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Statutory elections:
defined by statute.
Regulatory elections:
defined by regulation. The IRS has greater discretion to permit
late filed regulatory elections.
You may search the U.S. Code for most all the laws of the United
States here:
http://www4.law.cornell.edu/uscode/index.html#TITLES
§1.6012-1(a)(5) Election for a person to
sign a tax return on behalf of his/her spouse
§6013(a) Election to file an initial tax
return for a given year jointly with your spouse
§1(d) Choosing to file an initial tax return
for a given year separately from spouse
§1.6013-2 Election to file a joint return for
a given year after filing separate return
§1.6013-1 Election to file a separate return
for a given year after filing joint return
§761(f)(2) Spouses' Partnership May "Elect Out" of
Partnership Rules
Rev. Proc. 2002-69 Spouses' "Partnership"
has option to be treated as a disregarded entity
§1.761-2(b) Investment Partnership may "Elect Out"
of Subchapter K Partnership Rules
§461 What year to deduct an expense?
§1031 Tax-Deferred Exchanges
§709(b)(1) election to deduct LLC, partnership and Sch
C start-up expenditures
Net Operating Loss (NOL) Carryback /
Carryforward elections
Net Operating Loss (NOL) Helpful Hints
Net Operating Loss (NOL) form 1045 and 1040X
preparation (corporations use 1138, 1139 & 1120X)
Using form 1040X to deal with a CP2000 notification
Statute of Limitations limited to three years,
not six years for traders that report each individual sale
Statute of Limitations limited to three years,
not six years for partners who overstated basis
Rev. Rul. 87-115 regarding tiered partnerships
§754 elections
Capital Loss Carryback /
Carryforward election
Entity Classification Election
S-Corp election: Rev. Proc. 2004-48, 2004-32 I.R.B. 172 (8/9/2004) for
LLC's seeking S-Corp status
S-Corp election: Rev. Proc. 2006-62, 2007-166 I.R.B. (10/9/2007)
late election of S-Corp status
Rev. Proc. 2003-43, 2003-23 I.R.B. 998 (6/9/2003) for corporations or
LLC's seeking S-Corp status
Trader Status "election"
IRS Regs. §1.183-2(b) Trade or
Business
IRS Regs. §1.469-1T(e)(6) Partnership
has non-passive activity
IRS Code §446 General Rule For Methods Of
Accounting
Mark-to-Market Accounting Method §475
Treatment of Mark-to-Market Gains of Electing
Traders (SECA tax)
Treatment of Limited Liability Company members (SECA tax)
IRS Code §475(f) Mark-to-Market
election for taxpayers who have filed at least one federal income tax
return
IRS Code §475(f) Mark-to-Market
elections for newly formed entities that have not filed a tax return
yet
Safe Harbor for Valuation Under
Mark-to-Market Accounting Method
M2M losses are excluded from
Reportable Transactions
IRS Code §481 elections
IRS Code §1256 Mark-to-Market election for
dealers
IRS Code §1256 hedging election
Deadline to Be Extended for Elections
Under Mark-to-Mark Accounting
Extensions of Time to Make Elections
§ 301.9100-1 Extensions of time to make
elections.
§ 301.9100-2 Automatic extensions.
§ 301.9100-3 Other extensions
Interest Expense deduction paid for
Debt-Financed Acquisition of a "trade or business" pass-thru entity
Election to treat debt as not secured by a
qualified residence §163
Election to Capitalize Carrying Costs (property
taxes) §266
Extension for forgotten rental election
Trick to catch-up for forgotten depreciation
after the asset was sold
Fast depreciation under the "Whiteco test"
Does a principal residence converted to residential
rental property still qualify for tax-free treatment?
Worthless Inventory Thor Power Tool Company v.
Commissioner
Underpayment of withholding and estimated
tax payments
Trick to waive penalties for late filing a
partnership tax return
Trick to use when form W-2 is missing - new
IRS/State crackdown starting 2007
§1.6012-1(a)(5) Election for a person
to sign a tax return on behalf of his/her spouse:
Where one spouse is physically unable by reason of disease or injury
to sign a joint return, the other spouse may, with the oral consent of
the one who is incapacitated, sign the incapacitated spouse's name in
the proper place on the return followed by the words "By
................... Husband (or Wife)," and by the signature of the
signing spouse in his own right,
provided that a dated statement signed
by the spouse who is signing the return is attached
to and made a part of the return
stating:
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(i) The name of the return being
filed,
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(ii) The taxable year,
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(iii) The reason for the inability of
the spouse who is incapacitated to sign the return, and
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(iv) That the spouse who is
incapacitated consented to the signing of the return.
The taxpayer and his agent, if any, are responsible for the return as
made and incur liability for the penalties provided for erroneous,
false, or fraudulent returns.
IRS Notice 89-7:
Q.2. Who is responsible for filing a
child's return?
A.2. A child is responsible for filing his or her own return. If for
any reason, such as age, the child is unable to file a return, the
child's parent or guardian is responsible for filing the child's
return on the child's behalf. The parent or guardian should
sign the child's name
on the return in the proper place
followed by:
" By (signature), Parent
(or Guardian) for minor child."
Q.8. Under what circumstances
may the parent or guardian of a child deal with the Internal Revenue
Service concerning a notice, examination, or collection matter
pertaining to the child's return?
A.8. A parent or guardian who signs a return on a child's behalf may
deal with the Service concerning all matters arising in connection
with the return. A parent or guardian who does not sign the child's
return may provide the Service with information concerning the
return and pay the child's tax, but is not entitled to receive
information form or otherwise deal with the Service unless
designated as the child's representative by the child or the person
signing the return on the child's behalf. Such a designation is made
on Form 2848-D, Tax Information Authorization and Declaration of
Representative.
While entitled to receive notices and information concerning the
child's return, a parent or guardian named in Form 2848-D may not
legally bind the child with respect to a tax liability unless
authorized to do so by the state in which the child resides.
§6013(a) Election to file an initial tax return for a given year
jointly with your spouse:
A husband and wife may make a single return jointly of income taxes
even though one of the spouses has neither gross income nor
deductions, except as provided below:
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no joint return shall be made if
either the husband or wife at any time during the taxable year is a
nonresident alien;
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no joint return shall be made if the
husband and wife have different taxable years; except that if such
taxable years begin on the same day and end on different days
because of the death of either or both, then the joint return may be
made with respect to the taxable year of each. The above exception
shall not apply if the surviving spouse remarries before the close
of his taxable year, nor if the taxable year of either spouse is a
fractional part of a year under section 443(a)(1);
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in the case of death of one spouse or
both spouses the joint return with respect to the decedent may be
made only by his executor or administrator; except that in the case
of the death of one spouse the joint return may be made by the
surviving spouse with respect to both himself and the decedent if no
return for the taxable year has been made by the decedent, no
executor or administrator has been appointed, and no executor or
administrator is appointed before the last day prescribed by law for
filing the return of the surviving spouse. If an executor or
administrator of the decedent is appointed after the making of the
joint return by the surviving spouse, the executor or administrator
may disaffirm such joint return by making, within 1 year after the
last day prescribed by law for filing the return of the surviving
spouse, a separate return for the taxable year of the decedent with
respect to which the joint return was made, in which case the return
made by the survivor shall constitute his separate return.
§6013(f)(1) Joint Return Where Individual Is In Missing Status as a
result of service in a combat zone the spouse of such individual is
otherwise entitled to file a joint return for any taxable year which
begins on or before the day which is 2 years after the date designated
under section 112 as the date of termination of combatant activities
in such zone, then such spouse may elect under subsection (a) to file
a joint return for such taxable year.
§6013(f)(2)(A) such election shall be valid even if such individual
died before the beginning of such year, and
§1(d) Choosing to file an initial tax return
for a given year separately from spouse:
1(d) Married Individuals Filing
Separate Returns. --
There is hereby imposed on the taxable income of every married
individual (as defined in section 7703) who does not make a single
return jointly with his spouse under section 6013, a tax as
determined.
§7703(a) General Rule
7703(a)(1) the determination of whether an individual is married shall
be made as of the close of his taxable year; except that if his spouse
dies during his taxable year such determination shall be made as of
the time of such death; and
7703(a)(2) an individual legally separated from his spouse under a
decree of divorce or of separate maintenance shall not be considered
as married.
7703(b) Certain Married Individuals Living Apart
For purposes of those provisions of this title which refer to this
subsection, if--
7703(b)(1) an individual who is married (within the meaning of
subsection (a)) and who files a separate return maintains as his home
a household which constitutes for more than one-half of the taxable
year the principal place of abode of a child (within the meaning of
section 152(f)(1)) with respect to whom such individual is entitled to
a deduction for the taxable year under section 151 (or would be so
entitled but for section 152(e)),
7703(b)(2) such individual furnishes over one-half of the cost of
maintaining such household during the taxable year, and
7703(b)(3) during the last 6 months of the taxable year, such
individual's spouse is not a member of such household, such individual
shall not be considered as married.
Filing Status: Married Filing Separately and Allocation of Deductions
and Expenses
Most married taxpayers can choose whether to file joint returns or
separate returns. Most couples will pay less tax if they file joint
returns, but in some situations they will benefit from filing separate
returns.
A married individual filing a separate return must report on that
return his or her own items of gross income, exemptions, deductions
and credits.54 A married resident of a community property state must
report half of the combined community income and deductions along with
his or her separate income and deductions, unless the husband and wife
live apart at all times during the tax year.55 If a husband and
wife jointly own income-producing property, each must report a share
of the income in proportion to the fractional ownership interest in
the property.
IRS Publication 504, Divorced or Separated Individuals (2002),
includes a chart showing how itemized deductions are allocated when
separate returns are filed in community and noncommunity property
states.
Allowable deductions may be taken by the individual who actually makes
the expenditure.56 However, if the husband and wife maintain a joint
bank account in a common-law jurisdiction, a rebuttable presumption
treats payments of deductible items from the account by one spouse as
though each spouse paid one half of the payment.57 Similarly, in
community property jurisdictions, obligations discharged with
community funds are treated as though one half is paid by each
spouse.58 In addition, if either spouse itemizes deductions, the
standard deduction for the other spouse is zero.59
54 IRS Publication 17, Your Federal
Income Tax, 22 (2001).
55 Code Sec. 66(a); IRS Publication 555, Community Property, 4
(1999).
56 A.L. Zeeman v US, CA-2, 68-1 USTC ¶9406, 395 F2d 861; A.E. Calvin
v US, DC Colo., 65-1 USTC ¶9112, 235 FSupp 594, aff'd, CA-10, 66-1
USTC ¶9108, 354 F2d 202.
57 Rev. Rul. 59-66, 1959-1 CB 60.
58 Rev. Rul. 55-479, 1955-2 CB 57; Commr v D. Newcombe, 10 TCM 152,
Dec. 18,140(M) (1951), aff'd, CA-9, 53-1 USTC ¶9241, 203 F2d 128;
M.V. Godchaux v US, DC La., 52-1 USTC ¶9183, 102 FSupp 266, appeal
dism'd, CA-5, 53-1 USTC ¶9375.
59 Code Sec. 63(c)(6)(A).
Filing Status: When Married Taxpayers Should File Separate Returns
Married couples usually have a lower tax liability if they file a
joint return than if they file separately because of the tax rates and
other provisions which are generally more generous to married
individuals filing joint returns. However, circumstances may be such
that one spouse does not want to incur the potential liability for tax
on a joint return and would therefore rather file a separate return
even though the resulting tax liability may be higher.
Comment
Professor Dennis Calfee and Professor
David Hudson, Holland Law Center, University of Florida, Gainesville,
FL note that: There are a few, somewhat unusual situations when a
married couple might have a lower combined tax liability by filing
separate returns rather than by filing a joint return. When these fact
patterns appear, computations of tax liability should be made under
both the married filing separate returns rules and the married filing
jointly provisions so that a comparison can be made.
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Miscellaneous Itemized Deductions
Miscellaneous
itemized deductions are allowed only to the extent they exceed 2
percent of an individual's adjusted gross income.84 Thus, if one
spouse has a large amount of miscellaneous itemized deductions and a
low adjusted gross income, while the other spouse has low
miscellaneous itemized deductions and a high adjusted gross income,
separate returns may result in lower combined tax liability. If one
spouse itemizes deductions, however, the standard deduction for the
other spouse is zero.85
Example
Husband and Wife has adjusted
gross income of $100,000 and no miscellaneous deductions. Husband
has $10,000 of gross income and $2,200 miscellaneous itemized
deductions. If they file a joint return, no miscellaneous deductions
would be allowed, because 2 percent of $110,000 combined adjusted
gross income is $2,200. If separate returns are filed, Husband would
be allowed to deduct $2,000 of the miscellaneous itemized
deductions.
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Personal Casualty Gains and Losses
The excess of
personal casualty losses over personal casualty gains in a tax year
is deductible only to the extent the excess is greater than 10
percent of adjusted gross income.86 If personal casualty gains
exceed personal casualty losses in a tax year, all the gains and
losses are treated as capital gains and capital losses.87 Thus, if
one spouse has a large personal casualty loss while the other spouse
has a large personal casualty gain in the same tax year, if they
file joint returns the personal casualty gain is offset by the
personal casualty loss. If they file separate returns the loss would
be deducted from ordinary income, while the gain would be taxed at
the rates for capital gains.88
Example
Husband has adjusted gross income of
$100,000 and Wife has adjusted gross income of $10,000, without
including personal casualty gains or losses. Husband has a personal
casualty gain of $8,000. Wife has a personal casualty loss of
$8,000. If they file a joint return, the personal casualty gain is
offset by the personal casualty loss. If they file separate returns,
Husband must include in gross income an additional $8,000 of capital
gain and Wife may deduct $7,000 of the personal casualty loss from
ordinary income.
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Medical Expenses
The deduction for medical expenses is allowed only to the extent the
expenses exceed 7.5 percent of a taxpayer's adjusted gross income.89
Thus, if one spouse has paid a large amount of qualifying medical
expenses while the other spouse has not, it may be advantageous
to file separate returns.
Example
Husband and Wife each have adjusted gross income of $50,000. Wife
pays $10,000 of medical expenses.
Husband does not have any medical expenses for the tax year. If
Husband and Wife file a joint return, only $2,500 of the medical
expenses are deductible. If they file separate returns, Wife may
deduct $6,250 for medical expenses.
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Sales or Exchanges of Business
Property and Involuntary Conversions
Taxpayers treat gains and losses from the sale or exchange of
property used in a trade or business, or from the involuntary
conversion of capital assets held in connection with a trade or
business, as long-term capital gains and losses when recognized
gains in a
current tax year exceed recognized
losses. When the gains do not exceed the losses, the gains and
losses are treated as ordinary.90 Gains or losses from the sale or
exchange of depreciable property, real property held for more than
one year and used in a taxpayer's trade or business, capital assets
held in connection with a trade or business or a transaction entered
into for profit that are compulsorily or involuntarily converted all
result in Section 1231 gain or loss. Thus, if one spouse has
a large gain and the other spouse has a large loss, it may be
advantageous to file separate returns.
Example
Husband has a $20,000 Section 1231 gain and a $10,000 long-term
capital loss from the sale of investment property. Wife has a
$10,000 Section 1231 loss. If Husband and Wife file a joint return,
their aggregate Section 1231 gains
exceed their Section 1231 losses, so the Section 1231 gain is a
long-term capital gain and the Section 1231 loss is a long-term
capital loss. The aggregate long-term capital losses of $20,000 may
be deducted from the $20,000 long-term capital gain, resulting in no
net effect on their taxable income. If they file separate returns,
however, Husband's Section 1231 gain will be treated as long-term
capital gain, while Wife's Section 1231 loss will be treated an
ordinary loss. Husband's net capital gain is $10,000, taxable at
more favorable rates. Wife's $10,000 loss is not subject to the
limitations on the deductibility of capital losses,91 and may be
deducted in full.
84 Code Sec. 67(a).
85 Code Sec. 63(c)(6)(A).
86 Code Sec. 165(h)(2)(A).
87 Code Sec. 165(h)(2)(B).
88 Code Sec. 1(h).
89 Code Sec. 213(a).
90 Code Sec. 1231(a)(1), (2).
91 Code Sec. 1211(b).
Tax Consequences for Married Taxpayers Filing Separate Returns
Most married taxpayers can choose whether to file joint returns or
separate returns. Most couples will pay less tax if they file joint
returns, but in some situations they will benefit from filing separate
returns.
Individuals who are married filing separate returns have smaller
amounts of taxable income taxed at the lower tax rates than do
individuals with any other filing status.60 A number of other
provisions treat taxpayers with this filing status in a manner that is
generally more onerous than treatment of other taxpayers. These
include:
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the basic standard deduction is
lower;61
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the standard deduction is reduced to
zero if the other spouse itemizes deductions;62
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the credit for expenses for household
and dependent care services necessary for gainful employment is
disallowed;63
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the credit for the elderly and the
permanently and totally disabled has a lower initial amount, a lower
adjusted gross income limitation, and is disallowed if the spouses
live together at any time during the tax year;64
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the credit for qualified adoption
expenses is disallowed;65
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the Hope scholarship and lifetime
learning credit are disallowed;66
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the earned income credit is
disallowed;67
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the limitation on the general
business credit may be halved;68
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the threshold for reducing the amount
of otherwise allowable itemized deductions for higher-income
taxpayers is halved;69
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the threshold for including social
security benefits in gross income is reduced to zero if the spouses
live together at any time during the tax year, and the entire amount
of benefits is subject to inclusion at the higher 85-percent
level;70
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the amount that can be excluded under
the exclusion for gain on the sale of a principal residence is the
lower amount generally available to single taxpayers, and one
spouse's ownership and use are not attributed to the other spouse,
as they are if a joint return is filed;71
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the amount which may be excluded from
gross income under dependent care assistance programs is halved;72
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the exclusion from gross income
provided for the proceeds of the redemption of U.S. savings bonds
which are used to pay higher education tuition and fees is
disallowed;73
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the phaseout of deductions for
personal exemptions for higher-income taxpayers begins with a lower
threshold amount, and phases out more rapidly;74
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the amount of acquisition
indebtedness and home equity indebtedness which is deductible
qualified residence interest is limited;75
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the limitation on the amount of
deductible losses in insolvent financial institutions which may be
treated as an ordinary loss is halved;76
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for purposes of the election to
expense certain depreciable business assets, the two spouses are
treated as one taxpayer in applying the dollar limitation and the
reduction in the amount of the limitation;77
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the dollar limitation on the
deduction and/or amortization of reforestation expenditures is
halved;78
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the deduction for student loan
interest is not allowed;79
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the exception to the passive activity
losses and credits limitation for certain real estate activities is
restricted and is eliminated if the spouses live together at any
time during the tax year;80
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the amount of capital losses which
may be offset by ordinary income is halved ;81
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the threshold amounts for applying
the limitations on the use of the preceding year's tax liability in
computing the amount of required installments of payment of tax to
avoid the penalty for underpayment are affected;82 and
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tax tables are adjusted for inflation
by rounding to the nearest $25, rather than to the nearest $50.83
60 Rev. Proc. 91-65, 1991-2 CB 867.
61 Code Sec. 63(c)(2)(D).
62 Code Sec. 63(c)(6)(A).
63 Code Sec. 21(e)(2).
64 Code Sec. 22(c)(2)(A)(iii), (d)(3), (e)(1).
65 Code Sec. 23(f)(1).
66 Code Sec. 25A(g)(6).
67 Code Sec. 32(d).
68 Code Sec. 38(c)(2)(A).
69 Code Sec. 68(b)(1); Code Sec. 68(f), (g), as added by the
Economic Growth and Tax Relief Reconciliation Act of 2001, P.L.
107-16, Act §103(a) (June 7, 2001).
70 Code Sec. 86.
71 Code Sec. 121.
72 Code Sec. 129(a)(2)(A).
73 Code Sec. 135(d)(2).
74 Code Sec. 151(d)(3)(A) through (D); Code Sec. 151(d)(3)(E), (F),
as added by the Economic Growth and Tax Relief Reconciliation Act of
2001, P.L. 107-16, Act §102(a) (June 7, 2001).
75 Code Sec. 163(h)(3)(B)(ii), (C)(ii).
76 Code Sec. 165(l)(5)(B)(ii).
77 Code Sec. 179(b)(4).
78 Code Sec. 194(b)(1), as amended by the American Jobs Creation Act
of 2004, P.L. 108-357, Act §322(a) (October 22, 2004).
79 Code Sec. 221(b)(2).
80 Code Sec. 469(i)(5).
81 Code Sec. 1211(b)(1).
82 Code Sec. 6654(d)(1)(C)(ii).
83 Code Sec. 1(f)(6)(B).
§1.6013-2 Election to file a joint return for a given year after
filing separate return:
Where an individual has filed a separate return for a taxable year for
which a joint return could have been made by him and his spouse under
section 6013(a), and the time prescribed by law for filing the return
for such taxable year has expired, such individual and his spouse may,
under conditions hereinafter set forth, make a joint return for such
taxable year.
§1.6013-2(b) Limitations with respect to making of election.
A joint return shall not be made
under section 6013(b)(1) with
respect to a taxable year:
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After the expiration of three years
from the last day prescribed
by law for filing the return for such taxable year determined
without regard to any extension of time granted to either spouse; or
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After there has been mailed to either
spouse, with respect to such taxable year, a notice of deficiency
under section 6212, if the spouse, as to such notice, files a
petition with the Tax Court of the United States within the time
prescribed in section 6213; or
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After either spouse has commenced a
suit in any court for the recovery of any part of the tax for such
taxable year; or
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After either spouse has entered into
a closing agreement under section 7121 with respect to such taxable
year, or after any civil or criminal case arising against either
spouse with respect to such taxable year has been compromised under
section 7122.
§1.6013-1 Election to file a separate return for a given year after
filing joint return:
Where a couple files a joint return for
a taxable year, they cannot later file separate returns after the last
date prescribed for filing the return.
On the other hand, where a couple files separate returns, they may
later change their minds and file a joint return, provided it is not
filed after any of the following events:
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The expiration of three years from
the last day for filing the return.
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The mailing to either spouse of a
notice of deficiency if the spouse files a timely petition with the
Tax Court.
1.6013-1(a)(1) For any taxable year with respect to which a joint
return has been filed, separate
returns shall not be made by the spouses after the time for filing the
return of either has expired.
See, however, paragraph (d)(5) of this section for the right of an
executor to file a late separate return for a deceased spouse and
thereby disaffirm a timely joint return made by the surviving spouse.
1.6013-1(a)(2) A joint return of a husband and wife (if not made by an
agent of one or both spouses) shall be signed by both spouses. The
provisions of paragraph (a)(5) of § 1.6012-1, relating to returns made
by agents, shall apply where one spouse signs a return as agent for
the other, or where a third party signs a return as agent for one or
both spouses.
1.6013-1(d)(5) If the surviving
spouse makes the joint return provided for in subparagraph (3) of this
paragraph and thereafter an executor or administrator of the decedent
is appointed, the executor or administrator may disaffirm such joint
return. This disaffirmance, in order to be effective, must be made
within one year after the last day prescribed by law for filing the
return of the surviving spouse (including any extension of time for
filing such return) and must be made in the form of a separate return
for the taxable year of the decedent with respect to which the joint
return was made. In the event of such proper disaffirmance the return
made by the survivor shall constitute his separate return, that is,
the joint return made by him shall be treated as his return and the
tax thereon shall be computed by excluding all items properly
includible in the return of the deceased spouse. The separate return
made by the executor or administrator shall constitute the return of
the deceased spouse for the taxable year.
§761(f)(2)
Spouses' Partnership May "Elect Out" of Partnership Rules:
For tax years beginning after
Dec. 31, 2006, a "qualified joint venture" that is conducted by a
husband and wife who file a joint return for the tax year - may be
elected out of and not treated as a partnership for tax purposes.
http://www.irs.gov/pub/irs-pdf/i1040sc.pdf
http://www.irs.gov/pub/irs-prior/i1040sc--2007.pdf
http://www.irs.gov/pub/irs-pdf/i1040c_06.pdf
Husband-wife business. Beginning in 2007, you and your spouse, if you
are filing married filing jointly, may be able to make a joint
election to be taxed as a qualified joint venture instead of a
partnership.
Husband-wife business. If you and your spouse jointly own and operate
a business and share in the profits and losses, you are partners in a
partnership, whether or not you have a formal partnership agreement.
Do not use Schedule C or C-EZ. Instead, file Form 1065. See Pub. 541
for more details.
Exception - Qualified joint venture. If you and your spouse materially
participate (see Material participation beginning on page C-2) as the
only members of a jointly owned and operated business, and you file a
joint return for the tax year, you can make a joint election to be
taxed as a qualified joint venture instead of a partnership. To make
this election, you must divide all items of income, gain, loss,
deduction, and credit between you and your spouse in accordance with
your respective interests in the venture. Each of you must file a
separate Schedule C or C-EZ. On each line of your separate Schedule C
or C-EZ, you must enter your share of the applicable income,
deduction, or loss.
As long as you remain qualified, your election cannot be revoked
without IRS consent.
Rev. Proc. 2002-69 Spouses' "Partnership" has option to be treated
as a disregarded entity - when they reside in a Community Property
State:
Generally for tax years beginning after
Dec. 31, 2002, a "qualified entity" owned by a husband and wife in a
community property state may be
treated as a single Schedule C and not treated as a partnership for tax purposes
at the discretion of the taxpayers.
http://www.irs.gov/pub/irs-prior/i1040sc--2003.pdf
§1.761-2(b) Investment Partnership may "Elect Out" of Subchapter
K Partnership Rules:
A "qualified investment
partnership" - may be elected out of and not treated as a partnership
for tax purposes, as follows:
Pursuant to Internal Revenue Code §761 all the members of ABC
Associates elect to exclude the organization from the provisions of
Subchapter K of the Internal Revenue Code. This election shall be
effective beginning with the tax year ending December 31, ______. In
connection with this election the members of ABC Associates represent
the following:
1) ABC Associates is located at
100 Co-Ownership Road, Rockville, Maryland 20852. A copy of the
operating agreement is
available at that location.
2) ABC Associates qualifies for
this election as an investing partnership that satisfies the
requirements of Regulation §1.761-2(a)(1) & (2).
3) The members of ABC
Associates are:
(a) Mr. W. Smith ###-##-####
100 Co-Ownership Road
Rockville, Maryland 20852
(b) Ms. J. Jones ###-##-####
102 Co-Ownership Road
Rockville, Maryland 20852
§461
What year to deduct an expense?:
see:
The 2˝ month rule:
Regs §1.404(b)-1T A-2(b)(1) regarding accrual of deferred
compensation
The 3˝ month rule:
Regs §1.461-4(d)(6)(ii)
regarding prepaid services
The 8˝ month rule:
Regs §1.461-5(b)(1)(i)
regarding accrual of reoccurring items
The 3˝ month rule:
Regs §1.461-4(d)(6)(ii) A taxpayer is permitted to treat services or
property as provided to the taxpayer as the taxpayer makes payment to
the person providing the services or property (as defined in paragraph
(g)(1)(ii) of this section), if the taxpayer can reasonably expect the
person to provide the services or property within 3-1/2 months
after the date of payment.
The 8˝ month "recurring
item" rule:
Under the recurring item exception, a liability is treated as incurred
for a taxable year if --
1.461-5(b)(1)(i) As of the end
of that taxable year, all events have occurred that establish the fact
of the liability and the amount of the liability can be determined
with reasonable accuracy;
(ii) Economic performance with
respect to the liability occurs on or before the earlier of
(ii)(A) The date the taxpayer
files a timely (including extensions) return for that taxable year; or
(ii)(B) The 15th day of the
9th calendar month after the close of that taxable year;
(iii) The liability is
recurring in nature; and
(iv) Either
(iv)(A) The amount of the
liability is not material; or
(iv)(B) The accrual of the
liability for that taxable year results in a better matching of the
liability with the income to which it relates than would result from
accruing the liability for the taxable year in which economic
performance occurs.
From IRS Publication 538
Under an accrual method of
accounting, you generally deduct or capitalize a business expense when
both the following apply.
-
The all-events test has been met. The
test is met when:
-
All events have occurred that
fix the fact of liability, and
-
The liability can be
determined with reasonable accuracy.
-
Economic performance has occurred.
You generally cannot deduct or capitalize a business expense until
economic performance occurs. If your expense is for property or
services provided to you, or for your use of property, economic
performance occurs as the property or services are provided or the
property is used. If your expense is for property or services you
provide to others, economic performance occurs as you provide the
property or services.
Example. You are a calendar year taxpayer. You buy office supplies in
December 2003. You receive the supplies and the bill in December, but
you pay the bill in January 2004. You can deduct the expense in 2003
because all events have occurred to fix the fact of liability, the
liability can be determined, and economic performance occurred in
2003.
Your office supplies may qualify as a recurring item, discussed later.
If so, you can deduct them in 2003, even if the supplies are not
delivered until 2004 (when economic performance occurs).
Workers' compensation and tort liability. If you are required to make
payments under workers' compensation laws or in satisfaction of any
tort liability, economic performance occurs as you make the payments.
If you are required to make payments to a special designated
settlement fund established by court order for a tort liability,
economic performance occurs as you make the payments.
Taxes. Economic performance generally occurs as estimated income tax,
property taxes, employment taxes, etc. are paid. However, you can
elect to treat taxes as a recurring item, discussed later. You can
also elect to ratably accrue real estate taxes. See chapter 6 of
Publication 535 for information about real estate taxes.
Other liabilities. Other liabilities for which economic performance
occurs as you make payments include liabilities for breach of contract
(to the extent of incidental, consequential, and liquidated damages),
violation of law, rebates and refunds, awards, prizes, jackpots,
insurance, and warranty and service contracts.
Interest. Economic performance occurs with the passage of time (as the
borrower uses, and the lender forgoes use of, the lender's money)
rather than as payments are made.
Compensation for services. Generally, economic performance occurs as
an employee renders service to the employer. However, deductions for
compensation or other benefits paid to an employee in a year
subsequent to economic performance are subject to the rules governing
deferred compensation, deferred benefits, and funded welfare benefit
plans. For information on employee benefit programs, see Publication
15-B, Employer's Tax Guide to Fringe Benefits.
Vacation pay. You can take a current deduction for vacation pay earned
by your employees if you pay it during the year or, if the amount is
vested, within 2 months after the end of the year. If you pay it later
than this, you must deduct it in the year actually paid. An amount is
vested if your right to it cannot be nullified or cancelled.
Exception for recurring items. An exception to the economic
performance rule allows certain recurring items to be treated as
incurred during the tax year even though economic performance has not
occurred. The exception applies if all the following requirements are
met.
-
The all-events test, discussed
earlier, is met.
-
Economic performance occurs by
the earlier of the following dates.
- 8˝ months after the close
of the year.
- The date you file a timely
return (including extensions) for the year.
- The
item is recurring in nature and you
consistently treat similar items as incurred in the tax year in
which the all-events test is met.
-
Either:
-
The item is not material, or
-
Accruing the item in the year in
which the all-events test is met results in a better match against
income than accruing the item in the year of economic performance.
This exception does not apply to workers' compensation or tort
liabilities.
Amended return. You may be able to file an amended return and treat a
liability as incurred under the recurring item exception. You can do
so if economic performance for the liability occurs after you file
your tax return for the year, but within 8 1/2 months after the close
of the tax year.
Recurrence and consistency. To determine whether an item is recurring
and consistently reported, consider the frequency with which the item
and similar items are incurred (or expected to be incurred) and how
you report these items for tax purposes. A new expense or an expense
not incurred every year can be treated as recurring if it is
reasonable to expect that it will be incurred regularly in the future.
Materiality. Factors to consider in determining the materiality of a
recurring item include the size of the item (both in absolute terms
and in relation to your income and other expenses) and the treatment
of the item on your financial statements.
An item considered material for financial statement purposes is also
considered material for tax purposes. However, in certain situations
an immaterial item for financial accounting purposes is treated as
material for purposes of economic performance.
Matching expenses with income. Costs directly associated with the
revenue of a period are properly allocable to that period. To
determine whether the accrual of an expense in a particular year
results in a better match with the income to which it relates,
generally accepted accounting principles are an important factor. For
example, if you report sales income in the year of sale, but you do
not ship the goods until the following year, the shipping costs are
more properly matched to income in the year of sale than the year the
goods are shipped. Expenses that cannot be practically associated with
income of a particular period, such as advertising costs, should be
assigned to the period the costs are incurred. However, the matching
requirement is considered met for certain types of expenses. These
expenses include taxes, payments under insurance, warranty, and
service contracts, rebates and refunds, and awards, prizes, and
jackpots.
An expense you pay in advance is deductible only in the year to which
it applies, unless the expense qualifies for the "12-month rule."
Under the 12-month rule, a taxpayer is not required to capitalize
amounts paid to create certain rights or benefits for the taxpayer
that do not extend beyond the earlier of the following.
-
12 months after the right or benefit
begins, or
-
The end of the tax year after the tax
year in which payment is made.
If you have not been applying the general rule (an expense paid in
advance is deductible only in the year to which it applies) and/or the
12-month rule to the expenses you paid in advance, you must get IRS
approval before using the general rule and/or the 12-month rule. See
Change in Accounting Method, later, for information on how to get IRS
approval. See Expense paid in advance under Cash Method, earlier, for
examples illustrating the application of the general and 12-month
rules.
Business expenses and interest owed to a related person who uses the
cash method of accounting are not deductible until you make the
payment and the corresponding amount is includible in the related
person's gross income. Determine
the relationship for this rule as of the end of the tax year for which
the expense or interest would otherwise be deductible. If a deduction
is denied, the rule will continue to apply even if your relationship
with the person ends before the expense or interest is includible in
the gross income of that person.
Related persons. For purposes of this rule, the following persons are
related.
-
Members of a family, including only
brothers and sisters (either whole or half), husband and wife,
ancestors, and lineal descendants.
-
Two corporations that are members of
the same controlled group as defined in section 26 USC 267(f).
-
The fiduciaries of two different
trusts, and the fiduciary and beneficiary of two different trusts,
if the same person is the grantor of both trusts.
-
A tax-exempt educational or
charitable organization and a person (if an individual, including
the members of the individual's family) who directly or indirectly
controls such an organization.
-
An individual and a corporation when
the individual owns, directly or indirectly, more than 50% of the
value of the outstanding stock of the corporation.
-
A fiduciary of a trust and a
corporation when the trust or the grantor of the trust owns,
directly or indirectly, more than 50% in value of the outstanding
stock of the corporation.
-
The grantor and fiduciary, and the
fiduciary and beneficiary, of any trust.
-
Any two S corporations if the same
persons own more than 50% in value of the outstanding stock of each
corporation.
-
An S corporation and a corporation
that is not an S corporation if the same persons own more than 50%
in value of the outstanding stock of each corporation.
-
A corporation and a partnership if
the same persons own more than 50% in value of the outstanding stock
of the corporation and more than 50% of the capital or profits
interest in the partnership.
-
A PSC and any employee-owner,
regardless of the amount of stock owned by the employee-owner.
Ownership of stock. To determine whether an individual directly or
indirectly owns any of the outstanding stock of a corporation, the
following rules apply.
-
Stock owned directly or indirectly by
or for a corporation, partnership, estate, or trust is treated as
being owned proportionately by or for its shareholders, partners, or
beneficiaries.
-
An individual is treated as owning
the stock owned directly or indirectly by or for the individual's
family (as defined in item (1) under Related persons ).
-
Any individual owning (other than by
applying rule (2)) any stock in a corporation is treated as owning
the stock owned directly or indirectly
by that individual's partner.
-
To apply rule (1), (2), or (3), stock
constructively owned by a person under rule (1) is treated as
actually owned by that person. But stock constructively owned by an
individual under rule (2) or (3) is not treated as actually owned by
the individual for applying either rule (2) or (3) to make another
person the constructive owner of that stock.
Reallocation of income and deductions. Where it is necessary to
clearly show income or prevent tax evasion, the IRS can reallocate
gross income, deductions, credits, or allowances between two or more
organizations, trades, or businesses owned or controlled directly or
indirectly by the same interests.
If you use an accrual method of accounting and contest an asserted
liability, you can deduct the liability either in the year you pay it
(or transfer money or other property in satisfaction of it) or in the
year you finally settle the contest. However, to take the deduction in
the year of payment or transfer, you must meet certain conditions.
Conditions to be met. You must satisfy each of the following
conditions to take the deduction in the year of payment or transfer.
Liability must be contested. You do not have to start a suit in a
court of law to contest an asserted liability. However, you must deny
its validity or accuracy by a positive act. A written protest included
with payment of an asserted liability is enough to start a contest.
Lodging a protest in accordance with local law is also enough to
contest an asserted liability for taxes. You do not have to deny the
validity or accuracy of an asserted liability in writing if you can
show by all the facts and circumstances that you have asserted and
contested the liability.
Contest must exist. The contest for the asserted liability must exist
after the time of the transfer. If you make payment after the contest
is settled, you must accrue the liability in the year in which the
contest is settled.
Example. You are a calendar year taxpayer using an accrual method of
accounting. You had a $500 liability asserted against you in 2000 for
repair work completed that year. You contested the asserted liability
and settled in 2002 for the full $500. You pay the $500 in January
2003. Since you did not make the payment until after the contest was
settled, the liability accrues in 2002 and you can deduct it only in
2002.
Transfer to creditor. You must transfer to the creditor or other
person money or other property to provide for the payment of the
asserted liability. The money or other property transferred must be
beyond your control. If you transfer it to an escrow agent, you have
met this requirement if you give up all authority over the money or
other property. However, buying a bond to guarantee payment of the
asserted liability, making an entry on your books of account,
transferring funds to an account within your control, transferring
your indebtedness or your promise to provide services or property in
the future, or transferring (except to the creditor) your stock or the
stock or indebtedness of a related person will not meet this
requirement.
Liability deductible. The liability must have been deductible in the
year of payment, or in an earlier year when it would have accrued, if
there had been no contest.
Economic performance rule satisfied. You generally cannot deduct
contested liabilities until economic performance occurs. For workers'
compensation or a tort liability, or a liability for breach of
contract (to the extent of incidental, consequential, and liquidated
damages), violation of law, rebates and refunds, awards, prizes,
jackpots, insurance, warranty and service contracts, and taxes,
economic performance occurs as payments are made to the person. The
payment or transfer of money or other property into escrow to contest
an asserted liability is generally not a payment to the claimant that
discharges the liability. This payment does not satisfy the economic
performance test, discussed earlier, except as provided in section 26
USC 468B or the regulations thereunder.
Recovered amounts. An adjustment is usually necessary when you recover
any part of a contested liability. This occurs when you deduct the
liability in the year of payment and recover any part of it in a later
tax year when the contest is settled. Include in gross income in the
year of final settlement the part of the recovered amount that, when
deducted, decreased your tax for any tax year.
§1031 Tax-Deferred
Exchanges:
http://www.1031.org/
§709(b)(1) election to
deduct LLC, partnership and Sch C start-up expenditures:
(also see §195(b) and see §248(a) for corporations)
After October 22, 2004 a new law
allows this election to be made for expenditures of $5,000 or less for
start-up, §248 organizational, syndication and formation costs to be
deducted when it begins business. Otherwise, generally, these
costs are amortized over a 15 year period starting with the month it
begins business.
Prior to October 23, 2004 these costs were usually amortized
straight-line over 60 months.
How to make the election. You elect to deduct the start-up or
organizational costs by claiming the deduction on the income tax
return (filed by the due date including extensions) for the tax year
in which the active trade or business begins. However, if you timely
filed your return for the year without making the election, you can
still make the election by filing an amended return within 6 months of
the due date of the return (excluding extensions). Clearly indicate
the election on your amended return and write "Filed pursuant to section
301.9100-2." File the amended return at the same address you
filed the original return. The election applies when computing taxable
income for the current tax year and all subsequent years.
Start-up costs are costs for creating an active trade or business or
investigating the creation or acquisition of an active trade or
business. Start-up costs include any amounts paid or incurred in
connection with any activity engaged in for profit and for the
production of income in anticipation of the activity becoming an
active trade or business.
Qualifying costs. A start-up cost is amortizable if it meets both the
following tests.
- It is a cost you could
deduct if you paid or incurred it to operate an existing active
trade or business (in the same field as the one you entered into).
- It is a cost you pay or
incur before the day your active trade or business begins.
Start-up costs include costs
for the following items.
- An analysis or survey of
potential markets, products, labor supply, transportation
facilities, etc.
- Advertisements for the
opening of the business.
- Salaries and wages for
employees who are being trained and their instructors.
- Travel and other necessary
costs for securing prospective distributors, suppliers, or
customers.
- Salaries and fees for
executives and consultants, or for similar professional services.
Disposition of business.
If you completely dispose of your business before the end of the
amortization period, you can deduct any remaining deferred start-up
costs. However, you can deduct these deferred start-up costs only to
the extent they qualify as a loss from a business.
A special note about educational seminars attended before you begin
trading:
Education is deductible when it is not part of a program
that will qualify you for a new trade or business. Therefore for
tax deduction purposes it is perhaps best to consider avoiding such
controversy and defer your trader training seminars until after you
have actually begun active trading. The trading needs to be done with
appropriately significant dollars at stake - "paper trading" without
dollars at stake does not necessarily qualify as a legitimate trade or
business.
IRS Publication 17
Maintaining skills vs. qualifying for new job.
Education to maintain or improve skills needed in your present work is
not qualifying education if it will also qualify you for a new
trade or business.
IRS Publication 970
Temporary absence. If you stop working for a year or less in
order to get education to maintain or improve skills needed in your
present work and then return to the same general type of work, your
absence is considered temporary. Education that you get during a
temporary absence is qualifying work-related education if it maintains
or improves skills needed in your present work.
Indefinite absence. If you stop work for more than a year, your
absence from your job is considered indefinite. Education during an
indefinite absence, even if it maintains or improves skills needed in
the work from which you are absent, is considered to qualify you for a
new trade or business. Therefore, it is not qualifying work-related
education.
Net Operating Loss Carryback / Carryforward elections:
Individuals:
Planning stages:
2007 & 2008: Carry back five years (or elect to carry back two years),
carryforward twenty years.
1998, 1999, 2000 and 2003 to present (2006): Carry back two years,
carryforward twenty years.
2001 & 2002: Carry back five years (or elect to carry back two years),
carryforward twenty years.
prior to 1998 Carry back three years, carryforward fifteen years.
Corporations:
Numerous special cases and exemptions exist for:
Losses on Sec 1256 contracts, futures, commodities
Losses of a Real Estate Investment Trust (REIT)
Losses from certain product liabilities and deferred statutory
liabilities (ten year carryback)
Losses from certain Causalities, Thefts & Presidential Declared
Disasters (three year carryback)
Farming Losses (five year carryback)
Certain timber losses (three & five year carrybacks)
Gulf Opportunity (GO) Zone losses (five year carryback)
Losses from a casualty or thief (three year carryback)
Losses from a Presidentially declared disaster for a qualified small
business
Product liability (ten year carryback)
Reclamation of land (ten year carryback for accrual basis taxpayers
three years after an act)
Dismantling of a drilling platform (ten year carryback for accrual
basis taxpayers three years after an act)
Remediation of environmental contamination (ten year carryback for
accrual basis taxpayers three years after an act)
Payment under any workers compensation act (ten year carryback for
accrual basis taxpayers three years after an act)
The election to forgo the carrytback was added by the Tax Reform Act
of 1976. There are two basic requirements for elect to forgo the
carryback: A properly worded election statement and a timing
requirement.
There has been litigation when ambiguous election statements have been
made regarding the Regular Income Tax NOL vs. the Alternative
Minimum Tax (AMT) NOL.
Taxpayer may not make a split election (between regular and AMT NOL)
but the election should refer to both to be valid. Use language
such as "net operating losses"
(Miller v. Comr., 99 F.3d 1042 11th Cir. 1996 Taxpayers' attempt to
waive only carryback of their regular tax NOL rendered election
invalid because attached statement was ambiguous on its face and thus
invalid because taxpayer attempted to split election, rev'g, 104 T.C.
330 1995).
The irrevocable election must be filed no later than the due date
(including extensions) for the filing of the tax return for the
taxable year in which the net operating loss arises see IRC
§172(b)(3). There is much misunderstanding (general ignorance,
or purposefully ignoring of the law) by many tax advisors regarding
this requirement.
Once you choose to waive the carryback period, it is irrevocable. If
you choose to waive the carryback period for more than one NOL, you
must make a separate choice and attach a separate statement for each
NOL year.
CAUTION: If you do not file this statement on time, you cannot waive
the carryback period.
The form 1040 Election to Waive Net Operating Loss Carryback (NOL)
under IRS Code Sec 172(b)(3) has a deadline for filing which is the
due date including extensions of the tax return for the year of the
NOL, which in no event generally would go beyond October 15, 2004 (or
April 15, 2005 if filed pursuant to section 301.9100-2).
§172(b)(3).
The right to choose to forgo the carryback period is lost if a timely election is not made.
e.g., Young
v. Comr., 83 T.C. 831 (1984), aff'd, 783 F.2d 1201 (5th Cir. 1986)
(Statement electing to waive carryback made on an amended return for
1976 did not constitute a timely waiver where amended return was filed
in 1980); Curran v. U.S., 88 AFTR2d 7172 (D. Md. 2001) (Election to
waive carryback of a 1989 net operating loss untimely where the
taxpayer filed the 1989 return more than four years late); Diesel
Performance, Inc. v. Comr., T.C. Memo 1999-302, aff'd in unpub. opin.,
2001-2 USTC ¶50,589 (9th Cir. 2001) (Statement electing to waive
carryback on an amended return for 1992 did not constitute a timely
waiver where amended return was filed in 1994); Menaged v. Comr., T.C.
Memo 1991-079 (Statement of election to carry over unused net
operating loss generated in 1979 made on amended return filed more
than two years after due date of original return was not timely
election to waive carryback period).
When the election is made on an
amended return, the taxpayer must write "Filed pursuant to section
301.9100-2" on the election statement. IRS Pub. 536, Net Operating
Losses (NOLs) for Individuals, Estates, and Trusts. Regs. §301.9100-2(b) authorizes an automatic six-month extension to make a
regulatory election or a statutory election with a due date of the return
including extensions, provided the taxpayer timely filed its return
for the year the election should have been made and the taxpayer takes
corrective action within the six-month extension period.
Regs.
§301.9100-3 provides for
discretionary extensions for regulatory
elections that do not meet the requirements of Regs. §301.9100-2, if
the taxpayer acted reasonably and in good faith and granting relief
will not prejudice the government's interests. PLRs 200124007 and
200123048 involved consolidated groups that inadvertently failed to
file waivers of carryback for consolidated net operating losses on
their tax returns for the loss year. Although §172(b)(3) provides the
general deadline for waiving carryback, Regs. §1.1502-21T(b)(3)(i)
specifically addresses requirements for waiver by consolidated groups.
Treating the elections by the consolidated groups as regulatory
elections, the IRS granted discretionary extensions for making the
election under Regs. §301.9100-3. See also PLRs 200214023 (45-day
extension granted to relinquish carryback); 200209002 (45-day
extension granted to relinquish carryback period).
Absent application
of Regs. §301.9100-2 or Regs. §301.9100-3, the IRS will not grant an
extension of time to elect waiver of carryback. PLRs 9435004, 8549057,
8339056, 8229035; TAMs 8333001, 8107001. Additionally, the IRS may
postpone the deadline for making the election for taxpayers affected
by a Presidentially declared disaster or terroristic or military
action (§7508A) or serving in or in support of the Armed Forces in a
combat zone or qualifying deployment in a contingency operation
(§7508). Rev. Proc. 2004-13, 2004-4 I.R.B. 335.
The general rule provides a two-year carryback period and a 20-year
carryover period; provided, however, that a five-year carryback period
applies for net operating losses for taxable years ending during 2001
or 2002 and is planned again for 2007 & 2008. 264 To provide
flexibility, taxpayers incurring net operating losses may elect to
waive carryback of the losses and carry them
forward for the applicable carryover period. 265
/Footnote/ 264 §172(b)(1)(A), (H). The two-year carryback and 20-year
carryover periods were implemented by the Taxpayer Relief Act of 1997,
P.L. 105-34, §1082(a), effective for tax years beginning after Aug. 5,
1997. The five-year carryback period for net operating losses for
taxable years ending during 2001 or 2002 was implemented by the Job
Creation and Worker Assistance Act of 2002, P.L. 107-147, §102(a).
/Footnote/ 265 The waiver of the two-year carryback period is
discussed at ¶2410.04.C., below. The waiver of the five-year carryback
period is discussed at ¶2410.04.A.2.b., below.
Personal Income Tax Net Operating Losses are carried back using
form 1045. You must file Form
1045 within 1 year after the end of the year in which an NOL, unused
credit, a net section 1256 contracts loss, or claim of right
adjustment arose. Alternatively form 1040X
may be filed before three years from the date the form 1040 was filed.
Corporate Income Tax Net Operating Losses are carried back using
form 1139. The corporation must
file Form 1139 within 12 months of the end of the tax year in which an
NOL, net capital loss, unused credit, or claim of right adjustment
arose. Alternatively form 1120X
may be filed before three years from the date the form 1120 was filed.
http://www.irs.gov/businesses/small/article/0,,id=128495,00.html
Net Operating Loss (NOL)
Helpful Hints
Headliner Volume 98 - August 16, 2004
Tax practitioners can speed up the processing of net operating losses
(NOLs) by avoiding some common errors. Individuals, estates and trusts
may have an NOL if deductions exceed income for the year. Taxpayers
can use an NOL by deducting it from income in another year or years.
If you carry back your NOL, you can use Form 1045, Application for
Tentative Refund, or Form 1040X Amended U. S. Individual Income Tax
Return. Form 1045, is an application for a quick refund, resulting
from a tentative adjustment of tax in a carryback year. Generally,
Form 1045 must be filed after the NOL year tax return was filed, but
not later than one year after the NOL year. Any claims filed more than
one year after the end of the NOL year must be filed on Form 1040X, or
an amended Form 1041, U.S. Income Tax Return for Estates and Trusts.
Here are some common errors that resulted in an NOL rejection during
processing:
Error: Failure to
provide documentation
to support the NOL calculation.
Solution: Review the checklist of "What to Attach" in the Form 1045
instructions. Be sure to include all forms or schedules for items
refigured in the carryback year. Also, provide a copy of any
examination reports if the IRS has previously audited the return.
Error: Failure to separate all items shown on the return and tax
account when an allocation is required because of a change in filing
status or marital status.
Solution: Attach a complete breakdown of each spouse's income; a
detailed capital gain calculation; deductions, including a list of
total Schedule A Itemized Deductions; exemptions; taxable income;
credits; other taxes, including separate Forms 6251, Alternative
Minimum Tax; federal tax withheld; payments; offsets; and refunds. For
information about figuring the NOL carrybacks and carryovers for
married people whose filing status changes for any tax year involved
in figuring an NOL carryback or carryover, see Publication 536, Net
Operating Losses (NOLs) for Individuals, Estates, and Trusts.
Error: Incorrect "before carryback" figures on Form 1045 or Form
1040X.
Solution: "Before carryback" figures are the amounts from the original
filed return. If there have been any adjustments made to the original
tax return amounts, either by the taxpayer or the IRS, use personal
records or order an IRS transcript of the tax account. To order a
transcript, call (800) 829-1040 for Form 1040, U.S. Individual Income
Tax Return, or (800) 829-4933 for business returns, or file Form
4506-T Request for Transcript of Tax Return.
Error: Incorrect use of Table 1. Worksheet for NOL Carryover From 2003
to 2004 (For an NOL Year Before 2003) in Publication 536 instead of
Form 1045, Schedule B, NOL Carryover, to compute absorbed carryback.
Solution: Calculate the total NOL absorbed in each carryback year
using Form 1045, Schedule B. Taxpayer should not use the carryforward
worksheet shown in Publication 536 to calculate the absorbed NOL for
carryback claims. The worksheet is used to figure the amount of an NOL
from a prior year still remaining after applying it to the current
year.
Error: Missing NOL and
alternative tax net operating loss (ATNOL)
calculations.
Solution: For NOL calculations attach Form 1045, Schedule A NOL. For
ATNOL calculations attach the calculation and a Form 6251, Alternative
Minimum Tax. If taxpayer did not file a Form 6251, with the loss year
and/or carryover years' returns, IRS must have a copy of completed
Forms 6251 to determine the total adjustments and preferences for the ATNOL deductions.
Error: Incorrect NOL and ATNOL calculations.
Solution: The NOL calculation on Form 1045, Schedule A and ATNOL
calculations must include all non-business and business capital gains
and losses equal to the net capital gains or losses from Form 1040,
Schedule D Capitol Gains and Losses.
Error: Recalculating charitable contributions based on an NOL
carryback.
Solution: The charitable contributions on Form 1040 Schedule A,
Itemized Deductions, are not changed by an NOL carryback.
Only
carryforward losses (where the loss year occurred before the carryover
year) will affect the adjusted gross income for computing the
percentages for allowable contributions.
Deadline for NOL
carryback elections:
Error: Election to waive carryback
period filed late.
Solution: To make the election to carry an NOL and ATNOL forward
without first carrying it back,
the election must have been made with the original loss year return,
or filed with a Form 1040X within six months of the original due date
(excluding extensions) of the loss year return.
If the election was not timely made, the NOL must be carried back
before being carried forward. Remember
to attach a copy of the timely election
to the return where the NOL is carried forward.
Error: Failure to provide a breakdown of how each NOL changed the tax
figures when combining multiple years' NOL carrybacks on the same
Form1040X.
Solution: If you are carrying over more than one NOL, apply each one
separately, starting with the earliest one to determine your NOL
deduction. Attach a copy of each separate computation to your 1040X.
Error: Combining changes to other income/deductions on a prior year
return that are not related to an NOL carryback adjustment.
Solution: NOLs have different processing dates and statutory
requirements than regular tax changes. Therefore, non-NOL adjustments
must be made on a separate amended return.
For additional information on net operating losses, see Publication
536, Form 1045 and instructions. Forms and publications are available
by download from the IRS Web site, or by calling toll free
1-800-TAX-FORM (1-800-829-3676).
Deadline for NOL
carryback refunds:
NOL carrybacks must be filed
within three years of the original due date of the tax return for the
tax year of the loss being carried back. Otherwise the portion
that must be carried back is in effect lost since any resulting refund
is forfeited as a late filing penalty. Any remaining carryback
losses, that are then being carried forward are reduced by the
portions used up in computing the forfeited refunds.
Net Operating Loss (NOL)
form 1045 and 1040X preparation
Instructions for form 1045:
http://www.irs.gov/pub/irs-pdf/i1045.pdf
What to Attach
Attach copies of the following, if applicable, to Form 1045 for
the year of the loss or credit:
- If you are an individual,
page 1 and 2 of your loss-year Form 1040 and Schedule A, D and J
(Form 1040), if applicable.
- Any Form 4952, Investment
Interest Expense Deduction, attached to your loss-year income tax
return.
- All Schedules K-1 you
received from partnerships, S corporations, estates, or trusts that
contribute to the carryback.
- Any application for
extension of time to file your loss-year income tax return
- All Forms 8271, Investor
Reporting of Tax Shelter Registration Number, attached to your
loss-year income tax return.
- All Form 8886 Reportable
Transaction Disclosure Statement, attached to your loss-year income
tax return.
- Forms 8302. Electronic
Deposit of Tax Refund of $1 Million or More.
- All other forms and
schedules from which the carryback results, such as Schedule C or F
(Form 1040), Form 3800, General Business Credit, Form 6781, Gains
and Losses Form 6781, gains and Losses From Section 1256 Contracts
and Straddles, or Form 8586 Low-Income Housing Credit, and
- All forms and schedules for
items refigured in the carryback year(s), such as Form 3800, Form
6251, Alternative Minimum Tax - Individuals, Form 6781, Form 8586,
From 8844, Empowerment Zone and Renewal Community Employment Credit,
or Form 8884, New York Liberty Zone Business Employee Credit.
Instructions for form 1040X:
http://www.irs.gov/pub/irs-pdf/i1040x.pdf
Net operating loss
(NOL). Attach a computation of your NOL
using Schedule A (Form 1045) and any carryover using Schedule B (Form
1045). A refund based on an NOL should not include a refund of
self-employment tax reported on Form 1040X, line 9. See Pub. 536, Net
Operating Losses (NOLs) for Individuals, Estates, and Trusts, for
details.
Carryback claims.
You must attach copies of the following if Form 1040X is used as a
carryback claim.
- Both pages of Form 1040 and
Schedules A and D, if applicable, for the year in which the loss or
credit originated. Enter "Attachment to Form 1040X - Copy Only - Do
Not Process" at the top of these forms.
- Any Schedules K-1 you
received from any partnership, S corporation, estate, or trust for
the year of the loss or credit that contributed to the loss or
credit carryback.
- Any form or schedule from
which the carryback results, such as Form 3800, Form 6781 or
Schedule C or F.
- Forms or schedule from which
the carryback results, such as Form 6251, Form 3800, or Schedule A.
Using
form 1040X to deal with a CP2000 notification.
CP2000 notices are
sometimes so complicated that the preparation of an amended tax
return, Form 1040X, is the best way to address any errors made on the
original Form 1040. A problem in doing this is that the IRS mail room
upon seeing a 1040X is not letting the CP2000 dept people see it,
rather they reship it away to another dept that is very overworked.
The IRS CP2000 notices dept,
fed up with the slow processing of 1040X's, now requests that you send
them a full photocopy of the 1040X and it's supporting statements with
the CP2000 notice firmly stapled on top of it (the trick is to hide
the 1040X under the CP2000 paperwork). ALSO in red ink across
the top of the page #1 of the 1040X write "CP2000
RESPONSE" Send the package of materials to the address shown on
the CP2000 notice.
Statute of Limitations limited
to three years, not six years for traders that report each individual
sale
A taxpayer overstated
the tax basis (cost) of sales that were made during the year. In
Bakersfield Energy Partners, 128 TC No. 17 6/14/07 the Tax Court decided that
the IRS was not entitled to assess the underpaid tax by using the
special six year look-back statute of limitations that is applicable
when a taxpayer omits more than 25% of gross income pursuant to IR
Code §6501(e). The logic as stated by the court in denying the
IRS the six year statute of limitations was that there was no
"omission" since the sale was actually reported on the tax return (see
IR Code §6501(e)(1)(A)(ii)).
Statute of Limitations limited
to three years, not six years for partners who overstated basis
Partners overstated
their deductible basis on a §754 election by their partnership (husband and wife
partnership). In
Grapeview Imports Ltd v. U.S., No 05-296T Fed. Cl. 7/17/07 the Court decided that
the IRS was not entitled to assess the underpaid tax by using the
special six year look-back statute of limitations that is applicable
when a taxpayer omits more than 25% of gross income pursuant to IR
Code §6501(e)(1)(A). The logic as stated by the court in denying the
IRS the six year statute of limitations was based on US Supreme Court
Colony Inc v. Comr, 357 U.S. 28 1958 and Bakersfield Energy Partners
LP (above) - that there was no
"omission" since the sale was actually reported on the tax return (see IR Code §6501(e)(1)(A)(ii))
Rev. Rul. 87-115 regarding tiered partnerships §754 elections
Rev. Rul. 87-115, 1987-2 C.B. 163
ISSUES
Under section 26 USC 743(b) of
the Internal Revenue Code, does a sale of an interest in an upper-tier
partnership (UTP) result in an adjustment to the basis of the property
of a lower-tier partnership (LTP) in which UTP has an interest if:
-
both UTP and LTP have made an
election under section 26 USC 754?
-
Only UTP has made the election under
section 26 USC 754?
-
only LTP has made the election under
section 26 USC 754?
FACTS
UTP is a partnership in which A,
B, C, and D are equal partners. A, B, C, and D each contributed 30x
dollar interest in partnership capital and surplus. A's share of the
adjusted basis of partnership property is 30x dollars, the sum of A's
interest as a partner in partnership capital and surplus, plus A's
share of partnership liabilities (neither UTP nor LTP have any
liabilities). UTP is an equal partner in LTP, along with X and Y. LTP
was formed by X, Y, and Z, who each contributed 110x dollars of cash
to LTP upon its formation. UTP purchased its interest in LTP from Z
for 80x dollars in a taxable year for which LTP did not have an
election under section 26 USC 754 in effect. UTP, X, and Y each have a
110x dollar interest in partnership capital and surplus.
UTP has an adjusted basis of 120x dollars in its property as follows:
an adjusted basis of 80 dollars in its partnership interest in LTP and
an adjusted basis of 40x dollars in inventory. UTP's partnership
interest in LTP has a fair market value of 120x dollars, and UTP's
inventory has a fair market value of 80x dollars. LTP has only one
asset, a capital asset that is not a section 26 USC 751 asset. LTP's
asset has an adjusted basis of 330x dollars and a fair market value of
360x dollars.
In 1985, A sold A's entire interest in UTP to E for 50x dollars.
SITUATION 1
Both UTP and LTP have valid
section 26 USC 754 elections in effect.
SITUATION 2
UTP has a section 26 USC 754
election in effect, but LTP does not.
SITUATION 3
UTP does not have a section 26
USC 754 election in effect, but LTP does.
LAW AND ANALYSIS
Section 26 USC 742 of the Code
provides that the basis of an interest in a partnership acquired other
than by contribution shall be determined under part II of subchapter O
of chapter 1 (sections 26 USC 1011 through 26 USC 1015).
Section 26 USC 1012 of the Code provides, with certain exceptions,
that the basis of property shall be the cost of such property.
Section 26 USC 754 of the Code provides that if a partnership files an
election, in accordance with regulations prescribed by the Secretary,
the basis of partnership property shall be adjusted, in the case of a
transfer of a partnership interest, in the manner provided in section
26 USC 743(b). Such election shall apply with respect to all transfers
of interests in the partnership during the taxable year with respect
to which such election was filed and all subsequent years.
Section 26 USC 743(a) of the Code provides the general rule that the
basis of partnership property shall not be adjusted as the result of a
transfer of an interest in a partnership by sale or exchange or on the
death of a partner unless the election provided by section 26 USC 754
is in effect with respect to such partnership.
Section 26 USC 743(b) of the Code provides that, in the case of a
transfer of an interest in a partnership by sale or exchange or upon
the death of a partner, a partnership with respect to which the
election provided in section 26 USC 754 is in effect shall (1)
increase the adjusted basis of partnersh |
