Congress extends special depreciation to property placed in service in 2015.An additional 50% special (bonus) depreciation allowance is available for assets purchased and placed in service in 2014 and meeting the following requirements: [IRC §168(k)]1) MACRS recovery period of 20 years or less and2) New assets (not used).Depletion. A working interest owner is entitled to a deduction for the greater of cost depletion (IRC §612) or allowable percentage depletion (sometimes called statutory depletion—IRC Section 613A). Cost depletion is based on the LHC of the property and is calculated using the mineral reserves (obtained from engineering reports) and the number of units sold for the year [Reg. §1.611-2(a)]. For cash-basis taxpayers, the “number of units sold” means units for which payment was actually received within the tax year. Cost depletion is similar to depreciation determined on a units-of-production method.

Cost Depletion CalculationUnrecovered depletable costs

× Units Sold = Cost

DepletionEstimated recoverable reserves (in units) at beginning of year1

1 Usually obtained from engineering reports.

æ Practice Tip: For cost depletion purposes, natural gas produc-tion is converted into equivalent barrels of oil using a ratio of 6,000 cubic feet (6 MCF) of gas to one barrel of oil. [IRC §613A(c)(4)]

Percentage Depletion Quick Facts (2015)Based On A percentage of gross receipts from the property.Rate 15% for oil and gas properties. However, the rate for marginal

production properties (see Net Income Limitation below) is increased if the average crude oil price falls below $20. Given present oil prices, no rate increase is anticipated in the foreseeable future.

Who Qualifies?

Independent producers (generally working interest owners who are not retailers or refiners) with <1,000 barrels average daily productionfromallwells.Royaltyownersarealsoeligible.

Net Income Limit

Percentage depletion is limited to the taxable income from each property before any depletion or Section 199 domestic producer deductions.Reportincomeandexpensesbypropertyinasupporting schedule to Schedule C—the Oil and Gas Depletion Schedule on Page 8-12 can be used for this.

65% Limit A taxpayer’s total percentage depletion from all oil and gas properties cannot exceed 65% of the taxpayer’s taxable income, computed before percentage depletion, NOL and capital losscarrybackandSection199deductions[IRC§613A(d)].Deductions denied by this limitation are carried to succeeding tax years. See Example #2 on Page 8-6.

Not Limited to Basis

Cost depletion stops when LHC is fully depleted. Percentage depletion continues (even after LHC is depleted) because it is based on a percentage of gross income from the property.

Example #1: Hal West invested in oil and gas properties for the first time on March 15, 2015. He owns a working interest in three producing wells that were all drilled during 2015 after Hal acquired an interest in the properties. In addition, Hal invested in two additional drilling projects that were determined to be dry holes and abandoned before the end of the year. In addition to his oil and gas operations, Hal’s other income is $70,000 in wages and $500 of interest income.At year-end, Hal received a separate Form 1099-MISC for each of the three producing properties. In 1099-MISC box 7, “Nonemployee Compensation,” the well operators listed the gross payments (before deducting severance tax) made to him for each well. Hal saved all the stubs (run tickets) from the revenue checks he received. The run tickets indicate gross revenue, severance tax expense and barrels (oil) or MCF (thousand cubic feet—gas) produced by the well.The following table shows Hal’s share of the oil and gas operations. Page 1 of Hal’s completed Schedule C and Hal’s Oil and Gas Depletion Schedule are shown on Page 8-11.

WellsDuke 1 Duke 2 Nick 1 Mars 1 Mars 2 Totals

Dry Hole? No No No Yes Yes N/AHal’s share:Revenue $18,500 $ 4,600 $13,207 – – $36,307Deductions:Prod. Tax1 1,203 267 790 – – 2,260LHC2 $ 1,700 $ 850 2,550IDC 9,000 8,500 9,200 12,900 9,100 48,700LOE3 2,200 3,000 1,800 – – 7,000Section 1794 1,500 1,500 1,200 – – 4,200Depletion5 2,775 100 217 – – 3,092

Net Income 1,822 <8,767> 0 <14,600> <9,950> <31,495>Capitalized:LHC 1,000 1,000 750 2,750

1 Production (severance) tax.2 Deducted on dry holes; capitalized on producing properties. See the Practice Tip

on Page 8-6.3 Lease operating expense.4 Computed on L&WE—see Hal’s Oil and Gas Depletion Schedule on Page 8-11.5 Separately computed for each producing property as the greater of cost or

percentage depletion—see Hal’s Oil and Gas Depletion Schedule on Page 8-11.

2015

2015 Tax Year | Individuals—Special Tax Situations Quickfinder® Handbook 9-3Replacement Page 1/2016Real Estate Owners

Expenses for rental property sold. Ordinary and necessary expenses for managing, conserving or maintaining the property are deductible until the rental property is sold. Part interest. If the taxpayer owns a part interest in rental property, he can deduct the proportionate amount of the expenses paid.Uncollected rent. Cash basis taxpayers do not claim a deduc-tion for uncollected rent because it was never included in income.Accrual basis method taxpayers report income when it is earned. Therefore, if they are unable to collect the rent, they may be able to deduct it as a business bad debt.

Repairs and ImprovementsGenerally, an expense for repairing or maintaining rental prop-erty may be deducted if it is not required to be capitalized. [Reg. §1.162-4(a)] Improvements. Expenses paid to improve rental property must be capitalized. An expense is considered an improvement if it is any of the following: [Reg. §1.263(a)-3(d)]1) An expense that results in a betterment to the property. These

include expenses for fixing a pre-existing defect or condition, enlarging or expanding the property, or increasing its capacity, strength or quality.

2) An expense for restoration. These include include expenses for replacing a substantial structural part of the property, repairing damage to it after its basis was adjusted as a result of a casualty loss or rebuilding it to a like-new condition.

3) An expense that adapts property to a new or different use. These may include expenses for altering the property to a use that is not consistent with its intended ordinary use when the taxpayer began renting it.

The expenses capitalized for improving property can generally be depreciated as if the improvement were separate property. Safe harbor for small taxpayers. Taxpayers with average gross receipts of $10 million or less can elect not to capitalize improve-ments to an eligible building property if the total amount paid dur-ing the year for repairs, maintenance, improvements and similar activities performed on the building does not exceed the lesser of: [Reg. §1.263(a)-3(h)]1) $10,000 or2) 2% of the eligible building’s unadjusted basis.Eligible building property includes buildings that the taxpayer owns or leases if their unadjusted basis is $1 million or less.

Examples of Property ImprovementsAdditions Bedroom Bathroom Deck Garage Porch Patio

Lawn and Grounds Landscaping Driveway Walkway Fence Retainingwall Sprinkler system Swimming pool

Miscellaneous Storm windows, doors New roof Central vacuum Wiring upgrades Satellite dish Security system

Heating and Air Conditioning Heating system Central air conditioning Furnace Duct work Central humidifier Filtration system

Plumbing Septic system Water heater Soft water system Filtration system

Interior Improvements Built-in appliances Kitchen modernization Flooring Wall-to-wall carpeting

Insulation Attic Walls, floor Pipes, duct work

basis and depreCiaTion

Converted PropertyWhen a personal asset is converted to business or rental use, its basis for depreciation is the lower of: [Reg. §1.168(i)-4(b)]•Theadjustedbasisonthedateofconversionor•TheFMVofthepropertyatthetimeofconversion.

What Property Can Be Depreciated?Depreciate property that meets all the following requirements:•Taxpayerownstheproperty.•Propertyisusedinthebusinessorincome-producing

activity (such as rental property). •Propertyhasadeterminableusefullife.•Propertyisexpectedtolastmorethanoneyear.•Property isnotexceptedproperty (suchasproperty

placed in service and disposed of in the same year and Section 197 intangibles).

MACRS Recovery Periods for Property Used in Rental Activities

Page 9 of 31 of Publication 527 14:37 - 23-MAR-2009

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

This class also includes appliances, car- The other property classes do not gen-Depreciation Systemspeting, furniture, etc., used in a residential erally apply to property used in rentalrental real estate activity. activities. These classes are not dis-MACRS consists of two systems that determine CAUTION

!Depreciation on automobiles, certain cussed in this publication. See Publication 946how you depreciate your property—the General

computers, and cellular telephones is lim- for more information.Depreciation System (GDS) and the Alternativeited. See chapter 5 of Publication 946.Depreciation System (ADS). Generally, you

must use GDS for property used in most rental • 7-year property. This class includes office Recovery Periods activities, unless you elect ADS. furniture and equipment (desks, file cabi- Under GDS

nets, etc.). This class also includes anyproperty that does not have a class life The recovery period of property is the number ofExcluded Property and that has not been designated by law years over which you recover its cost or otheras being in any other class. basis. The recovery periods are generally longerYou cannot use MACRS for certain personal

under ADS than GDS.property (such as furniture or appliances) placed • 15-year property. This class includesThe recovery period of property depends onin service in your rental property in 2008 if it had roads, fences, and shrubbery (if deprecia-

its property class. Under GDS, the recovery pe-been previously placed in service before 1987 ble).riod of an asset is generally the same as itswhen MACRS became effective.

• Residential rental property. This class property class.Generally, personal property is excludedincludes any real property that is a rental Class lives and recovery periods for mostfrom MACRS if you (or a person related to you)building or structure (including a mobile assets are listed in Appendix B of Publicationowned or used it in 1986 or if your tenant is ahome) for which 80% or more of the gross 946. See Table 2-1 for recovery periods of prop-person (or someone related to the person) whorental income for the tax year is from erty commonly used in residential rental activi-owned or used it in 1986. However, the propertydwelling units. It does not include a unit in ties.is not excluded if your 2008 deduction undera hotel, motel, inn, or other establishmentMACRS (using a half-year convention) is less Qualified Indian reservation property.where more than half of the units are usedthan the deduction you would have under Shorter recovery periods are provided underon a transient basis. If you live in any partACRS. For more information, see What Method MACRS for qualified Indian reservation propertyof the building or structure, the grossCan You Use To Depreciate Your Property? in placed in service on Indian reservations. Forrental income includes the fair rental valuePublication 946, chapter 1. more information, see chapter 4 of Publicationof the part you live in.

946.

Electing ADS Additions or improvements to property.Treat additions or improvements you make to

If you choose, you can use the ADS method formost property. Under ADS, you use the straight

Table 2-1. MACRS Recovery Periods forline method of depreciation.Property Used in The election of ADS for one item in a class of

property generally applies to all property in that Rental Activities Keep for Your Recordsclass that is placed in service during the tax year

MACRS Recovery Periodof the election. However, the election applies ona property-by-property basis for residential General Alternativerental property and nonresidential real property. Depreciation Depreciation

For property placed in service during 2008, Type of Property System Systemyou elect to use ADS by entering the deprecia-

Computers and their peripheral equipment . . . . . . . . . . . . . 5 years 5 yearstion on Form 4562, Part III, line 20.Office machinery, such as:Once you elect to use ADS, you cannot

Typewriterschange your election.CalculatorsCopiers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 years 6 yearsProperty Classes Under GDS Automobiles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 years 5 years

Light trucks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 years 5 yearsEach item of property that can be depreciatedAppliances, such as:under MACRS is assigned to a property class,

Stovesdetermined by its class life. The property class Refrigerators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 years 9 yearsgenerally determines the depreciation method, Carpets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 years 9 yearsrecovery period, and convention. The property

Furniture used in rental property . . . . . . . . . . . . . . . . . . . . 5 years 9 yearsclasses under GDS are:

Office furniture and equipment, such as:• 3-year property,DesksFiles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 years 10 years• 5-year property,

Any property that does not have a class life and that has not• 7-year property, been designated by law as being in any other class . . . . 7 years 12 years• 10-year property,

Roads . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 years 20 years• 15-year property, Shrubbery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 years 20 years

Fences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 years 20 years• 20-year property,Residential rental property (buildings or structures)• Nonresidential real property, and

and structural components such as furnaces,• Residential rental property. waterpipes, venting, etc. . . . . . . . . . . . . . . . . . . . . . . 27.5 years 40 years

Additions and improvements, such as a new roof . . . . . . . . . The same recovery period asUnder MACRS, property that you placed inthat of the property to whichservice during 2008 in your rental activities gen-the addition or improvement iserally falls into one of the following classes.made, determined as if the

• 5-year property. This class includes com- property were placed inservice at the same time asputers and peripheral equipment, office ma-the addition or improvement.chinery (typewriters, calculators, copiers,

etc.), automobiles, and light trucks.

Chapter 2 Depreciation of Rental Property Page 9Section 179 DeductionTaxpayers cannot claim the Section 179 deduction for property used to furnish lodging. [IRC §179(d)(1) with reference to IRC §50(b)]U Caution: Any tangible property placed in service for residential rental real estate activities reported on Schedule E (such as kitchen appliances or carpeting installed in a rent house) is not eligible for Section 179 expense treatment.

Special Depreciation Allowance Expired Provision Alert: Qualified property placed in service during 2014 is eligible for 50% special depreciation. Residential real estate does not qualify for special depreciation, but qualified assets inside the property, such as appliances and furniture do. Unless Congress extends this provi-sion, special depreciation will not be available for assets placed in service after 2014.

2015

9-12 2015 Tax Year | Individuals—Special Tax Situations Quickfinder® Handbook Replacement Page 1/2016 Restaurant Owners

Cash includes U.S. coin and currency and foreign currency [IRC §6050I(d)]. Cashier’s checks, bank drafts, traveler’s checks and money orders having a face value of not more than $10,000 must be reported where meeting a designated reporting transaction test or received in a transaction in which the business knows the cash is being used in an at-tempt to avoid the reporting of the transaction. Designated reporting transactions include the retail sale of consumer durables, collectibles or travel and entertainment activities. [Reg. §1.6050I-1(c)]

Example: Krooked has his daughter’s wedding reception at the Indigestion Restaurantatacostof$11,000.Hepaysforthereceptionwithcash(U.S.currency). Since the reception occurs in Indigestion’s trade or business and the payment involves cash in excess of $10,000, Indigestion must file Form 8300 for this transaction. Variation: Now assume that Krooked pays for the reception with two $5,500 cashier checks and tells the Indigestion manager that he is doing so to avoid the Form 8300 filing requirement. Even though the checks individually are $10,000 or less, the restaurant knows that the transaction is structured to avoid the Form 8300 reporting requirements. Indigestion must file a Form 8300 reporting the transaction.

depreCiaTion and amorTizaTion

15-Year Recovery Period for Certain Real Property Expired Provision Alert: The 15-year re-covery period for qualified restaurant property and qualified leasehold improvement property expired for property placed in service after 2014. Unless extended, these provisions will not be available for property placed in service in 2015. This discussion is retained in the event that the provisions are extended to 2015. Qualified restaurant property and qualified leasehold improvement property is assigned a 15-year recovery period (rather than the 39-year recovery period that normally applies to such property). Qualified restaurant property. Qualified restaurant property is any Section 1250 property (generally, depreciable realty) placed in service after October 22, 2004 and before January 1, 2015 that is a building or an improvement to a building and more than 50% of the building’s square footage is devoted to the preparation of, and seating for, on-premises consumption of prepared meals. [IRC §168(e)(7)]Qualified leasehold improvement property. Qualified leasehold improvement property is a leasehold improvement placed in service after October 22, 2004 and before January 1, 2015 that is: 1) Made to an interior portion of a nonresi-

dential building;2) Made pursuant to a lease by either the lessee, sublessee or

the lessor to property that is occupied exclusively by the lessee or sublessee and

3) Placed in service more than three years after the date the building was first placed in service.

An improvement made by the lessor is qualified leasehold improve-ment property only if the improvement is held by that person. How-ever, there are certain events that do not cause qualified leasehold improvements made by the lessor to lose their status (for example, death, Section 1031 exchanges, etc.). [IRC §168(e)(6)(B)]

Special (Bonus) Depreciation Expired Provision Alert: Unless Congress extends it, special depreciation is not available for assets placed in service after 2014 (2015 for certain long production period property and aircraft). This discussion is retained in the event Congress extends special depreciation to assets placed in service after 2014.For most qualifying assets placed in service in 2014, the special (bonus) depreciation rate is 50%. Only new (not used) assets qualify for special depreciation. Assets with a MACRS recovery period of 20 years or less, computer software (unless acquired in connection with buying an entire business) and qualified leasehold improvements qualify. Qualified restaurant property (see Qualified restaurant property in the previous column) is not eligible for the special depreciation allowance [IRC §168(e)(7)(B)]. Exception: Qualified restaurant property that also meets the definition of a qualified leasehold improvement is eligible for special depreciation.

Section 179 Expense Expired Provision Alert: The treatment of qualified restaurant property and qualified leasehold improvement property as Section 179 property expired for tax years beginning after 2014. Unless Congress extends this provision, it will not be available for assets placed in service in a tax year beginning after 2014. This discus-sion is retained in the event the provision is extended to tax years beginning after 2014. Qualified leasehold improvement property and qualified restaurant property placed in service in tax years 2010–2014 are eligible for Section 179 expensing, subject to a $250,000 limit that applies to all qualified real property.

Amortizing IntangiblesA significant portion of the restaurant industry is comprised of franchised restaurants. The acquisition of a franchise is governed by Section 197 and therefore the cost of a franchise is amortized ratably over 15 years. The 15-year amortization period applies regardless of the actual useful life of the Section 197 intangible. Franchise renewals must also be amortized over 15 years. For purposes of Section 197, a franchise is defined as the right to distribute, sell or provide goods, services or facilities within a specified area.

Example:InJanuary2010,LittleRestaurantpurchasesanexclusivefranchisefromBigRestaurants, Inc. tooperate inAnytown,Texas, for fiveyears forthe sum of $100,000. The $100,000 franchise fee must be amortized over 15years.InJanuary2015,LittleRestaurantrenewsitsfranchiseagreementwithBigRestaurants,Inc.forfiveadditionalyearsatacostof$150,000.Theoriginal $100,000 cannot be written off in 2015; instead, it will continue to be amortized over the 15-year period that began in January 2010. The $150,000 renewal fee will be amortized over a 15-year period beginning in January 2015.

Note: Liquor licenses are also governed by Section 197 and therefore amortizable over 15 years. [IRC §197(d)(1)(D)]

MACRS Recovery PeriodsWhen a restaurant is acquired or built, some of the property may be eligible for five or seven year recovery periods. The IRS issued an IRS Field Directive that provides guidance to agents auditing cost segregation issues in the restaurant industry. See an excerpt of this IRS document in the Guide to Assets Used in the Restaurant Industry table on Page 9-20 for Section 1245 property qualifying for shorter recovery periods. See Tab 7 in the Depreciation Quick-finder® Handbook for the entire Table reproduced and discussion of cost segregation studies.

2015

2015

2015 Tax Year | Individuals—Special Tax Situations Quickfinder® Handbook 9-19Replacement Page 1/2016Restaurant Owners

(and their dependents) may be subject to an employer shared responsibility payment. This could occur if at least one of their full-time employees receives a premium tax credit for purchasing individual coverage on one of the Affordable Insurance Exchanges (also called a Health Insurance Marketplace). (IRC §4980H) Note: Employers with fewer than 50 full-time equivalent employees and who provide health insurance to their employees may qualify for a tax credit. See Small Employer Health Insurance Credit in the next column.

Form 1099-K reporTinG Payment settlement entities must report debit and credit card sales to the IRS and merchants receiving payments. These payments are reported on Form 1099-K. A payment settlement entity is a bank or other organization that has the contractual obligation to make payment to participating payees in settlement of payment card transactions or third party network transactions. A participating payee is anyone who accepts a pay-ment card (or account number associated with a card) as payment or accepts payments from a third party settlement organization in settlement of a third party network transaction. æ Practice Tip: Because many restaurants accept debit and credit cards, it is likely that they will receive one or more Form 1099-K. The amount reported to the payee and the IRS is the total reportable payment card/third-party net-work transactions for the year, without any adjustments for credits, discounts, refunded amounts or any other amounts. It could also include tips added to the total by customers. The amount reported on Form 1099-K is not reported on a specific line on the restaurant’s tax return. However, any taxable amount should be included in the proper line on the return. The IRS does not match amounts reported on the Form 1099-K to the taxpayer’s return. However, it could use the information reported on the Form 1099-K to identify potential under-reported income. So, taxpayers who receive Form 1099-K reporting information they believe is incorrect should contact the issuer to obtain a corrected Form 1099-K.

Tax CrediTs

Work Opportunity Tax Credit (WOTC)To be eligible for the WOTC, a new employee must be certified as a member of a targeted group by a state workforce agency (SWA). For individuals hired in 2014, only wages paid to certain target groups including qualified veterans and long-term family as-sistance recipients are eligible for the credit. The credit is claimed on Form 5884.

Credit for Employer Social Security and Medicare Taxes Paid on Certain Employee TipsRestaurant employers are allowed a credit (claimed on Form 8846) for the Social Security and Medicare (FICA) taxes they pay on their employees’ tip income. However, no credit is given to the

extent the tips are needed to bring an employee’s compensation up to $5.15 per hour. (IRC §45B)

Example: An employee is paid $3.75 per hour and tips of $1.40 per hour were applied to reach $5.15. The $1.40 per hour in tips cannot be used towards the credit. If, however, the employee was paid an amount equal to or more than $5.15 per hour without including tips, then the credit is computed on all reported tips.

Other rules:•Onlytipsreceivedatestablishmentswheretippingisacommon

practice qualify for the credit.•Nodeductionisallowedforanyamountsusedincomputingthe

credit.•Sincethecreditispartofthegeneralbusinesscredit,anyunused

credits can be carried back one year and forward 20 years.

Example: Tres Bon Chow offers both on-premises dining and take-out service, and encourages customers to tip employees and delivery personnel. During the year, Tres Bon Chow employees received $60,000 in tips from customers eating at the restaurant and $38,000 in tips from the delivery of food. Since tipping is customary at the establishment, both the tips from customers dining at the restaurant and the tips from food deliveries are included in the credit calculation.

Small Employer Health Insurance CreditQualified small employers that purchase health insurance cover-age for their employees are eligible for a tax credit (IRC §45R). The credit (claimed on Form 8941) is a specified general business credit, and is available to use against regular tax and AMT. Any unused credit can be carried back one year (but not before 2010) and carried forward 20 years.Amount of the credit. The credit generally is only available for premiums paid on behalf of employees enrolled in a qualified health plan offered through a Small Business Health Options Program (SHOP) Marketplace. The credit equals 50% of of the lesser of (1) premiums paid or (2) the amount that would have been contributed for employees if the premium equaled the small business bench-mark premium for the employer’s state. The credit is available to eligible small employers for a consecutive two-year tax credit period. See the Form 8941 instructions for state benchmark premiums. Qualified small employer. Generally, a qualified small employer is an employer that meets all of the following requirements:•Employeesnomorethan25fulltimeequiva-

lent (FTE) employees during a tax year,•Paysaverageannualwagesof$52,000(for2015)orlessper

FTE and •Hasaqualifiedhealth insuranceplanorarrangement thatre-

quires it to pay at least 50% of the premiums on behalf of all employees who enroll in the plan. Note: Although the wage limit is $51,600 for 2015, when cal-culating the credit, FTE wages are rounded down to the nearest $1,000. Therefore, average annual wages of $51,000–$51,999 for 2015 are rounded down to $51,000 and the credit is not completely phased out until average annual wages reach $52,000.

2015

2015 Tax Year | Individuals—Special Tax Situations Quickfinder® Handbook 10-7Replacement Page 1/2016Retailers

Qualified Retail Improvement Property Expired Provision Alert: The treatment of qualified retail improvement property as Section 179 property expired for years beginning after 2014. Unless Congress extends this provision, it will not be available for assets placed in service in a year beginning after 2014. This discussion is retained in the event the provision is extended to years beginning after 2014. Generally, building improvements are depreciated over 39 years. However, qualified retail improvement property qualifies for 15-year, straight-line depreciation [IRC §168(e)(3)(E)(ix)]. Qualified retail improvement property is any improvement to an interior por-tion of a building that is nonresidential real property that is placed in service after 2008 and before 2015 if: (1) that portion was open to the general public and is used in the retail trade or business of selling tangible personal property to the general public, and (2) that improvement is placed in service more than three years after the date the building is first placed in service. [IRC §168(e)(8)(A)]Qualified retail improvement property is not eligible for special depreciation, and the following improvements are not included: (1) the enlargement of the building, (2) any elevator or escalator, (3) any structural component benefitting a common area or (4) the internal structural framework of the building. [IRC §168(e)(8)(C)]For years beginning in 2010–2014, qualified retail improvement property is eligible for Section 179 expensing [IRC §179(f)]. The Section 179 election for this type of property is limited to $250,000 per year. Any such Section 179 deduction unused by the end of 2014 is not carried forward to 2015, but treated as an asset placed in service in the 2014 tax year. Disallowed Section 179 expense is allocated proportionately between qualified real property and ordinary Section 179 property. Upon sale of the property, any al-lowed Section 179 deduction that must be recaptured is treated as Section 1245 property and is ineligible for any lower tax rate allowed to Section 1250 property. (Notice 2013-59)

Gas Stations and Convenience StoresBuildings and land improvements used primarily in the marketing of petroleum and petroleum products are classified as 15-year property under Revenue Procedure 87-56 (Asset Class 57.1). So,

traditional gasoline service station buildings (that is, no conve-nience store attached) and related land improvements, including billboards and car washes, qualify as 15-year property.Underground storage tanks, fuel dispensing pumps and other automobile service equipment are typically considered personal property and assigned a five-year recovery period under Revenue Procedure 87-56 (Asset Class 57.0).N Observation: A service station building that is movable per-sonal property is property used in the retail business and assigned a five-year recovery (Asset Class 57.0). Generally, only smaller structures (such as kiosks) will qualify. The critical factors are whether the structure is easily movable and constructed in a man-ner that reflects anticipation of the structure having to be moved. Even if there is no plan to move a modular structure, it is still assigned a five-year recovery period. Retail motor fuels outlet. Depreciable real property that is a retail motor fuels outlet is 15-year property [IRC §168(e)(3)(E)(iii)]. How-ever, a retail motor fuels outlet is not eligible for the Section 179 deduction since it is Section 1250 property. Note: A building used for a business activity (such as a res-taurant or convenience store) in addition to selling gas (or other petroleum-related products) doesn’t qualify as an asset used primarily in the marketing of petroleum and petroleum products (Asset Class 57.1). Thus, it must be depreciated over 39 years unless it can qualify as a retail motor fuels outlet. (Rev. Proc. 88-22)Real property is a retail motor fuels outlet if it is used to a substantial extent in the retail marketing of petroleum (or petroleum products) and meets any one of the following three tests:•Itis1,400squarefeetorless.•50%ormoreofthegrossrevenuesgeneratedfromtheproperty

are derived from petroleum sales.•50%ormoreof the floorspace in theproperty isdevoted to

petroleum marketing activity.For determining whether a building qualifies as a retail motor fuels outlet, gross revenue includes all excise and sales taxes.

Assets Used in a Retail Business—Five Year Recovery Period (Continued)Per IRS Cost Segregation Audit Techniques Guide

Asset Description

Retail furniture Includes furniture unique to retail stores and distinguishable from office furniture. For example, a high stool in a cosmetic department, a shoe department footstool, a hair salon barber chair, or a bench outside a dressing room.

Ripening rooms Special enclosed equipment boxes used to ripen produce by circulating special gases. The rooms are large boxes with special doors and large airplane-type propellers, which circulate the gases used to ripen the produce. The boxes are housed within a distribution center warehouse. These specialized facilities are considered to be part of the retail distribution equipment because they have a special retail purpose and can not be used for any other purpose. The boxes are not a part of the building structure.

Security systems Electronic article surveillance systems including electronic gates, surveillance cameras, recorders, monitors and related equipment, the primary purpose of which is to minimize merchandise shrinkage due to theft. Also includes teller-style pass-through windows, security booths, and bulletproof enclosures generally located in the cash office and customer service areas.

Signs Interior and exterior signs used for display or theme identity. For example, interior signs to identify departments or exterior signs to display trade names or trade symbols. For pylon signs, includes only sign face.

Sound systems Equipment and apparatus, including wiring, used to provide amplified sound or music. For example, public address by way of paging a customer or background music. Excludes applications linked to fire protection and alarm systems.

Wall coverings Strippable wallpaper that causes no damage to the underlying wall or wall surface.

Walls—interior partitions

Interior walls for merchandise display where the partition can be (1) readily removed and remain in substantially the same condition after removal as before or (2) moved and reused, stored or sold in their entirety.

Window treatments Window treatments such as drapes, curtains, louver, blinds, post construction tinting and interior decorative theme décor which are readily removable.

Note: Many of the assets listed in this table are part of or attached to a building and thus might be incorrectly depreciated over 39 years.

201520162015

11-16 2015 Tax Year | Individuals—Special Tax Situations Quickfinder® Handbook Replacement Page 1/2016 Students—Higher Education

Educ

atio

n Ta

x Inc

entiv

es C

ompa

rison

Cha

rt (2

015)

Amer

ican

Op

portu

nity

Cre

dit

Life

time

Lear

ning

Cre

dit

IRA

W

ithdr

awals

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gs B

ond

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rest

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lusio

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uden

t Loa

n

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rest

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uctio

n

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on an

d Fe

es

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ctio

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utio

n: E

xpire

d1Qu

alifie

d Tu

ition

Pr

ogra

m (Q

TP)

Educ

atio

n Sa

vings

Ac

coun

t (ES

A)

IRC

§25

A25

A72

(t)13

522

122

252

953

0

Tax B

enef

itTa

x cre

dit—

40

% re

funda

ble;2

60%

nonr

efund

able.

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redit

—no

nrefu

ndab

le.10

% ea

rly w

ithdr

awal

pena

lty is

waiv

ed.

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ree i

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st.Ab

ove-

the-lin

e de

ducti

on.

Abov

e-the

-line

dedu

ction

.Ta

x-fre

e ear

nings

(sa

vings

plan

) or t

ax-

free e

duca

tion c

redit

s (p

repa

id pla

n).

Tax-f

ree e

arnin

gs.

2015

Ann

ual

Lim

itsCr

edit u

p to $

2,500

per

stude

nt (1

00%

of fir

st $2

,000 o

f exp

ense

s an

d 25%

of ne

xt $2

,000)

.

Cred

it up t

o $2,0

00 pe

r re

turn (

20%

of up

to

$10,0

00 of

expe

nses

).

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nt of

quali

fying

ex

pens

es.

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nt of

quali

fying

ex

pens

es.

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ction

of up

to

$2,50

0 of in

teres

t paid

on

educ

ation

loan

.

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ction

of up

to

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ualify

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expe

nses

paid.

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educ

tible

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ns lim

ited

to am

ount

nece

ssar

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cove

r qua

lified

ex

pens

es.

$2,00

0 non

dedu

ctible

co

ntribu

tion p

er ch

ild

unde

r age

18 an

d any

ag

e spe

cial-n

eeds

ch

ild.

Quali

fied

Ed

ucat

ion

Ex

pens

es (Q

EE)3

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n and

fees

; bo

oks,

supp

lies a

nd

equip

ment.

4

Tuitio

n and

fees

; bo

oks,

supp

lies a

nd

equip

ment.

5

Tuitio

n and

fees

; bo

oks,

supp

lies a

nd

equip

ment;

4 room

and

boar

d if a

t leas

t half

-tim

e atte

ndan

ce.

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n and

fees

; contribu

tionstoQTP

san

d ESA

s.

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n and

fees

; bo

oks,

supp

lies a

nd

equip

ment;

room

and

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d, tra

nspo

rtatio

n, oth

er ne

cess

ary

expe

nses

.

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n and

fees

; bo

oks,

supp

lies a

nd

equip

ment.

5

Tuitio

n and

fees

; bo

oks,

supp

lies a

nd

equip

ment;

4 room

and

boar

d if a

t leas

t half

-tim

e atte

ndan

ce.

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n and

fees

; bo

oks,

supp

lies a

nd

equip

ment;

4 room

an

d boa

rd if

at lea

st ha

lf-tim

e atte

ndan

ce;

contribu

tionstoQTP

;co

mpute

r and

inter

net

servi

ce (K

–12 o

nly).

QEE

Must

Be F

orTa

xpay

er, sp

ouse

or

depe

nden

t.Ta

xpay

er, sp

ouse

or

depe

nden

t.Ta

xpay

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ouse

, chil

d or

gran

dchil

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xpay

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or

depe

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depe

nden

t.Ta

xpay

er, sp

ouse

or

depe

nden

t.Ac

coun

t ben

eficia

ry.Ac

coun

t ben

eficia

ry.

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fyin

g Ed

ucat

ion

First

four y

ears

of un

derg

radu

ate.

Unde

rgra

duate

and

grad

uate.

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rgra

duate

and

grad

uate.

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rgra

duate

and

grad

uate.

Unde

rgra

duate

and

grad

uate.

Unde

rgra

duate

and

grad

uate.

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rgra

duate

and

grad

uate.

K–12

, und

ergr

adua

te an

d gra

duate

.

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quire

men

tsMu

st be

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at lea

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ree p

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pare

nts ca

n shif

t cre

dit

to stu

dent

by no

t cla

iming

stud

ent a

s a

depe

nden

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for un

limite

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of ye

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or

both

degr

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d no

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gree

prog

rams

; pa

rents

can s

hift c

redit

to

stude

nt by

not

claim

ing st

uden

t as a

de

pend

ent.

Penaltywaiv

edon

IRA

distrib

ution

s up t

o the

am

ount

of qu

alifie

d ex

pens

es fo

r the

year.

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es on

ly to

quali

fied

Serie

s EE

bond

s iss

ued

after

1989

or S

eries

I b

onds

; bon

d own

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must

be at

leas

t 24

year

s old

when

bond

iss

ued.

Loan

mus

t be i

ncur

red

solel

y to p

ay qu

alifie

d ed

ucati

on ex

pens

es of

stu

dent

enro

lled a

t leas

t ha

lf-tim

e in a

degr

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prog

ram.

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er m

ust

be le

gally

oblig

ated t

o re

pay d

ebt.

Not a

llowe

d if e

duca

tion

expe

nses

are d

educ

ted

unde

r ano

ther p

rovis

ion

or ed

ucati

on cr

edit i

s cla

imed

.

Acco

unt o

wner

can

chan

ge be

nefic

iary

or re

claim

fund

s; ca

n ele

ct to

spre

ad gi

ft ov

er fiv

e yea

rs; so

me

states

allow

dedu

ction

to

resid

ents;

bene

ficiar

y ca

n be a

nyon

e.

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ibutio

ns m

ust b

e ma

de by

the o

rigina

l re

turn d

ue da

te; m

ay

alsoc

ontrib

utetoQTP

;ma

ndato

ry dis

tributi

ons

at ag

e 30;

bene

ficiar

y ca

n be a

nyon

e.

2015

Mod

ified

AG

I Pha

se-O

utNo

t allo

wed i

f MAG

I ex

ceed

s:7

MFJ ..

........

........

.......

$ 160

,000 –

180,0

00$ 1

10,00

0 – 13

0,000

N/A

$ 115

,750 –

145,7

50$ 1

30,00

0 – 16

0,000

$ 160

,000

N/A

$ 190

,000 –

220,0

00

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,QW

6 ...80

,000 –

90,0

0055

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65,0

0077

,200 –

92,2

0065

,000 –

80,0

0080

,000

95,00

0 – 11

0,000

MFS .

........

........

.......

DoNotQu

alify

DoNotQu

alify

DoNotQu

alify

DoNotQu

alify

DoNotQu

alify

95,00

0 – 11

0,000

1 Exp

ired

Prov

ision

Aler

t: Th

e tuit

ion an

d fee

s ded

uctio

n exp

ired a

t the e

nd of

2014

. It’s

poss

ible C

ongr

ess w

ill ex

tend i

t to 20

15, b

ut ha

d not

done

so at

the t

ime o

f this

publi

catio

n. 2 E

xcep

tion:

Not r

efund

able

for ce

rtain

child

ren u

nder

age 2

4.3 Qu

alifyinged

ucationalexpensesmustbereducedby

anytax-freesc

holarships

andg

rants

.Thesa

meed

ucationalexpensesca

nnotbeus

edforfigu

ringm

orethano

nebe

nefit.

4 Mus

t be r

equir

ed fo

r enr

ollme

nt or

atten

danc

e at a

n elig

ible e

duca

tiona

l insti

tution

.5 M

ust b

e paid

to th

e elig

ible e

duca

tiona

l insti

tution

as a

cond

ition o

f the s

tuden

t’s en

rollm

ent o

r atte

ndan

ce at

the i

nstitu

tion.

6 Forsaving

sbondinte

restexclu

sion,QW

issu

bjecttothe

same

phase-outrangeas

MFJ.

7 No A

GI ph

ase-

out r

ange

. Up t

o $4,0

00 is

dedu

ctible

if MA

GI do

es no

t exc

eed $

65,00

0 ($1

30,00

0 for

MFJ

). Up

to $2

,000 i

s ded

uctib

le if M

AGI d

oes n

ot ex

ceed

$80,0

00 ($

160,0

00 fo

r MFJ

).

12-22 2015 Tax Year | Individuals—Special Tax Situations Quickfinder® Handbook Replacement Page 1/2016 Other Taxpayers

13) Wardrobe costs. These expenses represent another area of potential deductions for the entertainer. The technical requirements for deductibility are that the wardrobe expense be necessary to the performance of duties and that the cloth-ing would not be suitable for street wear. Although this latter requirement would seem a fairly difficult test to satisfy if one’s chosen profession is not clowning, deductions have been allowed for period clothing, clothes that were worn solely in a production, theatrical costumes and tuxedoes used solely for concerts.

U Caution: Some of the above expenses can be construed to be nondeductible personal expenses. The tax professional and the client should exercise care in documenting that any of the above expenses relate directly to the artiste/athlete’s profession.

Estimated Tax PaymentsMany artistes/athletes have sporadic non-wage income. This makes computing the appropriate amount of estimated tax an is-sue. Care should be taken in determining the most beneficial level of estimated tax payments by working with the exceptions to tax underpayment penalties specified by Section 6654.No prior-year tax liability. No estimated tax payments are re-quired if the taxpayer had no tax liability for the prior tax year, was a U.S. citizen or resident for that entire year and the prior tax year was for a full 12-month period.Using prior-year tax. The taxpayer’s withholding and estimated tax payments should equal 100% of the prior-year tax (110% if the taxpayer’s AGI exceeded $150,000 in the preceding year).90% of current-year tax. The taxpayer’s withholding and esti-mated tax payments should equal at least 90% of the current-year tax. Annualizing income may apply if the taxpayer receives the majority of his income in the latter part of the year.æ Practice Tip: If the taxpayer is employed and determines that his estimated tax is underpaid, he can request the employer to withhold additional amounts toward the end of the year. Since with-holding is treated as occurring ratably throughout the year, this has the effect of reducing or eliminating underpayment penalties that would otherwise have occurred in the earlier quarters of the year.U Caution: Artists/athletes need to consider the impact of the 0.9% additional Medicare tax when computing ES payments.

real esTaTe aGenTs

Statutory NonemployeeQualified real estate agents are one of two categories of statutory nonemployees (see Direct Sellers on Page 3-15) [IRC §3508(a)]. Qualified real estate agents are treated as self-employed for all federal tax purposes, including income and employment taxes regardless of the relationship between the worker and the payer. Qualified real estate agent. To be a qualified agent, the individual must: [Prop. Reg. §31.3508-1(b)]1) Hold a valid current real estate license.2) Be paid substantially (at least 90%) by commis-

sions on sales or other services performed as a real estate agent in connection with the sale of an interest in real property.

3) Have a written agreement with the payer stating the agent will not be treated as an employee for federal tax purposes.

Services performed as a real estate agent in connection with the sale of an interest in real property include the advertising or show-ing of real property, the acquisition of a lease to real property and the recruitment, training or supervision of other real estate persons.

Such services also include appraisal activities in connection with a sale. However, property management activities are not considered services performed as a real estate agent.

Example: SallyBlackworksasarealestateagentforRealtyAssociates.Sallyworks daily and has a stipulated number of office hours each week during which she must be available in the office to handle incoming calls or customers. Sally is a licensed agent paid strictly on a commission basis. Her written contract withRealtyAssociatesstatessheisnotanemployee.Sally meets the requirements for a qualified real estate agent. Accordingly, Sally isan independentcontractor,notanemployee,ofRealtyAssociatesforfederalincometaxwithholding(FITW),FICAandFUTApurposes.RealtyAssociates treats Sally’s compensation as contract labor.

1040 ReportingSchedule C. Since they are treated as independent contractors, qualified real estate agents report their income and deductions on Schedule C of Form 1040. (Pub. 334)Schedule SE. Since they are treated as self-employed for all purposes, qualified real estate agents are also liable for self-employment taxes. Therefore, their net income from Schedule C is carried to Schedule SE.

TeaChers

Educator's Expense Deduction Expired Provision Alert: The educator’s expense deduction is not available after 2014. However, Congress has extended the provision several times so this discussion is retained in the event Congress extends it to 2015. Tax practitio-ners should watch for developments.For 2014, an eligible educator is allowed an above-the-line deduc-tion of up to $250 for classroom expenses paid during the tax year [IRC §62(a)(2)(D)]. Taxpayers who are both eligible educators and filing a joint return are each eligible for the $250 deduction, for a total of $500 on the return. However, neither spouse can deduct more than $250 of his own expenses.Eligible expenses included:•Books.•Supplies(otherthannonathleticsuppliesforcoursesofinstruc-

tion in health or physical education).•Computerequipment(includingrelatedsoftwareandservices).•Other equipment and supplementarymaterials used by the

educator in the classroom.These expenses must be ordinary and necessary employee busi-ness expenses. An ordinary expense is one that is common and accepted in the educational field. A necessary expense is one that is helpful and appropriate for the profession of being an educator. An expense does not have to be required to be considered necessary.Eligible expenses must be reduced by the following amounts:•ExcludableU.S.seriesEEandIsavingsbondinterestfromForm

8815. •Nontaxablequalifiedtuitionprogramearnings.•NontaxableearningsfromCoverdelleducationsavingsaccounts.•Anyreimbursementsreceivedfortheseexpensesthatwerenot

reported in box 1 of the educator’s Form W-2. An eligible educator is:•Teacher,instructor,counselor,principaloraideand•WhoworkedinaK–12school(asdeterminedunderstatelaw)

for at least 900 hours during a school year. [IRC §62(d)(1)(A)]N Observation: The school year is used in determining if an individual meets the 900-hour requirement for defining an eligible educator, whereas the deduction is for expenses paid during the tax

2015

2015 Tax Year | Individuals—Special Tax Situations Quickfinder® Handbook 12-23Replacement Page 1/2016Other Taxpayers

year. Because a school year spans two tax years, an individual who qualifies as an eligible educator for either the 2013–2014 or 2014–2015 school year is eligible for the deduction for the 2014 tax year. If the ordinary and necessary educator expenses are over $250, the excess is deductible on Schedule A as a miscellaneous itemized deduction subject to the 2%-of-AGI floor. Complete Form 2106 for unreimbursed employee business expenses.

Example: Seth, age 25 and single, is a seventh-grade history teacher. Dur-ing 2014, he incurs $300 for supplemental classroom materials and supplies that are not reimbursed by his employer. Seth deducts $250 on line 23 of his 2014 Form 1040.The remaining $50 is deductible on Schedule A as a miscellaneous itemized deduction (subject to the 2%-of-AGI floor).

Personal Educational ExpensesIt’s not uncommon for teachers to incur education expenses related to their job. Education expenses can be claimed, subject to certain limits and requirements, as either:•Educator’sexpensededuction.•Educationcredit.•Work-relatededucationexpense(ScheduleAmiscel-

laneous itemized deduction subject to the 2%-of-AGI floor).

•ScheduleCdeductionifself-employed.Work-related education. An employee’s expenses for work-related education may be deductible, subject to the 2%-of-AGI floor. To be deductible, expenses must be incurred for qualifying education, defined as education that: [Reg. §1.162-5(a)]1) Is required by an employer or the law to keep a present salary,

status or job or 2) Maintains or improves skills required for present work.Generally, the cost of education that qualifies the individual to enter a new line of work are non-deductible. But, teaching and related duties are considered the same general kind of work. Thus, a change of duties in any of the following ways is not considered a change to a new business: [Reg. §1.162-5(b)(3)(i)]1) Elementary school teacher to secondary school teacher. 2) Teacher of one subject, such as mathematics, to teacher of

another subject, such as science. 3) Classroom teacher to guidance counselor. 4) Classroom teacher to school administrator. Current employment required. A taxpayer must be currently employed or otherwise engaged in a trade, business or profes-sion to deduct educational expenses as work-related expenses. However, a taxpayer who temporarily leaves his job to pursue full-time education (and then returns to his job) continues to qualify for the deduction. •TheIRSconsidersasuspensionperiodofoneyearorlesstobe

temporary. (Rev. Rul. 68-591)•TheTaxCourt is generallymore liberal. In one situation, the

court ruled that a school principal who quit his job to enroll in a three-year PhD program (full-time) had only temporarily ceased employment, and thus his educational expenses were deductible. (Picknally, TC Memo 1977-321)

Example #1: Charles, a high school English teacher, is required by state law to take a certain number of college hours (equal to one class) each year to keep his teaching job. Therefore, he takes an English composition class in the spring semester of 2015.Charles can deduct the cost of tuition, books and other related college fees associated with that course because the education is necessary for him to retain his teaching position. Alternately, Charles may be able to claim the Lifetime Learning credit for the education expenses.

Example #2: Phyllis is a high school history teacher. She takes a year leave of absence to obtain her master’s degree in school administration. Upon completion of her master’s program, she plans to return to her school as a vice principal. Although Phyllis is not required by either the law or her employer to get her master’s degree, her educational expenses are still deductible as work-related expenses because they meet the requirement of maintaining or improving her skills for her job and because she will be returning to work in education rather than starting a career in a new trade or business.

Minimum education requirement for teachers. Educa-tional expenses incurred to meet the minimum education requirements for qualification in an individual’s trade or business are not deductible. States or school districts usually set the minimum educational requirements for teachers. The requirement is the college degree or the minimum number of college hours usually required of a person hired for that position. [Reg. §1.162-5(b)(2)(ii)]If there are no requirements, an individual will have met the minimum educational requirements when he becomes a faculty member. A person generally will be considered a faculty member when one or more of the following occurs. •Hehastenure.•Hisyearsofservicecounttowardobtainingtenure.•Hehasavoteinfacultydecisions.•Hisschoolmakescontributionsforhimtoaretirementplanother

than Social Security or a similar program.

Example #1: State law requires the following of beginning secondary school teachers: • Abachelor'sdegree,including10professionaleducationcourses(minimum

job requirement). • Completionofafifthyearoftrainingwithin10yearsfromthedateofhire

(to keep job).If the employing school certifies to the state Department of Education that qualified teachers cannot be found, the school can hire persons with only three yearsofcollegebut,tokeeptheirjobs,theseteachersmustgetabachelor'sdegree and the required professional education courses within three years.Underthesefacts,thebachelor'sdegree,whetherornotit includesthe10professional education courses, is considered the minimum educational requirement for qualification as a teacher in the state. Example #2: Same facts as in Example #1. Allyson has all the required education except the fifth year, so she has met the minimum educational requirements. The fifth year of training is qualifying work-related education unless it is part of a program of study that will qualify her for a new trade or business. Example #3: SamefactsasinExample#1.Allanhasabachelor'sdegreeand only six professional education courses. The additional four education courses can be qualifying work-related education. Although he does not have all the required courses, Allan has already met the minimum educational requirements. Example #4: Same facts as in Example #1. Carol is hired with only three yearsofcollege.Thecoursesshetakesthat leadtoabachelor'sdegree(including those in education) are not qualifying work-related education. They are needed to meet the minimum educational requirements for employment as a teacher.

Certification in a new state. Once a teacher meets the minimum educational requirements for teachers for his state, he is consid-ered to have met the minimum educational requirements in all states. This is true even if additional education is required to be certified in another state. Thus, any additional education needed is qualifying work-related education. (Rev. Rul. 71-58)

2014–2015 or 2015–2016

2015

2015

2015