us/form/irs/ty2018

loading…

us/form/irs/ty2018 — Axiom

(i1040sca)Instructions for Schedule A (Form 1040), Itemized Deductions (2018)#

(i1040sca)(page-1)Page 1#

Department of the Treasury Internal Revenue Service 2018 Instructions for Schedule A (Rev. February 2020) Itemized Deductions Use Schedule A (Form 1040) to figure your itemized deductions. In most cases, your federal income tax will be less if you take the larger of your itemized deductions or your standard deduction. If you itemize, you can deduct a part of your medical and dental expenses, and amounts you paid for certain taxes, interest, contributions, and other expenses. You can also deduct certain casualty and theft losses. If you and your spouse paid expenses jointly and are filing separate returns for 2018, see Pub. 504 to figure the portion of joint expenses that you can claim as itemiz- ed deductions. Don't include on Schedule A items deducted elsewhere, such as on Form 1040 or Schedule C, C-EZ, E, or F. CAUTION ! Section references are to the Internal Revenue Code unless otherwise noted. Future Developments. For the latest information about developments related to Schedule A (Form 1040) and its in- structions, such as legislation enacted af- ter they were published, go to IRS.gov/ ScheduleA. What's New Retroactive legislation. These instruc- tions have been revised to reflect changes made by the Taxpayer Certainty and Disaster Tax Relief Act of 2019. The 2018 Schedule A (Form 1040) was also revised to reflect changes due to this act. Use these instructions with the most recent version of the 2018 Sched- ule A (Form 1040). Visit IRS.gov/ formspubs and IRS.gov/LatestForms to make sure you have the latest version of forms, instructions, and publications. Mortgage insurance premiums. The deduction for mortgage insurance premi- ums was retroactively extended by the Taxpayer Certainty and Disaster Tax Relief Act of 2019. You may be able to claim the deduction for amounts paid or accrued in 2018. See Line 8d for more information. Qualified charitable contributions. A temporary increase in the adjusted gross income limitation on deducting certain qualified charitable contributions was retroactively extended to payments made in 2018 for relief efforts in certain federally declared disaster areas by the Taxpayer Certainty and Disaster Tax Relief Act of 2019. See Pub. 526 for more information. Charitable contribution deduction. Generally, your charitable contribution deduction must be reduced to the extent you receive a state or local tax credit in return for your contribution. However, certain payments made in 2018 may qualify for safe harbor rules that allow the disallowed amount to be treated as a state or local tax payment. See Notice 2019-12 at IRS.gov/irb/ 2019-27_IRB#NOT-2019-12 for more information. Overall limitation on itemized deduc- tions no longer applies. There is no longer an overall limitation on itemized deductions based on your adjusted gross income; however, there may be other limitations that impact the amount of itemized deductions you can claim on Schedule A. Limitation on the deduction for state and local taxes. You can’t deduct more than $10,000 ($5,000 if married filing separate) of your total state and local taxes, including income taxes (or gener- al sales taxes, if elected instead of in- come taxes), real estate taxes, and per- sonal property taxes. See Line 5 for more information. No deduction for foreign taxes paid for real estate. You can no longer de- duct foreign taxes you paid on real es- tate. Limitation on deduction for home mortgage interest. You may be able to deduct mortgage interest only on the first $750,000 ($375,000 if married fil- ing separately) of indebtedness. Higher limitations apply if you are deducting mortgage interest from indebtedness in- curred on or before December 15, 2017. See Line 8 for more information. No deduction for home equity loan in- terest. No matter when the indebted- ness was incurred, you can no longer de- duct the interest from a loan secured by your home to the extent the loan pro- ceeds weren't used to buy, build, or im- prove your home. See Line 8 for more information. No miscellaneous itemized deductions allowed. You can no longer claim any miscellaneous itemized deductions, in- cluding the deduction for unreimbursed job expenses. Miscellaneous itemized deductions are those deductions that would have been subject to the 2 percent of adjusted gross income limitation. See Line 16, later, for a list of other itemized deductions you can still claim in addi- tion to the ones claimed using lines 1 through 15. Limitation on the deduction for casu- alty and theft losses. You can no lon- ger deduct a personal casualty or theft loss unless the loss is from a federally declared disaster. A-1 Feb 10, 2020 Cat. No. 53061X

(i1040sca)(page-2)Page 2#

Higher limitation threshold for cer- tain charitable contributions. For most gifts by cash or check, the total amount of such contributions that can be deducted is now limited to 60% of your contributions base, instead of 50%. See Pub. 526 for more information. Standard mileage rates. The standard mileage rate allowed for operating ex- penses for a car when you use it for medical reasons increased to 18 cents a mile. The 2018 rate for use of your vehi- cle to do volunteer work for certain charitable organizations remains at 14 cents a mile. Medical and Dental Expenses You can deduct only the part of your medical and dental expenses that ex- ceeds 7.5% of the amount of your adjus- ted gross income on Form 1040, line 7. If you received a distribution from a health savings account or a medical savings account in 2018, see Pub. 969 to figure your deduc- tion. Deceased taxpayer. Certain medical expenses paid out of a deceased taxpay- er's estate can be claimed on the de- ceased taxpayer's final return. See Pub. 502 for details. More information. Pub. 502 discusses the types of expenses you can and can’t deduct. It also explains when you can deduct capital expenses and special care expenses for disabled persons. Examples of Medical and Dental Payments You Can Deduct To the extent you weren't reimbursed, you can deduct what you paid for: • Insurance premiums for medical and dental care, including premiums for qualified long-term care insurance con- tracts as defined in Pub. 502. But see Limit on long-term care premiums you can deduct, later. Reduce the insurance premiums by any self-employed health insurance deduction you claimed on Schedule 1 (Form 1040), line 29. You can't deduct insurance premiums paid with pretax dollars because the premi- ums aren't included in box 1 of your Form(s) W-2. If you are a retired public CAUTION ! safety officer, you can't deduct any pre- miums you paid to the extent they were paid for with a tax-free distribution from your retirement plan. If, during 2018, you were an el- igible trade adjustment assis- tance (TAA) recipient, an alter- native TAA (ATAA) recipient, reemploy- ment TAA (RTAA) recipient, or Pension Benefit Guaranty Corporation (PBGC) payee, you must reduce your insurance premiums by any amounts used to figure the health coverage tax credit. See Line 1, later. • Prescription medicines or insulin. • Acupuncturists, chiropractors, den- tists, eye doctors, medical doctors, occu- pational therapists, osteopathic doctors, physical therapists, podiatrists, psychia- trists, psychoanalysts (medical care on- ly), and psychologists. • Medical examinations, X-ray and laboratory services, insulin treatment, and whirlpool baths your doctor ordered. • Diagnostic tests, such as a full-body scan, pregnancy test, or blood sugar test kit. • Nursing help (including your share of the employment taxes paid). If you paid someone to do both nursing and housework, you can deduct only the cost of the nursing help. • Hospital care (including meals and lodging), clinic costs, and lab fees. • Qualified long-term care services (see Pub. 502). • The supplemental part of Medicare insurance (Medicare B). • The premiums you pay for Medi- care Part D insurance. • A program to stop smoking and for prescription medicines to alleviate nico- tine withdrawal. • A weight-loss program as treat- ment for a specific disease (including obesity) diagnosed by a doctor. • Medical treatment at a center for drug or alcohol addiction. • Medical aids such as eyeglasses, contact lenses, hearing aids, braces, crutches, wheelchairs, and guide dogs, including the cost of maintaining them. • Surgery to improve defective vi- sion, such as laser eye surgery or radial keratotomy. • Lodging expenses (but not meals) while away from home to receive medi- cal care provided by a physician in a hospital or a medical care facility related to a hospital, provided there was no sig- CAUTION ! nificant element of personal pleasure, recreation, or vacation in the travel. Don't deduct more than $50 a night for each person who meets the requirements in Pub. 502 under Lodging. • Ambulance service and other trav- el costs to get medical care. If you used your own car, you can claim what you spent for gas and oil to go to and from the place you received the care; or you can claim 18 cents a mile. Add parking and tolls to the amount you claim under either method. • Cost of breast pumps and supplies that assist lactation. Limit on long-term care premiums you can deduct. The amount you can deduct for qualified long-term care in- surance contracts (as defined in Pub. 502) depends on the age, at the end of 2018, of the person for whom the premi- ums were paid. See the following chart for details. IF the person was, at the end of 2018, age . . . THEN the most you can deduct is . . . . 40 or under $ 420 41–50 $ 780 51–60 $ 1,560 61–70 $ 4,160 71 or older $ 5,200 Examples of Medical and Dental Payments You Can't Deduct • The cost of diet food. • Cosmetic surgery unless it was necessary to improve a deformity related to a congenital abnormality, an injury from an accident or trauma, or a disfig- uring disease. • Life insurance or income protec- tion policies. • The Medicare tax on your wages and tips or the Medicare tax paid as part of the self-employment tax or household employment taxes. If you were age 65 or older but not entitled to social security benefits, you can deduct premi- ums you voluntarily paid for Medicare A coverage. • Nursing care for a healthy baby. But you may be able to take a credit for the amount you paid. See the Instruc- tions for Form 2441. TIP A-2

(i1040sca)(page-3)Page 3#

• Illegal operations or drugs. • Imported drugs not approved by the U.S. Food and Drug Administration (FDA). This includes foreign-made ver- sions of U.S.-approved drugs manufac- tured without FDA approval. • Nonprescription medicines, other than insulin (including nicotine gum and certain nicotine patches). • Travel your doctor told you to take for rest or a change. • Funeral, burial, or cremation costs. Line 1 Medical and Dental Expenses Enter the total of your medical and den- tal expenses, after you reduce these ex- penses by any payments received from insurance or other sources. See Reim- bursements, later. If advance payments of the premium tax credit were made, or you think you may be eligible to claim a premium tax credit, fill out Form 8962 before filling out Schedule A, line 1. See Pub. 502 for how to figure your medical and dental expenses deduction. Don't forget to include insur- ance premiums you paid for medical and dental care. How- ever, if you claimed the self-employed health insurance deduction on Schedule 1 (Form 1040), line 29, reduce the pre- miums by the amount on line 29. If, during 2018, you were an el- igible trade adjustment assis- tance (TAA) recipient, an alter- native TAA (ATAA) recipient, reemploy- ment TAA (RTAA) recipient, or Pension Benefit Guaranty Corporation (PBGC) payee, you must complete Form 8885 before completing Schedule A, line 1. When figuring the amount of insurance premiums you can deduct on Sched- ule A, don’t include any of the following. • Any amounts you included on Form 8885, line 4 or on Form 14095 (The Health Coverage Tax Credit (HCTC) Reimbursement Request Form). • Any qualified health insurance coverage premiums you paid to "U.S. Treasury–HCTC" for eligible coverage months for which you received the bene- fit of the advance monthly payment pro- gram. • Any advance monthly payments your health plan administrator received TIP CAUTION ! from the IRS, as shown on Form 1099-H (Health Coverage Tax Credit (HCTC) Advance Payments). Whose medical and dental expenses can you include? You can include medical and dental bills you paid in 2018 for anyone who was one of the fol- lowing either when the services were provided or when you paid for them. • Yourself and your spouse. • All dependents you claim on your return. • Your child whom you don't claim as a dependent because of the rules for children of divorced or separated pa- rents. See Child of divorced or separa- ted parents in Pub. 502 for more infor- mation. • Any person you could have claim- ed as a dependent on your return except that person received $4,150 or more of gross income or filed a joint return. • Any person you could have claim- ed as a dependent except that you, or your spouse if filing jointly, can be claimed as a dependent on someone else's 2018 return. Example. You provided over half of your mother's support but can't claim her as a dependent because she received wa- ges of $4,150 in 2018. You can include on line 1 any medical and dental expen- ses you paid in 2018 for your mother. Insurance premiums for certain non- dependents. You may have a medical or dental insurance policy that also cov- ers an individual who isn't your depend- ent (for example, a nondependent child under age 27). You can't deduct any pre- miums attributable to this individual, un- less he or she is a person described un- der Whose medical and dental expenses can you include, earlier. However, if you had family coverage when you add- ed this individual to your policy and your premiums didn't increase, you can enter on line 1 the full amount of your medical and dental insurance premiums. See Pub. 502 for more information. Reimbursements. If your insurance company paid the provider directly for part of your expenses, and you paid only the amount that remained, include on line 1 only the amount you paid. If you received a reimbursement in 2018 for medical or dental expenses you paid in 2018, reduce your 2018 expenses by this amount. If you received a reimburse- ment in 2018 for prior year medical or dental expenses, don't reduce your 2018 expenses by this amount. However, if you deducted the expenses in the earlier year and the deduction reduced your tax, you must include the reimbursement in income on Schedule 1 (Form 1040), line 21. See Pub. 502 for details on how to figure the amount to include. Cafeteria plans. You can’t deduct amounts that have already been exclu- ded from your income; so, don’t include on line 1 insurance premiums paid by an employer-sponsored health insurance plan (cafeteria plan) unless the premi- ums are included in box 1 of your Form(s) W-2. Also, don't include any other medical and dental expenses paid by the plan unless the amount paid is in- cluded in box 1 of your Form(s) W-2. Taxes You Paid Taxes You Can't Deduct • Federal income and most excise taxes. • Social security, Medicare, federal unemployment (FUTA), and railroad re- tirement (RRTA) taxes. • Customs duties. • Federal estate and gift taxes. How- ever, see Line 16, later, if you had in- come in respect of a decedent. • Certain state and local taxes, in- cluding tax on gasoline, car inspection fees, assessments for sidewalks or other improvements to your property, tax you paid for someone else, and license fees (for example, marriage, driver's, and pet). • Foreign personal or real property taxes. Line 5 The deduction for state and local taxes is limited to $10,000 ($5,000 if married fil- ing married separately). State and local taxes are the taxes that you include on lines 5a, 5b, and 5c. Include taxes imposed by a U.S. pos- session with your state and local taxes on lines 5a, 5b, and 5c. However, don't include any U.S. possession taxes you paid that are allocable to excluded in- come. You may want to take a credit for U.S. possession tax instead of a deduction. See the instruc- tions for Schedule 3 (Form 1040), line 48, for details. TIP A-3

(i1040sca)(page-4)Page 4#

Line 5a You can elect to deduct state and local general sales taxes instead of state and local in- come taxes. You can't deduct both. State and Local Income Taxes If you don't elect to deduct general sales taxes, include on line 5a the state and lo- cal income taxes listed next. • State and local income taxes with- held from your salary during 2018. Your Form(s) W-2 will show these amounts. Forms W-2G, 1099-G, 1099-R, and 1099-MISC may also show state and lo- cal income taxes withheld. • State and local income taxes paid in 2018 for a prior year, such as taxes paid with your 2017 state or local in- come tax return. Don't include penalties or interest. • State and local estimated tax pay- ments made during 2018, including any part of a prior year refund that you chose to have credited to your 2018 state or lo- cal income taxes. • Mandatory contributions you made to the California, New Jersey, or New York Nonoccupational Disability Bene- fit Fund, Rhode Island Temporary Disa- bility Benefit Fund, or Washington State Supplemental Workmen's Compensation Fund. • Mandatory contributions to the Alaska, California, New Jersey, or Penn- sylvania state unemployment fund. • Mandatory contributions to state family leave programs, such as the New Jersey Family Leave Insurance (FLI) program and the California Paid Family Leave program. Don't reduce your deduction by any: • State or local income tax refund or credit you expect to receive for 2018, or • Refund of, or credit for, prior year state and local income taxes you actually received in 2018. Instead, see the in- structions for Schedule 1 (Form 1040), line 10. State and Local General Sales Taxes If you elect to deduct state and local general sales taxes instead of income taxes, you must check the box on line 5a. To figure your state and local general sales tax deduction, you can use CAUTION ! either your actual expenses or the op- tional sales tax tables. Actual Expenses Generally, you can deduct the actual state and local general sales taxes (in- cluding compensating use taxes) you paid in 2018 if the tax rate was the same as the general sales tax rate. Food, clothing, and medical supplies. Sales taxes on food, clothing, and medi- cal supplies are deductible as a general sales tax even if the tax rate was less than the general sales tax rate. Motor vehicles. Sales taxes on motor vehicles are deductible as a general sales tax even if the tax rate was different than the general sales tax rate. However, if you paid sales tax on a motor vehicle at a rate higher than the general sales tax, you can deduct only the amount of the tax that you would have paid at the gen- eral sales tax rate on that vehicle. In- clude any state and local general sales taxes paid for a leased motor vehicle. Motor vehicles include cars, motor- cycles, motor homes, recreational vehi- cles, sport utility vehicles, trucks, vans, and off-road vehicles. You must keep your actual re- ceipts showing general sales taxes paid to use this method. Trade or business items. Don't include sales taxes paid on items used in your trade or business. Instead, go to the in- structions for the form you are using to report business income and expenses to see if you can deduct these taxes. Refund of general sales taxes. If you received a refund of state or local gener- al sales taxes in 2018 for amounts paid in 2018, reduce your actual 2018 state and local general sales taxes by this amount. If you received a refund of state or local general sales taxes in 2018 for prior year purchases, don't reduce your 2018 state and local general sales taxes by this amount. However, if you deduc- ted your actual state and local general sales taxes in the earlier year and the de- duction reduced your tax, you may have to include the refund in income on Schedule 1 (Form 1040), line 21. See Recoveries in Pub. 525 for details. Optional Sales Tax Tables Instead of using your actual expenses, you can use the 2018 Optional State CAUTION ! Sales Tax Table and the 2018 Optional Local Sales Tax Tables at the end of these instructions to figure your state and local general sales tax deduction. You may also be able to add the state and local general sales taxes paid on cer- tain specified items. To figure your state and local general sales tax deduction using the tables, complete the State and Local General Sales Tax Deduction Worksheet or use the Sales Tax Deduction Calculator at IRS.gov/SalesTax. If your filing status is married filing separately, both you and your spouse elect to deduct sales taxes, and your spouse elects to use the optional sales tax tables, you al- so must use the tables to figure your state and local general sales tax deduc- tion. Instructions for the State and Local General Sales Tax Deduction Worksheet Line 1. If you lived in the same state for all of 2018, enter the applicable amount, based on your 2018 income and family size, from the 2018 Optional State Sales Tax Table for your state. Read down the “At least–But less than” columns for your state and find the line that includes your 2018 income. If mar- ried filing separately, don't include your spouse's income. Note. The family size column refers to the number of dependents listed on page 1 of Form 1040 (and any continua- tion sheets) plus you and, if you are fil- ing a joint return, your spouse. If you are married and not filing a joint return, you can include your spouse in family size only in certain circumstances, which are described in Pub. 501. Income. Your 2018 income is the amount shown on your Form 1040, line 7, plus any nontaxable items, such as the following. • Tax-exempt interest. • Veterans' benefits. • Nontaxable combat pay. • Workers' compensation. • Nontaxable part of social security and railroad retirement benefits. • Nontaxable part of IRA, pension, or annuity distributions. Don't include rollovers. CAUTION ! A-4

(i1040sca)(page-5)Page 5#

• Public assistance payments. State and Local General Sales Tax Deduction Worksheet—Line 5a Keep for Your Records Instead of using this worksheet, you can find your deduction by using the Sales Tax Deduction Calculator at IRS.gov/ SalesTax. See the instructions for line 1 of the worksheet if you: Lived in more than one state during 2018, or Had any nontaxable income in 2018. Before you begin:

1. Enter your state general sales taxes from the 2018 Optional State Sales Tax Table . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. $ Next. If, for all of 2018, you lived only in Connecticut, the District of Columbia, Indiana, Kentucky, Maine, Maryland, Massachusetts, Michigan, New Jersey, or Rhode Island, skip lines 2 through 5, enter -0- on line 6, and go to line 7. Otherwise, go to line 2. 2. Did you live in Alaska, Arizona, Arkansas, Colorado, Georgia, Illinois, Louisiana, Mississippi, Missouri, New York, North Carolina, South Carolina, Tennessee, Utah, or Virginia in 2018? No. Enter -0-. . . . . . . . . . . . . . 2. $ Yes. Enter your base local general sales taxes from the 2018 Optional Local Sales Tax Tables. 3. Did your locality impose a local general sales tax in 2018? Residents of California and Nevada, see the instructions for line 3 of the worksheet. No. Skip lines 3 through 5, enter -0- on line 6, and go to line 7. Yes. Enter your local general sales tax rate, but omit the percentage sign. For example, if your local general sales tax rate was 2.5%, enter 2.5. If your local general sales tax rate changed or you lived in more than one locality in the same state during 2018, see the instructions for line 3 of the worksheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. . 4. Did you enter -0- on line 2? No. Skip lines 4 and 5 and go to line 6. Yes. Enter your state general sales tax rate (shown in the table heading for your state), but omit the percentage sign. For example, if your state general sales tax rate is 6%, enter 6.0 . . . . . . . . . . . . . . . . 4. . 5. Divide line 3 by line 4. Enter the result as a decimal (rounded to at least three places) . . . . . . . . . . . . . . . . 5. . 6. Did you enter -0- on line 2? No. Multiply line 2 by line 3. . . . . . . . . . . . . . . . . . . . . 6. $ Yes. Multiply line 1 by line 5. If you lived in more than one locality in the same state during 2018, see the instructions for line 6 of the worksheet. 7. Enter your state and local general sales taxes paid on specified items, if any. See the instructions for line 7 of the worksheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7. $ 8. Deduction for general sales taxes. Add lines 1, 6, and 7. Enter the result here and the total from all your state and local general sales tax deduction worksheets, if you completed more than one, on Schedule A, line 5a. Be sure to check the box on that line . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8. $ TIP A-5

(i1040sca)(page-6)Page 6#

What if you lived in more than one state? If you lived in more than one state during 2018, use the following steps to figure the amount to put on line 1 of the worksheet. 1. Look up the table amount for each state using the rules stated earlier. (If there is no table for a state, the table amount for that state is considered to be zero.) 2. Multiply the table amount of each state by a fraction, the numerator of which is the number of days you lived in the state during 2018 and the denomina- tor of which is the total number of days in the year (365). 3. If you also lived in a locality dur- ing 2018 that imposed a local general sales tax, complete a separate worksheet for each state you lived in using the pro- rated amount from step (2) for that state on line 1 of its worksheet. Otherwise, combine the prorated table amounts from step (2) and enter the total on line 1 of a single worksheet. Example. You lived in State A from January 1 through August 31, 2018 (243 days), and in State B from September 1 through December 31, 2018 (122 days). The table amount for State A is $500. The table amount for State B is $400. You would figure your state general sales tax as follows. State A: $500 x 243/365 = $333 State B: $400 x 122/365 = 134 Total = $467 If none of the localities in which you lived during 2018 imposed a local gen- eral sales tax, enter $467 on line 1 of your worksheet. Otherwise, complete a separate worksheet for State A and State B. Enter $333 on line 1 of the State A worksheet and $134 on line 1 of the State B worksheet. Line 2. If you checked the “No” box, enter -0- on line 2, and go to line 3. If you checked the “Yes” box and lived in the same locality for all of 2018, enter the applicable amount, based on your 2018 income and family size, from the 2018 Optional Local Sales Tax Tables for your locality. Read down the “At least–But less than” columns for your locality and find the line that includes your 2018 income. See the instructions for line 1 of the worksheet to figure your 2018 income. The family size column refers to the number of dependents listed on page 1 of Form 1040 (and any con- tinuation sheets) plus you and, if you are filing a joint return, your spouse. If you are married and not filing a joint return, you can include your spouse in family size only in certain circumstances, which are described in Pub. 501. What if you lived in more than one locality? If you lived in more than one locality during 2018, look up the table amount for each locality using the rules stated earlier. If there is no table for your locality, the table amount is consid- ered to be zero. Multiply the table amount for each locality you lived in by a fraction. The numerator of the fraction is the number of days you lived in the locality during 2018 and the denomina- tor is the total number of days in the year (365). If you lived in more than one locality in the same state and the local general sales tax rate was the same for each locality, enter the total of the prora- ted table amounts for each locality in that state on line 2. Otherwise, complete a separate worksheet for lines 2 through 6 for each locality and enter each prora- ted table amount on line 2 of the appli- cable worksheet. Example. You lived in Locality 1 from January 1 through August 31, 2018 (243 days), and in Locality 2 from Sep- tember 1 through December 31, 2018 (122 days). The table amount for Locali- ty 1 is $100. The table amount for Lo- cality 2 is $150. You would figure the amount to enter on line 2 as follows. Note that this amount may not equal your local sales tax deduction, which is figured on line 6 of the worksheet. Locality 1: $100 x 243/365 = $ 67 Locality 2: $150 x 122/365 = 50 Total = $117 Line 3. If you lived in California, check the “No” box if your combined state and local general sales tax rate is 7.2500%. Otherwise, check the “Yes” box and in- clude on line 3 only the part of the com- bined rate that is more than 7.2500%. If you lived in Nevada, check the “No” box if your combined state and lo- cal general sales tax rate is 6.8500%. Otherwise, check the “Yes” box and in- clude on line 3 only the part of the com- bined rate that is more than 6.8500%. What if your local general sales tax rate changed during 2018? If you checked the “Yes” box and your local general sales tax rate changed during 2018, figure the rate to enter on line 3 as follows. Multiply each tax rate for the period it was in effect by a fraction. The numerator of the fraction is the number of days the rate was in effect during 2018 and the denominator is the total number of days in the year (365). Enter the total of the prorated tax rates on line 3. Example. Locality 1 imposed a 1% local general sales tax from January 1 through September 30, 2018 (273 days). The rate increased to 1.75% for the peri- od from October 1 through December 31, 2018 (92 days). You would enter “1.189” on line 3, figured as follows. January 1 – September 30: 1.00 x 273/365 = 0.748 October 1 – December 31: 1.75 x 92/365 = 0.441 Total = 1.189 What if you lived in more than one locality in the same state during 2018? Complete a separate worksheet for lines 2 through 6 for each locality in your state if you lived in more than one local- ity in the same state during 2018 and each locality didn't have the same local general sales tax rate. To figure the amount to enter on line 3 of the worksheet for each locality in which you lived (except a locality for which you used the 2018 Optional Local Sales Tax Tables to figure your local general sales tax deduction), multiply the local general sales tax rate by a frac- tion. The numerator of the fraction is the number of days you lived in the locality during 2018 and the denominator is the total number of days in the year (365). Example. You lived in Locality 1 from January 1 through August 31, 2018 (243 days), and in Locality 2 from Sep- tember 1 through December 31, 2018 (122 days). The local general sales tax rate for Locality 1 is 1%. The rate for Locality 2 is 1.75%. You would enter “0.666” on line 3 for the Locality 1 worksheet and “0.585” for the Locality 2 worksheet, figured as follows. A-6

(i1040sca)(page-7)Page 7#

Locality 1: 1.00 x 243/365 = 0.666 Locality 2: 1.75 x 122/365 = 0.585 Line 6. If you lived in more than one locality in the same state during 2018, you should have completed line 1 only on the first worksheet for that state and separate worksheets for lines 2 through 6 for any other locality within that state in which you lived during 2018. If you checked the “Yes” box on line 6 of any of those worksheets, multiply line 5 of that worksheet by the amount that you entered on line 1 for that state on the first worksheet. Line 7. Enter on line 7 any state and lo- cal general sales taxes paid on the fol- lowing specified items. If you are com- pleting more than one worksheet, include the total for line 7 on only one of the worksheets. 1. A motor vehicle (including a car, motorcycle, motor home, recreational vehicle, sport utility vehicle, truck, van, and off-road vehicle). Also include any state and local general sales taxes paid for a leased motor vehicle. If the state sales tax rate on these items is higher than the general sales tax rate, only in- clude the amount of tax you would have paid at the general sales tax rate. 2. An aircraft or boat, but only if the tax rate was the same as the general sales tax rate. 3. A home (including a mobile home or prefabricated home) or substan- tial addition to or major renovation of a home, but only if the tax rate was the same as the general sales tax rate and any of the following applies. a. Your state or locality imposes a general sales tax directly on the sale of a home or on the cost of a substantial ad- dition or major renovation. b. You purchased the materials to build a home or substantial addition or to perform a major renovation and paid the sales tax directly. c. Under your state law, your con- tractor is considered your agent in the construction of the home or substantial addition or the performance of a major renovation. The contract must state that the contractor is authorized to act in your name and must follow your direc- tions on construction decisions. In this case, you will be considered to have pur- chased any items subject to a sales tax and to have paid the sales tax directly. Don't include sales taxes paid on items used in your trade or business. If you received a refund of state or local general sales taxes in 2018, see Refund of general sales taxes, earlier. Line 5b State and Local Real Estate Taxes If you are a homeowner who re- ceived assistance under a State Housing Finance Agency Hard- est Hit Fund program or an Emergency Homeowners' Loan program, see Pub. 530 for the amount you can include on line 5b. Enter on line 5b the state and local taxes you paid on real estate you own that wasn't used for business, but only if the taxes are assessed uniformly at a like rate on all real property throughout the community, and the proceeds are used for general community or governmental purposes. Pub. 530 explains the deduc- tions homeowners can take. Don't include the following amounts on line 5b. • Foreign taxes you paid on real es- tate. • Itemized charges for services to specific property or persons (for exam- ple, a $20 monthly charge per house for trash collection, a $5 charge for every 1,000 gallons of water consumed, or a flat charge for mowing a lawn that had grown higher than permitted under a lo- cal ordinance). • Charges for improvements that tend to increase the value of your prop- erty (for example, an assessment to build a new sidewalk). The cost of a property improvement is added to the basis of the property. However, a charge is deductible if it is used only to main- tain an existing public facility in service (for example, a charge to repair an exist- ing sidewalk, and any interest included in that charge). If your mortgage payments include your real estate taxes, you can include only the amount the mortgage company actually paid to the taxing authority in 2018. If you sold your home in 2018, any real estate tax charged to the buyer TIP should be shown on your settlement statement and in box 6 of any Form 1099-S you received. This amount is considered a refund of real estate taxes. See Refunds and rebates, later. Any real estate taxes you paid at closing should be shown on your settlement statement. You must look at your real es- tate tax bill to decide if any nondeductible itemized charges, such as those listed earlier, are included in the bill. If your taxing authority (or lender) doesn't furnish you a copy of your real estate tax bill, ask for it. Prepayment of next year's property taxes. Only taxes paid in 2018 and as- sessed prior to 2019 can be deducted for 2018. State or local law determines whether and when a property tax is as- sessed, which is generally when the tax- payer becomes liable for the property tax imposed. Refunds and rebates. If you received a refund or rebate in 2018 of real estate taxes you paid in 2018, reduce your de- duction by the amount of the refund or rebate. If you received a refund or rebate in 2018 of real estate taxes you paid in an earlier year, don't reduce your deduc- tion by this amount. Instead, you must include the refund or rebate in income on Schedule 1 (Form 1040), line 21, if you deducted the real estate taxes in the earlier year and the deduction reduced your tax. See Recoveries in Pub. 525 for details on how to figure the amount to include in income. Line 5c State and Local Personal Property Taxes Enter on line 5c the state and local per- sonal property taxes you paid, but only if the taxes were based on value alone and were imposed on a yearly basis. Example. You paid a yearly fee for the registration of your car. Part of the fee was based on the car's value and part was based on its weight. You can deduct only the part of the fee that was based on the car's value. Prepayment of next year's property taxes. Only taxes paid in 2018 and as- sessed prior to 2019 can be deducted for 2018. State or local law determines CAUTION ! A-7

(i1040sca)(page-8)Page 8#

whether and when a property tax is as- sessed, which is generally when the tax- payer becomes liable for the property tax imposed. Line 6 Other Taxes Enter only one total on line 6, but list the type and amount of each tax included. Include on this line income taxes you paid to a foreign country and generation skipping tax (GST) imposed on certain income distributions. You may want to take a credit for the foreign tax instead of a deduction. See the instructions for Schedule 3 (Form 1040), line 48, for details. Don't include taxes you paid to a U.S. possession on this line; instead, include U.S. possession taxes on the appropriate state and local tax line. Don't include federal estate tax on in- come in respect of a decedent on this line; instead, include it on line 16. Interest You Paid The rules for deducting interest vary, de- pending on whether the loan proceeds are used for business, personal, or in- vestment activities. See Pub. 535 for more information about deducting busi- ness interest expenses. See Pub. 550 for more information about deducting in- vestment interest expenses. You can't deduct personal interest. However, you can deduct qualified home mortgage in- terest (on your Schedule A) and interest on certain student loans (on Schedule 1 (Form 1040), line 33), as explained in Pub. 936 and Pub. 970. If you use the proceeds of a loan for more than one purpose (for example, personal and business), you must allo- cate the interest on the loan to each use. You allocate interest on a loan in the same way as the loan is allocated. You do this by tracing disbursements of the debt proceeds to specific uses. For more information on allocating interest, see Pub. 535. In general, if you paid interest in 2018 that applies to any period after 2018, you can deduct only amounts that apply for 2018. TIP Use Schedule A to deduct qualified home mortgage interest and investment interest. Line 8 Home Mortgage Interest If you are a homeowner who re- ceived assistance under a State Housing Finance Agency Hard- est Hit Fund program or an Emergency Homeowners' Loan program, see Pub. 530 for the amount you can deduct on line 8a or 8b. A home mortgage is any loan that is se- cured by your main home or second home, regardless of how the loan is la- beled. It includes first and second mort- gages, home equity loans, and refi- nanced mortgages. A home can be a house, condomini- um, cooperative, mobile home, boat, or similar property. It must provide basic living accommodations including sleep- ing space, toilet, and cooking facilities. Check the box on line 8 if you had one or more home mortgages in 2018 with an outstanding balance and you didn't use all of your home mortgage proceeds from those loans to buy, build, or substantially improve your home. In- terest paid on home mortgage proceeds used for other purposes isn’t deductible. See Limits on home mortgage inter- est, later, for more information about what interest you can include on lines 8a and 8b. If you used any home mortgage proceeds for a business or in- vestment purpose, interest you paid that is allocable to those proceeds may still be deductible as a business or investment expense elsewhere on your return. Limits on home mortgage interest. Your deduction for home mortgage in- terest is subject to a number of limits. If one or more of the following limits ap- plies, see Pub. 936 to figure your deduc- tion. Limit for loan proceeds not used to buy, build, or substantially improve your home. You can only deduct home mortgage interest to the extent that the loan proceeds from your home mortgage are used to buy, build, or substantially improve the home securing the loan TIP TIP ("qualifying debt"). Make sure to check the box on line 8 if you had one or more home mortgages in 2018 with an out- standing balance and you didn't use all of the loan proceeds to buy, build, or substantially improve the home. The on- ly exception to this limit is for loans tak- en out on or before October 13, 1987; the loan proceeds for these loans are treated as having been used to buy, build, or substantially improve the home. See Pub. 936 for more informa- tion about loans taken out on or before October 13, 1987. See Pub. 936 to figure your deduction if you must check the box on line 8. Limit on loans taken out on or be fore December 15, 2017. For qualify- ing debt taken out on or before Decem- ber 15, 2017, you can only deduct home mortgage interest on up to $1,000,000 ($500,000 if you are married filing sepa- rately) of that debt. The only exception is for loans taken out on or before Octo- ber 13, 1987; see Pub. 936 for more in- formation about loans taken out on or before October 13, 1987. See Pub. 936 to figure your deduction if you have loans taken out on or before December 15, 2017, that exceed $1,000,000 ($500,000 if you are married filing separately). Limit on loans taken out after De cember 15, 2017. For qualifying debt taken out after December 15, 2017, you can only deduct home mortgage interest on up to $750,000 ($375,000 if you are married filing separately) of that debt. If you also have qualifying debt subject to the $1,000,000 limitation discussed un- der Limit on loans taken out on or be- fore December 15, 2017, earlier, the $750,000 limit for debt taken out after December 15, 2017, is reduced by the amount of your qualifying debt subject to the $1,000,000 limit. An exception exists for certain loans taken out after December 15, 2017, but before April 1, 2018. If the exception applies, your loan may be treated in the same manner as a loan taken out on or before December 15, 2017; see Pub. 936 for more infor- mation about this exception. See Pub. 936 to figure your deduction if you have loans taken out after October 13, 1987, that exceed $750,000 ($375,000 if you are married filing sepa- rately). A-8

(i1040sca)(page-9)Page 9#

Limit when loans exceed the fair market value of the home. If the total amount of all mortgages is more than the fair market value of the home, see Pub. 936 to figure your deduction. Line 8a Enter on line 8a mortgage interest and points reported to you on Form 1098 un- less you had to use Pub. 936 to figure your deductible interest. See Limits on home mortgage interest, earlier. Home mortgage interest limited. If your home mortgage interest deduction is limited, only enter on line 8a the de- ductible mortgage interest and points that were reported to you on Form 1098. Refund of overpaid interest. If your Form 1098 shows any refund of over- paid interest, don't reduce your deduc- tion by the refund. Instead, see the in- structions for Schedule 1 (Form 1040), line 21. Interest reported on someone else’s Form 1098. If you and at least one oth- er person (other than your spouse if fil- ing jointly) were liable for and paid in- terest on the mortgage, and the interest was reported on the other person's Form 1098, report your share of the interest on line 8b (as explained in Line 8b, later). Form 1098 doesn’t show all interest paid. If you paid more interest to the re- cipient than is shown on Form 1098, in- clude the larger deductible amount on line 8a and explain the difference. If you are filing a paper return, explain the dif- ference by attaching a statement to your paper return and printing “See attached” to the right of line 8a. If you are claiming the mort- gage interest credit (for holders of qualified mortgage credit certificates issued by state or local gov- ernmental units or agencies), subtract the amount shown on Form 8396, line 3, from the total deductible interest you paid on your home mortgage. Enter the result on line 8a. Line 8b If you paid home mortgage interest to a recipient who didn’t provide you a Form 1098, report your deductible mortgage interest on line 8b. Seller financed mortgage. If you paid home mortgage interest to the person from whom you bought the home and CAUTION ! that person didn’t provide you a Form 1098, write that person's name, identify- ing number, and address on the dotted lines next to line 8b. If the recipient of your home mortgage payment(s) is an individual, the identifying number is his or her social security number (SSN). Otherwise, it is the employer identifica- tion number (EIN). You must also let the recipient know your SSN. If you don't show the required information about the recipient or let the recipient know your SSN, you may have to pay a $50 penalty. Interest reported on someone else’s Form 1098. If you and at least one oth- er person (other than your spouse if fil- ing jointly) were liable for and paid in- terest on the mortgage, and the home mortgage interest paid was reported on the other person’s Form 1098, identify the name and address of the person or persons who received a Form 1098 re- porting the interest you paid. If you are filing a paper return, identify the person by attaching a statement to your paper return and printing “See attached” to the right of line 8b. Line 8c Points Not Reported on Form 1098 Points are shown on your settlement statement. Points you paid only to bor- row money are generally deductible over the life of the loan. See Pub. 936 to figure the amount you can deduct. Points paid for other purposes, such as for a lender's services, aren't deductible. Refinancing. Generally, you must de- duct points you paid to refinance a mort- gage over the life of the loan. This is true even if the new mortgage is secured by your main home. If you used part of the proceeds to improve your main home, you may be able to deduct the part of the points rela- ted to the improvement in the year paid. See Pub. 936 for details. If you paid off a mortgage ear- ly, deduct any remaining points in the year you paid off the mortgage. However, if you refinanced your mortgage with the same lender, see Mortgage ending early in Pub. 936 for an exception. CAUTION ! TIP Line 8d Mortgage Insurance Premiums Enter the qualified mortgage insurance premiums you paid under a mortgage in- surance contract issued after December 31, 2006, in connection with home ac- quisition debt that was secured by your first or second home. Box 5 of Form 1098 shows the amount of premiums you paid in 2018. If you and at least one other person (other than your spouse if filing jointly) were liable for and paid the premiums in connection with the loan, and the premiums were reported on the other person's Form 1098, report your share of the premiums on line 8d. See Prepaid mortgage insurance premi- ums, later, if you paid any premiums al- locable to any period after 2018. Qualified mortgage insurance is mortgage insurance provided by the De- partment of Veterans Affairs, the Feder- al Housing Administration, or the Rural Housing Service (or their successor or- ganizations), and private mortgage in- surance (as defined in section 2 of the Homeowners Protection Act of 1998 as in effect on December 20, 2006). Mortgage insurance provided by the Department of Veterans Affairs and the Rural Housing Service is commonly known as a funding fee and guarantee fee, respectively. These fees can be de- ducted fully in 2018 if the mortgage in- surance contract was issued in 2018. Contact the mortgage insurance issuer to determine the deductible amount if it isn't included in box 5 of Form 1098. Prepaid mortgage insurance premi- ums. If you paid qualified mortgage in- surance premiums that are allocable to periods after 2018, you must allocate them over the shorter of: • The stated term of the mortgage, or • 84 months, beginning with the month the insurance was obtained. The premiums are treated as paid in the year to which they are allocated. If the mortgage is satisfied before its term, no deduction is allowed for the unamor- tized balance. See Pub. 936 for details. The allocation rules, explained earli- er, don't apply to qualified mortgage in- surance provided by the Department of Veterans Affairs or the Rural Housing Service (or their successor organiza- tions). A-9

(i1040sca)(page-10)Page 10#

Limit on amount you can deduct. You can't deduct your mortgage insurance premiums if the amount on Form 1040, line 7, is more than $109,000 ($54,500 if married filing separately). If the amount on Form 1040, line 7, is more than $100,000 ($50,000 if married filing sep- arately), your deduction is limited and you must use the Mortgage Insurance Premiums Worksheet to figure your de- duction. Line 9 Investment Interest Investment interest is interest paid on money you borrowed that is allocable to property held for investment. It doesn't include any interest allocable to passive activities or to securities that generate tax-exempt income. Complete and attach Form 4952 to figure your deduction. Exception. You don't have to file Form 4952 if all three of the following apply. 1. Your investment interest expense is less than your investment income from interest and ordinary dividends mi- nus any qualified dividends. 2. You have no other deductible in- vestment expenses. 3. You have no disallowed invest- ment interest expense from 2017. Alaska Permanent Fund divi- dends, including those reported on Form 8814, aren't invest- ment income. For more details, see Pub. 550. Gifts to Charity You can deduct contributions or gifts you gave to organizations that are reli- gious, charitable, educational, scientific, or literary in purpose. You can also de- duct what you gave to organizations that work to prevent cruelty to children or animals. Certain whaling captains may be able to deduct expenses paid in 2018 for Native Alaskan subsistence bowhead whale hunting activities. See Pub. 526 for details. To verify an organization's charitable status, you can: • Check with the organization to which you made the donation. The or- ganization should be able to provide you with verification of its charitable status. • Use our online search tool at IRS.gov/TEOS to see if an organization is eligible to receive tax-deductible con- tributions (Publication 78 data). CAUTION ! Examples of Qualified Charitable Organizations The following list gives some examples of qualified organizations. See Pub. 526 for more examples. • Churches, mosques, synagogues, temples, and other religious organiza- tions. • Boy Scouts, Boys and Girls Clubs of America, CARE, Girl Scouts, Good- will Industries, Red Cross, Salvation Ar- my, and United Way. • Fraternal orders, if the gifts will be used for the purposes listed under Gifts to Charity, earlier. • Veterans' and certain cultural groups. • Nonprofit hospitals and medical research organizations. • Most nonprofit educational organi- zations, such as colleges, but only if your contribution isn't a substitute for tuition or other enrollment fees. • Federal, state, and local govern- ments if the gifts are solely for public purposes. Amounts You Can Deduct Contributions can be in cash, property, or out-of-pocket expenses you paid to do volunteer work for the kinds of organi- zations described earlier. If you drove to and from the volunteer work, you can take the actual cost of gas and oil or 14 cents a mile. Add parking and tolls to Mortgage Insurance Premiums Deduction Worksheet—Line 8d Keep for Your Records See the instructions for line 8d to see if you must use this worksheet to figure your deduction. Before you begin:

1. Enter the total premiums you paid in 2018 for qualified mortgage insurance for a contract issued after December 31, 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. 2. Enter the amount from Form 1040, line 7 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.

3. Enter $100,000 ($50,000 if married filing separately) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.

4. Is the amount on line 2 more than the amount on line 3? No. Your deduction isn't limited. Enter the amount from line 1 of this worksheet on Schedule A, line 8d. Don't complete the rest of this worksheet. Yes. Subtract line 3 from line 2. If the result isn't a multiple of $1,000 ($500 if married filing separately), increase it to the next multiple of $1,000 ($500 if married filing separately). For example, increase $425 to $1,000, increase $2,025 to $3,000; or if married filing separately, increase $425 to $500, increase $2,025 to $2,500, etc. . . . . . . . . . . . . . . . . 4.

5. Divide line 4 by $10,000 ($5,000 if married filing separately). Enter the result as a decimal. If the result is 1.0 or more, enter 1.0 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5. . 6. Multiply line 1 by line 5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6. 7. Mortgage insurance premiums deduction. Subtract line 6 from line 1. Enter the result here and on Schedule A, line 8d . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7. A-10

(i1040sca)(page-11)Page 11#

the amount you claim under either meth- od. But don't deduct any amounts that were repaid to you. Gifts from which you benefit. If you made a gift and received a benefit in re- turn, such as food, entertainment, or merchandise, you can generally only de- duct the amount that is more than the value of the benefit. But this rule doesn't apply to certain membership benefits provided in return for an annual pay- ment of $75 or less or to certain items or benefits of token value. For details, see Pub. 526. Example. You paid $70 to a charita- ble organization to attend a fund-raising dinner and the value of the dinner was $40. You can deduct only $30. Gifts of $250 or more. You can deduct a gift of $250 or more only if you have a statement from the charitable organiza- tion showing the information in (1) and (2) next. 1. The amount of any money con- tributed and a description (but not value) of any property donated. 2. Whether the organization did or didn’t give you any goods or services in return for your contribution. If you did receive any goods or services, a descrip- tion and estimate of the value must be included. If you received only intangible religious benefits (such as admission to a religious ceremony), the organization must state this, but it doesn't have to de- scribe or value the benefit. In figuring whether a gift is $250 or more, don't combine separate donations. For example, if you gave your church $25 each week for a total of $1,300, treat each $25 payment as a separate gift. If you made donations through pay- roll deductions, treat each deduction from each paycheck as a separate gift. See Pub. 526 if you made a separate gift of $250 or more through payroll deduc- tion. You must get the statement by the date you file your return or the due date (including exten- sions) for filing your return, whichever is earlier. Don't attach the statement to your return. Instead, keep it for your re- cords. Limit on the amount you can deduct. See Pub. 526 to figure the amount of your deduction if any of the following applies. TIP 1. Your cash contributions or contri- butions of ordinary income property are more than 30% of the amount on Form 1040, line 7. 2. Your gifts of capital gain property are more than 20% of the amount on Form 1040, line 7. 3. You gave gifts of property that increased in value or gave gifts of the use of property. Amounts You Can't Deduct • Certain contributions to charitable organizations, to the extent that you re- ceive a state or local tax credit in return for your contribution. See Pub. 526 for more details and exceptions. • An amount paid to or for the bene- fit of a college or university in exchange for the right to purchase tickets to an athletic event in the college or universi- ty's stadium. • Travel expenses (including meals and lodging) while away from home performing donated services, unless there was no significant element of per- sonal pleasure, recreation, or vacation in the travel. • Political contributions. • Dues, fees, or bills paid to country clubs, lodges, fraternal orders, or similar groups. • Cost of raffle, bingo, or lottery tickets. But you may be able to deduct these expenses on line 16. See Line 16, later, for more information on gambling losses. • Value of your time or services. • Value of blood given to a blood bank. • The transfer of a future interest in tangible personal property. Generally, no deduction is allowed until the entire interest has been transferred. • Gifts to individuals and groups that are operated for personal profit. • Gifts to foreign organizations. However, you may be able to deduct gifts to certain U.S. organizations that transfer funds to foreign charities and certain Canadian, Israeli, and Mexican charities. See Pub. 526 for details. • Gifts to organizations engaged in certain political activities that are of di- rect financial interest to your trade or business. See section 170(f)(9). • Gifts to groups whose purpose is to lobby for changes in the laws. • Gifts to civic leagues, social and sports clubs, labor unions, and chambers of commerce. • Value of benefits received in con- nection with a contribution to a charita- ble organization. See Pub. 526 for ex- ceptions. • Cost of tuition. However, you may be able to deduct this as part of the tui- tion and fees deduction (see Schedule 1 (Form 1040), line 34) or take an educa- tion credit (see Form 8863). Line 11 Gifts by Cash or Check Enter on line 11 the total value of gifts you made in cash or by check (including out-of-pocket expenses). Recordkeeping. For any contribution made in cash, regardless of the amount, you must maintain as a record of the contribution a bank record (such as a canceled check or credit card statement) or a written record from the charity. The written record must include the name of the charity, date, and amount of the con- tribution. If you made contributions through payroll deduction, see Pub. 526 for information on the records you must keep. Don't attach the record to your tax return. Instead, keep it with your other tax records. Qualified Contributions In general, you can elect to treat gifts by cash or check as qualified contributions if: • The gift was paid in 2018, to cer- tain qualified charitable organizations, • The gift was made for relief efforts in the disaster area of a federally de- clared disaster eligible for this tax relief, and • You obtained, from the qualified charitable organization, a written state- ment that the contribution was used (or is to be used) for relief efforts in those areas. For details, including the types of chari- table organizations that qualify and the descriptions of the disaster areas eligible for this tax relief, see Pub. 976 and Pub. 526. Qualified contributions aren’t subject to the adjusted gross income limitation; however, certain limits may apply if your qualified contributions are more than the amount on Form 1040, line 7, minus all other allowable contributions. For details, see Pub. 526. Include any contributions that you elect to treat as qualified contributions in A-11

(i1040sca)(page-12)Page 12#

the total amount reported on line 11. In- dicate the election by also entering the amount of your qualified contributions on the dotted line next to the line 11 en- try space. Line 12 Other Than by Cash or Check Enter on line 12 the total value of your contributions of property other than by cash or check. If you gave used items, such as clothing or furniture, deduct their fair market value at the time you gave them. Fair market value is what a willing buyer would pay a willing seller when neither has to buy or sell and both are aware of the conditions of the sale. For more details on determining the val- ue of donated property, see Pub. 561. Deduction more than $500. If the amount of your deduction is more than $500, you must complete and attach Form 8283. For this purpose, the “amount of your deduction” means your deduction before applying any income limits that could result in a carryover of contributions. Contribution of motor vehicle, boat, or airplane. If you deduct more than $500 for a contribution of a motor vehi- cle, boat, or airplane, you must also at- tach a statement from the charitable or- ganization to your paper return. The or- ganization may use Form 1098-C to pro- vide the required information. If your to- tal deduction is over $5,000 ($500 for certain contributions of clothing and household items (discussed next)), you may also have to get appraisals of the values of the donated property. See Form 8283 and its instructions for de- tails. Contributions of clothing and house- hold items. A deduction for these con- tributions will be allowed only if the items are in good used condition or bet- ter. However, this rule doesn't apply to a contribution of any single item for which a deduction of more than $500 is claimed and for which you include a qualified appraisal and Form 8283 with your tax return. Recordkeeping. If you gave property, you should keep a receipt or written statement from the organization you gave the property to, or a reliable written record, that shows the organization's name and address, the date and location of the gift, and a description of the prop- erty. For each gift of property, you should also keep reliable written records that include: • How you figured the property's value at the time you gave it. If the value was determined by an appraisal, keep a signed copy of the appraisal. • The cost or other basis of the prop- erty if you must reduce it by any ordina- ry income or capital gain that would have resulted if the property had been sold at its fair market value. • How you figured your deduction if you chose to reduce your deduction for gifts of capital gain property. • Any conditions attached to the gift. If your total deduction for gifts of property is over $500, you gave less than your entire inter- est in the property, or you made a quali- fied conservation contribution, your re- cords should contain additional infor- mation. See Pub. 526 for details. Line 13 Carryover From Prior Year You may have contributions that you couldn't deduct in an earlier year be- cause they exceeded the limits on the amount you could deduct. In most cases, you have 5 years to use contributions that were limited in an earlier year. The same limits apply this year to your car- ryover amounts as applied to those amounts in the earlier year. After apply- ing those limits, enter the amount of your carryover that you are allowed to deduct this year. See Pub. 526 for de- tails. Casualty and Theft Losses Line 15 Complete and attach Form 4684 to fig- ure the amount of your loss. Only enter the amount from Form 4684, line 18, on line 15. CAUTION ! Don't enter a net qualified dis- aster loss from Form 4684, line 15, on line 15. Instead, en- ter that amount, if any, on line 16. See Line 16, later, for information about re- porting a net qualified disaster loss. You can only deduct personal casual- ty and theft losses resulting from a fed- erally declared disaster to the extent that: 1. The amount of each separate casualty or theft loss is more than $100, and 2. The total amount of all losses during the year (reduced by the $100 limit discussed in (1)) is more than 10% of the amount on Form 1040, line 7. See the Instructions for Form 4684 and Pub. 547 for more information. Other Itemized Deductions Line 16 Increased Standard Deduction Reporting If you have a net qualified disaster loss on Form 4684, line 15, and you aren’t itemizing your deductions, you can claim an increased standard deduction using Schedule A by doing the follow- ing. 1. List the amount from Form 4684, line 15, on the dotted line next to line 16 as "Net Qualified Disaster Loss," and at- tach Form 4684. 2. List your standard deduction amount on the dotted line next to line 16 as "Standard Deduction Claimed With Qualified Disaster Loss." 3. Combine the two amounts on line 16 and enter on Form 1040, line 8. Do not enter an amount on any other line of Schedule A. For more informa- tion on how to determine your increased standard deduction, see Pub. 976. Net Qualified Disaster Loss Reporting If you have a net qualified disaster loss on Form 4684, line 15, and you are itemizing your deductions, list the amount from Form 4684, line 15, on the dotted line next to line 16 as "Net Quali- CAUTION ! A-12

(i1040sca)(page-13)Page 13#

fied Disaster Loss" and include with your other miscellaneous deductions on line 16. Also be sure to attach Form 4684. Don't include your net qualified disaster loss on line 15. Other Itemized Deductions List the type and amount of each ex- pense from the following list next to line 16 and enter the total of these ex- penses on line 16. If you are filing a pa- per return and you can't fit all your ex- penses on the dotted lines next to line 16, attach a statement instead show- ing the type and amount of each ex- pense. Only the expenses listed next can be deducted on line 16. For more information about each of these expenses, see Pub. 529. CAUTION ! CAUTION ! • Gambling losses (gambling losses include, but aren't limited to, the cost of non-winning bingo, lottery, and raffle tickets), but only to the extent of gam- bling winnings reported on Schedule 1 (Form 1040), line 21. • Casualty and theft losses of in- come-producing property from Form 4684, lines 32 and 38b, or Form 4797, line 18a. • Loss from other activities from Schedule K-1 (Form 1065-B), box 2. • Federal estate tax on income in re- spect of a decedent. • A deduction for amortizable bond premium (for example, a deduction al- lowed for a bond premium carryforward or a deduction for amortizable bond pre- mium on bonds acquired before October 23, 1986). • An ordinary loss attributable to a contingent payment debt instrument or an inflation-indexed debt instrument (for example, a Treasury Inflation-Protected Security). • Deduction for repayment of amounts under a claim of right if over $3,000. See Pub. 525 for details. • Certain unrecovered investment in a pension. • Impairment-related work expenses of a disabled person. Total Itemized Deductions Line 18 If you elect to itemize for state tax or other purposes even though your itemiz- ed deductions are less than your stand- ard deduction, check the box on line 18. A-13

(i1040sca)(page-14)Page 14#

2018 Optional State Sales Tax Tables Income Family Size Family Size Family Size At least But less than 1 2 3 4 5 Over 5 1 2 3 4 5 Over 5 1 2 3 4 5 Over 5 Alabama 1 4.0000% Arizona 2 5.6000% Arkansas 2 6.5000% $0 $20,000 278 325 357 382 402 430 291 318 334 346 356 370 398 436 460 478 492 511 $20,000 $30,000 389 455 499 534 562 602 430 469 493 512 526 546 589 645 680 706 727 756 $30,000 $40,000 445 520 570 609 641 687 501 546 575 596 614 637 687 752 793 824 849 882 $40,000 $50,000 491 574 629 672 708 758 562 613 645 669 688 714 770 844 890 925 952 990 $50,000 $60,000 532 621 681 728 766 820 616 672 707 733 754 783 845 925 976 1014 1044 1086 $60,000 $70,000 568 663 727 777 818 875 664 725 763 791 814 845 912 999 1054 1094 1127 1172 $70,000 $80,000 601 701 769 821 865 925 709 773 814 844 868 901 973 1066 1125 1168 1203 1251 $80,000 $90,000 631 736 807 862 908 972 750 818 861 893 919 954 1030 1128 1190 1237 1274 1324 $90,000 $100,000 659 769 843 900 948 1014 789 860 906 939 966 1003 1083 1187 1252 1301 1340 1393 $100,000 $120,000 696 812 890 951 1001 1071 840 916 964 1000 1029 1068 1154 1264 1334 1386 1427 1484 $120,000 $140,000 743 867 950 1015 1068 1143 906 989 1041 1079 1111 1153 1245 1365 1440 1496 1541 1602 $140,000 $160,000 786 918 1006 1074 1131 1210 967 1056 1111 1153 1186 1231 1330 1458 1538 1598 1646 1711 $160,000 $180,000 826 964 1056 1128 1187 1270 1024 1117 1176 1220 1255 1303 1408 1543 1629 1692 1743 1812 $180,000 $200,000 863 1007 1103 1178 1240 1327 1077 1175 1237 1283 1321 1371 1482 1624 1714 1781 1834 1907 $200,000 $225,000 901 1051 1152 1230 1295 1385 1132 1235 1301 1349 1388 1441 1558 1708 1802 1873 1929 2006 $225,000 $250,000 942 1098 1204 1285 1353 1447 1191 1300 1368 1420 1461 1517 1640 1798 1897 1971 2030 2111 $250,000 $275,000 980 1142 1252 1336 1407 1505 1246 1360 1432 1486 1529 1587 1717 1882 1986 2063 2125 2210 $275,000 $300,000 1015 1184 1297 1385 1458 1559 1299 1418 1493 1549 1593 1654 1790 1962 2070 2151 2216 2304 $300,000 or more 1222 1424 1560 1665 1752 1874 1608 1756 1849 1918 1974 2049 2219 2433 2568 2668 2749 2858 Income California 3 7.2500% Colorado 2 2.9000% Connecticut 4 6.3500% $0 $20,000 355 385 405 419 431 447 150 164 173 180 185 193 335 360 376 388 397 410 $20,000 $30,000 521 566 595 616 633 656 218 239 252 262 270 281 501 539 563 581 595 614 $30,000 $40,000 606 659 692 717 737 764 253 277 292 303 313 325 587 632 661 681 698 720 $40,000 $50,000 679 738 775 803 825 856 282 309 326 339 349 363 661 712 744 768 786 811 $50,000 $60,000 743 808 849 879 904 937 308 337 356 370 381 397 727 784 819 844 865 893 $60,000 $70,000 801 871 915 948 974 1010 331 363 383 398 410 427 787 848 886 914 936 966 $70,000 $80,000 854 929 976 1011 1039 1077 353 386 408 424 437 454 842 907 948 977 1001 1033 $80,000 $90,000 903 982 1032 1069 1098 1139 372 408 431 447 461 480 893 962 1005 1037 1062 1096 $90,000 $100,000 949 1032 1084 1123 1154 1197 391 428 452 470 484 503 941 1014 1059 1092 1119 1155 $100,000 $120,000 1010 1098 1154 1195 1228 1274 415 455 480 499 514 535 1004 1082 1131 1167 1195 1233 $120,000 $140,000 1088 1184 1244 1289 1324 1373 447 489 516 537 553 575 1087 1172 1224 1263 1294 1335 $140,000 $160,000 1161 1263 1327 1375 1413 1465 476 521 550 572 589 613 1164 1255 1311 1352 1385 1430 $160,000 $180,000 1228 1336 1404 1454 1495 1550 502 550 581 604 622 647 1235 1331 1391 1435 1470 1517 $180,000 $200,000 1291 1404 1476 1529 1571 1629 527 578 610 634 653 679 1302 1403 1466 1513 1550 1600 $200,000 $225,000 1356 1476 1551 1606 1651 1712 553 606 640 665 685 713 1372 1478 1545 1594 1633 1685 $225,000 $250,000 1426 1551 1630 1689 1736 1800 581 637 672 698 720 749 1446 1559 1629 1680 1722 1777 $250,000 $275,000 1492 1623 1705 1767 1816 1883 607 665 702 730 752 782 1516 1635 1708 1762 1805 1864 $275,000 $300,000 1554 1690 1776 1840 1892 1961 632 692 731 759 782 814 1584 1707 1784 1840 1885 1946 $300,000 or more 1919 2088 2194 2273 2337 2423 776 850 897 933 961 1000 1980 2135 2231 2301 2358 2434 Income District of Columbia 4, 7 5.8130% Florida 1 6.0000% Georgia 2 4.0000% $0 $20,000 236 245 250 254 257 262 322 346 362 373 382 394 205 226 239 249 256 267 $20,000 $30,000 352 366 374 380 384 391 479 516 539 556 570 588 303 333 352 366 378 394 $30,000 $40,000 413 428 438 445 450 457 561 604 631 651 667 689 353 388 410 427 440 459 $40,000 $50,000 464 482 493 501 507 515 631 679 710 732 750 775 395 435 460 479 494 515 $50,000 $60,000 510 530 542 550 557 566 693 747 780 805 825 851 433 476 504 524 541 564 $60,000 $70,000 552 573 586 595 602 612 749 807 843 870 891 920 467 514 543 566 584 608 $70,000 $80,000 590 613 626 636 644 654 800 863 901 930 953 984 498 548 580 603 623 649 $80,000 $90,000 626 650 664 675 683 694 848 914 955 986 1010 1043 527 580 613 638 659 686 $90,000 $100,000 659 684 699 710 719 731 893 963 1006 1038 1064 1098 554 609 645 671 692 722 $100,000 $120,000 703 730 746 758 767 780 953 1027 1073 1107 1135 1172 590 649 686 715 737 768 $120,000 $140,000 761 790 807 820 830 844 1030 1110 1160 1197 1227 1267 636 700 740 771 795 829 $140,000 $160,000 814 845 864 878 888 903 1102 1188 1241 1281 1313 1355 679 747 790 823 849 885 $160,000 $180,000 863 896 916 931 942 957 1168 1259 1316 1358 1391 1437 718 790 836 871 899 936 $180,000 $200,000 909 944 965 981 993 1009 1230 1326 1386 1430 1466 1514 755 831 880 916 945 985 $200,000 $225,000 958 994 1017 1033 1045 1062 1295 1396 1459 1506 1543 1594 794 874 925 963 993 1035 $225,000 $250,000 1009 1048 1071 1088 1102 1119 1364 1471 1537 1587 1626 1679 835 919 973 1013 1045 1089 $250,000 $275,000 1058 1098 1123 1141 1155 1173 1429 1541 1611 1663 1704 1760 874 962 1018 1060 1093 1140 $275,000 $300,000 1104 1147 1172 1191 1205 1225 1491 1608 1681 1735 1778 1836 910 1002 1061 1104 1139 1188 $300,000 or more 1377 1430 1462 1485 1504 1528 1857 2004 2095 2162 2216 2289 1126 1240 1312 1366 1410 1470 Income Hawaii 1, 6 4.0000% Idaho 1 6.0000% Illinois 2 6.2500% $0 $20,000 325 370 399 421 438 463 425 492 537 571 599 639 321 352 373 389 402 419 $20,000 $30,000 471 535 577 609 635 671 602 697 760 808 848 904 463 509 539 562 581 606 $30,000 $40,000 545 619 668 705 735 777 691 799 871 927 972 1036 535 589 624 650 671 701 $40,000 $50,000 607 691 745 786 820 866 765 885 965 1026 1077 1148 596 656 695 724 748 781 $50,000 $60,000 663 754 813 858 895 945 831 961 1047 1114 1169 1246 650 716 758 790 816 852 $60,000 $70,000 712 810 874 922 962 1016 889 1028 1121 1192 1251 1333 698 769 814 849 877 916 $70,000 $80,000 757 862 929 981 1023 1081 942 1089 1187 1263 1325 1412 742 817 866 903 933 974 $80,000 $90,000 799 909 981 1035 1080 1141 991 1146 1249 1328 1394 1485 783 862 913 952 984 1028 $90,000 $100,000 838 954 1029 1086 1132 1197 1036 1198 1306 1389 1458 1553 821 904 958 999 1032 1078 $100,000 $120,000 890 1012 1092 1153 1202 1270 1096 1268 1382 1469 1542 1642 871 959 1017 1060 1095 1144 $120,000 $140,000 957 1088 1174 1239 1293 1366 1174 1357 1479 1573 1650 1758 936 1031 1093 1139 1177 1229 $140,000 $160,000 1018 1158 1250 1319 1376 1454 1245 1439 1568 1667 1749 1864 996 1097 1162 1212 1253 1308 $160,000 $180,000 1075 1223 1319 1392 1452 1535 1309 1513 1649 1754 1840 1960 1050 1157 1227 1279 1322 1381 $180,000 $200,000 1128 1283 1384 1461 1524 1610 1370 1584 1726 1835 1925 2051 1102 1214 1287 1342 1387 1449 $200,000 $225,000 1182 1345 1452 1532 1598 1689 1433 1656 1804 1919 2013 2144 1155 1273 1349 1407 1454 1519 $225,000 $250,000 1241 1412 1523 1608 1677 1773 1499 1733 1888 2007 2106 2243 1212 1335 1415 1476 1526 1594 $250,000 $275,000 1296 1474 1591 1679 1751 1851 1561 1804 1966 2091 2193 2336 1265 1394 1478 1541 1593 1664 $275,000 $300,000 1348 1534 1655 1747 1822 1926 1620 1872 2040 2169 2276 2424 1315 1450 1537 1603 1657 1731 $300,000 or more 1651 1879 2028 2141 2233 2360 1962 2266 2469 2625 2753 2933 1609 1774 1881 1962 2028 2119 A-14

(i1040sca)(page-15)Page 15#

Income Family Size Family Size Family Size At least But less than 1 2 3 4 5 Over 5 1 2 3 4 5 Over 5 1 2 3 4 5 Over 5 Indiana 4 7.0000% Iowa 1 6.0000% Kansas 1 6.5000% $0 $20,000 380 417 440 457 470 489 336 362 377 389 398 411 475 552 603 642 674 720 $20,000 $30,000 554 607 640 665 685 712 501 539 563 580 594 612 667 775 847 902 947 1010 $30,000 $40,000 642 704 742 771 794 826 587 631 659 679 695 717 763 886 968 1031 1083 1155 $40,000 $50,000 717 786 829 862 888 923 660 710 741 764 782 807 843 979 1070 1139 1197 1277 $50,000 $60,000 783 859 906 942 970 1008 725 781 815 840 860 887 914 1061 1159 1234 1296 1383 $60,000 $70,000 843 924 975 1013 1044 1085 784 844 881 908 930 959 976 1133 1238 1319 1385 1477 $70,000 $80,000 897 984 1038 1079 1111 1155 839 902 942 971 994 1025 1033 1199 1310 1395 1465 1563 $80,000 $90,000 948 1039 1096 1139 1174 1220 889 956 998 1029 1054 1087 1085 1260 1376 1466 1540 1642 $90,000 $100,000 995 1091 1151 1196 1232 1281 936 1007 1051 1084 1110 1145 1134 1316 1438 1531 1608 1716 $100,000 $120,000 1057 1159 1223 1271 1309 1361 999 1075 1122 1157 1184 1221 1198 1391 1519 1618 1699 1812 $120,000 $140,000 1138 1247 1316 1368 1409 1465 1080 1162 1213 1251 1281 1321 1280 1486 1623 1729 1816 1937 $140,000 $160,000 1212 1329 1403 1457 1501 1561 1156 1244 1298 1339 1371 1414 1355 1574 1719 1830 1922 2051 $160,000 $180,000 1280 1404 1482 1540 1586 1649 1225 1319 1377 1419 1453 1499 1424 1653 1806 1923 2020 2155 $180,000 $200,000 1344 1474 1556 1617 1666 1732 1291 1390 1451 1496 1531 1580 1488 1728 1887 2010 2111 2252 $200,000 $225,000 1411 1547 1633 1697 1748 1818 1360 1463 1528 1575 1613 1663 1555 1805 1971 2099 2205 2352 $225,000 $250,000 1482 1625 1715 1782 1836 1910 1433 1542 1610 1660 1699 1753 1625 1887 2061 2194 2305 2458 $250,000 $275,000 1548 1698 1792 1862 1919 1995 1502 1616 1687 1739 1781 1837 1691 1963 2144 2283 2398 2558 $275,000 $300,000 1612 1767 1866 1939 1997 2077 1567 1687 1761 1816 1859 1918 1753 2035 2223 2367 2486 2652 $300,000 or more 1981 2173 2294 2384 2456 2554 1955 2104 2197 2265 2319 2393 2112 2452 2678 2852 2995 3195 Income Kentucky 4 6.0000% Louisiana 2, 8 4.7227% Maine 4 5.5000% $0 $20,000 318 347 366 380 391 407 255 272 283 291 298 306 238 257 270 279 286 296 $20,000 $30,000 472 516 544 565 582 605 382 409 425 437 446 459 339 367 385 398 408 422 $30,000 $40,000 551 603 636 660 680 707 448 479 499 513 524 539 390 422 443 457 469 486 $40,000 $50,000 619 677 714 742 764 794 505 540 562 578 590 608 433 469 491 508 521 539 $50,000 $60,000 679 744 784 814 839 872 556 594 618 636 650 669 471 510 534 552 567 586 $60,000 $70,000 734 803 847 880 906 942 602 643 669 688 703 724 505 546 572 592 607 628 $70,000 $80,000 784 858 905 940 968 1006 644 688 716 736 753 774 536 580 607 628 644 666 $80,000 $90,000 830 909 958 995 1025 1066 683 730 760 781 798 822 564 610 639 661 678 702 $90,000 $100,000 873 956 1008 1047 1079 1122 719 769 800 823 841 866 591 639 669 692 710 734 $100,000 $120,000 931 1019 1075 1117 1150 1196 768 822 855 879 898 925 626 677 709 733 752 778 $120,000 $140,000 1006 1101 1162 1207 1243 1292 831 889 925 952 973 1001 671 725 760 785 806 833 $140,000 $160,000 1075 1177 1242 1290 1329 1381 890 952 991 1019 1042 1072 712 770 807 834 855 885 $160,000 $180,000 1139 1247 1315 1366 1408 1464 945 1010 1051 1081 1105 1138 750 811 849 878 901 932 $180,000 $200,000 1199 1313 1385 1439 1482 1541 996 1065 1108 1140 1165 1199 785 849 890 919 943 976 $200,000 $225,000 1261 1381 1457 1514 1559 1622 1049 1122 1168 1201 1228 1264 822 889 931 962 987 1021 $225,000 $250,000 1328 1454 1534 1594 1642 1708 1106 1183 1231 1267 1295 1333 861 931 975 1008 1034 1070 $250,000 $275,000 1391 1523 1607 1669 1720 1788 1160 1241 1291 1328 1358 1397 897 970 1016 1050 1078 1115 $275,000 $300,000 1450 1589 1676 1741 1794 1866 1211 1296 1348 1387 1418 1459 932 1008 1056 1091 1119 1158 $300,000 or more 1802 1974 2083 2165 2230 2319 1514 1620 1686 1734 1773 1825 1133 1225 1283 1326 1360 1407 Income Maryland 4 6.0000% Massachusetts 4 6.2500% Michigan 4 6.0000% $0 $20,000 280 311 332 347 360 378 283 303 316 325 332 342 304 330 346 358 367 381 $20,000 $30,000 405 450 480 503 521 547 409 438 457 470 481 495 447 485 509 526 541 560 $30,000 $40,000 468 520 555 582 603 633 473 507 528 543 556 572 520 564 592 613 630 652 $40,000 $50,000 522 580 619 648 673 706 527 565 588 606 619 638 582 632 664 687 705 731 $50,000 $60,000 569 633 675 708 734 771 575 616 642 661 676 696 638 692 727 752 773 800 $60,000 $70,000 611 680 726 760 789 829 618 662 689 710 726 748 687 746 783 811 833 863 $70,000 $80,000 650 723 772 809 839 881 657 704 733 755 772 795 733 796 835 865 888 920 $80,000 $90,000 686 763 814 854 886 930 693 743 773 796 814 839 775 842 884 915 940 973 $90,000 $100,000 719 800 854 895 929 976 727 779 811 835 854 880 815 885 929 961 988 1023 $100,000 $120,000 763 850 907 950 986 1036 771 826 861 886 906 934 867 942 989 1023 1051 1089 $120,000 $140,000 820 913 975 1022 1060 1114 829 888 925 952 974 1003 935 1015 1066 1103 1134 1174 $140,000 $160,000 873 972 1037 1087 1128 1185 882 945 984 1013 1036 1068 998 1084 1138 1178 1210 1253 $160,000 $180,000 921 1026 1095 1148 1191 1251 930 997 1038 1069 1094 1127 1056 1146 1203 1246 1280 1326 $180,000 $200,000 966 1076 1149 1204 1250 1313 976 1046 1089 1122 1147 1182 1110 1205 1265 1310 1346 1394 $200,000 $225,000 1013 1128 1205 1263 1311 1377 1023 1096 1142 1176 1203 1239 1166 1267 1330 1377 1414 1465 $225,000 $250,000 1063 1184 1264 1325 1376 1445 1073 1150 1198 1234 1262 1300 1226 1332 1398 1448 1487 1541 $250,000 $275,000 1109 1236 1320 1384 1436 1509 1121 1201 1251 1288 1317 1357 1283 1393 1463 1514 1556 1612 $275,000 $300,000 1154 1286 1373 1439 1494 1570 1165 1249 1301 1339 1370 1412 1337 1452 1524 1578 1621 1680 $300,000 or more 1412 1575 1682 1764 1831 1924 1426 1529 1593 1640 1677 1728 1652 1794 1884 1950 2004 2076 Income Minnesota 1 6.8750% Mississippi 2 7.0000% Missouri 2 4.2250% $0 $20,000 338 362 377 388 396 408 524 600 650 688 719 761 232 257 274 286 297 310 $20,000 $30,000 504 540 562 578 591 609 745 853 923 977 1021 1082 341 379 403 422 437 457 $30,000 $40,000 590 632 658 677 693 713 856 980 1061 1123 1173 1243 397 441 470 491 509 532 $40,000 $50,000 664 711 741 762 779 803 949 1086 1176 1245 1301 1379 444 494 526 550 570 597 $50,000 $60,000 729 782 814 838 857 882 1031 1180 1278 1352 1413 1498 487 541 576 603 624 654 $60,000 $70,000 788 845 880 906 927 954 1104 1264 1368 1448 1514 1604 525 584 621 650 673 705 $70,000 $80,000 843 904 941 969 991 1021 1171 1340 1451 1535 1605 1701 560 622 663 693 718 752 $80,000 $90,000 894 958 998 1027 1051 1082 1232 1410 1527 1616 1689 1790 592 658 701 733 759 795 $90,000 $100,000 941 1009 1051 1082 1106 1140 1289 1475 1598 1691 1767 1873 622 692 737 771 798 836 $100,000 $120,000 1004 1077 1122 1155 1181 1216 1364 1562 1691 1790 1870 1982 662 737 784 820 850 890 $120,000 $140,000 1086 1165 1213 1249 1278 1316 1461 1673 1811 1917 2003 2123 714 794 846 885 916 960 $140,000 $160,000 1162 1247 1299 1337 1368 1409 1550 1775 1922 2034 2125 2252 762 848 903 944 978 1024 $160,000 $180,000 1233 1322 1377 1418 1450 1494 1632 1868 2022 2140 2237 2371 806 897 955 999 1035 1084 $180,000 $200,000 1299 1393 1451 1494 1529 1575 1708 1955 2117 2241 2342 2482 848 943 1004 1051 1088 1140 $200,000 $225,000 1368 1467 1529 1574 1610 1658 1787 2045 2215 2344 2450 2596 891 991 1056 1104 1144 1198 $225,000 $250,000 1442 1546 1611 1659 1697 1748 1870 2141 2318 2454 2564 2718 937 1042 1110 1161 1203 1260 $250,000 $275,000 1511 1621 1689 1739 1779 1833 1949 2231 2415 2556 2672 2832 980 1090 1161 1215 1258 1318 $275,000 $300,000 1577 1692 1763 1816 1857 1913 2023 2316 2508 2654 2774 2939 1021 1136 1210 1266 1311 1373 $300,000 or more 1969 2113 2202 2267 2319 2390 2453 2808 3041 3218 3364 3565 1262 1405 1496 1565 1621 1698 A-15

(i1040sca)(page-16)Page 16#

Income Family Size Family Size Family Size At least But less than 1 2 3 4 5 Over 5 1 2 3 4 5 Over 5 1 2 3 4 5 Over 5 Nebraska 1 5.5000% Nevada 5 6.8500% New Jersey 4 6.6250% $0 $20,000 305 328 342 352 361 372 345 375 395 409 420 436 331 345 354 360 365 372 $20,000 $30,000 457 491 512 527 539 556 505 550 578 599 615 638 498 520 533 543 550 560 $30,000 $40,000 535 575 600 618 632 652 587 639 672 696 715 742 585 611 626 638 647 659 $40,000 $50,000 603 648 675 696 712 734 657 715 751 779 800 830 660 689 707 720 730 744 $50,000 $60,000 663 712 743 765 783 807 719 782 822 852 876 908 727 759 779 793 804 819 $60,000 $70,000 717 771 804 828 847 873 774 843 886 918 943 978 788 823 844 859 871 888 $70,000 $80,000 767 824 860 886 906 934 825 898 944 978 1005 1042 843 881 904 920 933 950 $80,000 $90,000 814 874 912 939 961 991 872 949 998 1034 1062 1102 895 935 959 977 991 1009 $90,000 $100,000 857 921 961 990 1013 1044 916 997 1048 1086 1116 1157 944 986 1011 1030 1045 1064 $100,000 $120,000 915 983 1025 1056 1081 1115 974 1060 1114 1155 1187 1231 1009 1054 1081 1101 1116 1137 $120,000 $140,000 990 1064 1110 1143 1170 1206 1050 1142 1201 1244 1279 1326 1093 1142 1171 1193 1210 1233 $140,000 $160,000 1060 1139 1188 1224 1253 1292 1119 1218 1280 1327 1364 1414 1171 1224 1256 1279 1297 1321 $160,000 $180,000 1125 1209 1260 1299 1329 1370 1183 1288 1354 1402 1442 1495 1244 1299 1333 1358 1377 1403 $180,000 $200,000 1186 1274 1329 1369 1401 1444 1243 1353 1422 1474 1515 1571 1312 1371 1407 1433 1453 1480 $200,000 $225,000 1249 1342 1400 1442 1476 1521 1306 1421 1494 1548 1591 1650 1383 1445 1483 1510 1532 1561 $225,000 $250,000 1317 1415 1476 1520 1556 1604 1372 1493 1570 1627 1672 1734 1460 1525 1565 1594 1617 1647 $250,000 $275,000 1381 1484 1547 1594 1632 1682 1434 1561 1641 1701 1749 1814 1532 1600 1642 1672 1696 1728 $275,000 $300,000 1441 1549 1616 1665 1704 1756 1494 1626 1709 1771 1821 1889 1600 1672 1716 1747 1772 1806 $300,000 or more 1801 1936 2019 2080 2129 2195 1842 2005 2108 2184 2245 2329 2006 2097 2152 2192 2223 2265 Income New Mexico 1 5.1250% New York 2 4.0000% North Carolina 2 4.7500% $0 $20,000 320 346 361 373 382 395 202 212 218 223 226 231 291 324 345 361 374 392 $20,000 $30,000 483 521 545 562 576 595 302 317 327 333 339 346 419 467 497 520 539 565 $30,000 $40,000 568 613 641 662 678 700 355 372 383 391 397 405 484 539 575 601 623 652 $40,000 $50,000 641 692 723 747 765 791 399 419 431 440 447 457 539 601 640 669 693 726 $50,000 $60,000 706 762 797 823 844 871 439 461 475 484 492 503 588 655 697 730 756 792 $60,000 $70,000 765 826 864 892 914 944 475 499 514 524 533 544 631 703 749 784 812 850 $70,000 $80,000 819 885 925 955 979 1011 508 534 549 561 570 582 671 747 796 833 863 904 $80,000 $90,000 870 939 983 1014 1040 1074 539 566 583 595 604 617 708 788 839 878 910 953 $90,000 $100,000 918 991 1036 1070 1096 1133 568 596 614 627 637 650 742 826 880 920 953 999 $100,000 $120,000 981 1059 1108 1144 1172 1211 606 637 655 669 680 694 787 876 933 976 1012 1060 $120,000 $140,000 1063 1148 1201 1240 1271 1313 656 689 709 724 736 751 845 941 1002 1049 1086 1138 $140,000 $160,000 1140 1231 1287 1329 1362 1407 702 738 759 775 788 804 899 1001 1066 1115 1155 1210 $160,000 $180,000 1210 1307 1367 1412 1447 1495 745 783 806 822 836 853 948 1055 1124 1176 1219 1277 $180,000 $200,000 1277 1379 1443 1490 1527 1577 785 825 849 867 881 900 994 1107 1179 1234 1278 1339 $200,000 $225,000 1347 1454 1521 1571 1610 1663 827 869 895 913 928 948 1042 1160 1236 1293 1339 1403 $225,000 $250,000 1421 1535 1606 1658 1699 1756 872 916 943 963 978 999 1093 1216 1296 1356 1405 1471 $250,000 $275,000 1492 1611 1685 1740 1784 1843 914 961 989 1010 1026 1048 1140 1269 1352 1415 1466 1536 $275,000 $300,000 1559 1684 1761 1818 1864 1926 954 1003 1033 1054 1071 1094 1185 1320 1406 1471 1524 1596 $300,000 or more 1956 2113 2211 2283 2340 2417 1192 1253 1290 1317 1339 1367 1449 1613 1718 1798 1863 1951 Income North Dakota 1 5.0000% Ohio 1 5.7500% Oklahoma 1 4.5000% $0 $20,000 253 278 295 307 317 331 318 335 345 353 359 366 312 359 390 414 434 461 $20,000 $30,000 369 406 430 448 463 483 475 500 516 527 536 547 442 508 552 586 614 654 $30,000 $40,000 429 472 500 521 538 562 557 586 604 617 627 641 507 583 633 673 705 750 $40,000 $50,000 479 527 559 582 602 628 627 660 680 695 706 722 562 646 702 745 781 831 $50,000 $60,000 524 577 611 637 658 687 689 725 747 764 776 793 610 701 762 809 848 902 $60,000 $70,000 564 621 658 686 709 740 745 784 808 826 839 858 653 750 815 866 907 966 $70,000 $80,000 600 661 701 731 755 789 796 838 864 883 898 917 692 795 864 917 962 1023 $80,000 $90,000 634 698 740 772 798 833 844 889 916 936 951 972 727 836 909 965 1012 1076 $90,000 $100,000 666 733 777 811 838 875 889 936 965 985 1002 1024 761 874 950 1009 1058 1126 $100,000 $120,000 708 780 827 862 891 931 948 999 1029 1052 1069 1093 805 925 1005 1068 1119 1191 $120,000 $140,000 762 840 890 929 960 1003 1026 1080 1113 1137 1157 1182 861 990 1076 1143 1198 1275 $140,000 $160,000 812 895 949 990 1023 1069 1098 1156 1191 1217 1238 1265 913 1050 1141 1212 1270 1352 $160,000 $180,000 858 946 1003 1046 1082 1130 1164 1225 1263 1290 1312 1341 961 1104 1201 1275 1336 1422 $180,000 $200,000 901 994 1054 1099 1137 1188 1226 1291 1331 1360 1383 1413 1005 1156 1256 1334 1398 1488 $200,000 $225,000 946 1043 1106 1154 1193 1247 1291 1359 1401 1432 1456 1488 1051 1208 1314 1395 1462 1556 $225,000 $250,000 994 1096 1163 1213 1254 1311 1360 1433 1477 1509 1534 1568 1100 1264 1375 1460 1530 1629 $250,000 $275,000 1038 1146 1215 1268 1311 1370 1426 1501 1547 1581 1608 1643 1145 1317 1432 1520 1594 1696 $275,000 $300,000 1081 1193 1266 1321 1365 1427 1488 1567 1615 1650 1678 1715 1189 1366 1486 1578 1654 1760 $300,000 or more 1331 1469 1559 1627 1683 1759 1855 1954 2014 2058 2092 2139 1439 1654 1798 1910 2002 2131 Income Pennsylvania 1 6.0000% Rhode Island 4 7.0000% South Carolina 2 6.0000% $0 $20,000 280 295 303 310 315 321 351 381 400 414 425 440 319 352 373 389 401 418 $20,000 $30,000 411 432 444 454 461 471 498 541 568 589 605 626 463 511 542 565 583 608 $30,000 $40,000 477 502 517 527 536 547 573 622 653 676 695 720 537 593 628 654 676 705 $40,000 $50,000 534 561 578 590 600 613 635 690 724 750 770 798 599 662 701 731 754 787 $50,000 $60,000 584 614 633 646 656 671 690 750 787 815 837 867 654 722 766 798 824 859 $60,000 $70,000 630 662 682 696 707 722 739 803 843 873 897 929 704 777 823 858 886 924 $70,000 $80,000 671 705 726 742 754 770 783 851 894 925 951 985 749 827 876 913 943 984 $80,000 $90,000 709 746 768 784 797 814 824 896 941 974 1001 1037 791 873 925 964 996 1039 $90,000 $100,000 745 783 807 824 837 855 863 937 984 1019 1047 1085 830 916 971 1012 1045 1090 $100,000 $120,000 792 833 858 876 890 910 913 992 1042 1079 1109 1149 881 973 1031 1075 1110 1158 $120,000 $140,000 854 898 925 944 960 980 978 1063 1116 1156 1187 1230 948 1047 1110 1156 1194 1246 $140,000 $160,000 911 958 986 1007 1024 1046 1038 1128 1184 1226 1260 1306 1010 1115 1182 1232 1272 1327 $160,000 $180,000 963 1012 1043 1065 1082 1106 1092 1187 1247 1291 1326 1374 1066 1177 1248 1301 1343 1401 $180,000 $200,000 1012 1064 1096 1119 1137 1162 1143 1243 1305 1351 1389 1439 1119 1236 1310 1366 1410 1471 $200,000 $225,000 1063 1118 1151 1175 1195 1221 1196 1300 1366 1414 1453 1505 1174 1297 1375 1433 1480 1544 $225,000 $250,000 1117 1175 1210 1236 1256 1283 1252 1361 1430 1480 1521 1576 1233 1362 1443 1504 1554 1621 $250,000 $275,000 1168 1228 1265 1292 1313 1342 1305 1418 1490 1543 1585 1642 1288 1422 1508 1572 1623 1693 $275,000 $300,000 1217 1280 1318 1346 1368 1398 1355 1473 1547 1601 1645 1705 1340 1480 1569 1636 1689 1762 $300,000 or more 1501 1579 1626 1661 1688 1724 1643 1786 1876 1943 1996 2069 1645 1818 1927 2009 2075 2164 A-16

(i1040sca)(page-17)Page 17#

Income Family Size Family Size Family Size At least But less than 1 2 3 4 5 Over 5 1 2 3 4 5 Over 5 1 2 3 4 5 Over 5 South Dakota 1 4.5000% Tennessee 2 7.0000% Texas 1 6.2500% $0 $20,000 346 391 419 441 459 483 450 504 540 566 588 618 343 373 393 407 418 434 $20,000 $30,000 501 565 607 639 664 700 652 731 782 820 852 895 511 557 586 607 624 648 $30,000 $40,000 579 654 702 739 769 809 754 845 905 949 986 1036 598 652 686 711 731 759 $40,000 $50,000 646 729 783 824 857 903 841 943 1009 1059 1099 1155 673 734 772 800 823 854 $50,000 $60,000 705 795 854 899 935 985 917 1029 1101 1155 1200 1261 740 807 849 880 905 939 $60,000 $70,000 757 855 918 966 1005 1058 986 1106 1183 1242 1289 1355 800 872 918 951 978 1015 $70,000 $80,000 805 909 976 1027 1069 1126 1049 1176 1258 1321 1371 1441 855 933 981 1017 1046 1085 $80,000 $90,000 849 959 1030 1084 1128 1188 1107 1241 1328 1394 1447 1521 907 989 1040 1078 1109 1150 $90,000 $100,000 891 1006 1081 1137 1183 1246 1161 1302 1393 1462 1518 1595 955 1041 1095 1136 1168 1212 $100,000 $120,000 946 1068 1147 1207 1256 1323 1232 1382 1479 1552 1612 1694 1019 1111 1169 1212 1246 1293 $120,000 $140,000 1016 1148 1233 1297 1350 1422 1325 1485 1590 1668 1733 1821 1102 1202 1265 1311 1348 1399 $140,000 $160,000 1082 1222 1312 1381 1436 1513 1410 1581 1692 1776 1844 1938 1179 1286 1353 1403 1443 1497 $160,000 $180,000 1141 1289 1385 1457 1516 1597 1488 1669 1786 1874 1946 2045 1250 1364 1435 1488 1530 1588 $180,000 $200,000 1198 1353 1453 1529 1591 1676 1561 1751 1874 1967 2042 2146 1317 1437 1512 1568 1613 1673 $200,000 $225,000 1256 1418 1524 1603 1668 1757 1637 1836 1965 2062 2142 2251 1387 1513 1592 1651 1698 1762 $225,000 $250,000 1318 1488 1599 1682 1750 1844 1718 1927 2062 2164 2248 2362 1462 1595 1678 1740 1790 1857 $250,000 $275,000 1376 1554 1669 1757 1828 1925 1794 2012 2153 2260 2347 2467 1532 1671 1759 1824 1876 1947 $275,000 $300,000 1431 1616 1736 1827 1901 2003 1866 2093 2240 2351 2441 2566 1599 1745 1836 1904 1958 2032 $300,000 or more 1752 1980 2127 2238 2329 2453 2286 2564 2744 2881 2991 3144 1994 2177 2291 2376 2444 2536 Income Utah 2 4.7000% Vermont 1 6.0000% Virginia 2 4.3000% $0 $20,000 307 342 366 383 397 417 221 233 240 245 249 255 237 265 283 296 307 323 $20,000 $30,000 446 499 533 558 579 607 318 335 346 353 359 367 342 383 409 428 444 466 $30,000 $40,000 518 579 618 647 671 704 368 387 399 408 415 424 396 443 473 495 514 539 $40,000 $50,000 578 646 690 723 750 787 410 432 445 455 462 473 441 493 527 552 573 601 $50,000 $60,000 632 706 754 790 820 860 447 471 485 496 504 515 481 538 575 602 625 656 $60,000 $70,000 680 760 812 851 882 926 480 505 521 532 541 554 517 578 617 647 671 704 $70,000 $80,000 724 809 864 906 939 986 510 537 554 566 576 588 550 615 657 688 714 749 $80,000 $90,000 765 855 913 957 992 1041 538 567 584 597 607 621 580 649 693 726 753 790 $90,000 $100,000 803 897 958 1004 1041 1093 564 594 613 626 637 651 609 680 726 761 790 829 $100,000 $120,000 853 953 1018 1067 1107 1161 598 630 650 664 675 691 646 722 771 808 838 880 $120,000 $140,000 918 1026 1096 1148 1191 1250 643 677 698 714 726 742 694 776 829 868 901 945 $140,000 $160,000 978 1093 1168 1224 1269 1332 684 721 743 759 772 789 739 826 882 924 958 1006 $160,000 $180,000 1033 1155 1233 1293 1341 1407 722 760 784 801 815 833 780 871 930 975 1011 1061 $180,000 $200,000 1085 1213 1295 1358 1408 1478 757 797 822 840 854 873 818 914 976 1023 1061 1113 $200,000 $225,000 1138 1273 1359 1425 1478 1551 793 836 862 881 896 916 858 958 1023 1072 1112 1167 $225,000 $250,000 1196 1337 1428 1496 1552 1629 832 877 904 924 940 961 900 1005 1074 1125 1167 1225 $250,000 $275,000 1249 1397 1492 1564 1622 1702 869 915 944 965 981 1003 939 1050 1121 1175 1219 1279 $275,000 $300,000 1300 1454 1553 1628 1688 1772 904 952 982 1003 1020 1043 977 1092 1166 1222 1267 1330 $300,000 or more 1598 1787 1909 2001 2076 2178 1106 1165 1201 1228 1248 1276 1196 1336 1427 1496 1551 1628 Income Washington 1 6.5000% West Virginia 1 6.0000% Wisconsin 1 5.0000% $0 $20,000 365 387 400 410 418 428 340 365 381 393 402 414 282 304 318 328 336 347 $20,000 $30,000 545 577 597 612 623 639 513 551 575 592 606 625 421 454 475 490 501 518 $30,000 $40,000 638 676 699 716 730 748 603 648 676 697 713 735 493 532 556 573 587 606 $40,000 $50,000 717 760 787 806 821 842 681 732 763 787 805 830 555 599 626 645 661 682 $50,000 $60,000 788 836 865 886 903 925 750 807 841 867 888 915 610 658 688 709 727 750 $60,000 $70,000 852 903 935 958 976 1000 813 874 912 940 962 992 660 712 744 767 786 811 $70,000 $80,000 911 966 999 1024 1043 1069 871 936 977 1007 1030 1062 706 761 795 820 840 868 $80,000 $90,000 965 1023 1059 1085 1106 1133 925 994 1037 1069 1094 1128 748 807 843 870 891 920 $90,000 $100,000 1017 1078 1115 1143 1164 1194 975 1049 1094 1127 1154 1190 788 849 888 916 938 969 $100,000 $120,000 1084 1150 1190 1219 1242 1273 1043 1121 1170 1205 1234 1272 841 906 947 977 1001 1034 $120,000 $140,000 1173 1243 1287 1318 1343 1377 1130 1215 1268 1307 1338 1379 909 981 1025 1057 1083 1118 $140,000 $160,000 1255 1330 1376 1410 1437 1473 1212 1303 1360 1401 1434 1479 973 1049 1097 1131 1159 1197 $160,000 $180,000 1330 1410 1459 1495 1524 1562 1287 1384 1444 1488 1524 1571 1032 1113 1163 1200 1229 1269 $180,000 $200,000 1401 1485 1537 1575 1605 1646 1358 1461 1524 1571 1608 1658 1087 1172 1225 1264 1295 1337 $200,000 $225,000 1475 1564 1619 1658 1690 1733 1432 1540 1607 1657 1696 1749 1145 1235 1290 1331 1364 1408 $225,000 $250,000 1554 1648 1705 1747 1781 1826 1512 1626 1696 1749 1790 1846 1207 1301 1360 1403 1438 1484 $250,000 $275,000 1628 1727 1787 1831 1866 1913 1587 1706 1781 1835 1879 1937 1265 1364 1425 1471 1507 1556 $275,000 $300,000 1699 1802 1865 1911 1948 1997 1658 1783 1861 1918 1964 2025 1320 1424 1488 1535 1573 1624 $300,000 or more 2117 2245 2324 2382 2427 2489 2082 2240 2337 2409 2466 2543 1647 1776 1857 1916 1963 2027 Income Wyoming 1 4.0000% Note: Residents of Alaska do not have a state sales tax, but should follow the instructions on the next page to determine their local sales tax amount.

1 Use the Ratio Method to determine your local sales tax deduction, then add that to the appropriate amount in the state table. Your state sales tax rate is provided next to the state name. 2 Follow the instructions on the next page to determine your local sales tax deduction, then add that to the appropriate amount in the state table. 3 The California table includes the 1.25% uniform local sales tax rate in addition to the 6.00% state sales tax rate for a total of 7.25%. Some California localities impose a larger local sales tax. Taxpayers who reside in those jurisdictions should use the Ratio Method to determine their local sales tax deduction, then add that to the appropriate amount in the state table. The denominator of the correct ratio is 7.25%, and the numerator is the total sales tax rate minus 7.25%. 4 This state does not have a local general sales tax, so the amount in the state table is the only amount to be deducted. 5 The Nevada table includes the 2.25% uniform local sales tax rate in addition to the 4.6000% state sales tax rate for a total of 6.85%. Some Nevada localities impose a larger local sales tax. Taxpayers who reside in those jurisdictions should use the Ratio Method to determine their local sales tax deduction, then add that to the appropriate amount in the state table. The denominator of the correct ratio is 6.85%, and the numerator is the total sales tax rate minus 6.85%. 6 The 4.0% rate for Hawaii is actually an excise tax but is treated as a sales tax for purpose of this deduction. 7 The rate increased during 2018 so the given rate is an average for the year. 8 The rate decreased during 2018 so the given rate is an average for the year. $0 $20,000 216 230 239 246 251 259 $20,000 $30,000 322 345 358 368 376 387 $30,000 $40,000 378 404 420 432 441 454 $40,000 $50,000 425 455 473 486 497 511 $50,000 $60,000 468 500 520 535 546 562 $60,000 $70,000 506 541 562 578 591 608 $70,000 $80,000 541 578 602 619 632 650 $80,000 $90,000 574 613 638 656 670 690 $90,000 $100,000 604 646 672 691 706 727 $100,000 $120,000 645 690 717 738 754 776 $120,000 $140,000 698 746 776 798 816 839 $140,000 $160,000 747 799 831 854 873 899 $160,000 $180,000 792 847 881 906 926 953 $180,000 $200,000 834 893 929 955 976 1004 $200,000 $225,000 879 940 978 1006 1028 1058 $225,000 $250,000 926 991 1031 1060 1084 1115 $250,000 $275,000 971 1039 1081 1111 1136 1169 $275,000 $300,000 1014 1084 1128 1160 1186 1221 $300,000 or more 1265 1353 1408 1449 1481 1524 A-17

(i1040sca)(page-18)Page 18#

Which Optional Local Sales Tax Table Should I Use? IF you live in the state of… AND you live in… THEN use Local Table… Alaska Any locality that imposes a local sales tax C Arizona Chandler, Glendale, Mesa, Peoria, Phoenix, Tucson, or Yuma A Gilbert, Scottsdale, Tempe, or any other locality that imposes a local sales tax B Arkansas Any locality that imposes a local sales tax B Colorado Arvada, Boulder, Greeley, Longmont, Thornton, or Westminster B Adams County, Arapahoe County, Aurora, Boulder County, Centennial, Colorado Springs, Denver City, El Paso County, Fort Collins, Jefferson County, Lakewood, Larimer County, Pueblo City, Pueblo County, or any other locality that imposes a local sales tax A Georgia Any locality that imposes a local sales tax B Illinois Arlington Heights, Aurora, Bloomington, Champaign, Chicago, Cicero, Decatur, Elgin, Evanston, Joliet, Palatine, Peoria, Schaumburg, Skokie, Springfield, Waukegan, or any other locality that imposes a local sales tax A Louisiana Ascension Parish, Bossier Parish, Caddo Parish, Iberia Parish, Lafourche Parish, Livingston Parish, Orleans Parish, Ouachita Parish, Rapides Parish, St. Bernard Parish, St. Landry Parish, St Tammany Parish, Tangipahoa Parish, or Terrebonne Parish C Calcasieu Parish A East Baton Rouge Parish, Jefferson Parish, Lafayette Parish, or any other locality that imposes a local sales tax B Mississippi City of Jackson only A City of Tupelo only B Missouri Any locality that imposes a local sales tax B New York Counties: Albany, Allegany, Broome, Cattaraugus, Cayuga, Chautauqua, Chemung, Chenango, Clinton, Columbia, Cortland, Delaware, Dutchess, Erie, Essex, Franklin, Fulton, Genesee, Greene, Hamilton, Herkimer, Jefferson, Lewis, Livingston, Madison, Monroe, Montgomery, Nassau, Niagara, Oneida, Onondaga, Ontario, Orange, Orleans, Oswego, Otsego, Putnam, Rensselaer, Rockland, St. Lawrence, Saratoga, Schenectady, Schoharie, Schuyler, Seneca, Steuben, Suffolk, Sullivan, Tioga, Tompkins, Ulster, Warren, Washington, Wayne, Westchester, Wyoming, or Yatess A Cities: Olean, Salamanca, Auburn, Gloversville, Johnstown, New York, Norwich (Chenango County), Oneida (Madison County), Rome, Utica, Oswego, Saratoga Springs, Ithaca, Glens Falls, Mount Vernon, New Rochelle, White Plains, or Yonkers A Any other locality that imposes a local sales tax D* North Carolina Any locality that imposes a local sales tax A South Carolina Aiken County, Allendale, Andersonn County, Bamberg County, Barnwell County, Cherokee County, Chester County, Chesterfield County, Colleton County, Darlington County, Dillon County, Florence County, Georgetown County, Greenwood County, Hampton County, Horry County, Kershaw County, Lancaster County, Lee County, Lexington County, Marion County, Marlboro County, McCormick County, Newberry County, Orangeburg County, Spartanburg County, Sumter County, Williamsburg County, York County, or Myrtle Beach A Abbeville County, Berkeley County, Calhoun County, Charleston, Clarendon County, Dorchester County, Edgefield County, Fairfield County, Jasper County, Laurens County, Pickens County, Richland County, Saluda County, Union County, or any other locality that imposes a local sales tax B Tennessee Any locality that imposes a local sales tax B Utah Any locality that imposes a local sales tax A Virginia Any locality that imposes a local sales tax B * Note: Local Table D is just 25% of the NY State table. 2018 Optional Local Sales Tax Tables Income Family Size Family Size Family Size Family Size At least But less than 1 2 3 4 5 Over 5 1 2 3 4 5 Over 5 1 2 3 4 5 Over 5 1 2 3 4 5 Over 5 Local Table A Local Table B Local Table C Local Table D $0 $20,000 52 56 59 62 63 66 70 79 86 91 95 101 74 85 92 97 102 108 51 53 55 56 57 58 20,000 30,000 75 81 86 89 92 95 98 111 120 127 133 141 106 121 131 139 145 154 76 79 82 83 85 87 30,000 40,000 86 94 99 103 106 110 111 127 137 145 152 161 121 139 150 159 166 176 89 93 96 98 99 101 40,000 50,000 96 105 110 115 118 123 123 140 151 160 167 177 135 154 167 177 185 196 100 105 108 110 112 114 50,000 60,000 105 114 121 125 129 134 133 152 164 173 181 192 146 167 181 192 201 213 110 115 119 121 123 126 60,000 70,000 113 123 129 134 139 144 142 162 175 185 193 205 157 179 194 205 215 228 119 125 129 131 133 136 70,000 80,000 120 131 138 143 147 153 150 171 185 196 204 217 166 190 206 218 228 242 127 134 137 140 143 146 80,000 90,000 126 138 145 151 155 162 158 180 194 206 215 228 175 200 217 229 240 254 135 142 146 149 151 154 90,000 100,000 133 145 152 158 163 170 165 188 203 215 224 238 183 209 227 240 251 266 142 149 154 157 159 163 100,000 120,000 141 153 162 168 173 180 174 198 214 227 237 251 194 222 240 254 266 282 152 159 164 167 170 174 120,000 140,000 151 165 174 180 186 193 186 212 229 242 253 268 208 238 257 272 284 302 164 172 177 181 184 188 140,000 160,000 161 175 185 192 198 206 197 224 242 256 267 283 220 252 273 289 302 320 176 185 190 194 197 201 160,000 180,000 170 185 195 203 209 217 207 235 254 269 281 298 232 265 287 304 318 337 186 196 202 206 209 213 180,000 200,000 178 194 205 213 219 228 216 246 266 281 293 311 243 278 301 318 333 353 196 206 212 217 220 225 200,000 225,000 187 204 215 223 230 239 226 257 277 293 306 325 254 291 315 333 348 369 207 217 224 228 232 237 225,000 250,000 196 214 225 234 241 251 236 268 290 306 320 339 266 304 329 349 364 386 218 229 236 241 245 250 250,000 275,000 204 223 235 244 252 262 245 279 301 319 333 353 277 317 343 363 380 403 229 240 247 253 257 262 275,000 300,000 213 232 245 254 262 272 254 289 312 330 345 365 288 329 356 377 394 418 239 251 258 264 268 274 300,000 or more 260 284 299 311 321 334 306 348 376 397 415 439 350 400 432 458 478 507 298 313 323 329 335 342 A-18

(p535)Publication 535 (2018), Business Expenses#

(p535)(page-1)Page 1#

Caution: The form, instruction, or publication you are looking for begins on the next page. But first see the important information below.

This form, instruction, or publication is being revised to reflect legislation enacted December 20, 2019. The updated revision will be posted here as soon as possible. We apologize for the delay and inconvenience. The most recently issued final revision begins on the next page, but, again, is currently being updated.

Early release drafts of forms and instructions (and some pubs) are posted before the final release at www.irs.gov/DraftForms (note that they remain there after the final release is posted). The most recently issued final revision of forms, instructions, and publications is posted at www.irs.gov/LatestForms and at www.irs.gov/AllForms, which has revisions for all years each form, instruction, or pub has been issued.

Almost every form and publication has a page on IRS.gov with a friendly shortcut. For example, the Form 1040 page is at www.irs.gov/Form1040; the Pub. 501 page is at www.irs.gov/Pub501; the Form W-4 page is at www.irs.gov/W4; and the Schedule A (Form 1040 or 1040-SR) page is at www.irs.gov/ScheduleA. (If typing in a link above instead of clicking on it, be sure to type the link into the address bar of your browser, not a Search box.) Note that instructions and publications are available from these pages in PDF for printing, HTML for viewing online, and in many cases, in eBook format for mobile viewing (see www.irs.gov/eBook for more details).

If you wish, you can submit comments to the IRS about draft or final forms, instructions, or publications at www.irs.gov/FormComments. We cannot respond to all comments due to the high volume we receive and may not be able to consider many suggestions until the subsequent revision of the product.

All information about forms, instructions, and pubs is at www.irs.gov/Forms.

(p535)(page-2)Page 2#

Contents Introduction . . . . . . . . . . . . . . . . . . 1 What's New for 2018 . . . . . . . . . . . . . 2 What's New for 2019 . . . . . . . . . . . . . 2 Reminders . . . . . . . . . . . . . . . . . . . 2 Chapter 1. Deducting Business Expenses . . . . . . . . . . 3 Chapter 2. Employees' Pay . . . . . . . . 8 Chapter 3. Rent Expense . . . . . . . . 10 Chapter 4. Interest . . . . . . . . . . . . 13 Chapter 5. Taxes . . . . . . . . . . . . . 18 Chapter 6. Insurance . . . . . . . . . . . 20 Chapter 7. Costs You Can Deduct or Capitalize . . . . . . . . . . . . . . 24 Chapter 8. Amortization . . . . . . . . . 28 Chapter 9. Depletion . . . . . . . . . . . 35 Chapter 10. Business Bad Debts . . . . 40 Chapter 11. Other Expenses . . . . . . 42 Chapter 12. Qualified Business Income Deduction . . . . . . . . . . 49 Chapter 13. How To Get Tax Help . . . 58 Index . . . . . . . . . . . . . . . . . . . . . 64 Introduction This publication discusses common business expenses and explains what is and is not de- ductible. The general rules for deducting busi- ness expenses are discussed in the opening chapter. The chapters that follow cover specific expenses and list other publications and forms you may need. Note. Section references within this publica- tion are to the Internal Revenue Code and regu- lation references are to the Income Tax Regula- tions under the Code. Comments and suggestions. We welcome your comments about this publication and your suggestions for future editions. You can send us comments from IRS.gov/ FormComments. Or you can write to: Internal Revenue Service Tax Forms and Publications 1111 Constitution Ave. NW, IR-6526 Washington, DC 20224 Although we cannot respond individually to each comment received, we do appreciate your feedback and will consider your comments as we revise our tax forms, instructions, and publi- cations. Department of the Treasury Internal Revenue Service Publication 535 Cat. No. 15065Z Business Expenses For use in preparing 2018 Returns Get forms and other information faster and easier at: • IRS.gov (English) • IRS.gov/Spanish (Español) • IRS.gov/Chinese (中文) • IRS.gov/Korean (한국어) • IRS.gov/Russian (Pусский) • IRS.gov/Vietnamese (TiếngViệt) Jul 24, 2019

(p535)(page-3)Page 3#

Ordering forms and publications. Visit IRS.gov/FormsPubs to download forms and publications. Otherwise, you can go to IRS.gov/ OrderForms to order current and prior-year forms and instructions. Your order should arrive within 10 business days. Tax questions. If you have a tax question not answered by this publication, check IRS.gov and How To Get Tax Help at the end of this publication. Future Developments For the latest information about developments related to Pub. 535, such as legislation enacted after it was published, go to IRS.gov/Pub535. What's New for 2018 The following items highlight some changes in the tax law for 2018. Form 1040 redesigned. Form 1040 has been redesigned for 2018. See Form 1040 and its in- structions for more information. Forms 1040A and 1040EZ no longer availa- ble. Forms 1040A and 1040EZ aren't available to file your 2018 taxes. If you used one of these forms in the past, you will now file Form 1040. Credit expiration. At the time this publication was printed, certain credits expired at the end of 2017. To find out if legislation was enacted to extend these credits and make them available for 2018, go to IRS.gov/FormsUpdates. Small business taxpayers. For tax years be- ginning after 2017, more small business taxpay- ers may qualify to use the cash method of ac- counting and be exempt from capitalizing certain expenses under section 263A. In addi- tion, small business taxpayers may not be re- quired to account for inventories under section 471 and are not subject to the business interest expenses limitation. See the discussion in chapter 1. Compensation in excess of $1 million. P.L. 115-97, Tax Cuts and Jobs Act, made signifi- cant changes to section 162(m) which disallows the deduction of excessive employee compen- sation by any publicly held corporation. For more information, see chapter 2. Employee achievement awards. P.L. 115-97 defines items that aren't tangible personal prop- erty for purposes of employee achievement awards. Tangible personal property doesn't in- clude cash, gift cards, and other nontangible personal property. For more information, see chapter 2. Certain expense deductions are now limi- ted. Certain expense deductions are now limi- ted. P.L. 115-97 limits the deduction by employ- ers of expenses for certain fringe benefits and entertainment expenses. For more information, see chapter 2. Uniform capitalization rules. P.L. 115-97, Tax Cuts and Jobs Act, made changes to uni- form capitalization rules for small business tax- payers. For more information, see chapter 3. Alternative minimum tax (AMT). For tax years beginning after 2017, the Tax Cuts and Jobs Act, section 12001, repealed the corpo- rate AMT. For more information, see chapter 7. Standard mileage rate. Beginning in 2018, the standard mileage rate for the cost of operat- ing your car, van, pickup, or panel truck for each mile of business use is 54.5 cents per mile. For more information, see chapter 11. No miscellaneous itemized deductions al- lowed. You can no longer claim any miscella- neous itemized deductions, including the de- duction for repayments (claim of right). Miscellaneous itemized deductions are those deductions that would have been subject to the 2%-of-adjusted-gross-income limitation. For more information, see chapter 11. Certain payments made in sexual harass- ment or sexual abuse cases. For amounts paid or incurred after December 22, 2017, new section 162(q) provides that no deduction is al- lowed under section 162 for any settlement or payment related to sexual harassment or sexual abuse if it is subject to a nondisclosure agree- ment. In addition, attorney’s fees related to such a settlement or payment are not allowed as a deduction. For more information, see chap- ter 11. Qualified Business Income Deduction. We added a new chapter 12 discussing qualified business income deduction under section 199A. For tax years beginning after 2017, indi- vidual taxpayers and some trusts and estates may be entitled to a deduction of up to 20% of their Qualified Business Income (QBI) from a trade or business, including income from a pass-through entity, but not from a C corpora- tion, plus 20% of qualified real estate invest- ment trust (REIT) dividends and qualified pub- licly traded partnership (PTP) income. The deduction is subject to multiple limitations, such as the type of trade or business, the taxpayer’s taxable income, the amount of W-2 wages paid in the trade or business, and the unadjusted ba- sis immediately after acquisition (UBIA) of quali- fied property held by the trade or business. The deduction can be taken in addition to the stand- ard or itemized deductions. For more informa- tion, see chapter 12. What's New for 2019 The following item highlights a change in the tax law for 2019. Standard mileage rate. Beginning in 2019, the standard mileage rate for the cost of operat- ing your car, van, pickup, or panel truck for each mile of business use is 58 cents per mile. Reminders The following reminders and other items may help you file your tax return. IRS e-file (Electronic Filing) You can file your tax returns electronically using an IRS e-file option. The benefits of IRS e-file include faster refunds, increased accuracy, and acknowledgment of IRS receipt of your return. You can use one of the following IRS e-file options. • Use an authorized IRS e-file provider. • Use a personal computer. • Visit a Volunteer Income Tax Assistance (VITA) or Tax Counseling for the Elderly (TCE) site. For details on these fast filing methods, see your income tax package. Form 1099-MISC. File Form 1099-MISC, Mis- cellaneous Income, for each person to whom you have paid during the year in the course of your trade or business at least $600 in rents, services (including parts and materials), prizes and awards, other income payments, medical and health care payments, and crop insurance proceeds. See the Instructions for Form 1099-MISC for more information and additional reporting requirements. Photographs of missing children. The Inter- nal Revenue Service is a proud partner with the National Center for Missing & Exploited Children® (NCMEC). Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. You can help bring these children home by looking at the photographs and calling 800-THE-LOST (800-843-5678) (24 hours a day, 7 days a week) if you recognize a child. Preventing slavery and human trafficking. Human trafficking is a form of modern-day slav- ery, and involves the use of force, fraud, or co- ercion to exploit human beings for some type of labor or commercial sex purpose. The United States is a source, transit, and destination country for men, women, and children, both U.S. citizens and foreign nationals, who are subjected to the injustices of slavery and hu- man trafficking, including forced labor, debt bondage, involuntary servitude, “mail-order” marriages, and sex trafficking. Trafficking in persons can occur in both lawful and illicit in- dustries or markets, including in hotel services, hospitality, agriculture, manufacturing, janitorial services, construction, health and elder care, domestic service, brothels, massage parlors, and street prostitution, among others. The President’s Interagency Task Force to Monitor and Combat Trafficking in Persons (PITF) brings together federal departments and agencies to ensure a whole-of-government ap- proach that addresses all aspects of human trafficking. Online resources for recognizing and reporting trafficking activities, and assisting vic- tims include the Department of Homeland Se- curity (DHS) Blue Campaign at DHS.gov/blue- campaign, the Department of State Office to Monitor and Combat Trafficking in Persons at State.gov/j/tip, and the National Human Traf- ficking Resource Center (NHTRC) at humantraffickinghotline.org. DHS is responsible for investigating human trafficking, arresting traffickers, and protecting victims. DHS also provides immigration relief to non-U.S. citizen victims of human trafficking. DHS uses a victim- centered approach to combating human traf- ficking, which places equal value on identifying and stabilizing victims and on investigating and Page 2 Publication 535 (2018)

(p535)(page-4)Page 4#

prosecuting traffickers. Victims are crucial to in- vestigations and prosecutions; each case and every conviction changes lives. DHS under- stands how difficult it can be for victims to come forward and work with law enforcement due to their trauma. DHS is committed to helping vic- tims feel stable, safe, and secure. To report suspected human trafficking, call the DHS domestic 24-hour toll-free number at 866-DHS-2-ICE (866-347-2423) or 802-872-6199 (non-toll-free international). For help from the NHTRC, call the National Human Trafficking Hotline toll free at 888-373-7888 or text HELP or INFO to BeFree (233733). The Department of Treasury’s Financial Crimes Enforcement Network (FinCEN) has is- sued a public advisory to financial institutions that contains red flag indicators for potential suspicious financial activity associated with hu- man trafficking. If warranted, financial institu- tions should file a Suspicious Activity Report (FinCEN 112) with FinCEN to report these ac- tivities. For more information, go to Fincen.gov/ Sites/default/files/advisory/FIN-2014-A008.pdf 1. Deducting Business Expenses What’s New Form 1040 redesigned. Form 1040 has been redesigned for 2018. See Form 1040 and its in- structions for more information. Forms 1040A and 1040EZ no longer availa- ble. Forms 1040A and 1040EZ aren't available to file your 2018 taxes. If you used one of these forms in the past, you will now file Form 1040. Deduction for qualified business income. For tax years beginning after 2017, you may be entitled to take a deduction of up to 20% of your qualified business income from your qualified trade or business, plus 20% of the aggregate amount of qualified real estate investment trust (REIT), and qualified publicly traded partnership income. Small business taxpayers. For tax years be- ginning after 2017, more small business taxpay- ers may qualify to use the cash method of ac- counting and be exempt from capitalizing certain expenses under section 263A. In addi- tion, small business taxpayers may not be re- quired to account for inventories under section 471 and are not subject to the business interest expenses limitation. Introduction This chapter covers the general rules for de- ducting business expenses. Business expen- ses are the costs of carrying on a trade or busi- ness, and they are usually deductible if the business is operated to make a profit. Topics This chapter discusses: • What you can deduct • How much you can deduct • When you can deduct • Not-for-profit activities Useful Items You may want to see: Publication 334 Tax Guide for Small Business 463 Travel, Gift, and Car Expenses 525 Taxable and Nontaxable Income 529 Miscellaneous Deductions 536 Net Operating Losses (NOLs) for Individuals, Estates, and Trusts 538 Accounting Periods and Methods 542 Corporations 547 Casualties, Disasters, and Thefts 583 Starting a Business and Keeping Records 587 Business Use of Your Home 925 Passive Activity and At-Risk Rules 936 Home Mortgage Interest Deduction 946 How To Depreciate Property Form (and Instructions) Schedule A (Form 1040) Itemized Deductions 5213 Election To Postpone Determination as To Whether the Presumption Applies That an Activity Is Engaged in for Profit See chapter 13 for information about getting publications and forms. What Can I Deduct? To be deductible, a business expense must be both ordinary and necessary. An ordinary ex- pense is one that is common and accepted in your industry. A necessary expense is one that is helpful and appropriate for your trade or busi- ness. An expense does not have to be indis- pensable to be considered necessary. Even though an expense may be ordinary and necessary, you may not be allowed to de- duct the expense in the year you paid or 334 463 525 529 536 538 542 547 583 587 925 936 946 Schedule A (Form 1040) 5213 incurred it. In some cases, you may not be al- lowed to deduct the expense at all. Therefore, it is important to distinguish usual business ex- penses from expenses that include the follow- ing. • The expenses used to figure cost of goods sold. • Capital expenses. • Personal expenses. Cost of Goods Sold If your business manufactures products or pur- chases them for resale, you generally must value inventory at the beginning and end of each tax year to determine your cost of goods sold. Some of your business expenses may be included in figuring cost of goods sold. Cost of goods sold is deducted from your gross re- ceipts to figure your gross profit for the year. If you include an expense in the cost of goods sold, you cannot deduct it again as a business expense. The following are types of expenses that go into figuring cost of goods sold. • The cost of products or raw materials, in- cluding freight. • Storage. • Direct labor (including contributions to pen- sion or annuity plans) for workers who pro- duce the products. • Factory overhead. Under the uniform capitalization rules, you must capitalize the direct costs and part of the indirect costs for certain production or resale activities. Indirect costs include rent, interest, taxes, storage, purchasing, processing, repack- aging, handling, and administrative costs. This rule does not apply to small business taxpayers. You qualify as a small business tax- payer if you (a) have average annual gross re- ceipts of $25 million or less for the 3 prior tax years, and (b) are not a tax shelter (as defined in section 448(d)(3)). If your business has not been in existence for all of the 3-tax-year period used in figuring average gross receipts, base your average on the period it has existed, and if your business has a predecessor entity, include the gross receipts of the predecessor entity from the 3-tax-year period when figuring aver- age gross receipts. If your business (or prede- cessor entity) had short taxable years for any of the 3-tax-year period, annualize your business’ gross receipts for the short tax years that are part of the 3-tax-year period. See Pub. 538 for more information. For more information, see the following sources. • Cost of goods sold—chapter 6 of Pub. 334. • Inventories—Pub. 538. • Uniform capitalization rules—Pub. 538 and section 263A and the related regulations. Capital Expenses You must capitalize, rather than deduct, some costs. These costs are a part of your investment in your business and are called “capital expen- ses.” Capital expenses are considered assets Chapter 1 Deducting Business Expenses Page 3

(p535)(page-5)Page 5#

in your business. In general, you capitalize three types of costs. • Business start-up costs (see Tip below). • Business assets. • Improvements. You can elect to deduct or amortize certain business start-up costs. See chapters 7 and 8. Cost recovery. Although you generally cannot take a current deduction for a capital expense, you may be able to recover the amount you spend through depreciation, amortization, or depletion. These recovery methods allow you to deduct part of your cost each year. In this way, you are able to recover your capital expense. See Amortization (chapter 8) and Depletion (chapter 9) in this publication. A taxpayer can elect to deduct a portion of the costs of certain depreciable property as a section 179 deduc- tion. A greater portion of these costs can be de- ducted if the property is qualified disaster assis- tance property. See Pub. 946 for details. Going Into Business The costs of getting started in business, before you actually begin business operations, are capital expenses. These costs may include ex- penses for advertising, travel, or wages for training employees. If you go into business. When you go into business, treat all costs you had to get your business started as capital expenses. Usually, you recover costs for a particular asset through depreciation. Generally, you can- not recover other costs until you sell the busi- ness or otherwise go out of business. However, you can choose to amortize certain costs for setting up your business. See Starting a Busi- ness in chapter 8 for more information on busi- ness start-up costs. If your attempt to go into business is un- successful. If you are an individual and your attempt to go into business is not successful, the expenses you had in trying to establish yourself in business fall into two categories. 1. The costs you had before making a deci- sion to acquire or begin a specific busi- ness. These costs are personal and non- deductible. They include any costs incurred during a general search for, or preliminary investigation of, a business or investment possibility. 2. The costs you had in your attempt to ac- quire or begin a specific business. These costs are capital expenses and you can deduct them as a capital loss. If you are a corporation and your attempt to go into a new trade or business is not success- ful, you may be able to deduct all investigatory costs as a loss. The costs of any assets acquired during your unsuccessful attempt to go into business are a part of your basis in the assets. You can- not take a deduction for these costs. You will re- cover the costs of these assets when you dis- pose of them. TIP Business Assets There are many different kinds of business as- sets, for example, land, buildings, machinery, furniture, trucks, patents, and franchise rights. You must fully capitalize the cost of these as- sets, including freight and installation charges. Certain property you produce for use in your trade or business must be capitalized under the uniform capitalization rules. See Regulations section 1.263A-2 for information on these rules. De Minimis Safe Harbor for Tangible Property Although you must generally capitalize costs to acquire or produce real or tangible personal property used in your trade or business, such as buildings, equipment, or furniture, you can elect to use a de minimis safe harbor to deduct the costs of some tangible property. Under the de minimis safe harbor for tangible property, you can deduct de minimis amounts paid to ac- quire or produce certain tangible business prop- erty if these amounts are deducted by you for fi- nancial accounting purposes or in keeping your books and records. See the following for the re- quirements for the de minimis safe harbor. You have an applicable financial statement. If you elect the de minimis safe harbor for the tax year, you can deduct amounts paid to ac- quire or produce certain tangible business prop- erty if: • You have a trade or business or are a cor- poration, partnership, or S corporation that has an applicable financial statement; • You have, at the beginning of the tax year, written accounting procedures treating as an expense for nontax purposes:

– Amounts paid for property costing less than a certain dollar amount, or

– Amounts paid for property with an economic useful life of 12 months or less; • You treat the amount paid during the tax year for which you make the election as an expense on your applicable financial state- ments in accordance with your written ac- counting procedures; • The amount paid for the property does not exceed $5,000 per invoice (or per item substantiated by invoice); and • The uniform capitalization rules do not ap- ply to the amount. You do not have an applicable financial statement. If you elect the de minimis safe harbor for the tax year, you can deduct amounts paid to acquire or produce certain tangible busi- ness property if: • You have a trade or business, partnership, or S corporation that does not have an ap- plicable financial statement; • You have, at the beginning of the tax year, accounting procedures treating as an ex- pense for nontax purposes:

– Amounts paid for property costing less than a certain dollar amount, or

– Amounts paid for property with an economic useful life of 12 months or less; • You treat the amounts paid for the property as an expense on your books and records in accordance with your accounting proce- dures; • The amount paid for the property does not exceed $2,500 per invoice (or per item substantiated by invoice); and • The uniform capitalization rules do not ap- ply to the amounts. How to make the de minimis safe harbor election. To elect the de minimis safe harbor for the tax year, attach a statement to the tax- payer’s timely filed original tax return (including extensions) for the tax year when qualifying amounts were paid. The statement must be ti- tled “Section 1.263(a)-1(f) de minimis safe har- bor election” and must include your name, ad- dress, taxpayer identification number (TIN), and a statement that you are making the de minimis safe harbor election under section 1.263(a)-1(f). In the case of a consolidated group filing a con- solidated income tax return, the election is made for each member of the consolidated group. In the case of a consolidated group filing a consolidated income tax return, the election is made for each member of the consolidated group. In the case of an S corporation or a part- nership, the election is made by the S corpora- tion or the partnership and not by the share- holders or partners. The election applies only for the tax year for which it is made. Example. In 2018, you do not have an ap- plicable financial statement and you purchase five laptop computers for use in your trade or business. You paid $2,000 each for a total cost of $10,000 and these amounts are substanti- ated in an invoice. You had an accounting pro- cedure in place at the beginning of 2018 to ex- pense the cost of tangible property if the property costs $2,000 or less. You treat each computer as an expense on your books and re- cords for 2018 in accordance with this policy. If you elect the de minimis safe harbor in your tax returns for your 2018 tax year, you can deduct the cost of each $2,000 computer. Improvements Generally, you must capitalize the costs of mak- ing improvements to a business asset if the im- provements result in a betterment to the unit of property, restore the unit of property, or adapt the unit of property to a new or different use. Some examples of improvements include rewiring or replumbing of a building, replacing an entire roof, increasing the production output of your equipment, putting an addition on your building, strengthening the foundation of a building so you can use it for a new purpose, or replacing a major component or substantial structural part of a machine. However, you may currently deduct the costs of repairs or maintenance that do not im- prove a unit of property. This generally includes the costs of routine repairs and maintenance to your property that result from your use of the property and that keep your properly in an ordi- nary efficient operating condition. For example, deductible repairs include costs such as Page 4 Chapter 1 Deducting Business Expenses

(p535)(page-6)Page 6#

painting exteriors or interiors of business build- ings, repairing broken window panes, replacing worn-out minor parts, sealing cracks and leaks, and changing oil or other fluids to maintain busi- ness equipment. Routine maintenance safe harbor. If you de- termine that your cost was for an improvement to a building or equipment, you can deduct your cost under the routine maintenance safe har- bor. Under the routine maintenance safe har- bor, you can deduct the costs of an improve- ment that meets all of the following criteria. • It is paid for recurring activities performed on tangible property. • It arises from the use of the property in your trade or business. • It keeps your property in an ordinarily effi- cient operating condition. • You reasonably expect, at the time the property is placed in service, to perform this activity:

For buildings and building systems, more than once during the 10-year pe- riod after you place the building in service; or

For other property, more than once during the class life of the particular type of property. For class lives, see Revenue Procedure 88-57, 1987-2 C.B. 674. Costs incurred during an improvement. You must capitalize both the direct and indirect costs of an improvement. Indirect costs include repairs and other expenses that directly benefit or are incurred by reason of your improvement. For example, if you improve the electrical sys- tem in your building, you must also capitalize the costs of repairing the holes that you made in walls to install the new wiring. This rule applies even if this work, performed by itself, would oth- erwise be treated as currently deductible repair costs. Election to capitalize repair and mainte- nance costs. You can elect to capitalize and depreciate certain amounts paid for repair and maintenance of tangible property, even if they do not improve your property. To qualify for this election, you must treat these amounts as capi- tal expenditures on your books and records used in figuring your income. If you make this election, you must apply it to all repair and maintenance costs of tangible property that you treat as capital expenditures on your books and records for this tax year. To make the election to treat repairs and maintenance as capital ex- penditures, attach a statement titled “Section 1.263(a)-3(n) Election” to your timely filed origi- nal tax return (including extensions) and include your name and address, TIN, and a statement that you elect to capitalize repair and mainte- nance costs under section 1.263(a)-3(n). You must treat these amounts as improvements to your tangible property and begin to depreciate these amounts when the improvement is placed in service. Capital Versus Deductible Expenses To help you distinguish between capital and de- ductible expenses, different examples are given below. Motor vehicles. You usually capitalize the cost of a motor vehicle you use in your busi- ness. You can recover its cost through annual deductions for depreciation. There are dollar limits on the depreciation you can claim each year on passenger automo- biles used in your business. See Pub. 463 for more information. Generally, repairs you make to your busi- ness vehicle are currently deductible. However, amounts you pay to improve your business ve- hicle are generally capital expenditures and are recovered through depreciation. Roads and driveways. The cost of building a private road on your business property and the cost of replacing a gravel driveway with a con- crete one are capital expenses you may be able to depreciate. The cost of maintaining a private road on your business property is a deductible expense. Tools. Unless the uniform capitalization rules apply, amounts spent for tools used in your business are deductible expenses if the tools have a life expectancy of less than 1 year or they cost $200 or less per item or invoice. Machinery parts. Unless the uniform capitali- zation rules apply, the cost of replacing short-lived parts of a machine to keep it in good working condition, but not to improve the ma- chine, is a deductible expense. Heating equipment. The cost of changing from one heating system to another is a capital expense. Deduction for qualified business income. For tax years beginning after 2017, you may be entitled to take a deduction of up to 20% of your qualified business income from your qualified trade or business, plus 20% of the aggregate amount of qualified real estate investment trust (REIT), and qualified publicly traded partnership income. The deduction is subject to various lim- itations, such as limitations based on the type of your trade or business, your taxable income, the amount of W-2 wages paid with respect to the qualified trade or business, and the unad- justed basis of qualified property held by your trade or business. You will claim this deduction on Form 1040, not on Schedule C or C-EZ. Un- like other deductions, this deduction can be taken in addition to the standard or itemized de- ductions. For more information, see the Instruc- tions for Form 1040 and Pub. 535. Personal Versus Business Expenses Generally, you cannot deduct personal, living, or family expenses. However, if you have an ex- pense for something that is used partly for busi- ness and partly for personal purposes, divide the total cost between the business and per- sonal parts. You can deduct the business part. For example, if you borrow money and use 70% of it for business and the other 30% for a family vacation, you generally can deduct 70% of the interest as a business expense. The re- maining 30% is personal interest and generally is not deductible. See chapter 4 for information on deducting interest and the allocation rules. Business use of your home. If you use part of your home for business, you may be able to deduct expenses for the business use of your home. These expenses may include mortgage interest, insurance, utilities, repairs, and depre- ciation. To qualify to claim expenses for the busi- ness use of your home, you must meet both of the following tests. 1. The business part of your home must be used exclusively and regularly for your trade or business. 2. The business part of your home must be: a. Your principal place of business; or b. A place where you meet or deal with patients, clients, or customers in the normal course of your trade or busi- ness; or c. A separate structure (not attached to your home) used in connection with your trade or business. You generally do not have to meet the ex- clusive use test for the part of your home that you regularly use either for the storage of inven- tory or product samples, or as a daycare facility. Your home office qualifies as your principal place of business if you meet the following re- quirements. • You use the office exclusively and regu- larly for administrative or management ac- tivities of your trade or business. • You have no other fixed location where you conduct substantial administrative or management activities of your trade or business. If you have more than one business loca- tion, determine your principal place of business based on the following factors. • The relative importance of the activities performed at each location. • If the relative importance factor does not determine your principal place of business, consider the time spent at each location. Optional safe harbor method. Individual taxpayers can use the optional safe harbor method to determine the amount of deductible expenses attributable to certain business use of a residence during the tax year. This method is an alternative to the calculation, allocation, and substantiation of actual expenses. The deduction under the optional method is limited to $1,500 per year based on $5 per square foot for up to 300 square feet. Under this method, you claim your allowable mortgage in- terest, real estate taxes, and casualty losses on the home as itemized deductions on Sched- ule A (Form 1040). You are not required to allo- cate these deductions between personal and business use, as is required under the regular Chapter 1 Deducting Business Expenses Page 5

(p535)(page-7)Page 7#

method. If you use the optional method, you cannot depreciate the portion of your home used in a trade or business. Business expenses unrelated to the home, such as advertising, supplies, and wages paid to employees, are still fully deductible. All of the requirements discussed earlier under Business use of your home still apply. For more information on the deduction for business use of your home, including the op- tional safe harbor method, see Pub. 587. If you were entitled to deduct deprecia- tion on the part of your home used for business, you cannot exclude the part of the gain from the sale of your home that equals any depreciation you deducted (or could have deducted) for periods after May 6, 1997. Business use of your car. If you use your car exclusively in your business, you can deduct car expenses. If you use your car for both busi- ness and personal purposes, you must divide your expenses based on actual mileage. Gen- erally, commuting expenses between your home and your business location, within the area of your tax home, are not deductible. You can deduct actual car expenses, which include depreciation (or lease payments), gas and oil, tires, repairs, tune-ups, insurance, and registration fees. Or, instead of figuring the business part of these actual expenses, you may be able to use the standard mileage rate to figure your deduction. For 2018, the standard mileage rate is 54.5 cents per mile. Beginning in 2019, the standard mileage rate increases to 58 cents per mile. If you are self-employed, you can also de- duct the business part of interest on your car loan, state and local personal property tax on the car, parking fees, and tolls, whether or not you claim the standard mileage rate. For more information on car expenses and the rules for using the standard mileage rate, see Pub. 463. How Much Can I Deduct? Generally, you can deduct the full amount of a business expense if it meets the criteria of ordi- nary and necessary and it is not a capital ex- pense. Recovery of amount deducted (tax benefit rule). If you recover part of an expense in the same tax year in which you would have claimed a deduction, reduce your current year expense by the amount of the recovery. If you have a re- covery in a later year, include the recovered amount in income in that year. However, if part of the deduction for the expense did not reduce your tax, you do not have to include that part of the recovered amount in income. For more information on recoveries and the tax benefit rule, see Pub. 525. Payments in kind. If you provide services to pay a business expense, the amount you can deduct is limited to your out-of-pocket costs. You cannot deduct the cost of your own labor. CAUTION ! Similarly, if you pay a business expense in goods or other property, you can deduct only what the property costs you. If these costs are included in the cost of goods sold, do not de- duct them again as a business expense. Limits on losses. If your deductions for an in- vestment or business activity are more than the income it brings in, you have a loss. There may be limits on how much of the loss you can de- duct. Not-for-profit limits. If you carry on your business activity without the intention of making a profit, you cannot use a loss from it to offset other income. For more information, see Not-for-Profit Activities, later. At-risk limits. Generally, a deductible loss from a trade or business or other income-pro- ducing activity is limited to the investment you have “at risk” in the activity. You are at risk in any activity for the following. 1. The money and adjusted basis of property you contribute to the activity. 2. Amounts you borrow for use in the activity if: a. You are personally liable for repay- ment, or b. You pledge property (other than prop- erty used in the activity) as security for the loan. For more information, see Pub. 925. Passive activities. Generally, you are in a passive activity if you have a trade or business activity in which you do not materially partici- pate, or a rental activity. In general, deductions for losses from passive activities only offset in- come from passive activities. You cannot use any excess deductions to offset other income. In addition, passive activity credits can only off- set the tax on net passive income. Any excess loss or credits are carried over to later years. Suspended passive losses are fully deductible in the year you completely dispose of the activ- ity. For more information, see Pub. 925. Net operating loss (NOL). If your deduc- tions are more than your income for the year, you may have an NOL. You can use an NOL to lower your taxes in other years. See Pub. 536 for more information. See Pub. 542 for information about NOLs of corporations. When Can I Deduct an Expense? When you can deduct an expense depends on your accounting method. An accounting method is a set of rules used to determine when and how income and expenses are reported. The two basic methods are the cash method and the accrual method. Whichever method you choose must clearly reflect income. For more information on accounting meth- ods, see Pub. 538. Cash method. Under the cash method of ac- counting, you generally deduct business expen- ses in the tax year you pay them. Accrual method. Under an accrual method of accounting, you generally deduct business ex- penses when both of the following apply. 1. The all-events test has been met. The test is met when: a. All events have occurred that fix the fact of liability, and b. The liability can be determined with reasonable accuracy. 2. Economic performance has occurred. Economic performance. You generally cannot deduct or capitalize a business expense until economic performance occurs. If your ex- pense is for property or services provided to you, or for your use of property, economic per- formance occurs as the property or services are provided, or the property is used. If your ex- pense is for property or services you provide to others, economic performance occurs as you provide the property or services. Example. Your tax year is the calendar year. In December 2018, the Field Plumbing Company did some repair work at your place of business and sent you a bill for $600. You paid it by check in January 2019. If you use the ac- crual method of accounting, deduct the $600 on your tax return for 2018 because all events have occurred to “fix” the fact of liability (in this case, the work was completed), the liability can be determined, and economic performance oc- curred in that year. If you use the cash method of accounting, deduct the expense on your 2019 tax return. Prepayment. You generally cannot deduct ex- penses in advance, even if you pay them in ad- vance. This applies to prepaid interest, prepaid insurance premiums, and any other prepaid ex- pense that creates an intangible asset. If you pay an amount that creates an intangible asset, then you must capitalize the amounts paid and begin to amortize the payment over the appro- priate period. However, you do not have to capitalize amounts for creating an intangible asset if the right or benefit created does not extend beyond the earlier of 12 months after the date that you first receive the right or benefit or the end of the tax year following the year in which you made the advance payment. If you are a cash method taxpayer and your advance payment qualifies for this exception, then you can generally de- duct the amount when paid. If you are an ac- crual method taxpayer, you cannot deduct the amount until the all-events test has been met and economic performance has occurred. Example 1. In 2018, you sign a 10-year lease and immediately pay your rent for the first 3 years. Even though you paid the rent for 2018, 2019, and 2020, you can only deduct the rent for 2018 on your 2018 tax return. You can deduct the rent for 2019 and 2020 on your tax returns for those years. Page 6 Chapter 1 Deducting Business Expenses

(p535)(page-8)Page 8#

Example 2. You are a cash method calen- dar year taxpayer. On December 1, 2018, you sign a 12-month lease, effective beginning Jan- uary 1, 2019, and immediately pay your rent for the entire 12-month period that begins on Janu- ary 1, 2019. The right or benefit attributable to the payment neither extends more than 12 months beyond January 1, 2019 (the first day that you are entitled to use the property) nor be- yond the tax year ending December 31, 2019 (the year following the year in which you made the advance payment). Therefore, your prepay- ment does not have to be capitalized, and you can deduct the entire payment in the year you pay it. Contested liability. Under the cash method, you can deduct a contested liability only in the year you pay the liability. Under the accrual method, you can deduct contested liabilities such as taxes (except foreign or U.S. posses- sion income, war profits, and excess profits taxes) either in the tax year you pay the liability (or transfer money or other property to satisfy the obligation) or in the tax year you settle the contest. However, to take the deduction in the year of payment or transfer, you must meet cer- tain conditions. See Regulations section 1.461-2. Related person. Under an accrual method of accounting, you generally deduct expenses when you incur them, even if you have not yet paid them. However, if you and the person you owe are related and that person uses the cash method of accounting, you must pay the ex- pense before you can deduct it. Your deduction is allowed when the amount is includible in in- come by the related cash method payee. For more information, see Related Persons in Pub. 538. Not-for-Profit Activities If you do not carry on your business or invest- ment activity to make a profit, you cannot use a loss from the activity to offset other income. Ac- tivities you do as a hobby, or mainly for sport or recreation, are often not entered into for profit. The limit on not-for-profit losses applies to individuals, partnerships, estates, trusts, and S corporations. It does not apply to corporations other than S corporations. In determining whether you are carrying on an activity for profit, several factors are taken into account. No one factor alone is decisive. Among the factors to consider are whether: • You carry on the activity in a businesslike manner, • The time and effort you put into the activity indicate you intend to make it profitable, • You depend on the income for your liveli- hood, • Your losses are due to circumstances be- yond your control (or are normal in the start-up phase of your type of business), • You change your methods of operation in an attempt to improve profitability, • You (or your advisors) have the knowledge needed to carry on the activity as a suc- cessful business, • You were successful in making a profit in similar activities in the past, • The activity makes a profit in some years, and • You can expect to make a future profit from the appreciation of the assets used in the activity. Presumption of profit. An activity is pre- sumed carried on for profit if it produced a profit in at least 3 of the last 5 tax years, including the current year. Activities that consist primarily of breeding, training, showing, or racing horses are presumed carried on for profit if they pro- duced a profit in at least 2 of the last 7 tax years, including the current year. The activity must be substantially the same for each year within this period. You have a profit when the gross income from an activity exceeds the de- ductions. If a taxpayer dies before the end of the 5-year (or 7-year) period, the “test” period ends on the date of the taxpayer's death. If your business or investment activity passes this 3- (or 2-) years-of-profit test, the IRS will presume it is carried on for profit. This means the limits discussed here will not apply. You can take all your business deductions from the activity, even for the years that you have a loss. You can rely on this presumption unless the IRS later shows it to be invalid. Using the presumption later. If you are start- ing an activity and do not have 3 (or 2) years showing a profit, you can elect to have the pre- sumption made after you have the 5 (or 7) years of experience allowed by the test. You can elect to do this by filing Form 5213. Filing this form postpones any determination that your activity is not carried on for profit until 5 (or 7) years have passed since you started the activity. The benefit gained by making this election is that the IRS will not immediately question whether your activity is engaged in for profit. Accordingly, it will not restrict your deductions. Rather, you will gain time to earn a profit in the required number of years. If you show 3 (or 2) years of profit at the end of this period, your de- ductions are not limited under these rules. If you do not have 3 (or 2) years of profit, the limit can be applied retroactively to any year with a loss in the 5-year (or 7-year) period. Filing Form 5213 automatically extends the period of limitations on any year in the 5-year (or 7-year) period to 2 years after the due date of the tax return for the last year of the period. The period is extended only for deductions of the activity and any related deductions that might be affected. You must file Form 5213 within 3 years after the due date of your tax return (determined without extensions) for the year in which you first carried on the activity, or, if earlier, within 60 days after receiving written notice from the IRS proposing to disallow de- ductions attributable to the activity. Gross Income Gross income from a not-for-profit activity in- cludes the total of all gains from the sale, TIP exchange, or other disposition of property, and all other gross receipts derived from the activity. Gross income from the activity also includes capital gains and rents received for the use of property that is held in connection with the ac- tivity. You can determine gross income from any not-for-profit activity by subtracting the cost of goods sold from your gross receipts. However, if you determine gross income by subtracting cost of goods sold from gross receipts, you must do so consistently, and in a manner that follows generally accepted methods of account- ing. Limit on Deductions You can no longer claim any miscella- neous itemized deductions. Miscella- neous itemized deductions are those deductions that would have been subject to the 2%-of-adjusted-gross-income limitation. You can still claim certain expenses as itemized de- ductions on Schedule A (Form 1040). Deductions you can take for personal as well as for business activities are allowed in full. For in- dividuals, all nonbusiness deductions, such as those for home mortgage interest, taxes, and casualty losses, may also be deducted. Deduct them on the appropriate lines of Schedule A (Form 1040). For the limits that apply to home mortgage interest, see Pub. 936. Generally, you can deduct a casualty loss on property you own for personal use only to the extent each casualty loss is more than $100, and the total of all casualty losses ex- ceeds 10% of your adjusted gross income (AGI). See Pub. 547 for more information on casualty losses. Disaster tax relief. For personal casualty losses resulting from federally declared disas- ters that occurred before 2018, you may be en- titled to disaster tax relief. As a result, you may be required to figure your casualty loss differ- ently. Beginning in 2018, casualty and theft loss are allowed only to the extent it is attributable to a federally declared disaster. For more informa- tion, see Pub. 976, Disaster Relief. Partnerships and S corporations. If a part- nership or S corporation carries on a not-for-profit activity, these limits apply at the partnership or S corporation level. They are re- flected in the individual shareholder's or part- ner's distributive shares. More than one activity. If you have several undertakings, each may be a separate activity or several undertakings may be combined. The following are the most significant facts and cir- cumstances in making this determination. • The degree of organizational and eco- nomic interrelationship of various under- takings. • The business purpose that is (or might be) served by carrying on the various under- takings separately or together in a busi- ness or investment setting. • The similarity of the undertakings. CAUTION ! Chapter 1 Deducting Business Expenses Page 7

(p535)(page-9)Page 9#

The IRS will generally accept your charac- terization if it is supported by facts and circum- stances. If you are carrying on two or more dif- ferent activities, keep the deductions and income from each one separate. Figure separately whether each is a not-for-profit activity. Then figure the limit on de- ductions and losses separately for each activity that is not for profit. 2. Employees' Pay What’s New Compensation in excess of $1 million. P.L. 115-97, Tax Cuts and Jobs Act, made signifi- cant changes to section 162(m) which disallows the deduction of excessive employee compen- sation by any publicly held corporation. See Compensation in excess of $1 million, later. Employee achievement awards. P.L. 115-97 defines items that aren't tangible personal prop- erty for purposes of employee achievement awards. Tangible personal property doesn't in- clude cash, gift cards, and other nontangible personal property. See Achievement awards, later. Certain expense deductions are now limi- ted. P.L. 115-97 limits the deduction by em- ployers of expenses for certain fringe benefits and entertainment expenses. For more informa- tion, see the Caution under Meals and lodging, later. Also see Food and beverage expense in- curred together with entertainment expenses. and Transportation (commuting) benefits, later. At the time this publication was printed, the empowerment zone employment credit and the Indian employment credit expired at the end of 2017. To find out if legislation was enacted to extend these credits and make them available for 2018, go to IRS.gov/FormsUpdates. Introduction You can generally deduct the amount you pay your employees for the services they perform. The pay may be in cash, property, or services. It may include wages, salaries, bonuses, commis- sions, or other non-cash compensation such as vacation allowances and fringe benefits. For in- formation about deducting employment taxes, see chapter 5. You may be able to claim employment credits, such as the credits listed be- low, if you meet certain requirements. You must reduce your deduction for employee wages by the amount of employment credits that you claim. For more information about TIP CAUTION ! TIP these credits, see the form on which the credit is claimed; you can find a list of these forms in Form (and Instructions) under Useful Items, later. • Work opportunity credit. • Credit for employer differential wage pay- ments. • Employer credit for paid family and medi- cal leave. Topics This chapter discusses: • Tests for deducting pay • Kinds of pay Useful Items You may want to see: Publication 15 Employer's Tax Guide 15-A Employer's Supplemental Tax Guide 15-B Employer's Tax Guide to Fringe Benefits Form (and Instructions) 1099-MISC Miscellaneous Income 5884 Work Opportunity Credit 8932 Credit for Employer Differential Wage Payments 8994 Employer Credit for Paid Family and Medical Leave W-2 Wage and Tax Statement See chapter 13 for information about getting publications and forms. Tests for Deducting Pay To be deductible, your employees' pay must be an ordinary and necessary business expense and you must pay or incur it. These and other requirements that apply to all business expen- ses are explained in chapter 1. In addition, the pay must meet both of the following tests. • Test 1. It must be reasonable. • Test 2. It must be for services performed. The form or method of figuring the pay doesn't affect its deductibility. For example, bonuses and commissions based on sales or earnings, and paid under an agreement made before the services were performed, are both deductible. Test 1—Reasonableness You must be able to prove that the pay is rea- sonable. Whether the pay is reasonable de- pends on the circumstances that existed when you contracted for the services, not those that exist when reasonableness is questioned. If the pay is excessive, the excess pay is disallowed as a deduction. Factors to consider. Determine the reasona- bleness of pay by the facts and circumstances. 15 15-A 15-B 1099-MISC 5884 8932 8994 W-2 Generally, reasonable pay is the amount that a similar business would pay for the same or simi- lar services. To determine if pay is reasonable, also con- sider the following items and any other pertinent facts. • The duties performed by the employee. • The volume of business handled. • The character and amount of responsibil- ity. • The complexities of your business. • The amount of time required. • The cost of living in the locality. • The ability and achievements of the indi- vidual employee performing the service. • The pay compared with the gross and net income of the business, as well as with dis- tributions to shareholders if the business is a corporation. • Your policy regarding pay for all your em- ployees. • The history of pay for each employee. Compensation in excess of $1 million. Pub- licly held corporations can't deduct compensa- tion to a “covered employee” to the extent that the compensation exceeds $1 million. For more information, including the definition of a “cov- ered employee,” see the Instructions for Form 1125-E. Also see Notice 2018-68, 2018-36 I.R.B. 418, available at IRS.gov/irb/ 2018-36_IRB#NOT-2018-68. Test 2—For Services Performed You must be able to prove the payment was made for services actually performed. Employee-shareholder salaries. If a corpo- ration pays an employee who is also a share- holder a salary that is unreasonably high con- sidering the services actually performed, the excessive part of the salary may be treated as a constructive dividend to the employee-share- holder. The excessive part of the salary wouldn't be allowed as a salary deduction by the corporation. For more information on corpo- rate distributions to shareholders, see Pub. 542. Kinds of Pay Some of the ways you may provide pay to your employees in addition to regular wages or salar- ies are discussed next. For specialized and de- tailed information on employees' pay and the employment tax treatment of employees' pay, see Pubs. 15, 15-A, and 15-B. Awards You can generally deduct amounts you pay to your employees as awards, whether paid in cash or property. If you give property to an em- ployee as an employee achievement award, your deduction may be limited. Achievement awards. An achievement award is an item of tangible personal property that meets all the following requirements. • It is given to an employee for length of service or safety achievement. Page 8 Chapter 2 Employees' Pay

(p535)(page-10)Page 10#

• It is awarded as part of a meaningful pre- sentation. • It is awarded under conditions and circum- stances that don't create a significant likeli- hood of disguised pay. Tangible personal property. An award isn't an item of tangible personal property if it is an award of cash, cash equivalents, gift cards, gift coupons, or gift certificates (other than ar- rangements granting only the right to select and receive tangible personal property from a limi- ted assortment of items preselected or preap- proved by you). Also, tangible personal prop- erty doesn't include vacations, meals, lodging, tickets to theater or sporting events, stocks, bonds, other securities, and other similar items. Length-of-service award. An award will qualify as a length-of-service award only if ei- ther of the following applies. • The employee receives the award after his or her first 5 years of employment. • The employee didn't receive another length-of-service award (other than one of very small value) during the same year or in any of the prior 4 years. Safety achievement award. An award for safety achievement will qualify as an achieve- ment award unless one of the following applies. 1. It is given to a manager, administrator, clerical employee, or other professional employee. 2. During the tax year, more than 10% of your employees, excluding those listed in (1), have already received a safety ach- ievement award (other than one of very small value). Deduction limit. Your deduction for the cost of employee achievement awards given to any one employee during the tax year is limited to the following. • $400 for awards that aren't qualified plan awards. • $1,600 for all awards, whether or not quali- fied plan awards. A qualified plan award is an achievement award given as part of an established written plan or program that doesn't favor highly com- pensated employees as to eligibility or benefits. A highly compensated employee is an em- ployee who meets either of the following tests. 1. The employee was a 5% owner at any time during the year or the preceding year. 2. The employee received more than $120,000 in pay for 2017. You can choose to ignore test (2) if the em- ployee wasn't also in the top 20% of employees ranked by pay for the preceding year. An award isn't a qualified plan award if the average cost of all the employee achievement awards given during the tax year (that would be qualified plan awards except for this limit) is more than $400. To figure this average cost, ig- nore awards of nominal value. Deduct achievement awards, up to the max- imum amounts listed earlier, as a nonwage business expense on your return or business schedule. You may not owe employment taxes on the value of some achievement awards you provide to an employee. See Pub. 15-B. Bonuses You can generally deduct a bonus paid to an employee if you intended the bonus as addi- tional pay for services, not as a gift, and the services were performed. However, the total bonuses, salaries, and other pay must be rea- sonable for the services performed. If the bonus is paid in property, see Property, later. Gifts of nominal value. If, to promote em- ployee goodwill, you distribute merchandise of nominal value or other de minimis items to your employees at holidays, you can deduct the cost of these items as a nonwage business ex- pense. See Pub. 15-B for additional information on de minimis fringe benefits. If you provide food to your employees, your business deduc- tion may be limited; see Meals and lodging, later. Education Expenses If you pay or reimburse education expenses for an employee, you can deduct the payments if they are part of a qualified educational assis- tance program. Deduct them on the “Employee benefit programs” or other appropriate line of your tax return. For information on educational assistance programs, see Educational Assis- tance in section 2 of Pub. 15-B. Fringe Benefits A fringe benefit is a form of pay for the perform- ance of services. You can generally deduct the cost of fringe benefits. You may be able to exclude all or part of the value of some fringe benefits from your employ- ees' pay. You also may not owe employment taxes on the value of the fringe benefits. See Table 2-1 in Pub. 15-B for details. Generally, no deduction is allowed for activi- ties generally considered entertainment, amusement, or recreation, or for a facility used in connection with such activity. However, you may deduct these expenses if the goods, serv- ices, or facilities are treated as compensation to the recipient and reported on Form W-2 for an employee or on Form 1099-MISC for an inde- pendent contractor. If the recipient is an officer, director, beneficial owner (directly or indirectly), or other “specified individual” (as defined in section 274(e)(2)(B) and Regulations section 1.274-9(b)), special rules apply. See section 274(e)(2) and Regulations sections 1.274-9 and 1.274-10. Certain fringe benefits are discussed next. See Pub. 15-B for more details on these and other fringe benefits. Meals and lodging. Generally, you can de- duct 50% of certain meal expenses and 100% of certain lodging expenses provided to your employees. If the amounts are deductible, de- TIP duct the cost in whatever category the expense falls. Deduction limit on meals. You can gener- ally deduct only 50% of the cost of furnishing meals to your employees. However, you can deduct the full cost of certain meals; see sec- tion 274(n)(2) for more information. For exam- ple, you can deduct the full cost of the following meals. • Meals whose value you include in an em- ployee's wages. • Meals you furnish to your employees as part of the expense of providing recrea- tional or social activities, such as holiday parties or annual picnics, when made pri- marily for the benefit of your employees other than employees who are officers, shareholders or other owners who own a 10% or greater interest in your business, or other highly compensated employees. • Meals you’re required by federal law to fur- nish to crew members of certain commer- cial vessels (or would be required to fur- nish if the vessels were operated at sea). This doesn't include meals you furnish on vessels primarily providing luxury water transportation. • Meals you furnish on an oil or gas platform or drilling rig located offshore or in Alaska. This includes meals you furnish at a sup- port camp that is near and integral to an oil or gas drilling rig located in Alaska. P.L. 115-97 changed the rules for the deduction of food or beverage expen- ses that are excludable from employee income as a de minimis fringe benefit. For amounts incurred or paid after 2017, the 50% limit on deductions for food or beverage expen- ses also applies to food or beverage expenses excludable from employee income as a de mini- mis fringe benefit. While your business deduc- tion may be limited, the rules that allow you to exclude certain de minimis meals and meals on your business premises from your employee's wages still apply. See Meals in section 2 of Pub. 15-B. Food and beverage expense incurred to- gether with entertainment expenses. P.L. 115-97 changed the rules for the deduction of business entertainment expenses. For amounts incurred or paid after 2017, no business deduc- tion is allowed for any item generally consid- ered to be entertainment, amusement, or recre- ation. As discussed earlier, you can deduct 50% of the cost of business meals. If food and beverages are provided during or at an enter- tainment activity, and the food and beverages are purchased separately from the entertain- ment, or the cost of the food and beverages is stated separately from the cost of the entertain- ment on one or more bills, invoices, or receipts, you may continue to deduct 50% of the busi- ness meal expenses. However, if you purchase food and beverages together with entertain- ment expenses and the cost of the food and beverages isn't stated separately on the in- voice, the cost of the food and beverages are also an entertainment expense and none of the expenses are deductible. For more information, including details about four additional require- ments that must be met for a business meal to be deductible, see Notice 2018-76, 2018-42 CAUTION ! Chapter 2 Employees' Pay Page 9

(p535)(page-11)Page 11#

I.R.B. 599, available at IRS.gov/irb/ 2018-42_IRB#NOT-2018-76. Transportation (commuting) benefits. If you provide your employees with qualified transportation benefits, such as transportation in a commuter highway vehicle, transit passes, or qualified parking, you may no longer deduct these amounts. P.L. 115-97 provides that no deduction is allowed for qualified transportation benefits (whether provided directly by you, through a bona fide reimbursement arrange- ment, or through a compensation reduction agreement) incurred or paid after 2017. Also, no deduction is allowed for any expense incur- red for providing any transportation, or any pay- ment or reimbursement to your employee, in connection with travel between your employee's residence and place of employment, except as necessary for ensuring the safety of your em- ployee or for qualified bicycle commuting reim- bursements as described in section 132(f)(5) (F). While you may no longer deduct payments for qualified transportation benefits, the fringe benefit exclusion rules still apply and the pay- ments, except for qualified bicycle commuting reimbursements, may be excluded from your employee's wages. See Pub. 15-B for more in- formation about qualified transportation bene- fits. Tax-exempt organizations may need to in- crease their unrelated business taxable income by the amount of certain disallowed fringe ben- efits. For more information, see the Instructions for Form 990-T. Also see Notice 2018-99, 2018-52 I.R.B. 1067, available at IRS.gov/irb/ 2018-52_IRB#NOT-2018-99 and Notice 2018-100, 2018-52 I.R.B. 1074, available at IRS.gov/irb/2018-52_IRB#NOT-2018-100. Employee benefit programs. Employee ben- efit programs include the following. • Accident and health plans. • Adoption assistance. • Cafeteria plans. • Dependent care assistance. • Education assistance. • Life insurance coverage. • Welfare benefit funds. You can generally deduct amounts you spend on employee benefit programs on the applicable line of your tax return. For example, if you provide dependent care by operating a dependent care facility for your employees, de- duct your costs in whatever categories they fall (utilities, salaries, etc.). Life insurance coverage. You can't de- duct the cost of life insurance coverage for you, an employee, or any person with a financial in- terest in your business, if you’re directly or indi- rectly the beneficiary of the policy. See Regula- tions section 1.264-1 for more information. Welfare benefit funds. A welfare benefit fund is a funded plan (or a funded arrangement having the effect of a plan) that provides welfare benefits to your employees, independent con- tractors, or their beneficiaries. Welfare benefits are any benefits other than deferred compensa- tion or transfers of restricted property. Your deduction for contributions to a welfare benefit fund is limited to the fund's qualified cost for the tax year. If your contributions to the fund are more than its qualified cost, carry the ex- cess over to the next tax year. Generally, the fund's “qualified cost” is the total of the following amounts, reduced by the after-tax income of the fund. • The cost you would’ve been able to deduct using the cash method of accounting if you had paid for the benefits directly. • The contributions added to a reserve ac- count that are needed to fund claims incur- red but not paid as of the end of the year. These claims can be for supplemental un- employment benefits, severance pay, or disability, medical, or life insurance bene- fits. For more information, see sections 419(c) and 419A and the related regulations. Loans or Advances You generally can deduct as wages an advance you make to an employee for services per- formed if you don't expect the employee to re- pay the advance. However, if the employee per- forms no services, treat the amount you advanced as a loan. If the employee doesn't re- pay the loan, treat it as income to the employee. Below-market interest rate loans. On certain loans you make to an employee or shareholder, you’re treated as having received interest in- come and as having paid compensation or divi- dends equal to that interest. See Below-Market Loans in chapter 4. Property If you transfer property (including your compa- ny's stock) to an employee as payment for serv- ices, you can generally deduct it as wages. The amount you can deduct is the property's fair market value (FMV) on the date of the transfer less any amount the employee paid for the property. You can claim the deduction only for the tax year in which your employee includes the prop- erty's value in income. Your employee is deemed to have included the value in income if you report it on Form W-2 in a timely manner. You treat the deductible amount as received in exchange for the property, and you must rec- ognize any gain or loss realized on the transfer, unless it is the company's stock transferred as payment for services. Your gain or loss is the difference between the FMV of the property and its adjusted basis on the date of transfer. These rules also apply to property transfer- red to an independent contractor for services, generally reported on Form 1099-MISC. Restricted property. If the property you trans- fer for services is subject to restrictions that af- fect its value, you generally can't deduct it and don't report gain or loss until it is substantially vested in the recipient. However, if the recipient pays for the property, you must report any gain at the time of the transfer up to the amount paid. “Substantially vested” means the property isn't subject to a substantial risk of forfeiture. This means that the recipient isn't likely to have to give up his or her rights in the property in the future. Reimbursements for Business Expenses You can generally deduct the amount you pay or reimburse employees for business expenses incurred for your business. However, your de- duction may be limited. If you make the payment under an account- able plan, deduct it in the category of the ex- pense paid. For example, if you pay an em- ployee for travel expenses incurred on your behalf, deduct this payment as a travel ex- pense. If you make the payment under a nonac- countable plan, deduct it as wages and include it in the employee's Form W-2. See Reimbursement of Travel, Meals, and Entertainment, in chapter 11, for more informa- tion about deducting reimbursements and an explanation of accountable and nonaccounta- ble plans. Sick and Vacation Pay Sick pay. You can deduct amounts you pay to your employees for sickness and injury, includ- ing lump-sum amounts, as wages. However, your deduction is limited to amounts not com- pensated by insurance or other means. Vacation pay. Vacation pay is an employee benefit. It includes amounts paid for unused va- cation leave. You can deduct vacation pay only in the tax year in which the employee actually receives it. This rule applies regardless of whether you use the cash or accrual method of accounting. 3. Rent Expense What’s New Small business taxpayers. P.L. 115-97, Tax Cuts and Jobs Act, made changes to uniform capitalization rules for small business taxpay- ers. See Uniform capitalization rules, later. Introduction This chapter discusses the tax treatment of rent or lease payments you make for property you use in your business but do not own. It also dis- cusses how to treat other kinds of payments you make that are related to your use of this property. These include payments you make for taxes on the property. Page 10 Chapter 3 Rent Expense

(p535)(page-12)Page 12#

Topics This chapter discusses: • The definition of rent • Taxes on leased property • The cost of getting a lease • Improvements by the lessee • Capitalizing rent expenses Useful Items You may want to see: Publication 538 Accounting Periods and Methods 544 Sales and Other Dispositions of Assets 946 How To Depreciate Property See chapter 13 for information about getting publications and forms. Rent Rent is any amount you pay for the use of prop- erty you do not own. In general, you can deduct rent as an expense only if the rent is for prop- erty you use in your trade or business. If you have or will receive equity in or title to the prop- erty, the rent is not deductible. Unreasonable rent. You can’t take a rental deduction for unreasonable rent. Ordinarily, the issue of reasonableness arises only if you and the lessor are related. Rent paid to a related person is reasonable if it is the same amount you would pay to a stranger for use of the same property. Rent isn’t unreasonable just because it is figured as a percentage of gross sales. For examples of related persons, see Related per- sons in chapter 2 of Pub. 544. Rent on your home. If you rent your home and use part of it as your place of business, you may be able to deduct the rent you pay for that part. You must meet the requirements for busi- ness use of your home. For more information, see Business use of your home in chapter 1. Rent paid in advance. Generally, rent paid for use of property in your trade or business is de- ductible in the year paid or incurred. If you are an accrual method taxpayer and pay rent in ad- vance, you can deduct only the amount of rent that applies to your use of rented property dur- ing the tax year. You can deduct the rest of the rent payment only over the period to which it applies. If you are a cash method taxpayer, you may deduct the entire amount of rent you paid in advance in the year of payment if the pay- ment applies to right to use property that does not extend beyond the earlier of 12 months after the first date you have the right to use the prop- erty or the end of the tax year following the year in which you paid the advance rent. If your pay- ment applies to the right to use property beyond this period, then you must capitalize the rent payment and deduct it over the period to which it applies. Example 1. You are an accrual method cal- endar year taxpayer and you lease a building at 538 544 946 a monthly rental rate of $1,000 beginning July 1, 2018. On June 30, 2018, you pay advance rent of $12,000 for the last 6 months of 2018 and the first 6 months of 2019. You can deduct only $6,000 for 2018, for the right to use prop- erty in 2018. You deduct the other $6,000 in 2019. Example 2. Assume the same facts as Ex- ample 1, except you are a cash method calen- dar year taxpayer. You may deduct the entire $12,000 payment for 2018. The payment ap- plies to your right to use the property that does not extend beyond 12 months after the date you received this right. If you deduct the $12,000 in 2018, you should not deduct any part of this payment in 2019. Example 3. You are either a cash or ac- crual calendar year taxpayer. Last January, you leased property for 3 years for $6,000 per year. You pay the full $18,000 (3 x $6,000) during the first year of the lease. Because this amount is a prepaid expense that must be capitalized, you can deduct only $6,000 per year, the amount al- locable to your use of the property in each year. Canceling a lease. You generally can deduct as rent an amount you pay to cancel a business lease. Lease or purchase. There may be instances in which you must determine whether your pay- ments are for rent or for the purchase of the property. You must first determine whether your agreement is a lease or a conditional sales con- tract. Payments made under a conditional sales contract are not deductible as rent expense. Conditional sales contract. Whether an agreement is a conditional sales contract de- pends on the intent of the parties. Determine in- tent based on the provisions of the agreement and the facts and circumstances that exist when you make the agreement. No single test, or special combination of tests, always applies. However, in general, an agreement may be considered a conditional sales contract rather than a lease if any of the following is true. • The agreement applies part of each pay- ment toward an equity interest you will re- ceive. • You get title to the property after you make a stated amount of required payments. • The amount you must pay to use the prop- erty for a short time is a large part of the amount you would pay to get title to the property. • You pay much more than the current fair rental value of the property. • You have an option to buy the property at a nominal price compared to the value of the property when you may exercise the op- tion. Determine this value when you make the agreement. • You have an option to buy the property at a nominal price compared to the total amount you have to pay under the agree- ment. • The agreement designates part of the pay- ments as interest, or that part is easy to recognize as interest. Leveraged leases. Leveraged lease trans- actions may not be considered leases. Lever- aged leases generally involve three parties: a lessor, a lessee, and a lender to the lessor. Usually, the lease term covers a large part of the useful life of the leased property, and the lessee's payments to the lessor are enough to cover the lessor's payments to the lender. If you plan to take part in what appears to be a leveraged lease, you may want to get an ad- vance ruling. • Revenue Procedure 2001-28 contains the guidelines the IRS will use to determine if a leveraged lease is a lease for federal in- come tax purposes. • Revenue Procedure 2001-29 provides the information required to be furnished in a request for an advance ruling on a lever- aged lease transaction. These two revenue procedures can be found in I.R.B. 2001-19, which is available at IRS.gov/pub/irs-irbs/irb01-19.pdf. For advance ruling purposes only, the IRS will consider the lessor in a leveraged lease transaction to be the owner of the property and the transaction to be a valid lease if all the fac- tors in the revenue procedure are met, including the following. • The lessor must maintain a minimum un- conditional “at risk” equity investment in the property (at least 20% of the cost of the property) during the entire lease term. • The lessee may not have a contractual right to buy the property from the lessor at less than FMV when the right is exercised. • The lessee may not invest in the property, except as provided by Revenue Procedure 2001-28. • The lessee may not lend any money to the lessor to buy the property or guarantee the loan used by the lessor to buy the prop- erty. • The lessor must show that it expects to re- ceive a profit apart from the tax deduc- tions, allowances, credits, and other tax at- tributes. The IRS may charge you a user fee for issu- ing a tax ruling. For more information, see Rev- enue Procedure 2018-1, available at IRS.gov/irb/2018-1_IRB#RP-2018-1. Leveraged leases of limited-use prop- erty. The IRS won’t issue advance rulings on leveraged leases of so-called limited-use prop- erty. Limited-use property is property not ex- pected to be either useful to or usable by a les- sor at the end of the lease term except for continued leasing or transfer to a lessee. See Revenue Procedure 2001-28 for examples of limited-use property and property that isn’t limi- ted-use property. Leases over $250,000. Special rules are pro- vided for certain leases of tangible property. The rules apply if the lease calls for total pay- ments of more than $250,000 and any of the fol- lowing apply. • Rents increase during the lease. • Rents decrease during the lease. • Rents are deferred (rent is payable after the end of the calendar year following the calendar year in which the use occurs and the rent is allocated). Chapter 3 Rent Expense Page 11

(p535)(page-13)Page 13#

• Rents are prepaid (rent is payable before the end of the calendar year preceding the calendar year in which the use occurs and the rent is allocated). These rules do not apply if your lease specifies equal amounts of rent for each month in the lease term and all rent payments are due in the calendar year to which the rent relates (or in the preceding or following calendar year). Generally, if the special rules apply, you must use an accrual method of accounting (and time value of money principles) for your rental expenses, regardless of your overall method of accounting. In addition, in certain cases in which the IRS has determined that a lease was designed to achieve tax avoidance, you must take rent and stated or imputed interest into ac- count under a constant rental accrual method in which the rent is treated as accruing ratably over the entire lease term. For details, see sec- tion 467. Taxes on Leased Property If you lease business property, you can deduct as additional rent any taxes you have to pay to or for the lessor. When you can deduct these taxes as additional rent depends on your ac- counting method. Cash method. If you use the cash method of accounting, you can deduct the taxes as addi- tional rent only for the tax year in which you pay them. Accrual method. If you use an accrual method of accounting, you can deduct the taxes as ad- ditional rent for the tax year in which you can determine all the following. • That you have a liability for taxes on the leased property. • How much the liability is. • That economic performance occurred. The liability and amount of taxes are deter- mined by state or local law and the lease agree- ment. Economic performance occurs as you use the property. Example 1. Oak Corporation is a calendar year taxpayer that uses an accrual method of accounting. Oak leases land for use in its busi- ness. Under state law, owners of real property become liable (incur a lien on the property) for real estate taxes for the year on January 1 of that year. However, they don’t have to pay these taxes until July 1 of the next year (18 months later) when tax bills are issued. Under the terms of the lease, Oak becomes liable for the real estate taxes in the later year when the tax bills are issued. If the lease ends before the tax bill for a year is issued, Oak isn’t liable for the taxes for that year. Oak cannot deduct the real estate taxes as rent until the tax bill is issued. This is when Oak's liability under the lease becomes fixed. Example 2. The facts are the same as in Example 1, except that, according to the terms of the lease, Oak becomes liable for the real es- tate taxes when the owner of the property becomes liable for them. As a result, Oak will deduct the real estate taxes as rent on its tax return for the earlier year. This is the year in which Oak's liability under the lease becomes fixed. Cost of Getting a Lease You may either enter into a new lease with the lessor of the property or get an existing lease from another lessee. Very often when you get an existing lease from another lessee, you must pay the previous lessee money to get the lease, besides having to pay the rent on the lease. If you get an existing lease on property or equipment for your business, you generally must amortize any amount you pay to get that lease over the remaining term of the lease. For example, if you pay $10,000 to get a lease and there are 10 years remaining on the lease with no option to renew, you can deduct $1,000 each year. The cost of getting an existing lease of tan- gible property is not subject to the amortization rules for section 197 intangibles discussed in chapter 8. Option to renew. The term of the lease for amortization includes all renewal options plus any other period for which you and the lessor reasonably expect the lease to be renewed. However, this applies only if less than 75% of the cost of getting the lease is for the term re- maining on the purchase date (not including any period for which you may choose to renew, extend, or continue the lease). Allocate the lease cost to the original term and any option term based on the facts and circumstances. In some cases, it may be appropriate to make the allocation using a present value calculation. For more information, see Regulations section 1.178-1(b)(5). Example 1. You paid $10,000 to get a lease with 20 years remaining on it and two op- tions to renew for 5 years each. Of this cost, you paid $7,000 for the original lease and $3,000 for the renewal options. Because $7,000 is less than 75% of the total $10,000 cost of the lease (or $7,500), you must amortize the $10,000 over 30 years. That is the remain- ing life of your present lease plus the periods for renewal. Example 2. The facts are the same as in Example 1, except that you paid $8,000 for the original lease and $2,000 for the renewal op- tions. You can amortize the entire $10,000 over the 20-year remaining life of the original lease. The $8,000 cost of getting the original lease was not less than 75% of the total cost of the lease (or $7,500). Cost of a modification agreement. You may have to pay an additional “rent” amount over part of the lease period to change certain provi- sions in your lease. You must capitalize these payments and amortize them over the remain- ing period of the lease. You can’t deduct the payments as additional rent, even if they are described as rent in the agreement. Example. You are a calendar year taxpayer and sign a 20-year lease to rent part of a build- ing starting on January 1. However, before you occupy it, you decide that you really need less space. The lessor agrees to reduce your rent from $7,000 to $6,000 per year and to release the excess space from the original lease. In ex- change, you agree to pay an additional rent amount of $3,000, payable in 60 monthly install- ments of $50 each. You must capitalize the $3,000 and amortize it over the 20-year term of the lease. Your amor- tization deduction each year will be $150 ($3,000 ÷ 20). You can’t deduct the $600 (12 × $50) that you will pay during each of the first 5 years as rent. Commissions, bonuses, and fees. Commis- sions, bonuses, fees, and other amounts you pay to get a lease on property you use in your business are capital costs. You must amortize these costs over the term of the lease. Loss on merchandise and fixtures. If you sell at a loss merchandise and fixtures that you bought solely to get a lease, the loss is a cost of getting the lease. You must capitalize the loss and amortize it over the remaining term of the lease. Improvements by Lessee If you add buildings or make other permanent improvements to leased property, depreciate the cost of the improvements using the modified accelerated cost recovery system (MACRS). Depreciate the property over its appropriate re- covery period. You can’t amortize the cost over the remaining term of the lease. If you don’t keep the improvements when you end the lease, figure your gain or loss based on your adjusted basis in the improve- ments at that time. For more information, see the discussion of MACRS in chapter 4 of Pub. 946. Assignment of a lease. If a long-term lessee who makes permanent improvements to land later assigns all lease rights to you for money and you pay the rent required by the lease, the amount you pay for the assignment is a capital investment. If the rental value of the leased land increased since the lease began, part of your capital investment is for that increase in the rental value. The rest is for your investment in the permanent improvements. The part that is for the increased rental value of the land is a cost of getting a lease, and you amortize it over the remaining term of the lease. You can depreciate the part that is for your in- vestment in the improvements over the recov- ery period of the property as discussed earlier, without regard to the lease term. Page 12 Chapter 3 Rent Expense

(p535)(page-14)Page 14#

Capitalizing Rent Expenses Under the uniform capitalization rules, you must capitalize the direct costs and part of the indi- rect costs for certain production or resale activi- ties. Include these costs in the basis of property you produce or acquire for resale, rather than claiming them as a current deduction. You re- cover the costs through depreciation, amortiza- tion, or cost of goods sold when you use, sell, or otherwise dispose of the property. Indirect costs include amounts incurred for renting or leasing equipment, facilities, or land. Uniform capitalization rules. You may be subject to the uniform capitalization rules if you do any of the following, unless the property is produced for your use other than in a business or an activity carried on for profit. 1. Produce real property or tangible personal property. 2. Acquire property for resale. Effective for tax years beginning after 12/31/2017, if you are a small business tax- payer (see Cost of Goods Sold in chapter 1), you are not required to capitalize costs under section 263A. See section 263A(i). Producing property. You produce prop- erty if you construct, build, install, manufacture, develop, improve, create, raise, or grow the property. Property produced for you under a contract is treated as produced by you to the extent you make payments or otherwise incur costs in connection with the property. Example 1. You rent construction equip- ment to build a storage facility. If you are sub- ject to the uniform capitalization rules, you must capitalize as part of the cost of the building the rent you paid for the equipment. You recover your cost by claiming a deduction for deprecia- tion on the building. Example 2. You rent space in a facility to conduct your business of manufacturing tools. If you are subject to the uniform capitalization rules, you must include the rent you paid to oc- cupy the facility in the cost of the tools you pro- duce. More information. For exceptions and more information on these rules, see Uniform Capital- ization Rules in Pub. 538 and the regulations under section 263A. 4. Interest Introduction This chapter discusses the tax treatment of business interest expense. Business interest expense is an amount charged for the use of money you borrowed for business activities. Topics This chapter discusses: • Allocation of interest • Interest expense limitation • Interest you can deduct • Interest you cannot deduct • Capitalization of interest • When to deduct interest • Below-market loans. Useful Items You may want to see: Publication 537 Installment Sales 550 Investment Income and Expenses 936 Home Mortgage Interest Deduction Form (and Instructions) Schedule A (Form 1040) Itemized Deductions Schedule E (Form 1040) Supplemental Income and Loss Schedule K-1 (Form 1065) Partner's Share of Income, Deductions, Credits, etc. Schedule K-1 (Form 1120S) Shareholder's Share of Income, Deductions, Credits, etc. 1098 Mortgage Interest Statement 3115 Application for Change in Accounting Method 4952 Investment Interest Expense Deduction 8582 Passive Activity Loss Limitations 8990 Limitation on Business Interest Expense Under Section 163(j) See chapter 13 for information about getting publications and forms. Allocation of Interest The rules for deducting interest vary, depending on whether the loan proceeds are used for busi- ness, personal, or investment activities. If you use the proceeds of a loan for more than one type of expense, you must allocate the interest based on the use of the loan's proceeds. 537 550 936 Schedule A (Form 1040) Schedule E (Form 1040) Schedule K-1 (Form 1065) Schedule K-1 (Form 1120S) 1098 3115 4952 8582 8990 Allocate your interest expense to the follow- ing categories. • Nonpassive trade or business activity inter- est. • Passive trade or business activity interest. • Investment interest. • Portfolio interest. • Personal interest. In general, you allocate interest on a loan the same way you allocate the loan proceeds. You allocate loan proceeds by tracing disburse- ments to specific uses. The easiest way to trace disburse- ments to specific uses is to keep the proceeds of a particular loan separate from any other funds. Secured loan. The allocation of loan proceeds and the related interest is not generally affected by the use of property that secures the loan. Example. You secure a loan with property used in your business. You use the loan pro- ceeds to buy an automobile for personal use. You must allocate interest expense on the loan to personal use (purchase of the automobile) even though the loan is secured by business property. P.L. 115-97 sec. 11043 limited the de- duction for mortgage interest paid on home equity loans and line of credit. For more information, see Pub. 936. Allocation period. The period for which a loan is allocated to a particular use begins on the date the proceeds are used and ends on the earlier of the following dates. • The date the loan is repaid. • The date the loan is reallocated to another use. Proceeds not disbursed to borrower. Even if the lender disburses the loan proceeds to a third party, the allocation of the loan is still based on your use of the funds. This applies whether you pay for property, services, or any- thing else by incurring a loan, or you take prop- erty subject to a debt. Proceeds deposited in borrower's account. Treat loan proceeds deposited in an account as property held for investment. It does not matter whether the account pays interest. Any interest you pay on the loan is investment interest ex- pense. If you withdraw the proceeds of the loan, you must reallocate the loan based on the use of the funds. Example. Celina, a calendar year taxpayer, borrows $100,000 on January 4 and immedi- ately uses the proceeds to open a checking ac- count. No other amounts are deposited in the account during the year and no part of the loan principal is repaid during the year. On April 2, Celina uses $20,000 from the checking account for a passive activity expenditure. On Septem- ber 4, Celina uses an additional $40,000 from the account for personal purposes. Under the interest allocation rules, the entire $100,000 loan is treated as property held for in- vestment for the period from January 4 through April 1. From April 2 through September 3, TIP CAUTION ! Chapter 4 Interest Page 13

(p535)(page-15)Page 15#

Celina must treat $20,000 of the loan as used in the passive activity and $80,000 of the loan as property held for investment. From September 4 through December 31, she must treat $40,000 of the loan as used for personal purpo- ses, $20,000 as used in the passive activity, and $40,000 as property held for investment. Order of funds spent. Generally, you treat loan proceeds deposited in an account as used (spent) before either of the following amounts. • Any unborrowed amounts held in the same account. • Any amounts deposited after these loan proceeds. Example. On January 9, Olena opened a checking account, depositing $500 of the pro- ceeds of Loan A and $1,000 of unborrowed funds. The following table shows the transac- tions in her account during the tax year. Date Transaction January 9 $500 proceeds of Loan A and $1,000 unborrowed funds deposited January 14 $500 proceeds of Loan B deposited February 19 $800 used for personal purposes February 27 $700 used for passive activity June 19 $1,000 proceeds of Loan C deposited November 20 $800 used for an investment December 18 $600 used for personal purposes Olena treats the $800 used for personal pur- poses as made from the $500 proceeds of Loan A and $300 of the proceeds of Loan B. She treats the $700 used for a passive activity as made from the remaining $200 proceeds of Loan B and $500 of unborrowed funds. She treats the $800 used for an investment as made entirely from the proceeds of Loan C. She treats the $600 used for personal purposes as made from the remaining $200 proceeds of Loan C and $400 of unborrowed funds. For the periods during which loan proceeds are held in the account, Olena treats them as property held for investment. Payments from checking accounts. Generally, you treat a payment from a checking or similar account as made at the time the check is written if you mail or deliver it to the payee within a reasonable period after you write it. You can treat checks written on the same day as written in any order. Amounts paid within 30 days. If you re- ceive loan proceeds in cash or if the loan pro- ceeds are deposited in an account, you can treat any payment (up to the amount of the pro- ceeds) made from any account you own, or from cash, as made from those proceeds. This applies to any payment made within 30 days before or after the proceeds are received in cash or deposited in your account. If the loan proceeds are deposited in an ac- count, you can apply this rule even if the rules stated earlier under Order of funds spent would otherwise require you to treat the proceeds as used for other purposes. If you apply this rule to any payments, disregard those payments (and the proceeds from which they are made) when applying the rules stated earlier under Order of funds spent. If you received the loan proceeds in cash, you can treat the payment as made on the date you received the cash instead of the date you actually made the payment. Example. Giovanni gets a loan of $1,000 on August 4 and receives the proceeds in cash. Giovanni deposits $1,500 in an account on Au- gust 18 and on August 28 writes a check on the account for a passive activity expense. Also, Giovanni deposits his paycheck, deposits other loan proceeds, and pays his bills during the same period. Regardless of these other trans- actions, Giovanni can treat $1,000 of the de- posit he made on August 18 as being paid on August 4 from the loan proceeds. In addition, Giovanni can treat the passive activity expense he paid on August 28 as made from the $1,000 loan proceeds treated as deposited in the ac- count. Optional method for determining date of reallocation. You can use the following method to determine the date loan proceeds are reallocated to another use. You can treat all payments from loan proceeds in the account during any month as taking place on the later of the following dates. • The first day of that month. • The date the loan proceeds are deposited in the account. However, you can use this optional method only if you treat all payments from the account dur- ing the same calendar month in the same way. Interest on a segregated account. If you have an account that contains only loan pro- ceeds and interest earned on the account, you can treat any payment from that account as be- ing made first from the interest. When the inter- est earned is used up, any remaining payments are from loan proceeds. Example. You borrowed $20,000 and used the proceeds of this loan to open a new savings account. When the account had earned interest of $867, you withdrew $20,000 for personal pur- poses. You can treat the withdrawal as coming first from the interest earned on the account, $867, and then from the loan proceeds, $19,133 ($20,000 − $867). All the interest charged on the loan from the time it was depos- ited in the account until the time of the with- drawal is investment interest expense. The in- terest charged on the part of the proceeds used for personal purposes ($19,133) from the time you withdrew it until you either repay it or reallo- cate it to another use is personal interest ex- pense. The interest charged on the loan pro- ceeds you left in the account ($867) continues to be investment interest expense until you ei- ther repay it or reallocate it to another use. Loan repayment. When you repay any part of a loan allocated to more than one use, treat it as being repaid in the following order. 1. Personal use. 2. Investments and passive activities (other than those included in (3)). 3. Passive activities in connection with a rental real estate activity in which you ac- tively participate. 4. Former passive activities. 5. Trade or business use and expenses for certain low-income housing projects. Line of credit (continuous borrowings). The following rules apply if you have a line of credit or similar arrangement. 1. Treat all borrowed funds on which interest accrues at the same fixed or variable rate as a single loan. 2. Treat borrowed funds or parts of borrowed funds on which interest accrues at differ- ent fixed or variable rates as different loans. Treat these loans as repaid in the order shown on the loan agreement. Loan refinancing. Allocate the replacement loan to the same uses to which the repaid loan was allocated. Make the allocation only to the extent you use the proceeds of the new loan to repay any part of the original loan. Debt-financed distribution. A debt-financed distribution occurs when a partnership or S cor- poration borrows funds and allocates those funds to distributions made to partners or shareholders. The manner in which you report the interest expense associated with the distrib- uted debt proceeds depends on your use of those proceeds. How to report. If the proceeds were used in a nonpassive trade or business activity, re- port the interest on Schedule E (Form 1040), line 28; enter “interest expense” and the name of the partnership or S corporation in column (a) and the amount in column (h). If the proceeds were used in a passive activity, follow the In- structions for Form 8582 to determine the amount of interest expense that can be repor- ted on Schedule E (Form 1040), line 28; enter “interest expense” and the name of the partner- ship in column (a) and the amount in column (f). If the proceeds were used in an investment ac- tivity, enter the interest on Form 4952. If the pro- ceeds are used for personal purposes, the in- terest is generally not deductible. Interest Expense Limitation You generally must limit business interest ex- pense you pay or accrue during the tax year, unless an exception to the limitation is met. The business interest expense deduction al- lowed for a taxable year is generally limited to the sum of: 1. Business interest income, 2. 30% of the adjustable taxable income, and 3. Floor plan financing interest. If the section 163(j) limitation applies, gener- ally the amount of any business interest ex- pense that is not allowed as a deduction under section 163(j) for the tax year is carried forward to the following year as a disallowed business Page 14 Chapter 4 Interest

(p535)(page-16)Page 16#

interest expense carryforward. See Instructions to Form 8990, Limitation on Business Interest Expense Under Section 163(j), for more infor- mation. Interest You Can Deduct Your trade or business interest expense may be limited. See Instructions to Form 8990, for more information. Interest relates to your trade or business if you use the proceeds of the loan for a trade or business expense. It does not matter what type of property secures the loan. You can deduct interest on a debt only if you meet all the following requirements. • You are legally liable for that debt. • Both you and the lender intend that the debt be repaid. • You and the lender have a true debtor-creditor relationship. Partial liability. If you are liable for part of a business debt, only your share of the total inter- est paid or accrued is included in your interest limitation calculation. Example. You and your brother borrow money. You are liable for 50% of the note. You use your half of the loan in your business, and you make one-half of the loan payments. Your business interest is half of the total interest pay- ments. However, the current year interest ex- pense deduction may be limited. Mortgage. Generally, mortgage interest paid or accrued on real estate you own legally or equitably is deductible. However, rather than deducting the interest currently, you may have to add it to the cost basis of the property as ex- plained later under Capitalization of Interest. Statement. If you paid $600 or more of mortgage interest (including certain points) dur- ing the year on any one mortgage, you gener- ally will receive a Form 1098 or a similar state- ment. You will receive the statement if you pay interest to a person (including a financial institu- tion or a cooperative housing corporation) in the course of that person's trade or business. A governmental unit is a person for purposes of furnishing the statement. If you receive a refund of interest you over- paid in an earlier year, this amount will be repor- ted in box 4 of Form 1098. You cannot deduct this amount. For information on how to report this refund, see Refunds of interest, later in this chapter. Expenses paid to obtain a mortgage. Certain expenses you pay to obtain a mortgage cannot be deducted as interest. These expen- ses, which include mortgage commissions, ab- stract fees, and recording fees, are capital ex- penses. If the property mortgaged is business or income-producing property, you can amor- tize the costs over the life of the mortgage. Prepayment penalty. If you pay off your mortgage early and pay the lender a penalty for doing this, you can deduct the penalty as inter- est. Interest on employment tax deficiency. In- terest charged on employment taxes assessed on your business is deductible. Original issue discount (OID). OID is a form of interest. A loan (mortgage or other debt) gen- erally has OID when its proceeds are less than its principal amount. The OID is the difference between the stated redemption price at maturity and the issue price of the loan. A loan's stated redemption price at maturity is the sum of all amounts (principal and interest) payable on it other than qualified stated inter- est. Qualified stated interest is stated interest that is unconditionally payable in cash or prop- erty (other than another loan of the issuer) at least annually over the term of the loan at a sin- gle fixed rate. You generally deduct OID over the term of the loan. Figure the amount to deduct each year using the constant-yield method, unless the OID on the loan is de minimis. De minimis OID. The OID is de minimis if it is less than one-fourth of 1% (0.0025) of the stated redemption price of the loan at maturity multiplied by the number of full years from the date of original issue to maturity (the term of the loan). If the OID is de minimis, you can choose one of the following ways to figure the amount you can deduct each year. • On a constant-yield basis over the term of the loan. • On a straight-line basis over the term of the loan. • In proportion to stated interest payments. • In its entirety at maturity of the loan. You make this choice by deducting the OID in a manner consistent with the method chosen on your timely filed tax return for the tax year in which the loan is issued. Example. On January 1, 2018, you took out a $100,000 discounted loan and received $98,500 in proceeds. The loan will mature on January 1, 2028 (a 10-year term), and the $100,000 principal is payable on that date. In- terest of $10,000 is payable on January 1 of each year, beginning January 1, 2019. The $1,500 OID on the loan is de minimis because it is less than $2,500 ($100,000 × 0.0025 × 10). You choose to deduct the OID on a straight-line basis over the term of the loan. Beginning in 2018, you can deduct $150 each year for 10 years. Constant-yield method. If the OID is not de minimis, you must use the constant-yield method to figure how much you can deduct each year. You figure your deduction for the first year using the following steps. 1. Determine the issue price of the loan. Generally, this equals the proceeds of the loan. If you paid points on the loan (as dis- cussed later), the issue price generally is the difference between the proceeds and the points. 2. Multiply the result in (1) by the yield to ma- turity. 3. Subtract any qualified stated interest pay- ments from the result in (2). This is the OID you can deduct in the first year. To figure your deduction in any subsequent year, follow the above steps, except determine the adjusted issue price in step (1). To get the adjusted issue price, add to the issue price any OID previously deducted. Then follow steps (2) and (3) above. The yield to maturity is generally shown in the literature you receive from your lender. If you do not have this information, consult your lender or tax advisor. In general, the yield to maturity is the discount rate that, when used in figuring the present value of all principal and in- terest payments, produces an amount equal to the principal amount of the loan. Example. The facts are the same as in the previous example, except that you deduct the OID on a constant-yield basis over the term of the loan. The yield to maturity on your loan is 10.2467%, compounded annually. For 2018, you can deduct $93 [($98,500 × 0.102467) − $10,000]. For 2019, you can deduct $103 [($98,593 × 0.102467) − $10,000]. Loan or mortgage ends. If your loan or mortgage ends, you may be able to deduct any remaining OID in the tax year in which the loan or mortgage ends. A loan or mortgage may end due to a refinancing, prepayment, foreclosure, or similar event. If you refinance with the original lender, you generally cannot deduct the re- maining OID in the year in which the re- financing occurs, but you may be able to deduct it over the term of the new mortgage or loan. See Interest paid with funds borrowed from original lender under Interest You Cannot De- duct, later. Points. The term “points” is used to describe certain charges paid, or treated as paid, by a borrower to obtain a loan or a mortgage. These charges are also called loan origination fees, maximum loan charges, discount points, or pre- mium charges. If any of these charges (points) are solely for the use of money, they are inter- est. Because points are prepaid interest, you generally cannot deduct the full amount in the year paid. However, you can choose to fully de- duct points in the year paid if you meet certain tests. For exceptions to the general rule, see Pub. 936. The points reduce the issue price of the loan and result in OID, deductible as explained in the preceding discussion. Partial payments on a nontax debt. If you make partial payments on a debt (other than a debt owed the IRS), the payments are applied, in general, first to interest and any remainder to principal. You can deduct only the interest. This rule does not apply when it can be inferred that the borrower and lender understood that a dif- ferent allocation of the payments would be made. Installment purchase. If you make an install- ment purchase of business property, the con- tract between you and the seller generally pro- vides for the payment of interest. If no interest or a low rate of interest is charged under the contract, a portion of the stated principal CAUTION ! Chapter 4 Interest Page 15

(p535)(page-17)Page 17#

amount payable under the contract may be re- characterized as interest (unstated interest). The amount recharacterized as interest reduces your basis in the property and increases your interest expense. For more information on in- stallment sales and unstated interest, see Pub. 537. Interest You Cannot Deduct Certain interest payments cannot be deducted. In addition, certain other expenses that may seem to be interest but are not cannot be de- ducted as interest. You cannot currently deduct interest that must be capitalized, and you generally cannot deduct personal interest. Interest paid with funds borrowed from original lender. If you use the cash method of accounting, you cannot deduct interest you pay with funds borrowed from the original lender through a second loan, an advance, or any other arrangement similar to a loan. You can deduct the interest expense once you start making payments on the new loan. When you make a payment on the new loan, you first apply the payment to interest and then to the principal. All amounts you apply to the in- terest on the first loan are deductible, along with any interest you pay on the second loan, sub- ject to any limits that apply. Capitalized interest. You cannot currently de- duct interest you are required to capitalize un- der the uniform capitalization rules. See Capi- talization of Interest, later. In addition, if you buy property and pay interest owed by the seller (for example, by assuming the debt and any interest accrued on the property), you cannot deduct the interest. Add this interest to the basis of the property. Commitment fees or standby charges. Fees you incur to have business funds available on a standby basis, but not for the actual use of the funds, are not deductible as interest payments. You may be able to deduct them as business expenses. If the funds are for inventory or certain prop- erty used in your business, the fees are indirect costs and you generally must capitalize them under the uniform capitalization rules. See Cap- italization of Interest, later. Interest on income tax. Interest charged on income tax assessed on your individual income tax return is not a business deduction even though the tax due is related to income from your trade or business. Treat this interest as a business deduction only in figuring an NOL de- duction. Penalties. Penalties on underpaid deficien- cies and underpaid estimated tax are not inter- est. You cannot deduct them. Generally, you cannot deduct any fines or penalties. Interest on loans with respect to life insur- ance policies. You generally cannot deduct interest on a debt incurred with respect to any life insurance, annuity, or endowment contract that covers any individual unless that individual is a key person. If the policy or contract covers a key person, you can deduct the interest on up to $50,000 of debt for that person. However, the deduction for any month cannot be more than the interest fig- ured using Moody's Composite Yield on Seas- oned Corporate Bonds (formerly known as Moody's Corporate Bond Yield Aver- age—Monthly Average Corporates) (Moody's rate) for that month. Who is a key person? A key person is an officer or 20% owner. However, the number of individuals you can treat as key persons is limi- ted to the greater of the following. • Five individuals. • The lesser of 5% of the total officers and employees of the company or 20 individu- als. Exceptions for pre-June 1997 contracts. You can generally deduct the interest if the con- tract was issued before June 9, 1997, and the covered individual is someone other than an employee, officer, or someone financially inter- ested in your business. If the contract was pur- chased before June 21, 1986, you can gener- ally deduct the interest no matter who is covered by the contract. Interest allocated to unborrowed policy cash value. Corporations and partnerships generally cannot deduct any interest expense allocable to unborrowed cash values of life in- surance, annuity, or endowment contracts. This rule applies to contracts issued after June 8, 1997, that cover someone other than an officer, director, employee, or 20% owner. For more in- formation, see section 264(f). Capitalization of Interest Under the uniform capitalization rules, you gen- erally must capitalize interest on debt equal to your expenditures to produce real property or certain tangible personal property. The property must be produced by you for use in your trade or business or for sale to customers. You can- not capitalize interest related to property that you acquire in any other manner. Interest you paid or incurred during the pro- duction period must be capitalized if the prop- erty produced is designated property. Designa- ted property is any of the following. • Real property. • Tangible personal property with a class life of 20 years or more. • Tangible personal property with an estima- ted production period of more than 2 years. • Tangible personal property with an estima- ted production period of more than 1 year if the estimated cost of production is more than $1 million. Property you produce. You produce property if you construct, build, install, manufacture, de- velop, improve, create, raise, or grow it. Treat property produced for you under a contract as produced by you up to the amount you pay or incur for the property. Carrying charges. Carrying charges include taxes you pay to carry or develop real estate or to carry, transport, or install personal property. You can choose to capitalize carrying charges not subject to the uniform capitalization rules if they are otherwise deductible. For more infor- mation, see chapter 7. Capitalized interest. Treat capitalized interest as a cost of the property produced. You recover your interest when you sell or use the property. If the property is inventory, recover capitalized interest through cost of goods sold. If the prop- erty is used in your trade or business, recover capitalized interest through an adjustment to basis, depreciation, amortization, or other method. Partnerships and S corporations. The inter- est capitalization rules are applied first at the partnership or S corporation level. The rules are then applied at the partners' or shareholders' level to the extent the partnership or S corpora- tion has insufficient debt to support the produc- tion or construction costs. If you are a partner or a shareholder, you may have to capitalize interest you incur during the tax year for the production costs of the part- nership or S corporation. You may also have to capitalize interest incurred by the partnership or S corporation for your own production costs. To properly capitalize interest under these rules, you must be given the required information in an attachment to the Schedule K-1 you receive from the partnership or S corporation. Additional information. The procedures for applying the uniform capitalization rules are be- yond the scope of this publication. For more in- formation, see sections 1.263A-8 through 1.263A-15 of the regulations and Notice 88-99. Notice 88-99 is in Cumulative Bulletin 1988-2. When To Deduct Interest If the uniform capitalization rules, discussed un- der Capitalization of Interest, earlier, and the business interest expense deduction limitation rules discussed under Interest Expense Limita- tion, earlier, do not apply, deduct interest as fol- lows. Cash method. Under the cash method, you can generally deduct only the interest you ac- tually paid during the tax year. You cannot de- duct a promissory note you gave as payment because it is a promise to pay and not an actual payment. Prepaid interest. You generally cannot de- duct any interest paid before the year it is due. Interest paid in advance can be deducted only in the tax year in which it is due. Discounted loan. If interest or a discount is subtracted from your loan proceeds, it is not a payment of interest and you cannot deduct it when you get the loan. For more information, see Original issue discount (OID) under Interest You Can Deduct, earlier. Refunds of interest. If you pay interest and then receive a refund in the same tax year of any part of the interest, reduce your interest Page 16 Chapter 4 Interest

(p535)(page-18)Page 18#

deduction by the refund. If you receive the re- fund in a later tax year, include the refund in your income to the extent the deduction for the interest reduced your tax. Accrual method. Under an accrual method, you can deduct only interest that has accrued during the tax year. Prepaid interest. You generally cannot de- duct any interest paid before the year it is due. Interest paid in advance can be deducted only in the tax year in which it is due. Discounted loan. If interest or a discount is subtracted from your loan proceeds, it is not a payment of interest and you cannot deduct it when you get the loan. For more information, see Original issue discount (OID) under Interest You Can Deduct, earlier. Tax deficiency. If you contest a federal in- come tax deficiency, interest does not accrue until the tax year the final determination of liabil- ity is made. If you do not contest the deficiency, then the interest accrues in the year the tax was asserted and agreed to by you. However, if you contest but pay the pro- posed tax deficiency and interest, and you do not designate the payment as a cash bond, then the interest is deductible in the year paid. Related person. If you use an accrual method, you cannot deduct interest owed to a related person who uses the cash method until payment is made and the interest is includible in the gross income of that person. The relation- ship is determined as of the end of the tax year for which the interest would otherwise be de- ductible. See section 267 for more information. Below-Market Loans If you receive a below-market gift or demand loan and use the proceeds in your trade or busi- ness, you may be able to deduct the forgone in- terest. See Treatment of gift and demand loans, later, in this discussion. A below-market loan is a loan on which no interest is charged or on which interest is charged at a rate below the applicable federal rate (AFR). A gift or demand loan that is a be- low-market loan generally is considered an arm's-length transaction in which you, the bor- rower, are considered as having received both the following. • A loan in exchange for a note that requires the payment of interest at the AFR. • An additional payment in an amount equal to the forgone interest. The additional payment is treated as a gift, divi- dend, contribution to capital, payment of com- pensation, or other payment, depending on the substance of the transaction. Forgone interest. For any period, forgone in- terest is: 1. The interest that would be payable for that period if interest accrued on the loan at the AFR and was payable annually on De- cember 31, minus 2. Any interest actually payable on the loan for the period. AFRs are published by the IRS each month in the I.R.B. I.R.B.s are available on the IRS web site at IRS.gov/irb. You can also contact an IRS office to get these rates. Loans subject to the rules. The rules for be- low-market loans apply to the following. 1. Gift loans (below-market loans where the forgone interest is in the nature of a gift). 2. Compensation-related loans (below-mar- ket loans between an employer and an employee or between an independent contractor and a person for whom the con- tractor provides services). 3. Corporation-shareholder loans. 4. Tax avoidance loans (below-market loans where the avoidance of federal tax is one of the main purposes of the interest ar- rangement). 5. Loans to qualified continuing care facilities under a continuing care contract (made af- ter October 11, 1985). Except as noted in (5) above, these rules apply to demand loans (loans payable in full at any time upon the lender's demand) outstand- ing after June 6, 1984, and to term loans (loans that are not demand loans) made after that date. Treatment of gift and demand loans. If you receive a below-market gift loan or demand loan, you are treated as receiving an additional payment (as a gift, dividend, etc.) equal to the forgone interest on the loan. You are then trea- ted as transferring this amount back to the lender as interest. These transfers are consid- ered to occur annually, generally on December 31. If you use the loan proceeds in your trade or business, you can deduct the forgone interest each year as a business interest expense. The lender must report it as interest income. Limit on forgone interest for gift loans of $100,000 or less. For gift loans between indi- viduals, forgone interest treated as transferred back to the lender is limited to the borrower's net investment income for the year. This limit applies if the outstanding loans between the lender and borrower total $100,000 or less. If the borrower's net investment income is $1,000 or less, it is treated as zero. This limit does not apply to a loan if the avoidance of any federal tax is one of the main purposes of the interest arrangement. Treatment of term loans. If you receive a be- low-market term loan other than a gift or de- mand loan, you are treated as receiving an ad- ditional cash payment (as a dividend, etc.) on the date the loan is made. This payment is equal to the loan amount minus the present value, at the AFR, of all payments due under the loan. The same amount is treated as OID on the loan. See Original issue discount (OID) un- der Interest You Can Deduct, earlier. Exceptions for loans of $10,000 or less. The rules for below-market loans do not apply to any day on which the total outstanding loans between the borrower and lender is $10,000 or TIP less. This exception applies only to the follow- ing. 1. Gift loans between individuals if the loan is not directly used to buy or carry in- come-producing assets. 2. Compensation-related loans or corpora- tion-shareholder loans if the avoidance of any federal tax is not a principal purpose of the interest arrangement. This exception does not apply to a term loan described in (2) above that was previously sub- ject to the below-market loan rules. Those rules will continue to apply even if the outstanding balance is reduced to $10,000 or less. Exceptions for loans without significant tax effect. The following loans are specifically ex- empted from the rules for below-market loans because their interest arrangements do not have a significant effect on the federal tax liabil- ity of the borrower or the lender. 1. Loans made available by lenders to the general public on the same terms and conditions that are consistent with the lender's customary business practices. 2. Loans subsidized by a federal, state, or municipal government that are made avail- able under a program of general applica- tion to the public. 3. Certain employee-relocation loans. 4. Certain loans to or from a foreign person, unless the interest income would be effec- tively connected with the conduct of a U.S. trade or business and not exempt from U.S. tax under an income tax treaty. 5. Any other loan if the taxpayer can show that the interest arrangement has no sig- nificant effect on the federal tax liability of the lender or the borrower. Whether an in- terest arrangement has a significant effect on the federal tax liability of the lender or the borrower will be determined by all the facts and circumstances. Consider all the following factors. a. Whether items of income and deduc- tion generated by the loan offset each other. b. The amount of the items. c. The cost of complying with the be- low-market loan provisions if they were to apply. d. Any reasons, other than taxes, for structuring the transaction as a be- low-market loan. Exception for loans to qualified continuing care facilities. The below-market interest rules do not apply to a loan owed by a qualified continuing care facility under a continuing care contract if the lender or lender's spouse is age 62 or older by the end of the calendar year. A qualified continuing care facility is one or more facilities (excluding nursing homes) meet- ing the requirements listed below. 1. Designed to provide services under con- tinuing care contracts (defined below). Chapter 4 Interest Page 17

(p535)(page-19)Page 19#

2. Includes an independent living unit, and either an assisted living or nursing facility, or both. 3. Substantially all of the independent living unit residents are covered by continuing care contracts. A continuing care contract is a written con- tract between an individual and a qualified con- tinuing care facility that includes all of the fol- lowing conditions. 1. The individual or individual's spouse must be entitled to use the facility for the rest of their life or lives. 2. The individual or individual's spouse will be provided with housing, as appropriate for the health of the individual or individu- al's spouse in an: a. Independent living unit (which has ad- ditional available facilities outside the unit for the provision of meals and other personal care), and b. Assisted living or nursing facility avail- able in the continuing care facility. 3. The individual or individual's spouse will be provided with assisted living or nursing care available in the continuing care fa- cility, as required for the health of the indi- vidual or the individual's spouse. For more information, see section 7872(h). Sale or exchange of property. Different rules generally apply to a loan connected with the sale or exchange of property. If the loan does not provide adequate stated interest, part of the principal payment may be considered interest. However, there are exceptions that may require you to apply the below-market interest rate rules to these loans. See Unstated Interest and Original Issue Discount (OID) in Pub. 537. More information. For more information on below-market loans, see section 7872 and sec- tion 1.7872-5 of the regulations. 5. Taxes Introduction You can deduct various federal, state, local, and foreign taxes directly attributable to your trade or business as business expenses. You cannot deduct federal income taxes, estate and gift taxes, or state in- heritance, legacy, and succession taxes. CAUTION ! Topics This chapter discusses: • When to deduct taxes • Real estate taxes • Income taxes • Employment taxes • Other taxes Useful Items You may want to see: Publication 15 (Circular E), Employer's Tax Guide 334 Tax Guide for Small Business 510 Excise Taxes 538 Accounting Periods and Methods 551 Basis of Assets Form (and Instructions) 1040 U.S. Individual Income Tax Return Schedule A (Form 1040) Itemized Deductions Schedule SE (Form 1040) Self-Employment Tax 3115 Application for Change in Accounting Method 8959 Additional Medicare Tax See chapter 13 for information about getting publications and forms. When To Deduct Taxes Generally, you can only deduct taxes in the year you pay them. This applies whether you use the cash method or an accrual method of accounting. Under an accrual method, you can deduct a tax before you pay it if you meet the exception for recurring items discussed under Economic Performance in Pub. 538. You can also elect to ratably accrue real estate taxes as discussed later under Real Estate Taxes. Limit on accrual of taxes. A taxing jurisdic- tion can require the use of a date for accruing taxes that is earlier than the date it originally re- quired. However, if you use an accrual method, and can deduct the tax before you pay it, use the original accrual date for the year of change and all future years to determine when you can deduct the tax. Example. Your state imposes a tax on per- sonal property used in a trade or business con- ducted in the state. This tax is assessed and becomes a lien as of July 1 (accrual date). In 2018, the state changed the assessment and lien dates from July 1, 2019, to December 31, 2018, for property tax year 2019. Use the origi- nal accrual date (July 1, 2019) to determine when you can deduct the tax. You must also use the July 1 accrual date for all future years to determine when you can deduct the tax. 15 334 510 538 551 1040 Schedule A (Form 1040) Schedule SE (Form 1040) 3115 8959 Uniform capitalization rules. Uniform capital- ization rules apply to certain taxpayers who pro- duce real property or tangible personal property for use in a trade or business or for sale to cus- tomers. They also apply to certain taxpayers who acquire property for resale. Under these rules, you either include certain costs in inven- tory or capitalize certain expenses related to the property, such as taxes. For more information, see chapter 1. Carrying charges. Carrying charges include taxes you pay to carry or develop real estate or to carry, transport, or install personal property. You can elect to capitalize carrying charges not subject to the uniform capitalization rules if they are otherwise deductible. For more information, see chapter 7. Refunds of taxes. If you receive a refund for any taxes you deducted in an earlier year, in- clude the refund in income to the extent the de- duction reduced your federal income tax in the earlier year. For more information, see Recov- ery of amount deducted (tax benefit rule) in chapter 1. You must include in income any inter- est you receive on tax refunds. Real Estate Taxes Deductible real estate taxes are any state, local, or foreign taxes on real estate levied for the general public welfare. The taxing authority must base the taxes on the assessed value of the real estate and charge them uniformly against all property under its jurisdiction. De- ductible real estate taxes generally do not in- clude taxes charged for local benefits and im- provements that increase the value of the property. See Taxes for local benefits, later. If you use an accrual method, you generally cannot accrue real estate taxes until you pay them to the government authority. However, you can elect to ratably accrue the taxes during the year. See Electing to ratably accrue, later. Taxes for local benefits. Generally, you can- not deduct taxes charged for local benefits and improvements that tend to increase the value of your property. These include assessments for streets, sidewalks, water mains, sewer lines, and public parking facilities. You should in- crease the basis of your property by the amount of the assessment. You can deduct taxes for these local bene- fits only if the taxes are for maintenance, re- pairs, or interest charges related to those bene- fits. If part of the tax is for maintenance, repairs, or interest, you must be able to show how much of the tax is for these expenses to claim a de- duction for that part of the tax. Example. To improve downtown commer- cial business, Waterfront City converted a downtown business area street into an en- closed pedestrian mall. The city assessed the full cost of construction, financed with 10-year bonds, against the affected properties. The city is paying the principal and interest with the an- nual payments made by the property owners. TIP Page 18 Chapter 5 Taxes

(p535)(page-20)Page 20#

The assessments for construction costs are not deductible as taxes or as business expen- ses, but are depreciable capital expenses. The part of the payments used to pay the interest charges on the bonds is deductible as taxes. Charges for services. Water bills, sewerage, and other service charges assessed against your business property are not real estate taxes, but are deductible as business expen- ses. Purchase or sale of real estate. If real estate is sold, the real estate taxes must be allocated between the buyer and the seller. The buyer and seller must allocate the real estate taxes according to the number of days in the real property tax year (the period to which the tax imposed relates) that each owned the property. Treat the seller as paying the taxes up to but not including the date of sale. Treat the buyer as paying the taxes beginning with the date of sale. You can usually find this informa- tion on the settlement statement you received at closing. If you (the seller) use an accrual method and have not elected to ratably accrue real estate taxes, you are considered to have accrued your part of the tax on the date you sell the property. Example. Alberto Verde, a calendar year accrual method taxpayer, owns real estate in Olmo County. He has not elected to ratably ac- crue property taxes. November 30 of each year is the assessment and lien date for the current real property tax year, which is the calendar year. He sold the property on June 30, 2018. Under his accounting method, he would not be able to claim a deduction for the taxes because the sale occurred before November 30. He is treated as having accrued his part of the tax, 181/366 (January 1–June 29), on June 30, and he can deduct it for 2018. Electing to ratably accrue. If you use an ac- crual method, you can elect to accrue real es- tate tax related to a definite period ratably over that period. Example. Juan Sanchez is a calendar year taxpayer who uses an accrual method. His real estate taxes for the real property tax year, July 1, 2018, to June 30, 2019, are $1,200. July 1 is the assessment and lien date. If Juan elects to ratably accrue the taxes, $600 will accrue in 2018 ($1,200 × 6/12, July 1– December 31) and the balance will accrue in 2019. Separate elections. You can elect to rata- bly accrue the taxes for each separate trade or business and for nonbusiness activities if you account for them separately. Once you elect to ratably accrue real estate taxes, you must use that method unless you get permission from the IRS to change. See Form 3115, later. Making the election. If you elect to ratably accrue the taxes for the first year in which you incur real estate taxes, attach a statement to your income tax return for that year. The state- ment should show all the following items. • The trades or businesses to which the election applies and the accounting method or methods used. • The period to which the taxes relate. • The calculation of the real estate tax de- duction for that first year. Generally, you must file your return by the due date (including extensions). However, if you timely filed your return for the year without electing to ratably accrue, you can still make the election by filing an amended return within 6 months after the due date of the return (exclud- ing extensions). Attach the statement to the amended return and write “Filed pursuant to section 301.9100-2” on the statement. File the amended return at the same address where you filed the original return. Form 3115. If you elect to ratably accrue real estate taxes for a year after the first year in which you incur real estate taxes, or if you want to revoke your election to ratably accrue real estate taxes, file Form 3115. For more informa- tion, including applicable time frames for filing, see the Instructions for Form 3115. Income Taxes This section discusses federal, state, local, and foreign income taxes. Federal income taxes. You cannot deduct federal income taxes. State and local income taxes. A corporation or partnership can deduct state and local in- come taxes imposed on the corporation or part- nership as business expenses. An individual can deduct state and local in- come taxes only as an itemized deduction on Schedule A (Form 1040), subject to limitations. The deduction is limited to $10,000 as a total of the following taxes. 1. State and local income taxes or general sales taxes. See the Schedule A (Form 1040) instructions. 2. State and local real estate taxes. See the Schedule A (Form 1040) instructions. 3. State and local personal property taxes. 4. Other taxes. See the Schedule A (Form 1040) instructions. However, an individual can deduct a state tax on gross income (as distinguished from net income) directly attributable to a trade or busi- ness as a business expense. Accrual of contested income taxes. If you use an accrual method, and you contest a state or local income tax liability, you must ac- crue and deduct any contested amount in the tax year in which the liability is finally deter- mined. If additional state or local income taxes for a prior year are assessed in a later year, you can deduct the taxes in the year in which they were originally imposed (the prior year) if the tax lia- bility is not contested. You cannot deduct them in the year in which the liability is finally deter- mined. The filing of an income tax return is not considered a contest and, in the ab- sence of an overt act of protest, you can deduct the tax in the prior year. Also, you can deduct any additional taxes in the prior year if you do not show some affirmative evidence of denial of the liability. However, if you consistently deduct addi- tional assessments in the year they are paid or finally determined (including those for which there was no contest), you must continue to do so. You cannot take a deduction in the earlier year unless you receive permission to change your method of accounting. For more informa- tion on accounting methods, see When Can I Deduct an Expense in chapter 1. Foreign income taxes. Generally, you can take either a deduction or a credit for income taxes imposed on you by a foreign country or a U.S. possession, subject to limitations. How- ever, an individual cannot take a deduction or credit for foreign income taxes paid on income that is exempt from U.S. tax under the foreign earned income exclusion or the foreign housing exclusion. For information on these exclusions, see Pub. 54. For information on the foreign tax credit, see Pub. 514. Employment Taxes If you have employees, you must withhold vari- ous taxes from your employees' pay. Most em- ployers must withhold their employees' share of social security, Medicare taxes, and Additional Medicare Tax (if applicable), along with state and federal income taxes. You may also need to pay certain employment taxes from your own funds. These include your share of social secur- ity and Medicare taxes as an employer, along with unemployment taxes. Your deduction for wages paid is not re- duced by the social security and Medicare taxes, Additional Medicare Tax, and income taxes you withhold from your employees. You can deduct the employment taxes you must pay from your own funds as taxes. Example. You pay your employee $18,000 a year. However, after you withhold various taxes, your employee receives $14,500. You also pay an additional $1,500 in employment taxes. You should deduct the full $18,000 as wages. You can deduct the $1,500 you pay from your own funds as taxes. Additional Medicare Tax. You must withhold a 0.9% Additional Medicare Tax from wages you pay to an employee in excess of $200,000 in a calendar year. The Additional Medicare Tax is only imposed on the employee. There is no employer share of Additional Medicare Tax. For more information on the Additional Med- icare Tax, see Form 8959 and its instructions. For more information on employment taxes, see Pub. 15 (Circular E). Unemployment fund taxes. As an employer, you may have to make payments to a state un- employment compensation fund or to a state TIP TIP Chapter 5 Taxes Page 19

(p535)(page-21)Page 21#

disability benefit fund. Deduct these payments as taxes. Self-employment tax. You can deduct part of your self-employment tax as a business ex- pense in figuring your adjusted gross income. This deduction only affects your income tax. It does not affect your net earnings from self-em- ployment or your self-employment tax. To deduct the tax, enter on Schedule 1 (Form 1040), line 27, the amount shown on the Deduction for one-half of self-employment tax line of Schedule SE (Form 1040). For more information on self-employment tax, see Pub. 334. Additional Medicare Tax. You may be re- quired to pay Additional Medicare Tax on self-employment income. See Form 8959 and the Instructions for Form 8959 for more informa- tion on the Additional Medicare Tax. Other Taxes The following are other taxes you can deduct if you incur them in the ordinary course of your trade or business. Excise taxes. Generally, you can deduct as a business expense all excise taxes that are ordi- nary and necessary expenses of carrying on your trade or business. However, see Fuel taxes, later. For more information on excise taxes, see Pub. 510. Franchise taxes. You can deduct corporate franchise taxes as a business expense. Fuel taxes. Generally, taxes on gasoline, die- sel fuel, and other motor fuels that you use in your business are included as part of the cost of the fuel. Do not deduct these taxes as a sepa- rate item. You may be entitled to a credit or refund for federal excise tax you paid on fuels used for certain purposes. For more information, see Pub. 510. Occupational taxes. You can deduct as a business expense an occupational tax charged at a flat rate by a locality for the privilege of working or conducting a business in the locality. Personal property tax. You can deduct any tax imposed by a state or local government on personal property used in your trade or busi- ness. Sales tax. Any sales tax you pay on a service for your business, or on the purchase or use of property in your business is treated as part of the cost of the service or property. If the service or the cost or use of the property is a deductible business expense, you can deduct the tax as part of that service or cost. If the property is merchandise bought for resale, the sales tax is part of the cost of the merchandise. If the prop- erty is depreciable, add the sales tax to the ba- sis for depreciation. For more information on basis, see Pub. 551. Do not deduct state and local sales taxes imposed on the buyer that you must collect and pay over to the state or local government. Also, do not include these taxes in gross receipts or sales. 6. Insurance Reminder Premium tax credit. You may have to use the worksheets in Pub. 974 instead of the work- sheet in this chapter if the insurance plan estab- lished, or considered to be established, under your business was obtained through the Health Insurance Marketplace and you are claiming the premium tax credit. See Pub. 974 for de- tails. Introduction You generally can deduct the ordinary and nec- essary cost of insurance as a business expense if it is for your trade, business, or profession. However, you may have to capitalize certain in- surance costs under the uniform capitalization rules. For more information, see Capitalized Premiums, later. Topics This chapter discusses: • Deductible premiums • Nondeductible premiums • Capitalized premiums • When to deduct premiums Useful Items You may want to see: Publication 15-B Employer's Tax Guide to Fringe Benefits 525 Taxable and Nontaxable Income 538 Accounting Periods and Methods 547 Casualties, Disasters, and Thefts Form (and Instructions) 1040 U.S. Individual Income Tax Return 1040-NR U.S. Nonresident Alien Income Tax Return Schedule A (Form 1040) Itemized Deductions Schedule C (Form 1040) Profit or Loss From Business Schedule C-EZ (Form 1040) Net Profit From Business CAUTION ! 15-B 525 538 547 1040 1040-NR Schedule A (Form 1040) Schedule C (Form 1040) Schedule C-EZ (Form 1040) Schedule F (Form 1040) Profit or Loss From Farming Schedule SE (Form 1040) Self-Employment Tax Schedule K-1 (Form 1065) Partner's Share of Income, Deductions, Credits, etc. 1099-H Health Coverage Tax Credit (HCTC) Advance Payments 2555 Foreign Earned Income 2555-EZ Foreign Earned Income Exclusion 8885 Health Coverage Tax Credit W-2 Wage and Tax Statement See chapter 13 for information about getting publications and forms. Deductible Premiums You generally can deduct premiums you pay for the following kinds of insurance related to your trade or business. 1. Insurance that covers fire, storm, theft, ac- cident, or similar losses. 2. Credit insurance that covers losses from business bad debts. 3. Group hospitalization and medical insur- ance for employees, including long-term care insurance. a. If a partnership pays accident and health insurance premiums for its partners, it generally can deduct them as guaranteed payments to partners. b. If an S corporation pays accident and health insurance premiums for its more-than-2% shareholder-employ- ees, it generally can deduct them, but also must include them in the share- holder's wages subject to federal in- come tax withholding. See Pub.15-B. 4. Liability insurance. 5. Malpractice insurance that covers your personal liability for professional negli- gence resulting in injury or damage to pa- tients or clients. 6. Workers' compensation insurance set by state law that covers any claims for bodily injuries or job-related diseases suffered by employees in your business, regardless of fault. a. If a partnership pays workers' com- pensation premiums for its partners, it generally can deduct them as guaran- teed payments to partners. b. If an S corporation pays workers' compensation premiums for its more-than-2% shareholder-employ- ees, it generally can deduct them, but also must include them in the share- holder's wages. 7. Contributions to a state unemployment in- surance fund are deductible as taxes if they are considered taxes under state law. Schedule F (Form 1040) Schedule SE (Form 1040) Schedule K-1 (Form 1065) 1099-H 2555 2555-EZ 8885 W-2 Page 20 Chapter 6 Insurance

(p535)(page-22)Page 22#

8. Overhead insurance that pays for busi- ness overhead expenses you have during long periods of disability caused by your injury or sickness. 9. Car and other vehicle insurance that cov- ers vehicles used in your business for lia- bility, damages, and other losses. If you operate a vehicle partly for personal use, deduct only the part of the insurance pre- mium that applies to the business use of the vehicle. If you use the standard mile- age rate to figure your car expenses, you can’t deduct any car insurance premiums. 10. Life insurance covering your officers and employees if you aren’t directly or indi- rectly a beneficiary under the contract. 11. Business interruption insurance that pays for lost profits if your business is shut down due to a fire or other cause. Self-Employed Health Insurance Deduction You may be able to deduct the amount you paid for medical and dental insurance and qualified long-term care insurance for yourself, your spouse, and your dependents. The insurance also can cover your child who was under age 27 at the end of 2018, even if the child wasn’t your dependent. A child includes your son, daughter, stepchild, adopted child, or foster child. A foster child is any child placed with you by an authorized placement agency or by judg- ment, decree, or other order of any court of competent jurisdiction. One of the following statements must be true. • You were self-employed and had a net profit for the year reported on Schedule C (Form 1040), Schedule C-EZ (Form 1040), or Schedule F (Form 1040). • You were a partner with net earnings from self-employment for the year reported on Schedule K-1 (Form 1065), box 14, code A. • You used one of the optional methods to figure your net earnings from self-employ- ment on Schedule SE. • You received wages in 2018 from an S cor- poration in which you were a more-than-2% shareholder. Health insur- ance premiums paid or reimbursed by the S corporation are shown as wages on Form W-2. The insurance plan must be established, or considered to be established as discussed in the following bullets, under your business. • For self-employed individuals filing a Schedule C, C-EZ, or F, a policy can be ei- ther in the name of the business or in the name of the individual. • For partners, a policy can be either in the name of the partnership or in the name of the partner. You can either pay the premi- ums yourself or the partnership can pay them and report the premium amounts on Schedule K-1 (Form 1065) as guaranteed payments to be included in your gross in- come. However, if the policy is in your name and you pay the premiums yourself, the partnership must reimburse you and report the premium amounts on Sched- ule K-1 (Form 1065) as guaranteed pay- ments to be included in your gross income. Otherwise, the insurance plan won’t be considered to be established under your business. • For more-than-2% shareholders, a policy can be either in the name of the S corpora- tion or in the name of the shareholder. You can either pay the premiums yourself or the S corporation can pay them and report the premium amounts on Form W-2 as wa- ges to be included in your gross income. However, if the policy is in your name and you pay the premiums yourself, the S cor- poration must reimburse you and report the premium amounts on Form W-2 in box 1 as wages to be included in your gross income. Otherwise, the insurance plan won’t be considered to be established under your business. Medicare premiums you voluntarily pay to obtain insurance in your name that is similar to qualifying private health insurance can be used to figure the deduction. Amounts paid for health insurance coverage from retirement plan distri- butions that were nontaxable because you are a retired public safety officer can’t be used to fig- ure the deduction. Take the deduction on Schedule 1 (Form 1040), line 29. Qualified long-term care insurance. You can include premiums paid on a qualified long-term care insurance contract when figuring your deduction. But, for each person covered, you can include only the smaller of the following amounts. 1. The amount paid for that person. 2. The amount shown below. Use the per- son's age at the end of the tax year. a. Age 40 or younger–$420 b. Age 41 to 50–$780 c. Age 51 to 60–$1,560 d. Age 61 to 70–$4,160 e. Age 71 or older–$5,200 Qualified long-term care insurance con- tract. A qualified long-term care insurance contract is an insurance contract that only pro- vides coverage of qualified long-term care serv- ices. The contract must meet all the following requirements. • It must be guaranteed renewable. • It must provide that refunds, other than re- funds on the death of the insured or com- plete surrender or cancellation of the con- tract, and dividends under the contract may be used only to reduce future premi- ums or increase future benefits. • It must not provide for a cash surrender value or other money that can be paid, as- signed, pledged, or borrowed. • It generally must not pay or reimburse ex- penses incurred for services or items that would be reimbursed under Medicare, ex- cept where Medicare is a secondary payer or the contract makes per diem or other periodic payments without regard to ex- penses. Qualified long-term care services. Quali- fied long-term care services are: • Necessary diagnostic, preventive, thera- peutic, curing, treating, mitigating, and re- habilitative services; and • Maintenance or personal care services. The services must be required by a chronically ill individual and prescribed by a licensed health care practitioner. Chapter 6 Insurance Page 21

(p535)(page-23)Page 23#

Worksheet 6-A. Self-Employed Health Insurance Deduction Worksheet Keep for Your Records Caution. You may have to use the worksheets in Pub. 974 instead of this worksheet if the insurance plan established, or considered to be established, under your business was obtained through the Health Insurance Marketplace and you are claiming the premium tax credit. See Pub. 974 for details. Note. Use a separate worksheet for each trade or business under which an insurance plan is established. 1. Enter the total amount paid in 2018 for health insurance coverage established under your business (or the S corporation in which you were a more-than-2% shareholder) for 2018 for you, your spouse, and your dependents. Your insurance also can cover your child who was under age 27 at the end of 2018, even if the child was not your dependent. But don’t include the following. • Amounts for any month you were eligible to participate in a health plan subsidized by your or your spouse’s employer or the employer of either your dependent or your child who was under the age of 27 at the end of 2018. • Any amounts paid from retirement plan distributions that were nontaxable because you are a retired public safety officer. • Any qualified health insurance coverage payments that you included on Form 8885, line 4, to claim the HCTC or on Form 14095 to receive a reimbursement of the HCTC during the year. • Any advance monthly payments of the HCTC that your health plan administrator received from the IRS, as shown on Form 1099-H. • Any qualified health insurance coverage payments you paid to for eligible coverage months for which you received the benefit of the HCTC monthly advance payment program. • Any payments for qualified long-term care insurance (see line 2) . . . . . . . . . . . . . . . . . . . . . . 1.

2. For coverage under a qualified long-term care insurance contract, enter for each person covered the smaller of the following amounts. a) Total payments made for that person during the year. b) The amount shown below. Use the person's age at the end of the tax year. $420— if that person is age 40 or younger $780— if age 41 to 50 $1,560— if age 51 to 60 $4,160— if age 61 to 70 $5,200— if age 71 or older Don’t include payments for any month you were eligible to participate in a long-term care insurance plan subsidized by your or your spouse’s employer or the employer of either your dependent or your child who was under the age of 27 at the end of 2018. If more than one person is covered, figure separately the amount to enter for each person. Then enter the total of those amounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.

3. Add lines 1 and 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.

4. Enter your net profit* and any other earned income** from the trade or business under which the insurance plan is established. Don’t include Conservation Reserve Program payments exempt from self-employment tax. If the business is an S corporation, skip to line 11 . . . . . . . . . . . . . . . . 4.

5. Enter the total of all net profits* from: Schedule C (Form 1040), line 31; Schedule C-EZ (Form 1040), line 3; Schedule F (Form 1040), line 34; or Schedule K-1 (Form 1065), box 14, code A; plus any other income allocable to the profitable businesses. Don’t include Conservation Reserve Program payments exempt from self-employment tax. See the Instructions for Schedule SE (Form 1040). Don’t include any net losses shown on these schedules . . . . . . . . . . 5.

6. Divide line 4 by line 5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.

7. Multiply Schedule 1 (Form 1040), (or Form 1040NR), line 27, by the percentage on line 6 . . . . . . 7.

8. Subtract line 7 from line 4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.

9. Enter the amount, if any, from Schedule 1 (Form 1040), (or Form 1040NR), line 28, attributable to the same trade or business in which the insurance plan is established . . . . . . . . . . . . . . . . . . . . . . 9.

10. Subtract line 9 from line 8 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.

11. Enter your Medicare wages (Form W-2, box 5) from an S corporation in which you are a more-than-2% shareholder and in which the insurance plan is established . . . . . . . . . . . . . . . . . . 11.

12. Enter any amount from Form 2555, line 45, attributable to the amount entered on line 4 or 11 above, or any amount from Form 2555-EZ, line 18, attributable to the amount entered on line 11 above . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.

13. Subtract line 12 from line 10 or 11, whichever applies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.

14. Enter the smaller of line 3 or line 13 here and on Schedule 1 (Form 1040), (or Form 1040NR), line 29. Don’t include this amount when figuring any medical expense deduction on Schedule A (Form 1040) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14.

* If you used either optional method to figure your net earnings from self-employment from any business, don’t enter your net profit from the business. Instead, enter the amount attributable to that business from Schedule SE (Form 1040), Section B, line 4b. * * Earned Income includes net earnings and gains from the sale, transfer, or licensing of property you created. However, it doesn’t include capital gain income. Chronically ill individual. A chronically ill individual is a person who has been certified as one of the following. • An individual who has been unable, due to loss of functional capacity for at least 90 days, to perform at least two activities of daily living without substantial assistance from another individual. Activities of daily living are eating, toileting, transferring (general mobility), bathing, dressing, and continence. • An individual who requires substantial su- pervision to be protected from threats to health and safety due to severe cognitive impairment. Page 22 Chapter 6 Insurance

(p535)(page-24)Page 24#

The certification must have been made by a li- censed health care practitioner within the previ- ous 12 months. Benefits received. For information on ex- cluding benefits you receive from a long-term care contract from gross income, see Pub. 525. Other coverage. You can’t take the deduction for any month you were eligible to participate in any employer (including your spouse's) subsi- dized health plan at any time during that month, even if you didn’t actually participate. In addi- tion, if you were eligible for any month or part of a month to participate in any subsidized health plan maintained by the employer of either your dependent or your child who was under age 27 at the end of 2018, don’t use amounts paid for coverage for that month to figure the deduction. These rules are applied separately to plans that provide long-term care insurance and plans that don’t provide long-term care insurance. However, any medical insurance payments not deductible on Schedule 1 (Form 1040), line 29, can be included as medical expenses on Schedule A (Form 1040), if you itemize deduc- tions. Effect on itemized deductions. Subtract the health insurance deduction from your medical insurance when figuring medical expenses on Schedule A (Form 1040) if you itemize deduc- tions. Effect on self-employment tax. For tax years beginning before or after 2010, you can’t sub- tract the self-employed health insurance deduc- tion when figuring net earnings for your self-em- ployment tax from the business under which the insurance plan is established, or considered to be established, as discussed earlier. For more information, see Schedule SE (Form 1040). How to figure the deduction. Generally, you can use the worksheet in the Form 1040 in- structions to figure your deduction. However, if any of the following apply, you must use Work- sheet 6-A in this chapter. • You had more than one source of income subject to self-employment tax. • You file Form 2555 or Form 2555-EZ. • You are using amounts paid for qualified long-term care insurance to figure the de- duction. If you are claiming the HCTC, complete Form 8885 before you figure this deduction. Health coverage tax credit. You elect to take this credit only if you were an eligible trade adjustment assistance (TAA) recipient, alterna- tive TAA (ATAA) recipient, reemployment trade adjustment assistance (RTAA) recipient, or Pension Benefit Guaranty Corporation (PBGC) pension recipient. Use Form 8885 to figure the amount, if any, of this credit. When figuring the amount to enter on line 1 of Worksheet 6-A, don’t include any amounts you included on Form 8885, line 4. There is coordination of tax benefits be- tween advance monthly payments of the HCTC and the HCTC. In general, you can’t claim the HCTC for a payment you made for qualifying health insurance when you file your tax return if you previously received the benefit of the advance monthly payment program for that cov- erage month. If you benefited from the advance monthly payment program, you will receive a Form 1099-H that reports the amount of the payments that were forwarded directly to your health plan administrator for each coverage month. Don’t report these amounts on Form 8885. More than one health plan and business. If you have more than one health plan during the year and each plan is established under a different business, you must use separate work- sheets (Worksheet 6-A) to figure each plan's net earnings limit. Include the premium you paid under each plan on line 1 or line 2 of that sepa- rate worksheet and your net profit (or wages) from that business on line 4 (or line 11). For a plan that provides long-term care insurance, the total of the amounts entered for each person on line 2 of all worksheets can’t be more than the appropriate limit shown on line 2 for that per- son. Nondeductible Premiums You can’t deduct premiums on the following kinds of insurance. 1. Self-insurance reserve funds. You can’t deduct amounts credited to a reserve set up for self-insurance. This applies even if you can’t get business insurance cover- age for certain business risks. However, your actual losses may be deductible. See Pub. 547. 2. Loss of earnings. You can’t deduct premi- ums for a policy that pays for lost earnings due to sickness or disability. However, see the discussion on overhead insurance, item (8), under Deductible Premiums, ear- lier. 3. Certain life insurance and annuities. a. For contracts issued before June 9, 1997, you can’t deduct the premiums on a life insurance policy covering you, an employee, or any person with a financial interest in your business if you are directly or indirectly a benefi- ciary of the policy. You are included among possible beneficiaries of the policy if the policy owner is obligated to repay a loan from you using the proceeds of the policy. A person has a financial interest in your business if the person is an owner or part owner of the business or has lent money to the business. b. For contracts issued after June 8, 1997, you generally can’t deduct the premiums on any life insurance policy, endowment contract, or annuity con- tract if you are directly or indirectly a beneficiary. The disallowance applies without regard to whom the policy covers. c. Partners. If, as a partner in a partner- ship, you take out an insurance policy on your own life and name your part- ners as beneficiaries to induce them to retain their investments in the part- nership, you are considered a benefi- ciary. You can't deduct the insurance premiums. 4. Insurance to secure a loan. If you take out a policy on your life or on the life of an- other person with a financial interest in your business to get or protect a business loan, you can't deduct the premiums as a business expense. Nor can you deduct the premiums as interest on business loans or as an expense of financing loans. In the event of death, the proceeds of the policy are generally not taxed as income even if they are used to liquidate the debt. Capitalized Premiums Under the uniform capitalization rules, you must capitalize the direct costs and part of the indi- rect costs for certain production or resale activi- ties. Include these costs in the basis of property you produce or acquire for resale, rather than claiming them as a current deduction. You re- cover the costs through depreciation, amortiza- tion, or cost of goods sold when you use, sell, or otherwise dispose of the property. Indirect costs include premiums for insur- ance on your plant or facility, machinery, equip- ment, materials, property produced, or property acquired for resale. Uniform capitalization rules. You may be subject to the uniform capitalization rules if you do any of the following, unless the property is produced for your use other than in a business or an activity carried on for profit. 1. Produce real property or tangible personal property. For this purpose, tangible per- sonal property includes a film, sound re- cording, video tape, book, or similar prop- erty. 2. Acquire property for resale. However, these rules don't apply to the follow- ing property. 1. Personal property you acquire for resale if your average annual gross receipts are $25 million or less for the 3 prior tax years. 2. Property you produce if you meet either of the following conditions. a. Your indirect costs of producing the property are $200,000 or less. b. You use the cash method of account- ing and don't account for inventories. More information. For more information on these rules, see Uniform Capitalization Rules in Pub. 538 and the regulations under section 263A. When To Deduct Premiums You can usually deduct insurance premiums in the tax year to which they apply. Chapter 6 Insurance Page 23

(p535)(page-25)Page 25#

Cash method. If you use the cash method of accounting, you generally deduct insurance premiums in the tax year you actually paid them, even if you incurred them in an earlier year. However, see Prepayment, later. Accrual method. If you use an accrual method of accounting, you can't deduct insurance pre- miums before the tax year in which you incur a liability for them. In addition, you can't deduct insurance premiums before the tax year in which you actually pay them (unless the excep- tion for recurring items applies). For more infor- mation about the accrual method of accounting, see chapter 1. For information about the excep- tion for recurring items, see Pub. 538. Prepayment. You can't deduct expenses in advance, even if you pay them in advance. This rule applies to any expense paid far enough in advance to, in effect, create an asset with a useful life extending substantially beyond the end of the current tax year. Expenses such as insurance are generally allocable to a period of time. You can deduct in- surance expenses for the year to which they are allocable. Example. In 2018, you signed a 3-year in- surance contract. Even though you paid the premiums for 2018, 2019, and 2020 when you signed the contract, you can only deduct the premium for 2018 on your 2018 tax return. You can deduct in 2019 and 2020 the premium allo- cable to those years. Dividends received. If you receive dividends from business insurance and you deducted the premiums in prior years, at least part of the divi- dends generally are income. For more informa- tion, see Recovery of amount deducted (tax benefit rule) in chapter 1 under How Much Can I Deduct. 7. Costs You Can Deduct or Capitalize What’s New Alternative minimum tax (AMT). For tax years beginning after 2017, the Tax Cuts and Jobs Act, section 12001, repealed the corpo- rate AMT. Introduction This chapter discusses costs you can elect to deduct or capitalize. You generally deduct a cost as a current business expense by subtracting it from your in- come in either the year you incur it or the year you pay it. If you capitalize a cost, you may be able to recover it over a period of years through peri- odic deductions for amortization, depletion, or depreciation. When you capitalize a cost, you add it to the basis of property to which it relates. A partnership, corporation, estate, or trust makes the election to deduct or capitalize the costs discussed in this chapter except for ex- ploration costs for mineral deposits. Each indi- vidual partner, shareholder, or beneficiary elects whether to deduct or capitalize explora- tion costs. You may be subject to AMT if you de- duct certain research and experimen- tal, intangible drilling, exploration, de- velopment, circulation, or business organizational costs. For more information on the AMT, see the Instructions for Form 6251, Alternative Mini- mum Tax—Individuals. Topics This chapter discusses: • Carrying charges • Research and experimental costs • Intangible drilling costs • Exploration costs • Development costs • Circulation costs • Business start-up and organizational costs • Reforestation costs • Retired asset removal costs • Barrier removal costs • Film and television production costs • Repair and maintenance costs Useful Items You may want to see: Publication 544 Sales and Other Dispositions of Assets Form (and Instructions) Schedule C (Form 1040) Profit or Loss From Business (Sole Proprietorship) 3468 Investment Credit 6765 Credit for Increasing Research Activities 8826 Disabled Access Credit T (Timber) Forest Activities Schedule See chapter 13 for information about getting publications and forms. Carrying Charges Carrying charges include the taxes and interest you pay to carry or develop real property or to carry, transport, or install personal property. Certain carrying charges must be capitalized under the uniform capitalization rules. (For infor- mation on capitalization of interest, see CAUTION ! 544 Schedule C (Form 1040) 3468 6765 8826 T (Timber) chapter 4.) You can elect to capitalize carrying charges not subject to the uniform capitalization rules, but only if they are otherwise deductible. You can elect to capitalize carrying charges separately for each project you have and for each type of carrying charge. Your election is good for only 1 year for unimproved and unpro- ductive real property. You must decide whether to capitalize carrying charges each year the property remains unimproved and unproduc- tive. For other real property, your election to capitalize carrying charges remains in effect un- til construction or development is completed. For personal property, your election is effective until the date you install or first use it, whichever is later. How to make the election. To make the elec- tion to capitalize a carrying charge, attach a statement to your original tax return for the year the election is to be effective indicating which charges you are electing to capitalize. However, if you timely filed your return for the year without making the election, you can still make the elec- tion by filing an amended return within 6 months of the due date of the return (excluding exten- sions). Attach the statement to the amended re- turn and write “Filed pursuant to section 301.9100-2” on the statement. File the amen- ded return at the same address you filed the original return. Research and Experimental Costs The costs of research and experimentation are generally capital expenses. However, you can elect to deduct these costs as a current busi- ness expense. Your election to deduct these costs is binding for the year it is made and for all later years unless you get IRS approval to make a change. If you meet certain requirements, you may elect to defer and amortize research and exper- imental costs. For information on electing to de- fer and amortize these costs, see Research and Experimental Costs in chapter 8. Research and experimental costs defined. Research and experimental costs are reasona- ble costs you incur in your trade or business for activities intended to provide information that would eliminate uncertainty about the develop- ment or improvement of a product. Uncertainty exists if the information available to you does not establish how to develop or improve a prod- uct or the appropriate design of a product. Whether costs qualify as research and experi- mental costs depends on the nature of the ac- tivity to which the costs relate rather than on the nature of the product or improvement being de- veloped or the level of technological advance- ment. The costs of obtaining a patent, including at- torneys' fees paid or incurred in making and perfecting a patent application, are research and experimental costs. However, costs paid or incurred to obtain another's patent are not re- search and experimental costs. Page 24 Chapter 7 Costs You Can Deduct or Capitalize

(p535)(page-26)Page 26#

Product. The term “product” includes any of the following items. • Formula. • Invention. • Patent. • Pilot model. • Process. • Technique. • Property similar to the items listed above. It also includes products used by you in your trade or business or held for sale, lease, or li- cense. Costs not included. Research and experi- mental costs do not include expenses for any of the following activities. • Advertising or promotions. • Consumer surveys. • Efficiency surveys. • Management studies. • Quality control testing. • Research in connection with literary, his- torical, or similar projects. • The acquisition of another's patent, model, production, or process. When and how to elect. You make the elec- tion to deduct research and experimental costs by deducting them on your tax return for the year in which you first pay or incur research and experimental costs. If you do not make the elec- tion to deduct research and experimental costs in the first year in which you pay or incur the costs, you can deduct the costs in a later year only with approval from the IRS. Research credit. If you pay or incur qualified research expenses, you may be able to take the research credit. For more information, see Form 6765 and its instructions. Payroll tax credit. The payroll tax credit is an annual election made by a qualified small busi- ness specifying the amount of research credit, not to exceed $250,000, that may be used against the employer portion of social security liability. The credit is the smallest of the current year research credit, an elected amount not to exceed $250,000, or the general business credit carryforward for the tax year. The election must be made on or before the due date of the originally filed return (including extensions). An election cannot be made for a tax year if an election was made for 5 or more preceding tax years. The election made by a partnership or S corporation is made at the entity level. A qualified small business that elects to claim the payroll tax credit and files quarterly employment tax returns, will claim the payroll tax credit on its employment tax return for the first quarter that begins after it files the return re- flecting the payroll tax election. For more infor- mation, see Form 6765 and its instructions. Intangible Drilling Costs The costs of developing oil, gas, or geothermal wells are ordinarily capital expenditures. You can usually recover them through depreciation or depletion. However, you can elect to deduct intangible drilling costs (IDCs) as a current business expense. These are certain drilling and development costs for wells in the United States in which you hold an operating or work- ing interest. You can deduct only costs for drill- ing or preparing a well for the production of oil, gas, or geothermal steam or hot water. You can elect to deduct only the costs of items with no salvage value. These include wa- ges, fuel, repairs, hauling, and supplies related to drilling wells and preparing them for produc- tion. Your cost for any drilling or development work done by contractors under any form of contract is also an IDC. However, see Amounts paid to contractor that must be capitalized, later. You can also elect to deduct the cost of drill- ing exploratory bore holes to determine the lo- cation and delineation of offshore hydrocarbon deposits if the shaft is capable of conducting hydrocarbons to the surface on completion. It does not matter whether there is any intent to produce hydrocarbons. If you do not elect to deduct your IDCs as a current business expense, you can elect to de- duct them over the 60-month period beginning with the month they were paid or incurred. Amounts paid to contractor that must be capitalized. Amounts paid to a contractor must be capitalized if they are either: • Amounts properly allocable to the cost of depreciable property, or • Amounts paid only out of production or proceeds from production if these amounts are depletable income to the recipient. How to make the election. You elect to de- duct IDCs as a current business expense by taking the deduction on your income tax return for the first tax year you have eligible costs. No formal statement is required. If you file Sched- ule C (Form 1040), enter these costs under “Other expenses.” For oil and gas wells, your election is bind- ing for the year it is made and for all later years. For geothermal wells, your election can be re- voked by the filing of an amended return on which you do not take the deduction. You can file the amended return for the year up to the normal time of expiration for filing a claim for credit or refund, generally, within 3 years after the date you filed the original return or within 2 years after the date you paid the tax, whichever is later. Energy credit for costs of geothermal wells. If you capitalize the drilling and development costs of geothermal wells that you place in serv- ice during the tax year, you may be able to claim a business energy credit. See the Instruc- tions for Form 3468 for more information. Nonproductive well. If you capitalize your IDCs, you have another option if the well is non- productive. You can deduct the IDCs of the nonproductive well as an ordinary loss. You must indicate and clearly state your election on your tax return for the year the well is comple- ted. Once made, the election for oil and gas wells is binding for all later years. You can re- voke your election for a geothermal well by filing an amended return that does not claim the loss. Costs incurred outside the United States. You cannot deduct as a current business ex- pense all the IDCs paid or incurred for an oil, gas, or geothermal well located outside the Uni- ted States. However, you can elect to include the costs in the adjusted basis of the well to fig- ure depletion or depreciation. If you do not make this election, you can deduct the costs over the 10-year period beginning with the tax year in which you paid or incurred them. These rules do not apply to a nonproductive well. Exploration Costs The costs of determining the existence, loca- tion, extent, or quality of any mineral deposit are ordinarily capital expenditures if the costs lead to the development of a mine. You recover these costs through depletion as the mineral is removed from the ground. However, you can elect to deduct domestic exploration costs paid or incurred before the beginning of the develop- ment stage of the mine (except those for oil and gas wells). How to make the election. You elect to de- duct exploration costs by taking the deduction on your income tax return, or on an amended income tax return, for the first tax year for which you wish to deduct the costs paid or incurred during the tax year. Your return must ade- quately describe and identify each property or mine, and clearly state how much is being de- ducted for each one. The election applies to the tax year you make this election and all later tax years. Partnerships and S corporations. Each partner, not the partnership, elects whether to capitalize or to deduct that partner's share of exploration costs. Each shareholder, not the S corporation, elects whether to capitalize or to deduct that shareholder's share of exploration costs. Reduced corporate deductions for explora- tion costs. A corporation (other than an S cor- poration) can deduct only 70% of its domestic exploration costs. It must capitalize the remain- ing 30% of costs and amortize them over the 60-month period starting with the month the ex- ploration costs are paid or incurred. A corpora- tion may also elect to capitalize and amortize mining exploration costs over a 10-year period. For more information on this method of amorti- zation, see section 59(e). The 30% that the corporation capitalizes cannot be added to its basis in the property to figure cost depletion. However, the amount amortized is treated as additional depreciation and is subject to recapture as ordinary income on a disposition of the property. See Section 1250 Property under Depreciation Recapture in chapter 3 of Pub. 544. These rules also apply to the deduction of development costs by corporations. See Devel- opment Costs, later. Recapture of exploration expenses. When your mine reaches the producing stage, you Chapter 7 Costs You Can Deduct or Capitalize Page 25

(p535)(page-27)Page 27#

must recapture any exploration costs you elec- ted to deduct. Use either of the following meth- ods.

Method 1—Include the deducted costs in gross income for the tax year the mine rea- ches the producing stage. Your election must be clearly indicated on the return. In- crease your adjusted basis in the mine by the amount included in income. Generally, you must elect this recapture method by the due date (including extensions) of your return. However, if you timely filed your re- turn for the year without making the elec- tion, you can still make the election by filing an amended return within 6 months of the due date of the return (excluding exten- sions). Make the election on your amended return and write “Filed pursuant to section 301.9100-2” on the form where you are in- cluding the income. File the amended re- turn at the same address you filed the origi- nal return.

Method 2—Do not claim any depletion de- duction for the tax year the mine reaches the producing stage and any later tax years until the depletion you would have deduc- ted equals the exploration costs you de- ducted. You also must recapture deducted explora- tion costs if you receive a bonus or royalty from mine property before it reaches the producing stage. Do not claim any depletion deduction for the tax year you receive the bonus or royalty and any later tax years until the depletion you would have deducted equals the exploration costs you deducted. Generally, if you dispose of the mine before you have fully recaptured the exploration costs you deducted, recapture the balance by treating all or part of your gain as ordinary income. Un- der these circumstances, you generally treat as ordinary income all of your gain if it is less than your adjusted exploration costs with respect to the mine. If your gain is more than your adjusted exploration costs, treat as ordinary income only a part of your gain, up to the amount of your ad- justed exploration costs. Foreign exploration costs. If you pay or incur exploration costs for a mine or other natural de- posit located outside the United States, you cannot deduct all the costs in the current year. You can elect to include the costs (other than for an oil, gas, or geothermal well) in the adjus- ted basis of the mineral property to figure cost depletion. (Cost depletion is discussed in chap- ter 9.) If you do not make this election, you must deduct the costs over the 10-year period begin- ning with the tax year in which you pay or incur them. These rules also apply to foreign devel- opment costs. Development Costs You can deduct costs paid or incurred during the tax year for developing a mine or any other natural deposit (other than an oil or gas well) lo- cated in the United States. These costs must be paid or incurred after the discovery of ores or minerals in commercially marketable quantities. Development costs also include depreciation on improvements used in the development of ores or minerals and costs incurred for you by a contractor. Development costs do not include the costs for the acquisition or improvement of depreciable property. Instead of deducting development costs in the year paid or incurred, you can elect to treat the costs as deferred expenses and deduct them ratably as the units of produced ores or minerals benefited by the expenses are sold. This election applies each tax year to expenses paid or incurred in that year. Once made, the election is binding for the year and cannot be revoked for any reason. How to make the election. The election to deduct development costs ratably as the ores or minerals are sold must be made for each mine or other natural deposit by a clear indica- tion on your return or by a statement filed with the IRS office where you file your return. Gener- ally, you must make the election by the due date of the return (including extensions). How- ever, 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 re- turn. Foreign development costs. The rules dis- cussed earlier for Foreign exploration costs ap- ply to foreign development costs. Reduced corporate deductions for develop- ment costs. The rules discussed earlier for Reduced corporate deductions for exploration costs also apply to corporate deductions for de- velopment costs. Circulation Costs A publisher can deduct as a current business expense the costs of establishing, maintaining, or increasing the circulation of a newspaper, magazine, or other periodical. For example, a publisher can deduct the cost of hiring extra employees for a limited time to get new sub- scriptions through telephone calls. Circulation costs may be deducted even if they normally would be capitalized. This rule does not apply to the following costs that must be capitalized. • The purchase of land or depreciable prop- erty. • The acquisition of circulation through the purchase of any part of the business of an- other publisher of a newspaper, magazine, or other periodical, including the purchase of another publisher's list of subscribers. Other treatment of circulation costs. If you do not want to deduct circulation costs as a cur- rent business expense, you can elect one of the following ways to recover these costs. • Capitalize all circulation costs that are properly chargeable to a capital account (see chapter 1). • Amortize circulation costs over the 3-year period beginning with the tax year they were paid or incurred. How to make the election. You elect to capi- talize circulation costs by attaching a statement to your return for the first tax year the election applies. Your election is binding for the year it is made and for all later years, unless you get IRS approval to revoke it. Business Start-Up and Organizational Costs Business start-up and organizational costs are generally capital expenditures. However, you can elect to deduct up to $5,000 of business start-up and $5,000 of organizational costs paid or incurred after October 22, 2004. The $5,000 deduction is reduced by the amount your total start-up or organizational costs exceed $50,000. Any remaining costs must be amor- tized. For information about amortizing start-up and organizational costs, see chapter 8. Start-up costs include any amounts paid or incurred in connection with creating an active trade or business or investigating the creation or acquisition of an active trade or business. Or- ganizational costs include the costs of creating a corporation or partnership. How to make the election. You elect to de- duct the start-up or organizational costs by claiming the deduction on your income tax re- turn (filed by the due date including extensions) for the tax year in which the active trade or busi- ness begins. For costs paid or incurred after September 8, 2008, you are not required to at- tach a statement to your return to elect to de- duct such costs. However, for start-up or organ- izational costs paid or incurred before September 9, 2008, you may be required to at- tach a statement to your return to elect to de- duct such costs. 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 re- turn (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 ad- dress you filed the original return. The election applies when figuring taxable income for the current tax year and all subsequent years. Once made, the election is irrevocable. For more in- formation on start-up and organizational costs, see chapter 8. Reforestation Costs Reforestation costs are generally capital expen- ditures. However, you can elect to deduct up to $10,000 ($5,000 if married filing separately; $0 for a trust) of qualifying reforestation costs paid or incurred after October 22, 2004, for each qualified timber property. The remaining costs can be amortized over an 84-month period. For information about amortizing reforestation costs, see chapter 8. Page 26 Chapter 7 Costs You Can Deduct or Capitalize

(p535)(page-28)Page 28#

Qualifying reforestation costs are the direct costs of planting or seeding for forestation or re- forestation. Qualified timber property is property that contains trees in significant commercial quantities. See chapter 8 for more information on qualifying reforestation costs and qualified timber property. If you elect to deduct qualified reforestation costs, create and maintain separate timber ac- counts for each qualified timber property and in- clude all reforestation costs and the dates each was applied. Do not include this qualified timber property in any account (for example, depletion block) for which depletion is allowed. How to make the election. You elect to de- duct qualifying reforestation costs by claiming the deduction on your timely filed income tax re- turn (including extensions) for the tax year the expenses were paid or incurred. If Form T (Tim- ber) is required, complete Part IV of the form. If Form T (Timber) is not required, attach a state- ment containing the following information for each qualified timber property for which an election is being made. • The unique stand identification numbers. • The total number of acres reforested dur- ing the tax year. • The nature of the reforestation treatments. • The total amounts of qualified reforestation expenditures eligible to be amortized or deducted. 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 re- turn. The election applies when figuring taxable income for the current tax year and all subse- quent years. For additional information on reforestation costs, see chapter 8. Recapture. This deduction may have to be re- captured as ordinary income under section 1245 when you sell or otherwise dispose of the property that would have received an addition to basis if you had not elected to deduct the ex- penditure. For more information on recapturing the deduction, see Depreciation Recapture in Pub. 544. Retired Asset Removal Costs If you retire and remove a depreciable asset in connection with the installation or production of a replacement asset, you can deduct the costs of removing the retired asset. However, if you replace a component (part) of a depreciable as- set, capitalize the removal costs if the replace- ment is an improvement and deduct the costs if the replacement is a repair. Barrier Removal Costs The cost of an improvement to a business asset is normally a capital expense. However, you can elect to deduct the costs of making a facility or public transportation vehicle more accessible to and usable by those who are disabled or eld- erly. You must own or lease the facility or vehi- cle for use in connection with your trade or busi- ness. A facility is all or any part of buildings, struc- tures, equipment, roads, walks, parking lots, or similar real or personal property. A public trans- portation vehicle is a vehicle, such as a bus or railroad car, that provides transportation service to the public (including service for your custom- ers, even if you are not in the business of pro- viding transportation services). You cannot deduct any costs that you paid or incurred to completely renovate or build a fa- cility or public transportation vehicle or to re- place depreciable property in the normal course of business. Deduction limit. The most you can deduct as a cost of removing barriers to the disabled and the elderly for any tax year is $15,000. How- ever, you can add any costs over this limit to the basis of the property and depreciate these ex- cess costs. Partners and partnerships. The $15,000 limit applies to a partnership and also to each part- ner in the partnership. A partner can allocate the $15,000 limit in any manner among the part- ner's individually incurred costs and the part- ner's distributive share of partnership costs. If the partner cannot deduct the entire share of partnership costs, the partnership can add any costs not deducted to the basis of the improved property. A partnership must be able to show that any amount added to basis was not deducted by the partner and that it was over a partner's $15,000 limit (as determined by the partner). If the partnership cannot show this, it is presumed that the partner was able to deduct the distribu- tive share of the partnership's costs in full. Example. Emilio Azul's distributive share of ABC partnership's deductible expenses for the removal of architectural barriers was $14,000. Emilio had $12,000 of similar expenses in his sole proprietorship. He elected to deduct $7,000 of them. Emilio allocated the remaining $8,000 of the $15,000 limit to his share of ABC's expenses. Emilio can add the excess $5,000 of his own expenses to the basis of the property used in his business. Also, if ABC can show that Emilio could not deduct $6,000 ($14,000 – $8,000) of his share of the partner- ship's expenses because of how Emilio applied the limit, ABC can add $6,000 to the basis of its property. Qualification standards. You can deduct your costs as a current expense only if the bar- rier removal meets the guidelines and require- ments issued by the Architectural and Trans- portation Barriers Compliance Board under the Americans with Disabilities Act (ADA) of 1990. You can view the Americans with Disabilities Act at ADA.gov/pubs/ada.htm. The following is a list of some architectural barrier removal costs that can be deducted. • Ground and floor surfaces. • Walks. • Parking lots. • Ramps. • Entrances. • Doors and doorways. • Stairs. • Floors. • Toilet rooms. • Water fountains. • Public telephones. • Elevators. • Controls. • Signage. • Alarms. • Protruding objects. • Symbols of accessibility. You can find the ADA guidelines and require- ments for architectural barrier removal at USDOJ.gov/crt/ada/reg3a.html. The costs for removal of transportation barri- ers from rail facilities, buses, and rapid and light rail vehicles are deductible. You can find the guidelines and requirements for transportation barrier removal at FTA.dot.gov. Also, you can access the ADA website at ADA.gov for additional information. Other barrier removals. To be deductible, expenses of removing any barrier not covered by the above standards must meet all three of the following tests. 1. The removed barrier must be a substantial barrier to access or use of a facility or pub- lic transportation vehicle by persons who have a disability or are elderly. 2. The removed barrier must have been a barrier for at least one major group of per- sons who have a disability or are elderly (such as people who are blind, deaf, or wheelchair users). 3. The barrier must be removed without cre- ating any new barrier that significantly im- pairs access to or use of the facility or ve- hicle by a major group of persons who have a disability or are elderly. How to make the election. If you elect to de- duct your costs for removing barriers to the dis- abled or the elderly, claim the deduction on your income tax return (partnership return for partnerships) for the tax year the expenses were paid or incurred. Identify the deduction as a separate item. The election applies to all the qualifying costs you have during the year, up to the $15,000 limit. If you make this election, you must maintain adequate records to support your deduction. For your election to be valid, you generally must file your return by its due date, including extensions. However, if you timely filed your re- turn 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 in- dicate the election on your amended return and write “Filed pursuant to section 301.9100-2.” File the amended return at the same address Chapter 7 Costs You Can Deduct or Capitalize Page 27

(p535)(page-29)Page 29#

you filed the original return. Your election is ir- revocable after the due date, including exten- sions, of your return. Disabled access credit. If you make your business accessible to persons with disabilities and your business is an eligible small business, you may be able to claim the disabled access credit. If you choose to claim the credit, you must reduce the amount you deduct or capital- ize by the amount of the credit. For more information, see Form 8826. Film and Television Production Costs Film and television production costs are gener- ally capital expenses. However, you can elect to deduct certain costs of qualified film, televi- sion, and live theatrical productions that begin before January 1, 2018. For more information, see section 181 and the related regulations. Certain qualified film, television, or live the- atrical productions acquired and placed in serv- ice after September 27, 2017, may be eligible for the special depreciation allowance under section 168(k). For more information, see Pub. 946, How to Depreciate Property. Repair and Maintenance Costs Generally, you can deduct amounts paid for re- pairs and maintenance to tangible property if the amounts paid are not otherwise required to be capitalized. However, you may elect to capi- talize amounts paid for repair and maintenance consistent with the treatment on your books and records. If you make this election, it applies to all amounts paid for repair and maintenance to tangible property that you treat as capital ex- penditures on your books and records for the tax year. How to make the election. To make the elec- tion to treat repairs and maintenance as capital expenditures, attach a statement titled “Section 1.263(a)-3(n) Election” to your timely filed return (including extensions). For more information on what to include in the statement, see Regula- tions section 1.263(a)-3(n). If you timely filed your return without making the election, you can still make the election by filing an amended re- turn within 6 months of the due date of the re- turn (excluding extensions). Attach the state- ment to the amended return and write “Filed pursuant to section 301.9100-2” on the state- ment. File the amended return at the same ad- dress you filed the original return. 8. Amortization Introduction Amortization is a method of recovering (deduct- ing) certain capital costs over a fixed period of time. It is similar to the straight line method of depreciation. The various amortizable costs covered in this chapter are included in the list below. How- ever, this chapter doesn't discuss amortization of bond premium. For information on that topic, see chapter 3 of Pub. 550, Investment Income and Expenses. Topics This chapter discusses: • Deducting amortization • Amortizing costs of starting a business • Amortizing costs of getting a lease • Amortizing costs of section 197 intangibles • Amortizing reforestation costs • Amortizing costs of geological and geophysical costs • Amortizing costs of pollution control facilities • Amortizing costs of research and experimentation • Amortizing costs of certain tax preferences Useful Items You may want to see: Publication 544 Sales and Other Dispositions of Assets 550 Investment Income and Expenses 946 How To Depreciate Property Form (and Instructions) 3115 Application for Change in Accounting Method 4562 Depreciation and Amortization 6251 Alternative Minimum Tax—Individuals See chapter 13 for information about getting publications and forms. How To Deduct Amortization To deduct amortization that begins during the current tax year, complete Part VI of Form 4562 and attach it to your income tax return. To report amortization from previous years, in addition to amortization that begins in the cur- rent year, list on Form 4562 each item sepa- rately. For example, in 2017, you began to 544 550 946 3115 4562 6251 amortize a lease. In 2018, you began to amor- tize a second lease. Report amortization from the new lease on line 42 of your 2018 Form 4562. Report amortization from the 2017 lease on line 43 of your 2018 Form 4562. If you don't have any new amortizable ex- penses for the current year, you aren't required to complete Form 4562 (unless you are claim- ing depreciation). Report the current year's de- duction for amortization that began in a prior year directly on the “Other deduction” or “Other expense line” of your return. Starting a Business When you start a business, treat all eligible costs you incur before you begin operating the business as capital expenditures which are part of your basis in the business. Generally, you re- cover costs for particular assets through depre- ciation deductions. However, you generally can't recover other costs until you sell the busi- ness or otherwise go out of business. For a dis- cussion on how to treat these costs, see If your attempt to go into business is unsuccessful un- der Capital Expenses in chapter 1. For costs paid or incurred after September 8, 2008, you can deduct a limited amount of start-up and organizational costs. The costs that aren't deducted currently can be amortized ratably over a 180-month period. The amortiza- tion period starts with the month you begin op- erating your active trade or business. You aren't required to attach a statement to make this election. You can choose to forgo this election by affirmatively electing to capitalize your start-up costs on your income tax return filed by the due date (including extensions) for the tax year in which the active trade or business be- gins. Once made, the election to either amortize or capitalize start-up costs is irrevocable and applies to all start-up costs that are related to your trade or business. See Regulations sec- tions 1.195-1, 1.248-1, and 1.709-1. For costs paid or incurred after October 22, 2004, and before September 9, 2008, you can elect to deduct a limited amount of business start-up and organizational costs in the year your active trade or business begins. Any costs not deducted can be amortized ratably over a 180-month period, beginning with the month you begin business. If the election is made, you must attach any statement required by Regula- tions sections 1.195-1(b), 1.248-1(c), and 1.709-1(c), as in effect before September 9, 2008. Note. You can apply the provisions of Reg- ulations sections 1.195-1, 1.248-1, and 1.709-1 to all business start-up and organizational costs paid or incurred after October 22, 2004, provi- ded the period of limitations on assessment hasn't expired for the year of the election. Oth- erwise, for business start-up and organizational costs paid or incurred after October 22, 2004, and before September 9, 2008, the provisions under Regulations sections 1.195-1(b), 1.248-1(c), and 1.709-1(c), as in effect before September 9, 2008, will apply. For costs paid or incurred before October 23, 2004, you can elect to amortize business Page 28 Chapter 8 Amortization

(p535)(page-30)Page 30#

start-up and organizational costs over an amor- tization period of 60 months or more. See How To Make the Election, later. The cost must qualify as one of the follow- ing. • A business start-up cost. • An organizational cost for a corporation. • An organizational cost for a partnership. Business Start-Up Costs Start-up costs are amounts paid or incurred for (a) creating an active trade or business, or (b) investigating the creation or acquisition of an active trade or business. Start-up costs include amounts paid or incurred in connection with an existing activity engaged in for profit, and for the production of income in anticipation of the activ- ity becoming an active trade or business. Qualifying costs. A start-up cost is amortiza- ble if it meets both of 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 amounts paid for the following. • An analysis or survey of potential markets, products, labor supply, transportation fa- cilities, etc. • Advertisements for the opening of the busi- ness. • Salaries and wages for employees who are being trained and their instructors. • Travel and other necessary costs for se- curing prospective distributors, suppliers, or customers. • Salaries and fees for executives and con- sultants, or for similar professional serv- ices. Nonqualifying costs. Start-up costs Don't in- clude deductible interest, taxes, or research and experimental costs. See Research and Ex- perimental Costs, later. Purchasing an active trade or business. Amortizable start-up costs for purchasing an ac- tive trade or business include only investigative costs incurred in the course of a general search for or preliminary investigation of the business. These are costs that help you decide whether to purchase a business. Costs you incur in an attempt to purchase a specific business are capital expenses that you can't amortize. Example. On June 1, you hired an account- ing firm and a law firm to assist you in the po- tential purchase of XYZ, Inc. They researched XYZ's industry and analyzed the financial pro- jections of XYZ, Inc. In September, the law firm prepared and submitted a letter of intent to XYZ, Inc. The letter stated that a binding com- mitment would result only after a purchase agreement was signed. The law firm and ac- counting firm continued to provide services in- cluding a review of XYZ's books and records and the preparation of a purchase agreement. On October 22, you signed a purchase agree- ment with XYZ, Inc. All amounts paid or incurred to investigate the business before October 22 are amortizable investigative costs. Amounts paid on or after that date relate to the attempt to purchase the business and therefore must be capitalized. Disposition of business. If you completely dispose of your business before the end of the amortization period, you can deduct any re- maining deferred start-up costs. However, you can deduct these deferred start-up costs only to the extent they qualify as a loss from a busi- ness. Costs of Organizing a Corporation Amounts paid to organize a corporation are the direct costs of creating the corporation. Qualifying costs. To qualify as an organiza- tional cost, it must be: • For the creation of the corporation, • Chargeable to a capital account (see chap- ter 1), • Amortized over the life of the corporation if the corporation had a fixed life, and • Incurred before the end of the first tax year in which the corporation is in business. A corporation using the cash method of ac- counting can amortize organizational costs in- curred within the first tax year, even if it doesn't pay them in that year. Examples of organizational costs include the following. • The cost of temporary directors. • The cost of organizational meetings. • State incorporation fees. • The cost of legal services. Nonqualifying costs. The following items are capital expenses that can't be amortized. • Costs for issuing and selling stock or se- curities, such as commissions, professio- nal fees, and printing costs. • Costs associated with the transfer of as- sets to the corporation. Costs of Organizing a Partnership The costs to organize a partnership are the di- rect costs of creating the partnership. Qualifying costs. A partnership can amortize an organizational cost only if it meets all the fol- lowing tests. • It is for the creation of the partnership and not for starting or operating the partnership trade or business. • It is chargeable to a capital account (see chapter 1). • It could be amortized over the life of the partnership if the partnership had a fixed life. • It is incurred by the due date of the partner- ship return (excluding extensions) for the first tax year in which the partnership is in business. However, if the partnership uses the cash method of accounting and pays the cost after the end of its first tax year, see Cash method partnership under How To Amortize, later. • It is for a type of item normally expected to benefit the partnership throughout its entire life. Organizational costs include the following fees. • Legal fees for services incident to the or- ganization of the partnership, such as ne- gotiation and preparation of the partner- ship agreement. • Accounting fees for services incident to the organization of the partnership. • Filing fees. Nonqualifying costs. The following costs can't be amortized. • The cost of acquiring assets for the part- nership or transferring assets to the part- nership. • The cost of admitting or removing partners, other than at the time the partnership is first organized. • The cost of making a contract concerning the operation of the partnership trade or business including a contract between a partner and the partnership. • The costs for issuing and marketing inter- ests in the partnership such as brokerage, registration, and legal fees and printing costs. These “syndication fees” are capital expenses that can't be depreciated or amortized. Liquidation of partnership. If a partnership is liquidated before the end of the amortization pe- riod, the unamortized amount of qualifying or- ganizational costs can be deducted in the part- nership's final tax year. However, these costs can be deducted only to the extent they qualify as a loss from a business. How To Amortize Deduct start-up and organizational costs in equal amounts over the applicable amortization period (discussed earlier under Business Start-Up Costs). You can choose an amortiza- tion period for start-up costs that is different from the period you choose for organizational costs, as long as both aren't less than the appli- cable amortization period. Once you choose an amortization period, you can't change it. To figure your deduction, divide your total start-up or organizational costs by the months in the amortization period. The result is the amount you can deduct for each month. Cash method partnership. A partnership us- ing the cash method of accounting can deduct an organizational cost only if it has been paid by the end of the tax year. However, any cost the partnership could have deducted as an organi- zational cost in an earlier tax year (if it had been paid that year) can be deducted in the tax year of payment. How To Make the Election To elect to amortize start-up or organizational costs, you must complete and attach Form 4562 to your return for the first tax year you are in business. You also may be required to attach Chapter 8 Amortization Page 29

(p535)(page-31)Page 31#

Organizational costs election statement (descri- bed later) to your return. For start-up or organizational costs paid or incurred after September 8, 2008, an accompa- nying statement isn't required. Generally, for start-up or organizational costs paid or incurred before September 9, 2008, and after October 22, 2004, unless you choose to apply Regula- tions sections 1.195-1, 1.248-1, and 1.709-1, you also must attach an accompanying state- ment to elect to amortize the costs. If you have both start-up and organizational costs, attach a separate statement (if required) to your return for each type of cost. See Starting a Business, earlier, for more information. Generally, you must file the return by the due date (including any extensions). However, if you timely filed your return for the year without making the election, you can still make the elec- tion by filing an amended return within 6 months of the due date of the return (excluding exten- sions). For more information, see the instruc- tions for Part VI of Form 4562. You can choose to forgo the election to am- ortize by affirmatively electing to capitalize your start-up or organizational costs on your income tax return filed by the due date (including exten- sions) for the tax year in which the active trade or business begins. Note. The election to either amortize or capitalize start-up or organizational costs is ir- revocable and applies to all start-up and organi- zational costs that are related to the trade or business. If your business is organized as a corpora- tion or partnership, only the corporation or part- nership can elect to amortize its start-up or or- ganizational costs. A shareholder or partner can't make this election. You, as a shareholder or partner, can't amortize any costs you incur in setting up your corporation or partnership. Only the corporation or partnership can amortize these costs. However, you, as an individual, can elect to amortize costs you incur to investigate an inter- est in an existing partnership. These costs qual- ify as business start-up costs if you acquire the partnership interest. Start-up costs election statement. If you elect to amortize your start-up costs, attach a separate statement (if required) that contains the following information. • A description of the business to which the start-up costs relate. • A description of each start-up cost incur- red. • The month your active business began (or was acquired). • The number of months in your amortization period (which is generally 180 months). Filing the statement early. You can elect to amortize your start-up costs by filing the statement with a return for any tax year before the year your active business begins. If you file the statement early, the election becomes ef- fective in the month of the tax year your active business begins. Revised statement. You can file a revised statement to include any start-up costs not in- cluded in your original statement. However, you can't include on the revised statement any cost you previously treated on your return as a cost other than a start-up cost. You can file the re- vised statement with a return filed after the re- turn on which you elected to amortize your start-up costs. Organizational costs election statement. If you elect to amortize your corporation's or part- nership's organizational costs, attach a sepa- rate statement (if required) that contains the fol- lowing information. • A description of each cost. • The amount of each cost. • The date each cost was incurred. • The month your corporation or partnership began active business (or acquired the business). • The number of months in your amortization period (which is generally 180 months). Partnerships. The statement prepared for a cash basis partnership also must indicate the amount paid before the end of the year for each cost. You don't need to separately list any part- nership organizational cost that is less than $10. Instead, you can list the total amount of these costs with the dates the first and last costs were incurred. After a partnership makes the election to amortize organizational costs, it can later file an amended return to include additional organiza- tional costs not included in the partnership's original return and statement. Getting a Lease If you get a lease for business property, you may recover the cost of acquiring the lease by amortizing it over the term of the lease. The term of the lease for amortization purposes gen- erally includes all renewal options (and any other period for which you and the lessor rea- sonably expect the lease to be renewed). How- ever, renewal periods aren't included if 75% or more of the cost of acquiring the lease is for the term of the lease remaining on the acquisition date (not including any period for which you may choose to renew, extend, or continue the lease). For more information on the costs of getting a lease, see Cost of Getting a Lease in chapter 3. How to amortize. Enter your deduction in Part VI of Form 4562 if you are deducting amortiza- tion that begins during the current year, or on the appropriate line of your tax return if you aren't otherwise required to file Form 4562. Section 197 Intangibles Generally, you may amortize the capitalized costs of “section 197 intangibles” (see Section 197 Intangibles Defined, later) ratably over a 15-year period. You must amortize these costs if you hold the section 197 intangibles in con- nection with your trade or business or in an ac- tivity engaged in for the production of income. You may not be able to amortize sec- tion 197 intangibles acquired in a trans- action that didn't result in a significant change in ownership or use. See Anti-Churning Rules, later. Your amortization deduction each year is the applicable part of the intangible's adjusted basis (for purposes of determining gain), fig- ured by amortizing it ratably over 15 years (180 months). The 15-year period begins with the later of: • The month the intangible is acquired, or • The month the trade or business or activity engaged in for the production of income begins. You can't deduct amortization for the month you dispose of the intangible. If you pay or incur an amount that increases the basis of an amortizable section 197 intangi- ble after the 15-year period begins, amortize it over the remainder of the 15-year period begin- ning with the month the basis increase occurs. You aren't allowed any other depreciation or amortization deduction for an amortizable sec- tion 197 intangible. Tax-exempt use property subject to a lease. The amortization period for any section 197 in- tangible leased under a lease agreement en- tered into after March 12, 2004, to a tax-exempt organization, governmental unit, or foreign per- son or entity (other than a partnership), shall not be less than 125% of the lease term. Cost attributable to other property. The rules for section 197 intangibles don't apply to any amount that is included in determining the cost of property that isn't a section 197 intangi- ble. For example, if the cost of computer soft- ware isn't separately stated from the cost of hardware or other tangible property and you consistently treat it as part of the cost of the hardware or other tangible property, these rules don't apply. Similarly, none of the cost of acquir- ing real property held for the production of rental income is considered the cost of good- will, going concern value, or any other section 197 intangible. Section 197 Intangibles Defined The following assets are section 197 intangibles and must be amortized over 180 months. 1. Goodwill. 2. Going concern value. 3. Workforce in place. 4. Business books and records, operating systems, or any other information base, in- cluding lists or other information concern- ing current or prospective customers. 5. A patent, copyright, formula, process, de- sign, pattern, know-how, format, or similar item. CAUTION ! Page 30 Chapter 8 Amortization

(p535)(page-32)Page 32#

6. A customer-based intangible. 7. A supplier-based intangible. 8. Any item similar to items 3 through 7. 9. A license, permit, or other right granted by a governmental unit or agency (including issuances and renewals). 10. A covenant not to compete entered into in connection with the acquisition of an inter- est in a trade or business. 11. Any franchise, trademark, or trade name. 12. A contract for the use of, or a term interest in, any item in this list. You can't amortize any of the intangi- bles listed in items 1 through 8 that you created rather than acquired unless you created them in acquiring assets that make up a trade or business or a substantial part of a trade or business. Goodwill. This is the value of a trade or busi- ness based on expected continued customer patronage due to its name, reputation, or any other factor. Going concern value. This is the additional value of a trade or business that attaches to property because the property is an integral part of an ongoing business activity. It includes value based on the ability of a business to con- tinue to function and generate income even though there is a change in ownership (but doesn't include any other section 197 intangi- ble). It also includes value based on the imme- diate use or availability of an acquired trade or business, such as the use of earnings during any period in which the business wouldn't other- wise be available or operational. Workforce in place, etc. This includes the composition of a workforce (for example, its ex- perience, education, or training). It also includes the terms and conditions of employment, whether contractual or otherwise, and any other value placed on employees or any of their at- tributes. For example, you must amortize the part of the purchase price of a business that is for the existence of a highly skilled workforce. Also, you must amortize the cost of acquiring an ex- isting employment contract or relationship with employees or consultants. Business books and records, etc. This in- cludes the intangible value of technical man- uals, training manuals or programs, data files, and accounting or inventory control systems. It also includes the cost of customer lists, sub- scription lists, insurance expirations, patient or client files, and lists of newspaper, magazine, radio, and television advertisers. Patents, copyrights, etc. This includes pack- age design, computer software, and any inter- est in a film, sound recording, videotape, book, or other similar property, except as discussed later under Assets That aren't Section 197 In- tangibles. Customer-based intangible. This is the com- position of market, market share, and any other CAUTION ! value resulting from the future provision of goods or services because of relationships with customers in the ordinary course of business. For example, you must amortize the part of the purchase price of a business that is for the exis- tence of the following intangibles. • A customer base. • A circulation base. • An undeveloped market or market growth. • Insurance in force. • A mortgage servicing contract. • An investment management contract. • Any other relationship with customers in- volving the future provision of goods or services. Accounts receivable or other similar rights to income for goods or services provided to cus- tomers before the acquisition of a trade or busi- ness aren't section 197 intangibles. Supplier-based intangible. A supplier-based intangible is the value resulting from the future acquisitions (through contract or other relation- ships with suppliers in the ordinary course of business) of goods or services that you will sell or use. The amount you pay or incur for sup- plier-based intangibles includes, for example, any portion of the purchase price of an acquired trade or business that is attributable to the exis- tence of a favorable relationship with persons providing distribution services (such as a favor- able shelf or display space or a retail outlet), or the existence of favorable supply contracts. Don't include any amount required to be paid for the goods or services to honor the terms of the agreement or other relationship. Also, see Assets That aren't Section 197 Intangibles, later. Government-granted license, permit, etc. This is any right granted by a governmental unit or an agency or instrumentality of a governmen- tal unit. For example, you must amortize the capitalized costs of acquiring (including issuing or renewing) a liquor license, a taxicab medal- lion or license, or a television or radio broad- casting license. Covenant not to compete. Section 197 intan- gibles include a covenant not to compete (or similar arrangement) entered into in connection with the acquisition of an interest in a trade or business, or a substantial portion of a trade or business. An interest in a trade or business in- cludes an interest in a partnership or a corpora- tion engaged in a trade or business. An arrangement that requires the former owner to perform services (or to provide prop- erty or the use of property) isn't similar to a cov- enant not to compete to the extent the amount paid under the arrangement represents reason- able compensation for those services or for that property or its use. Franchise, trademark, or trade name. A franchise, trademark, or trade name is a section 197 intangible. You must amortize its purchase or renewal costs, other than certain contingent payments that you can deduct currently. For in- formation on currently deductible contingent payments, see chapter 11. Professional sports franchise. A fran- chise engaged in professional sports and any intangible assets acquired in connection with acquiring the franchise (including player con- tracts) is a section 197 intangible amortizable over a 15-year period. Contract for the use of, or a term interest in, a section 197 intangible. Section 197 intangi- bles include any right under a license, contract, or other arrangement providing for the use of any section 197 intangible. It also includes any term interest in any section 197 intangible, whether the interest is outright or in trust. Assets That aren't Section 197 Intangibles The following assets aren't section 197 intangi- bles. 1. Any interest in a corporation, partnership, trust, or estate. 2. Any interest under an existing futures con- tract, foreign currency contract, notional principal contract, interest rate swap, or similar financial contract. 3. Any interest in land. 4. Most computer software. (See Computer software, later.) 5. Any of the following assets not acquired in connection with the acquisition of a trade or business or a substantial part of a trade or business. a. An interest in a film, sound recording, video tape, book, or similar property. b. A right to receive tangible property or services under a contract or from a governmental agency. c. An interest in a patent or copyright. d. Certain rights that have a fixed dura- tion or amount. (See Rights of fixed duration or amount, later.) 6. An interest under either of the following. a. An existing lease or sublease of tangi- ble property. b. A debt that was in existence when the interest was acquired. 7. A right to service residential mortgages unless the right is acquired in connection with the acquisition of a trade or business or a substantial part of a trade or business. 8. Certain transaction costs incurred by par- ties to a corporate organization or reorgan- ization in which any part of a gain or loss isn't recognized. Intangible property that isn't amortizable un- der the rules for section 197 intangibles can be depreciated if it meets certain requirements. You generally must use the straight line method over its useful life. For certain intangibles, the depreciation period is specified in the law and regulations. For example, the depreciation pe- riod for computer software that isn't a section 197 intangible is generally 36 months. For more information on depreciating intan- gible property, see Intangible Property under What Method Can You Use To Depreciate Your Property? in chapter 1 of Pub. 946. Chapter 8 Amortization Page 31

(p535)(page-33)Page 33#

Computer software. Section 197 intangibles don’t include the following types of computer software. 1. Software that meets all the following re- quirements. a. It is, or has been, readily available for purchase by the general public. b. It is subject to a nonexclusive license. c. It hasn't been substantially modified. This requirement is considered met if the cost of all modifications isn't more than the greater of 25% of the price of the publicly available unmodified soft- ware or $2,000. 2. Software that isn't acquired in connection with the acquisition of a trade or business or a substantial part of a trade or business. Computer software defined. Computer software includes all programs designed to cause a computer to perform a desired function. It also includes any database or similar item that is in the public domain and is incidental to the operation of qualifying software. Rights of fixed duration or amount. Section 197 intangibles don't include any right under a contract or from a governmental agency if the right is acquired in the ordinary course of a trade or business (or in an activity engaged in for the production of income) but not as part of a purchase of a trade or business and either: • Has a fixed life of less than 15 years; or • Is of a fixed amount that, except for the rules for section 197 intangibles, would be recovered under a method similar to the unit-of-production method of cost recov- ery. However, this doesn't apply to the following in- tangibles. • Goodwill. • Going concern value. • A covenant not to compete. • A franchise, trademark, or trade name. • A customer-related information base, cus- tomer-based intangible, or similar item. Safe Harbor for Creative Property Costs If you are engaged in the trade or business of film production, you may be able to amortize the creative property costs for properties not set for production within 3 years of the first capitalized transaction. You may amortize these costs rata- bly over a 15-year period beginning on the first day of the second half of the tax year in which you properly write off the costs for financial ac- counting purposes. If, during the 15-year pe- riod, you dispose of the creative property rights, you must continue to amortize the costs over the remainder of the 15-year period. Creative property costs include costs paid or incurred to acquire and develop screenplays, scripts, story outlines, motion picture production rights to books and plays, and other similar properties for purposes of potential future film development, production, and exploitation. Amortize these costs using the rules of Rev- enue Procedure 2004-36. For more information, see Revenue Procedure 2004-36, 2004-24 I.R.B. 1063, available at IRS.gov/irb/2004-24_IRB#RP-2004-36. A change in the treatment of creative property costs is a change in method of accounting. Anti-Churning Rules Anti-churning rules prevent you from amortizing most section 197 intangibles if the transaction in which you acquired them didn't result in a sig- nificant change in ownership or use. These rules apply to goodwill and going concern value, and to any other section 197 intangible that isn't otherwise depreciable or amortizable. Under the anti-churning rules, you can't use 15-year amortization for the intangible if any of the following conditions apply. 1. You or a related person (defined later) held or used the intangible at any time from July 25, 1991, through August 10, 1993. 2. You acquired the intangible from a person who held it at any time during the period in (1) and, as part of the transaction, the user didn't change. 3. You granted the right to use the intangible to a person (or a person related to that person) who held or used it at any time during the period in (1). This applies only if the transaction in which you granted the right and the transaction in which you ac- quired the intangible are part of a series of related transactions. See Related person, later, for more information. Exceptions. The anti-churning rules don't ap- ply in the following situations. • You acquired the intangible from a dece- dent and its basis was stepped up to its FMV. • The intangible was amortizable as a sec- tion 197 intangible by the seller or trans- feror you acquired it from. This exception doesn't apply if the transaction in which you acquired the intangible and the trans- action in which the seller or transferor ac- quired it are part of a series of related transactions. • The gain-recognition exception, discussed later, applies. Related person. For purposes of the anti-churning rules, the following are related persons. • An individual and his or her brothers, sis- ters, half-brothers, half-sisters, spouse, an- cestors (parents, grandparents, etc.), and lineal descendants (children, grandchil- dren, etc.). • A corporation and an individual who owns, directly or indirectly, more than 20% of the value of the corporation's outstanding stock. • Two corporations that are members of the same controlled group as defined in sec- tion 1563(a), except that “more than 20%” is substituted for “at least 80%” in that defi- nition and the determination is made with- out regard to subsections (a)(4) and (e)(3) CAUTION ! (C) of section 1563. For an exception, see section 1.197-2(h)(6)(iv) of the regulations. • A trust fiduciary and a corporation if more than 20% of the value of the corporation's outstanding stock is owned, directly or in- directly, by or for the trust or grantor of the trust. • The grantor and fiduciary, and the fiduciary and beneficiary, of any trust. • The fiduciaries of two different trusts, and the fiduciaries and beneficiaries of two dif- ferent trusts, if the same person is the grantor of both trusts. • The executor and beneficiary of an estate. • A tax-exempt educational or charitable or- ganization and a person who directly or in- directly controls the organization (or whose family members control it). • A corporation and a partnership if the same persons own more than 20% of the value of the outstanding stock of the cor- poration and more than 20% of the capital or profits interest in the partnership. • Two S corporations, and an S corporation and a regular corporation, if the same per- sons own more than 20% of the value of the outstanding stock of each corporation. • Two partnerships if the same persons own, directly or indirectly, more than 20% of the capital or profits interests in both partner- ships. • A partnership and a person who owns, di- rectly or indirectly, more than 20% of the capital or profits interests in the partner- ship. • Two persons who are engaged in trades or businesses under common control (as de- scribed in section 41(f)(1)). When to determine relationship. Persons are treated as related if the relationship existed at the following time. • In the case of a single transaction, immedi- ately before or immediately after the trans- action in which the intangible was ac- quired. • In the case of a series of related transac- tions (or a series of transactions that com- prise a qualified stock purchase under sec- tion 338(d)(3)), immediately before the earliest transaction or immediately after the last transaction. Ownership of stock. In determining whether an individual directly or indirectly owns any of the outstanding stock of a corporation, the following rules apply. Rule 1. Stock directly or indirectly owned by or for a corporation, partnership, estate, or trust is considered owned proportionately by or for its shareholders, partners, or beneficiaries. Rule 2. An individual is considered to own the stock directly or indirectly owned by or for his or her family. Family includes only brothers and sisters, half-brothers and half-sisters, spouse, ancestors, and lineal descendants. Rule 3. An individual owning (other than by applying Rule 2) any stock in a corporation is considered to own the stock directly or indi- rectly owned by or for his or her partner. Page 32 Chapter 8 Amortization

(p535)(page-34)Page 34#

Rule 4. For purposes of applying Rule 1, 2, or 3, treat stock constructively owned by a per- son under Rule 1 as actually owned by that per- son. Don't treat stock constructively owned by an individual under Rule 2 or 3 as owned by the individual for reapplying Rule 2 or 3 to make an- other person the constructive owner of the stock. Gain-recognition exception. This exception to the anti-churning rules applies if the person you acquired the intangible from (the transferor) meets both of the following requirements. • That person wouldn't be related to you (as described under Related person, earlier) if the 20% test for ownership of stock and partnership interests were replaced by a 50% test. • That person chose to recognize gain on the disposition of the intangible and pay in- come tax on the gain at the highest tax rate. See chapter 2 in Pub. 544 for infor- mation on making this choice. If this exception applies, the anti-churning rules apply only to the amount of your adjusted basis in the intangible that is more than the gain recognized by the transferor. Notification. If the person you acquired the intangible from chooses to recognize gain un- der the rules for this exception, that person must notify you in writing by the due date of the return on which the choice is made. Anti-abuse rule. You can't amortize any sec- tion 197 intangible acquired in a transaction for which the principal purpose was either of the following. • To avoid the requirement that the intangi- ble be acquired after August 10, 1993. • To avoid any of the anti-churning rules. More information. For more information about the anti-churning rules, including additional rules for partnerships, see Regulations section 1.197-2(h). Incorrect Amount of Amortization Deducted If you later discover that you deducted an incor- rect amount for amortization for a section 197 intangible in any year, you may be able to make a correction for that year by filing an amended return. See Amended Return next. If you aren't allowed to make the correction on an amended return, you can change your accounting method to claim the correct amortization. See Changing Your Accounting Method, later. Amended Return If you deducted an incorrect amount for amorti- zation, you can file an amended return to cor- rect the following. • A mathematical error made in any year. • A posting error made in any year. • An amortization deduction for a section 197 intangible for which you haven't adop- ted a method of accounting. When to file. If an amended return is allowed, you must file it by the later of the following dates. • 3 years from the date you filed your original return for the year in which you didn't de- duct the correct amount. (A return filed early is considered filed on the due date.) • 2 years from the time you paid your tax for that year. Changing Your Accounting Method Generally, you must get IRS approval to change your method of accounting. File Form 3115 to request a change to a permissible method of accounting for amortization. The following are examples of a change in method of accounting for amortization. • A change in the amortization method, pe- riod of recovery, or convention of an amor- tizable asset. • A change in the accounting for amortizable assets from a single asset account to a multiple asset account (pooling), or vice versa. • A change in the accounting for amortizable assets from one type of multiple asset ac- count to a different type of multiple asset account. Changes in amortization that aren't a change in method of accounting include the fol- lowing. • A change in figuring amortization in the tax year in which your use of the asset changes. • An adjustment in the useful life of an amor- tizable asset. • Generally, the making of a late amortiza- tion election or the revocation of a timely valid amortization election. • Any change in the placed-in-service date of an amortizable asset. See Regulations section 1.446-1(e)(2)(ii)(a) for more information and examples. Automatic approval. In some instances, you may be able to get automatic approval from the IRS to change your method of accounting for amortization. For a list of automatic accounting method changes, see the Instructions for Form 3115. Also, see the Instructions for Form 3115 for more information on getting approval, auto- matic approval procedures, and a list of excep- tions to the automatic approval process. Disposition of Section 197 Intangibles A section 197 intangible is treated as deprecia- ble property used in your trade or business. If you held the intangible for more than 1 year, any gain on its disposition, up to the amount of allowable amortization, is ordinary income (sec- tion 1245 gain). If multiple section 197 intangi- bles are disposed of in a single transaction or a series of related transactions, treat all of the section 197 intangibles as if they were a single asset for purposes of determining the amount of gain that is ordinary income. Any remaining gain, or any loss, is a section 1231 gain or loss. If you held the intangible 1 year or less, any gain or loss on its disposition is an ordinary gain or loss. For more information on ordinary or capital gain or loss on business property, see chapter 3 in Pub. 544. Nondeductible loss. You can't deduct any loss on the disposition or worthlessness of a section 197 intangible that you acquired in the same transaction (or series of related transac- tions) as other section 197 intangibles you still have. Instead, increase the adjusted basis of each remaining amortizable section 197 intangi- ble by a proportionate part of the nondeductible loss. Figure the increase by multiplying the non- deductible loss on the disposition of the intangi- ble by the following fraction. • The numerator is the adjusted basis of each remaining intangible on the date of the disposition. • The denominator is the total adjusted bases of all remaining amortizable section 197 intangibles on the date of the disposi- tion. Covenant not to compete. A covenant not to compete, or similar arrangement, isn't consid- ered disposed of or worthless before you dis- pose of your entire interest in the trade or busi- ness for which you entered into the covenant. Nonrecognition transfers. If you acquire a section 197 intangible in a nonrecognition trans- fer, you are treated as the transferor with re- spect to the part of your adjusted basis in the in- tangible that isn't more than the transferor's adjusted basis. You amortize this part of the ad- justed basis over the intangible's remaining am- ortization period in the hands of the transferor. Nonrecognition transfers include transfers to a corporation, partnership contributions and dis- tributions, like-kind exchanges, and involuntary conversions. In a like-kind exchange or involuntary con- version of a section 197 intangible, you must continue to amortize the part of your adjusted basis in the acquired intangible that isn't more than your adjusted basis in the exchanged or converted intangible over the remaining amorti- zation period of the exchanged or converted in- tangible. Amortize over a new 15-year period the part of your adjusted basis in the acquired intangible that is more than your adjusted basis in the exchanged or converted intangible. Example. You own a section 197 intangible you have amortized for 4 full years. It has a re- maining unamortized basis of $30,000. You ex- change the asset plus $10,000 for a like-kind section 197 intangible. The nonrecognition pro- visions of like-kind exchanges apply. You amor- tize $30,000 of the $40,000 adjusted basis of the acquired intangible over the 11 years re- maining in the original 15-year amortization pe- riod for the transferred asset. You amortize the other $10,000 of adjusted basis over a new 15-year period. For more information, see Reg- ulations section 1.197-2(g). Reforestation Costs You can elect to deduct a limited amount of re- forestation costs paid or incurred during the tax Chapter 8 Amortization Page 33

(p535)(page-35)Page 35#

year. See Reforestation Costs in chapter 7. You can elect to amortize the qualifying costs that aren't deducted currently over an 84-month pe- riod. There is no limit on the amount of your am- ortization deduction for reforestation costs paid or incurred during the tax year. The election to amortize reforestation costs incurred by a partnership, S corporation, or es- tate must be made by the partnership, corpora- tion, or estate. A partner, shareholder, or bene- ficiary can't make that election. A partner's or shareholder's share of amor- tizable costs is figured under the general rules for allocating items of income, loss, deduction, etc., of a partnership or S corporation. The am- ortizable costs of an estate are divided between the estate and the income beneficiary based on the income of the estate allocable to each. Qualifying costs. Reforestation costs are the direct costs of planting or seeding for foresta- tion or reforestation. Qualifying costs include only those costs you must capitalize and in- clude in the adjusted basis of the property. They include costs for the following items. • Site preparation. • Seeds or seedlings. • Labor. • Tools. • Depreciation on equipment used in plant- ing and seeding. Qualifying costs don't include costs for which the government reimburses you under a cost-sharing program, unless you include the reimbursement in your income. Qualified timber property. Qualified timber property is property that contains trees in signif- icant commercial quantities. It can be a woodlot or other site that you own or lease. The property qualifies only if it meets all of the following re- quirements. • It is located in the United States. • It is held for the growing and cutting of tim- ber you will either use in, or sell for use in, the commercial production of timber prod- ucts. • It consists of at least one acre planted with tree seedlings in the manner normally used in forestation or reforestation. Qualified timber property doesn't include property on which you have planted shelter belts or ornamental trees, such as Christmas trees. Amortization period. The 84-month amortiza- tion period starts on the first day of the first month of the second half of the tax year you in- cur the costs (July 1 for a calendar year tax- payer), regardless of the month you actually in- cur the costs. You can claim amortization deductions for no more than 6 months of the first and last (eighth) tax years of the period. Life tenant and remainderman. If one person holds the property for life with the remainder go- ing to another person, the life tenant is entitled to the full amortization for qualifying reforesta- tion costs incurred by the life tenant. Any re- mainder interest in the property is ignored for amortization purposes. Recapture. If you dispose of qualified timber property within 10 years after the tax year you incur qualifying reforestation expenses, report any gain as ordinary income up to the amortiza- tion you took. See chapter 3 of Pub. 544 for more information. How to make the election. To elect to amor- tize qualifying reforestation costs, complete Part VI of Form 4562 and attach a statement that contains the following information. • A description of the costs and the dates you incurred them. • A description of the type of timber being grown and the purpose for which it is grown. Attach a separate statement for each property for which you amortize reforestation costs. Generally, you must make the election on a timely filed return (including extensions) for the tax year in which you incurred the costs. How- ever, 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). Attach Form 4562 and the state- ment to the amended return and write “Filed pursuant to section 301.9100-2” on Form 4562. File the amended return at the same address you filed the original return. Revoking the election. You must get IRS ap- proval to revoke your election to amortize quali- fying reforestation costs. Your application to re- voke the election must include your name, address, the years for which your election was in effect, and your reason for revoking it. Please provide your daytime telephone number (op- tional), in case we need to contact you. You, or your duly authorized representative, must sign the application and file it at least 90 days before the due date (without extensions) for filing your income tax return for the first tax year for which your election is to end. Send the application to: Internal Revenue Service Associate Chief Counsel Passthroughs and Special Industries CC:PSI:6 1111 Constitution Ave. NW, IR-5300 Washington, DC 20224 Geological and Geophysical Costs You can amortize the cost of geological and ge- ophysical expenses paid or incurred in connec- tion with oil and gas exploration or development within the United States. These costs can be amortized ratably over a 24-month period be- ginning on the mid-point of the tax year in which the expenses were paid or incurred. For major integrated oil companies (as defined in section 167(h)(5)), these costs must be amortized rata- bly over a 5-year period for costs paid or incur- red after May 17, 2006 (a 7-year period for costs paid or incurred after December 19, 2007). If you retire or abandon the property during the amortization period, no amortization deduc- tion is allowed in the year of retirement or aban- donment. Pollution Control Facilities You can elect to amortize the cost of a certified pollution control facility over 60 months. How- ever, see Atmospheric pollution control facili- ties, later, for an exception. The cost of a pollu- tion control facility that isn't eligible for amortization can be depreciated under the reg- ular rules for depreciation. Also, you can claim a special depreciation allowance on a certified pollution control facility that is qualified property even if you elect to amortize its cost. You must reduce its cost (amortizable basis) by the amount of any special allowance you claim. See chapter 3 of Pub. 946. A certified pollution control facility is a new identifiable treatment facility used in connection with a plant or other property in operation be- fore 1976 to reduce or control water or atmos- pheric pollution or contamination. The facility must do so by removing, changing, disposing, storing, or preventing the creation or emission of pollutants, contaminants, wastes, or heat. The facility must be certified by state and fed- eral certifying authorities. The facility must not significantly increase the output or capacity, extend the useful life, or reduce the total operating costs of the plant or other property. Also, it must not significantly change the nature of the manufacturing or pro- duction process or facility. The federal certifying authority won't certify your property to the extent it appears you will recover (over the property's useful life) all or part of its cost from the profit based on its oper- ation (such as through sales of recovered wastes). The federal certifying authority will de- scribe the nature of the potential cost recovery. You must then reduce the amortizable basis of the facility by this potential recovery. New identifiable treatment facility. A new identifiable treatment facility is tangible de- preciable property that is identifiable as a treat- ment facility. It doesn't include a building and its structural components unless the building is ex- clusively a treatment facility. Atmospheric pollution control facilities. Certain atmospheric pollution control facilities can be amortized over 84 months. To qualify, the following must apply. • The facility must be acquired and placed in service after April 11, 2005. If acquired, the original use must begin with you after April 11, 2005. • The facility must be used in connection with an electric generation plant or other property placed in operation after Decem- ber 31, 1975, that is primarily coal fired. • If you construct, reconstruct, or erect the facility, only the basis attributable to the construction, reconstruction, or erection completed after April 11, 2005, qualifies. Page 34 Chapter 8 Amortization

(p535)(page-36)Page 36#

Basis reduction for corporations. A corpora- tion must reduce the amortizable basis of a pol- lution control facility by 20% before figuring the amortization deduction. More information. For more information on the amortization of pollution control facilities, see sections 169 and 291(c) and the related regulations. Research and Experimental Costs You can elect to amortize your research and ex- perimental costs, deduct them as current busi- ness expenses, or write them off over a 10-year period (see Optional write-off method below). If you elect to amortize these costs, deduct them in equal amounts over 60 months or more. The amortization period begins the month you first receive an economic benefit from the costs. For a definition of “research and experimen- tal costs” and information on deducting them as current business expenses, see chapter 7. Optional write-off method. Rather than am- ortize these costs or deduct them as a current expense, you have the option of deducting (writing off) research and experimental costs ratably over a 10-year period beginning with the tax year in which you incurred the costs. For more information, see Optional Write-Off of Certain Tax Preferences, later, and section 59(e). Costs you can amortize. You can amortize costs chargeable to a capital account (see chapter 1) if you meet both of the following re- quirements. • You paid or incurred the costs in your trade or business. • You aren't deducting the costs currently. How to make the election. To elect to amor- tize research and experimental costs, complete Part VI of Form 4562 and attach it to your in- come tax return. Generally, you must file the re- turn by the due date (including extensions). 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). Attach Form 4562 to the amended return and write “Filed pursuant to section 301.9100-2” on Form 4562. File the amended return at the same address you filed the original return. Your election is binding for the year it is made and for all later years unless you obtain approval from the IRS to change to a different method. Optional Write-Off of Certain Tax Preferences You can elect to amortize certain tax preference items over an optional period beginning in the tax year in which you incurred the costs. If you make this election, there is no AMT adjustment. The applicable costs and the optional recovery periods are as follows. • Circulation costs—3 years. • Intangible drilling and development costs—60 months. • Mining exploration and development costs—10 years. • Research and experimental costs—10 years. How to make the election. To elect to amor- tize qualifying costs over the optional recovery period, complete Part VI of Form 4562 and at- tach a statement containing the following infor- mation to your return for the tax year in which the election begins. • Your name, address, and taxpayer identifi- cation number. • The type of cost and the specific amount of the cost for which you are making the elec- tion. Generally, the election must be made on a timely filed return (including extensions) for the tax year in which you incurred the costs. How- ever, 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). Attach Form 4562 to the amended return and write “Filed pursuant to section 301.9100-2” on Form 4562. File the amended return at the same address you filed the original return. Revoking the election. You must obtain con- sent from the IRS to revoke your election. Your request to revoke the election must be submit- ted to the IRS in the form of a letter ruling before the end of the tax year in which the optional re- covery period ends. The request must contain all of the information necessary to demonstrate the rare and unusual circumstances that would justify granting revocation. If the request for rev- ocation is approved, any unamortized costs are deductible in the year the revocation is effec- tive. 9. Depletion Introduction Depletion is the using up of natural resources by mining, drilling, quarrying stone, or cutting timber. The depletion deduction allows an owner or operator to account for the reduction of a product's reserves. There are two ways of figuring depletion: cost depletion and percentage depletion. For mineral property, you generally must use the method that gives you the larger deduction. For standing timber, you must use cost depletion. Topics This chapter discusses: • Who can claim depletion • Mineral property • Timber Useful Items You may want to see: Publication 544 Sales and Other Dispositions of Assets 551 Basis of Assets Form (and Instructions) Schedule E (Form 1040) Supplemental Income and Loss Schedule K-1 (Form 1065) Partner's Share of Income, Deductions, Credits, etc. Schedule K-1 (Form 1120S) Shareholder's Share of Income, Deductions, Credits, etc. 6198 At-Risk Limitations 8582 Passive Activity Loss Limitations T (Timber) Forest Activities Schedule See chapter 13 for information about getting publications and forms. Who Can Claim Depletion? If you have an economic interest in mineral property or standing timber, you can take a de- duction for depletion. More than one person can have an economic interest in the same min- eral deposit or timber. In the case of leased property, the depletion deduction is divided be- tween the lessor and the lessee. You have an economic interest if both the following apply. • You have acquired by investment any in- terest in mineral deposits or standing tim- ber. • You have a legal right to income from the extraction of the mineral or cutting of the timber to which you must look for a return of your capital investment. A contractual relationship that allows you an economic or monetary advantage from prod- ucts of the mineral deposit or standing timber is not, in itself, an economic interest. A production payment carved out of, or retained on the sale of, mineral property is not an economic interest. Individuals, estates, and trusts who claim depletion deductions may be lia- ble for the AMT. For tax years begin- ning after 2017, the Tax Cuts and Jobs Act, section 12001, repealed the corporate AMT. Basis adjustment for depletion. You must reduce the basis of your property by the deple- tion allowed or allowable, whichever is greater. 544 551 Schedule E (Form 1040) Schedule K-1 (Form 1065) Schedule K-1 (Form 1120S) 6198 8582 T (Timber) CAUTION ! Chapter 9 Depletion Page 35

(p535)(page-37)Page 37#

Mineral Property Mineral property includes oil and gas wells, mines, and other natural deposits (including ge- othermal deposits). For this purpose, the term “property” means each separate interest you own in each mineral deposit in each separate tract or parcel of land. You can treat two or more separate interests as one property or as separate properties. See section 614 and the related regulations for rules on how to treat sep- arate mineral interests. There are two ways of figuring depletion on mineral property. • Cost depletion. • Percentage depletion. Generally, you must use the method that gives you the larger deduction. However, unless you are an independent producer or royalty owner, you generally cannot use percentage depletion for oil and gas wells. See Oil and Gas Wells, later. Cost Depletion To figure cost depletion, you must first deter- mine the following. • The property's basis for depletion. • The total recoverable units of mineral in the property's natural deposit. • The number of units of mineral sold during the tax year. Basis for depletion. To figure the property's basis for depletion, subtract all the following from the property's adjusted basis. 1. Amounts recoverable through: a. Depreciation deductions, b. Deferred expenses (including defer- red exploration and development costs), and c. Deductions other than depletion. 2. The residual value of land and improve- ments at the end of operations. 3. The cost or value of land acquired for pur- poses other than mineral production. Adjusted basis. The adjusted basis of your property is your original cost or other ba- sis, plus certain additions and improvements, and minus certain deductions such as depletion allowed or allowable and casualty losses. Your adjusted basis can never be less than zero. See Pub. 551 for more information on adjusted ba- sis. Total recoverable units. The total recovera- ble units is the sum of the following. • The number of units of mineral remaining at the end of the year (including units re- covered but not sold). • The number of units of mineral sold during the tax year (determined under your method of accounting, as explained next). You must estimate or determine recoverable units (tons, pounds, ounces, barrels, thousands of cubic feet, or other measure) of mineral prod- ucts using the current industry method and the most accurate and reliable information you can obtain. You must include ores and minerals that are developed, in sight, blocked out, or as- sured. You must also include probable or pro- spective ores or minerals that are believed to exist based on good evidence. But see Elective safe harbor for owners of oil and gas property, later. Number of units sold. You determine the number of units sold during the tax year based on your method of accounting. Use the follow- ing table to make this determination. IF you use ... THEN the units sold during the year are ... the cash method of accounting the units sold for which you receive payment during the tax year (regardless of the year of sale). an accrual method of accounting the units sold based on your inventories and method of accounting for inventory. The number of units sold during the tax year does not include any for which depletion deduc- tions were allowed or allowable in earlier years. Figuring the cost depletion deduction. Once you have figured your property's basis for depletion, the total recoverable units, and the number of units sold during the tax year, you can figure your cost depletion deduction by tak- ing the following steps. Step Action Result 1 Divide your property's basis for depletion by total recoverable units. Rate per unit. 2 Multiply the rate per unit by units sold during the tax year. Cost depletion deduction. You must keep accounts for the depletion of each property and adjust these accounts each year for units sold and depletion claimed. Elective safe harbor for owners of oil and gas property. Instead of using the method de- scribed earlier to determine the total recovera- ble units, you can use an elective safe harbor. If you choose the elective safe harbor, the total recoverable units equal 105% of a property's proven reserves (both developed and undevel- oped). For details, see Revenue Procedure 2004-19 on page 563 of I.R.B. 2004-10, availa- ble at IRS.gov/irb/2004-10_IRB/RP-2004-19. To make the election, attach a statement to your timely filed (including extensions) original return for the first tax year for which the safe harbor is elected. The statement must indicate that you are electing the safe harbor provided by Revenue Procedure 2004-19. The election, if made, is effective for the tax year in which it is made and all later years. It cannot be revoked for the tax year in which it is elected, but may be revoked in a later year. Once revoked, it cannot be re-elected for the next 5 years. Percentage Depletion To figure percentage depletion, you multiply a certain percentage, specified for each mineral, by your gross income from the property during the tax year. The rates to be used and other rules for oil and gas wells are discussed later under Inde- pendent Producers and Royalty Owners and under Natural Gas Wells. Rates and other rules for percentage depletion of other specific miner- als are found later under Mines and Geothermal Deposits. Gross income. When figuring percentage de- pletion, subtract from your gross income from the property the following amounts. • Any rents or royalties you paid or incurred for the property. • The part of any bonus you paid for a lease on the property allocable to the product sold (or that otherwise gives rise to gross income) for the tax year. A bonus payment includes amounts you paid as a lessee to satisfy a production payment re- tained by the lessor. Use the following fraction to figure the part of the bonus you must subtract. No. of units sold in the tax year Recoverable units from the property × Bonus Payments For oil and gas wells and geothermal depos- its, more information about the definition of gross income from the property is under Oil and Gas Wells, later. For other property, more infor- mation about the definition of gross income from the property is under Mines and Geother- mal Deposits, later. Taxable income limit. The percentage deple- tion deduction generally cannot be more than 50% (100% for oil and gas property) of your tax- able income from the property figured without the depletion deduction and the domestic pro- duction activities deduction. Taxable income from the property means gross income from the property minus all allow- able deductions (except any deduction for de- pletion or domestic production activities) attrib- utable to mining processes, including mining transportation. These deductible items include, but are not limited to, the following. • Operating expenses. • Certain selling expenses. • Administrative and financial overhead. • Depreciation. • Intangible drilling and development costs. • Exploration and development expendi- tures. • Deductible taxes (see chapter 5), but not taxes that you capitalize or take as a credit. • Losses sustained. The following rules apply when figuring your taxable income from the property for purposes of the taxable income limit. • Do not deduct any NOL deduction from the gross income from the property. • Corporations do not deduct charitable con- tributions from the gross income from the property. • If, during the year, you dispose of an item of section 1245 property that was used in connection with mineral property, reduce any allowable deduction for mining expen- ses by the part of any gain you must report as ordinary income that is allocable to the Page 36 Chapter 9 Depletion

(p535)(page-38)Page 38#

mineral property. See section 1.613-5(b) (1) of the regulations for information on how to figure the ordinary gain allocable to the property. Oil and Gas Wells You cannot claim percentage depletion for an oil or gas well unless at least one of the follow- ing applies. • You are either an independent producer or a royalty owner. • The well produces natural gas that is either sold under a fixed contract or produced from geopressured brine. If you are an independent producer or roy- alty owner, see Independent Producers and Royalty Owners next. For information on the depletion deduction for wells that produce natural gas that is either sold under a fixed contract or produced from geopressured brine, see Natural Gas Wells, later. Independent Producers and Royalty Owners If you are an independent producer or royalty owner, you figure percentage depletion using a rate of 15% of the gross income from the prop- erty based on your average daily production of domestic crude oil or domestic natural gas up to your depletable oil or natural gas quantity. How- ever, certain refiners, as explained next, and certain retailers and transferees of proven oil and gas properties, as explained next, cannot claim percentage depletion. For information on figuring the deduction, see Figuring percentage depletion, later. Refiners who cannot claim percentage de- pletion. You cannot claim percentage deple- tion if you or a related person refines crude oil and you and the related person refined more than 75,000 barrels on any day during the tax year based on average (rather than actual) daily refinery runs for the tax year. The average daily refinery run is figured by dividing total refinery runs for the tax year by the total number of days in the tax year. Related person. You and another person are related persons if either of you holds a sig- nificant ownership interest in the other person or if a third person holds a significant ownership interest in both of you. For example, a corporation, partnership, es- tate, or trust and anyone who holds a significant ownership interest in it are related persons. A partnership and a trust are related persons if one person holds a significant ownership inter- est in each of them. For purposes of the related person rules, significant ownership interest means direct or indirect ownership of 5% or more in any one of the following. • The value of the outstanding stock of a corporation. • The interest in the profits or capital of a partnership. • The beneficial interests in an estate or trust. Any interest owned by or for a corporation, partnership, trust, or estate is considered to be owned directly both by itself and proportionately by its shareholders, partners, or beneficiaries. Retailers who cannot claim percentage de- pletion. You cannot claim percentage deple- tion if both the following apply. 1. You sell oil or natural gas or their by-prod- ucts directly or through a related person in any of the following situations. a. Through a retail outlet operated by you or a related person. b. To any person who is required under an agreement with you or a related person to use a trademark, trade name, or service mark or name owned by you or a related person in marketing or distributing oil, natural gas, or their by-products. c. To any person given authority under an agreement with you or a related person to occupy any retail outlet owned, leased, or controlled by you or a related person. 2. The combined gross receipts from sales (not counting resales) of oil, natural gas, or their by-products by all retail outlets taken into account in (1) are more than $5 million for the tax year. For the purpose of determining if this rule applies, do not count the following. • Bulk sales (sales in very large quantities) of oil or natural gas to commercial or indus- trial users. • Bulk sales of aviation fuels to the Depart- ment of Defense. • Sales of oil or natural gas or their by-prod- ucts outside the United States if none of your domestic production or that of a rela- ted person is exported during the tax year or the prior tax year. Related person. To determine if you and another person are related persons, see Rela- ted person under Refiners who cannot claim percentage depletion, earlier. Sales through a related person. You are considered to be selling through a related per- son if any sale by the related person produces gross income from which you may benefit be- cause of your direct or indirect ownership inter- est in the person. You are not considered to be selling through a related person who is a retailer if all the following apply. • You do not have a significant ownership in- terest in the retailer. • You sell your production to persons who are not related to either you or the retailer. • The retailer does not buy oil or natural gas from your customers or persons related to your customers. • There are no arrangements for the retailer to acquire oil or natural gas you produced for resale or made available for purchase by the retailer. • Neither you nor the retailer knows of or controls the final disposition of the oil or natural gas you sold or the original source of the petroleum products the retailer ac- quired for resale. Transferees who cannot claim percentage depletion. You cannot claim percentage de- pletion if you received your interest in a proven oil or gas property by transfer after 1974 and before October 12, 1990. For a definition of the term “transfer,” see section 1.613A-7(n) of the regulations. For a definition of the term “interest in proven oil or gas property,” see section 1.613A-7(p) of the regulations. Figuring percentage depletion. Generally, as an independent producer or royalty owner, you figure your percentage depletion by figuring your average daily production of domestic oil or gas and comparing it to your depletable oil or gas quantity. If your average daily production does not exceed your depletable oil or gas quantity, you figure your percentage depletion by multiplying the gross income from the oil or gas property (as defined under Gross income from the property, later) by 15% (0.15). If your average daily production of domestic oil or gas exceeds your depletable oil or gas quantity, you must make an allocation as explained later un- der Average daily production. In addition, there is a limit on the percentage depletion deduction. See Taxable income limit, later. Average daily production. Figure your aver- age daily production by dividing your total do- mestic production of oil or gas for the tax year by the number of days in your tax year. Partial interest. If you have a partial inter- est in the production from a property, figure your share of the production by multiplying total production from the property by your percent- age of interest in the revenues from the prop- erty. You have a partial interest in the production from a property if you have a net profits interest in the property. To figure the share of produc- tion for your net profits interest, you must first determine your percentage participation (as measured by the net profits) in the gross reve- nue from the property. To figure this percent- age, you divide the income you receive for your net profits interest by the gross revenue from the property. Then multiply the total production from the property by your percentage participa- tion to figure your share of the production. Example. Javier Robles owns oil property in which Pablo Olmos owns a 20% net profits interest. During the year, the property produced 10,000 barrels of oil, which Javier sold for $200,000. Javier had expenses of $90,000 at- tributable to the property. The property gener- ated a net profit of $110,000 ($200,000 − $90,000). Pablo received income of $22,000 ($110,000 × 20% (0.20)) for his net profits inter- est. Pablo determined his percentage participa- tion to be 11% by dividing $22,000 (the income he received) by $200,000 (the gross revenue from the property). Pablo determined his share Chapter 9 Depletion Page 37

(p535)(page-39)Page 39#

of the oil production to be 1,100 barrels (10,000 barrels × 11% (0.11)). Depletable oil or natural gas quantity. Gen- erally, your depletable oil quantity is 1,000 bar- rels. Your depletable natural gas quantity is 6,000 cubic feet multiplied by the number of barrels of your depletable oil quantity that you choose to apply. If you claim depletion on both oil and natural gas, you must reduce your de- pletable oil quantity (1,000 barrels) by the num- ber of barrels you use to figure your depletable natural gas quantity. Example. You have both oil and natural gas production. To figure your depletable natu- ral gas quantity, you choose to apply 360 bar- rels of your 1,000-barrel depletable oil quantity. Your depletable natural gas quantity is 2.16 mil- lion cubic feet of gas (360 × 6,000). You must reduce your depletable oil quantity to 640 bar- rels (1,000 – 360). If you have production from marginal wells, see section 613A(c)(6) to figure your depletable oil or natural gas quantity. Also, see Notice 2012-50, available at IRS.gov/irb/ 2012-31_IRB#NOT-2012-50. Business entities and family members. You must allocate the depletable oil or gas quantity among the following related persons in proportion to each entity's or family member's production of domestic oil or gas for the year. • Corporations, trusts, and estates if 50% or more of the beneficial interest is owned by the same or related persons (considering only persons that own at least 5% of the beneficial interest). • You and your spouse and minor children. A related person is anyone mentioned in the re- lated persons discussion under Nondeductible loss in chapter 2 of Pub. 544, except that for purposes of this allocation, item (1) in that dis- cussion includes only an individual, his or her spouse, and minor children. Controlled group of corporations. Mem- bers of the same controlled group of corpora- tions are treated as one taxpayer when figuring the depletable oil or natural gas quantity. They share the depletable quantity. A controlled group of corporations is defined in section 1563(a), except that, for this purpose, the stock ownership requirement in that definition is “more than 50%” rather than “at least 80%.” Gross income from the property. For purpo- ses of percentage depletion, gross income from the property (in the case of oil and gas wells) is the amount you receive from the sale of the oil or gas in the immediate vicinity of the well. If you do not sell the oil or gas on the property but manufacture or convert it into a refined product before sale, or transport it before sale, the gross income from the property is the representative market or field price (RMFP) of the oil or gas before conversion or transportation. If you sold gas after you removed it from the premises for a price that is lower than the RMFP, determine gross income from the prop- erty for percentage depletion purposes without regard to the RMFP. Gross income from the property does not in- clude lease bonuses, advance royalties, or other amounts payable without regard to pro- duction from the property. Average daily production exceeds depleta- ble quantities. If your average daily produc- tion for the year is more than your depletable oil or natural gas quantity, figure your allowance for depletion for each domestic oil or natural gas property as follows. 1. Figure your average daily production of oil or natural gas for the year. 2. Figure your depletable oil or natural gas quantity for the year. 3. Figure depletion for all oil or natural gas produced from the property using a per- centage depletion rate of 15% (0.15). 4. Multiply the result figured in (3) by a frac- tion, the numerator of which is the result figured in (2) and the denominator of which is the result figured in (1). This is your depletion allowance for that property for the year. Taxable income limit. If you are an independ- ent producer or royalty owner of oil and gas, your deduction for percentage depletion is limi- ted to the smaller of the following. • 100% of your taxable income from the property figured without the deduction for depletion and the deduction for domestic production activities under section 199. For a definition of taxable income from the property, see Taxable income limit, earlier, under Mineral Property. • 65% of your taxable income from all sour- ces, figured without the depletion allow- ance, the deduction for domestic produc- tion activities, any NOL carryback, and any capital loss carryback. You can carry over to the following year any amount you cannot deduct because of the 65%-of-taxable-income limit. Add it to your de- pletion allowance (before applying any limits) for the following year. Partnerships and S Corporations Generally, each partner or S corporation share- holder, and not the partnership or S corpora- tion, figures the depletion allowance separately. Each partner or shareholder must decide whether to use cost or percentage depletion. If a partner or shareholder uses percentage de- pletion, he or she must apply the 65%-of-taxa- ble-income limit using his or her taxable income from all sources. Partner's or shareholder's adjusted basis. The partnership or S corporation must allocate to each partner or shareholder his or her share of the adjusted basis of each oil or gas property held by the partnership or S corporation. The partnership or S corporation makes the alloca- tion as of the date it acquires the oil or gas property. Each partner's share of the adjusted basis of the oil or gas property generally is figured ac- cording to that partner's interest in partnership capital. However, in some cases, it is figured according to the partner's interest in partnership income. The partnership or S corporation adjusts the partner's or shareholder's share of the adjusted basis of the oil and gas property for any capital expenditures made for the property and for any change in partnership or S corporation inter- ests. Recordkeeping. Each partner or shareholder must separately keep re- cords of his or her share of the adjus- ted basis in each oil and gas property of the partnership or S corporation. The partner or shareholder must reduce his or her adjusted basis by the depletion allowed or allowable on the property each year. The partner or share- holder must use that reduced adjusted basis to figure cost depletion or his or her gain or loss if the partnership or S corporation disposes of the property. Reporting the deduction. Information that you, as a partner or shareholder, use to figure your depletion deduction on oil and gas proper- ties is reported by the partnership or S corpora- tion on Schedule K-1 (Form 1065) or on Sched- ule K-1 (Form 1120S). Deduct oil and gas depletion for your partnership or S corporation interest on Schedule E (Form 1040). The deple- tion deducted on Schedule E is included in fig- uring income or loss from rental real estate or royalty properties. The Instructions for Sched- ule E (Form 1040) explain where to report this income or loss and whether you need to file ei- ther of the following forms. • Form 6198. • Form 8582. Natural Gas Wells You can use percentage depletion for a well that produces natural gas that is either: • Sold under a fixed contract, or • Produced from geopressured brine. Natural gas sold under a fixed contract. Natural gas sold under a fixed contract qualifies for a percentage depletion rate of 22%. This is domestic natural gas sold by the producer un- der a contract that does not provide for a price increase to reflect any increase in the seller's tax liability because of the repeal of percentage depletion for gas. The contract must have been in effect from February 1, 1975, until the date of sale of the gas. Price increases after February 1, 1975, are presumed to take the increase in tax liability into account unless demonstrated otherwise by clear and convincing evidence. Natural gas from geopressured brine. Qualified natural gas from geopressured brine is eligible for a percentage depletion rate of 10%. This is natural gas that is both the follow- ing. • Produced from a well you began to drill af- ter September 1978 and before 1984. • Determined in accordance with section 503 of the Natural Gas Policy Act of 1978 to be produced from geopressured brine. RECORDS Page 38 Chapter 9 Depletion

(p535)(page-40)Page 40#

Mines and Geothermal Deposits Certain mines, wells, and other natural depos- its, including geothermal deposits, qualify for percentage depletion. Mines and other natural deposits. For a nat- ural deposit, the percentage of your gross in- come from the property that you can deduct as depletion depends on the type of deposit. The following is a list of the percentage de- pletion rates for the more common minerals. DEPOSITS RATE Sulphur, uranium, and, if from deposits in the United States, asbestos, lead ore, zinc ore, nickel ore, and mica . . . . . . . . 22% Gold, silver, copper, iron ore, and certain oil shale, if from deposits in the United States . . . . . . . . . . . . . . . . . . . . . . . 15% Borax, granite, limestone, marble, mollusk shells, potash, slate, soapstone, and carbon dioxide produced from a well . . . . . . . . . . . . . . . . . . . . . . . . . . 14% Coal, lignite, and sodium chloride . . . . . 10% Clay and shale used or sold for use in making sewer pipe or bricks or used or sold for use as sintered or burned lightweight aggregates . . . . . . . . . . . . 7.5% Clay used or sold for use in making drainage and roofing tile, flower pots, and kindred products, and gravel, sand, and stone (other than stone used or sold for use by a mine owner or operator as dimension or ornamental stone) . . . . . . 5% You can find a complete list of minerals and their percentage depletion rates in section 613(b). Corporate deduction for iron ore and coal. The percentage depletion deduction of a corporation for iron ore and coal (including lig- nite) is reduced by 20% (0.20) of: • The percentage depletion deduction for the tax year (figured without this reduc- tion), minus • The adjusted basis of the property at the close of the tax year (figured without the depletion deduction for the tax year). Gross income from the property. For prop- erty other than a geothermal deposit or an oil or gas well, gross income from the property means the gross income from mining. Mining includes all the following. • Extracting ores or minerals from the ground. • Applying certain treatment processes de- scribed later. • Transporting ores or minerals (generally, not more than 50 miles) from the point of extraction to the plants or mills in which the treatment processes are applied. Excise tax. Gross income from mining in- cludes the separately stated excise tax re- ceived by a mine operator from the sale of coal to compensate the operator for the excise tax the mine operator must pay to finance black lung benefits. Extraction. Extracting ores or minerals from the ground includes extraction by mine owners or operators of ores or minerals from the waste or residue of prior mining. This does not apply to extraction from waste or residue of prior mining by the purchaser of the waste or residue or the purchaser of the rights to extract ores or minerals from the waste or residue. Treatment processes. The processes in- cluded as mining depend on the ore or mineral mined. To qualify as mining, the treatment pro- cesses must be applied by the mine owner or operator. For a listing of treatment processes considered as mining, see section 613(c)(4) and the related regulations. Transportation of more than 50 miles. If the IRS finds that the ore or mineral must be transported more than 50 miles to plants or mills to be treated because of physical and other requirements, the additional authorized transportation is considered mining and inclu- ded in the calculation of gross income from min- ing. If you wish to include transportation of more than 50 miles in the calculation of gross income from mining, request an advance ruling from the IRS. Include in the re- quest the facts about the physical and other re- quirements that prevented the construction and operation of the plant within 50 miles of the point of extraction. For more information about requesting an advance ruling, see Revenue Procedure 2018-1, available at IRS.gov/irb/ 2018-01_IRB#RP-2018-1. Disposal of coal or iron ore. You cannot take a depletion deduction for coal (including lignite) or iron ore mined in the United States if both the following apply. • You disposed of it after holding it for more than 1 year. • You disposed of it under a contract under which you retain an economic interest in the coal or iron ore. Treat any gain on the disposition as a capital gain. Disposal to related person. This rule does not apply if you dispose of the coal or iron ore to one of the following persons. • A related person (as listed in chapter 2 of Pub. 544). • A person owned or controlled by the same interests that own or control you. Geothermal deposits. Geothermal deposits located in the United States or its possessions qualify for a percentage depletion rate of 15%. A geothermal deposit is a geothermal reservoir of natural heat stored in rocks or in a watery liq- uid or vapor. For percentage depletion purpo- ses, a geothermal deposit is not considered a gas well. Figure gross income from the property for a geothermal steam well in the same way as for oil and gas wells. See Gross income from the property, earlier, under Oil and Gas Wells. Per- centage depletion on a geothermal deposit can- not be more than 50% of your taxable income from the property. Lessor's Gross Income In the case of leased property, the depletion de- duction is divided between the lessor and the lessee. A lessor's gross income from the property that qualifies for percentage depletion usually is the total of the royalties received from the lease. Bonuses and advanced royalties. Bonuses and advanced royalties are payments a lessee makes before production to a lessor for the grant of rights in a lease or for minerals, gas, or oil to be extracted from leased property. If you are the lessor, your income from bonuses and advanced royalties received is subject to an al- lowance for depletion, as explained in the next two paragraphs. Figuring cost depletion. To figure cost depletion on a bonus, multiply your adjusted ba- sis in the property by a fraction, the numerator of which is the bonus and the denominator of which is the total bonus and royalties expected to be received. To figure cost depletion on ad- vanced royalties, use the calculation explained earlier under Cost Depletion, treating the num- ber of units for which the advanced royalty is re- ceived as the number of units sold. Figuring percentage depletion. In the case of mines, wells, and other natural deposits other than gas, oil, or geothermal property, you may use the percentage rates discussed earlier under Mines and Geothermal Deposits. Any bo- nus or advanced royalty payments are gener- ally part of the gross income from the property to which the rates are applied in making the cal- culation. However, for oil, gas, or geothermal property, gross income does not include lease bonuses, advanced royalties, or other amounts payable without regard to production from the property. Ending the lease. If you receive a bonus on a lease that ends or is abandoned before you derive any income from mineral extraction, include in income the depletion deduction you took. Do this for the year the lease ends or is abandoned. Also, increase your adjusted basis in the property to restore the depletion deduc- tion you previously subtracted. For advanced royalties, include in income the depletion claimed on minerals for which the advanced royalties were paid if the minerals were not produced before the lease ended. In- clude this amount in income for the year the lease ends. Increase your adjusted basis in the property by the amount you include in income. Delay rentals. These are payments for defer- ring development of the property. Since delay rentals are ordinary rent, they are ordinary in- come that is not subject to depletion. These rentals can be avoided by either abandoning the lease, beginning development operations, or obtaining production. Timber You can figure timber depletion only by the cost method. Percentage depletion does not apply to timber. Base your depletion on your cost or Chapter 9 Depletion Page 39

(p535)(page-41)Page 41#

other basis in the timber. Your cost does not in- clude the cost of land or any amounts recovera- ble through depreciation. Depletion takes place when you cut stand- ing timber. You can figure your depletion de- duction when the quantity of cut timber is first accurately measured in the process of exploita- tion. Figuring cost depletion. To figure your cost depletion allowance, you multiply the number of timber units cut by your depletion unit. Timber units. When you acquire timber property, you must make an estimate of the quantity of marketable timber that exists on the property. You measure the timber using board feet, log scale, cords, or other units. If you later determine that you have more or less units of timber, you must adjust the original estimate. The term “timber property” means your eco- nomic interest in standing timber in each tract or block representing a separate timber account. Depletion unit. You figure your depletion unit each year by taking the following steps. 1. Determine your cost or adjusted basis of the timber on hand at the beginning of the year. Adjusted basis is defined under Cost Depletion in the discussion on Mineral Property, earlier. 2. Add to the amount determined in (1) the cost of any timber units acquired during the year and any additions to capital. 3. Figure the number of timber units to take into account by adding the number of tim- ber units acquired during the year to the number of timber units on hand in the ac- count at the beginning of the year and then adding (or subtracting) any correction to the estimate of the number of timber units remaining in the account. 4. Divide the result of (2) by the result of (3). This is your depletion unit. Example. You bought a timber tract for $160,000 and the land was worth as much as the timber. Your basis for the timber is $80,000. Based on an estimated 1 million board feet (1,000 MBF) of standing timber, you figure your depletion unit to be $80 per MBF ($80,000 ÷ 1,000). If you cut 500 MBF of timber, your de- pletion allowance would be $40,000 (500 MBF × $80). When to claim depletion. Claim your deple- tion allowance as a deduction in the year of sale or other disposition of the products cut from the timber, unless you choose to treat the cutting of timber as a sale or exchange (explained below). Include allowable depletion for timber products not sold during the tax year the timber is cut as a cost item in the closing inventory of timber products for the year. The inventory is your ba- sis for determining gain or loss in the tax year you sell the timber products. Example. The facts are the same as in the previous example, except that you sold only half of the timber products in the cutting year. You would deduct $20,000 of the $40,000 de- pletion that year. You would add the remaining $20,000 depletion to your closing inventory of timber products. Electing to treat the cutting of timber as a sale or exchange. You can elect, under cer- tain circumstances, to treat the cutting of timber held for more than 1 year as a sale or ex- change. You must make the election on your in- come tax return for the tax year to which it ap- plies. If you make this election, subtract the adjusted basis for depletion from the FMV of the timber on the first day of the tax year in which you cut it to figure the gain or loss on the cutting. You generally report the gain as long-term capital gain. The FMV then becomes your basis for figuring your ordinary gain or loss on the sale or other disposition of the products cut from the timber. For more information, see Timber in chapter 2 of Pub. 544. You may revoke an election to treat the cut- ting of timber as a sale or exchange without the IRS's consent. The prior election (and revoca- tion) is disregarded for purposes of making a subsequent election. See Form T (Timber) for more information. Form T (Timber). Complete and attach Form T (Timber) to your income tax return if you claim a deduction for timber depletion, choose to treat the cutting of timber as a sale or exchange, or make an outright sale of timber. 10. Business Bad Debts Introduction You have a bad debt if you cannot collect money owed to you. A bad debt is either a busi- ness bad debt or a nonbusiness bad debt. This chapter discusses only business bad debts. Generally, a business bad debt is one that comes from operating your trade or business. You can deduct business bad debts on Sched- ule C (Form 1040) or your applicable business income tax return. All other bad debts are nonbusiness bad debts and are deductible only as short-term capital losses. For more information on nonbus- iness bad debts, see Pub. 550. Topics This chapter discusses: • Definition of business bad debt • When a debt becomes worthless • How to claim a business bad debt • Recovery of a bad debt Useful Items You may want to see: Publication 525 Taxable and Nontaxable Income 536 Net Operating Losses (NOLs) for Individuals, Estates, and Trusts 544 Sales and Other Dispositions of Assets 550 Investment Income and Expenses 556 Examination of Returns, Appeal Rights, and Claims for Refund Form (and Instructions) Schedule C (Form 1040) Profit or Loss From Business 1040X Amended U.S. Individual Income Tax Return 1045 Application for Tentative Refund 1065 U.S. Return of Partnership Income 1065X Amended Return or Administrative Adjustment Request (AAR) 1120S U.S. Income Tax Return for an S Corporation 1120X Amended U.S. Corporation Income Tax Return 1139 Corporation Application for Tentative Refund 3115 Application for Change in Accounting Method See chapter 13 for information about getting publications and forms. Definition of Business Bad Debt A business bad debt is a loss from the worth- lessness of a debt that was either: • Created or acquired in your trade or busi- ness, or • Closely related to your trade or business when it became partly or totally worthless. A debt is closely related to your trade or business if your primary motive for incurring the debt is business related. Bad debts of a corpo- ration (other than an S corporation) are always business bad debts. Credit sales. Business bad debts are mainly the result of credit sales to customers. Goods that have been sold, but not yet paid for, and services that have been performed, but not yet paid for, are recorded in your books as either accounts receivable or notes receivable. After a reasonable period of time, if you have tried to collect the amount due, but are unable to do so, the uncollectible part becomes a business bad debt. Accounts or notes receivable valued at FMV when received are deductible only at that value, even though the FMV may be less than the face value. If you purchased an account receivable for less than its face value, and the receivable 525 536 544 550 556 Schedule C (Form 1040) 1040X 1045 1065 1065X 1120S 1120X 1139 3115 Page 40 Chapter 10 Business Bad Debts

(p535)(page-42)Page 42#

subsequently becomes worthless, the most you’re allowed to deduct is the amount you paid to acquire it. You can claim a business bad debt de- duction only if the amount owed to you was previously included in gross in- come. This applies to amounts owed to you from all sources of taxable income, including sales, services, rents, and interest. Accrual method. If you use an accrual method of accounting, you generally report in- come as you earn it. You can only claim a bad debt deduction for an uncollectible receivable if you have previously included the uncollectible amount in income. If you qualify, you can use the nonac- crual-experience method of accounting dis- cussed later. Under this method, you don’t have to accrue income that, based on your experi- ence, you don’t expect to collect. Cash method. If you use the cash method of accounting, you generally report income when you receive payment. You can’t claim a bad debt deduction for amounts owed to you because you never included those amounts in income. For example, a cash basis architect can’t claim a bad debt deduction if a client fails to pay the bill because the architect's fee was never included in income. Debts from a former business. If you sell your business but retain its receivables, these debts are business debts because they arose out of your trade or business. If any of these re- ceivables subsequently become worthless, the loss is still a business bad debt. Debt acquired from a decedent. The character of a loss from debts of a business ac- quired from a decedent is determined in the same way as debts acquired on the purchase of a business. The executor of the decedent's es- tate treats any loss from the debts as a busi- ness bad debt if the debts were closely related to the decedent's trade or business when they became worthless. Otherwise, a loss from these debts becomes a nonbusiness bad debt for the decedent's estate. Liquidation. If you liquidate your business and some of the accounts receivable that you retain become worthless, they’re treated as business bad debts. Types of Business Bad Debts Business bad debts may result from the follow- ing. Loans to clients and suppliers. If you loan money to a client, supplier, employee, or distrib- utor for a business reason and you’re unable to collect the loan after attempting to do so, you have a business bad debt. Debts owed by political parties. If a political party (or other organization that accepts contri- butions or spends money to influence elections) owes you money and the debt becomes worth- less, you can claim a bad debt deduction only if all of the following requirements are met. CAUTION ! 1. You use an accrual method of accounting. 2. The debt arose from the sale of goods or services in the ordinary course of your trade or business. 3. More than 30% of your receivables ac- crued in the year of the sale were from sales to political parties. 4. You made substantial and continuing ef- forts to collect on the debt. Loan or capital contribution. You cannot claim a bad debt deduction for a loan you made to a corporation if, based on the facts and cir- cumstances, the loan is actually a contribution to capital. Debts of an insolvent partner. If your busi- ness partnership breaks up and one of your for- mer partners becomes insolvent, you may have to pay more than your pro rata share of the part- nership's debts. If you pay any part of the insol- vent partner's share of the debts, you can claim a bad debt deduction for the amount you paid that is attributable to the insolvent partner's share. Business loan guarantee. If you guarantee a debt that subsequently becomes worthless, the debt can qualify as a business bad debt if all the following requirements are met. • You made the guarantee in the course of your trade or business. • You have a legal duty to pay the debt. • You made the guarantee before the debt became worthless. You meet this require- ment if you reasonably expected you wouldn’t have to pay the debt without full reimbursement from the borrower. • You received reasonable consideration for making the guarantee. You meet this re- quirement if you made the guarantee ac- cording to normal business practice or for a good faith business purpose. Example. Jane Zayne owns the Zayne Dress Company. She guaranteed payment of a $20,000 note for Elegant Fashions, a dress out- let. Elegant Fashions is one of Zayne's largest clients. Elegant Fashions later defaulted on the loan. As a result, Ms. Zayne paid the remaining balance of the loan in full to the bank. She can claim a business bad debt deduc- tion only for the amount she paid because her guarantee was made in the course of her trade or business for a good faith business purpose. She was motivated by the desire to retain one of her better clients and keep a sales outlet. Deductible in the year paid. If you make a payment on a loan you guaranteed, you can de- duct it in the year paid, unless you have rights against the borrower. Rights against a borrower. When you make payment on a loan you guaranteed, you may have the right to take the place of the lender. The debt is then owed to you. If you have this right, or some other right to demand payment from the borrower, you can’t claim a bad debt deduction until these rights become partly or totally worthless. Joint debtor. If two or more debtors jointly owe you money, your inability to collect from one doesn’t enable you to deduct a proportion- ate amount as a bad debt. Sale of mortgaged property. If mortgaged or pledged property is sold for less than the debt, the unpaid, uncollectible balance of the debt is a bad debt. When a Debt Becomes Worthless A debt becomes worthless when there is no longer any chance the amount owed will be paid. This may occur on the date the debt is due or prior to that date. To demonstrate worthlessness, you must only show that you have taken reasonable steps to collect the debt but were unable to do so. It isn’t necessary to go to court if you can show that a judgment from the court would be uncollectible. Bankruptcy of your debtor is gen- erally good evidence of the worthlessness of at least a part of an unsecured and unpreferred debt. Property received for debt. If you receive property in partial settlement of a debt, reduce the debt by the property's FMV, which becomes the property's basis. You can deduct the re- maining debt as a bad debt if and when it be- comes worthless. If you later sell the property for more than its basis, any gain on the sale is due to the appre- ciation of the property. It isn’t a recovery of a bad debt. For information on the sale of an as- set, see Pub. 544. How To Claim a Business Bad Debt There are two methods to claim a business bad debt. • The specific charge-off method. • The nonaccrual-experience method. Generally, you must use the specific charge-off method. However, you may use the nonac- crual-experience method if you meet the re- quirements discussed later under Nonac- crual-Experience Method. Specific Charge-off Method If you use the specific charge-off method, you can deduct specific business bad debts that be- come either partly or totally worthless during the tax year. However, with respect to partly worth- less bad debts, your deduction is limited to the amount you charged off on your books during the year. Partly worthless debts. You can deduct spe- cific bad debts that become partly uncollectible during the tax year. Your tax deduction is limi- ted to the amount you charge off on your books during the year. You don’t have to charge off and deduct your partly worthless debts annu- ally. You can delay the charge-off until a later year. However, you can’t deduct any part of a debt after the year it becomes totally worthless. Chapter 10 Business Bad Debts Page 41

(p535)(page-43)Page 43#

Significantly modified debt. An exception to the charge-off rule exists for debt that has been significantly modified and on which the holder recognized gain. For more information, see Regulations section 1.166-3(a)(3). Deduction disallowed. Generally, you can claim a partial bad debt deduction only in the year you make the charge-off on your books. If, under audit, the IRS doesn’t allow your deduc- tion and the debt becomes partly worthless in a later tax year, you can deduct the amount you charged off in that year plus the disallowed amount charged off in the earlier year. The charge-off in the earlier year, unless reversed on your books, fulfills the charge-off require- ment for the later year. Totally worthless debts. If a debt becomes totally worthless in the current tax year, you can deduct the entire amount minus any amount de- ducted in an earlier tax year when the debt was only partly worthless. You don’t have to make an actual charge-off on your books to claim a bad debt deduction for a totally worthless debt. However, you may want to do so. If you don’t and the IRS later rules the debt is only partly worthless, you’ll not be allowed a deduction for the debt in that tax year because a deduction of a partly worthless bad debt is limited to the amount actually charged off. See Partly worthless debts, earlier. Filing a claim for refund. If you didn’t deduct a bad debt on your original return for the year it became worthless, you can file a claim for a credit or refund. If the bad debt was totally worthless, you must file the claim by the later of the following dates. • 7 years from the date your original return was due (not including extensions). • 2 years from the date you paid the tax. If the claim is for a partly worthless bad debt, you must file the claim by the later of the follow- ing dates. • 3 years from the date you filed your original return. • 2 years from the date you paid the tax. You may have longer to file the claim if you were unable to manage your financial affairs due to a physical or mental impairment. Such an impairment requires proof of existence. For details and more information about filing a claim, see Pub. 556. Use one of the following forms to file a claim. For more information, see the instructions for the applicable form. Table 10-1. Forms Used To File a Claim IF you filed as a... THEN file... sole proprietor or farmer Form 1040X. corporation Form 1120X. S corporation Form 1120S and check box H(4). partnership Form 1065X if filing on paper or Form 1065 and check box G(5) if filing electronically. Nonaccrual-Experience Method Generally, a person using accrual accounting isn’t required to accrue a service-provided re- ceivable that experience shows won't be collec- ted if: • The service provided is health, law, engi- neering, architecture, accounting, actuarial science, performing arts, or consulting; or • The person's average annual gross re- ceipts for all previous 3‐tax‐year periods don't exceed $25 million. See section 448 for details and exceptions. Recovery of a Bad Debt If you claim a deduction for a bad debt on your income tax return and later recover (collect) all or part of it, you may have to include all or part of the recovery in gross income. The amount you include is limited to the amount you actually deducted. However, you can exclude the amount deducted that did not reduce your tax. Report the recovery as “Other income” on the appropriate business form or schedule. See Recoveries in Pub. 525 for more infor- mation. NOL carryover. If a bad debt deduction in- creases an NOL carryover that has not expired before the beginning of the tax year in which the recovery takes place, you treat the deduction as having reduced your tax. A bad debt deduction that contributes to an NOL helps lower taxes in the year to which you carry the NOL. For more information about NOLs for individuals, see Pub. 536. Also, see the Instructions for Form 1045, and the Instructions for Form 1139. 11. Other Expenses What's New Standard mileage rate. Beginning in 2018, the standard mileage rate for the cost of operat- ing your car, van, pickup, or panel truck for business use is 54.5 cents per mile. For more information, see Car and truck expenses under Miscellaneous Expenses, later. No miscellaneous itemized deductions al- lowed. You can no longer claim any miscella- neous itemized deductions, including the de- duction for repayments (claim of right). Miscellaneous itemized deductions are those deductions that would have been subject to the 2%-of-adjusted-gross-income limitation. Qualified business income deduction. For tax years beginning after 2017, individual tax- payers and some trusts and estates may be en- titled to a deduction of up to 20% of their Quali- fied Business Income (QBI) from a trade or business, including income from a pass-through entity, but not from a C corporation, plus 20% of qualified real estate investment trust (REIT) div- idends and qualified publicly traded partnership (PTP) income. The deduction is subject to mul- tiple limitations, such as the type of trade or business, the taxpayer’s taxable income, the amount of W-2 wages paid in the trade or busi- ness, and the unadjusted basis immediately af- ter acquisition (UBIA) of qualified property held by the trade or business. The deduction can be taken in addition to the standard or itemized de- ductions. See chapter 12 of this publication for more information. Travel, meals, and entertainment. In gen- eral, entertainment expenses are no longer de- ductible. For more information on travel and non-entertainment related meals including de- ductibility, see Pub. 463. Certain payments made in sexual harass- ment or sexual abuse cases. For amounts paid or incurred after December 22, 2017, new section 162(q) provides that no deduction is al- lowed under section 162 for any settlement or payment related to sexual harassment or sexual abuse if it is subject to a nondisclosure agree- ment. In addition, attorney’s fees related to such a settlement or payment are not allowed as a deduction. Introduction This chapter covers business expenses that may not have been explained to you, as a busi- ness owner, in previous chapters of this publi- cation. Topics This chapter discusses: • Travel and non-entertainment related meals Page 42 Chapter 11 Other Expenses

(p535)(page-44)Page 44#

• Bribes and kickbacks • Charitable contributions • Education expenses • Lobbying expenses • Penalties and fines • Repayments (claim of right) • Other miscellaneous expenses Useful Items You may want to see: Publication 15-B Employer's Tax Guide to Fringe Benefits 463 Travel, Gift, and Car Expenses 526 Charitable Contributions 529 Miscellaneous Deductions 544 Sales and Other Dispositions of Assets 946 How To Depreciate Property 970 Tax Benefits for Education Form (and Instructions) Schedule A (Form 1040) Itemized Deductions Schedule C (Form 1040) Profit or Loss From Business Schedule C-EZ (Form 1040) Net Profit From Business Schedule F (Form 1040) Profit or Loss From Farming 1099-MISC Miscellaneous Income 1120 U.S. Corporation Income Tax Return 4562 Depreciation and Amortization 8949 Sales and Other Dispositions of Capital Assets W-2 Wage and Tax Statement See chapter 13 for information about getting publications and forms. Reimbursement of Travel and Non-Entertainment Related Meals The following discussion explains how to han- dle any reimbursements or allowances you may provide to your employees under a reimburse- ment or allowance arrangement for travel and non-entertainment related meals expenses. If you are self-employed and report your income and expenses on Schedule C (Form 1040) or Schedule C-EZ (Form 1040), see Pub. 463. To be deductible for tax purposes, expen- ses incurred for travel and non-entertainment related meals must be ordinary and necessary expenses incurred while carrying on your trade or business. Generally, you also must show that non-entertainment related meals expenses are 15-B 463 526 529 544 946 970 Schedule A (Form 1040) Schedule C (Form 1040) Schedule C-EZ (Form 1040) Schedule F (Form 1040) 1099-MISC 1120 4562 8949 W-2 directly related to, or associated with, the con- duct of your trade or business. For more infor- mation on travel and non-entertainment related meals, including deductibility, see Pub. 463. Reimbursements A “reimbursement or allowance arrangement” provides for payment of advances, reimburse- ments, and allowances for travel and non-enter- tainment related meals expenses incurred by your employees during the ordinary course of business. If the expenses are substantiated, you can deduct the allowable amount on your tax return. Because of differences between ac- counting methods and tax law, the amount you can deduct for tax purposes may not be the same as the amount you deduct on your busi- ness books and records. For example, you can deduct 100% of the cost of meals on your busi- ness books and records. However, only 50% of these costs are allowed by law as a tax deduc- tion. How you deduct a business expense under a reimbursement or allowance arrangement de- pends on whether you have: • An accountable plan, or • A nonaccountable plan. If you reimburse these expenses under an ac- countable plan, deduct them as travel and non-entertainment related meals expenses. If you reimburse these expenses under a nonaccountable plan, report the reimburse- ments as wages on Form W-2, and deduct them as wages on the appropriate line of your tax return. If you make a single payment to your employees and it includes both wages and an expense reimbursement, you must specify the amount of the reimbursement and report it ac- cordingly. See Table 11-1. Accountable Plans An accountable plan requires your employees to meet all of the following requirements. Each employee must: 1. Have paid or incurred deductible expen- ses while performing services as your em- ployee, 2. Adequately account to you for these ex- penses within a reasonable period of time, and 3. Return any excess reimbursement or al- lowance within a reasonable period of time. An arrangement under which you advance money to employees is treated as meeting (3) above only if the following requirements are also met. • The advance is reasonably calculated not to exceed the amount of anticipated ex- penses. • You make the advance within a reasonable period of time of your employee paying or incurring the expense. If any expenses reimbursed under this ar- rangement aren’t substantiated, or an excess reimbursement isn’t returned within a reasona- ble period of time by an employee, you cannot treat these expenses as reimbursed under an accountable plan. Instead, treat the reimbursed expenses as paid under a nonaccountable plan, discussed later. Adequate accounting. Your employees must adequately account to you for their travel and non-entertainment related meals expenses. They must give you documentary evidence of their travel, mileage, and other employee busi- ness expenses. This evidence should include items such as receipts, along with either a statement of expenses, an account book, a day-planner, or similar record in which the em- ployee entered each expense at or near the time the expense was incurred. Excess reimbursement or allowance. An excess reimbursement or allowance is any amount you pay to an employee that is more than the business-related expenses for which the employee adequately accounted. The em- ployee must return any excess reimbursement Table 11-1. Reporting Reimbursements IF the type of reimbursement (or other expense allowance) arrangement is under THEN the employer reports on Form W-2 An accountable plan with: Actual expense reimbursement: Adequate accounting made and excess returned No amount. Actual expense reimbursement: Adequate accounting and return of excess both required but excess not returned The excess amount as wages in box 1. Per diem or mileage allowance up to the federal rate: Adequate accounting made and excess returned No amount. Per diem or mileage allowance up to the federal rate: Adequate accounting and return of excess both required but excess not returned The excess amount as wages in box 1. The amount up to the federal rate is reported only in box 12—it is not reported in box 1. Per diem or mileage allowance exceeds the federal rate: Adequate accounting made up to the federal rate only and excess not returned The excess amount as wages in box 1. The amount up to the federal rate is reported only in box 12—it is not reported in box 1. A nonaccountable plan with: Either adequate accounting or return of excess, or both, not required by plan The entire amount as wages in box 1. No reimbursement plan The entire amount as wages in box 1. Chapter 11 Other Expenses Page 43

(p535)(page-45)Page 45#

or other expense allowance to you within a rea- sonable period of time. Reasonable period of time. A reasonable pe- riod of time depends on the facts and circum- stances. Generally, actions that take place within the times specified in the following list will be treated as taking place within a reasonable period of time. 1. You give an advance within 30 days of the time the employee pays or incurs the ex- pense. 2. Your employees adequately account for their expenses within 60 days after the ex- penses were paid or incurred. 3. Your employees return any excess reim- bursement within 120 days after the ex- penses were paid or incurred. 4. You give a periodic statement (at least quarterly) to your employees that asks them to either return or adequately ac- count for outstanding advances and they comply within 120 days of the date of the statement. How to deduct. You can claim a deduction for travel and non-entertainment related meals ex- penses if you reimburse your employees for these expenses under an accountable plan. Generally, the amount you can deduct for non-entertainment related meals is subject to a 50% limit, discussed later. If you are a sole pro- prietor, or are filing as a single member limited liability company, deduct the travel reimburse- ment on line 24a and the deductible part of the non-entertainment related meals reimburse- ment on line 24b, Schedule C (Form 1040), or line 2, Schedule C-EZ (Form 1040). If you are filing an income tax return for a corporation, include the reimbursement on the Other deductions line of Form 1120. If you are filing any other business income tax return, such as a partnership or S corporation return, deduct the reimbursement on the appropriate line of the return as provided in the instructions for that return. Per Diem and Car Allowances You can reimburse your employees under an accountable plan based on travel days, miles, or some other fixed allowance. In these cases, your employee is considered to have accounted to you for the amount of the expense that doesn’t exceed the rates established by the federal government. Your employee must ac- tually substantiate to you the other elements of the expense, such as time, place, and business purpose. Federal rate. The federal rate can be figured using any one of the following methods. 1. For car expenses: a. The standard mileage rate. b. A fixed and variable rate (FAVR). 2. For per diem amounts: a. The regular federal per diem rate. b. The standard meal allowance. c. The high-low rate. Car allowance. Your employee is considered to have accounted to you for car expenses that do not exceed the standard mileage rate. Be- ginning in 2018, the standard business mileage rate is 54.5 cents per mile. You can choose to reimburse your employ- ees using an FAVR allowance. This is an allow- ance that includes a combination of payments covering fixed and variable costs, such as a cents-per-mile rate to cover your employees' variable operating costs (such as gas, oil, etc.) plus a flat amount to cover your employees' fixed costs (such as depreciation, insurance, etc.). For information on using an FAVR allow- ance, see Revenue Procedure 2010-51, availa- ble at IRS.gov/irb/2010-51_IRB#RP-2010-51, and Notice 2018-03, available at IRS.gov/irb/ 2018-02_IRB#NOT-2018-03. Per diem allowance. If your employee ac- tually substantiates to you the other elements (discussed earlier) of the expenses reimbursed using the per diem allowance, how you report and deduct the allowance depends on whether the allowance is for lodging and meal expenses or for meal expenses only and whether the al- lowance is more than the federal rate. Regular federal per diem rate. The regu- lar federal per diem rate is the highest amount the federal government will pay to its employ- ees while away from home on travel. It has the following two components. 1. Lodging expense. 2. Meal and incidental expense (M&IE). The rates are different for different locations. See GSA.gov/perdiem for the per diem rates in the continental United States. Standard meal allowance. The federal rate for M&IE is the standard meal allowance. You can pay only an M&IE allowance to em- ployees who travel away from home if: • You pay the employee for actual expenses for lodging based on receipts submitted to you, • You provide for the lodging, • You pay for the actual expense of the lodg- ing directly to the provider, • You don’t have a reasonable belief that lodging expenses were incurred by the employee, or • The allowance is figured on a basis similar to that used in figuring the employee's wa- ges (that is, number of hours worked or miles traveled). Per diem rates online. You can access per diem rates at GSA.gov/perdiem. High-low method. This is a simplified method of figuring the federal per diem rate for travel within the continental United States. It eliminates the need to keep a current list of the per diem rate for each city. Under the high-low method, the per diem amount for travel during January through Sep- tember of 2018 is $284 ($68 for M&IE) for cer- tain high-cost locations. All other areas have a per diem amount of $191 ($57 for M&IE). The high-cost localities eligible for the higher per diem amount under the high-low method are lis- ted in Notice 2018-77, available at IRS.gov/irb/ 2018-42_IRB#NOT-2018-77. Effective October 1, 2018, the per diem rate for high-cost locations increased to $287 ($71 for M&IE). The rate for all other locations in- creased to $195 ($60 for M&IE). For October, November, and December 2018, you can either continue to use the rates described in the pre- ceding paragraph or change to the new rates. However, you must use the same rate for all employees reimbursed under the high-low method. For more information about the high-low method, see Notice 2018-77, available at IRS.gov/irb/2018-42_IRB#NOT-2018-77. See GSA.gov/perdiem for the current per diem rates for all locations. Reporting per diem and car allowances. The following discussion explains how to report per diem and car allowances. The manner in which you report them depends on how the al- lowance compares to the federal rate. See Ta- ble 11-1. Allowance less than or equal to the fed- eral rate. If your allowance for the employee is less than or equal to the appropriate federal rate, that allowance isn’t included as part of the employee's pay in box 1 of the employee's Form W-2. Deduct the allowance as travel ex- penses (including meals that may be subject to the 50% limit, discussed later). See How to de- duct under Accountable Plans, earlier. Allowance more than the federal rate. If your employee's allowance is more than the ap- propriate federal rate, you must report the al- lowance as two separate items. Include the allowance amount up to the fed- eral rate in box 12 (code L) of the employee's Form W-2. Deduct it as travel expenses (as ex- plained above). This part of the allowance is treated as reimbursed under an accountable plan. Include the amount that is more than the federal rate in box 1 (and in boxes 3 and 5 if they apply) of the employee's Form W-2. De- duct it as wages subject to income tax withhold- ing, social security, Medicare, and federal un- employment taxes. This part of the allowance is treated as reimbursed under a nonaccountable plan as explained later under Nonaccountable Plans. Meals and Entertainment Under an accountable plan, you can generally deduct only 50% of any otherwise deductible business-related meal and entertainment ex- penses you reimburse your employees. The de- duction limit applies even if you reimburse them for 100% of the expenses. Application of the 50% limit. The 50% de- duction limit applies to reimbursements you make to your employees for expenses they in- cur for meals while traveling away from home on business and for entertaining business cus- tomers at your place of business, a restaurant, or another location. It applies to expenses in- curred at a business convention or reception, business meeting, or business luncheon at a club. The deduction limit may also apply to meals you furnish on your premises to your em- ployees. Page 44 Chapter 11 Other Expenses

(p535)(page-46)Page 46#

Related expenses. Taxes and tips relating to a meal or entertainment activity you reim- burse to your employee under an accountable plan are included in the amount subject to the 50% limit. Reimbursements you make for ex- penses, such as cover charges for admission to a nightclub, rent paid for a room to hold a dinner or cocktail party, or the amount you pay for parking at a sports arena, are all subject to the 50% limit. However, the cost of transportation to and from an otherwise allowable business meal or a business-related entertainment activity isn’t subject to the 50% limit. Amount subject to 50% limit. If you provide your employees with a per diem allowance only for meal and incidental expenses, the amount treated as an expense for food and beverages is the lesser of the following. • The per diem allowance. • The federal rate for M&IE. If you provide your employees with a per diem allowance that covers lodging, meals, and incidental expenses, you must treat an amount equal to the federal M&IE rate for the area of travel as an expense for food and beverages. If the per diem allowance you provide is less than the federal per diem rate for the area of travel, you can treat 40% of the per diem allowance as the amount for food and beverages. Meal expenses when subject to “hours of service” limits. You can deduct 80% of the cost of reimbursed meals your employees con- sume while away from their tax home on busi- ness during, or incident to, any period subject to the Department of Transportation's “hours of service” limits. See Pub. 463 for a detailed discussion of in- dividuals subject to the Department of Trans- portation's “hours of service” limits. De minimis (minimal) fringe benefit. The 50% limit doesn’t apply to an expense for food or beverage that is excluded from the gross in- come of an employee because it is a de minimis fringe benefit. See Pub.15-B for additional infor- mation on de minimis fringe benefits. Company cafeteria or executive dining room. The cost of food and beverages you provide primarily to your employees on your business premises is deductible. This includes the cost of maintaining the facilities for provid- ing the food and beverages. These expenses are subject to the 50% limit unless they qualify as a de minimis fringe benefit, as just dis- cussed, or unless they are compensation to your employees (explained later). Employee activities. The expense of provid- ing recreational, social, or similar activities (in- cluding the use of a facility) for your employees is deductible and isn’t subject to the 50% limit. The benefit must be primarily for your employ- ees who aren’t highly compensated. For this purpose, a highly compensated em- ployee is an employee who meets either of the following requirements. 1. Owned a 5% or more interest in the busi- ness during the year or the preceding year. An employee is treated as owning any interest owned by his or her brother, sister, spouse, ancestors, and lineal de- scendants. 2. Received more than $80,000 in pay for the preceding year. You can choose to in- clude only employees who were also in the top 20% of employees when ranked by pay for the preceding year. For example, the expenses for food, bever- ages, and entertainment for a company-wide picnic aren’t subject to the 50% limit. Meals or entertainment treated as compen- sation. The 50% limit doesn’t apply to either of the following. 1. Expenses for meals or entertainment that you treat as: a. Compensation to an employee who was the recipient of the meals or en- tertainment, and b. Wages subject to withholding of fed- eral income tax. 2. Expenses for meals or entertainment if: a. A recipient of the meals or entertain- ment who isn’t your employee has to include the expenses in gross income as compensation for services or as a prize or award; and b. You include that amount on a Form 1099-MISC issued to the recipient, if a Form 1099-MISC is required. Sales of meals or entertainment. You can deduct the cost of meals or entertainment (in- cluding the use of facilities) you sell to the pub- lic. For example, if you run a nightclub, your ex- pense for the entertainment you furnish to your customers, such as a floor show, is a business expense that is fully deductible. The 50% limit doesn’t apply to this expense. Providing meals or entertainment to gen- eral public to promote goodwill. You can deduct the cost of providing meals, entertain- ment, or recreational facilities to the general public as a means of advertising or promoting goodwill in the community. The 50% limit doesn’t apply to this expense. Director, stockholder, or employee meet- ings. You can deduct entertainment expenses directly related to business meetings of your employees, partners, stockholders, agents, or directors. You can provide some minor social activities, but the main purpose of the meeting must be your company's business. These ex- penses are subject to the 50% limit. Trade association meetings. You can deduct expenses directly related to and necessary for attending business meetings or conventions of certain tax-exempt organizations. These organi- zations include business leagues, chambers of commerce, real estate boards, and trade and professional associations. Nonaccountable Plans A nonaccountable plan is an arrangement that doesn’t meet the requirements for an accounta- ble plan. All amounts paid, or treated as paid, under a nonaccountable plan are reported as wages on Form W-2. The payments are subject to income tax withholding, social security, Medi- care, and federal unemployment taxes. You can deduct the reimbursement as compensation or wages only to the extent it meets the deductibil- ity tests for employees' pay in chapter 2. Deduct the allowable amount as compensation or wa- ges on the appropriate line of your income tax return, as provided in its instructions. Miscellaneous Expenses In addition to travel, meal, and entertainment expenses, there are other expenses you can deduct. Advertising expenses. You generally can de- duct reasonable advertising expenses that are directly related to your business activities. Gen- erally, you can’t deduct amounts paid to influ- ence legislation (for example, lobbying). For more information, see Lobbying expenses, later. You can usually deduct as a business ex- pense the cost of institutional or goodwill adver- tising to keep your name before the public if it relates to business you reasonably expect to gain in the future. For example, the cost of ad- vertising that encourages people to contribute to the Red Cross, to buy U.S. Savings Bonds, or to participate in similar causes is usually de- ductible. Anticipated liabilities. Anticipated liabilities or reserves for anticipated liabilities aren’t deducti- ble. For example, assume you sold 1-year TV service contracts this year totaling $50,000. From experience, you know you will have ex- penses of about $15,000 in the coming year for these contracts. You can’t deduct any of the $15,000 this year by charging expenses to a re- serve or liability account. You can deduct your expenses only when you actually pay or accrue them, depending on your accounting method. Bribes and kickbacks. Engaging in the pay- ment of bribes or kickbacks is a serious criminal matter. Such activity could result in criminal prosecution. Any payments that appear to have been made, either directly or indirectly, to an of- ficial or employee of any government or an agency or instrumentality of any government aren’t deductible for tax purposes and are in vi- olation of the law. Payments paid directly or indirectly to a per- son in violation of any federal or state law (but only if that state law is generally enforced, de- fined below) that provides for a criminal penalty or for the loss of a license or privilege to engage in a trade or business aren’t allowed as a de- duction for tax purposes. Meaning of “generally enforced.” A state law is considered generally enforced unless it is never enforced or enforced only for infamous persons or persons whose violations are extra- ordinarily flagrant. For example, a state law is generally enforced unless proper reporting of a violation of the law results in enforcement only under unusual circumstances. Chapter 11 Other Expenses Page 45

(p535)(page-47)Page 47#

Kickbacks. A kickback is a payment for re- ferring a client, patient, or customer. The com- mon kickback situation occurs when money or property is given to someone as payment for in- fluencing a third party to purchase from, use the services of, or otherwise deal with the person who pays the kickback. In many cases, the per- son whose business is being sought or enjoyed by the person who pays the kickback isn’t aware of the payment. For example, the Yard Corporation is in the business of repairing ships. It returns 10% of the repair bills as kickbacks to the captains and chief officers of the vessels it repairs. Although this practice is considered an ordinary and nec- essary expense of getting business, it is clearly a violation of a state law that is generally en- forced. These expenditures aren’t deductible for tax purposes, whether or not the owners of the shipyard are subsequently prosecuted. Form 1099-MISC. It doesn’t matter whether any kickbacks paid during the tax year are deductible on your income tax return in re- gards to information reporting. See Form 1099-MISC for more information. Car and truck expenses. The costs of operat- ing a car, truck, or other vehicle in your busi- ness are deductible. For more information on how to figure your deduction, see Pub. 463. Charitable contributions. Cash payments to an organization, charitable or otherwise, may be deductible as business expenses if the pay- ments aren’t charitable contributions or gifts and are directly related to your business. If the payments are charitable contributions or gifts, you can’t deduct them as business expenses. However, corporations (other than S corpora- tions) can deduct charitable contributions on their income tax returns, subject to limitations. See the Instructions for Form 1120 for more in- formation. Sole proprietors, partners in a part- nership, or shareholders in an S corporation may be able to deduct charitable contributions made by their business on Schedule A (Form 1040). Example. You paid $15 to a local church for a half-page ad in a program for a concert it is sponsoring. The purpose of the ad was to en- courage readers to buy your products. Your payment isn’t a charitable contribution. You can deduct it as an advertising expense. Example. You made a $100,000 donation to a committee organized by the local Chamber of Commerce to bring a convention to your city, intended to increase business activity, including yours. Your payment isn’t a charitable contribu- tion. You can deduct it as a business expense. See Pub. 526 for a discussion of donated in- ventory, including capital gain property. Club dues and membership fees. Generally, you can’t deduct amounts paid or incurred for membership in any club organized for business, pleasure, recreation, or any other social pur- pose. This includes country clubs, golf and ath- letic clubs, hotel clubs, sporting clubs, airline clubs, and clubs operated to provide meals un- der circumstances generally considered to be conducive to business discussions. Exception. The following organizations aren’t treated as clubs organized for business, pleasure, recreation, or other social purpose unless one of the main purposes is to conduct entertainment activities for members or their guests or to provide members or their guests with access to entertainment facilities. • Boards of trade. • Business leagues. • Chambers of commerce. • Civic or public service organizations. • Professional organizations such as bar as- sociations and medical associations. • Real estate boards. • Trade associations. Credit card convenience fees. Credit card companies charge a fee to businesses who ac- cept their cards. This fee when paid or incurred by the business can be deducted as a business expense. Damages recovered. Special rules apply to compensation you receive for damages sus- tained as a result of patent infringement, breach of contract or fiduciary duty, or antitrust viola- tions. You must include this compensation in your income. However, you may be able to take a special deduction. The deduction applies only to amounts recovered for actual economic in- jury, not any additional amount. The deduction is the smaller of the following. • The amount you received or accrued for damages in the tax year reduced by the amount you paid or incurred in the year to recover that amount. • Your losses from the injury you haven’t de- ducted. Demolition expenses or losses. Amounts paid or incurred to demolish a structure aren’t deductible. These amounts are added to the basis of the land where the demolished struc- ture was located. Any loss for the remaining un- depreciated basis of a demolished structure wouldn’t be recognized until the property is dis- posed of. Education expenses. Ordinary and neces- sary expenses paid for the cost of the education and training of your employees are deductible. See Education Expenses in chapter 2. You can also deduct the cost of your own education (including certain related travel) rela- ted to your trade or business. You must be able to show the education maintains or improves skills required in your trade or business, or that it is required by law or regulations, for keeping your license to practice, status, or job. For ex- ample, an attorney can deduct the cost of at- tending Continuing Legal Education (CLE) classes that are required by the state bar asso- ciation to maintain his or her license to practice law. Education expenses you incur to meet the minimum requirements of your present trade or business, or those that qualify you for a new trade or business, aren’t deductible. This is true even if the education maintains or improves skills presently required in your business. For more information on education expenses, see Pub. 970. Franchise, trademark, trade name. If you buy a franchise, trademark, or trade name, you can deduct the amount you pay or incur as a business expense only if your payments are part of a series of payments that are: 1. Contingent on productivity, use, or dispo- sition of the item; 2. Payable at least annually for the entire term of the transfer agreement; and 3. Substantially equal in amount (or payable under a fixed formula). When determining the term of the transfer agreement, include all renewal options and any other period for which you and the transferor reasonably expect the agreement to be re- newed. A franchise includes an agreement that gives one of the parties to the agreement the right to distribute, sell, or provide goods, serv- ices, or facilities within a specified area. Impairment-related expenses. If you are dis- abled, you can deduct expenses necessary for you to be able to work (impairment-related ex- penses) as a business expense, rather than as a medical expense. You are disabled if you have either of the fol- lowing. • A physical or mental disability (for exam- ple, blindness or deafness) that function- ally limits your being employed. • A physical or mental impairment that sub- stantially limits one or more of your major life activities. The expense qualifies as a business ex- pense if all the following apply. • Your work clearly requires the expense for you to satisfactorily perform that work. • The goods or services purchased are clearly not needed or used, other than inci- dentally, in your personal activities. • Their treatment isn’t specifically provided for under other tax law provisions. Example. You are blind. You must use a reader to do your work, both at and away from your place of work. The reader's services are only for your work. You can deduct your expen- ses for the reader as a business expense. Internet-related expenses. Generally, you can deduct Internet-related expenses including domain registration fees and webmaster con- sulting costs. If you are starting a business, you may have to amortize these expenses as start-up costs. For more information about am- ortizing start-up and organizational costs, see chapter 8. Interview expense allowances. Reimburse- ments you make to job candidates for transpor- tation or other expenses related to interviews for possible employment aren’t wages. You can deduct the reimbursements as a business ex- pense. However, expenses for food, bever- ages, and entertainment are subject to the 50% limit discussed earlier under Meals and Enter- tainment. Legal and professional fees. Fees charged by accountants and attorneys that are ordinary Page 46 Chapter 11 Other Expenses

(p535)(page-48)Page 48#

and necessary expenses directly related to op- erating your business are deductible as busi- ness expenses. However, usually legal fees you pay to acquire business assets aren’t de- ductible. These costs are added to the basis of the property. Fees that include payments for work of a personal nature (such as drafting a will, or dam- ages arising from a personal injury) aren’t al- lowed as a business deduction on Schedule C (Form 1040) or Schedule C-EZ (Form 1040). If the invoice includes both business and per- sonal charges, figure the business portion as follows: multiply the total amount of the bill by a fraction, the numerator of which is the amount attributable to business matters, the denomina- tor of which is the total amount paid. The result is the portion of the invoice attributable to busi- ness expenses. The portion attributable to per- sonal matters is the difference between the total amount and the business portion (figured above). Legal fees relating to doing or keeping your job, such as those you paid to defend yourself against criminal charges arising out of your trade or business, may be deductible on Sched- ule A (Form 1040), if you itemize deductions. For more information, see Pub. 529. Certain payments made in sexual har- assment or sexual abuse cases. For amounts paid or incurred after December 22, 2017, new section 162(q) provides that no de- duction is allowed under section 162 for any settlement or payment related to sexual harass- ment or sexual abuse if it is subject to a nondi- sclosure agreement. In addition, attorney’s fees related to such a settlement or payment are not allowed as a deduction. Tax preparation fees. The cost of hiring a tax professional, such as a Certified Public Ac- countant (CPA), to prepare that part of your tax return relating to your business as a sole pro- prietor is deductible on Schedule C (Form 1040) or Schedule C-EZ (Form 1040). Deduct expenses of preparing tax schedules relating to rentals or royalties (Schedule E), or farm in- come and expenses (Schedule F) on the appro- priate schedule. Expenses for completing the remainder of the return are miscellaneous de- ductions and are no longer deductible. You can also claim a business deduction for amounts paid or incurred in resolving asserted tax deficiencies for your business operated as a sole proprietor. Licenses and regulatory fees. Licenses and regulatory fees for your trade or business paid annually to state or local governments generally are deductible. Some licenses and fees may have to be amortized. See chapter 8 for more information. Lobbying expenses. Generally, lobbying ex- penses aren’t deductible. Lobbying expenses include amounts paid or incurred for any of the following activities. • Influencing legislation. • Participating in or intervening in any politi- cal campaign for, or against, any candidate for public office. • Attempting to influence the general public, or segments of the public, about elections, legislative matters, or referendums. • Communicating directly with covered ex- ecutive branch officials (defined later) in any attempt to influence the official actions or positions of those officials. • Researching, preparing, planning, or coor- dinating any of the preceding activities. Your expenses for influencing legislation and communicating directly with a covered ex- ecutive branch official include a portion of your labor costs and general and administrative costs of your business. For information on mak- ing this allocation, see section 1.162-28 of the regulations. You can’t claim a charitable or business ex- pense deduction for amounts paid to an organi- zation if both of the following apply. • The organization conducts lobbying activi- ties on matters of direct financial interest to your business. • A principal purpose of your contribution is to avoid the rules discussed earlier that prohibit a business deduction for lobbying expenses. If a tax-exempt organization, other than a section 501(c)(3) organization, provides you with a notice on the part of dues that is allocable to nondeductible lobbying and political expen- ses, you can’t deduct that part of the dues. Covered executive branch official. For purposes of this discussion, a covered execu- tive branch official is any of the following. 1. The President. 2. The Vice President. 3. Any officer or employee of the White House Office of the Executive Office of the President and the two most senior level of- ficers of each of the other agencies in the Executive Office. 4. Any individual who: a. Is serving in a position in Level I of the Executive Schedule under section 5312 of title 5, United States Code; b. Has been designated by the Presi- dent as having Cabinet-level status; or c. Is an immediate deputy of an individ- ual listed in item (a) or (b). Exceptions to denial of deduction. The general denial of the deduction doesn’t apply to the following. • Any in-house expenses for influencing leg- islation and communicating directly with a covered executive branch official if those expenses for the tax year don’t exceed $2,000 (excluding overhead expenses). • Expenses incurred by taxpayers engaged in the trade or business of lobbying (pro- fessional lobbyists) on behalf of another person (but does apply to payments by the other person to the lobbyist for lobbying activities). Moving machinery. Generally, the cost of moving machinery from one city to another is a deductible expense. So is the cost of moving machinery from one plant to another, or from one part of your plant to another. You can de- duct the cost of installing the machinery in the new location. However, you must capitalize the costs of installing or moving newly purchased machinery. Outplacement services. The costs of out- placement services you provide to your employ- ees to help them find new employment, such as career counseling, résumé assistance, skills as- sessment, etc., are deductible. The costs of outplacement services may cover more than one deduction category. For example, deduct as a utilities expense the cost of telephone calls made under this service and deduct as a rental expense the cost of renting machinery and equipment for this service. For information on whether the value of out- placement services is includible in your employ- ees' income, see Pub. 15-B. Penalties and fines. Penalties paid for late performance or nonperformance of a contract are generally deductible. For instance, you own and operate a construction company. Under a contract, you are to finish construction of a building by a certain date. Due to construction delays, the building isn’t completed and ready for occupancy on the date stipulated in the con- tract. You are now required to pay an additional amount for each day that completion is delayed beyond the completion date stipulated in the contract. These additional costs are deductible business expenses. On the other hand, generally, no deduction is allowed for penalties and fines paid to a gov- ernment or specified nongovernmental entity for the violation of any law except the following. • Amounts that constitute restitution. • Amounts paid to come into compliance with the law. • Amounts paid or incurred as the result of certain court orders in which no govern- ment or specified nongovernmental agency is a party. • Amounts paid or incurred for taxes due. On or after December 22, 2017, no deduc- tion is allowed for the restitution amount or amount paid to come into compliance with the law unless the amounts are specifically identi- fied in the settlement agreement or court order. Also, any amount paid or incurred as reim- bursement to a government for the costs of any investigation or litigation are not eligible for the exceptions and are nondeductible. See section 162(f), as amended by P.L. 115-97, section 13306. Examples of nondeductible penalties and fines include the following. • Amounts paid because of a conviction for a crime or after a plea of guilty or no con- test in a criminal proceeding. • Amounts paid as a penalty imposed by federal, state, or local law in a civil action, including certain additions to tax and addi- tional amounts and assessable penalties imposed by the Internal Revenue Code. • Amounts paid in settlement of actual or possible liability for a fine or penalty, whether civil or criminal. • Amounts forfeited as collateral posted for a proceeding that could result in a fine or penalty. • Fines paid for violating city housing codes. • Fines paid by truckers for violating state maximum highway weight laws. Chapter 11 Other Expenses Page 47

(p535)(page-49)Page 49#

• Fines paid for violating air quality laws. • Civil penalties paid for violating federal laws regarding mining safety standards and discharges into navigable waters. A fine or penalty doesn’t include any of the following. • Legal fees and related expenses to defend yourself in a prosecution or civil action for a violation of the law imposing the fine or civil penalty. • Court costs or stenographic and printing charges. • Compensatory damages paid to a govern- ment. Political contributions. Contributions or gifts paid to political parties or candidates aren’t de- ductible. In addition, expenses paid or incurred to take part in any political campaign of a candi- date for public office aren’t deductible. Indirect political contributions. You can’t deduct indirect political contributions and costs of taking part in political activities as business expenses. Examples of nondeductible expen- ses include the following. • Advertising in a convention program of a political party, or in any other publication if any of the proceeds from the publication are for, or intended for, the use of a politi- cal party or candidate. • Admission to a dinner or program (includ- ing, but not limited to, galas, dances, film presentations, parties, and sporting events) if any of the proceeds from the function are for, or intended for, the use of a political party or candidate. • Admission to an inaugural ball, gala, pa- rade, concert, or similar event if identified with a political party or candidate. Repairs. The cost of repairing or improving property used in your trade or business is either a deductible or capital expense. Routine main- tenance that keeps your property in a normal ef- ficient operating condition, but that doesn’t ma- terially increase the value or substantially prolong the useful life of the property, is deduc- tible in the year that it is incurred. Otherwise, the cost must be capitalized and depreciated. See Form 4562 and its instructions for how to figure and claim the depreciation deduction. The cost of repairs includes the costs of la- bor, supplies, and certain other items. The value of your own labor isn’t deductible. Exam- ples of repairs include: • Reconditioning floors (but not replace- ment), • Repainting the interior and exterior walls of a building, • Cleaning and repairing roofs and gutters, and • Fixing plumbing leaks (but not replacement of fixtures). Repayments. If you had to repay an amount you included in your income in an earlier year, you may be able to deduct the amount repaid for the year in which you repaid it. Or, if the amount you repaid is more than $3,000, you may be able to take a credit against your tax for the year in which you repaid it. In most cases, you can claim a deduction or credit only if the repayment qualifies as an expense or loss in- curred in your trade or business or in a for-profit transaction. Type of deduction. The type of deduction you are allowed in the year of repayment de- pends on the type of income you included in the earlier year. For instance, if you repay an amount you previously reported as a capital gain, deduct the repayment as a capital loss as explained in the Instructions for Schedule D (Form 1040). If you reported it as self-employ- ment income, deduct it as a business expense on Schedule C (Form 1040) or Schedule C-EZ (Form 1040) or Schedule F (Form 1040). If you reported the amount as wages, unem- ployment compensation, or other nonbusiness ordinary income, you may be able to deduct it as an other itemized deduction if the amount re- paid is over $3,000. Beginning in 2018, due to the suspen- sion of miscellaneous itemized deduc- tions subject to the 2% floor under sec- tion 67(a), your are not able to deduct the repayment as an itemized deduction if it is $3,000 or less. Repayment—$3,000 or less. If the amount you repaid was $3,000 or less, deduct it from your income in the year you repaid it. Repayment—Over $3,000. If the amount you repaid was more than $3,000, you can de- duct the repayment as an other itemized deduc- tion on Schedule A (Form 1040), line 16, if you included the income under a “claim of right.” This means that at the time you included the in- come, it appeared that you had an unrestricted right to it. However, you can choose to take a credit for the year of repayment. Figure your tax under both methods and use the method that results in less tax. Method 1. Figure your tax for 2018 claim- ing a deduction for the repaid amount. Method 2. Figure your tax for 2018 claim- ing a credit for the repaid amount. Follow these steps. 1. Figure your tax for 2018 without deducting the repaid amount. 2. Refigure your tax from the earlier year without including in income the amount you repaid in 2018. 3. Subtract the tax in (2) from the tax shown on your return for the earlier year. This is the amount of your credit. 4. Subtract the answer in (3) from the tax for 2018 figured without the deduction (step 1). If Method 1 results in less tax, deduct the amount repaid as discussed earlier under Type of deduction. If Method 2 results in less tax, claim the credit on Schedule 5 (Form 1040), line 74, and write “I.R.C. 1341” next to line 74. Example. For 2017, you filed a return and reported your income on the cash method. In 2018, you repaid $5,000 included in your 2017 gross income under a claim of right. Your filing status in 2018 and 2017 is single. Your income and tax for both years are as follows: CAUTION ! 2017 With Income 2017 Without Income Taxable Income $15,000 $10,000 Tax $ 1,788 $ 1,038 2018 Without Deduction 2018 With Deduction Taxable Income $49,950 $44,950 Tax $6,934 $5,834 Your tax under Method 1 is $5,834. Your tax un- der Method 2 is $6,184, figured as follows: Tax previously determined for 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,788 Less: Tax as refigured . . . . . . . . . . . − 1,038 Decrease in 2017 tax $750 Regular tax liability for 2018 . . . . . . . $6,934 Less: Decrease in 2017 tax . . . . . . . − 750 Refigured tax for 2018 $ 6,184 Because you pay less tax under Method 1, you should take a deduction for the repayment in 2018. Repayment does not apply. This discus- sion doesn’t apply to the following. • Deductions for bad debts. • Deductions from sales to customers, such as returns and allowances, and similar items. • Deductions for legal and other expenses of contesting the repayment. Year of deduction (or credit). If you use the cash method of accounting, you can take the deduction (or credit, if applicable) for the tax year in which you actually make the repayment. If you use any other accounting method, you can deduct the repayment or claim a credit for it only for the tax year in which it is a proper de- duction under your accounting method. For ex- ample, if you use the accrual method, you are entitled to the deduction or credit in the tax year in which the obligation for the repayment ac- crues. Supplies and materials. Unless you have de- ducted the cost in any earlier year, you gener- ally can deduct the cost of materials and sup- plies actually consumed and used during the tax year. If you keep incidental materials and supplies on hand, you can deduct the cost of the inci- dental materials and supplies you bought during the tax year if all the following requirements are met. • You don’t keep a record of when they are used. • You don’t take an inventory of the amount on hand at the beginning and end of the tax year. • This method doesn’t distort your income. You can also deduct the cost of books, pro- fessional instruments, equipment, etc., if you normally use them within a year. However, if the usefulness of these items extends substantially Page 48 Chapter 11 Other Expenses

(p535)(page-50)Page 50#

beyond the year they are placed in service, you generally must recover their costs through de- preciation. For more information regarding de- preciation, see Pub. 946. Utilities. Business expenses for heat, lights, power, telephone service, and water and sew- erage are deductible. However, any part due to personal use isn’t deductible. Telephone. You can’t deduct the cost of basic local telephone service (including any taxes) for the first telephone line you have in your home, even if you have an office in your home. However, charges for business long-dis- tance phone calls on that line, as well as the cost of a second line into your home used ex- clusively for business, are deductible business expenses. 12. Qualified Business Income Deduction Introduction This chapter covers the rules for determining the qualified business income (QBI) deduction. For tax years beginning after 2017, individ- ual taxpayers and certain trusts and estates may be entitled to a deduction of up to 20% of their QBI from a trade or business, including in- come from a pass-through entity, but not from a C corporation, plus 20% of qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership (PTP) income. The deduction is subject to multiple limitations, de- pending on the taxpayer’s taxable income, and may include the type of trade or business, the amount of W-2 wages paid by the trade or busi- ness, and the unadjusted basis immediately af- ter acquisition (UBIA) of qualified property held by the trade or business. The deduction can be taken in addition to the standard or itemized de- ductions. For more information, see section 199A, the Regulations section 1.199A, Rev. Proc. 2019–11, and Notice 2019–07. Topics This chapter discusses: • Taxpayers who may take a QBI deduction • How to figure the deduction • Coordination with other Code sections • Special rules Useful Items You may want to see: Form (and Instructions) Form 1040 U.S. Individual Income Tax Return Schedule K-1 (Form 1065) Partner’s Share of Income, Deductions, Credits, etc. Schedule K-1 (Form 1120S) Shareholder’s Share of Income, Deductions, Credits, etc. Form 1041 U.S. Income Tax Return for Estates and Trusts Schedule K-1 (Form 1041) Beneficiary’s Share of Income, Deductions, Credits, etc. See chapter 13 for information about getting publications and forms. Taxpayers Who May Take a Qualified Business Income Deduction Individuals, estates, and trusts may take a QBI deduction. S corporations and partnerships. S corpo- rations and partnerships are not eligible for the deduction. Instead, S corporations and partner- ships must pass through the necessary infor- mation to their shareholders or partners so they may figure their deduction. S corporations and partnerships must report each shareholder’s or partner’s share of the fol- lowing items for each qualified trade or busi- ness (or aggregated trade or business) on Schedule K-1, so the shareholder or partner may figure their deduction. • Section 199A QBI. • Section 199A W-2 wages. • Section 199A UBIA. • Section 199A Qualified REIT dividends. • Section 199A Qualified PTP income. • QBI allocable to qualified payments re- ceived from a specified cooperative. • Passed-through domestic production activ- ities deduction (DPAD) under section 199A(g) from a specified cooperative. • Whether each trade or business is a speci- fied service trade or business. • Disclosure of information for aggregated trades or businesses. For more information, see the Instructions for Form 1120S, U.S. Income Tax Return for an S Corporations, and Form 1065, U.S. Return of Partnership Income. Estates and trusts. To the extent that a gran- tor or another person is treated as owning all or part of a trust or estate, the owner will compute its QBI with respect to the owned portion of the trust as if that QBI had been received directly by the owner. Generally, in the case of a non-gran- tor trust or estate, the trust or estate may either deduct or pass through information to their ben- Form 1040 Schedule K-1 (Form 1065) Schedule K-1 (Form 1120S) Form 1041 Schedule K-1 (Form 1041) eficiaries so that the beneficiaries may figure their deduction. In determining the QBI deduc- tion or the amount that must be passed through to beneficiaries, the estate or trust allocates QBI items based on the relative proportion of the es- tate's or trust's distributable net income (DNI) for the tax year that is distributed or required to be distributed to the beneficiary or retained by the estate or trust. If the estate or trust has no DNI for the tax year, QBI, W-2 wages, and UBIA are allocated entirely to the estate or trust. Although estates and trusts may compute their own QBI deduction, they must reduce the amounts reported as QBI, W-2 wages, and UBIA to reflect the portion of those amounts that were allocated to beneficiaries. For more information, see the Instructions for Form 1041, U.S. Income Tax Return for Es- tates and Trusts. Agricultural and horticultural cooperatives. See the Instructions for Form 1120C, U.S. In- come Tax Return for Cooperative Associations, for rules applicable to agricultural and horticul- tural cooperatives. How To Figure the Deduction General Computation. In general, the amount of your QBI deduction equals your QBI Compo- nent plus your qualified REIT/PTP Component. However, the deduction is limited to the lesser of this amount or 20% of your taxable income minus your net capital gain. Use one of two worksheets to help you fig- ure your QBI deduction. 1. Use the Qualified Business Income De- duction—Simplified Worksheet in the In- structions for Form 1040 if: a. You have QBI, qualified REIT divi- dends, or qualified PTP income (de- fined later); b. Your 2018 taxable income before QBI deduction isn’t more than $157,500 ($315,000 if married filing jointly); and c. You aren’t a patron in a specified agri- cultural or horticultural cooperative. 2. Use Worksheet 12-A and its instructions in this Pub. 535 if: a. You have QBI, qualified REIT divi- dends, or qualified PTP income, and b. Your 2018 taxable income before QBI deduction is more than $157,500 ($315,000 if married filing jointly); or c. You’re a patron in a specified agricul- tural or horticultural cooperative. QBI Component. Your QBI Component is generally 20% of your QBI from your trades or businesses. However, if your taxable income (before the QBI deduction) exceeds the thresh- old your QBI for each of your trades or busi- nesses may be partially or fully reduced to the greater of 50% of wages from the qualified trade or business, or 25% of wages plus 2.5% of the unadjusted basis on acquisition of Chapter 12 Qualified Business Income Deduction Page 49

(p535)(page-51)Page 51#

qualified property from the qualified trade or business. The partial or full reduction to QBI is determined by your taxable income. If your tax- able income (before the QBI deduction) is: • At or below the threshold, you don’t need to reduce your QBI, • Above the threshold but below the phase in range, the reduction is phased-in, • Above the threshold and phase in range, the full reduction applies. In addition, if you are a patron of an agricul- tural or horticultural cooperative you must re- duce your cooperative QBI by the lesser of: • 9% of the QBI allocable to qualified pay- ments, or • 50% of W-2 wages from the trade or busi- ness allocable to the qualified payments. Determining your qualified trades or busi- nesses. Your qualified trades and businesses include your section 162 trades or businesses, other than trades or businesses conducted through a C corporation, W-2 wages earned as an employee, and specified service trades or businesses. In general, to be engaged in a trade or busi- ness, you must be involved in the activity with continuity and regularity and your primary pur- pose for engaging in the activity must be for in- come or profit. If you own an interest in a pass-through entity, the trade or business de- termination is made at that entity's level. The ownership and rental of real property may constitute a trade or business. Notice 2019-07 provides a safe harbor under which rental real estate enterprise will be treated as a trade or business for purposes of the QBI de- duction. For more information, on the safe har- bor see Notice 2019-07. Rental real estate that does not meet the requirements of the safe har- bor may still be treated as a trade or business for purposes of the QBI deduction if it is a sec- tion 162 trade or business. In addition, the rental or licensing of property to a commonly controlled trade or business op- erated by an individual or a pass-through entity is considered a trade or business under section 199A. Services performed as an employee exclu- ded from qualified trades or businesses. The trade or business of performing services as an employee is not a trade or business for pur- poses of section 199A. Therefore, any amounts reported in box 1 of Form W-2, other than amounts reported in box 1 where the “Statutory Employee” box in box 13 is checked, are not QBI. If you were previously an employee of a business and continue to provide substantially the same services to that business after you are no longer treated as an employee, there is a presumption that you are providing services as an employee for purposes of section 199A for the 3-year period after ceasing to be an em- ployee. You may have to rebut this presumption upon notice from the IRS by providing records such as contracts or partnership agreements that corroborate your status as a non-em- ployee. For more information on whether you are an employee or an independent contractor, see Pub. 15-A, Employer’s Supplemental Tax Guide, and Pub. 1779, Independent Contractor or Employee. Specified service trade or business exclu- ded from your qualified trades or busi- nesses. Specified service trades or busi- nesses generally are excluded from the definition of qualified trade or business income if the taxpayer's taxable income exceeds the threshold. Therefore, no QBI, W-2 wages, or UBIA of the qualified property from the specified trade or business are taken into account in fig- uring your QBI deduction. If the specified serv- ice trade or business is conducted by your pass-through entity, the same limitation applies to the pass-through items regardless of whether you are a passive owner or materially partici- pate in the business. Exception 1: If your taxable income before the QBI deduction isn’t more than $157,500 ($315,000 if married filing jointly), your specified service trade or business is a qualified trade or business, and thus may generate income eligi- ble for the QBI deduction. Exception 2: If your taxable income before the QBI deduction is more than $157,500 but not $207,500 ($315,000 and $415,000 if mar- ried filing jointly), an applicable percentage of your specified service trade or business is trea- ted as a qualified trade or business. For more information on the applicable percentage and this exception, see the instructions for Sched- ule A in this publication. A specified service trade or business is any trade or business providing services in the fields of: • Health, including physicians, nurses, den- tists, veterinarians, physical therapists, psychologists, and other similar healthcare professionals. However, it excludes serv- ices not directly related to a medical serv- ices field, such as the operation of health clubs or spas; payment processing; or the research, testing, manufacture, and sale of pharmaceuticals or medical devices; • Law, including lawyers, paralegals, legal arbitrators, mediators, and similar profes- sionals. However, it excludes services that do not require skills unique to the field of law such as services by printers, delivery services, or stenography services; • Accounting, including accountants, enrol- led agents, return preparers, financial audi- tors, and similar professionals; • Actuarial science, including actuaries, and similar professionals; • Performing arts, including actors, directors, singers, musicians, entertainers, and simi- lar professionals. However, it excludes services that don’t require skills unique to the creation of performing arts, such as the maintenance and operation of equipment or facilities for use in the performing arts or the provision of services by persons who broadcast video or audio of performing arts to the public; • Consulting, including providing advice and counsel with the intention of influencing decisions made by a government or gov- ernmental agency and all attempts to influ- ence legislators and other government offi- cials on behalf of a client by lobbyists, and other similar professionals. However, it ex- cludes the performance of services other than advice or counsel, such as sales, training or educational courses. It also ex- cludes embedded or ancillary services that are otherwise not SSTBs, if there is no separate payment for the services; • Athletics, including athletes, coaches, and managers in sports such as baseball, bas- ketball, football, soccer, hockey, martial arts, boxing, bowling, tennis, golf, snow- boarding, track and field, billiards, racing, and other athletic performance. However, it excludes services that do not require skills unique to athletic competition, such as the maintenance and operation of equipment or facilities for use in athletic events or the provision of services by per- sons who broadcast video or audio of ath- letic events to the public; • Financial services, including managing wealth, advising clients with respect to fi- nances, developing retirement plans, de- veloping wealth transition plans, the provi- sion of advisory and other similar services regarding valuations, mergers, acquisi- tions, dispositions, restructuring (including in title 11 or similar cases), and raising fi- nancial capital by underwriting, or acting as a client’s agent in the issuance of secur- ities, and similar services. This includes services provided by financial advisors, in- vestment bankers, wealth planners, retire- ment advisors, and other similar professio- nals. However, it excludes taking deposits or making loans, but does include arrange lending transactions between a lender and borrower; • Brokerage services, including services in which a person arranges transactions be- tween a buyer and a seller with respect to securities for a commission or fee includ- ing services provided by stock brokers and other similar professionals. However, it ex- cludes services provided by real estate agents and brokers, or insurance agents and brokers; • Investing and investment management, in which a fee is received for providing invest- ing, asset management, or investment management services, including providing advice with respect to buying and selling investments. However, it excludes the service of directly managing real property; • Trading, including the trade or business of trading in securities (as defined in section 475(c)(2)), commodities (as defined in section 475(e)(2)), or partnership interests; • Dealing in securities, including dealing in securities (as defined in section 475(c)(2)), commodities (as defined in section 475(e) (2)), or partnership interests; • Any trade or business where the principal asset is the reputation or skill of one or more of its employees, as demonstrated by:

– Receiving fees, compensation, or other income for endorsing products or services;

– Licensing or receiving fees, com- pensation or other income for the use of an individual’s image, likeness, name, signature, voice, trademark, or any other symbols associated with the individual’s identity; or

– Receiving fees, compensation, or other income for appearing at an event or on radio, television, or an- other media format. Page 50 Chapter 12 Qualified Business Income Deduction

(p535)(page-52)Page 52#

De minimis rule 1—If your gross receipts from a trade or business are $25 million or less and less than 10% of the gross receipts are from the performance of services in a specified service field, then your trade or business is not considered specified service trade or business, and thus may generate income eligible for the QBI deduction for the tax year. De minimis rule 2—If your gross receipts from a trade or business are more than $25 mil- lion and less than 5% of the gross receipts are from the performance of services, then your trade or business is not considered a specified service trade or business, and thus may gener- ate income eligible for the QBI deduction for the tax year. Service or peoperty provided to an SSTB—If your trade or business provides serv- ices or property to an SSTB and there is 50% or more common ownership of the trades or busi- nesses, that portion of the services or property provided to the SSTB is treated as a separate SSTB. Determining your qualified business in- come. Your QBI includes items of income, gain, deduction, and loss from any trades or businesses (or aggregated trade or business) that are effectively connected with the conduct of a trade or business within the United State. This includes income from partnerships (other than PTPs), S corporations, sole proprietor- ships, and certain trusts that are included or al- lowed in determining your taxable income for the year. It also includes other deductions at- tributable to the trade or business including, but not limited to, deductible tax on self-employ- ment income, self-employed health insurance, and contributions to qualified retirement plans. Note. Your QBI doesn’t include any losses or deductions disallowed under the basis, at-risk, passive loss, or section 461(l) limita- tions, as they aren’t included or allowed in de- termining your taxable income for the year. In- stead, these losses and deductions are taken into account in the tax year they are included in determining your taxable income. Loss and de- duction items that were generated prior to 2018, that are included in income during the year, are not included in QBI. QBI doesn’t include any of the following. • Items that aren’t properly includible in in- come. • Investment items such as capital gains or losses, or dividends. • Interest income, other than interest income properly allocable to a trade or business (interest income attributable to an invest- ment of working capital, reserves, or simi- lar accounts is not properly allocable to a trade or business). • W-2 income. See Services performed as an employee excluded from qualified trades or businesses., earlier. • Income that isn’t effectively connected with the conduct of business within the United States. (For more information, go to IRS.gov and type in the key word “effec- tively connected income.”) • Commodities transaction or foreign cur- rency gains or losses described in section 954(c)(1)(C) or (D). • Income, loss, or deductions from notional principal contracts under section 954(c)(1) (F). • Annuities (unless received in connection with the trade or business). • Amounts received as reasonable compen- sation from an S corporation. • Amounts received as guaranteed pay- ments. • Payments received by a partner for serv- ices under section 707(a). • Qualified REIT dividends. • Qualified PTP income. W-2 wages. W-2 wages generally include amounts paid to employees for the perform- ance of services, plus elective deferrals (for ex- ample, contributions to 401(k) plans), deferred compensation, and Roth IRA contributions. Amounts paid to statutory employees when the “Statutory Employee” box in box 13 is checked are not W-2 wages. If you conduct more than one trade or busi- ness, the W-2 wages must be allocated among the various trades or businesses (or aggregated trades or businesses) to the business that gen- erated the wage. In addition, only the W-2 wa- ges properly allocable to QBI are includible. W-2 wages are properly allocable to QBI if the associated wage expense is taken into account in computing QBI. Before allocating W-2 wages among various trades or businesses (or aggregated trades or businesses) and/or allocating W-2 wages to QBI, first determine the total amount of W-2 wa- ges. There are three methods to figure your W-2 wages. • Unmodified box method. • Modified box 1 method. • Tracking wages method. Unmodified box method. Under the un- modified box method, W-2 wages are the smaller of: 1. The sum of the amounts reported in box 1 of the relevant Forms W-2, or 2. The sum of the amounts reported in box 5 of the relevant Forms W-2. Modified box 1 method. Under the modi- fied box 1 method, W-2 wages are figured as follows. 1. Add the amounts reported in box 1 of the relevant Forms W-2. 2. Add all the amounts described below that have been included in box 1 of the rele- vant Forms W-2. a. Amounts not considered wages for federal income tax withholding purpo- ses. b. Supplemental unemployment com- pensation benefits within the meaning of Rev. Rul. 90-72. c. Sick pay or annuity payments. 3. Subtract (2) from (1). 4. Add together any amounts reported in box 12 of the relevant Forms W-2 that are properly coded D, E, F, G, or S. 5. Add (3) and (4). Tracking wages method. Under the tracking wages method, W-2 wages are figured as follows. 1. Add the amounts that are wages for fed- eral income tax withholding purposes and that are also reported in box 1 of the rele- vant Forms W-2. 2. Add together any amounts reported in box 12 of the relevant Forms W-2 that are properly coded D, E, F, G, or S. 3. Add (1) and (2). To figure your W-2 wages using one of the three methods above, generally use the sum of the amounts you properly report for each em- ployee on Form W-2, Wage and Tax Statement, for the calendar year ending with or within your tax year. However, don't use any amounts re- ported on a Form W-2 filed with the Social Se- curity Administration more than 60 days after its due date (including extensions). Short tax year. If you have a short tax year, you generally will use the sum of the amounts you properly report for each employee on Form W-2 for the calendar year ending with or within that short tax year. However, if you have a short tax year that doesn't include a calendar year ending within that short tax year, then wages you properly report on Form W-2 that you paid during the short tax year are treated as W-2 wa- ges for that short tax year. Acquisition or disposition of a trade or business. If you acquired or disposed of a trade or business that causes you and another employer to pay W-2 wages to employees of the acquired or disposed of trade or business during the calendar year, then the W-2 wages for the calendar year of the acquisition or dispo- sition are allocated between each employer based on the period that the employees of the acquired or disposed of trade or business were employed by each employer. If you have a short tax year that doesn’t include a calendar year ending within your short tax year, see Short tax year, earlier. Non-duplication rule. Amounts that are trea- ted as W-2 wages for a tax year under any method can't be treated as W-2 wages for any other tax year. Also, an amount can't be treated as W-2 wages by more than one taxpayer. Unadjusted basis immediately after acquis- ition. For purposes of determining your UBIA for all qualified property, the unadjusted basis immediately after acquisition means the basis on the placed-in-service date. Qualified prop- erty includes all tangible property subject to de- preciation under section 167 that is held and used by the trade or business (or aggregated trade or business) during and at the close of the tax year, for which the depreciable period hasn’t ended. The depreciable period ends on the later of 10 years after the property is placed-in-service or the last day of the full year for the applicable recovery period under section 168. Additional first-year depreciation, such as bonus depreciation, doesn’t affect the applica- ble recovery period. Improvements to property are treated as a separate qualified property. Chapter 12 Qualified Business Income Deduction Page 51

(p535)(page-53)Page 53#

For like-kind exchange and involuntary con- version property, the depreciable period ends on the same date as the relinquished property. The UBIA is the same as the UBIA of the quali- fied property exchanged, decreased by excess boot or increased by the amount of money paid or the fair market value of property received that is not of a like-kind or similar service/use. And the depreciable period of any excess basis of the replacement property is determined using the date on which the replacement property is first placed in service. Generally, property received in a non-recog- nition transaction (for example, section 332, 351, 361, 721, or 731) retains the same unad- justed basis and placed-in-service date as that of the transferor. However, for the portion of the transferee’s unadjusted basis that exceeds the transferor’s unadjusted basis, the portion is treated as a separate qualified property placed in service on the date of the transfer. Property acquired within 60 days of the year end that is disposed within 120 days without be- ing used by the trade or business for at least 45 days generally isn’t qualified property. REIT / PTP Component. Your qualified REIT/PTP component equals 20% of your quali- fied REIT dividends and qualified PTP income or loss (including your share of REIT dividends and PTP income or loss from relevant pass-through entities (RPEs)). Determining your qualified REIT dividends and qualified PTP income/(loss). Qualified REIT dividends include any dividend you re- ceived from a real estate investment trust held for more than 45 days and for which the pay- ment is not obligated to someone else and that isn’t a capital gain dividend under section 857(b)(3) and isn’t a qualified dividend under section 1(h)(11). Plus your qualified REIT divi- dends received from a regulated investment company (RIC). Qualified PTP income/(loss) includes your share of qualified items of income, gain, deduc- tion, and loss from a PTP. It also may include gain or loss recognized on the disposition of your partnership interest that isn’t treated as a capital gain or loss. It doesn’t include any loss or deduction disallowed in determining your tax- able income for the year. Note: PTP income generated by an SSTB may be limited to the applicable percentage if your taxable income is within the phase in-range or completely exclu- ded from qualified PTP income if your taxable income is above the phase-in range. See Schedule A. Taxable Income Limitation. Your total quali- fied business income deduction is limited to 20% of taxable income, calculated before the QBI deduction, less net capital gain. Worksheet 12-A Specific Instructions Be aware that you may need to fill out Sched- ule A, B, C, and/or D, as applicable, prior to starting Part I of the worksheet. Schedule A—Specified Service Trades or Businesses (SSTB) Keep for Your Records Caution. Complete Schedule A only if your trade or business is a specified service trade or business and your taxable income is more than $157,500 but not $207,500 ($315,000 and $415,000 if married filing jointly). If your taxable income isn’t more than $157,500 ($315,000 if married filing jointly), and you aren’t a patron of agricultural or horticultural cooperative, don’t use this worksheet; instead, use the Qualified Business Income Deduction—Simplified Worksheet in the Instructions for Form 1040. Otherwise, complete Schedule D before beginning Part I. If your taxable income is more than $207,500 ($415,000 if married filing jointly), your specified service business doesn’t qualify for the deduction. Part I—Non-Publiclly Traded Partnership SSTB 1 SSTB 2 SSTB 3 1a. Trade or business name: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1b. Taxpayer identification number . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2. Qualified business income from the trade or business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3. Allocable share of W-2 wages from the trade or business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4. Allocable share of the unadjusted basis of all qualified property . . . . . . . . . . . . . . . . . . . . . . . . . . .

5. Taxable income before qualified business income deduction . . . . . . . . . . . . . . . . . .

6. Threshold. Enter $157,500 ($315,000 if married filing jointly) . . . . . . . . . . . . . . . . . .

7. Subtract line 6 from line 5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

8. Phase-in range. Enter $50,000 ($100,000 if married filing jointly) . . . . . . . . . . . . . . .

9. Divide line 7 by line 8 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

10. Applicable percentage. Subtract line 9 from 100% . . . . . . . . . . . . . . . . . . . . . . . . . . .

11. Applicable percentage of qualified business income. Multiply line 2 by line 10. Enter this amount on Schedule C or Part II, line 2, for the corresponding trade or business, as appropriate . . . . . . .

12. Applicable percentage of W-2 wages. Multiply line 3 by line 10. Enter this amount on Part II, line 4, for the corresponding trade or business, as appropriate . . . . . . . . . . . . . . . . . . . . . . . . . . . .

13. Applicable percentage of the unadjusted basis of qualified property. Multiply line 4 by line 10. Enter this amount on Part II, line 7, for the corresponding trade or business, as appropriate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Part II—Publiclly Traded Partnership PTP SSTB 1 PTP SSTB 2 PTP SSTB 3 14. Trade or business name . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

15. Taxpayer identification number . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Page 52 Chapter 12 Qualified Business Income Deduction

(p535)(page-54)Page 54#

16. Qualified PTP income or loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

17. Taxable income before qualified business income deduction . . . . . . . . . . . . . . . . . .

18. Threshold. Enter $157,500 ($315,000 if married filing jointly) . . . . . . . . . . . . . . . . . .

19. Subtract line 18 from line 17 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

20. Phase-in range. Enter $50,000 ($100,000 if married filing jointly) . . . . . . . . . . . . . . .

21. Divide line 19 by line 20 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

22. Applicable percentage. Subtract line 21 from 100% . . . . . . . . . . . . . . . . . . . . . . . . .

23. Applicable percentage of qualified PTP income or loss. Multiply line 16 by line 22. Enter this amount on Part IV, line 28 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Schedule A—Specified Service Trades or Businesses (SSTB) Fill out Schedule A if your trade or business is a specified service trade or business and your taxable income is more than $157,500 but not $207,500 ($315,000 and $415,000 if married fil- ing jointly). If your taxable income is $157,500 or less ($315,000 if married filing jointly), skip Schedule A. If your taxable income is $207,500 or greater ($415,000 if married filing jointly), your specified services business does not qual- ify for the QBI deduction. For more information on specified service trades or businesses, see Specified service trade or business excluded from your qualified trades or businesses, earlier. Line 2. Qualified business income from the trade or business. Enter your QBI for each specified service trade or business. Line 3. Allocable share of W-2 wages from trade or business. Enter your W-2 wages from each specified service trade or business. Line 4. Allocable share of the unadjusted basis immediately after acquisition. Enter your share of the UBIA of qualified property for each specified service trade or business. Line 5. Taxable income before qualified business income deduction. Enter your tax- able income figured without regard to the QBI deduction. (Form 1040, line 7, Adjusted gross income, minus Form 1040, line 8, Standard de- duction or itemized deductions). Line 6. Threshold. Enter the threshold amount, $157,500 ($315,000 if married filing jointly). Line 8. Phase-in range. Enter the phase-in range, $50,000 ($100,000 if married filing jointly). Schedule B—Aggregation of Business Operations Keep for Your Records Aggregation: 1. Provide a description of the trade or business and an explanation of the factors met that allow the aggregation in accordance with Regulations section 1.199A-4. In addition, if you hold a direct or indirect interest in a relevant pass-through entity (RPE) that aggregates multiple trades or businesses you must attach a copy of the RPE's aggregations.

2. Has this trade or business aggregation changed from the prior year? This includes changes in the aggregation due to a trade or business being formed, acquired, disposed, or ceasing operations. If yes, explain.

3. (a) Name of trade or business (b) Taxpayer identification number (c) Qualified business income/ (loss) (d) W-2 wages (e) Unadjusted basis immediately after acquisition

4. Totals. Total columns (c), (d),and (e). Enter the total amounts on Schedule C or Parts II and IV of Worksheet 12-A, as appropriate. See instructions . . . . . . . . . . . . . . . . . .

Note. If you have more than one aggregated group, attach additional Schedules B. Name the additional aggregations 2, 3, 4, and so forth. Chapter 12 Qualified Business Income Deduction Page 53

(p535)(page-55)Page 55#

Schedule B—Aggregation of Business Operations An individual or pass-through entity may be en- gaged in more than one trade or business. Each trade or business is a separate trade or business for purposes of applying the W-2 wage limitation or the UBIA limitation, dis- cussed earlier. However, you may choose to aggregate multiple trades or businesses into a single trade or business for purposes of apply- ing the limitations if you met the following re- quirements. 1. You or a group of persons directly or indi- rectly own 50% or more of each trade or business for a majority of the tax year, in- cluding the last day of the tax year, and all trades or businesses use the same tax year end, 2. None of the trades or business are a specified service trade or business, and 3. The trades or business meet at least two of the following factors. a. They provide products, property, or services that are the same or that are customarily offered together. b. They share facilities or share signifi- cant centralized business elements such as personnel, accounting, legal, manufacturing, purchasing, human re- sources, or information technology re- sources. c. They are operated in coordination with, or reliance upon, one or more of the businesses in the aggregated group. If a RPE aggregates multiple trades or busi- nesses, you must attach the RPE’s aggrega- tions to your Schedule B. You may not subtract from the trades or businesses aggregated by the RPE, but you may add additional trades or businesses to the aggregation, assuming the rules above are met. If you choose to aggregate multiple trades or businesses, fill out Sched- ule B before starting Part I in Worksheet 12-A. Your aggregations must be reported consis- tently for all subsequent years, unless there is a significant change in facts and circumstances that disqualify the aggregation. Schedule B must be completed each year to show your trade or business aggregations, and must in- clude any aggregation of a RPE in which you hold a direct or indirect interest. Failure to dis- close such aggregations may cause them to be disaggregate. Note. You must combine the QBI, W-2 wa- ges, and UBIA of qualified property for all ag- gregated trades or businesses, for purposes of applying the W-2 wage and UBIA limitations. Line 3(c). Current year qualified business income/(loss). Enter your QBI for each sepa- rate trade or business. Line 3(d). W-2 wages. Enter your W-2 wages from the trade or business. Line 3(e). Unadjusted basis immediately af- ter acquisition. Enter your UBIA of qualified property from the trade or business. Line 4. Totals. If any of your trades or busi- nesses have a net loss for the current year or you have a qualified business net loss carryfor- ward from prior years, you must complete Schedule C before starting Part I. If none of your trades or businesses have a net loss in the current year and you don’t have a qualified business loss carryforward from prior years, enter the total amounts on the appropri- ate lines of Parts II and IV of Worksheet 12-A. Schedule C—Loss Netting and Carryforward Keep for Your Records Trade, business, or aggregation name Taxpayer identification number (a) Qualified business income/(loss) (b) Reduction for loss netting (c) Adjusted qualified business income (combine (a) and (b); if zero or less, enter -0-) 1.

2. Qualified business net loss carryforward from prior years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3. Total trade or business losses. Combine the negative amounts on lines 1, column (a), and 2, for all trades and businesses. Enter as a negative number . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4. Total trade or business income. Add the positive amounts on line 1, column (a), for all trades and businesses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

5. Losses netted with income of other trades or businesses. Enter as a negative number, the smaller of the absolute value of line 3 or line 4. Allocate this amount to each trade or business on line 1, column (b). See instructions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

6. Qualified business net loss carryforward. Subtract line 5 from line 3. If greater than zero, enter -0- . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Schedule C—Loss Netting and Carryforward If any of your trades or businesses have a net loss for the current year or you have a qualified business net loss carryforward from prior years, you must complete Schedule C before starting Part I. Schedule C offsets your trade or business net losses against net income from your other trades or businesses. The net loss must be ap- portioned among all your trades or businesses with net income in proportion to their net in- come. Note. The line items for this schedule are computed out of order: first figure line 1, column (a), and line 2; then skip to lines 3 through 5; and come back to line 1, columns (b) and (c). Line 1, column (a). Qualified business in- come or (loss) from the trade or business. Enter each trade’s or business’s income or loss. If you aggregated multiple trades or busi- nesses into a single business on Schedule B, enter the aggregation group name, that is Aggregation 1, 2, 3, etc., instead of entering the business name and TIN along with the aggrega- ted trade’s or business’s total income or loss. Line 2. Qualified business net loss carryfor- ward from prior years. Enter your qualified business net loss carryforward from prior years, if any. This is the amount reported in the prior year on line 6. Line 1, column (b). Reduction for loss net- ting. Apportion the amount from line 5 among all your trades or businesses with net income in proportion to their net income. Page 54 Chapter 12 Qualified Business Income Deduction

(p535)(page-56)Page 56#

Line 1, column (c). Adjusted qualified busi- ness income. Subtract line 1, column (b) from column (a); if zero or less, enter -0-. Enter this amount on the corresponding line on Part II. Note. If the adjusted QBI from the trade or business is zero or less after the reduction for loss netting, then the amount reported for W-2 wages and UBIA of qualified property must be zero for that trade or business, as the actual amounts aren’t allowed in computing your quali- fied business income limitations. Line 6. Qualified business net loss carryfor- ward. Subtract line 5 from line 3. If greater than zero, enter -0-. The amount reported on this line must be reported in the next tax year on line 2, Qualified business net loss carryforward from prior years. Note. If you have an overall net loss for the year, you don’t qualify for a QBI deduction in the current year. Worksheet 12-A. Qualified Business Income Deduction Worksheet Keep for Your Records Part I: Trade, Business, or Aggregation Information 1. (a) Name (b) Check if specified service (c) Check if Aggregated (d) Taxpayer identification number (e) Check if Patron A.

Part II: Determine Your Qualified Business Income Component A B C 2. Qualified business income from the trade, business, or aggregation (see instructions) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3. Multiply line 2 by 20% (0.20). If your taxable income is $157,500 or less ($315,000 if married filing jointly), skip lines 4 through 12 and enter line 3 on line 13 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4. Allocable share of W-2 wages from the trade, business, or aggregation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

5. Multiply line 4 by 50% (0.50) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

6. Multiply line 4 by 25% (0.25) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

7. Allocable share of the unadjusted basis of all qualified property . . . . . . . . . . .

8. Multiply line 7 by 2.5% (0.025) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

9. Add lines 6 and 8 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

10. Enter the greater of line 5 or line 9 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

11. W-2 wage and qualified property limitation. Enter the smaller of line 3 or line 10 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

12. Phased-in reduction. Enter amount from Part III, line 26, if any. See instructions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

13. Qualified business income deduction before patron reduction. Enter the greater of line 11 or line 12 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

14. Patron reduction. Enter the amount from Schedule D, line 6, if any . . . . . . . . .

15. Qualified business income component. Subtract line 14 from line 13 . . . . . . . 16. Total qualified business income component. Add all amounts reported on line 15 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Part III: Phased-in Reduction Caution. Complete Part III only if your taxable income is more than $157,500 but not $207,500 ($315,000 and $415,000 if married filing jointly), and line 10 is less than line 3. Otherwise, skip Part III. A B C 17. Enter amounts from line 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

18. Enter the amount from line 10 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

19. Subtract line 18 from line 17 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

20. Taxable income before qualified business income deduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

21. Threshold. Enter $157,500 ($315,000 if married filing jointly) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Chapter 12 Qualified Business Income Deduction Page 55

(p535)(page-57)Page 57#

22. Subtract line 21 from line 20 . . . . . . . . . . . . . . . . . . . . . . . . . . .

23. Phase-in range. Enter $50,000 ($100,000 if married filing jointly) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

24. Phase-in percentage. Divide line 22 by line 23 . . . . . . . . . . . .

25. Total phase-in reduction. Multiply line 19 by line 24 . . . . . . . . . . . . . . . . . . . . . .

26. Qualified business income after phase-in reduction. Subtract line 25 from line 17. Enter this amount on line 12 for the corresponding trade or business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Part IV: Determine Your Qualified Business Income Deduction 27. Total qualified business income component from all qualified trades, businesses, or aggregations. Enter the amount from Part II, line 16 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27.

28. Qualified REIT dividends and qualified PTP income or (loss) (see instructions) . . . . . . . . . 28.

29. Qualified REIT dividends and qualified PTP loss carryforward from prior years. Enter as a negative number . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29.

30. Total qualified REIT dividends and qualified PTP income. Add lines 28 and 29. If less than zero, enter -0- . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30.

31. REIT and PTP component. Multiply line 30 by 20% (0.20) . . . . . . . . . . . . . . . . . . . . . . . . . . . 31.

32. Qualified business income deduction before the income limitation. Add lines 27 and 31 . . . . . 32.

33. Taxable income before qualified business income deduction . . . . . . . . . . . . . . . . . . . . . . . . 33.

34. Net capital gain (see instructions) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34.

35. Subtract line 34 from line 33. If zero or less, enter -0- . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35.

36. Income limitation. Multiply line 35 by 20% (0.20) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36.

37. Qualified business income deduction. Enter the smaller of line 32 or line 36 . . . . . . . . . . . . . . . 37.

38. Total qualified REIT dividend and qualified PTP loss carryforward. Add lines 28 and 29, if zero or greater enter -0- . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38. 39. DPAD under section 199A(g) allocated from an agricultural or horticultural cooperative. Don't enter more than line 33 minus line 37. Enter this deduction on Form 1040, line 10. See the instructions for Form 1040, line 10 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39.

Part I—Trade, Business, and Aggregation Information Before you beginning to fill out Part I, determine if you need to complete Schedule A, B, C, or D by answering the following questions. 1. Do you have a specified service trade or business? If you answered yes, complete Schedule A before starting Part I. 2. Are you choosing to aggregate multiple trades or businesses into a single trade or business? If you answered yes, complete Schedule B before starting Part I. 3. Did any of your trades or businesses have a net loss for the year or do you have a qualified business net loss from prior years? If you answered yes, complete Schedule C before starting Part I. Line 1. Enter the trade or business name and check the appropriate boxes. If you aggregated multiple trades or businesses into a single busi- ness on Schedule B, enter the aggregation group name, for example, Aggregation 1, 2, 3, etc., instead of entering the business name and leave line 1(d) blank. Enter on line 1(d), the em- ployer identification number (EIN) that was is- sued to you or your business on Form SS-4. If you do not have an EIN, enter your social se- curity number (SSN) or individual taxpayer identification number (ITIN). If you are the sole owner of an LLC that is not treated as a sepa- rate entity for federal income tax purposes, en- ter the EIN issued to the LLC. If you do not have such an EIN, enter the owner's name and tax identification number. Part II—Determine Your Qualified Business Income Component Line 2. Qualified business income from the trade or business. Enter your QBI for each trade or business. The amount reported on line 2 can’t be less than zero. See the instruc- tions for Schedule C. Line 3. Multiple line 2 by 20% (0.20). If your taxable income is $157,500 or less ($315,000 if married filing jointly), skip lines 4 through 12 and enter line 3 on line 13. Line 4. Allocable share of W-2 wages from trade or business. Enter your W-2 wages from the trade or business. Note. if the QBI on line 2 for the trade or business is zero, then the amount reported on line 4 with respect to that trade or business must also be zero. Line 7. Allocable share of the unadjusted basis immediately after acquisition. Enter your share of the UBIA for all qualified property for the trade or business. Note. if the QBI on line 2 for the trade or business is zero, then the amount reported on line 7 with respect to that trade or business must also be zero. Line 14. Patron reduction. Patrons of agri- cultural or horticultural cooperatives are re- quired to reduce their QBI deduction by the lesser of: • 9% of QBI allocable to qualified payments from a specified cooperative, or • 50% of W-2 wages allocable to qualified payments. If you are a patron of an agricultural or horti- cultural cooperative, fill out Schedule D, Special Rules for Patrons of Agricultural or Horticultural Cooperatives. Page 56 Chapter 12 Qualified Business Income Deduction

(p535)(page-58)Page 58#

Schedule D—Special Rules for Patrons of Agricultural or Horticultural Cooperatives (Coop) Keep for Your Records Caution. Complete Schedule D only if you're a patron of an agricultural or horticultural cooperative. Coop 1 Coop 2 Coop 3 1a. Trade, business, or aggregation name: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1b. Taxpayer identification number . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2. Qualified business income allocable to qualified payments received from cooperative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3. Multiply line 2 by 9% (0.09) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4. W-2 wages from trade or business allocable to the qualified payments . . . . . . .

5. Multiply line 4 by 50% (0.50) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

6. Patron reduction. Enter the smaller of line 3 or line 5. Enter this amount on Part II, line 14, for the corresponding trade or business . . . . . . . . . . . . . . . . . . . . . . . .

Schedule D—Special Rules for Patrons of Agricultural or Horticultural Cooperatives (Coop) A specified agricultural or horticultural coopera- tive is a cooperative that markets or is engaged in the manufacturing, production, growth, or ex- traction of any agricultural or horticultural prod- ucts to which Part I of Subchapter T applies. See section 199A(g)(3). Line 2. Qualified payments received from cooperative. Enter your qualified business in- come allocable to qualified payments received from the cooperative. Qualified payments in- clude patronage dividends and per-unit retains allocations. Line 4. W-2 wages from trade or business. Enter your W-2 wages allocable to qualified payments. Part III—Phased-in Reduction Fill out Part III if your taxable income is more than $157,500 but not $207,500 ($315,000 and $415,000 if married filing jointly), and line 10 is smaller than line 3. Otherwise, skip Part III. Line 20. Taxable income before qualified business income deduction. Enter your tax- able income figured without regard to any de- duction computed on this worksheet (Form 1040, line 7, Adjusted gross income, minus Form 1040, line 8, Standard deduction or item- ized deductions). Line 21. Threshold. Enter the threshold amount, $157,500 (315,000 if married filing jointly). Line 23. Phase-in range. Enter the phase-in range, $50,000 ($100,000 if married filing jointly). Part IV—Determine Your Qualified Business Income Deduction Line 28. Qualified REIT dividends and quali- fied PTP income. Enter your qualified REIT dividends and qualified PTP income. If the net amount is a loss, enter as a negative number. Any resulting loss isn’t netted against net positive QBI; instead, the net loss is carried for- ward to the next tax year and offsets future qualified REIT dividends and qualified PTP in- come. Line 29. Qualified REIT dividends and quali- fied PTP loss carryforward from prior years. Enter your qualified PTP loss carryfor- ward from prior years, if any. Enter as a nega- tive number. Line 30. Total qualified REIT dividends and qualified PTP income. Add lines 28 and 29. If zero or less, enter -0-. If the amount reported on this line is less than zero, it must be reported in the next tax year on the line for PTP loss carry- forward from prior years. Line 33. Taxable income before qualified business income deduction. Enter your tax- able income figured without regard to any de- duction computed on this worksheet (Form 1040, line 7, Adjusted gross income, minus Form 1040, line 8, Standard deduction or item- ized deductions). Line 34. Net capital gain. Enter your quali- fied dividends from Form 1040, line 3a, plus your net capital gain. If you’re not required to file Schedule D (Form 1040), your net capital gain is the gain reported on your Schedule 1 (Form 1040), line 13. If you file Schedule D (Form 1040), your net capital gain is the smaller of Schedule D (Form 1040), line 15 or line 16, un- less either line is zero or less, in which case your net capital gain is zero. Line 37. Qualified business income deduc- tion. Enter this amount on Form 1040, line 9. Line 38. Total qualified REIT dividends and qualified PTP loss carryforward. Add lines 28 and 29; if zero or greater, enter -0-. This loss must be carried over to the next tax year. Line 39. DPAD allocated from an agricul- tural or horticultural cooperative. Enter your DPAD allocated from your agricultural or horticultural cooperative, if any. The amount en- tered on this line can’t be more than your taxa- ble income less your qualified business income deduction (line 33 less line 37). Include this de- duction on Form 1040, line 10, and attach a statement and name it “DPAD 199A(g)” to ex- plain this adjustment that reduces taxable in- come. See instructions for Form 1040, line 10. Coordination With Other Code Sections. A net operating loss under section 172 gen- erally is figured without the QBI deduction, meaning the QBI deduction can’t create or in- crease the net operating loss. Alternative minimum tax. The QBI deduction that is used to determine regular tax is also used to determine alternative minimum taxable income. Net earnings from self-employment aren’t reduced by the QBI deduction when computing self-employment tax. Net investment income isn’t reduced by the QBI deduction when computing net investment income tax. Special Rules Puerto Rico. For purposes of determining QBI, the United States includes Puerto Rico for taxpayers who have taxable income from sour- ces within Puerto Rico that are subject to tax under section 1. Further, W-2 wages are figured by including W-2 wages paid for services per- formed in Puerto Rico without regard to section 3401(a)(8). Chapter 12 Qualified Business Income Deduction Page 57

(p535)(page-59)Page 59#

13. How To Get Tax Help If you have questions about a tax issue, need help preparing your tax return, or want to down- load free publications, forms, or instructions, go to IRS.gov and find resources that can help you right away. People who are deaf, hard of hearing, or have a speech disability and who have access to TTY/TDD equipment can call toll free 800-829-4059 to ask tax questions or to order forms and publications. Deaf or hard-of-hearing individuals can contact the IRS through relay services such as the Federal Relay Service, available at GSA.gov/FedRelay. Tax reform. Major tax reform legislation im- pacting individuals, businesses, and tax-ex- empt entities was enacted in the Tax Cuts and Jobs Act on December 22, 2017. Go to IRS.gov/TaxReform for information and up- dates on how this legislation affects your taxes. Tax reform provisions that affect busi- nesses. Business owners can refer to IRS.gov/ Newsroom/Businesses for updates and resour- ces on business-related changes resulting from the Tax Cuts and Jobs Act 2017. Small Business and Self-Employed (SB/SE) tax center. SB/SE serves taxpayers who file Form 1040, Schedules C, E, or F, or Form 2106, as well as small businesses with assets under $10 million. A–Z index for business. Find it fast! Know what you're looking for and want to find it fast? Select business topics using our A–Z listing, or by business type such as sole proprietor, cor- poration, etc. We also provide links to major business subjects, such as Business Expenses, which provide a gateway to all related informa- tion on those subjects. • Small Business Forms and Publications. You can download forms and publications for small business and self-employed indi- viduals. • Employer ID Numbers (EINs). Find out about EINs or apply for one online. • e-File Form 940, 941, 944, or 945 for Small Businesses. Learn your options for e-filing Form 940, 941, 944, or 945 for small busi- nesses. • Starting, Operating, or Closing a Business. Important tax information related to the various stages of owning a business. • Employment Taxes. Federal income tax, social security and Medicare taxes, FUTA, self-employment tax, and more. • Independent Contractor (Self-Employed) or Employee. It is critical that you, the em- ployer, correctly determine whether the in- dividuals providing services are employees or independent contractors. • Self-Employed Individuals Tax Center. The basics on self-employment, filing require- ments, and reporting responsibilities for in- dependent contractors. • Information Return Filing Requirements. If you made or received a payment as a small business or self-employed individual, you are most likely required to file an infor- mation return with the IRS. • IRS Video Portal. Video, webinars, and au- dio presentations for small businesses, in- dividuals, and tax pros. • Small Business Events. Workshops and webinars on a variety of topics for small businesses. • Online Tools & Educational Products. Choose from a variety of products, includ- ing the Tax Calendar desktop tool, to help you learn about business taxes on your own time, and at your own pace. • Subscribe to e-News. A free electronic mail service keeping you up to date on tax topics. Requirements for filing. If you made or re- ceived a payment during the calendar year as a small business or self-employed individual, you are most likely required to file an information re- turn with the IRS. For more information, see Am I Required To File a Form 1099 or Other Information Return? on IRS.gov. Preparing and filing your tax return. Find free options to prepare and file your return on IRS.gov or in your local community if you qual- ify. The Volunteer Income Tax Assistance (VITA) program offers free tax help to people who generally make $55,000 or less, persons with disabilities, the elderly, and limited-Eng- lish-speaking taxpayers who need help prepar- ing their own tax returns. The Tax Counseling for the Elderly (TCE) program offers free tax help for all taxpayers, particularly those who are 60 years of age and older. TCE volunteers spe- cialize in answering questions about pensions and retirement-related issues unique to seniors. You can go to IRS.gov/Filing to see your op- tions for preparing and filing your return, which include the following. • Free File. Go to IRS.gov/FreeFile. See if you qualify to use brand-name software to prepare and e-file your federal tax return for free. • VITA. Go to IRS.gov/VITA, download the free IRS2Go app, or call 800-906-9887 to find the nearest VITA location for free tax preparation. • TCE. Go to IRS.gov/TCE, download the free IRS2Go app, or call 888-227-7669 to find the nearest TCE location for free tax preparation. How to choose a tax return preparer. If you choose to have someone prepare your tax re- turn, choose that preparer wisely. A paid tax re- turn preparer is primarily responsible for the overall substantive accuracy of your tax return and, by law, is required to sign the return and include their preparer tax identification number (PTIN) on it. Although the tax return preparer signs the return, you are ultimately responsible for the accuracy of every item reported on your return. Anyone paid to prepare tax returns for others should have a thorough understanding of tax matters and is required to have a PTIN. You may want to ask friends, co-workers, or your employer for help in selecting a competent tax return preparer. For your convenience, the IRS provides an online database for all Authorized IRS e-file Providers that choose to be included in the da- tabase. You can locate the closest Authorized IRS e-file Providers in your area where you can electronically file your tax return. For more infor- mation on finding a tax return preparer who pro- vides IRS e-file, see Authorized IRS e-file Providers for Individuals on IRS.gov, or go to IRS.gov/uac/Authorized-IRS-e-file-Providers- for-Individuals. The inclusion in this database does not constitute any endorsement by the IRS of the e-file Providers listed in this database or any of the products or services that they pro- vide. You should always be sure to conduct your own due diligence when selecting an e-file Provider. In addition to the Authorized IRS e-file Provider locator tool above, you can also find professional help through the IRS Tax Professional Partner page at IRS.gov/Tax- Professionals/IRSTaxProAssociationPartners. Choose a tax return preparer you will be able to contact in case the IRS examines your return and has questions regarding how your return was prepared. You can designate your paid tax return preparer or another third party to speak to the IRS concerning the preparation of your return, payment/refund issues, and mathe- matical errors. The third party authorization checkbox on Form 1040 gives the designated party the authority to receive and inspect re- turns and return information for 1 year from the original due date of your return (without regard to extensions). You can extend the authority to receive and inspect returns and return informa- tion to a third party using Form 8821, Tax Information Authorization. The following points will assist you when se- lecting a tax return preparer. • Check the preparer’s qualifications. All paid tax return preparers are required to have a PTIN. • Check the preparer’s history. You can check with the Better Business Bureau to find out if a preparer has a questionable history. Check for disciplinary actions and the license status for credentialed prepar- ers. For Certified Public Accountants (CPAs), check with the State Board of Ac- countancy. For attorneys, check with the State Bar Association. For Enrolled Agents (EAs), go to IRS.gov/Tax-Professionals/ Verify-the-Status-of-an-Enrolled-Agent and follow the instructions for requesting EA status verification. • Ask about service fees. Avoid preparers who base their fee on a percentage of your refund or those who say they can get larger refunds than others can. Always make sure any refund due is sent directly to you or deposited into your bank ac- count. You should not have your refund deposited into a preparer’s bank account. • Ask to e-file your return. Make sure your preparer offers IRS e-file. Any paid pre- parer who prepares and files more than 10 returns generally must e-file their clients’ returns. The IRS has safely processed more than 1.3 billion e-filed tax returns. Page 58 Chapter 13 How To Get Tax Help

(p535)(page-60)Page 60#

• Make sure the preparer is available. You need to ensure that you can contact the tax preparer after you file your return. That’s true even after the April 15, 2019, due date for individual returns. The due date for partnerships and S corporations using a calendar year is March 15, 2019. You may need to contact the preparer if questions come up about your tax return at a later time. • Provide tax records. A good preparer will ask to see your records and receipts. They ask you questions to report your total in- come and the tax benefits you’re entitled to claim. These may include tax deductions, tax credits, and other items. Do not use a preparer who is willing to e-file your return using your last pay stub instead of your Form W-2. This is against IRS e-file rules. • Never sign a blank tax return. Do not use a tax preparer who asks you to sign a blank tax form. • Review your return before signing. Be- fore you sign your tax return, review it thor- oughly. Ask questions if something is not clear to you. Make sure you’re comfortable with the information on the return before you sign it. • Preparer must sign returns and include their PTIN. A paid preparer must sign re- turns and include his or her PTIN as re- quired by law. The preparer also must give you a copy of the return. • Report abusive tax preparers to the IRS. You can report abusive tax preparers and suspected tax fraud to the IRS. Use Form 14157, Complaint: Tax Return Preparer. If you suspect a return preparer filed or changed the return without your consent, you should also file Form 14157- A, Return Preparer Fraud or Misconduct Affidavit. You can download and print these forms from IRS.gov. If you need a paper form mailed to you, go to IRS.gov/ OrderForms to order online. For more in- formation, go to How Do You Report Suspected Tax Fraud Activity? on IRS.gov. Getting answers to your tax law questions. On IRS.gov, get answers to your tax questions anytime, anywhere. • Go to IRS.gov/Help or IRS.gov/LetUsHelp for a variety of tools that will help you get answers to the most common tax ques- tions. • Go to IRS.gov/ITA for the Interactive Tax Assistant (ITA), a tool that will ask you questions on a number of tax law topics and provide answers. You can print the en- tire interview and the final response for your records. • Go to IRS.gov/Pub17 to get Pub. 17, Your Federal Income Tax for Individuals, which features details on tax-saving opportuni- ties, 2018 tax changes, and thousands of interactive links to help you find answers to your questions. View it online in HTML or as a PDF or, better yet, download it to your mobile device to enjoy eBook features. • You may also be able to access tax law in- formation in your electronic filing software. • Go to IRS.gov and click on the Help & Re- sources tab for more information. Getting tax forms and publications. Go to IRS.gov/Forms to view, download, or print all of the forms and publications you may need. You can also download and view popular tax publi- cations and instructions (including the 1040 in- structions) on mobile devices such as an eBook at no charge. Or you can go to IRS.gov/ OrderForms to place an order. Access your online account (individual tax- payers only). Go to IRS.gov/Account to se- curely access information about your federal tax account. • View the amount you owe, pay online, or set up an online payment agreement. • Access your tax records online. • Review the past 18 months of your pay- ment history. • Go to IRS.gov/SecureAccess to review the required identity authentication process. Using direct deposit. The fastest way to re- ceive a tax refund is to combine direct deposit and IRS e-file. Direct deposit securely and elec- tronically transfers your refund directly into your financial account. Eight in 10 taxpayers use di- rect deposit to receive their refunds. The IRS is- sues more than 90% of refunds in less than 21 days. Delayed refund for returns claiming certain credits. Due to changes in the law, the IRS can’t issue refunds for 2018 tax returns before mid-February 2019 for returns that claim the earned income credit (EIC) or the additional child tax credit (ACTC). This applies to the en- tire refund, not just the portion associated with these credits. Getting a transcript or copy of a return. Tax transcripts are summaries of tax returns. IRS transcripts are best and most often used to vali- date past income and tax filing status for mort- gage, student, and small business loan applica- tions, and to help with tax preparation. Taxpayers can also use transcripts to obtain their prior-year adjusted gross income (AGI), which they need in order to e-file their tax re- turns. You can get a transcript by mail to view your tax account transactions or line-by-line tax return information for a specific tax year. The method you used to file your return and whether you have a refund or balance due affects your current tax year transcript availability. Gener- ally, these transcript types are available for the current tax year and 3 prior years. The quickest way to get a copy of your tax transcript is to go to IRS.gov/Transcripts. Click on either "Get Transcript Online" or "Get Transcript by Mail" to order a copy of your transcript. If you need an account transcript for an older tax year, a wage and income transcript, or a verification of nonfil- ing letter, you’ll need to complete Form 4506-T, Request for Transcript of Tax Return, available at IRS.gov/Forms-Pubs/About-Form-4506-T- Request-for-Transcript-of-Tax-Return, and send it to us as instructed on the form. If you made estimated tax payments and/or ap- plied your overpayment from a prior-year tax re- turn to your current-year tax return, you can re- quest a tax account transcript to confirm these payments or credits a few weeks after the be- ginning of the calendar year prior to filing your current-year return. For the list of the various types of transcripts available for you to order, see Transcript Types and Ways to Order Them at IRS.gov/Individuals/Tax-Return-Transcript- Types-and-Ways-to-Order-Them. To order your transcript, you can choose from one of the fol- lowing convenient options. • Request a return or account transcript us- ing Get Transcript at IRS.gov/Individuals/ Get-Transcript. • Download the free IRS2Go app to your mobile device and use it to order tran- scripts of your tax returns or tax account. • Call the automated transcript toll-free line at 800-908-9946 to receive your transcript by mail. • Go to Get Transcript at IRS.gov/ Individuals/Get-Transcript, and click on “Get Transcript by Mail.” You will need your social security number (SSN) or your Individual Taxpayer Identification Number (ITIN), date of birth, and address from your latest tax return. Transcripts arrive in 5 to 10 calendar days at the address we have on file for you. • Mail Form 4506-T, Request for Transcript of Tax Return, or Form 4506T-EZ, Short Form Request for Individual Tax Return Transcript (both available on IRS.gov). The IRS never sends email requesting that you obtain or access your transcripts. Report all unsolicited email claiming to be from the IRS or an IRS-related function to phishing@irs.gov. A transcript isn’t a photocopy of your return. If you need a photocopy of your original return, complete and mail Form 4506, Request for Copy of Tax Return, available at IRS.gov/Pub/ irs-pdf/F4506.pdf, along with the applicable fee. Using online tools to help prepare your re- turn. Go to IRS.gov/Tools for the following. • The Earned Income Tax Credit Assistant (IRS.gov/EIC) determines if you are eligi- ble for the EIC. • The Online EIN Application (IRS.gov/EIN) helps you get an employer identification number. • The IRS Withholding Calculator (IRS.gov/ W4App) estimates the amount you should have withheld from your paycheck for fed- eral income tax purposes. • The First Time Homebuyer Credit Account Look-up (IRS.gov/HomeBuyer) tool pro- vides information on your repayments and account balance. • The Sales Tax Deduction Calculator (IRS.gov/SalesTax) figures the amount you can claim if you itemize deductions on Schedule A (Form 1040), choose not to claim state and local income taxes, and didn’t save your receipts showing the sales tax you paid. Where to file your tax return. • There are many ways to file your return electronically. It’s safe, quick, and easy. See Preparing and filing your tax return, earlier, for more information. • See your tax return instructions to deter- mine where to mail your completed paper tax return. Understanding and resolving tax-related identity (ID) theft issues. The IRS doesn’t ini- tiate contact with taxpayers by email or phone Chapter 13 How To Get Tax Help Page 59

(p535)(page-61)Page 61#

to request personal or financial information. This includes any type of electronic communi- cation, such as text messages and social media channels. For 2018, the IRS, the states, and the tax in- dustry joined together to enact new safeguards and take additional actions to combat tax-rela- ted identity theft. Many of these safeguards will be invisible to you, but invaluable to our fight against these criminal syndicates. If you pre- pare your own return with tax software, you will see new log-on standards. Some states also have taken additional steps. See your state revenue agency’s web site for additional de- tails. The following is a list of resources available to assist you in identifying and resolving ID theft issues. • Go to IRS.gov/IDProtection for information and videos. • If your SSN or ITIN has been lost or stolen or you suspect you are a victim of tax-rela- ted ID theft, visit IRS.gov/ID to learn what steps you should take. Also, see Pub. 5027, Identity Theft Information for Taxpayers, available at IRS.gov/Pub/irs- pdf/P5027.pdf, for more information. • To report ID theft, access the IRS ID Theft Tool Kit at IRS.gov/uac/Taxpayer-Guide- to-Identity-Theft. This page also provides a list of helpful toll-free phone numbers and links to other resources for reporting ID or data theft. • The IRS stops and flags suspicious or du- plicate federal tax returns that falsely rep- resent your identity, such as your name or SSN. If the IRS suspects tax ID theft, the agency will send a 5071C letter to your home address. If you receive this letter, verify your identity at IDVerify.IRS.gov or call the toll-free number listed in the letter. If you did not receive an IRS notice but be- lieve you’ve been the victim of ID theft, contact the IRS Identity Protection Special- ized Unit at 800-908-4490 right away so we can take steps to secure your tax ac- count and match your SSN or ITIN. • Also, fill out and submit the IRS Form 14039, Identity Theft Affidavit. Please write legibly and follow the directions on the back of the form that relate to your specific circumstances. • If you are a victim of state tax ID theft, con- tact your state's taxation department or comptroller's office about the next steps you need to take. • You should protect the information that you keep, and properly dispose of what you no longer need. And, of course, you should create a plan to respond to security inci- dents. As part of its long-standing efforts to promote good data security practices, the Federal Trade Commission (FTC) has un- dertaken extensive efforts to educate busi- nesses and has brought more than 50 law enforcement actions related to data secur- ity issues. For more information, see Pro- tecting Personal Information: A Guide for Business, available at FTC.gov/Tips- advice/business-center/guidance/ protecting-personal-information-guide- business, for practical tips on creating and implementing a plan for safeguarding per- sonal information used in your business. Most recently, the FTC released Start with Security: A Guide for Business, available at FTC.gov/Tips-advice/business-center/ guidance/start-security-guide-business? utm_source=govdelivery, which draws on the lessons learned from the FTC's en- forcement actions. The FTC works for consumers to prevent fraudulent, deceptive, and unfair business prac- tices and to provide information to help spot, stop, and avoid them. To file a complaint, for example, to report someone falsely claiming to be from the government, a business, or a family member, visit the FTC’s online Complaint Assistant or call 877-FTC-HELP (877-382-4357). The FTC enters complaints into Consumer Sentinel, a secure, online data- base available to more than 2,000 civil and criminal law enforcement agencies in the United States and abroad. Complaints from consumers help the FTC detect patterns of fraud and abuse. The FTC’s website provides free infor- mation on a variety of consumer topics, in Eng- lish and in Spanish. Consumer complaints regarding interna- tional scams can be reported online through Econsumer.gov. These are also entered into Consumer Sentinel, the complaint database maintained by the FTC, and are made available to enforcers and regulators in countries with participating agencies. Those agencies may use the complaints to investigate cross-border issues, uncover new scams, pursue regulatory or enforcement actions, and spot consumer trends. Recognizing and reporting tax scams. The Dirty Dozen is compiled annually by the IRS and lists a variety of common scams taxpayers may encounter any time during the year. Many of these con games peak during filing season as people prepare their tax returns or hire someone to do so. Aggressive and threatening phone calls by criminals impersonating IRS agents remain near the top of the annual Dirty Dozen list of tax scams for the 2018 filing sea- son. Scammers are able to alter caller identifica- tion (caller ID) numbers to make it look like the IRS is calling. They use fake names and bogus IRS identification or badge numbers. They often leave “urgent” callback requests. They prey on the most vulnerable people, such as the elderly, newly arrived immigrants, and those whose first language is not English. Scammers have been known to impersonate agents of IRS Criminal Investigation as well. Be cautious when receiving suspicious calls at home or at work from sources claiming to be from the IRS, other agencies, or outside sour- ces asking for money or credit card information, or threatening to have you arrested for not pay- ing. These callers may demand money or may say you have a refund due and try to trick you into sharing private information. These con ar- tists can sound convincing when they call. They may know a lot about you. Here are five things the scammers often do but the IRS will not do. Any one of these five things is a tell-tale sign of a scam. The IRS will never do any of the follow- ing. • Call to demand immediate payment, nor will the agency call about taxes owed with- out first having mailed you a bill. • Demand that you pay taxes without giving you the opportunity to question or appeal the amount they say you owe. • Require you to use a specific payment method for your taxes, such as a prepaid debit card. • Ask for credit or debit card numbers over the phone. • Threaten to bring in local police or other law-enforcement groups to have you arres- ted for not paying. If you get a phone call from someone claim- ing to be from the IRS and asking for money, do not disclose your personal information. You should make notes of all information regarding the call and/or the caller, for example, any caller ID information, then hang up immediately and do the following. • If you know you owe taxes or think you might owe, call the IRS toll free at 800-829-1040. The IRS assistors can help you with a payment issue. • If you know you don’t owe taxes or have no reason to believe that you do, report the in- cident to the Treasury Inspector General for Tax Administration (TIGTA) toll free at 800-366-4484 or at TIGTA.gov. • If you’ve been targeted by this scam, also contact the FTC and use their FTC Complaint Assistant at FTC.gov. Please add “IRS Telephone Scam” to the com- ments of your complaint. Remember, too, the IRS does not use email, text messages, or any social media to discuss your personal tax issue involving bills or refunds. If you get a phone call from someone claiming to be from the IRS regarding a refund owed to you and asking you for your SSN and bank account information, do not give them this information. You should make notes of all infor- mation regarding the call and/or the caller, for example, any caller ID information, and report this scam. For more information on reporting tax scams, go to IRS.gov and type “scam” in the search box. You can verify any potential re- funds owed to you by contacting the IRS di- rectly. Additional information about tax scams is available on IRS social media sites, including YouTube, youtube.com/irsvideos, and Tumblr, internalrevenueservice.tumblr.com, where peo- ple can search “scam” to find all the scam-rela- ted posts. Checking on the status of a refund. • Go to IRS.gov/Refunds. • According to the Protecting Americans from Tax Hikes (PATH) Act, the IRS can’t issue refunds before mid-February 2019 for returns that properly claim the EIC or the ACTC. This applies to the entire re- fund, not just the portion associated with these credits. • Download the official IRS2Go app to your mobile device to check your refund status. • Call the automated refund hotline toll free at 800-829-1954. Page 60 Chapter 13 How To Get Tax Help

(p535)(page-62)Page 62#

Making a tax payment. The IRS uses the lat- est encryption technology to ensure your elec- tronic payments are safe and secure. You can make electronic payments online, by phone, and from a mobile device using the IRS2Go app. Paying electronically is quick, easy, and faster than mailing in a check or money order. Go to IRS.gov/Payments to make a payment using any of the following options. • IRS Direct Pay. Pay your individual tax bill or estimated tax payment directly from your checking or savings account at no cost to you. • Debit or credit card. Choose an approved payment processor to make a secure tax payment online, by phone, and by mobile device. Your payment will be processed by a payment processor who will charge a processing fee. The fees vary by service provider and may be tax deductible. No part of the service fee goes to the IRS. Note. You usually can’t cancel payments. You can’t make Federal Tax Deposits. You can't get an immediate release of a Fed- eral Tax Lien. • Electronic Funds Withdrawal. Offered only when filing your federal taxes using tax preparation software or through a tax pro- fessional during e-filing. • Electronic Federal Tax Payment System (EFTPS®). EFTPS® is a system for pay- ing federal taxes electronically online, or by phone using the EFTPS® Voice Re- sponse System. EFTPS® is offered free by the U.S. Department of Treasury. You can use EFTPS® to make all your federal tax payments, including income, employ- ment, estimated, and excise taxes. It is the best option for businesses. Enrollment is required. You can initiate your tax payment from your home or office, 24/7. Businesses and individuals can schedule payments up to 365 days in advance. Scheduled pay- ments can be changed or canceled up to 2 business days in advance of the scheduled payment date. • Check or money order. Mail your payment to the address listed on the notice or in- structions. • Cash. If cash is your only option, you may be able to pay your taxes at a participating retail store. What if I can’t pay now? Go to IRS.gov/ Payments for more information about your op- tions. • Apply for an online payment agreement (IRS.gov/OPA) to meet your tax obligation in monthly installments if you can’t pay your taxes in full by the due date of the re- turn. For individuals to qualify for a long-term agreement, you must owe $50,000 or less in combined tax, penalties, and interest, and must have filed all re- quired returns. You may also qualify for a short-term agreement if your balance is un- der $100,000. For a business to qualify, you must owe $25,000 or less in combined tax, penalties, and interest for the current year or last year's liabilities, and must have filed all required returns. Once you com- plete the online process (in about 30 mi- nutes), you will receive immediate notifica- tion of whether your agreement has been approved. • Use the Offer in Compromise Pre-Qualifier (IRS.gov/OIC) to see if you can settle your tax debt for less than the full amount you owe. Note. If you are a sole proprietor or inde- pendent contractor, apply for a payment agree- ment as an individual. Checking the status of an amended return. Go to IRS.gov/WMAR, Where’s My Amended Return, to track the status of Form 1040X amended returns. Note. It can take up to 3 weeks from the date you mailed your amended return for it to show up in our system and processing it can take up to 16 weeks. Filing past due tax returns. File all tax re- turns that are due, regardless of whether or not you can pay in full. File your past due return the same way and to the same location where you would file an on-time return. If you have re- ceived a notice, make sure to send your past due return to the location indicated on the no- tice you received. If you have a past due return, filing your past due return now can help you do the following. • Avoid interest and penalties. File your past due return and pay now to limit inter- est charges and late payment penalties. • Claim a refund. You risk losing your re- fund if you don't file your return. If you are due a refund for withholding or estimated taxes, you must file your return to claim it within 3 years of the return due date. The same rule applies to a right to claim tax credits such as the EIC. We hold income tax refunds in cases where our records show that one or more income tax returns are past due. We hold them until we get the past due return or receive an accepta- ble reason for not filing a past due return. • Protect social security benefits. If you are self-employed and do not file your fed- eral income tax return, any self-employ- ment income you earned will not be repor- ted to the Social Security Administration and you will not receive credits toward so- cial security retirement or disability bene- fits. • Avoid issues obtaining loans. Loan ap- provals may be delayed if you don't file your return. Copies of filed tax returns must be submitted to financial institutions, mort- gage lenders/brokers, etc., whenever you want to buy or refinance a home, get a loan for a business, or apply for federal aid for higher education. For more information, go to Filing Past Due Tax Returns on IRS.gov. Substitute return. If you fail to file voluntarily, we may file a substitute return for you, based on income reported to the IRS. This return might not give you credit for deductions and exemp- tions you may be entitled to receive. We will send you a Notice of Deficiency CP3219N (90-day letter) proposing a tax assessment. You will have 90 days to file your past due tax return or file a petition in Tax Court. If you do neither, we will proceed with our proposed as- sessment. If you have received a Notice of Defi- ciency CP3219N, you can't request an exten- sion to file. Call us if you think you don't have to file. If any of the income listed is incorrect, you may do the following. • Contact us toll free at 866-681-4271 to let us know. • Contact the payer (source) of the income to request a corrected Form W-2 or 1099. • Attach the corrected forms when you send us your completed tax returns. If the IRS files a substitute return, it is still in your best interest to file your own tax return to take advantage of any exemptions, credits, and deductions you are entitled to receive. The IRS generally will adjust your account to reflect the correct figures. If you filed a past due return and have received a notice, you should send us a copy of the past due return to the indicated ad- dress. It takes approximately 6 weeks for us to process an accurately completed past due tax return. Understanding an IRS notice or letter. Go to IRS.gov/Notices to find additional information about responding to an IRS notice or letter. We will send you a notice or letter if any of the fol- lowing apply. • You have a balance due. • You are due a larger or smaller refund. • We have a question about your tax return. • We need to verify your identity. • We need additional information. • We changed your return. • We are notifying you of delays in process- ing your return. When you receive correspondence from us, read the entire notice or letter carefully. Typi- cally, we only need a response if you don’t agree with the information, we need additional information, or you have a balance due. If we changed your tax return, compare the informa- tion we provided in the notice or letter with the information in your original return. If we receive a return that we suspect is ID theft, we will ask you to verify your identity using the web ad- dress provided in the letter. If we ask for a response within a specific timeframe, you must respond on time to mini- mize additional interest and penalty charges or to preserve your appeal rights if you don’t agree. Pay as much as you can, even if you can’t pay the full amount you owe. You can pay online or apply for an Online Payment Agree- ment or Offer in Compromise. See What if I can’t pay now? above or visit our payments page, IRS.gov/Payments, for more information. We provide our contact phone number on the top right-hand corner of our correspond- ence. Be sure you have your tax return and any related documentation available when you call. You can also write to us at the address in the correspondence to explain why you disagree. If you write, allow at least 30 days for our re- sponse. Keep a copy of all correspondence with your tax records. Collection and enforcement actions. The return we prepare for you (our proposed as- sessment) will lead to a tax bill, which, if unpaid, will trigger the collection process. This can Chapter 13 How To Get Tax Help Page 61

(p535)(page-63)Page 63#

include such actions as a levy on your wages or bank account or the filing of a notice of federal tax lien. If you repeatedly do not file, you could be subject to additional enforcement measures, such as additional penalties and/or criminal prosecution. Contacting your local IRS office. Keep in mind, many questions can be resolved on IRS.gov without visiting an IRS Tax Assistance Center (TAC). Go to IRS.gov/LetUsHelp for the topics people ask about most. If you still need help, IRS TACs provide tax help when a tax is- sue can’t be handled online or by phone. All TACs now provide service by appointment so you’ll know in advance that you can get the service you need without long wait times. Be- fore you visit, go to IRS.gov/TACLocator to find the nearest TAC, and check hours, available services, and appointment options. Or, on the IRS2Go app, under the Stay Connected tab, choose the Contact Us option and click on “Lo- cal Offices.” Watching IRS videos. The IRS Video Portal, IRSVideos.gov, contains video and audio pre- sentations on topics of interest to individuals, small businesses, and tax professionals. Getting tax information in other languages. For taxpayers whose native language is not English, we have information on IRS.gov in the following languages. • Spanish (IRS.gov/Spanish). • Chinese (IRS.gov/Chinese). • Vietnamese (IRS.gov/Vietnamese). • Korean (IRS.gov/Korean). • Russian (IRS.gov/Russian). The IRS TACs provide over-the-phone inter- preter service in over 170 languages, and the service is available free to taxpayers. The Taxpayer Advocate Service Is Here To Help You What is the Taxpayer Advocate Service? The Taxpayer Advocate Service (TAS) is an in- dependent organization within the IRS that helps taxpayers and protects taxpayer rights. Their job is to ensure that every taxpayer is treated fairly and that you know and understand your rights under the Taxpayer Bill of Rights. The Taxpayer Bill of Rights groups the existing rights in the tax code into 10 fundamental rights, and makes them clear, understandable, and ac- cessible. See How Can You Learn About Your Taxpayer Rights, later. What Can the TAS Do For You? They can help you resolve problems that you can’t resolve with the IRS, and their service is free. If you qualify for their assistance, you will be assigned to one advocate who will work with you throughout the process and will do every- thing possible to resolve your issue. The TAS can help you if: • Your problem is causing financial difficulty for you, your family, or your business; • You face (or your business is facing) an immediate threat of adverse action; or • You’ve tried repeatedly to contact the IRS but no one has responded, or the IRS hasn’t responded by the date promised. How Can You Reach the TAS? The TAS has offices in every state, the District of Columbia, and Puerto Rico. Your local advo- cate’s number is in your local directory and at TaxpayerAdvocate.IRS.gov. You can also call them toll free at 877-777-4778. How Can You Learn About Your Taxpayer Rights? The Taxpayer Bill of Rights describes 10 basic rights that all taxpayers have when dealing with the IRS. The TAS Tax Toolkit at TaxpayerAdvocate.IRS.gov/Contact-Us can help you understand what these rights mean to you and how they apply. These are your rights. Know them. Use them. The IRS released the Taxpayer Bill of Rights following extensive discussions with the TAS. You can find a list of your rights and the IRS’s obligations to protect them in Pub. 1, Your Rights as a Taxpayer. It includes the following. 1. The Right To Be Informed. Taxpayers have the right to know what they need to do to comply with the tax laws. They are entitled to clear explanations of the laws and IRS procedures in all tax forms, in- structions, publications, notices, and cor- respondence. They have the right to be in- formed of IRS decisions about their tax accounts and to receive clear explana- tions of the outcomes. 2. The Right to Quality Service. Taxpayers have the right to receive prompt, courte- ous, and professional assistance in their dealings with the IRS, to be spoken to in a way they can easily understand, to receive clear and easily understandable communi- cations from the IRS, and to speak to a su- pervisor about inadequate service. 3. The Right To Pay No More Than the Correct Amount of Tax. Taxpayers have the right to pay only the amount of tax le- gally due, including interest and penalties, and to have the IRS apply all tax payments properly. 4. The Right To Challenge the IRS’s Posi- tion and Be Heard. Taxpayers have the right to raise objections and provide addi- tional documentation in response to formal IRS actions or proposed actions, to expect that the IRS will consider their timely ob- jections and documentation promptly and fairly, and to receive a response if the IRS does not agree with their position. 5. The Right To Appeal an IRS Decision in an Independent Forum. Taxpayers are entitled to a fair and impartial adminis- trative appeal of most IRS decisions, in- cluding many penalties, and have the right to receive a written response regarding the Office of Appeals’ decision. Taxpayers generally have the right to take their cases to court. 6. The Right to Finality. Taxpayers have the right to know the maximum amount of time they have to challenge the IRS’s posi- tion as well as the maximum amount of time the IRS has to audit a particular tax year or collect a tax debt. Taxpayers have the right to know when the IRS has fin- ished an audit. 7. The Right to Privacy. Taxpayers have the right to expect that any IRS inquiry, ex- amination, or enforcement action will com- ply with the law and be no more intrusive than necessary, and will respect all due process rights, including search and seiz- ure protections, and will provide, where applicable, a collection due process hear- ing. 8. The Right to Confidentiality. Taxpayers have the right to expect that any informa- tion they provide to the IRS will not be dis- closed unless authorized by the taxpayer or by law. Taxpayers have the right to ex- pect appropriate action will be taken against employees, return preparers, and others who wrongfully use or disclose tax- payer return information. 9. The Right To Retain Representation. Taxpayers have the right to retain an au- thorized representative of their choice to represent them in their dealings with the IRS. Taxpayers have the right to seek as- sistance from a Low Income Taxpayer Clinic if they cannot afford representation. 10. The Right to a Fair and Just Tax Sys- tem. Taxpayers have the right to expect the tax system to consider facts and cir- cumstances that might affect their underly- ing liabilities, ability to pay, or ability to pro- vide information timely. Taxpayers have the right to receive assistance from the TAS if they are experiencing financial diffi- culty or if the IRS has not resolved their tax issues properly and timely through its nor- mal channels. The IRS is trying to increase the number of Americans who know and understand their rights under the tax law. To expand awareness, the IRS is making Pub. 1 available in multiple languages on IRS.gov. This important publica- tion is available in the following languages. • English, Your Rights as a Taxpayer, at IRS.gov/Pub/irs-pdf/P1.pdf. • Chinese, Chinese- Your Rights as a Taxpayer (Pub 1), at IRS.gov/Chinese. • Korean, Korean- Your Rights as a Taxpayer (Pub 1), at IRS.gov/Korean. • Russian, Ваши права в качестве налогоплательщика (Публикацию № 1), at IRS.gov/Russian. • Spanish, Publicación 1SP, Derechos del Contribuyente, at IRS.gov/Spanish. • Vietnamese, Quyền Hạn của Người Đóng Thuế, Your Rights as a Taxpayer (Pub 1), at IRS.gov/Vietnamese. Page 62 Chapter 13 How To Get Tax Help

(p535)(page-64)Page 64#

The IRS will include Pub. 1 when sending noti- ces to taxpayers on a range of issues, such as an audit or collection matter. All IRS facilities will publicly display the rights for taxpayers and employees to see. How Else Does the TAS Help Taxpayers? The TAS works to resolve large-scale problems that affect many taxpayers. If you know of one of these broad issues, please report it to them at IRS.gov/SAMS. The TAS also has a website, Tax Reform Changes, which shows you how the new tax law may change your future tax filings and helps you plan for these changes. The information is categorized by tax topic in the order of the IRS Form 1040. Go to TaxChanges.us for more in- formation. Low Income Taxpayer Clinics (LITCs) LITCs are independent from the IRS and repre- sent individuals whose income is below a cer- tain level and need to resolve tax problems with the IRS such as audits, appeals, and tax collec- tion disputes. Some LITCs can provide informa- tion about taxpayer rights and responsibilities in different languages for individuals who speak English as a second language. Services are of- fered for free or a small fee. To find an LITC near you, visit TaxpayerAdvocate.IRS.gov/ LITCmap or see Pub. 4134, Low Income Taxpayer Clinic List. Chapter 13 How To Get Tax Help Page 63

(p535)(page-65)Page 65#

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

A Advertising 45 Amortization: Anti-abuse rule 33 Anti-churning rules 32 Atmospheric pollution control facilities 34 Corporate organization costs 29 Dispositions of section 197 intangibles 33 Experimental costs 35 Geological and geophysical costs 34 How to deduct 28 Incorrect amount deducted 33 Partnership organization costs 29 Pollution control facilities 34 Reforestation costs 33 Reforestation expenses 26 Related person 32 Research costs 35 Section 197 intangibles defined 30 Starting a businesscosts 28 Start-up costs 29 Anticipated liabilities 45 Assistance (See Tax help) At-risk limits 6 Attorney fees 46 Authorized IRS e-file providers 58 Awards 8, 9 A-Z Index for Business 58 B Bad debts: Defined 40 How to treat 41 Recovery 42 Types of 41 When worthless 41 Bonuses: Employee 9 Royalties 39 Bribes 45 Business: Assets 4 Books and records 31 Meal expenses 44 Use of car 6, 46 Use of home 5 C Campaign contribution 48 Capital expenses 3, 5 Capitalization of interest 16 Car allowance 44 Car and truck expenses 46 Carrying charges 24 Charitable contributions 46 Checking amended return status 61 Choosing a tax return preparer 58 Circulation costs, newspapers and periodicals 26 Claim a refund 61 Club dues 46 Collection and enforcement actions 61 Commitment fees 16 Compensation in excess of $1 million 8 Computer software 32 Constant-yield method, OID 15 Contested liability 7 Contributions: Charitable 46 Political 48 Copyrights 31 Cost depletion 36 Cost of getting lease 12, 30 Cost of goods sold 3 Cost recovery 4 Covenant not to compete 31 Credit card convenience fees 46 D Debt-financed distributions 14 Definitions: Business bad debt 40 Necessary expense 3 Ordinary expense 3 Section 197 intangibles 30 De minimis OID 15 Demolition expenses 46 Depletion: Mineral property 36 Oil and gas wells 37 Percentage table 39 Timber 39 Who can claim 35 Depreciation (See Cost recovery) Development costs, miners 26 Direct Pay 61 Dirty Dozen 60 Disabled, improvements for 27 Drilling and development costs 25 Dues, membership 46 E Economic interest 35 Economic performance 6 Education expenses 9, 46 e-File Form 940, 941, or 944 for Small Businesses 58 Elderly, improvements for 27 Electronic Federal Tax Payment System (EFTPS®) 61 Employee benefit programs 10 Employer ID Numbers (EINs) 58 Employment taxes 19 Employment Taxes 58 Additional Medicare Tax 19 Self-employment tax: Additional Medicare Tax 20 Unemployment fund 19 e-News 58 Entertainment 43 Entertainment expenses 9 Experimentation costs 24, 35 Exploration costs 25 F Federal Relay Service 58 Fees: Commitment 16 Legal and professional 46 Regulatory 47 Tax return preparation 47 Filing past due tax returns 61 Fines 47 Forgone 17 Forgone interest 17 Form: 3115 33 4562 28 5213 7 8826 28 T 40 Franchise 31, 46 Fringe benefits 9 G Gas wells 38 Geological and geophysical costs: Development, oil and gas 34 Exploration, oil and gas 34 Geothermal wells 25, 39 Gifts, nominal value 9 Going into business 4, 28 Goodwill 31 Gross income, not-for-profit activity 7 H Health coverage tax credit (HCTC) 23 Health plan 23 Heating equipment 5 Home, business use of 5 How to Figure the Deduction 49 I Identity (ID) theft issues 59 Impairment-related expenses 46 Improvements 4 By lessee 12 For disabled and elderly 27 Income Taxes 19 Accrual of contested income taxes 19 Federal income taxes 19 Foreign income taxes 19 State and local income taxes 19 Incorrect amount of amortization deducted 33 Independent Contractor (Self-Employed) or Employee? 58 Information Return Filing Requirements 58 Insurance 23 Capitalized premiums 23 Deductible premiums 20 Nondeductible premiums 23 Intangible drilling costs 25 Intangibles, amortization 30 Interest 17 Allocation of 13 Below-market 17 Business expense for 13 Capitalized 16 Carrying charge 24 Deductible 15 Life insurance policies 16 Limitation 14 Not deductible 16 Refunds of 16 When to deduct 16 Internet-related expenses 46 Interview expenses 46 IRS Tax Professional Partners 58 IRS Video Portal 58 K Key person 16 Kickbacks 45 L Leases: Canceling 11 Cost of getting 12, 30 Improvements by lessee 12 Leveraged 11 Mineral 39 Oil and gas 39 Sales distinguished 11 Taxes on 12 Legal and professional fees 46 Letter 5071C 60 Licenses 31, 47 Life insurance coverage 10 Limit on deductions 7 Line of credit 14 Loans: Below-market 17 Discounted 16 Loans or advances 10 Lobbying expenses 47 Long-term care insurance 21 Losses 6, 7 At-risk limits 6 Net operating 6 Passive activities 6 Low Income Taxpayer Clinics (LITCs) 63 M Machinery parts 5 Making a tax payment 61 Meals 43 Meals and entertainment 44 Meals and lodging 9 Methods of accounting 6 Page 64 Publication 535 (2018)

(p535)(page-66)Page 66#

Mining: Depletion 39 Development costs 26 Exploration costs 25 More than one health plan and business 23 Mortgage 15 Moving expenses, machinery 47 N Natural gas 38 Nonqualifying intangibles 31 Not-for-profit activities 7 Not-for-profit activity, gross income 7 Notice of Deficiency CP3219N 61 O Office in home 5 Oil and gas wells: Depletion 37 Drilling costs 25 Partnerships 38 S corporations 38 Online payment agreement 61 Online Tools & Educational Products 58 Optional safe harbor method 5 Optional write-off method: Circulation costs 35 Experimental costs 35 Intangible drilling and development costs 35 Mining exploration and development costs 35 Research costs 35 Organizational costs 26 Organization costs: Corporate 29 Partnership 29 Original issue discount 15 Other coverage 23 Other Taxes 20 Excise taxes 20 Franchise taxes 20 Fuel taxes 20 Occupational taxes 20 Personal property taxes 20 Sales taxes 20 Outplacement services 47 P Passive activities 6 Payments in kind 6 Penalties 15 Deductible 47 Nondeductible 47 Prepayment 15 Percentage depletion 36 Per diem and car allowances 44 Political contributions 48 Pollution control facilities 34 Prepaid expense 6 Extends useful life 24 Interest 16, 17 Rent 11 Prepayment penalty 15 Presumption of profit 7 Publication 1, Your Rights as a Taxpayer 62 Publications (See Tax help) Q Qualified Business Income Deduction Worksheet 55 Qualified long-term care insurance: Benefits received 22 Chronically ill individual 22 Qualified long-term care insurance contract 21 Qualified long-term care services 21 R Real EstateTaxes 18 Assessments Local 18 Charges for services 19 Electing to ratably accrue to a definite period 19 Form 3115 19 Making the election to ratably accrue the taxes 19 Purchase or sale of real estate 19 Separate elections to ratably accrue for each separate trade or business and for nonbusiness activities 19 Recapture: Exploration expenses 25 Timber property 34 Recordkeeping 38 Recovery of amount deducted 6 Refiners who cannot claim percentage depletion 37 Reforestation costs 26, 33 Regulatory fees 47 Reimbursements 43 Business expenses 10 Mileage 44 Nonaccountable plan 45 Per diem 44 Related persons: Anti-churning rules 32 Coal or iron ore 39 Payments to 7, 17 Refiners 37 Unreasonable rent 11 Reminder: Premium tax credit 20 Removal 27 Rent expense, capitalizing 13 Repairs 48 Repayments (claim of right) 48 Reporting abusive tax preparers 59 Research costs 24, 35 S Scammers 60 Section 179 expense deduction (See Cost recovery) Self-employed health insurance deduction 21 Self-Employed Health Insurance Deduction Worksheet 22 Self-Employed Individuals Tax Center 58 Self-insurance, reserve for 23 Sick pay 10 Small Business and Self-Employed (SB/SE) Tax Center 58 Small Business Events 58 Small Business Forms and Publications 58 Standard meal allowance 44 Standard mileage rate (See Business use of your car) Standby charges 16 Starting, Operating, or Closing a Business 58 Start-up costs 26, 29 Substitute return 61 Supplies and materials 48 T Taxes 12, 18 Carrying charge 24 Leased property 12 When To Deduct Taxes 18 Tax help 58 Tax information in other languages 62 Tax law questions 59 Taxpayer Advocate Service (TAS) 62 Taxpayer Assistance Center (TAC) locator 62 Taxpayer Bill of Rights 62 Tax preparation 58 Tax preparation fees 47 Tax scams 60 Telephone 49 Timber 33, 39 Tools 5 Trademark, trade name 31, 46 transcript or copy of a return 59 Transportation (commuting) benefits 10 Travel 43 TTY/TDD information 58 U Understanding an IRS notice or letter 61 Unpaid expenses, related person 17 Utilities 49 V Vacation pay 10 W Wages: Property 10 Tests for deducting pay 8 Welfare benefit funds 10 When To Deduct Premiums 23 When To Deduct Taxes: Carrying charges 18 Limit on accrual of taxes 18 Refunds of taxes 18 Uniform capitalization rules 18 Where to file 59 Publication 535 (2018) Page 65

(p590a)Publication 590-A (2018), Contributions to Individual Retirement Arrangements (IRAs)#

(p590a)(page-1)Page 1#

Caution: The form, instruction, or publication you are looking for begins on the next page. But first see the important information below.

All information about forms, instructions, and pubs is at www.irs.gov/Forms.

(p590a)(page-2)Page 2#

Department of the Treasury Internal Revenue Service Publication 590-A Cat. No. 66302J Contributions to Individual Retirement Arrangements (IRAs) For use in preparing 2018 Returns Get forms and other information faster and easier at: • IRS.gov (English) • IRS.gov/Spanish (Español) • IRS.gov/Chinese (中文) • IRS.gov/Korean (한국어) • IRS.gov/Russian (Pусский) • IRS.gov/Vietnamese (TiếngViệt) Contents What's New for 2018 . . . . . . . . . . . . . . . . . . . . . . . . 1 What’s New for 2019 . . . . . . . . . . . . . . . . . . . . . . . 2 Reminders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Chapter 1. Traditional IRAs . . . . . . . . . . . . . . . . . . 5 Who Can Open a Traditional IRA? . . . . . . . . . . . . 5 When Can a Traditional IRA Be Opened? . . . . . . . 6 How Can a Traditional IRA Be Opened? . . . . . . . . 6 How Much Can Be Contributed? . . . . . . . . . . . . . 8 When Can Contributions Be Made? . . . . . . . . . . . 9 How Much Can You Deduct? . . . . . . . . . . . . . . . 10 What if You Inherit an IRA? . . . . . . . . . . . . . . . . 20 Can You Move Retirement Plan Assets? . . . . . . 20 When Can You Withdraw or Use Assets? . . . . . . 31 What Acts Result in Penalties or Additional Taxes? . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Chapter 2. Roth IRAs . . . . . . . . . . . . . . . . . . . . . 38 What Is a Roth IRA? . . . . . . . . . . . . . . . . . . . . . 39 When Can a Roth IRA Be Opened? . . . . . . . . . . 39 Can You Contribute to a Roth IRA? . . . . . . . . . . 39 Can You Move Amounts Into a Roth IRA? . . . . . . 44 Chapter 3. Retirement Savings Contributions Credit (Saver's Credit) . . . . . . . . . . . . . . . . . . 46 Chapter 4. How To Get Tax Help . . . . . . . . . . . . . 48 Appendices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 What's New for 2018 Extended rollover period for qualified plan loan off- sets in 2018 or later. For distributions made in tax years beginning after December 31, 2017, you have until the due date (including extensions) for your tax return for the tax year in which the offset occurs to roll over a qualified plan loan offset amount. For more information, see Time Limit for Making a Rollover Contribution in chapter 1. No recharacterizations of conversions made in 2018 or later. A conversion of a traditional IRA to a Roth IRA, and a rollover from any other eligible retirement plan to a Roth IRA, made after December 31, 2017, cannot be re- characterized as having been made to a traditional IRA. For more information, see Recharacterizations in chap- ter 1. Modified AGI limit for traditional IRA contributions. For 2018, if you are covered by a retirement plan at work, your deduction for contributions to a traditional IRA is re- duced (phased out) if your modified AGI is: • More than $101,000 but less than $121,000 for a mar- ried couple filing a joint return or a qualifying widow(er), Dec 21, 2018

(p590a)(page-3)Page 3#

• More than $63,000 but less than $73,000 for a single individual or head of household, or • Less than $10,000 for a married individual filing a sep- arate return. Modified AGI limit for certain married individuals. If you are married and your spouse is covered by a retire- ment plan at work and you aren’t, and you live with your spouse or file a joint return, your deduction is phased out if your modified AGI is more than $189,000 (up from $186,000 for 2017) but less than $199,000 (up from $196,000 for 2017). If your modified AGI is $199,000 or more, you can’t take a deduction for contributions to a tra- ditional IRA. Modified AGI limit for Roth IRA contributions. For 2018, your Roth IRA contribution limit is reduced (phased out) in the following situations. • Your filing status is married filing jointly or qualifying widow(er) and your modified AGI is at least $189,000. You can’t make a Roth IRA contribution if your modi- fied AGI is $199,000 or more. • Your filing status is single, head of household, or mar- ried filing separately and you didn’t live with your spouse at any time in 2018 and your modified AGI is at least $120,000. You can’t make a Roth IRA contri- bution if your modified AGI is $135,000 or more. • Your filing status is married filing separately, you lived with your spouse at any time during the year, and your modified AGI is more than zero. You can’t make a Roth IRA contribution if your modified AGI is $10,000 or more. What’s New for 2019 Modified AGI limit for traditional IRA contributions in- creased. For 2019, if you are covered by a retirement plan at work, your deduction for contributions to a tradi- tional IRA is reduced (phased out) if your modified AGI is: • More than $103,000 but less than $123,000 for a mar- ried couple filing a joint return or a qualifying widow(er), • More than $64,000 but less than $74,000 for a single individual or head of household, or • Less than $10,000 for a married individual filing a sep- arate return. Modified AGI limit for certain married individuals increased. If you are married and your spouse is cov- ered by a retirement plan at work and you aren’t, and you live with your spouse or file a joint return, your deduction is phased out if your modified AGI is more than $193,000 (up from $189,000 for 2018) but less than $203,000 (up from $199,000 for 2018). If your modified AGI is $203,000 or more, you can’t take a deduction for contributions to a traditional IRA. Modified AGI limit for Roth IRA contributions in- creased. For 2019, your Roth IRA contribution limit is re- duced (phased out) in the following situations. • Your filing status is married filing jointly or qualifying widow(er) and your modified AGI is at least $193,000. You can’t make a Roth IRA contribution if your modi- fied AGI is $203,000 or more. • Your filing status is single, head of household, or mar- ried filing separately and you didn’t live with your spouse at any time in 2019 and your modified AGI is at least $122,000. You can’t make a Roth IRA contri- bution if your modified AGI is $137,000 or more. • Your filing status is married filing separately, you lived with your spouse at any time during the year, and your modified AGI is more than zero. You can’t make a Roth IRA contribution if your modified AGI is $10,000 or more. Reminders Future developments. For the latest information about developments related to Pub. 590-A, such as legislation enacted after it was published, go to IRS.gov/Pub590A. Qualified disaster tax relief. Special rules provide for tax-favored withdrawals and repayments from certain re- tirement plans for taxpayers who suffered economic los- ses as a result of Hurricane Harvey or Tropical Storm Har- vey, Hurricane Irma, Hurricane Maria, or the California wildfires. See Pub. 976, Disaster Relief, for information on these special rules. Also, see the Instructions for Form 8915B, Qualified 2017 Disaster Retirement Plan Distribu- tions and Repayments, for more information on these new rules. Disaster tax relief is also available for taxpayers who suffered economic losses as a result of disasters declared by the President under section 401 of the Robert T. Staf- ford Disaster Relief and Emergency Assistance Act during calendar year 2016. See Pub. 976 and the Instructions for 2016 and 2017 Form 8915A, Qualified 2016 Disaster Re- tirement Plan Distributions and Repayments, for more in- formation on these provisions. IRAs and unrelated business income. An IRA is sub- ject to tax on unrelated business income if it carries on an unrelated trade or business. An unrelated trade or busi- ness means any trade or business regularly carried on by the IRA or by a partnership of which it is a member. For more information, see Unrelated business income under What Acts Result in Penalties or Additional Taxes, later. IRA interest. Although interest earned from your IRA is generally not taxed in the year earned, it isn’t tax-exempt interest. Tax on your traditional IRA is generally deferred until you take a distribution. Don’t report this interest on your return as tax-exempt interest. For more information on tax-exempt interest, see the instructions for your tax re- turn. Photographs of missing children. The IRS is a proud partner with the National Center for Missing & Exploited Page 2 Publication 590-A (2018)

(p590a)(page-4)Page 4#

Children® (NCMEC). Photographs of missing children se- lected by the Center may appear in this publication on pa- ges that would otherwise be blank. You can help bring these children home by looking at the photographs and calling 1-800-THE-LOST (1-800-843-5678) if you recog- nize a child. Introduction This publication discusses contributions to individual re- tirement arrangements (IRAs). An IRA is a personal sav- ings plan that gives you tax advantages for setting aside money for retirement. For information about distributions from an IRA, see Pub. 590-B. What are some tax advantages of an IRA? Two tax advantages of an IRA are that: • Contributions you make to an IRA may be fully or par- tially deductible, depending on which type of IRA you have and on your circumstances; and • Generally, amounts in your IRA (including earnings and gains) aren’t taxed until distributed. In some ca- ses, amounts aren’t taxed at all if distributed accord- ing to the rules. What's in this publication? This publication discusses contributions to traditional and Roth IRAs. It explains the rules for: • Setting up an IRA, • Contributing to an IRA, • Transferring money or property to and from an IRA, and • Taking a credit for contributions to an IRA. It also explains the penalties and additional taxes that apply when the rules aren’t followed. To assist you in complying with the tax rules for IRAs, this publication con- tains worksheets and sample forms which can be found throughout the publication and in the appendices at the back of the publication. How to use this publication. The rules that you must follow depend on which type of IRA you have. Use Table I-1 to help you determine which parts of this publication to read. Also use Table I-1 if you were referred to this publi- cation from instructions to a form. Comments and suggestions. We welcome your com- ments about this publication and your suggestions for fu- ture editions. You can send us comments through IRS.gov/ FormComments. Or you can write to: Internal Revenue Service Tax Forms and Publications 1111 Constitution Ave. NW, IR-6526 Washington, DC 20224 Although we can’t respond individually to each com- ment received, we do appreciate your feedback and will consider your comments as we revise our tax forms, in- structions, and publications. Ordering forms and publications. Visit IRS.gov/ FormsPubs to download forms and publications. Other- wise, you can go to IRS.gov/OrderForms to order current and prior-year forms and instructions. Your order should arrive within 10 business days. Tax questions. If you have a tax question not an- swered by this publication, check IRS.gov and How To Get Tax Help at the end of this publication. Useful Items You may want to see: Publications 590-B Distributions from Individual Retirement Arrangements (IRAs) 560 Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans) 571 Tax-Sheltered Annuity Plans (403(b) Plans) 575 Pension and Annuity Income 939 General Rule for Pensions and Annuities Forms (and Instructions) W-4P Withholding Certificate for Pension or Annuity Payments 1099-R Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. 5304-SIMPLE Savings Incentive Match Plan for Employees of Small Employers (SIMPLE)—Not for Use With a Designated Financial Institution 5305-S SIMPLE Individual Retirement Trust Account 5305-SA SIMPLE Individual Retirement Custodial Account 5305-SIMPLE Savings Incentive Match Plan for Employees of Small Employers (SIMPLE)—for Use With a Designated Financial Institution 5329 Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts 5498 IRA Contribution Information 8606 Nondeductible IRAs 8815 Exclusion of Interest From Series EE and I U.S. Savings Bonds Issued After 1989 8839 Qualified Adoption Expenses 8880 Credit for Qualified Retirement Savings Contributions 8915A Qualified 2016 Disaster Retirement Plan Distributions and Repayments 590-B 560 571 575 939 W-4P 1099-R 5304-SIMPLE 5305-S 5305-SA 5305-SIMPLE 5329 5498 8606 8815 8839 8880 8915A Publication 590-A (2018) Page 3

(p590a)(page-5)Page 5#

8915B Qualified 2017 Disaster Retirement Plan Distributions and Repayments 8915B See chapter 4 for information about getting these publica- tions and forms. Table I-1. Using This Publication IF you need information on ... THEN see ... traditional IRAs chapter 1. Roth IRAs chapter 2, and parts of chapter 1. the credit for qualified retirement savings contributions (the saver's credit) chapter 3. how to keep a record of your contributions to, and distributions from, your traditional IRA(s) Appendix A. SEP IRAs, SIMPLE IRAs, and 401(k) plans Pub. 560. Coverdell education savings accounts (formerly called education IRAs) Pub. 970. IF for 2018, you: • received social security benefits, • had taxable compensation, • contributed to a traditional IRA, and • you or your spouse was covered by an employer retirement plan, and you want to... THEN see ... first figure your modified adjusted gross income (AGI) Appendix B, Worksheet 1. then figure how much of your traditional IRA contribution you can deduct Appendix B, Worksheet 2. and finally figure how much of your social security is taxable Appendix B, Worksheet 3. Page 4 Publication 590-A (2018)

(p590a)(page-6)Page 6#

1. Traditional IRAs Introduction This chapter discusses the original IRA. In this publica- tion, the original IRA (sometimes called an ordinary or reg- ular IRA) is referred to as a “traditional IRA.” A traditional IRA is any IRA that isn’t a Roth IRA or a SIMPLE IRA. The following are two advantages of a traditional IRA. • You may be able to deduct some or all of your contri- butions to it, depending on your circumstances. • Generally, amounts in your IRA, including earnings and gains, aren’t taxed until they are distributed. Who Can Open a Traditional IRA? You can open and make contributions to a traditional IRA if: • You (or, if you file a joint return, your spouse) received taxable compensation during the year, and • You weren’t age 701/2 by the end of the year. You can have a traditional IRA whether or not you are covered by any other retirement plan. However, you may not be able to deduct all of your contributions if you or your spouse is covered by an employer retirement plan. See How Much Can You Deduct, later. Both spouses have compensation. If both you and your spouse have compensation and are under age 701/2, each of you can open an IRA. You can’t both participate in the same IRA. If you file a joint return, only one of you needs to have compensation. Table I-2. How Are a Traditional IRA and a Roth IRA Different? This table shows the differences between traditional and Roth IRAs. Answers in the middle column apply to traditional IRAs. Answers in the right column apply to Roth IRAs. Question Answer Traditional IRA? Roth IRA? Is there an age limit on when I can open and contribute to a . . . . . . . . . . . . . . . . Yes. You must not have reached age 701/2 by the end of the year. See Who Can Open a Traditional IRA? in chapter 1. No. You can be any age. See Can You Contribute to a Roth IRA? in chapter 2. If I earned more than $5,500 in 2018 ($6,500 if I was 50 or older by the end of 2018), is there a limit on how much I can contribute to a . . . . . . . . . . . . . . . . . . . . Yes. For 2018, you can contribute to a traditional IRA up to: • $5,500, or • $6,500 if you were age 50 or older by the end of 2018. There is no upper limit on how much you can earn and still contribute. See How Much Can Be Contributed? in chapter 1. Yes. For 2018, you may be able to contribute to a Roth IRA up to: • $5,500, or • $6,500 if you were age 50 or older by the end of 2018, but the amount you can contribute may be less than that depending on your income, filing status, and if you contribute to another IRA. See How Much Can Be Contributed? and Table 2-1 in chapter 2. Can I deduct contributions to a . . . . . . . Yes. You may be able to deduct your contributions to a traditional IRA depending on your income, filing status, whether you are covered by a retirement plan at work, and whether you receive social security benefits. See How Much Can You Deduct? in chapter 1. No. You can never deduct contributions to a Roth IRA. See What Is a Roth IRA? in chapter 2. Do I have to file a form just because I contribute to a . . . . . . . . . . . . . . . . . . . . Not unless you make nondeductible contributions to your traditional IRA. In that case, you must file Form 8606. See Nondeductible Contributions in chapter 1. No. You don’t have to file a form if you contribute to a Roth IRA. See Contributions not reported in chapter 2. Chapter 1 Traditional IRAs Page 5

(p590a)(page-7)Page 7#

What Is Compensation? Generally, compensation is what you earn from working. For a summary of what compensation does and doesn’t include, see Table 1-1. Compensation includes all of the items discussed next (even if you have more than one type). Wages, salaries, etc. Wages, salaries, tips, professional fees, bonuses, and other amounts you receive for provid- ing personal services are compensation. The IRS treats as compensation any amount properly shown in box 1 (Wages, tips, other compensation) of Form W-2, Wage and Tax Statement, provided that amount is reduced by any amount properly shown in box 11 (Nonqualified plans). Scholarship and fellowship payments are compen- sation for IRA purposes only if shown in box 1 of Form W-2. Commissions. An amount you receive that is a percent- age of profits or sales price is compensation. Self-employment income. If you are self-employed (a sole proprietor or a partner), compensation is the net earnings from your trade or business (provided your per- sonal services are a material income-producing factor) re- duced by the total of: • The deduction for contributions made on your behalf to retirement plans, and • The deduction allowed for the deductible part of your self-employment taxes. Compensation includes earnings from self-employment even if they aren’t subject to self-employment tax because of your religious beliefs. Self-employment loss. If you have a net loss from self-employment, don’t subtract the loss from your salar- ies or wages when figuring your total compensation. Alimony and separate maintenance. For IRA purpo- ses, compensation includes any taxable alimony and sep- arate maintenance payments you receive under a decree of divorce or separate maintenance. Nontaxable combat pay. If you were a member of the U.S. Armed Forces, compensation includes any nontaxa- ble combat pay you received. This amount should be re- ported in box 12 of your 2018 Form W-2 with code Q. Compensation for Purposes of an IRA Includes ... Doesn’t include ... earnings and profits from property. wages, salaries, etc. interest and dividend income. commissions. pension or annuity income. self-employment income. deferred compensation. alimony and separate maintenance. income from certain partnerships. nontaxable combat pay. any amounts you exclude from income. What Isn’t Compensation? Compensation doesn’t include any of the following items. • Earnings and profits from property, such as rental in- come, interest income, and dividend income. • Pension or annuity income. • Deferred compensation received (compensation pay- ments postponed from a past year). • Income from a partnership for which you don’t provide services that are a material income-producing factor. • Conservation Reserve Program (CRP) payments re- ported on Schedule SE (Form 1040), line 1b. • Any amounts (other than combat pay) you exclude from income, such as foreign earned income and housing costs. When Can a Traditional IRA Be Opened? You can open a traditional IRA at any time. However, the time for making contributions for any year is limited. See When Can Contributions Be Made, later. How Can a Traditional IRA Be Opened? You can open different kinds of IRAs with a variety of or- ganizations. You can open an IRA at a bank or other fi- nancial institution or with a mutual fund or life insurance company. You can also open an IRA through your stock- broker. Any IRA must meet Internal Revenue Code re- quirements. The requirements for the various arrange- ments are discussed below. Table 1-1. Page 6 Chapter 1 Traditional IRAs

(p590a)(page-8)Page 8#

Kinds of traditional IRAs. Your traditional IRA can be an individual retirement account or annuity. It can be part of either a SEP or an employer or employee association trust account. Individual Retirement Account An individual retirement account is a trust or custodial ac- count set up in the United States for the exclusive benefit of you or your beneficiaries. The account is created by a written document. The document must show that the ac- count meets all of the following requirements. • The trustee or custodian must be a bank, a federally insured credit union, a savings and loan association, or an entity approved by the IRS to act as trustee or custodian. • The trustee or custodian generally can’t accept contri- butions of more than the deductible amount for the year. However, rollover contributions and employer contributions to a SEP can be more than this amount. • Contributions, except for rollover contributions, must be in cash. See Rollovers, later. • You must have a nonforfeitable right to the amount at all times. • Money in your account can’t be used to buy a life in- surance policy. • Assets in your account can’t be combined with other property, except in a common trust fund or common investment fund. • You must start receiving distributions by April 1 of the year following the year in which you reach age 701/2. See Pub. 590-B for more information about Required Minimum Distributions (RMDs) and other distribution rules. Individual Retirement Annuity You can open an individual retirement annuity by purchas- ing an annuity contract or an endowment contract from a life insurance company. An individual retirement annuity must be issued in your name as the owner, and either you or your beneficiaries who survive you are the only ones who can receive the benefits or payments. An individual retirement annuity must meet all the fol- lowing requirements. • Your entire interest in the contract must be nonforfeit- able. • The contract must provide that you can’t transfer any portion of it to any person other than the issuer. • There must be flexible premiums so that if your com- pensation changes, your payment can also change. This provision applies to contracts issued after No- vember 6, 1978. • The contract must provide that contributions can’t be more than the deductible amount for an IRA for the year, and that you must use any refunded premiums to pay for future premiums or to buy more benefits be- fore the end of the calendar year after the year in which you receive the refund. • Distributions must begin by April 1 of the year follow- ing the year in which you reach age 701/2. See Pub. 590-B for more information about Required Minimum Distributions (RMDs) and other distribution rules. Individual Retirement Bonds The sale of individual retirement bonds issued by the fed- eral government was suspended after April 30, 1982. The bonds have the following features. • They stop earning interest when you reach age 701/2. If you die, interest will stop 5 years after your death, or on the date you would have reached age 701/2, which- ever is earlier. • You can’t transfer the bonds. If you cash (redeem) the bonds before the year in which you reach age 591/2, you may be subject to a 10% addi- tional tax. See Pub. 590-B for more information about Age 591/2 Rule for Early Distributions and other distribution rules. You can roll over redemption proceeds into IRAs. SIMPLE IRAs A SIMPLE IRA plan is a tax-favored retirement plan that certain small employers (including self-employed employ- ees) can set up for the benefit of their employees. Your participation in your employer's SIMPLE IRA plan doesn’t prevent you from making contributions to a traditional or Roth IRA. See Pub. 560 for more information about SIM- PLE IRAs. Simplified Employee Pension (SEP) A SEP is a written arrangement that allows your employer to make deductible contributions to a traditional IRA (a SEP IRA) set up for you to receive such contributions. Generally, distributions from SEP IRAs are subject to the withdrawal and tax rules that apply to traditional IRAs. See Pub. 560 for more information about SEPs. Employer and Employee Association Trust Accounts Your employer or your labor union or other employee as- sociation can set up a trust to provide individual retirement accounts for employees or members. The requirements for individual retirement accounts apply to these tradi- tional IRAs. Required Disclosures The trustee or issuer (sometimes called the sponsor) of your traditional IRA generally must give you a disclosure statement at least 7 days before you open your IRA. Chapter 1 Traditional IRAs Page 7

(p590a)(page-9)Page 9#

However, the sponsor doesn’t have to give you the state- ment until the date you open (or purchase, if earlier) your IRA, provided you are given at least 7 days from that date to revoke the IRA. The disclosure statement must explain certain items in plain language. For example, the statement should ex- plain when and how you can revoke the IRA, and include the name, address, and telephone number of the person to receive the notice of cancellation. This explanation must appear at the beginning of the disclosure statement. If you revoke your IRA within the revocation period, the sponsor must return to you the entire amount you paid. The sponsor must report on the appropriate IRS forms both your contribution to the IRA (unless it was made by a trustee-to-trustee transfer) and the amount returned to you. These requirements apply to all sponsors. How Much Can Be Contributed? There are limits and other rules that affect the amount that can be contributed to a traditional IRA. These limits and rules are explained below. Community property laws. Except as discussed later under Kay Bailey Hutchison Spousal IRA Limit, each spouse figures his or her limit separately, using his or her own compensation. This is the rule even in states with community property laws. Brokers' commissions. Brokers' commissions paid in connection with your traditional IRA are subject to the con- tribution limit. For information about whether you can de- duct brokers' commissions, see Brokers' commissions, later, under How Much Can You Deduct. Trustees' fees. Trustees' administrative fees aren’t sub- ject to the contribution limit. For information about whether you can deduct trustees' fees, see Trustees' fees, later, under How Much Can You Deduct. Qualified reservist repayments. If you were a member of a reserve component and you were ordered or called to active duty after September 11, 2001, you may be able to contribute (repay) to an IRA amounts equal to any quali- fied reservist distributions (defined under Early Distribu- tions in Pub. 590-B) you received. You can make these re- payment contributions even if they would cause your total contributions to the IRA to be more than the general limit on contributions. To be eligible to make these repayment contributions, you must have received a qualified reservist distribution from an IRA or from a section 401(k) or 403(b) plan or a similar arrangement. See Pub. 590-B under Early Distributions for more information on qualified re- servist distributions. Limit. Your qualified reservist repayments can’t be more than your qualified reservist distributions. When repayment contributions can be made. You can’t make these repayment contributions later than the date that is 2 years after your active duty period ends. No deduction. You can’t deduct qualified reservist re- payments. Reserve component. The term “reserve component” means the: • Army National Guard of the United States, • Army Reserve, • Naval Reserve, • Marine Corps Reserve, • Air National Guard of the United States, • Air Force Reserve, • Coast Guard Reserve, or • Reserve Corps of the Public Health Service. Figuring your IRA deduction. The repayment of qualified reservist distributions doesn’t affect the amount you can deduct as an IRA contribution. Reporting the repayment. If you repay a qualified re- servist distribution, include the amount of the repayment with nondeductible contributions on line 1 of Form 8606. Example. In 2018, your IRA contribution limit is $5,500. However, because of your filing status and AGI, the limit on the amount you can deduct is $3,500. You can make a nondeductible contribution of $2,000 ($5,500 - $3,500). In an earlier year, you received a $3,000 qualified reservist distribution, which you would like to repay this year. For 2018, you can contribute a total of $8,500 to your IRA. This is made up of the maximum deductible contribu- tion of $3,500; a nondeductible contribution of $2,000; and a $3,000 qualified reservist repayment. You contrib- ute the maximum allowable for the year. Since you are making a nondeductible contribution ($2,000) and a quali- fied reservist repayment ($3,000), you must file Form 8606 with your return and include $5,000 ($2,000 + $3,000) on line 1 of Form 8606. The qualified reservist re- payment isn’t deductible. Contributions on your behalf to a traditional IRA reduce your limit for contributions to a Roth IRA. See chapter 2 for information about Roth IRAs. General Limit For 2018, the most that can be contributed to your tradi- tional IRA generally is the smaller of the following amounts. • $5,500 ($6,500 if you are age 50 or older). • Your taxable compensation (defined earlier) for the year. Note. This limit is reduced by any contributions to a section 501(c)(18) plan (generally, a pension plan created CAUTION ! Page 8 Chapter 1 Traditional IRAs

(p590a)(page-10)Page 10#

before June 25, 1959, that is funded entirely by employee contributions). This is the most that can be contributed regardless of whether the contributions are to one or more traditional IRAs or whether all or part of the contributions are nonde- ductible. (See Nondeductible Contributions, later.) Quali- fied reservist repayments don’t affect this limit. Examples. George, who is 34 years old and single, earns $24,000 in 2018. His IRA contributions for 2018 are limited to $5,500. Danny, an unmarried college student working part time, earns $3,500 in 2018. His IRA contributions for 2018 are limited to $3,500, the amount of his compensation. More than one IRA. If you have more than one IRA, the limit applies to the total contributions made on your behalf to all your traditional IRAs for the year. Annuity or endowment contracts. If you invest in an annuity or endowment contract under an individual retire- ment annuity, no more than $5,500 ($6,500 if you are age 50 or older) can be contributed toward its cost for the tax year, including the cost of life insurance coverage. If more than this amount is contributed, the annuity or endowment contract is disqualified. Kay Bailey Hutchison Spousal IRA Limit For 2018, if you file a joint return and your taxable com- pensation is less than that of your spouse, the most that can be contributed for the year to your IRA is the smaller of the following two amounts. 1. $5,500 ($6,500 if you are age 50 or older). 2. The total compensation includible in the gross income of both you and your spouse for the year, reduced by the following two amounts. a. Your spouse's IRA contribution for the year to a traditional IRA. b. Any contributions for the year to a Roth IRA on be- half of your spouse. This means that the total combined contributions that can be made for the year to your IRA and your spouse's IRA can be as much as $11,000 ($12,000 if only one of you is age 50 or older, or $13,000 if both of you are age 50 or older). Note. This traditional IRA limit is reduced by any con- tributions to a section 501(c)(18) plan (generally, a pen- sion plan created before June 25, 1959, that is funded en- tirely by employee contributions). Example. Kristin, a full-time student with no taxable compensation, marries Carl during the year. Neither of them was age 50 by the end of 2018. For the year, Carl has taxable compensation of $30,000. He plans to con- tribute (and deduct) $5,500 to a traditional IRA. If he and Kristin file a joint return, each can contribute $5,500 to a traditional IRA. This is because Kristin, who has no com- pensation, can add Carl's compensation, reduced by the amount of his IRA contribution ($30,000 − $5,500 = $24,500), to her own compensation (-0-) to figure her maximum contribution to a traditional IRA. In her case, $5,500 is her contribution limit, because $5,500 is less than $24,500 (her compensation for purposes of figuring her contribution limit). Filing Status Generally, except as discussed earlier under Kay Bailey Hutchison Spousal IRA Limit, your filing status has no ef- fect on the amount of allowable contributions to your tradi- tional IRA. However, if during the year either you or your spouse was covered by a retirement plan at work, your deduction may be reduced or eliminated, depending on your filing status and income. See How Much Can You Deduct, later. Example. Tom and Darcy are married and both are 53. They both work and each has a traditional IRA. Tom earned $3,800 and Darcy earned $48,000 in 2018. Be- cause of the Kay Bailey Hutchison Spousal IRA limit rule, even though Tom earned less than $6,500, they can con- tribute up to $6,500 to his IRA for 2018 if they file a joint return. They can contribute up to $6,500 to Darcy's IRA. If they file separate returns, the amount that can be contrib- uted to Tom's IRA is limited by his earned income, $3,800. Less Than Maximum Contributions If contributions to your traditional IRA for a year were less than the limit, you can’t contribute more after the due date of your return for that year to make up the difference. Example. Rafael, who is 40, earns $30,000 in 2018. Although he can contribute up to $5,500 for 2018, he con- tributes only $3,000. After April 15, 2019, Rafael can’t make up the difference between his actual contributions for 2018 ($3,000) and his 2018 limit ($5,500). He can’t contribute $2,500 more than the limit for any later year. More Than Maximum Contributions If contributions to your IRA for a year were more than the limit, you can apply the excess contribution in one year to a later year if the contributions for that later year are less than the maximum allowed for that year. However, a pen- alty or additional tax may apply. See Excess Contribu- tions, later, under What Acts Result in Penalties or Addi- tional Taxes. When Can Contributions Be Made? As soon as you open your traditional IRA, contributions can be made to it through your chosen sponsor (trustee or other administrator). Contributions must be in the form of Chapter 1 Traditional IRAs Page 9

(p590a)(page-11)Page 11#

money (cash, check, or money order). Property can’t be contributed. Although property can’t be contributed, your IRA may invest in certain property. For example, your IRA may pur- chase shares of stock. For other restrictions on the use of funds in your IRA, see Prohibited Transactions, later in this chapter. You may be able to transfer or roll over cer- tain property from one retirement plan to another. See the discussion of rollovers and other transfers later in this chapter under Can You Move Retirement Plan Assets. You can make a contribution to your IRA by hav- ing your income tax refund (or a portion of your re- fund), if any, paid directly to your traditional IRA, Roth IRA, or SEP IRA. For details, see the instructions for your income tax return or Form 8888, Allocation of Re- fund. Contributions can be made to your traditional IRA for each year that you receive compensation and haven’t reached age 701/2. For any year in which you don’t work, contributions can’t be made to your IRA unless you re- ceive alimony, nontaxable combat pay, military differential pay, or file a joint return with a spouse who has compen- sation. See Who Can Open a Traditional IRA, earlier. Even if contributions can’t be made for the current year, the amounts contributed for years in which you did qualify can remain in your IRA. Contributions can resume for any years that you qualify. Contributions must be made by due date. Contribu- tions can be made to your traditional IRA for a year at any time during the year or by the due date for filing your re- turn for that year, not including extensions. For most peo- ple, this means that contributions for 2018 must be made by April 15, 2019 (April 17, 2019, if you live in Maine or Massachusetts). Age 701/2 rule. Contributions can’t be made to your tradi- tional IRA for the year in which you reach age 701/2 or for any later year. You attain age 701/2 on the date that is 6 calendar months after the 70th anniversary of your birth. If you were born on or before June 30, 1948, you can’t contribute for 2019 or any later year. Designating year for which contribution is made. If an amount is contributed to your traditional IRA between January 1 and April 15, you should tell the sponsor which year (the current year or the previous year) the contribu- tion is for. If you don’t tell the sponsor which year it is for, the sponsor can assume, and report to the IRS, that the contribution is for the current year (the year the sponsor received it). Filing before a contribution is made. You can file your return claiming a traditional IRA contribution before the contribution is actually made. Generally, the contribution must be made by the due date of your return, not including extensions. TIP Contributions not required. You don’t have to contrib- ute to your traditional IRA for every tax year, even if you can. How Much Can You Deduct? Generally, you can deduct the lesser of: • The contributions to your traditional IRA for the year, or • The general limit (or the Kay Bailey Hutchison Spousal IRA limit, if applicable) explained earlier un- der How Much Can Be Contributed. However, if you or your spouse was covered by an em- ployer retirement plan, you may not be able to deduct this amount. See Limit if Covered by Employer Plan, later. You may be able to claim a credit for contributions to your traditional IRA. For more information, see chapter 3. Trustees' fees. Trustees' administrative fees that are bil- led separately and paid in connection with your traditional IRA aren’t deductible as IRA contributions. You are also not able to deduct these fees as an itemized deduction. Brokers' commissions. These commissions are part of your IRA contribution and, as such, are deductible subject to the limits. Full deduction. If neither you nor your spouse was cov- ered for any part of the year by an employer retirement plan, you can take a deduction for total contributions to one or more of your traditional IRAs of up to the lesser of: • $5,500 ($6,500 if you are age 50 or older), or • 100% of your compensation. This limit is reduced by any contributions made to a 501(c)(18) plan on your behalf. Kay Bailey Hutchison Spousal IRA. In the case of a married couple with unequal compensation who file a joint return, the deduction for contributions to the traditional IRA of the spouse with less compensation is limited to the lesser of: 1. $5,500 ($6,500 if the spouse with the lower compen- sation is age 50 or older), or 2. The total compensation includible in the gross income of both spouses for the year reduced by the following three amounts. a. The IRA deduction for the year of the spouse with the greater compensation. b. Any designated nondeductible contribution for the year made on behalf of the spouse with the greater compensation. c. Any contributions for the year to a Roth IRA on be- half of the spouse with the greater compensation. TIP Page 10 Chapter 1 Traditional IRAs

(p590a)(page-12)Page 12#

This limit is reduced by any contributions to a section 501(c)(18) plan on behalf of the spouse with the lesser compensation. Note. If you were divorced or legally separated (and didn’t remarry) before the end of the year, you can’t de- duct any contributions to your spouse's IRA. After a di- vorce or legal separation, you can deduct only the contri- butions to your own IRA. Your deductions are subject to the rules for single individuals. Covered by an employer retirement plan. If you or your spouse was covered by an employer retirement plan at any time during the year for which contributions were made, your deduction may be further limited. This is dis- cussed later under Limit if Covered by Employer Plan. Limits on the amount you can deduct don’t affect the amount that can be contributed. Are You Covered by an Employer Plan? The Form W-2 you receive from your employer has a box used to indicate whether you were covered for the year. The “Retirement plan” box should be checked if you were covered. Reservists and volunteer firefighters should also see Situations in Which You Aren’t Covered, later. If you aren’t certain whether you were covered by your employer's retirement plan, you should ask your em- ployer. Federal judges. For purposes of the IRA deduction, fed- eral judges are covered by an employer plan. For Which Year(s) Are You Covered? Special rules apply to determine the tax years for which you are covered by an employer plan. These rules differ depending on whether the plan is a defined contribution plan or a defined benefit plan. Tax year. Your tax year is the annual accounting period you use to keep records and report income and expenses on your income tax return. For almost all people, the tax year is the calendar year. Defined contribution plan. Generally, you are covered by a defined contribution plan for a tax year if amounts are contributed or allocated to your account for the plan year that ends with or within that tax year. However, also see Situations in Which You Aren’t Covered, later. A defined contribution plan is a plan that provides for a separate account for each person covered by the plan. In a defined contribution plan, the amount to be contributed to each participant's account is spelled out in the plan. The level of benefits actually provided to a participant de- pends on the total amount contributed to that participant's account and any earnings and losses on those contribu- tions. Types of defined contribution plans include profit-sharing plans, stock bonus plans, and money pur- chase pension plans. Example. Company A has a money purchase pension plan. Its plan year is from July 1 to June 30. The plan pro- vides that contributions must be allocated as of June 30. Bob, an employee, leaves Company A on December 31, 2017. The contribution for the plan year ending on June 30, 2018, is made February 15, 2019. Because an amount is contributed to Bob's account for the plan year, Bob is covered by the plan for his 2018 tax year. A special rule applies to certain plans in which it isn’t possible to determine if an amount will be contributed to your account for a given plan year. If, for a plan year, no amounts have been allocated to your account that are at- tributable to employer contributions, employee contribu- tions, or forfeitures, by the last day of the plan year, and contributions are discretionary for the plan year, you aren’t covered for the tax year in which the plan year ends. If, af- ter the plan year ends, the employer makes a contribution for that plan year, you are covered for the tax year in which the contribution is made. Example. Mickey was covered by a profit-sharing plan and left the company on December 31, 2017. The plan year runs from July 1 to June 30. Under the terms of the plan, employer contributions don’t have to be made, but if they are made, they are contributed to the plan before the due date for filing the company's tax return. Such contri- butions are allocated as of the last day of the plan year, and allocations are made to the accounts of individuals who have any service during the plan year. As of June 30, 2018, no contributions were made that were allocated to the June 30, 2018, plan year, and no forfeitures had been allocated within the plan year. In addition, as of that date, the company wasn’t obligated to make a contribution for such plan year and it was impossible to determine whether or not a contribution would be made for the plan year. On December 31, 2018, the company decided to contribute to the plan for the plan year ending June 30, 2018. That contribution was made on February 15, 2019. Mickey is an active participant in the plan for his 2019 tax year but not for his 2018 tax year. No vested interest. If an amount is allocated to your account for a plan year, you are covered by that plan even if you have no vested interest in (legal right to) the ac- count. Defined benefit plan. If you are eligible to participate in your employer's defined benefit plan for the plan year that ends within your tax year, you are covered by the plan. This rule applies even if you: • Declined to participate in the plan, • Didn’t make a required contribution, or • Didn’t perform the minimum service required to accrue a benefit for the year. A defined benefit plan is any plan that isn’t a defined contribution plan. In a defined benefit plan, the level of benefits to be provided to each participant is spelled out in the plan. The plan administrator figures the amount Chapter 1 Traditional IRAs Page 11

(p590a)(page-13)Page 13#

needed to provide those benefits and those amounts are contributed to the plan. Defined benefit plans include pen- sion plans and annuity plans. Example. Nick, an employee of Company B, is eligible to participate in Company B's defined benefit plan, which has a July 1 to June 30 plan year. Nick leaves Company B on December 31, 2017. Because Nick is eligible to partici- pate in the plan for its year ending June 30, 2018, he is covered by the plan for his 2018 tax year. No vested interest. If you accrue a benefit for a plan year, you are covered by that plan even if you have no vested interest in (legal right to) the accrual. Situations in Which You Aren’t Covered Unless you are covered by another employer plan, you aren’t covered by an employer plan if you are in one of the situations described below. Social security or railroad retirement. Coverage under social security or railroad retirement isn’t coverage under an employer retirement plan. Benefits from previous employer's plan. If you receive retirement benefits from a previous employer's plan, you aren’t covered by that plan. Reservists. If the only reason you participate in a plan is because you are a member of a reserve unit of the Armed Forces, you may not be covered by the plan. You aren’t covered by the plan if both of the following conditions are met. 1. The plan you participate in is established for its em- ployees by: a. The United States, b. A state or political subdivision of a state, or c. An instrumentality of either (a) or (b) above. 2. You didn’t serve more than 90 days on active duty during the year (not counting duty for training). Volunteer firefighters. If the only reason you participate in a plan is because you are a volunteer firefighter, you may not be covered by the plan. You aren’t covered by the plan if both of the following conditions are met. 1. The plan you participate in is established for its em- ployees by: a. The United States, b. A state or political subdivision of a state, or c. An instrumentality of either (a) or (b) above. 2. Your accrued retirement benefits at the beginning of the year won’t provide more than $1,800 per year at retirement. Limit if Covered by Employer Plan As discussed earlier, the deduction you can take for con- tributions made to your traditional IRA depends on whether you or your spouse was covered for any part of the year by an employer retirement plan. Your deduction is also affected by how much income you had and by your filing status. Your deduction may also be affected by so- cial security benefits you received. Reduced or no deduction. If either you or your spouse was covered by an employer retirement plan, you may be entitled to only a partial (reduced) deduction or no deduc- tion at all, depending on your income and your filing sta- tus. Your deduction begins to decrease (phase out) when your income rises above a certain amount and is elimina- ted altogether when it reaches a higher amount. These amounts vary depending on your filing status. To determine if your deduction is subject to the phase- out, you must determine your modified AGI and your filing status, as explained later under Deduction Phaseout. Once you have determined your modified AGI and your fil- ing status, you can use Table 1-2 or Table 1-3 to deter- mine if the phaseout applies. Social Security Recipients Instead of using Table 1-2 or Table 1-3 and Worksheet 1-2, complete the worksheets in Appendix B of this publi- cation if, for the year, all of the following apply. • You received social security benefits. • You received taxable compensation. • Contributions were made to your traditional IRA. • You or your spouse were covered by an employer re- tirement plan. Use the worksheets in Appendix B to figure your IRA de- duction, your nondeductible contribution, and the taxable portion, if any, of your social security benefits. Appendix B includes an example with filled-in worksheets to assist you. Deduction Phaseout The amount of any reduction in the limit on your IRA de- duction (phaseout) depends on whether you or your spouse was covered by an employer retirement plan. Covered by a retirement plan. If you are covered by an employer retirement plan and you didn’t receive any social security retirement benefits, your IRA deduction may be reduced or eliminated depending on your filing status and modified AGI, as shown in Table 1-2. If your spouse is covered. If you aren’t covered by an employer retirement plan, but your spouse is, and you didn’t receive any social security benefits, your IRA de- duction may be reduced or eliminated entirely depending on your filing status and modified AGI as shown in Ta- ble 1-3. Page 12 Chapter 1 Traditional IRAs

(p590a)(page-14)Page 14#

Filing status. Your filing status depends primarily on your marital status. For this purpose, you need to know if your filing status is single or head of household, married filing jointly or qualifying widow(er), or married filing sepa- rately. If you need more information on filing status, see Pub. 501, Exemptions, Standard Deduction, and Filing In- formation. Lived apart from spouse. If you didn’t live with your spouse at any time during the year and you file a separate return, your filing status, for this purpose, is single. Modified adjusted gross income (AGI). You can use Worksheet 1-1 to figure your modified AGI. If you made contributions to your IRA for 2018 and received a distribu- tion from your IRA in 2018, see Both contributions for 2018 and distributions in 2018, later. Don’t assume that your modified AGI is the same as your compensation. Your modified AGI may in- clude income in addition to your compensation (discussed earlier) such as interest, dividends, and in- come from IRA distributions. CAUTION ! Effect of Modified AGI1 on Deduction if You Are Covered by a Retirement Plan at Work If you are covered by a retirement plan at work, use this table to determine if your modified AGI affects the amount of your deduction. IF your filing status is ... AND your modified AGI is ... THEN you can take ... single or head of household $63,000 or less a full deduction. more than $63,000 but less than $73,000 a partial deduction. $73,000 or more no deduction. married filing jointly or qualifying widow(er) $101,000 or less a full deduction. more than $101,000 but less than $121,000 a partial deduction. $121,000 or more no deduction. married filing separately2 less than $10,000 a partial deduction. $10,000 or more no deduction. 1 Modified AGI (adjusted gross income). See Modified adjusted gross income (AGI), later. 2 If you didn’t live with your spouse at any time during the year, your filing status is considered Single for this purpose (therefore, your IRA deduction is determined under the “Single” filing status). Table 1-2. Effect of Modified AGI1 on Deduction if You Aren’t Covered by a Retirement Plan at Work If you aren’t covered by a retirement plan at work, use this table to determine if your modified AGI affects the amount of your deduction. IF your filing status is ... AND your modified AGI is ... THEN you can take ... single, head of household, or qualifying widow(er) any amount a full deduction. married filing jointly or separately with a spouse who isn’t covered by a plan at work any amount a full deduction. married filing jointly with a spouse who is covered by a plan at work $189,000 or less a full deduction. more than $189,000 but less than $199,000 a partial deduction. $199,000 or more no deduction. married filing separately with a spouse who is covered by a plan at work2 less than $10,000 a partial deduction. $10,000 or more no deduction. 1 Modified AGI (adjusted gross income). See Modified adjusted gross income (AGI), later. 2 You are entitled to the full deduction if you didn’t live with your spouse at any time during the year. Table 1-3. Chapter 1 Traditional IRAs Page 13

(p590a)(page-15)Page 15#

Form 1040. If you file Form 1040, refigure the amount on the page 2 “adjusted gross income” line without taking into account any of the following amounts. • IRA deduction. • Student loan interest deduction. • Domestic production activities deduction. • Foreign earned income exclusion. • Foreign housing exclusion or deduction. • Exclusion of qualified savings bond interest shown on Form 8815. • Exclusion of employer-provided adoption benefits shown on Form 8839. This is your modified AGI. Form 1040NR. If you file Form 1040NR, refigure the amount on the page 1 “adjusted gross income” line with- out taking into account any of the following amounts. • IRA deduction. • Student loan interest deduction. • Domestic production activities deduction. • Exclusion of qualified savings bond interest shown on Form 8815. • Exclusion of employer-provided adoption benefits shown on Form 8839. This is your modified AGI. Income from IRA distributions. If you received distri- butions in 2018 from one or more traditional IRAs and your traditional IRAs include only deductible contributions, your distributions are fully taxable and are included in your modified AGI. See Pub. 590-B for more information on distributions. Both contributions for 2018 and distributions in 2018. If all three of the following apply, any IRA distribu- tions you received in 2018 may be partly tax free and partly taxable. • You received distributions in 2018 from one or more traditional IRAs. • You made contributions to a traditional IRA for 2018. • Some of those contributions may be nondeductible contributions. (See Nondeductible Contributions and Worksheet 1-2, later.) If this is your situation, you must figure the taxable part of the traditional IRA distribution before you can figure your modified AGI. To do this, you can use Worksheet 1-1 in Pub. 590-B. If at least one of the above doesn’t apply, figure your modified AGI using Worksheet 1-1. Page 14 Chapter 1 Traditional IRAs

(p590a)(page-16)Page 16#

How To Figure Your Reduced IRA Deduction If you or your spouse is covered by an employer retire- ment plan and you didn’t receive any social security bene- fits, you can figure your reduced IRA deduction by using Worksheet 1-2. The Instructions for Form 1040 and Form 1040NR include similar worksheets that you can use in- stead of the worksheet in this publication. If you or your spouse is covered by an employer retire- ment plan, and you received any social security benefits, see Social Security Recipients, earlier. Note. If you were married and both you and your spouse contributed to IRAs, figure your deduction and your spouse's deduction separately. Reporting Deductible Contributions If you file Schedule 1 (Form 1040), enter your IRA deduc- tion on line 32 of that form. If you file Form 1040NR, enter your IRA deduction on line 32 of that form. You can’t de- duct IRA contributions on Form 1040NR-EZ. Self-employed. If you are self-employed (a sole proprie- tor or partner) and have a SIMPLE IRA, enter your deduc- tion for allowable plan contributions on Schedule 1 (Form 1040), line 28. If you file Form 1040NR, enter your deduc- tion on line 28. Nondeductible Contributions Although your deduction for IRA contributions may be re- duced or eliminated, contributions can be made to your IRA of up to the general limit or, if it applies, the Kay Bailey Hutchison Spousal IRA limit. The difference between your total permitted contributions and your IRA deduction, if any, is your nondeductible contribution. Example. Tony is 29 years old and single. In 2018, he was covered by a retirement plan at work. His salary is $67,000. His modified AGI is $80,000. Tony makes a $5,500 IRA contribution for 2018. Because he was cov- ered by a retirement plan and his modified AGI is above $73,000, he can’t deduct his $5,500 IRA contribution. He must designate this contribution as a nondeductible con- tribution by reporting it on Form 8606. Repayment of reservist distributions. Nondeductible contributions may include repayments of qualified reserv- ist distributions. For more information, see Qualified re- servist repayments under How Much Can Be Contributed, earlier. Form 8606. To designate contributions as nondeducti- ble, you must file Form 8606. You don’t have to designate a contribution as nonde- ductible until you file your tax return. When you file, you can even designate otherwise deductible contributions as nondeductible contributions. You must file Form 8606 to report nondeductible contri- butions even if you don’t have to file a tax return for the year. A Form 8606 isn’t used for the year that you make a rollover from a qualified retirement plan to a tra- ditional IRA and the rollover includes nontaxable amounts. In those situations, a Form 8606 is completed for the year you take a distribution from that IRA. See Form 8606 under Distributions Fully or Partly Taxable in Pub. 590-B. Failure to report nondeductible contributions. If you don’t report nondeductible contributions, all of the contri- butions to your traditional IRA will be treated like deducti- ble contributions when withdrawn. All distributions from your IRA will be taxed unless you can show, with satisfac- tory evidence, that nondeductible contributions were made. CAUTION ! Worksheet 1-1. Figuring Your Modified AGI Keep for Your Records Use this worksheet to figure your modified AGI for traditional IRA purposes. 1. Enter your adjusted gross income (AGI) from Form 1040, line 7; or Form 1040NR, line 35, figured without taking into account the amount from Schedule 1 (Form 1040), line 32; or Form 1040NR, line 32 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. 2. Enter any student loan interest deduction from Schedule 1 (Form 1040), line 33; or Form 1040NR, line 33 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. 3. Enter any domestic production activities deduction (DPAD) from Schedule 1 (Form 1040), line 36; or Form 1040NR, line 34 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. 4. Enter any foreign earned income exclusion and/or housing exclusion from Form 2555, line 45; or Form 2555-EZ, line 18 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. 5. Enter any foreign housing deduction from Form 2555, line 50 . . . . . . . . . . . . . . . . . . . . . . . . . . . 5. 6. Enter any excludable savings bond interest from Form 8815, line 14 . . . . . . . . . . . . . . . . . . . . . . 6. 7. Enter any excluded employer-provided adoption benefits from Form 8839, line 28 . . . . . . . . . . 7. 8. Add lines 1 through 6. This is your Modified AGI for traditional IRA purposes . . . . . . . . . . . . . . 8. Chapter 1 Traditional IRAs Page 15

(p590a)(page-17)Page 17#

Penalty for overstatement. If you overstate the amount of nondeductible contributions on your Form 8606 for any tax year, you must pay a penalty of $100 for each over- statement, unless it was due to reasonable cause. Penalty for failure to file Form 8606. You will have to pay a $50 penalty if you don’t file a required Form 8606, unless you can prove that the failure was due to reasona- ble cause. Tax on earnings on nondeductible contributions. As long as contributions are within the contribution limits, none of the earnings or gains on contributions (deductible or nondeductible) will be taxed until they are distributed. Cost basis. You will have a cost basis in your traditional IRA if you made any nondeductible contributions. Your cost basis is the sum of the nondeductible contributions to your IRA minus any withdrawals or distributions of nonde- ductible contributions. Commonly, distributions from your traditional IRAs will include both taxable and nontaxable (cost basis) amounts. See Pub. 590-B for more information on distributions for more information. Recordkeeping. There is a recordkeeping work- sheet, Appendix A. Summary Record of Tradi- tional IRA(s) for 2018, that you can use to keep a record of deductible and nondeductible IRA contributions. Examples—Worksheet for Reduced IRA Deduction for 2018 The following examples illustrate the use of Worksheet 1-2. Example 1. For 2018, Tom and Betty file a joint return on Form 1040. They are both 39 years old. They are both employed. Tom is covered by his employer's retirement plan. However, Betty isn’t covered by her employer's re- tirement plan. Tom's salary is $62,000, and Betty's is $33,500. They each have a traditional IRA and their com- bined modified AGI, which includes $9,000 interest and dividend income, is $104,500. Because their modified AGI is between $101,000 and $121,000 and Tom is covered by an employer plan, Tom is subject to the deduction pha- seout discussed earlier under Limit if Covered by Em- ployer Plan. CAUTION ! RECORDS For 2018, Tom contributed $5,500 to his IRA, and Betty contributed $5,500 to hers. Even though they file a joint return, they must figure their IRA deduction separately. Tom can take a deduction of only $4,538. Using Work- sheet 1-2, Figuring Your Reduced IRA Deduction for 2018, Tom figures his deductible and nondeductible amounts as shown on Worksheet 1-2. Figuring Your Re- duced IRA Deduction for 2018—Example 1 Illustrated. He can choose to treat the $4,538 as either deductible or nondeductible contributions. He can either leave the $962 ($5,500 − $4,538) of nondeductible contributions in his IRA or withdraw them by April 15, 2019. He decides to treat the $4,538 as deductible contributions and leave the $962 of nondeductible contributions in his IRA. Betty figures her IRA deduction as follows. Betty can treat all or part of her $5,500 contribution as either deduc- tible or nondeductible. This is because she isn’t covered by her employer's retirement plan, and their combined modified AGI isn’t between $189,000 and $199,000. Therefore, she isn’t subject to the deduction phaseout dis- cussed earlier under Limit if Covered by Employer Plan, and she doesn’t need to use Worksheet 1-2. Betty de- cides to treat her $5,500 IRA contributions as deductible. The IRA deductions of $4,538 and $5,500 on the joint return for Tom and Betty total $10,038. Example 2. For 2018, Ed and Sue file a joint return on Form 1040. They are both 39 years old. Ed is covered by his employer's retirement plan. Ed's salary is $45,000. Sue had no compensation for the year and didn’t contrib- ute to an IRA. Sue isn’t covered by an employer plan. Ed contributed $5,500 to his traditional IRA and $5,500 to a traditional IRA for Sue (a Kay Bailey Hutchison Spousal IRA). Their combined modified AGI, which includes $2,000 interest and dividend income and a large capital gain from the sale of stock, is $188,555. Because the combined modified AGI is $121,000 or more and Ed is covered by his employer's plan, he can’t deduct any of the contribution to his traditional IRA. He can either leave the $5,500 of nondeductible contributions in his IRA or withdraw them by April 15, 2019. Sue figures her IRA deduction as shown on Worksheet 1-2. Figuring Your Reduced IRA Deduction for 2018—Ex- ample 2 Illustrated. Page 16 Chapter 1 Traditional IRAs

(p590a)(page-18)Page 18#

Figuring Your Reduced IRA Deduction for 2018 Worksheet 1-2. Keep for Your Records (Use only if you or your spouse is covered by an employer plan and your modified AGI falls between the two amounts shown below for your coverage situation and filing status.) Note. If you were married and both you and your spouse contributed to IRAs, figure your deduction and your spouse's deduction separately. . IF you ... AND your filing status is ... AND your modified AGI is over ... THEN enter on line 1 below ... are covered by an employer plan single or head of household $63,000 $73,000 married filing jointly or qualifying widow(er) $101,000 $121,000 married filing separately $0 $10,000 aren’t covered by an employer plan, but your spouse is covered married filing jointly $189,000 $199,000 married filing separately $0 $10,000 1. Enter applicable amount from table above . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.

2. Enter your modified AGI (that of both spouses, if married filing jointly) . . . . . . . . . . . . . . . . . . 2.

Note. If line 2 is equal to or more than the amount on line 1, stop here. Your IRA contributions aren’t deductible. See Nondeductible Contributions, earlier. 3. Subtract line 2 from line 1. If line 3 is $10,000 or more ($20,000 or more if married filing jointly or qualifying widow(er) and you are covered by an employer plan), stop here. You can take a full IRA deduction for contributions of up to $5,500 ($6,500 if you are age 50 or older) or 100% of your (and if married filing jointly, your spouse's) compensation, whichever is less . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.

4. Multiply line 3 by the percentage below that applies to you. If the result isn’t a multiple of $10, round it to the next highest multiple of $10. (For example, $611.40 is rounded to $620.) However, if the result is less than $200, enter $200. • Married filing jointly or qualifying widow(er) and you are covered by an employer plan, multiply line 3 by 27.5% (0.275) (by 32.5% (0.325) if you are age 50 or older). • All others, multiply line 3 by 55% (0.55) (by 65% (0.65) if you are age 50 or older). . . . . . . 4.

5. Enter your compensation minus any deductions on Schedule 1 (Form 1040), line 27; or Form 1040NR, line 27 (deductible part of self-employment tax), and Schedule 1 (Form 1040), line 28; or Form 1040NR, line 28 (self-employed SEP, SIMPLE, and qualified plans). If you are filing a joint return and your compensation is less than your spouse's, include your spouse's compensation reduced by his or her traditional IRA and Roth IRA contributions for this year. If you file Form 1040 or Form 1040NR, don’t reduce your compensation by any losses from self-employment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.

6. Enter contributions made, or to be made, to your IRA for 2018, but don’t enter more than $5,500 ($6,500 if you are age 50 or older). If contributions are more than $5,500 ($6,500 if you are age 50 or older), see Excess Contributions, later . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.

7. IRA deduction. Compare lines 4, 5, and 6. Enter the smallest amount (or a smaller amount if you choose) here and on the Form 1040 or 1040NR line for your IRA, whichever applies. If line 6 is more than line 7 and you want to make a nondeductible contribution, go to line 8 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.

8. Nondeductible contribution. Subtract line 7 from line 5 or 6, whichever is smaller. Enter the result here and on line 1 of your Form 8606 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.

Chapter 1 Traditional IRAs Page 17

(p590a)(page-19)Page 19#

Worksheet 1-2. Figuring Your Reduced IRA Deduction for 2018—Example 1 Illustrated (Use only if you or your spouse is covered by an employer plan and your modified AGI falls between the two amounts shown below for your coverage situation and filing status.) Note. If you were married and both you and your spouse contributed to IRAs, figure your deduction and your spouse's deduction separately. . IF you ... AND your filing status is ... AND your modified AGI is over ... THEN enter on line 1 below ... are covered by an employer plan single or head of household $63,000 $73,000 married filing jointly or qualifying widow(er) $101,000 $121,000 married filing separately $0 $10,000 aren’t covered by an employer plan, but your spouse is covered married filing jointly $189,000 $199,000 married filing separately $0 $10,000 1. Enter applicable amount from table above . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. 121,000 2. Enter your modified AGI (that of both spouses, if married filing jointly) . . . . . . . . . . . . . . . 2. 104,500 Note. If line 2 is equal to or more than the amount on line 1, stop here. Your IRA contributions are not deductible. See Nondeductible Contributions, earlier. 3. Subtract line 2 from line 1. If line 3 is $10,000 or more ($20,000 or more if married filing jointly or qualifying widow(er) and you are covered by an employer plan), stop here. You can take a full IRA deduction for contributions of up to $5,500 ($6,500 if you are age 50 or older) or 100% of your (and if married filing jointly, your spouse's) compensation, whichever is less . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. 16,500 4. Multiply line 3 by the percentage below that applies to you. If the result isn’t a multiple of $10, round it to the next highest multiple of $10. (For example, $611.40 is rounded to $620.) However, if the result is less than $200, enter $200. • Married filing jointly or qualifying widow(er) and you are covered by an employer plan, multiply line 3 by 27.5% (0.275) (by 32.5% (0.325) if you are age 50 or older). • All others, multiply line 3 by 55% (0.55) (by 65% (0.65) if you are age 50 or older). . . . . . . 4. 4,538 5. Enter your compensation minus any deductions on Schedule 1 (Form 1040), line 27; or Form 1040NR, line 27 (deductible part of self-employment tax) and Schedule 1 (Form 1040), line 28; or Form 1040NR, line 28 (self-employed SEP, SIMPLE, and qualified plans). If you are filing a joint return and your compensation is less than your spouse's, include your spouse's compensation reduced by his or her traditional IRA and Roth IRA contributions for this year. If you file Form 1040 or Form 1040NR, don’t reduce your compensation by any losses from self-employment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5. 62,000 6. Enter contributions made, or to be made, to your IRA for 2018, but don’t enter more than $5,500 ($6,500 if you are age 50 or older). If contributions are more than $5,500 ($6,500 if you are age 50 or older), see Excess Contributions, later . . . . . . . . . . . . . . . . . . 6. 5,500 7. IRA deduction. Compare lines 4, 5, and 6. Enter the smallest amount (or a smaller amount if you choose) here and on the Form 1040 or 1040NR line for your IRA, whichever applies. If line 6 is more than line 7 and you want to make a nondeductible contribution, go to line 8 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7. 4,538 8. Nondeductible contribution. Subtract line 7 from line 5 or 6, whichever is smaller. Enter the result here and on line 1 of your Form 8606 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8. 962 Page 18 Chapter 1 Traditional IRAs

(p590a)(page-20)Page 20#

Worksheet 1-2. Figuring Your Reduced IRA Deduction for 2018—Example 2 Illustrated (Use only if you or your spouse is covered by an employer plan and your modified AGI falls between the two amounts shown below for your coverage situation and filing status.) Note. If you were married and both you and your spouse contributed to IRAs, figure your deduction and your spouse's deduction separately. . IF you ... AND your filing status is ... AND your modified AGI is over ... THEN enter on line 1 below ... are covered by an employer plan single or head of household $63,000 $73,000 married filing jointly or qualifying widow(er) $101,000 $121,000 married filing separately $0 $10,000 aren’t covered by an employer plan, but your spouse is covered married filing jointly $189,000 $199,000 married filing separately $0 $10,000 1. Enter applicable amount from table above . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. 199,000 2. Enter your modified AGI (that of both spouses, if married filing jointly) . . . . . . . . . . . . . . . 2. 188,555 Note. If line 2 is equal to or more than the amount on line 1, stop here. Your IRA contributions aren’t deductible. See Nondeductible Contributions, earlier. 3. Subtract line 2 from line 1. If line 3 is $10,000 or more ($20,000 or more if married filing jointly or qualifying widow(er) and you are covered by an employer plan), stop here. You can take a full IRA deduction for contributions of up to $5,500 ($6,500 if you are age 50 or older) or 100% of your (and if married filing jointly, your spouse's) compensation, whichever is less . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. 10,445 4. Multiply line 3 by the percentage below that applies to you. If the result isn’t a multiple of $10, round it to the next highest multiple of $10. (For example, $611.40 is rounded to $620.) However, if the result is less than $200, enter $200. • Married filing jointly or qualifying widow(er) and you are covered by an employer plan, multiply line 3 by 27.5% (0.275) (by 32.5% (0.325) if you are age 50 or older). • All others, multiply line 3 by 55% (0.55) (by 65% (0.65) if you are age 50 or older). . . . . . . 4. 2,872 5. Enter your compensation minus any deductions on Schedule 1 (Form 1040), line 27 or Form 1040NR, line 27 (deductible part of self-employment tax) and Schedule 1 (Form 1040), line 28; or Form 1040NR, line 28 (self-employed SEP, SIMPLE, and qualified plans). If you are filing a joint return and your compensation is less than your spouse's, include your spouse's compensation reduced by his or her traditional IRA and Roth IRA contributions for this year. If you file Form 1040 or Form 1040NR, don’t reduce your compensation by any losses from self-employment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5. 39,500 6. Enter contributions made, or to be made, to your IRA for 2018, but don’t enter more than $5,500 ($6,500 if you are age 50 or older). If contributions are more than $5,500 ($6,500 if you are age 50 or older), see Excess Contributions, later . . . . . . . . . . . . . . . . . . 6. 5,500 7. IRA deduction. Compare lines 4, 5, and 6. Enter the smallest amount (or a smaller amount if you choose) here and on the Form 1040 or 1040NR line for your IRA, whichever applies. If line 6 is more than line 7 and you want to make a nondeductible contribution, go to line 8 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7. 2,872 8. Nondeductible contribution. Subtract line 7 from line 5 or 6, whichever is smaller. Enter the result here and on line 1 of your Form 8606 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8. 2,628 Chapter 1 Traditional IRAs Page 19

(p590a)(page-21)Page 21#

What if You Inherit an IRA? If you inherit a traditional IRA, you are called a beneficiary. A beneficiary can be any person or entity the owner choo- ses to receive the benefits of the IRA after he or she dies. Beneficiaries of a traditional IRA must include in their gross income any taxable distributions they receive. Inherited From Spouse If you inherit a traditional IRA from your spouse, you gen- erally have the following three choices. You can do one of the following. 1. Treat it as your own IRA by designating yourself as the account owner. 2. Treat it as your own by rolling it over into your IRA, or to the extent it is taxable, into a: a. Qualified employer plan, b. Qualified employee annuity plan (section 403(a) plan), c. Tax-sheltered annuity plan (section 403(b) plan), or d. Deferred compensation plan of a state or local government (section 457 plan). 3. Treat yourself as the beneficiary rather than treating the IRA as your own. Treating it as your own. You will be considered to have chosen to treat the IRA as your own if: • Contributions (including rollover contributions) are made to the inherited IRA, or • You don’t take the required minimum distribution for a year as a beneficiary of the IRA. You will only be considered to have chosen to treat the IRA as your own if: • You are the sole beneficiary of the IRA, and • You have an unlimited right to withdraw amounts from it. However, if you receive a distribution from your de- ceased spouse's IRA, you can roll that distribution over into your own IRA within the 60-day time limit, as long as the distribution isn’t a required distribution, even if you aren’t the sole beneficiary of your deceased spouse's IRA. For more information, see When Must You Withdraw As- sets? (Required Minimum Distributions) in Pub. 590-B for more information on required minimum distributions. Inherited From Someone Other Than Spouse If you inherit a traditional IRA from anyone other than your deceased spouse, you can’t treat the inherited IRA as your own. This means that you can’t make any contributions to the IRA. It also means you can’t roll over any amounts into or out of the inherited IRA. However, you can make a trustee-to-trustee transfer as long as the IRA into which amounts are being moved is set up and maintained in the name of the deceased IRA owner for the benefit of you as beneficiary. See Pub. 590-B for more in- formation. Like the original owner, you generally won’t owe tax on the assets in the IRA until you receive distributions from it. You must begin receiving distributions from the IRA under the rules for distributions that apply to beneficiaries. More information. For more information about rollovers, required distributions, and inherited IRAs, see: • Rollovers, later, under Can You Move Retirement Plan Assets, • When Must You Withdraw Assets? (Required Mini- mum Distributions) in Pub. 590-B, and • The discussion of IRA Beneficiaries under When Must You Withdraw Assets? (Required Minimum Distribu- tions) in Pub. 590-B. Can You Move Retirement Plan Assets? You can transfer, tax free, assets (money or property) from other retirement programs (including traditional IRAs) to a traditional IRA. You can make the following kinds of transfers. • Transfers from one trustee to another. • Rollovers. • Transfers incident to a divorce. This chapter discusses all three kinds of transfers. Transfers to Roth IRAs. Under certain conditions, you can move assets from a traditional IRA or from a designa- ted Roth account to a Roth IRA. For more information about these transfers, see Converting From Any Tradi- tional IRA Into a Roth IRA, later in this chapter, and Can You Move Amounts Into a Roth IRA? in chapter 2. Transfers to Roth IRAs from other retirement plans. Under certain conditions, you can move assets from a qualified retirement plan to a Roth IRA. For more information, see Can You Move Amounts Into a Roth IRA? in chapter 2. Page 20 Chapter 1 Traditional IRAs

(p590a)(page-22)Page 22#

Trustee-to-Trustee Transfer A transfer of funds in your traditional IRA from one trustee directly to another, either at your request or at the trustee's request, isn’t a rollover. This includes the situation where the current trustee issues a check to the new trustee but gives it to you to deposit. Because there is no distribution to you, the transfer is tax free. Because it isn’t a rollover, it isn’t affected by the 1-year waiting period required be- tween rollovers. This waiting period is discussed later un- der Rollover From One IRA Into Another. For information about direct transfers from retirement programs other than traditional IRAs, see Direct rollover option, later. Rollovers Generally, a rollover is a tax-free distribution to you of cash or other assets from one retirement plan that you contribute to another retirement plan within 60 days you received the payment or distribution. The contribution to the second retirement plan is called a “rollover contribu- tion.” Note. An amount rolled over tax free from one retire- ment plan to another is generally includible in income when it is distributed from the second plan. Kinds of rollovers to a traditional IRA. You can roll over amounts from the following plans into a traditional IRA. • A traditional IRA. • An employer's qualified retirement plan for its employ- ees. • A deferred compensation plan of a state or local gov- ernment (section 457 plan). • A tax-sheltered annuity plan (section 403 plan). Also, see Table 1-4. Treatment of rollovers. You can’t deduct a rollover con- tribution, but you must report the rollover distribution on your tax return as discussed later under Reporting roll- overs from IRAs and Reporting rollovers from employer plans. Rollover notice. A written explanation of rollover treatment must be given to you by the plan (other than an IRA) making the distribution. See Written explanation to recipients, later, for more details. Kinds of rollovers from a traditional IRA. You may be able to roll over, tax free, a distribution from your tradi- tional IRA into a qualified plan. These plans include the Federal Thrift Savings Fund (for federal employees), de- ferred compensation plans of state or local governments (section 457 plans), and tax-sheltered annuity plans (sec- tion 403(b) plans). The part of the distribution that you can roll over is the part that would otherwise be taxable (in- cludible in your income). Qualified plans may, but aren’t required to, accept such rollovers. Tax treatment of a rollover from a traditional IRA to an eligible retirement plan other than an IRA. Ordi- narily, when you have basis in your IRAs, any distribution is considered to include both nontaxable and taxable amounts. Without a special rule, the nontaxable portion of such a distribution couldn’t be rolled over. However, a special rule treats a distribution you roll over into an eligi- ble retirement plan as including only otherwise taxable amounts if the amount you either leave in your IRAs or don’t roll over is at least equal to your basis. The effect of this special rule is to make the amount in your traditional IRAs that you can roll over to an eligible retirement plan as large as possible. Eligible retirement plans. The following are consid- ered eligible retirement plans. • IRAs. • Qualified trusts. • Qualified employee annuity plans under section 403(a). • Deferred compensation plans of state and local gov- ernments (section 457 plans). • Tax-sheltered annuities (section 403(b) annuities). Time Limit for Making a Rollover Contribution You generally must make the rollover contribution by the 60th day after the day you receive the distribution from your traditional IRA or your employer's plan. Example. You received an eligible rollover distribution from your traditional IRA on June 30, 2018, that you intend to roll over to your 403(b) plan. To postpone including the distribution in your income, you must complete the rollover by August 29, 2018, the 60th day following June 30. The IRS may waive the 60-day requirement where the failure to do so would be against equity or good con- science, such as in the event of a casualty, disaster, or other event beyond your reasonable control. For excep- tions to the 60-day period, see Ways to get a waiver of the 60-day rollover requirement, later. Plan loan offset. A plan loan offset is the amount your employer plan account balance is reduced, or offset, to re- pay a loan from the plan. How long you have to complete the rollover of a plan loan offset depends on what kind of plan loan offset you have. For tax years beginning after December 31, 2017, if you have a qualified plan loan off- set, you will have until the due date (including extensions) for your tax return for the tax year in which the offset oc- curs to complete your rollover. A qualified plan loan offset occurs when a plan loan in good standing is offset be- cause your employer plan terminates, or because you sever from employment. If your plan loan offset occurs for any other reason, then you have 60 days from the date the offset occurs to complete your rollover. Rollovers completed after the 60-day period. In the absence of a waiver, amounts not rolled over within the Chapter 1 Traditional IRAs Page 21

(p590a)(page-23)Page 23#

60-day period don’t qualify for tax-free rollover treatment. You must treat them as a taxable distribution from either your IRA or your employer's plan. These amounts are tax- able in the year distributed, even if the 60-day period ex- pires in the next year. You may also have to pay a 10% additional tax on early distributions as discussed under Early Distributions in Pub. 590-B. Unless there is a waiver or an extension of the 60-day rollover period, any contribution you make to your IRA more than 60 days after the distribution is a regular contri- bution, not a rollover contribution. Example. You received a distribution in late Decem- ber 2018 from a traditional IRA that you don’t roll over into another traditional IRA within the 60-day limit. You don’t qualify for a waiver. This distribution is taxable in 2018 even though the 60-day limit wasn’t up until 2019. Ways to get a waiver of the 60-day rollover require- ment. There are three ways to obtain a waiver of the 60-day rollover requirement. • You qualify for an automatic waiver. • You self-certify that you met the requirements of a waiver. • You request and receive a private letter ruling granting a waiver. How do you qualify for an automatic waiver? You qualify for an automatic waiver if all of the following apply. • The financial institution receives the funds on your be- half before the end of the 60-day rollover period. • You followed all of the procedures set by the financial institution for depositing the funds into an IRA or other eligible retirement plan within the 60-day rollover Table 1-4. Rollover Chart The following chart indicates the rollovers that are permitted between various types of plans. Roll To Roth IRA Traditional IRA SIMPLE IRA SEP IRA Governme ntal 457(b) Plan Qualified Plan1 (pre-tax) 403(b) Plan (pre-tax) Designated Roth Account (401(k), 403(b), or 457(b)) Roth IRA Yes 2 No No No No No No No Traditional IRA Yes3 Yes 2 Yes2, 7, after 2 years Yes 2 Yes4 Yes Yes No SIMPLE IRA Yes3, after 2 years Yes 2, after 2 years Yes2 Yes 2, after 2 years Yes4, after 2 years Yes, after 2 years Yes, after 2 years No SEP IRA Yes3 Yes 2 Yes2, 7, after 2 years Yes 2 Yes4 Yes Yes No Governme ntal 457(b) Plan Yes3 Yes Yes7, after 2 years Yes Yes Yes Yes Yes,3, 5 Roll From Qualified Plan1 (pre-tax) Yes3 Yes Yes7, after 2 years Yes Yes4 Yes Yes Yes,3, 5 403(b) Plan (pre-tax) Yes3 Yes Yes7, after 2 years Yes Yes4 Yes Yes Yes,3, 5 Designated Roth Account (401(k), 403(b), or 457(b)) Yes No No No No No No Yes6 1Qualified plans include, for example, profit-sharing, 401(k), money purchase, and defined benefit plans. 2Only one rollover in any 12-month period. 3Must include in income. 4Must have separate accounts. 5Must be an in-plan rollover. 6Any nontaxable amounts distributed must be rolled over by direct trustee-to-trustee transfer. 7Applies to rollover contributions after December 18, 2015. For more information regarding retirement plans and rollovers, visit Tax Information for Retirement Plans. Page 22 Chapter 1 Traditional IRAs

(p590a)(page-24)Page 24#

period (including giving instructions to deposit the funds into a plan or IRA). • The funds aren’t deposited into a plan or IRA within the 60-day rollover period solely because of an error on the part of the financial institution. • The funds are deposited into a plan or IRA within 1 year from the beginning of the 60-day rollover period. • It would have been a valid rollover if the financial insti- tution had deposited the funds as instructed. If you don’t qualify for an automatic waiver, you can use the self-certification procedure to make a late rollover con- tribution or you can apply to the IRS for a waiver of the 60- day rollover requirement. How do you self-certify that you qualify for a waiver? Pursuant to Revenue Procedure 2016-47 in Internal Reve- nue Bulletin 2016-37, available at IRB 2016-37, you may make a written certification to a plan administrator or an IRA trustee that you missed the 60-day rollover contribu- tion deadline because of one or more of the 11 reasons listed in Revenue Procedure 2016-47. A plan administra- tor or an IRA trustee may rely on the certification in ac- cepting and reporting receipt of the rollover contribution. You may make the certification by using the model letter in the appendix to the revenue procedure or by using a letter that is substantially similar. There is no IRS fee for self-certification. A copy of the certification should be kept in your files and be available if requested on audit. How do you apply for a waiver and what is the fee? You can request a ruling according to the procedures out- lined in Revenue Procedure 2003-16 and Revenue Proce- dure 2018-4. The appropriate user fee of $10,000 must accompany every request for a waiver of the 60-day roll- over requirement (see the user fee chart in Appendix A of Revenue Procedure 2018-4). How does the IRS determine whether to grant a waiver in a private letter ruling? In determining whether to issue a favorable letter ruling granting a waiver, the IRS will consider all of the relevant facts and circum- stances, including: • Whether errors were made by the financial institution, that is, the plan administrator, or IRA trustee, issuer or custodian; • Whether you were unable to complete the rollover within the 60-day period due to death, disability, hos- pitalization, incarceration, serious illness, restrictions imposed by a foreign country, or postal error; • Whether you used the amount distributed; and • How much time has passed since the date of the dis- tribution. Note. The IRS can waive only the 60-day rollover re- quirement and not the other requirements for a valid roll- over contribution. For example, the IRS can’t waive the IRA one-rollover-per-year rule. For more information on waivers of the 60-day rollover requirement, go to RetirementPlans-FAQs. Amount. The rules regarding the amount that can be rol- led over within the 60-day time period also apply to the amount that can be deposited due to a waiver. For exam- ple, if you received $6,000 from your IRA, the most that you can deposit into an eligible retirement plan due to a waiver is $6,000. Extension of rollover period. If an amount distributed to you from a traditional IRA or a qualified employer retire- ment plan is a frozen deposit at any time during the 60-day period allowed for a rollover, two special rules ex- tend the rollover period. • The period during which the amount is a frozen de- posit isn’t counted in the 60-day period. • The 60-day period can’t end earlier than 10 days after the deposit is no longer frozen. Frozen deposit. This is any deposit that can’t be with- drawn from a financial institution because of either of the following reasons. • The financial institution is bankrupt or insolvent. • The state where the institution is located restricts with- drawals because one or more financial institutions in the state are (or are about to be) bankrupt or insol- vent. Rollover From One IRA Into Another You can withdraw, tax free, all or part of the assets from one traditional IRA if you reinvest them within 60 days in the same or another traditional IRA. Because this is a roll- over, you can’t deduct the amount that you reinvest in an IRA. You may be able to treat a contribution made to one type of IRA as having been made to a differ- ent type of IRA. This is called recharacterizing the contribution. See Recharacterizations in this chapter for more information. Waiting period between rollovers. Generally, if you make a tax-free rollover of any part of a distribution from a traditional IRA, you can’t, within a 1-year period, make a tax-free rollover of any later distribution from that same IRA. You also can’t make a tax-free rollover of any amount distributed, within the same 1-year period, from the IRA into which you made the tax-free rollover. The 1-year period begins on the date you receive the IRA distribution, not on the date you roll it over into an IRA. Rules apply to the number of rollovers you can have with your traditional IRAs. See Application of one-roll- over-per-year limitation below. Example. You have two traditional IRAs, IRA-1 and IRA-2. In 2018, you made a tax-free rollover of a distribu- tion from IRA-1 into a new traditional IRA (IRA-3). You can’t, within 1 year of the distribution from IRA-1, make a tax-free rollover of any distribution from either IRA-1 or IRA-3 into another traditional IRA. For 2018, the rollover from IRA-1 into IRA-3 prevents you from making a tax-free rollover from IRA-2 into any TIP Chapter 1 Traditional IRAs Page 23

(p590a)(page-25)Page 25#

other traditional IRA. This is because in 2018 you are only allowed to make one rollover within a 1-year period. So when you make a rollover from IRA-1 to IRA-3, you can’t make a rollover from IRA-2 to any other traditional IRA. Exception. An IRA distribution made from a failed fi- nancial institution by the Federal Deposit Insurance Cor- poration as receiver is not treated as a rollover for purpo- ses of the one-rollover-per-year limitation, provided: 1. Neither the failed financial institution nor the depositor initiated the distribution, and 2. No financial institution has assumed the IRAs of the failed financial institution. Application of one-rollover-per-year limitation. You can make only one rollover from an IRA to another (or the same) IRA in any 1-year period regardless of the number of IRAs you own. The limit will apply by aggregating all of an individual's IRAs, including SEP and SIMPLE IRAs as well as traditional and Roth IRAs, effectively treating them as one IRA for purposes of the limit. However, trustee-to-trustee transfers between IRAs aren’t limited and rollovers from traditional IRAs to Roth IRAs (conver- sions) aren’t limited. Example. John has three traditional IRAs: IRA-1, IRA-2, and IRA-3. John didn’t take any distributions from his IRAs in 2018. On January 1, 2019, John took a distri- bution from IRA-1 and rolled it over into IRA-2 on the same day. For 2019, John can’t roll over any other 2019 IRA distribution, including a rollover distribution involving IRA-3. This wouldn’t apply to a conversion. The same property must be rolled over. If property is distributed to you from an IRA and you complete the roll- over by contributing property to an IRA, your rollover is tax free only if the property you contribute is the same prop- erty that was distributed to you. Partial rollovers. If you withdraw assets from a tradi- tional IRA, you can roll over part of the withdrawal tax free and keep the rest of it. The amount you keep will generally be taxable (except for the part that is a return of nonde- ductible contributions). The amount you keep may be sub- ject to the 10% additional tax on early distributions dis- cussed later under What Acts Result in Penalties or Additional Taxes. Required distributions. Amounts that must be distrib- uted during a particular year under the required distribu- tion rules (discussed in Pub. 590-B) aren’t eligible for roll- over treatment. Inherited IRAs. If you inherit a traditional IRA from your spouse, you generally can roll it over, or you can choose to make the inherited IRA your own as discussed earlier under What if You Inherit an IRA. Reporting rollovers from IRAs. Report any rollover from one traditional IRA to the same or another traditional IRA on Form 1040, lines 4a and 4b; or Form 1040NR, lines 17a and 17b. Enter the total amount of the distribution on Form 1040, line 4a; or Form 1040NR, line 17a. If the total amount on Form 1040, line 4a; or Form 1040NR, line 17a, was rolled over, enter zero on Form 1040, line 4b; or Form 1040NR, line 17b. If the total distribution wasn’t rolled over, enter the taxable portion of the part that wasn’t rolled over on Form 1040, line 4b; or Form 1040NR, line 17b. Enter “Rollover” next to line 4b; or line 17b, Form 1040NR. See your tax return instructions. If you rolled over the distribution into a qualified plan (other than an IRA) or you make the rollover in 2019, at- tach a statement explaining what you did. For information on how to figure the taxable portion, see Are Distributions Taxable? in Pub. 590-B. Rollover From Employer's Plan Into an IRA You can roll over into a traditional IRA all or part of an eli- gible rollover distribution you receive from your (or your deceased spouse's): • Employer's qualified pension, profit-sharing, or stock bonus plan; • Annuity plan; • Tax-sheltered annuity plan (section 403(b) plan); or • Governmental deferred compensation plan (section 457 plan). A qualified plan is one that meets the requirements of the Internal Revenue Code. Eligible rollover distribution. Generally, an eligible roll- over distribution is any distribution of all or part of the bal- ance to your credit in a qualified retirement plan except the following. 1. A required minimum distribution (explained later un- der When Must You Withdraw Assets? (Required Minimum Distributions) in Pub. 590-B). 2. A hardship distribution. 3. Any of a series of substantially equal periodic distribu- tions paid at least once a year over: a. Your lifetime or life expectancy, b. The lifetimes or life expectancies of you and your beneficiary, or c. A period of 10 years or more. 4. Corrective distributions of excess contributions or ex- cess deferrals, and any income allocable to the ex- cess, or of excess annual additions and any allocable gains. 5. A loan treated as a distribution because it doesn’t sat- isfy certain requirements either when made or later (such as upon default), unless the participant's ac- crued benefits are reduced (offset) to repay the loan. See the discussion earlier of plan loan offsets (includ- ing qualified plan loan offsets) under Time Limit for Making a Rollover Contribution. Page 24 Chapter 1 Traditional IRAs

(p590a)(page-26)Page 26#

6. Dividends on employer securities. 7. The cost of life insurance coverage. Your rollover into a traditional IRA may include both amounts that would be taxable and amounts that wouldn’t be taxable if they were distributed to you, but not rolled over. To the extent the distribution is rolled over into a tra- ditional IRA, it isn’t includible in your income. Any nontaxable amounts that you roll over into your traditional IRA become part of your basis (cost) in your IRAs. To recover your basis when you take distributions from your IRA, you must complete Form 8606 for the year of the distribution. See Form 8606 under Distributions Fully or Partly Taxable in Pub. 590-B. Rollover by nonspouse beneficiary. If you are a desig- nated beneficiary (other than a surviving spouse) of a de- ceased employee, you can roll over all or part of an eligi- ble rollover distribution from one of the types of plans listed above into a traditional IRA. You must make the roll- over by a direct trustee-to-trustee transfer into an inherited IRA. You will determine your required minimum distributions in years after you make the rollover based on whether the employee died before his or her required beginning date for taking distributions from the plan. For more informa- tion, see Distributions after the employee's death under Tax on Excess Accumulation in Pub. 575. Written explanation to recipients. Before making an el- igible rollover distribution, the administrator of a qualified retirement plan must provide you with a written explana- tion. It must tell you about all of the following. • Your right to have the distribution paid tax free directly to a traditional IRA or another eligible retirement plan. • The requirement to withhold tax from the distribution if it isn’t paid directly to a traditional IRA or another eligi- ble retirement plan. • The tax treatment of any part of the distribution that you roll over to a traditional IRA or another eligible re- tirement plan within 60 days after you receive the dis- tribution. • Other qualified retirement plan rules, if they apply, in- cluding those for lump-sum distributions, alternate payees, and cash or deferred arrangements. • How the plan receiving the distribution differs from the plan making the distribution in its restrictions and tax consequences. The plan administrator must provide you with this writ- ten explanation no earlier than 90 days and no later than 30 days before the distribution is made. However, you can choose to have a distribution made less than 30 days after the explanation is provided as long as both of the following requirements are met. • You are given at least 30 days after the notice is provi- ded to consider whether you want to elect a direct roll- over. TIP • You are given information that clearly states that you have this 30-day period to make the decision. Contact the plan administrator if you have any questions regarding this information. Withholding requirement. Generally, if an eligible roll- over distribution is paid directly to you, the payer must withhold 20% of it. This applies even if you plan to roll over the distribution to a traditional IRA. You can avoid withholding by choosing the direct rollover option, dis- cussed later. Exceptions. The payer doesn’t have to withhold from an eligible rollover distribution paid to you if either of the following conditions applies. • The distribution and all previous eligible rollover distri- butions you received during your tax year from the same plan (or, at the payer's option, from all your em- ployer's plans) total less than $200. • The distribution consists solely of employer securities, plus cash of $200 or less in lieu of fractional shares. The amount withheld is part of the distribution. If you roll over less than the full amount of the distri- bution, you may have to include in your income the amount you don’t roll over. However, you can make up the amount withheld with funds from other sources. Other withholding rules. The 20% withholding re- quirement doesn’t apply to distributions that aren’t eligible rollover distributions. However, other withholding rules ap- ply to these distributions. The rules that apply depend on whether the distribution is a periodic distribution or a non- periodic distribution. For either of these types of distribu- tions, you can still choose not to have tax withheld. For more information, see Pub. 575. Direct rollover option. Your employer's qualified plan must give you the option to have any part of an eligible rollover distribution paid directly to a traditional IRA. The plan isn’t required to give you this option if your eligible rollover distributions are expected to total less than $200 for the year. Withholding. If you choose the direct rollover option, no tax is withheld from any part of the designated distribu- tion that is directly paid to the trustee of the traditional IRA. If any part is paid to you, the payer must withhold 20% of that part's taxable amount. Choosing an option. Table 1-5 may help you decide which distribution option to choose. Carefully compare the effects of each option. CAUTION ! Chapter 1 Traditional IRAs Page 25

(p590a)(page-27)Page 27#

Comparison of Payment to You Versus Di- rect Rollover Affected item Result of a payment to you Result of a direct rollover Withholding The payer must withhold 20% of the taxable part. There is no withholding. Additional tax If you are under age 591/2, a 10% additional tax may apply to the taxable part (including an amount equal to the tax withheld) that isn’t rolled over. There is no 10% additional tax. See Early Distributions in Pub. 590-B. When to report as income Any taxable part (including the taxable part of any amount withheld) not rolled over is income to you in the year paid. Any taxable part isn’t income to you until later distributed to you from the IRA. If you decide to roll over any part of a distribution, the direct rollover option will generally be to your advantage. This is because you won’t have 20% withholding or be subject to the 10% additional tax under that option. If you have a lump-sum distribution and don’t plan to roll over any part of it, the distribution may be eligible for spe- cial tax treatment that could lower your tax for the distribu- tion year. In that case, you may want to see Pub. 575 and Form 4972, Tax on Lump-Sum Distributions, and its in- structions to determine whether your distribution qualifies for special tax treatment and, if so, to figure your tax under the special methods. You can then compare any advantages from using Form 4972 to figure your tax on the lump-sum distribution with any advantages from rolling over all or part of the distribu- tion. However, if you roll over any part of the lump-sum distribution, you can’t use the Form 4972 special tax treat- ment for any part of the distribution. Contributions you made to your employer's plan. You can roll over a distribution of voluntary deductible em- ployee contributions (DECs) you made to your employer's plan. Prior to January 1, 1987, employees could make and deduct these contributions to certain qualified employers' plans and government plans. These aren’t the same as an employee's elective contributions to a 401(k) plan, which aren’t deductible by the employee. If you receive a distribution from your employer's quali- fied plan of any part of the balance of your DECs and the earnings from them, you can roll over any part of the distri- bution. No waiting period between rollovers. The once-a-year limit on IRA-to-IRA rollovers doesn’t apply to eligible roll- over distributions from an employer plan. You can roll over more than one distribution from the same employer plan within a year. IRA as a holding account (conduit IRA) for rollovers to other eligible plans. If you receive an eligible rollover distribution from your employer's plan, you can roll over Table 1-5. TIP part or all of it into one or more conduit IRAs. You can later roll over those assets into a new employer's plan. You can use a traditional IRA as a conduit IRA. You can roll over part or all of the conduit IRA to a qualified plan, even if you make regular contributions to it or add funds from sources other than your employer's plan. However, if you make regular contributions to the conduit IRA or add funds from other sources, the qualified plan into which you move funds won’t be eligible for any optional tax treatment for which it might have otherwise qualified. Property and cash received in a distribution. If you receive both property and cash in an eligible rollover dis- tribution, you can roll over part or all of the property, part or all of the cash, or any combination of the two that you choose. The same property (or sales proceeds) must be rolled over. If you receive property in an eligible rollover distribution from a qualified retirement plan, you can’t keep the property and contribute cash to a traditional IRA in place of the property. You must either roll over the prop- erty or sell it and roll over the proceeds, as explained next. Sale of property received in a distribution from a qualified plan. Instead of rolling over a distribution of property other than cash, you can sell all or part of the property and roll over the amount you receive from the sale (the proceeds) into a traditional IRA. You can’t keep the property and substitute your own funds for property you received. Example. You receive a total distribution from your employer's plan consisting of $10,000 cash and $15,000 worth of property. You decide to keep the property. You can roll over to a traditional IRA the $10,000 cash re- ceived, but you can’t roll over an additional $15,000 repre- senting the value of the property you choose not to sell. Treatment of gain or loss. If you sell the distributed property and roll over all the proceeds into a traditional IRA, no gain or loss is recognized. The sale proceeds (in- cluding any increase in value) are treated as part of the distribution and aren’t included in your gross income. Example. On September 6, Mike received a lump-sum distribution from his employer's retirement plan of $50,000 in cash and $50,000 in stock. The stock wasn’t stock of his employer. On September 24, he sold the stock for $60,000. On October 6, he rolled over $110,000 in cash ($50,000 from the original distribution and $60,000 from the sale of stock). Mike doesn’t include the $10,000 gain from the sale of stock as part of his income because he rolled over the entire amount into a traditional IRA. Note. Special rules may apply to distributions of em- ployer securities. For more information, see Figuring the Taxable Amount under Taxation of Nonperiodic Payments in Pub. 575. Partial rollover. If you received both cash and property, or just property, but didn’t roll over the entire distribution, see Rollovers in Pub. 575. Page 26 Chapter 1 Traditional IRAs

(p590a)(page-28)Page 28#

Life insurance contract. You can’t roll over a life insur- ance contract from a qualified plan into a traditional IRA. Distributions received by a surviving spouse. If you receive an eligible rollover distribution (defined earlier) from your deceased spouse's eligible retirement plan (de- fined earlier), you can roll over part or all of it into a tradi- tional IRA. You can also roll over all or any part of a distri- bution of DECs. Distributions under divorce or similar proceedings (alternate payees). If you are the spouse or former spouse of an employee and you receive a distribution from a qualified retirement plan as a result of divorce or similar proceedings, you may be able to roll over all or part of it into a traditional IRA. To qualify, the distribution must be: • One that would have been an eligible rollover distribu- tion (defined earlier) if it had been made to the em- ployee, and • Made under a qualified domestic relations order. Qualified domestic relations order. A domestic rela- tions order is a judgment, decree, or order (including ap- proval of a property settlement agreement) that is issued under the domestic relations law of a state. A “qualified domestic relations order” gives to an alternate payee (a spouse, former spouse, child, or dependent of a partici- pant in a retirement plan) the right to receive all or part of the benefits that would be payable to a participant under the plan. The order requires certain specific information, and it can’t alter the amount or form of the benefits of the plan. Tax treatment if all of an eligible distribution isn’t rolled over. Any part of an eligible rollover distribution that you keep is taxable in the year you receive it. If you don’t roll over any of it, special rules for lump-sum distribu- tions may apply. See Lump-Sum Distributions under Tax- ation of Nonperiodic Payments in Pub. 575. The 10% ad- ditional tax on early distributions, discussed later under What Acts Result in Penalties or Additional Taxes, doesn’t apply. Keogh plans and rollovers. If you are self-employed, you are generally treated as an employee for rollover pur- poses. Consequently, if you receive an eligible rollover distribution from a Keogh plan (a qualified plan with at least one self-employed participant), you can roll over all or part of the distribution (including a lump-sum distribu- tion) into a traditional IRA. For information on lump-sum distributions, see Lump-Sum Distributions under Taxation of Nonperiodic Payments in Pub. 575. More information. For more information about Keogh plans, see chapter 4 of Pub. 560. Distribution from a tax-sheltered annuity. If you re- ceive an eligible rollover distribution from a tax-sheltered annuity plan (section 403(b) plan), you can roll it over into a traditional IRA. Receipt of property other than money. If you re- ceive property other than money, you can sell the property and roll over the proceeds as discussed earlier. Rollover from bond purchase plan. If you redeem re- tirement bonds that were distributed to you under a quali- fied bond purchase plan, you can roll over tax free into a traditional IRA the part of the amount you receive that is more than your basis in the retirement bonds. Reporting rollovers from employer plans. Enter the total distribution (before income tax or other deductions were withheld) on Form 1040, line 4a; or Form 1040NR, line 17a. This amount should be shown in box 1 of Form 1099-R. From this amount, subtract any contributions (usually shown in box 5 of Form 1099-R) that were taxable to you when made. From that result, subtract the amount that was rolled over either directly or within 60 days of re- ceiving the distribution. Enter the remaining amount, even if zero, on Form 1040, line 4b; or Form 1040NR, line 17b. Also, enter "Rollover" next to line 4b of Form 1040; or line 17b of Form 1040NR. Rollover of Airline Payments If you are a qualified airline employee (defined below) and you received any airline payment(s) (defined below), you may be able to exclude from income a portion of any pay- ment(s) received that are rolled over to a traditional IRA. The maximum amount that can be rolled over to a tradi- tional IRA is 90% of the total airline payment(s) received. The rollover to a traditional IRA must be done within 180 days of receipt of the airline payment. For 2018, report any airline payment(s) you received in income on Form 1040 or Form 1040NR. For example, if you received a Form W-2 with airline payment amounts reported in box 1, the full amount should be included on Form 1040, line 1; or Form 1040NR, line 8. Up to 90% of all airline payment(s) received may be excluded from in- come if rolled over to a traditional IRA. To exclude these airline payment rollover amounts for 2018, you must in- clude the amount rolled over on Schedule 1 (Form 1040), line 21; or Form 1040NR, line 21, as a negative amount and write “airline payment” on the dotted line next to line 21. Example. John, a qualified airline employee, received an airline payment in the amount of $1,000 on January 14, 2018. John rolled over $900 (90%) of the airline payment received to a traditional IRA on March 18, 2018 (within 180 days of receipt). John received a Form W-2 for 2018 with $1,000 reported in box 1 (amount of airline payment). The $1,000 airline payment received (Form W-2, box 1) is reported on Form 1040, line 1. The $900 rollover is repor- ted as a negative amount on Schedule 1 (Form 1040), line 21. John must also write “airline payment” on the dot- ted line next to line 21. Amending a return. If you are excluding airline pay- ments from gross income for an earlier year, you will need to file Form 1040X, Amended U.S. Individual Income Tax Chapter 1 Traditional IRAs Page 27

(p590a)(page-29)Page 29#

Return, for the tax year(s) in which the airline payments were received and included in your gross income. You generally must file your amended return by the later of 3 years after the date you filed your original return or within 2 years after the date you paid the tax. For more details on filing Form 1040X to exclude airline payments from gross income, go to IRS.gov/Form1040X. Qualified airline employee. A current or former em- ployee of a commercial airline carrier who was a partici- pant in a qualified defined benefit plan maintained by the carrier which was terminated became subject to restric- tions under section 402(b) of the Pension Protection Act of 2006, or was frozen effective November 1, 2012. These provisions also apply to surviving spouses of qualified air- line employees but don’t apply to covered executives or to surviving spouses of covered executives. Covered executives. A current or former principal exec- utive officer (PEO) or one of the three highest compensa- ted officers (other than the PEO and principal financial of- ficer (PFO). The term “covered executives” generally doesn’t include the PFO. Airline payment. An airline payment is any payment of money or other property that is paid to a qualified airline employee from a commercial airline carrier. The payment also must be made both: • Under the approval of an order of a federal bankruptcy court in a case filed after September 11, 2001, and before January 1, 2007, or filed on November 29, 2011; • In respect of the qualified airline employee’s interest in a bankruptcy claim against the airline carrier, any note of the carrier (or amount paid in lieu of a note being is- sued), or any other fixed obligation of the carrier to pay a lump-sum amount. Any reduction in the airline payment amount on account of employment taxes shall be disregarded when figuring the amount you can roll over to your traditional IRA. Also, an airline payment shall not include any amount payable on the basis of the airline carrier’s future earnings or profits. Rollover of Exxon Valdez Settlement Income If you are a qualified taxpayer (defined later) and you re- ceived qualified settlement income (defined later), you can contribute all or part of the amount received to an eli- gible retirement plan which includes a traditional IRA. The amount contributed can’t exceed $100,000 (reduced by the amount of qualified settlement income contributed to an eligible retirement plan in prior tax years) or the amount of qualified settlement income received during the tax year. Contributions for the year can be made until the due date for filing your return, not including extensions. Qualified settlement income that you contribute to a tra- ditional IRA will be treated as having been rolled over in a direct trustee-to-trustee transfer within 60 days of the dis- tribution. The amount contributed isn’t included in your income at the time of the contributions and isn’t consid- ered to be investment in the contract. Also, the 1-year waiting period between rollovers doesn’t apply. Qualified taxpayer. You are a qualified taxpayer if you are: • A plaintiff in the civil action In re Exxon Valdez, No. 89-095-CV (HRH) (Consolidated) (D.Alaska); • The beneficiary of the estate of a plaintiff who ac- quired the right to receive qualified settlement income and who is the spouse or immediate relative of that plaintiff. Qualified settlement income. Qualified settlement in- come is any interest and punitive damage awards which are: • Otherwise includible in income; and • Received in connection with the civil action In re Ex- xon Valdez, No. 89-095-CV (HRH) (Consolidated) (D.Alaska) (whether pre- or post-judgment and whether related to a settlement or judgment). Qualified settlement income can be received as periodic payments or as a lump sum. See Miscellaneous Income in Pub. 525, Taxable and Nontaxable Income, for informa- tion on how to report qualified settlement income. Transfers Incident to Divorce If an interest in a traditional IRA is transferred from your spouse or former spouse to you by a divorce or separate maintenance decree or a written document related to such a decree, the interest in the IRA, starting from the date of the transfer, is treated as your IRA. The transfer is tax free. For information about transfers of interests in em- ployer plans, see Distributions under divorce or similar proceedings (alternate payees) under Rollover From Em- ployer's Plan Into an IRA, earlier. Transfer methods. There are two commonly used meth- ods of transferring IRA assets to a spouse or former spouse. The methods are: • Changing the name on the IRA, and • Making a direct transfer of IRA assets. Changing the name on the IRA. If all the assets are to be transferred, you can make the transfer by changing the name on the IRA from your name to the name of your spouse or former spouse. Direct transfer. Under this method, you direct the trustee of the traditional IRA to transfer the affected assets directly to the trustee of a new or existing traditional IRA set up in the name of your spouse or former spouse. If your spouse or former spouse is allowed to keep his or her portion of the IRA assets in your existing IRA, you can direct the trustee to transfer the assets you are per- mitted to keep directly to a new or existing traditional IRA set up in your name. The name on the IRA containing your spouse's or former spouse's portion of the assets would then be changed to show his or her ownership. Page 28 Chapter 1 Traditional IRAs

(p590a)(page-30)Page 30#

If the transfer results in a change in the basis of the traditional IRA of either spouse, both spouses must file Form 8606 and follow the directions in the instructions for that form. Converting From Any Traditional IRA Into a Roth IRA Allowable conversions. You can withdraw all or part of the assets from a traditional IRA and reinvest them (within 60 days) in a Roth IRA. The amount that you withdraw and timely contribute (convert) to the Roth IRA is called a con- version contribution. If properly (and timely) rolled over, the 10% additional tax on early distributions won’t apply. However, a part or all of the distribution from your tradi- tional IRA may be included in gross income and subjected to ordinary income tax. You must roll over into the Roth IRA the same property you received from the traditional IRA. You can roll over part of the withdrawal into a Roth IRA and keep the rest of it. The amount you keep will generally be taxable (except for the part that is a return of nondeductible contributions) and may be subject to the 10% additional tax on early dis- tributions. See When Can You Withdraw or Use Assets, later, for more information on distributions from traditional IRAs and Early Distributions in Pub. 590-B for more infor- mation on the tax on early distributions. Periodic distributions. If you started taking substan- tially equal periodic payments from a traditional IRA, you can convert the amounts in the traditional IRA to a Roth IRA and then continue the periodic payments. The 10% additional tax on early distributions won’t apply even if the distributions aren’t qualified distributions (as long as they are part of a series of substantially equal periodic pay- ments). Required distributions. You can’t convert amounts that must be distributed from your traditional IRA for a particu- lar year (including the calendar year in which you reach age 701/2) under the required distribution rules (discussed in Pub. 590-B). Income. You must include in your gross income distribu- tions from a traditional IRA that you would have had to in- clude in income if you hadn’t converted them into a Roth IRA. These amounts are normally included in income on your return for the year that you converted them from a traditional IRA to a Roth IRA. You don’t include in gross income any part of a distribu- tion from a traditional IRA that is a return of your basis, as discussed under Are Distributions Taxable in Pub. 590-B. If you must include any amount in your gross in- come, you may have to increase your withholding or make estimated tax payments. See Pub. 505, Tax Withholding and Estimated Tax. CAUTION ! CAUTION ! Recharacterizations You may be able to treat a contribution made to one type of IRA as having been made to a different type of IRA. This is called recharacterizing the contribution. To recharacterize a contribution, you generally must have the contribution transferred from the first IRA (the one to which it was made) to the second IRA in a trustee-to-trustee transfer. If the transfer is made by the due date (including extensions) for your tax return for the tax year for which the contribution was made, you can elect to treat the contribution as having been originally made to the second IRA instead of to the first IRA. If you recharacterize your contribution, you must do all three of the following. • Include in the transfer any net income allocable to the contribution. If there was a loss, the net income you must transfer may be a negative amount. • Report the recharacterization on your tax return for the year during which the contribution was made. • Treat the contribution as having been made to the second IRA on the date that it was actually made to the first IRA. No recharacterizations of conversions made in 2018 or later. A conversion of a traditional IRA to a Roth IRA, and a rollover from any other eligible retirement plan to a Roth IRA, made in tax years beginning after December 31, 2017, cannot be recharacterized as having been made to a traditional IRA. If you made a conversion in the 2017 tax year, you have until the due date (with exten- sions) for filing the return for that tax year to recharacterize it. No deduction allowed. You can’t deduct the contribu- tion to the first IRA. Any net income you transfer with the recharacterized contribution is treated as earned in the second IRA. The contribution won’t be treated as having been made to the second IRA to the extent any deduction was allowed for the contribution to the first IRA. Conversion by rollover from traditional to Roth IRA. You receive a distribution from a traditional IRA in 1 tax year. You then roll it over into a Roth IRA within 60 days of the distribution from the traditional IRA but in the next year. For recharacterization purposes, you would treat this transaction as a contribution to the Roth IRA in the year of the distribution from the traditional IRA. Effect of previous tax-free transfers. If an amount has been moved from one IRA to another in a tax-free trans- fer, such as a rollover, you generally can’t recharacterize the amount that was transferred. However, see Traditional IRA mistakenly moved to SIMPLE IRA below. Traditional IRA mistakenly moved to SIMPLE IRA. If you mistakenly roll over or transfer an amount from a tra- ditional IRA to a SIMPLE IRA, you can later recharacterize the amount as a contribution to another traditional IRA. Chapter 1 Traditional IRAs Page 29

(p590a)(page-31)Page 31#

Recharacterizing excess contributions. You can re- characterize only actual contributions. If you are applying excess contributions for prior years as current contribu- tions, you can recharacterize them only if the recharacteri- zation would still be timely with respect to the tax year for which the applied contributions were actually made. Example. You contributed more than you were entitled to in 2018. You can’t recharacterize the excess contribu- tions you made in 2018 after April 15, 2019, because con- tributions after that date are no longer timely for 2018. Recharacterizing employer contributions. You can’t recharacterize employer contributions (including elective deferrals) under a SEP or SIMPLE plan as contributions to another IRA. SEPs are discussed in chapter 2 of Pub. 560. SIMPLE plans are discussed in chapter 3 of Pub. 560. Recharacterization not counted as rollover. The re- characterization of a contribution is not treated as a roll- over for purposes of the 1-year waiting period described earlier in this chapter under Rollover From One IRA Into Another. This is true even if the contribution would have been treated as a rollover contribution by the second IRA if it had been made directly to the second IRA rather than as a result of a recharacterization of a contribution to the first IRA. How Do You Recharacterize a Contribution? To recharacterize a contribution, you must notify both the trustee of the first IRA (the one to which the contribution was actually made) and the trustee of the second IRA (the one to which the contribution is being moved) that you have elected to treat the contribution as having been made to the second IRA rather than the first. You must make the notifications by the date of the transfer. Only one notification is required if both IRAs are maintained by the same trustee. The notification(s) must include all of the following information. • The type and amount of the contribution to the first IRA that is to be recharacterized. • The date on which the contribution was made to the first IRA and the year for which it was made. • A direction to the trustee of the first IRA to transfer in a trustee-to-trustee transfer the amount of the contribu- tion and any net income (or loss) allocable to the con- tribution to the trustee of the second IRA. • The name of the trustee of the first IRA and the name of the trustee of the second IRA. • Any additional information needed to make the trans- fer. In most cases, the net income you must transfer is de- termined by your IRA trustee or custodian. If you need to determine the applicable net income on IRA contributions made after 2018 that are recharacterized, use Worksheet 1-3. See Regulations section 1.408A-5 for more informa- tion. Timing. The election to recharacterize and the transfer must both take place on or before the due date (including extensions) for filing your tax return for the tax year for which the contribution was made to the first IRA. Extension. Ordinarily, you must choose to recharac- terize a contribution by the due date of the return or the due date plus extensions. However, if you miss this dead- line, you can still recharacterize a contribution if: • Your return was timely filed for the year the choice should have been made, and • You take appropriate corrective action within 6 months from the due date of your return excluding extensions. For returns due April 15, 2019, this period ends on October 15, 2019. When the date for doing any act for Determining the Amount of Net Income Due to an IRA Contribution and Total Amount to be Recharacterized Worksheet 1-3. Keep for Your Records 1. Enter the amount of your IRA contribution for 2019 to be recharacterized . . . . . . . . . . . . . . . . 1.

2. Enter the fair market value of the IRA immediately prior to the recharacterization (include any distributions, transfers, or recharacterization made while the contribution was in the account) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.

3. Enter the fair market value of the IRA immediately prior to the time the contribution being recharacterized was made, including the amount of such contribution and any other contributions, transfers, or recharacterizations made while the contribution was in the account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.

4. Subtract line 3 from line 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.

5. Divide line 4 by line 3. Enter the result as a decimal (rounded to at least three places) . . . . . . 5.

6. Multiply line 1 by line 5. This is the net income attributable to the contribution to be recharacterized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.

7. Add lines 1 and 6. This is the amount of the IRA contribution plus the net income attributable to it to be recharacterized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.

Page 30 Chapter 1 Traditional IRAs

(p590a)(page-32)Page 32#

tax purposes falls on a Saturday, Sunday, or legal hol- iday, the due date is delayed until the next business day. Appropriate corrective action consists of: • Notifying the trustee(s) of your intent to recharacterize, • Providing the trustee with all necessary information, and • Having the trustee transfer the contribution. Once this is done, you must amend your return to show the recharacterization. You have until the regular due date for amending a return to do this. Report the recharacteri- zation on the amended return and write “Filed pursuant to section 301.9100-2” on the return. File the amended re- turn at the same address you filed the original return. Decedent. The election to recharacterize can be made on behalf of a deceased IRA owner by the executor, administrator, or other person responsible for filing the de- cedent's final income tax return. Election can’t be changed. After the transfer has taken place, you can’t change your election to recharacterize. Same trustee. Recharacterizations made with the same trustee can be made by redesignating the first IRA as the second IRA, rather than transferring the account balance. Reporting a Recharacterization If you elect to recharacterize a contribution to one IRA as a contribution to another IRA, you must report the rechar- acterization on your tax return as directed by Form 8606 and its instructions. You must treat the contribution as having been made to the second IRA. More than one IRA. If you have more than one IRA, fig- ure the amount to be recharacterized only on the account from which you withdraw the contribution. When Can You Withdraw or Use Assets? You can withdraw or use your traditional IRA assets at any time. However, a 10% additional tax generally applies if you withdraw or use IRA assets before you are age 591/2. This is explained under Age 591/2 Rule under Early Distri- butions in Pub. 590-B. You generally can make a tax-free withdrawal of contri- butions if you do it before the due date for filing your tax return for the year in which you made them. This means that, even if you are under age 591/2, the 10% additional tax may not apply. These withdrawals are explained later. Contributions Returned Before Due Date of Return If you made IRA contributions in 2018, you can withdraw them tax free by the due date of your return. If you have an extension of time to file your return, you can withdraw them tax free by the extended due date. You can do this if, for each contribution you withdraw, both of the following conditions apply. • You didn’t take a deduction for the contribution. • You withdraw any interest or other income earned on the contribution. You can take into account any loss on the contribution while it was in the IRA when calcu- lating the amount that must be withdrawn. If there was a loss, the net income earned on the contribution may be a negative amount. Note. If you timely filed your 2018 tax return without withdrawing a contribution that you made in 2018, you can still have the contribution returned to you within 6 months of the due date of your 2018 tax return, excluding exten- sions. If you do, file an amended return with “Filed pur- suant to section 301.9100-2” written at the top. Report any related earnings on the amended return and include an explanation of the withdrawal. Make any other necessary changes on the amended return (for example, if you re- ported the contributions as excess contributions on your original return, include an amended Form 5329 reflecting that the withdrawn contributions are no longer treated as having been contributed). In most cases, the net income you must withdraw is de- termined by the IRA trustee or custodian. If you need to determine the applicable net income on IRA contributions made after 2018 that are returned to you, use Worksheet 1-4. See Regulations section 1.408-11 for more informa- tion. Example. On May 2, 2019, when her IRA is worth $4,800, Cathy makes a $1,600 regular contribution to her IRA. Cathy requests that $400 of the May 2, 2019, contri- bution be returned to her. On February 2, 2020, when the IRA is worth $7,600, the IRA trustee distributes to Cathy the $400 plus net income attributable to the contribution. No other contributions have been made to the IRA for 2019 and no distributions have been made. The adjusted opening balance is $6,400 ($4,800 + $1,600) and the adjusted closing balance is $7,600. The net income due to the May 2, 2019, contribution is $75 ($400 x ($7,600 – $6,400) ÷ $6,400). Therefore, the total to be distributed on February 2, 2020, is $475. This is shown on Worksheet 1-4. Example—Illustrated. Chapter 1 Traditional IRAs Page 31

(p590a)(page-33)Page 33#

Last-in first-out rule. If you made more than one regular contribution for the year, your last contribution is consid- ered to be the one that is returned to you first. Earnings Includible in Income You must include in income any earnings on the contribu- tions you withdraw. Include the earnings in income for the year in which you made the contributions, not the year in which you withdraw them. Generally, except for any part of a withdrawal that is a return of nondeductible contributions (basis), any withdrawal of your contributions after the due date (or extended due date) of your return will be treated as a taxable distribution. Excess contributions can also be recovered tax free as discussed under What Acts Result in Penalties or Additional Taxes, later. Early Distributions Tax The 10% additional tax on distributions made before you reach age 591/2 doesn’t apply to these tax-free withdraw- als of your contributions. However, the distribution of CAUTION ! interest or other income must be reported on Form 5329 and, unless the distribution qualifies as an exception to the age 591/2 rule, it will be subject to this tax. See Early Distributions under What Acts Result in Penalties or Addi- tional Taxes? in Pub. 590-B. Excess Contributions Tax If any part of these contributions is an excess contribution for 2017, it is subject to a 6% excise tax. You won’t have to pay the 6% tax if any 2017 excess contribution was withdrawn by April 17, 2018 (plus extensions), and if any 2018 excess contribution is withdrawn by April 15, 2019 (plus extensions). See Excess Contributions under What Acts Result in Penalties or Additional Taxes, later. You may be able to treat a contribution made to one type of IRA as having been made to a differ- ent type of IRA. This is called recharacterizing the contribution. See Recharacterizations, earlier, for more in- formation. TIP Determining the Amount of Net Income Due to an IRA Contribution and Total Amount to be Withdrawn From the IRA Worksheet 1-4. Keep for Your Records 1. Enter the amount of your IRA contribution for 2019 to be returned to you . . . . . . . . . . . . . . . . . 1.

2. Enter the fair market value of the IRA immediately prior to the removal of the contribution, plus the amount of any distributions, transfers, and recharacterizations made while the contribution was in the IRA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.

3. Enter the fair market value of the IRA immediately before the contribution was made, plus the amount of such contribution and any other contributions, transfers, and recharacterizations made while the contribution was in the IRA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.

4. Subtract line 3 from line 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.

5. Divide line 4 by line 3. Enter the result as a decimal (rounded to at least three places) . . . . . . 5.

6. Multiply line 1 by line 5. This is the net income attributable to the contribution to be returned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.

7. Add lines 1 and 6. This is the amount of the IRA contribution plus the net income attributable to it to be returned to you . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.

Example—Illustrated Worksheet 1-4. Keep for Your Records 1. Enter the amount of your IRA contribution for 2019 to be returned to you . . . . . . . . . . . . . . . . . 1. 400 2. Enter the fair market value of the IRA immediately prior to the removal of the contribution, plus the amount of any distributions, transfers, and recharacterizations made while the contribution was in the IRA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. 7,600 3. Enter the fair market value of the IRA immediately before the contribution was made, plus the amount of such contribution and any other contributions, transfers, and recharacterizations made while the contribution was in the IRA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. 6,400 4. Subtract line 3 from line 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. 1,200 5. Divide line 4 by line 3. Enter the result as a decimal (rounded to at least three places) . . . . . . 5. 0.1875 6. Multiply line 1 by line 5. This is the net income attributable to the contribution to be returned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6. 75 7. Add lines 1 and 6. This is the amount of the IRA contribution plus the net income attributable to it to be returned to you . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7. 475 Page 32 Chapter 1 Traditional IRAs

(p590a)(page-34)Page 34#

What Acts Result in Penalties or Additional Taxes? The tax advantages of using traditional IRAs for retirement savings can be offset by additional taxes and penalties if you don’t follow the rules. There are additions to the regu- lar tax for using your IRA funds in prohibited transactions. There are also additional taxes for the following activities. • Investing in collectibles. • Making excess contributions. • Taking early distributions. See Pub. 590-B. • Allowing excess amounts to accumulate (failing to take required distributions). See Pub. 590-B. • Having unrelated business income. There are penalties for overstating the amount of non- deductible contributions and for failure to file Form 8606, if required. This chapter discusses those acts that you should avoid and the additional taxes and other costs, including loss of IRA status, that apply if you don’t avoid those acts. Prohibited Transactions Generally, a prohibited transaction is any improper use of your traditional IRA account or annuity by you, your bene- ficiary, or any disqualified person. Disqualified persons include your fiduciary and mem- bers of your family (spouse, ancestor, lineal descendant, and any spouse of a lineal descendant). The following are some examples of prohibited trans- actions with a traditional IRA. • Borrowing money from it. • Selling property to it. • Using it as security for a loan. • Buying property for personal use (present or future) with IRA funds. If your IRA is invested in nonpublicly traded as- sets or assets that you directly control, the risk of engaging in a prohibited transaction in connection with your account may be increased. Fiduciary. For these purposes, a fiduciary includes any- one who does any of the following. • Exercises any discretionary authority or discretionary control in managing your IRA or exercises any author- ity or control in managing or disposing of its assets. • Provides investment advice to your IRA for a fee, or has any authority or responsibility to do so. • Has any discretionary authority or discretionary re- sponsibility in administering your IRA. CAUTION ! Effect on an IRA account. Generally, if you or your ben- eficiary engages in a prohibited transaction in connection with your traditional IRA account at any time during the year, the account stops being an IRA as of the first day of that year. Effect on you or your beneficiary. If your account stops being an IRA because you or your beneficiary en- gaged in a prohibited transaction, the account is treated as distributing all its assets to you at their fair market val- ues on the first day of the year. If the total of those values is more than your basis in the IRA, you will have a taxable gain that is includible in your income. For information on figuring your gain and reporting it in income, see Are Dis- tributions Taxable in Pub. 590-B. The distribution may be subject to additional taxes or penalties. Borrowing on an annuity contract. If you borrow money against your traditional IRA annuity contract, you must include in your gross income the fair market value of the annuity contract as of the first day of your tax year. You may have to pay the 10% additional tax on early dis- tributions discussed in Pub. 590-B. Pledging an account as security. If you use a part of your traditional IRA account as security for a loan, that part is treated as a distribution and is included in your gross income. You may have to pay the 10% additional tax on early distributions discussed in Pub. 590-B. Trust account set up by an employer or an employee association. Your account or annuity doesn’t lose its IRA treatment if your employer or the employee association with whom you have your traditional IRA engages in a pro- hibited transaction. Owner participation. If you participate in the prohibi- ted transaction with your employer or the association, your account is no longer treated as an IRA. Taxes on prohibited transactions. If someone other than the owner or beneficiary of a traditional IRA engages in a prohibited transaction, that person may be liable for certain taxes. In general, there is a 15% tax on the amount of the prohibited transaction and a 100% additional tax if the transaction isn’t corrected. Loss of IRA status. If the traditional IRA ceases to be an IRA because of a prohibited transaction by you or your beneficiary, you or your beneficiary aren’t liable for these excise taxes. However, you or your beneficiary may have to pay other taxes as discussed under Effect on you or your beneficiary, earlier. Exempt Transactions The following two types of transactions aren’t prohibited transactions if they meet the requirements that follow. • Payments of cash, property, or other consideration by the sponsor of your traditional IRA to you (or members of your family). Chapter 1 Traditional IRAs Page 33

(p590a)(page-35)Page 35#

• Your receipt of services at reduced or no cost from the bank where your traditional IRA is established or maintained. Payments of cash, property, or other consideration. Even if a sponsor makes payments to you or your family, there is no prohibited transaction if all three of the follow- ing requirements are met. 1. The payments are for establishing a traditional IRA or for making additional contributions to it. 2. The IRA is established solely to benefit you, your spouse, and your or your spouse's beneficiaries. 3. During the year, the total fair market value of the pay- ments you receive isn’t more than: a. $10 for IRA deposits of less than $5,000, or b. $20 for IRA deposits of $5,000 or more. If the consideration is group term life insurance, require- ments (1) and (3) don’t apply if no more than $5,000 of the face value of the insurance is based on a dollar-for-dollar basis on the assets in your IRA. Services received at reduced or no cost. Even if a sponsor provides services at reduced or no cost, there is no prohibited transaction if all of the following require- ments are met. • The traditional IRA qualifying you to receive the serv- ices is established and maintained for the benefit of you, your spouse, and your or your spouse's benefi- ciaries. • The bank itself can legally offer the services. • The services are provided in the ordinary course of business by the bank (or a bank affiliate) to customers who qualify but don’t maintain an IRA (or a Keogh plan). • The determination, for a traditional IRA, of who quali- fies for these services is based on an IRA (or a Keogh plan) deposit balance equal to the lowest qualifying balance for any other type of account. • The rate of return on a traditional IRA investment that qualifies isn’t less than the return on an identical in- vestment that could have been made at the same time at the same branch of the bank by a customer who isn’t eligible for (or doesn’t receive) these services. Investment in Collectibles If your traditional IRA invests in collectibles, the amount in- vested is considered distributed to you in the year inves- ted. You may have to pay the 10% additional tax on early distributions discussed in Pub. 590-B. Any amounts that were considered to be distributed when the investment in the collectible was made, and which were included in your income at that time, aren’t in- cluded in your income when the collectible is actually dis- tributed from your IRA. Collectibles. These include: • Artworks, • Rugs, • Antiques, • Metals, • Gems, • Stamps, • Coins, • Alcoholic beverages, and • Certain other tangible personal property. Exception. Your IRA can invest in one, one-half, one-quarter, or one-tenth ounce U.S. gold coins, or one-ounce silver coins minted by the Treasury Depart- ment. It can also invest in certain platinum coins and cer- tain gold, silver, palladium, and platinum bullion. Unrelated Business Income An IRA is subject to tax on unrelated business income if it carries on an unrelated trade or business. An unrelated trade or business means any trade or business regularly carried on by the IRA or by a partnership of which it is a member. If the IRA has $1,000 or more of unrelated trade or business gross income, the IRA trustee is required to file a Form 990-T, Exempt Organization Business Income Tax Return. The Form 990-T must be filed by the 15th day of the 4th month after the end of the IRA’s tax year. See Pub. 598, Tax on Unrelated Business Income of Exempt Organizations, for more information. Excess Contributions Generally, an excess contribution is the amount contrib- uted to your traditional IRAs for the year that is more than the smaller of: • $5,500 ($6,500 if you are age 50 or older), or • Your taxable compensation for the year. The taxable compensation limit applies whether your contributions are deductible or nondeductible. Contributions for the year you reach age 701/2 and any later year are also excess contributions. An excess contribution could be the result of your con- tribution, your spouse's contribution, your employer's con- tribution, or an improper rollover contribution. If your em- ployer makes contributions on your behalf to a SEP IRA, see chapter 2 of Pub. 560. Tax on Excess Contributions In general, if the excess contributions for a year aren’t withdrawn by the date your return for the year is due (in- cluding extensions), you are subject to a 6% tax. You must pay the 6% tax each year on excess amounts that remain in your traditional IRA at the end of your tax year. Page 34 Chapter 1 Traditional IRAs

(p590a)(page-36)Page 36#

The tax can’t be more than 6% of the combined value of all your IRAs as of the end of your tax year. The additional tax is figured on Form 5329. For infor- mation on filing Form 5329, see Reporting Additional Taxes, later. Example. For 2018, Paul Jones is 45 years old and single, his compensation is $31,000, and he contributed $6,000 to his traditional IRA. Paul has made an excess contribution to his IRA of $500 ($6,000 minus the $5,500 limit). The contribution earned $5 interest in 2018 and $6 interest in 2018 before the due date of the return, includ- ing extensions. He doesn’t withdraw the $500 or the inter- est it earned by the due date of his return, including exten- sions. Paul figures his additional tax for 2018 by multiplying the excess contribution ($500) shown on Form 5329, line 16, by 0.06, giving him an additional tax liability of $30. He enters the tax on Form 5329, line 17, and on Schedule 4 (Form 1040), line 59. See Paul's filled-in Form 5329, later. Excess Contributions Withdrawn by Due Date of Return You won’t have to pay the 6% tax if you withdraw an ex- cess contribution made during a tax year and you also withdraw any interest or other income earned on the ex- cess contribution. You must complete your withdrawal by the date your tax return for that year is due, including ex- tensions. How to treat withdrawn contributions. Don’t include in your gross income an excess contribution that you with- draw from your traditional IRA before your tax return is due if both of the following conditions are met. • No deduction was allowed for the excess contribution. • You withdraw the interest or other income earned on the excess contribution. You can take into account any loss on the contribution while it was in the IRA when calculating the amount that must be withdrawn. If there was a loss, the net income you must withdraw may be a negative amount. In most cases, the net income you must transfer will be determined by your IRA trustee or custodian. If you need to determine the applicable net income you need to with- draw, you can use the same method that was used in Worksheet 1-3. If you timely filed your 2018 tax return without withdraw- ing a contribution that you made in 2018, you can still have the contribution returned to you within 6 months of the due date of your 2018 tax return, excluding exten- sions. If you do, file an amended return with “Filed pur- suant to section 301.9100-2” written at the top. Report any related earnings on the amended return and include an explanation of the withdrawal. Make any other necessary changes on the amended return (for example, if you re- ported the contributions as excess contributions on your original return, include an amended Form 5329 reflecting that the withdrawn contributions are no longer treated as having been contributed). How to treat withdrawn interest or other income. You must include in your gross income the interest or other in- come that was earned on the excess contribution. Report it on your return for the year in which the excess contribu- tion was made. Your withdrawal of interest or other in- come may be subject to an additional 10% tax on early distributions discussed in Pub. 590-B. Form 1099-R. You will receive Form 1099-R indicating the amount of the withdrawal. If the excess contribution was made in a previous tax year, the form will indicate the year in which the earnings are taxable. Example. Maria, age 35, made an excess contribution in 2018 of $1,000, which she withdrew by April 15, 2019, the due date of her return. At the same time, she also withdrew the $50 income that was earned on the $1,000. She must include the $50 in her gross income for 2018 (the year in which the excess contribution was made). She must also pay an additional tax of $5 (the 10% additional tax on early distributions because she isn’t yet 591/2 years old), but she doesn’t have to report the excess contribu- tion as income or pay the 6% excise tax. Maria receives a Form 1099-R showing that the earnings are taxable for 2018. Excess Contributions Withdrawn After Due Date of Return In general, you must include all distributions (withdrawals) from your traditional IRA in your gross income. However, if the following conditions are met, you can withdraw excess contributions from your IRA and not include the amount withdrawn in your gross income. • Total contributions (other than rollover contributions) for 2018 to your IRA weren’t more than $5,500 ($6,500 if you are age 50 or older). • You didn’t take a deduction for the excess contribution being withdrawn. The withdrawal can take place at any time, even after the due date, including extensions, for filing your tax return for the year. Excess contribution deducted in an earlier year. If you deducted an excess contribution in an earlier year for which the total contributions weren’t more than the maxi- mum deductible amount for that year (see the following ta- ble), you can still remove the excess from your traditional IRA and not include it in your gross income. To do this, file Form 1040X for that year and don’t deduct the excess contribution on the amended return. Generally, you can file an amended return within 3 years after you filed your return, or 2 years from the time the tax was paid, which- ever is later. Chapter 1 Traditional IRAs Page 35

(p590a)(page-37)Page 37#

Year(s) Contribution limit Contribution limit if age 50 or older at the end of the year 2013 through 2018 $5,500 $6,500 2008 through 2012 $5,000 $6,000 2006 or 2007 $4,000 $5,000 2005 $4,000 $4,500 2002 through 2004 $3,000 $3,500 1997 through 2001 $2,000 — before 1997 $2,250 — Excess due to incorrect rollover information. If an ex- cess contribution in your traditional IRA is the result of a rollover and the excess occurred because the information the plan was required to give you was incorrect, you can withdraw the excess contribution. The limits mentioned above are increased by the amount of the excess that is due to the incorrect information. You will have to amend your return for the year in which the excess occurred to correct the reporting of the rollover amounts in that year. Don’t include in your gross income the part of the excess contribution caused by the incorrect information. Deducting an Excess Contribution in a Later Year You can’t apply an excess contribution to an earlier year even if you contributed less than the maximum amount al- lowable for the earlier year. However, you may be able to apply it to a later year if the contributions for that later year are less than the maximum allowed for that year. You can deduct excess contributions for previous years that are still in your traditional IRA. The amount you can deduct this year is the lesser of the following two amounts. • Your maximum IRA deduction for this year minus any amounts contributed to your traditional IRAs for this year. • The total excess contributions in your IRAs at the be- ginning of this year. This method lets you avoid making a withdrawal. It doesn’t, however, let you avoid the 6% tax on any excess contributions remaining at the end of a tax year. To figure the amount of excess contributions for previ- ous years that you can deduct this year, see Worksheet 1-5. Excess Contributions Deductible This Year Use this worksheet to figure the amount of excess contributions from prior years you can deduct this year. 1. Maximum IRA deduction for the current year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. 2. IRA contributions for the current year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. 3. Subtract line 2 from line 1. If zero or less, enter -0- . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. 4. Excess contributions in IRA at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. 5. Enter the lesser of line 3 or line 4. This is the amount of excess contributions for previous years that you can deduct this year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5. Example. Teri was entitled to contribute to her tradi- tional IRA and deduct $1,000 in 2017 and $1,500 in 2018 (the amounts of her taxable compensation for these years). For 2017, she actually contributed $1,400 but could deduct only $1,000. In 2017, $400 is an excess con- tribution subject to the 6% tax. However, she wouldn’t have to pay the 6% tax if she withdrew the excess (includ- ing any earnings) before the due date of her 2017 return. Because Teri didn’t withdraw the excess, she owes excise tax of $24 for 2017. To avoid the excise tax for 2018, she can correct the $400 excess amount from 2017 in 2018 if her actual contributions are only $1,100 for 2018 (the al- lowable deductible contribution of $1,500 minus the $400 excess from 2017 she wants to treat as a deductible con- tribution in 2018). Teri can deduct $1,500 in 2018 (the $1,100 actually contributed plus the $400 excess contri- bution from 2017). This is shown on Worksheet 1-5. Ex- ample—Illustrated. Worksheet 1-5. Example—Illustrated Use this worksheet to figure the amount of excess contributions from prior years you can deduct this year. 1. Maximum IRA deduction for the current year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. 1,500 2. IRA contributions for the current year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. 1,100 3. Subtract line 2 from line 1. If zero or less, enter -0- . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. 400 4. Excess contributions in IRA at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. 400 5. Enter the lesser of line 3 or line 4. This is the amount of excess contributions for previous years that you can deduct this year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5. 400 Worksheet 1-5. Page 36 Chapter 1 Traditional IRAs

(p590a)(page-38)Page 38#

Form 5329 Department of the Treasury Internal Revenue Service (99) Additional Taxes on Qualiﬁed Plans (Including IRAs) and Other Tax-Favored Accounts Attach to Form 1040 or Form 1040NR. Go to www.irs.gov/Form5329 for instructions and the latest information. OMB No. 1545-0074 2018 Attachment Sequence No. 29 Name of individual subject to additional tax. If married ﬁling jointly, see instructions. Your social security number Fill in Your Address Only if You Are Filing This Form by Itself and Not With Your Tax Return Home address (number and street), or P.O. box if mail is not delivered to your home Apt. no. City, town or post ofﬁce, state, and ZIP code. If you have a foreign address, also complete the spaces below. See instructions. If this is an amended return, check here Foreign country name Foreign province/state/county Foreign postal code If you only owe the additional 10% tax on early distributions, you may be able to report this tax directly on Schedule 4 (Form 1040), line 59, or Form 1040NR, line 57, without ﬁling Form 5329. See the instructions for Schedule 4 (Form 1040), line 59, or for Form 1040NR, line 57. Part I Additional Tax on Early Distributions. Complete this part if you took a taxable distribution (other than a qualiﬁed disaster distribution) before you reached age 59½ from a qualiﬁed retirement plan (including an IRA) or modiﬁed endowment contract (unless you are reporting this tax directly on Form 1040 or Form 1040NR—see above). You may also have to complete this part to indicate that you qualify for an exception to the additional tax on early distributions or for certain Roth IRA distributions. See instructions. 1 Early distributions included in income. For Roth IRA distributions, see instructions . . . . . . 1 2 Early distributions included on line 1 that are not subject to the additional tax (see instructions). Enter the appropriate exception number from the instructions: . . . . . . . . . 2 3 Amount subject to additional tax. Subtract line 2 from line 1 . . . . . . . . . . . . . 3 4 Additional tax. Enter 10% (0.10) of line 3. Include this amount on Schedule 4 (Form 1040), line 59, or Form 1040NR, line 57 4 Caution: If any part of the amount on line 3 was a distribution from a SIMPLE IRA, you may have to include 25% of that amount on line 4 instead of 10%. See instructions. Part II Additional Tax on Certain Distributions From Education Accounts and ABLE Accounts. Complete this part if you included an amount in income, on Schedule 1 (Form 1040), line 21, or Form 1040NR, line 21, from a Coverdell education savings account (ESA), a qualiﬁed tuition program (QTP), or an ABLE account. 5 Distributions included in income from a Coverdell ESA, a QTP, or an ABLE account . . . . . 5 6 Distributions included on line 5 that are not subject to the additional tax (see instructions) . . . 6 7 Amount subject to additional tax. Subtract line 6 from line 5 . . . . . . . . . . . . . 7 8 Additional tax. Enter 10% (0.10) of line 7. Include this amount on Schedule 4 (Form 1040), line 59, or Form 1040NR, line 57 8 Part III Additional Tax on Excess Contributions to Traditional IRAs. Complete this part if you contributed more to your traditional IRAs for 2018 than is allowable or you had an amount on line 17 of your 2017 Form 5329. 9 Enter your excess contributions from line 16 of your 2017 Form 5329. See instructions. If zero, go to line 15 9 10

If your traditional IRA contributions for 2018 are less than your maximum allowable contribution, see instructions. Otherwise, enter -0- 10 11 2018 traditional IRA distributions included in income (see instructions) . 11 12 2018 distributions of prior year excess contributions (see instructions) . 12 13 Add lines 10, 11, and 12 . . . . . . . . . . . . . . . . . . . . . . . . . 13 14 Prior year excess contributions. Subtract line 13 from line 9. If zero or less, enter -0- . . . . . 14 15 Excess contributions for 2018 (see instructions) . . . . . . . . . . . . . . . . . 15 16 Total excess contributions. Add lines 14 and 15 . . . . . . . . . . . . . . . . . 16 17

Additional tax. Enter 6% (0.06) of the smaller of line 16 or the value of your traditional IRAs on December 31, 2018 (including 2018 contributions made in 2019). Include this amount on Schedule 4 (Form 1040), line 59, or Form 1040NR, line 57 . . . 17 Part IV Additional Tax on Excess Contributions to Roth IRAs. Complete this part if you contributed more to your Roth IRAs for 2018 than is allowable or you had an amount on line 25 of your 2017 Form 5329. 18 Enter your excess contributions from line 24 of your 2017 Form 5329. See instructions. If zero, go to line 23 18 19

If your Roth IRA contributions for 2018 are less than your maximum allowable contribution, see instructions. Otherwise, enter -0- . . . . 19 20 2018 distributions from your Roth IRAs (see instructions) . . . . . 20 21 Add lines 19 and 20 . . . . . . . . . . . . . . . . . . . . . . . . . . 21 22 Prior year excess contributions. Subtract line 21 from line 18. If zero or less, enter -0- . . . . . 22 23 Excess contributions for 2018 (see instructions) . . . . . . . . . . . . . . . . . 23 24 Total excess contributions. Add lines 22 and 23 . . . . . . . . . . . . . . . . . 24 25

Additional tax. Enter 6% (0.06) of the smaller of line 24 or the value of your Roth IRAs on December 31, 2018 (including 2018 contributions made in 2019). Include this amount on Schedule 4 (Form 1040), line 59, or Form 1040NR, line 57 . . 25 For Privacy Act and Paperwork Reduction Act Notice, see your tax return instructions. Cat. No. 13329Q Form 5329 (2018) Paul Jones 003-00-0000 500 500 30 Chapter 1 Traditional IRAs Page 37

(p590a)(page-39)Page 39#

Closed tax year. A special rule applies if you incorrectly deducted part of the excess contribution in a closed tax year (one for which the period to assess a tax deficiency has expired). The amount allowable as a traditional IRA deduction for a later correction year (the year you contrib- ute less than the allowable amount) must be reduced by the amount of the excess contribution deducted in the closed year. To figure the amount of excess contributions for previ- ous years that you can deduct this year if you incorrectly deducted part of the excess contribution in a closed tax year, see Worksheet 1-6. Excess Contributions Deductible This Year if Any Were Deducted in a Closed Tax Year Use this worksheet to figure the amount of excess contributions for prior years that you can deduct this year if you incorrectly deducted excess contributions in a closed tax year. 1. Maximum IRA deduction for the current year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. 2. IRA contributions for the current year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. 3. If line 2 is less than line 1, enter any excess contributions that were deducted in a closed tax year. Otherwise, enter -0- . . . . . 3. 4. Subtract line 3 from line 1 . . . . . . . . . . . . . . 4. 5. Subtract line 2 from line 4. If zero or less, enter -0- . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5. 6. Excess contributions in IRA at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6. 7. Enter the lesser of line 5 or line 6. This is the amount of excess contributions for previous years that you can deduct this year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7. Reporting Additional Taxes Generally, you must use Form 5329 to report the tax on excess contributions, early distributions, and excess ac- cumulations. Filing a tax return. If you must file an individual income tax return, complete Form 5329 and attach it to your Form 1040 or Form 1040NR. Enter the total additional taxes due on Schedule 4 (Form 1040), line 59; or on Form 1040NR, line 57. Not filing a tax return. If you don’t have to file a return, but do have to pay one of the additional taxes mentioned earlier, file the completed Form 5329 with the IRS at the time and place you would have filed Form 1040 or Form 1040NR. Be sure to include your address on page 1 and your signature and date on page 2. Enclose, but don’t at- tach, a check or money order payable to “United States Treasury” for the tax you owe, as shown on Form 5329. Worksheet 1-6. Write your social security number and “2018 Form 5329” on your check or money order. Form 5329 not required. You don’t have to use Form 5329 if either of the following situations exists. • Distribution code 1 (early distribution) is correctly shown in box 7 of Form 1099-R. If you don’t owe any other additional tax on a distribution, multiply the taxa- ble part of the early distribution by 10% and enter the result on Schedule 4 (Form 1040), line 59; or on Form 1040NR, line 57. Enter “No” to the left of the line to in- dicate that you don’t have to file Form 5329. However, if you owe this tax and also owe any other additional tax on a distribution, don’t enter this 10% additional tax directly on your Form 1040 or Form 1040NR. You must file Form 5329 to report your additional taxes. • If you rolled over part or all of a distribution from a qualified retirement plan, the part rolled over isn’t sub- ject to the tax on early distributions. 2. Roth IRAs Reminders Deemed IRAs. For plan years beginning after 2002, a qualified employer plan (retirement plan) can maintain a separate account or annuity under the plan (a deemed IRA) to receive voluntary employee contributions. If the separate account or annuity otherwise meets the require- ments of an IRA, it will be subject only to IRA rules. An employee's account can be treated as a traditional IRA or a Roth IRA. For this purpose, a “qualified employer plan” includes: • A qualified pension, profit-sharing, or stock bonus plan (section 401(a) plan); • A qualified employee annuity plan (section 403(a) plan); • A tax-sheltered annuity plan (section 403(b) plan); and • A deferred compensation plan (section 457 plan) maintained by a state, a political subdivision of a state, or an agency or instrumentality of a state or political subdivision of a state. Designated Roth accounts. Designated Roth accounts are separate accounts under 401(k), 403(b), or 457(b) plans that accept elective deferrals that are referred to as Roth contributions. These elective deferrals are included in your income, but qualified distributions from these ac- counts aren’t included in your income. Designated Roth accounts aren’t IRAs and shouldn’t be confused with Roth IRAs. Contributions, up to their respective limits, can be Page 38 Chapter 2 Roth IRAs

(p590a)(page-40)Page 40#

made to Roth IRAs and designated Roth accounts ac- cording to your eligibility to participate. A contribution to one doesn’t impact your eligibility to contribute to the other. See Pub. 575 for more information on designated Roth accounts. Introduction Regardless of your age, you may be able to establish and make nondeductible contributions to an individual retire- ment plan called a Roth IRA. Contributions not reported. You don’t report Roth IRA contributions on your return. What Is a Roth IRA? A Roth IRA is an individual retirement plan that, except as explained in this chapter, is subject to the rules that apply to a traditional IRA (defined next). It can be either an ac- count or an annuity. Individual retirement accounts and annuities are described in chapter 1 under How Can a Traditional IRA Be Opened. To be a Roth IRA, the account or annuity must be des- ignated as a Roth IRA when it is opened. A deemed IRA can be a Roth IRA, but neither a SEP IRA nor a SIMPLE IRA can be designated as a Roth IRA. Unlike a traditional IRA, you can’t deduct contributions to a Roth IRA. But, if you satisfy the requirements, quali- fied distributions (discussed in chapter 2 of Pub. 590-B) are tax free. Contributions can be made to your Roth IRA after you reach age 701/2 and you can leave amounts in your Roth IRA as long as you live. Traditional IRA. A traditional IRA is any IRA that isn’t a Roth IRA or SIMPLE IRA. Traditional IRAs are discussed in chapter 1. When Can a Roth IRA Be Opened? You can open a Roth IRA at any time. However, the time for making contributions for any year is limited. See When Can You Make Contributions, later, under Can You Con- tribute to a Roth IRA. Can You Contribute to a Roth IRA? Generally, you can contribute to a Roth IRA if you have taxable compensation (defined later) and your modified AGI (defined later) is less than: • $199,000 for married filing jointly or qualifying widow(er); • $135,000 for single, head of household, or married fil- ing separately and you didn’t live with your spouse at any time during the year; and • $10,000 for married filing separately and you lived with your spouse at any time during the year. You may be able to claim a credit for contributions to your Roth IRA. For more information, see chap- ter 3. Is there an age limit for contributions? Contributions can be made to your Roth IRA regardless of your age. Can you contribute to a Roth IRA for your spouse? You can contribute to a Roth IRA for your spouse provi- ded the contributions satisfy the Kay Bailey Hutchison Spousal IRA limit discussed in chapter 1 under How Much Can Be Contributed, you file jointly, and your modified AGI is less than $199,000. Compensation. Compensation includes wages, salaries, tips, professional fees, bonuses, and other amounts re- ceived for providing personal services. It also includes commissions, self-employment income, nontaxable com- bat pay, military differential pay, and taxable alimony and separate maintenance payments. For more information, see What Is Compensation under Who Can Open a Tradi- tional IRA? in chapter 1. Modified AGI. Your modified AGI for Roth IRA purposes is your adjusted gross income (AGI) as shown on your re- turn with some adjustments. Use Worksheet 2-1 to deter- mine your modified AGI. Don’t subtract conversion income when figuring your other AGI-based phaseouts and taxable in- come, such as your deduction for medical and dental expenses. Subtract them from AGI only for the pur- pose of figuring your modified AGI for Roth IRA purposes. How Much Can Be Contributed? The contribution limit for Roth IRAs generally depends on whether contributions are made only to Roth IRAs or to both traditional IRAs and Roth IRAs. Roth IRAs only. If contributions are made only to Roth IRAs, your contribution limit generally is the lesser of: • $5,500 ($6,500 if you are age 50 or older), or • Your taxable compensation. However, if your modified AGI is above a certain amount, your contribution limit may be reduced, as ex- plained later under Contribution limit reduced. Roth IRAs and traditional IRAs. If contributions are made to both Roth IRAs and traditional IRAs established for your benefit, your contribution limit for Roth IRAs gen- erally is the same as your limit would be if contributions were made only to Roth IRAs, but then reduced by all con- tributions for the year to all IRAs other than Roth IRAs. TIP CAUTION ! Chapter 2 Roth IRAs Page 39

(p590a)(page-41)Page 41#

Worksheet 2-1. Modified Adjusted Gross Income for Roth IRA Purposes Use this worksheet to figure your modified adjusted gross income for Roth IRA purposes. 1. Enter your adjusted gross income from Form 1040, line 7; or Form 1040NR, line 35 .............................................................. 1. 2. Enter any income resulting from the conversion of an IRA (other than a Roth IRA) to a Roth IRA (included on Form 1040, line 4b; or Form 1040NR, line 17b) and a rollover from a qualified retirement plan to a Roth IRA (included on Form 1040, line 4b; or Form 1040NR, line 17b) ...................................................................... 2. 3. Subtract line 2 from line 1 ................................................... 3. 4. Enter any traditional IRA deduction from Schedule 1 (Form 1040), line 32; or Form 1040NR, line 32 ........................................... 4. 5. Enter any student loan interest deduction from Schedule 1 (Form 1040), line 33; For Form 1040NR, line 33 ......................................... 5. 6. Enter any domestic production activities deduction (DPAD) from Schedule 1 (Form 1040), line 36, or Form 1040NR, line 34 ............... 6. 7. Enter any foreign earned income exclusion and/or housing exclusion from Form 2555, line 45, or Form 2555-EZ, line 18 ........................ 7. 8. Enter any foreign housing deduction from Form 2555, line 50 ............ 8. 9. Enter any excludable qualified savings bond interest from Form 8815, line 14 ........................................................................ 9. 10. Enter any excluded employer-provided adoption benefits from Form 8839, line 28 ................................................................. 10. 11. Add the amounts on lines 3 through 10 .................................... 11. 12. Enter: • $199,000 if married filing jointly or qualifying widow(er), • $10,000 if married filing separately and you lived with your spouse at any time during the year, or • $135,000 for all others .................................................... 12. Is the amount on line 11 more than the amount on line 12? If yes, see the Note below. If no, the amount on line 11 is your modified adjusted gross income for Roth IRA purposes. Note. If the amount on line 11 is more than the amount on line 12 and you have other income or loss items, such as social security income or passive activity losses, that are subject to AGI-based phaseouts, you can refigure your AGI solely for the purpose of figuring your modified AGI for Roth IRA purposes. (If you receive social security benefits, use Worksheet 1 in Appendix B to refigure your AGI.) Then go to line 3 above in this Worksheet 2-1 to refigure your modified AGI. If you don’t have other income or loss items subject to AGI-based phaseouts, your modified adjusted gross income for Roth IRA purposes is the amount on line 11 above. Page 40 Chapter 2 Roth IRAs

(p590a)(page-42)Page 42#

Employer contributions under a SEP or SIMPLE IRA plan don’t affect this limit. This means that your contribution limit is the lesser of: • $5,500 ($6,500 if you are age 50 or older) minus all contributions (other than employer contributions under a SEP or SIMPLE IRA plan) for the year to all IRAs other than Roth IRAs, or • Your taxable compensation minus all contributions (other than employer contributions under a SEP or SIMPLE IRA plan) for the year to all IRAs other than Roth IRAs. However, if your modified AGI is above a certain amount, your contribution limit may be reduced, as ex- plained later under Contribution limit reduced. Simplified employee pensions (SEPs) and savings in- centive match plans for employees (SIMPLEs) are dis- cussed in Pub. 560. Repayment of reservist distributions. You can repay qualified reservist distributions even if the repayments would cause your total contributions to the Roth IRA to be more than the general limit on contributions. However, the total repayments can’t be more than the amount of your distribution. Note. If you make repayments of qualified reservist distributions to a Roth IRA, increase your basis in the Roth IRA by the amount of the repayment. For more informa- tion, see Qualified reservist repayments under How Much Can Be Contributed? in chapter 1. Contribution limit reduced. If your modified AGI is above a certain amount, your contribution limit is gradually reduced. Use Table 2-1 to determine if this reduction ap- plies to you. Figuring the reduction. If the amount you can con- tribute must be reduced, use Worksheet 2-2 to figure your reduced contribution limit. Round your reduced contribution limit up to the nearest $10. If your reduced contribution limit is more than $0, but less than $200, increase the limit to $200. Example. You are a 45-year-old, single individual with taxable compensation of $121,000. You want to make the maximum allowable contribution to your Roth IRA for 2018. Your modified AGI for 2018 is $121,000. You haven’t contributed to any traditional IRA, so the maxi- mum contribution limit before the modified AGI reduction is $5,500. You figure your reduced Roth IRA contribution of $5,140 as shown on Worksheet 2-2. Example—Illustra- ted. TIP Chapter 2 Roth IRAs Page 41

(p590a)(page-43)Page 43#

Table 2-1. Effect of Modified AGI on Roth IRA Contribution This table shows whether your contribution to a Roth IRA is affected by the amount of your modified adjusted gross income (modified AGI). IF you have taxable compensation and your filing status is ... AND your modified AGI is ... THEN ... married filing jointly or qualifying widow(er) less than $189,000 you can contribute up to $5,500 ($6,500 if you are age 50 or older) as explained under How Much Can Be Contributed, earlier. at least $189,000 but less than $199,000 the amount you can contribute is reduced as explained under Contribution limit reduced, earlier. $199,000 or more you can’t contribute to a Roth IRA. married filing separately (and you lived with your spouse at anytime during the year) zero (-0-) you can contribute up to $5,500 ($6,500 if you are age 50 or older) as explained under How Much Can Be Contributed, earlier. more than zero (-0-) but less than $10,000 the amount you can contribute is reduced as explained under Contribution limit reduced, earlier. $10,000 or more you can’t contribute to a Roth IRA. single, head of household, or married filing separately (and you didn’t live with your spouse at any time during the year) less than $120,000 you can contribute up to $5,500 ($6,500 if you are age 50 or older) as explained under How Much Can Be Contributed, earlier. at least $120,000 but less than $135,000 the amount you can contribute is reduced as explained under Contribution limit reduced, earlier. $135,000 or more you can’t contribute to a Roth IRA. Page 42 Chapter 2 Roth IRAs

(p590a)(page-44)Page 44#

When Can You Make Contributions? You can make contributions to a Roth IRA for a year at any time during the year or by the due date of your return for that year (not including extensions). You can make contributions for 2018 by the due date (not including extensions) for filing your 2018 tax return. This means that most people can make contributions for 2018 by April 15, 2019. What if You Contribute Too Much? A 6% excise tax applies to any excess contribution to a Roth IRA. Excess contributions. These are the contributions to your Roth IRAs for a year that equal the total of: 1. Amounts contributed for the tax year to your Roth IRAs (other than amounts properly and timely rolled TIP over from a Roth IRA or properly converted from a tra- ditional IRA or rolled over from a qualified retirement plan, as described later) that are more than your con- tribution limit for the year (explained earlier under How Much Can Be Contributed); plus 2. Any excess contributions for the preceding year, re- duced by the total of: a. Any distributions out of your Roth IRAs for the year, plus b. Your contribution limit for the year minus your con- tributions to all your IRAs for the year. Withdrawal of excess contributions. For purposes of determining excess contributions, any contribution that is withdrawn on or before the due date (including exten- sions) for filing your tax return for the year is treated as an amount not contributed. This treatment only applies if any earnings on the contributions are also withdrawn. The Determining Your Reduced Roth IRA Contribution Limit Before using this worksheet, check Table 2-1 to determine whether or not your Roth IRA contribution limit is reduced. If it is, use this worksheet to determine how much it is reduced. 1. Enter your modified AGI for Roth IRA purposes (Worksheet 2-1, line 11) .................................................................. 1. 2. Enter: • $189,000 if filing a joint return or qualifying widow(er), • $-0- if married filing a separate return and you lived with your spouse at any time in 2018, or • $120,000 for all others ................................................ 2. 3. Subtract line 2 from line 1 ................................................ 3. 4. Enter: • $10,000 if filing a joint return or qualifying widow(er) or married filing a separate return and you lived with your spouse at any time during the year, or • $15,000 for all others ........................ ........................ 4. 5. Divide line 3 by line 4 and enter the result as a decimal (rounded to at least three places). If the result is 1.000 or more, enter 1.000 ............ 5. 6. Enter the lesser of: • $5,500 ($6,500 if you are age 50 or older), or • Your taxable compensation ..................... ..................... 6. 7. Multiply line 5 by line 6 ................................................... 7. 8. Subtract line 7 from line 6. Round the result up to the nearest $10. If the result is less than $200, enter $200 ...................................... 8. 9. Enter contributions for the year to other IRAs ............................ 9. 10. Subtract line 9 from line 6 ................................................ 10. 11. Enter the lesser of line 8 or line 10. This is your reduced Roth IRA contribution limit ...................................................... 11. Worksheet 2-2. Chapter 2 Roth IRAs Page 43

(p590a)(page-45)Page 45#

earnings are considered earned and received in the year the excess contribution was made. If you timely filed your 2018 tax return without withdraw- ing a contribution that you made in 2018, you can still have the contribution returned to you within 6 months of the due date of your 2018 tax return, excluding exten- sions. If you do, file an amended return with “Filed pur- suant to section 301.9100-2” written at the top. Report any related earnings on the amended return and include an explanation of the withdrawal. Make any other necessary changes on the amended return. Applying excess contributions. If contributions to your Roth IRA for a year were more than the limit, you can ap- ply the excess contribution in 1 year to a later year if the contributions for that later year are less than the maximum allowed for that year. Can You Move Amounts Into a Roth IRA? You may be able to convert amounts from either a tradi- tional, SEP, or SIMPLE IRA into a Roth IRA. You may be able to roll over amounts from a qualified retirement plan to a Roth IRA. You may be able to recharacterize contri- butions made to one IRA as having been made directly to a different IRA. You can roll amounts over from a designa- ted Roth account or from one Roth IRA to another Roth IRA. Conversions You can convert a traditional IRA to a Roth IRA. The con- version is treated as a rollover, regardless of the conver- sion method used. Most of the rules for rollovers, descri- bed in chapter 1 under Rollover From One IRA Into Another, apply to these rollovers. However, the 1-year waiting period doesn’t apply. Conversion methods. You can convert amounts from a traditional IRA to a Roth IRA in any of the following three ways. • Rollover. You can receive a distribution from a tradi- tional IRA and roll it over (contribute it) to a Roth IRA within 60 days after the distribution. • Trustee-to-trustee transfer. You can direct the trustee of the traditional IRA to transfer an amount from the traditional IRA to the trustee of the Roth IRA. • Same trustee transfer. If the trustee of the traditional IRA also maintains the Roth IRA, you can direct the trustee to transfer an amount from the traditional IRA to the Roth IRA. Worksheet 2-2. Example—Illustrated Before using this worksheet, check Table 2-1 to determine whether or not your Roth IRA contribution limit is reduced. If it is, use this worksheet to determine how much it is reduced. 1. Enter your modified AGI for Roth IRA purposes (Worksheet 2-1, line 11) . . . . . . . . . . . . . . 1. 121,000 2. Enter: • $189,000 if filing a joint return or qualifying widow(er), • $-0- if married filing a separate return and you lived with your spouse at any time in 2018, or • $120,000 for all others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. 120,000 3. Subtract line 2 from line 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. 1,000 4. Enter: • $10,000 if filing a joint return or qualifying widow(er) or married filing a separate return and you lived with your spouse at any time during the year, or • $15,000 for all others . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . 4. 15,000 5. Divide line 3 by line 4 and enter the result as a decimal (rounded to at least three places). If the result is 1.000 or more, enter 1.000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5. 0.067 6. Enter the lesser of: • $5,500 ($6,500 if you are age 50 or older), or • Your taxable compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6. 5,500 7. Multiply line 5 by line 6 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7. 367 8. Subtract line 7 from line 6. Round the result up to the nearest $10. If the result is less than $200, enter $200 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8. 5,140 9. Enter contributions for the year to other IRAs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9. 0 10. Subtract line 9 from line 6 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10. 5,500 11. Enter the lesser of line 8 or line 10. This is your reduced Roth IRA contribution limit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11. 5,140 Page 44 Chapter 2 Roth IRAs

(p590a)(page-46)Page 46#

Same trustee. Conversions made with the same trustee can be made by redesignating the traditional IRA as a Roth IRA, rather than opening a new account or issu- ing a new contract. Income. You must include in your gross income distribu- tions from a traditional IRA that you would have had to in- clude in income if you hadn’t converted them into a Roth IRA. These amounts are normally included in income on your return for the year that you converted them from a traditional IRA to a Roth IRA. If you must include any amount in your gross in- come, you may have to increase your withholding or make estimated tax payments. See Pub. 505, Tax Withholding and Estimated Tax. More information. For more information on conversions, see Converting From Any Traditional IRA Into a Roth IRA in chapter 1. Rollover From Employer's Plan Into a Roth IRA You can roll over into a Roth IRA all or part of an eligible rollover distribution you receive from your (or your de- ceased spouse's): • Employer's qualified pension, profit-sharing, or stock bonus plan (including a 401(k) plan); • Annuity plan; • Tax-sheltered annuity plan (section 403(b) plan); or • Governmental deferred compensation plan (section 457 plan). Any amount rolled over is subject to the same rules for converting a traditional IRA into a Roth IRA. See Convert- ing From Any Traditional IRA Into a Roth IRA in chapter 1. Also, the rollover contribution must meet the rollover re- quirements that apply to the specific type of retirement plan. Rollover methods. You can roll over amounts from a qualified retirement plan to a Roth IRA in one of the follow- ing ways. • Rollover. You can receive a distribution from a quali- fied retirement plan and roll it over (contribute) to a Roth IRA within 60 days after the distribution. Since the distribution is paid directly to you, the payer gener- ally must withhold 20% of it. For rules about making a rollover of a plan loan offset, including a qualified plan loan offset, see Time Limit for Making a Rollover Con- tribution in chapter 1. • Direct rollover option. Your employer's qualified plan must give you the option to have any part of an eligible rollover distribution paid directly to a Roth IRA. Generally, no tax is withheld from any part of the des- ignated distribution that is directly paid to the trustee of the Roth IRA. CAUTION ! Rollover by nonspouse beneficiary. If you are a desig- nated beneficiary (other than a surviving spouse) of a de- ceased employee, you can roll over all or part of an eligi- ble rollover distribution from one of the types of plans listed above into a Roth IRA. You must make the rollover by a direct trustee-to-trustee transfer into an inherited Roth IRA. You will determine your required minimum distributions in years after you make the rollover based on whether the employee died before his or her required beginning date for taking distributions from the plan. For more informa- tion, see Distributions after the employee’s death under Tax on Excess Accumulation in Pub. 575. Income. You must include in your gross income distribu- tions from a qualified retirement plan that you would have had to include in income if you hadn’t rolled them over into a Roth IRA. You don’t include in gross income any part of a distribution from a qualified retirement plan that is a re- turn of basis (after-tax contributions) to the plan that were taxable to you when paid. These amounts are normally in- cluded in income on your return for the year of the rollover from the qualified employer plan to a Roth IRA. If you must include any amount in your gross in- come, you may have to increase your withholding or make estimated tax payments. See Pub. 505, Tax Withholding and Estimated Tax. For more information on eligible rollover distributions from qualified retirement plans and withholding, see Roll- over From Employer's Plan Into an IRA in chapter 1. Military Death Gratuities and Servicemembers' Group Life Insurance (SGLI) Payments If you received a military death gratuity or SGLI payment with respect to a death from injury that occurred after Oc- tober 6, 2001, you can contribute (roll over) all or part of the amount received to your Roth IRA. The contribution is treated as a qualified rollover contribution. The amount you can roll over to your Roth IRA can’t ex- ceed the total amount that you received reduced by any part of that amount that was contributed to a Coverdell ESA or another Roth IRA. Any military death gratuity or SGLI payment contributed to a Roth IRA is disregarded for purposes of the 1-year waiting period between roll- overs. The rollover must be completed before the end of the 1-year period beginning on the date you received the pay- ment. The amount contributed to your Roth IRA is treated as part of your cost basis (investment in the contract) in the Roth IRA that isn’t taxable when distributed. Rollover From a Roth IRA You can withdraw, tax free, all or part of the assets from one Roth IRA if you contribute them within 60 days to an- other Roth IRA. Most of the rules for rollovers, described CAUTION ! Chapter 2 Roth IRAs Page 45

(p590a)(page-47)Page 47#

in chapter 1 under Rollover From One IRA Into Another, apply to these rollovers. However, rollovers from retire- ment plans other than Roth IRAs are disregarded for pur- poses of the 1-year waiting period between rollovers. A rollover from a Roth IRA to an employer retirement plan isn’t allowed. A rollover from a designated Roth account can only be made to another designated Roth account or to a Roth IRA. If you roll over an amount from one Roth IRA to another Roth IRA, the 5-year period used to determine qualified distributions doesn’t change. The 5-year period begins with the first tax year for which the contribution was made to the initial Roth IRA. See What Are Qualified Distribu- tions in chapter 2 of Pub. 590-B. Rollover of Exxon Valdez Settlement Income If you are a qualified taxpayer (defined in chapter 1, ear- lier) and you received qualified settlement income (de- fined in chapter 1, earlier), you can contribute all or part of the amount received to an eligible retirement plan which includes a Roth IRA. The rules for contributing qualified settlement income to a Roth IRA are the same as the rules for contributing qualified settlement income to a traditional IRA with the following exception. Qualified settlement in- come that is contributed to a Roth IRA, or to a designated Roth account, will be: • Included in your taxable income for the year the quali- fied settlement income was received, and • Treated as part of your cost basis (investment in the contract) in the Roth IRA that isn’t taxable when dis- tributed. For more information, see Rollover of Exxon Valdez Settlement Income in chapter 1. 3. Retirement Savings Contributions Credit (Saver's Credit) What's New Modified AGI limit for retirement savings contribu- tions credit increased. For 2018, you may be able to claim the retirement savings contributions credit if your modified AGI isn’t more than: • $63,000 if your filing status is married filing jointly; • $47,250 if your filing status is head of household; or • $31,500 if your filing status is single, married filing separately, or qualifying widow(er). Introduction You may be able to take a tax credit if you make eligible contributions (defined later) to a qualified retirement plan, an eligible deferred compensation plan, or an IRA. You may be able to take a credit of up to $1,000 (up to $2,000 if filing jointly). This credit could reduce the federal income tax you pay dollar for dollar.

Can you claim the credit? If you make eligible contribu- tions to a qualified retirement plan, an eligible deferred compensation plan, or an IRA, you can claim the credit if all of the following apply. 1. You were born before January 2, 2001. 2. You aren’t a full-time student (explained later). 3. No one else, such as your parent(s), claims an ex- emption for you on their tax return. 4. Your adjusted gross income (defined below) isn’t more than: a. $63,000 if your filing status is married filing jointly; b. $47,250 if your filing status is head of household; or c. $31,500 if your filing status is single, married filing separately, or qualifying widow(er). Full-time student. You are a full-time student if, dur- ing some part of each of 5 calendar months (not necessa- rily consecutive) during the calendar year, you are either: • A full-time student at a school that has a regular teaching staff, course of study, and regularly enrolled body of students in attendance; or • A student taking a full-time, on-farm training course given by either a school that has a regular teaching staff, course of study, and regularly enrolled body of students in attendance, or a state, county, or local government. You are a full-time student if you are enrolled for the num- ber of hours or courses the school considers to be full time. Adjusted gross income. This is generally the amount on line 7 of your 2018 Form 1040; or line 35 of your 2018 Form 1040NR. However, you must add to that amount any exclusion or deduction claimed for the year for: • Foreign earned income, • Foreign housing costs, Page 46 Chapter 3 Retirement Savings Contributions Credit (Saver's Credit)

(p590a)(page-48)Page 48#

• Income for bona fide residents of American Samoa, and • Income from Puerto Rico. Eligible contributions. These include: 1. Contributions to a traditional or Roth IRA; 2. Salary reduction contributions (elective deferrals, in- cluding amounts designated as after-tax Roth contri- butions) to: a. A 401(k) plan (including a SIMPLE 401(k)), b. A section 403(b) annuity, c. An eligible deferred compensation plan of a state or local government (a governmental 457 plan), d. A SIMPLE IRA plan, or e. A salary reduction SEP; and 3. Contributions to a section 501(c)(18) plan. They also include voluntary after-tax employee contribu- tions to a tax-qualified retirement plan or section 403(b) annuity. For purposes of the credit, an employee contribu- tion will be voluntary as long as it isn’t required as a condi- tion of employment. Reducing eligible contributions. Reduce your eligible contributions (but not below zero) by the total distributions you received during the testing period (defined later) from any IRA, plan, or annuity included above under Eligible contributions. Also reduce your eligible contributions by any distribution from a Roth IRA that isn’t rolled over, even if the distribution isn’t taxable. Don’t reduce your eligible contributions by any of the following. 1. The portion of any distribution which isn’t includible in income because it is a trustee-to-trustee transfer or a rollover distribution. 2. Distributions that are taxable as the result of an in-plan rollover to your designated Roth account. 3. Any distribution that is a return of a contribution to an IRA (including a Roth IRA) made during the year for which you claim the credit if: a. The distribution is made before the due date (in- cluding extensions) of your tax return for that year, b. You don’t take a deduction for the contribution, and c. The distribution includes any income attributable to the contribution. 4. Loans from a qualified employer plan treated as a dis- tribution. 5. Distributions of excess contributions or deferrals (and income attributable to excess contributions and defer- rals). 6. Distributions of dividends paid on stock held by an employee stock ownership plan under section 404(k). 7. Distributions from an eligible retirement plan that are converted or rolled over to a Roth IRA. 8. Distributions from a military retirement plan. 9. Distributions from an inherited IRA by a nonspousal beneficiary. Distributions received by spouse. Any distributions your spouse receives are treated as received by you if you file a joint return with your spouse both for the year of the distribution and for the year for which you claim the credit. Testing period. The testing period consists of the year for which you claim the credit, the period after the end of that year and before the due date (including exten- sions) for filing your return for that year, and the 2 tax years before that year. Example. You and your spouse filed joint returns in 2016 and 2017, and plan to do so in 2018 and 2019. You received a taxable distribution from a qualified plan in 2016 and a taxable distribution from an eligible deferred compensation plan in 2017. Your spouse received taxable distributions from a Roth IRA in 2018 and tax-free distribu- tions from a Roth IRA in 2019 before April 15. You made eligible contributions to an IRA in 2018 and you otherwise qualify for this credit. You must reduce the amount of your qualifying contributions in 2018 by the total of the distribu- tions you received in 2016, 2017, 2018, and 2019. Maximum eligible contributions. After your contribu- tions are reduced, the maximum annual contribution on which you can base the credit is $2,000 per person. Effect on other credits. The amount of this credit won’t change the amount of your refundable tax credits. A re- fundable tax credit, such as the earned income credit or the refundable amount of your child tax credit, is an amount that you would receive as a refund even if you didn’t otherwise owe any taxes. Maximum credit. This is a nonrefundable credit. The amount of the credit in any year can’t be more than the amount of tax that you would otherwise pay (not counting any refundable credits) in any year. If your tax liability is reduced to zero because of other nonrefundable credits, such as the credit for child and dependent care expenses, then you won’t be entitled to this credit. How to figure and report the credit. The amount of the credit you can get is based on the contributions you make and your credit rate. Your credit rate can be as low as 10% or as high as 50%. Your credit rate depends on your income and your filing status. See Form 8880 to deter- mine your credit rate. The maximum contribution taken into account is $2,000 per person. On a joint return, up to $2,000 is taken into ac- count for each spouse. Figure the credit on Form 8880. Report the credit on Schedule 3 (Form 1040), line 51; or line 48 of your Form 1040NR and attach Form 8880 to your return. Chapter 3 Retirement Savings Contributions Credit (Saver's Credit) Page 47

(p590a)(page-49)Page 49#

4. How To Get Tax Help If you have questions about a tax issue, need help prepar- ing your tax return, or want to download free publications, forms, or instructions, go to IRS.gov and find resources that can help you right away. Tax reform. Major tax reform legislation impacting indi- viduals, businesses, and tax-exempt entities was enacted in the Tax Cuts and Jobs Act on December 22, 2017. Go to IRS.gov/TaxReform for information and updates on how this legislation affects your taxes. Preparing and filing your tax return. Find free options to prepare and file your return on IRS.gov or in your local community if you qualify. The Volunteer Income Tax Assistance (VITA) program offers free tax help to people who generally make $55,000 or less, persons with disabilities, and limited-Eng- lish-speaking taxpayers who need help preparing their own tax returns. The Tax Counseling for the Elderly (TCE) program offers free tax help for all taxpayers, particularly those who are 60 years of age and older. TCE volunteers specialize in answering questions about pensions and re- tirement-related issues unique to seniors. You can go to IRS.gov to see your options for preparing and filing your return which include the following. • Free File. Go to IRS.gov/FreeFile to see if you qualify to use brand-name software to prepare and e-file your federal tax return for free. • VITA. Go to IRS.gov/VITA, download the free IRS2Go app, or call 800-906-9887 to find the nearest VITA lo- cation for free tax return preparation. • TCE. Go to IRS.gov/TCE, download the free IRS2Go app, or call 888-227-7669 to find the nearest TCE lo- cation for free tax return preparation. Getting answers to your tax questions. On IRS.gov, get answers to your tax questions any- time, anywhere. • Go to IRS.gov/Help for a variety of tools that will help you get answers to some of the most common tax questions. • Go to IRS.gov/ITA for the Interactive Tax Assistant, a tool that will ask you questions on a number of tax law topics and provide answers. You can print the entire interview and the final response for your records. • Go to IRS.gov/Pub17 to get Pub. 17, Your Federal In- come Tax for Individuals, which features details on tax-saving opportunities, 2018 tax changes, and thou- sands of interactive links to help you find answers to your questions. View it online in HTML, as a PDF, or download it to your mobile device as an eBook. • You may also be able to access tax law information in your electronic filing software. Getting tax forms and publications. Go to IRS.gov/ Forms to view, download, or print all of the forms and pub- lications you may need. You can also download and view popular tax publications and instructions (including the 1040 instructions) on mobile devices as an eBook at no charge. Or you can go to IRS.gov/OrderForms to place an order and have forms mailed to you within 10 business days. Access your online account (individual taxpayers only). Go to IRS.gov/Account to securely access infor- mation about your federal tax account. • View the amount you owe, pay online, or set up an on- line payment agreement. • Access your tax records online. • Review the past 24 months of your payment history. • Go to IRS.gov/SecureAccess to review the required identity authentication process. Using direct deposit. The fastest way to receive a tax refund is to combine direct deposit and IRS e-file. Direct deposit securely and electronically transfers your refund directly into your financial account. Eight in 10 taxpayers use direct deposit to receive their refund. The IRS issues more than 90% of refunds in less than 21 days. Refund timing for returns claiming certain credits. The IRS can’t issue refunds before mid-February 2019 for returns that claimed the earned income credit (EIC) or the additional child tax credit (ACTC). This applies to the en- tire refund, not just the portion associated with these cred- its. Getting a transcript or copy of a return. The quickest way to get a copy of your tax transcript is to go to IRS.gov/ Transcripts. Click on either "Get Transcript Online" or "Get Transcript by Mail" to order a copy of your transcript. If you prefer, you can: • Order your transcript by calling 800-908-9946, or • Mail Form 4506-T or Form 4506T-EZ (both available on IRS.gov). Using online tools to help prepare your return. Go to IRS.gov/Tools for the following. • The Earned Income Tax Credit Assistant (IRS.gov/ EITCAssistant) determines if you’re eligible for the EIC. • The Online EIN Application (IRS.gov/EIN) helps you get an employer identification number. • The IRS Withholding Calculator (IRS.gov/W4App) es- timates the amount you should have withheld from your paycheck for federal income tax purposes and can help you perform a “paycheck checkup.” Page 48 Chapter 4 How To Get Tax Help

(p590a)(page-50)Page 50#

• The First Time Homebuyer Credit Account Look-up (IRS.gov/HomeBuyer) tool provides information on your repayments and account balance. • The Sales Tax Deduction Calculator (IRS.gov/ SalesTax) figures the amount you can claim if you itemize deductions on Schedule A (Form 1040), choose not to claim state and local income taxes, and you didn’t save your receipts showing the sales tax you paid. Resolving tax-related identity theft issues. • The IRS doesn’t initiate contact with taxpayers by email or telephone to request personal or financial in- formation. This includes any type of electronic com- munication, such as text messages and social media channels. • Go to IRS.gov/IDProtection for information. • If your SSN has been lost or stolen or you suspect you’re a victim of tax-related identity theft, visit IRS.gov/IdentiityTheft to learn what steps you should take. Checking on the status of your refund. • Go to IRS.gov/Refunds. • The IRS can’t issue refunds before mid-February 2019 for returns that claimed the EIC or the ACTC. This ap- plies to the entire refund, not just the portion associ- ated with these credits. • Download the official IRS2Go app to your mobile de- vice to check your refund status. • Call the automated refund hotline at 800-829-1954. Making a tax payment. The IRS uses the latest encryp- tion technology to ensure your electronic payments are safe and secure. You can make electronic payments on- line, by phone, and from a mobile device using the IRS2Go app. Paying electronically is quick, easy, and faster than mailing in a check or money order. Go to IRS.gov/Payments to make a payment using any of the following options. • IRS Direct Pay: Pay your individual tax bill or estima- ted tax payment directly from your checking or sav- ings account at no cost to you. • Debit or credit card: Choose an approved payment processor to pay online, by phone, and by mobile de- vice. • Electronic Funds Withdrawal: Offered only when fil- ing your federal taxes using tax return preparation software or through a tax professional. • Electronic Federal Tax Payment System: Best op- tion for businesses. Enrollment is required. • Check or money order: Mail your payment to the ad- dress listed on the notice or instructions. • Cash: You may be able to pay your taxes with cash at a participating retail store. What if I can’t pay now? Go to IRS.gov/Payments for more information about your options. • Apply for an online payment agreement (IRS.gov/ OPA) to meet your tax obligation in monthly install- ments if you can’t pay your taxes in full today. Once you complete the online process, you will receive im- mediate notification of whether your agreement has been approved. • Use the Offer in Compromise Pre-Qualifier (IRS.gov/ OIC) to see if you can settle your tax debt for less than the full amount you owe. Checking the status of an amended return. Go to IRS.gov/WMAR to track the status of Form 1040X amen- ded returns. Please note that it can take up to 3 weeks from the date you mailed your amended return for it to show up in our system and processing it can take up to 16 weeks. Understanding an IRS notice or letter. Go to IRS.gov/ Notices to find additional information about responding to an IRS notice or letter. Contacting your local IRS office. Keep in mind, many questions can be answered on IRS.gov without visiting an IRS Tax Assistance Center (TAC). Go to IRS.gov/ LetUsHelp for the topics people ask about most. If you still need help, IRS TACs provide tax help when a tax issue can’t be handled online or by phone. All TACs now pro- vide service by appointment so you’ll know in advance that you can get the service you need without long wait times. Before you visit, go to IRS.gov/TACLocator to find the nearest TAC, check hours, available services, and ap- pointment options. Or, on the IRS2Go app, under the Stay Connected tab, choose the Contact Us option and click on “Local Offices.” Watching IRS videos. The IRS Video portal (IRSVideos.gov) contains video and audio presentations for individuals, small businesses, and tax professionals. Getting tax information in other languages. For tax- payers whose native language isn’t English, we have the following resources available. Taxpayers can find informa- tion on IRS.gov in the following languages. • Spanish (IRS.gov/Spanish). • Chinese (IRS.gov/Chinese). • Vietnamese (IRS.gov/Vietnamese). • Korean (IRS.gov/Korean). • Russian (IRS.gov/Russian). The IRS TACs provide over-the-phone interpreter serv- ice in over 170 languages, and the service is available free to taxpayers. Chapter 4 How To Get Tax Help Page 49

(p590a)(page-51)Page 51#

The Taxpayer Advocate Service (TAS) Is Here To Help You What is TAS? TAS is an independent organization within the IRS that helps taxpayers and protects taxpayer rights. Their job is to ensure that every taxpayer is treated fairly and that you know and understand your rights under the Taxpayer Bill of Rights. How Can You Learn About Your Taxpayer Rights? The Taxpayer Bill of Rights describes 10 basic rights that all taxpayers have when dealing with the IRS. Go to TaxpayerAdvocate.IRS.gov to help you understand what these rights mean to you and how they apply. These are your rights. Know them. Use them. What Can TAS Do For You? TAS can help you resolve problems that you can’t resolve with the IRS. And their service is free. If you qualify for their assistance, you will be assigned to one advocate who will work with you throughout the process and will do everything possible to resolve your issue. TAS can help you if: • Your problem is causing financial difficulty for you, your family, or your business; • You face (or your business is facing) an immediate threat of adverse action; or • You’ve tried repeatedly to contact the IRS but no one has responded, or the IRS hasn’t responded by the date promised. How Can You Reach TAS? TAS has offices in every state, the District of Columbia, and Puerto Rico. Your local advocate’s number is in your local directory and at TaxpayerAdvocate.IRS.gov/ Contact-Us. You can also call them at 877-777-4778. How Else Does TAS Help Taxpayers? TAS works to resolve large-scale problems that affect many taxpayers. If you know of one of these broad issues, please report it to them at IRS.gov/SAMS. TAS also has a website, Tax Reform Changes, which shows you how the new tax law may change your future tax filings and helps you plan for these changes. The in- formation is categorized by tax topic in the order of the IRS Form 1040. Go to TaxChanges.us for more informa- tion. Low Income Taxpayer Clinics (LITCs) LITCs are independent from the IRS. LITCs represent in- dividuals whose income is below a certain level and need to resolve tax problems with the IRS, such as audits, ap- peals, and tax collection disputes. In addition, clinics can provide information about taxpayer rights and responsibili- ties in different languages for individuals who speak Eng- lish as a second language. Services are offered for free or a small fee. To find a clinic near you, visit TaxpayerAdvocate.IRS.gov/LITCmap or see IRS Pub. 4134, Low Income Taxpayer Clinic List. Page 50 Chapter 4 How To Get Tax Help

(p590a)(page-52)Page 52#

Appendices To help you complete your tax return, use the following appendices that in- clude worksheets and tables. 1. Appendix A—Summary Record of Traditional IRA(s) for 2018. 2. Appendix B—Worksheets you use if you receive social security benefits and are subject to the IRA deduction phaseout rules. A fil- led-in example is included. a. Worksheet 1, Computation of Modified AGI. b. Worksheet 2, Computation of Traditional IRA Deduction for 2018. c. Worksheet 3, Computation of Taxable Social Security Bene- fits. d. Comprehensive Example and completed worksheets. Publication 590-A (2018) Page 51

(p590a)(page-53)Page 53#

Summary Record of Traditional IRA(s) for 2018 Appendix A. Keep for Your Records

Name ______________________________________ I was covered not covered by my employer's retirement plan during the year. I became 591/2 on ______________________________________(month) (day) (year) I became 701/2 on ______________________________________(month) (day) (year) Contributions Name of traditional IRA Date Amount contributed for 2018 Check if rollover contribution Fair Market Value of IRA as of December 31, 2018, from Form 5498 1. 2. 3. 4. 5. 6. 7. 8. Total Total contributions deducted on tax return . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Total contributions treated as nondeductible on Form 8606 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Distributions Name of traditional IRA Date Amount of Distribution Reason (for example, retirement, rollover, conversion, withdrawal of excess contributions) Income earned on IRA Taxable amount reported on income tax return Nontaxable amount from Form 8606, line 13 1. 2. 3. 4. 5. 6. 7. 8. Total Basis of all traditional IRAs for 2018 and earlier years (from Form 8606, line 14) . . . . . . . . . . . . . $ Note. You should keep copies of your income tax return, and Forms W-2, 8606, and 5498. Page 52 Publication 590-A (2018)

(p590a)(page-54)Page 54#

Worksheets for Social Security Recipients Who Contribute to a Traditional IRA Appendix B. Keep for Your Records If you receive social security benefits, have taxable compensation, contribute to your traditional IRA, and you or your spouse is covered by an employer retirement plan, complete the following worksheets. (See Are You Covered by an Employer Plan? in chapter 1.)

Use Worksheet 1 to figure your modified adjusted gross income. This amount is needed in the computation of your IRA deduction, if any, which is figured using Worksheet 2.

The IRA deduction figured using Worksheet 2 is entered on your tax return. Worksheet 1 Computation of Modified AGI (For use only by taxpayers who receive social security benefits) Filing Status—Check only one box: A. Married filing jointly B. Single, Head of Household, Qualifying Widow(er), or Married filing separately and lived apart from your spouse during the entire year C. Married filing separately and lived with your spouse at any time during the year 1. Adjusted gross income (AGI) from Form 1040 (For purposes of this worksheet, figure your AGI without taking into account any social security benefits from Form SSA-1099 or RRB-1099, any deduction for contributions to a traditional IRA, any student loan interest deduction, any domestic production activities deduction or any exclusion of interest from savings bonds to be reported on Form 8815.) . . . . . . . . . . . . . . . . . . . 1. 2. Enter the amount in box 5 of all Forms SSA-1099 and Forms RRB-1099 . . . . . . . . . . . . . . . . . . 2. 3. Enter one-half of line 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. 4. Enter the amount of any foreign earned income exclusion, foreign housing exclusion, U.S. possessions income exclusion, exclusion of income from Puerto Rico you claimed as a bona fide resident of Puerto Rico, or exclusion of employer-provided adoption benefits . . . . . . . . . . 4. 5. Enter the amount of any tax-exempt interest reported on Form 1040, line 2a . . . . . . . . . . . . . . . 5. 6. Add lines 1, 3, 4, and 5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6. 7. Enter the amount listed below for your filing status. • $32,000 if you checked box A above. • $25,000 if you checked box B above. • $0 if you checked box C above. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7. 8. Subtract line 7 from line 6. If zero or less, enter -0- on this line . . . . . . . . . . . . . . . . . . . . . . . . . . . 8. 9. If line 8 is zero, skip to line 17, enter -0-, and continue with line 18. If line 8 is more than zero, enter the amount listed below for your filing status. • $12,000 if you checked box A above. • $9,000 if you checked box B above. • $0 if you checked box C above . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . 9. 10. Subtract line 9 from line 8. If zero or less, enter -0- . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

10. 11. Enter the smaller of line 8 or line 9 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

11. 12. Enter one-half of line 11 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

12. 13. Enter the smaller of line 3 or line 12 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

13. 14. Multiply line 10 by 0.85. If line 10 is zero, enter -0- . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

14. 15. Add lines 13 and 14 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

15. 16. Multiply line 2 by 0.85 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

16. 17. Taxable benefits to be included in modified AGI for traditional IRA deduction purposes. Enter the smaller of line 15 or line 16 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

17. 18. Enter the amount of any employer-provided adoption benefits exclusion and any foreign earned income exclusion and foreign housing exclusion or deduction that you claimed . . . . .

18. 19. Modified AGI for determining your reduced traditional IRA deduction—add lines 1, 17, and 18. Enter here and on line 2 of Worksheet 2 next . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

19. Publication 590-A (2018) Page 53

(p590a)(page-55)Page 55#

2. Enter your modified AGI from Worksheet 1, line 19 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.

Note. If line 2 is equal to or more than the amount on line 1, stop here; your traditional IRA contributions aren’t deductible. Proceed to Worksheet 3. 3. Subtract line 2 from line 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.

5. Enter your compensation minus any deductions on Schedule 1 (Form 1040), line 27; or Form 1040NR, line 27 (deductible part of self-employment tax) and Schedule 1 (Form 1040), line 28; or Form 1040NR, line 28 (self-employed SEP, SIMPLE, and qualified plans). If you are the lower-income spouse, include your spouse's compensation reduced by his or her traditional IRA and Roth IRA contributions for this year . . . . . . . . . . . 5.

6. Enter contributions you made, or plan to make, to your traditional IRA for 2018, but don’t enter more than $5,500 ($6,500 if you are age 50 or older) . . . . . . . . . . . . . . . . . . . . . . . . . . 6.

7. Deduction. Compare lines 4, 5, and 6. Enter the smallest amount here (or a smaller amount if you choose). Enter this amount on the Form 1040 line for your IRA. (If the amount on line 6 is more than the amount on line 7, complete line 8.) . . . . . . . . . . . . . . . . . 7.

8. Nondeductible contributions. Subtract line 7 from line 5 or 6, whichever is smaller. Enter the result here and on line 1 of your Form 8606, Nondeductible IRAs . . . . . . . . . . . . 8.

Page 54 Publication 590-A (2018)

(p590a)(page-56)Page 56#

2. Deduction(s) from line 7 of Worksheet(s) 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.

3. Subtract line 2 from line 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.

4. Enter amount in box 5 of all Forms SSA-1099 and Forms RRB-1099 . . . . . . . . . . . . . . . . . . 4.

5. Enter one-half of line 4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.

6. Enter the amount of any foreign earned income exclusion, foreign housing exclusion, exclusion of income from U.S. possessions, exclusion of income from Puerto Rico you claimed as a bona fide resident of Puerto Rico, or exclusion of employer-provided adoption benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.

7. Enter the amount of any tax-exempt interest reported on line 2a of Form 1040 . . . . . . . . . 7.

8. Add lines 3, 5, 6, and 7 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.

9. Enter the amount listed below for your filing status. • $32,000 if you checked box A above. • $25,000 if you checked box B above. • $0 if you checked box C above. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.

10. Subtract line 9 from line 8. If zero or less, enter -0- on this line . . . . . . . . . . . . . . . . . . . . . . . . 10. 11. If line 10 is zero, stop here. None of your social security benefits are taxable. If line 10 is more than zero, enter the amount listed below for your filing status. • $12,000 if you checked box A above. • $9,000 if you checked box B above. • $0 if you checked box C above. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11. 12. Subtract line 11 from line 10. If zero or less, enter -0- . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12. 13. Enter the smaller of line 10 or line 11 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13. 14. Enter one-half of line 13 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14. 15. Enter the smaller of line 5 or line 14 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15. 16. Multiply line 12 by 0.85. If line 12 is zero, enter -0- . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16. 17. Add lines 15 and 16 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17. 18. Multiply line 4 by 0.85 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18. 19. Taxable social security benefits. Enter the smaller of line 17 or line 18 . . . . . . . . . . . . . 19. Publication 590-A (2018) Page 55

(p590a)(page-57)Page 57#

Appendix B. (Continued) Keep for Your Records Comprehensive Example Determining Your Traditional IRA Deduction and the Taxable Portion of Your Social Security Benefits John Black is married and files a joint return. He is 65 years old and had 2018 wages of $90,500. His wife didn’t work in 2018. He also received social security benefits of $12,000 and made a $6,000 contribution to his traditional IRA for the year. He had no foreign income, no tax-exempt interest, and no adjustments to income on lines 23 through 36 on his Schedule 1 (Form 1040). He participated in a section 401(k) retirement plan at work. John completes Worksheets 1 and 2. Worksheet 2 shows that his 2018 IRA deduction is $5,950. He must either withdraw the contributions that are more than the deduction (the $50 shown on line 8 of Worksheet 2), or treat the excess amounts as nondeductible contributions (in which case he must complete Form 8606 and attach it to his Form 1040). The completed worksheets that follow show how John figured his modified AGI to determine the IRA deduction and the taxable social security benefits to report on his Form 1040. Worksheet 1 Computation of Modified AGI (For use only by taxpayers who receive social security benefits) Filing Status—Check only one box:

A. Married filing jointly B. Single, Head of Household, Qualifying Widow(er), or Married filing separately and lived apart from your spouse during the entire year C. Married filing separately and lived with your spouse at any time during the year 1. Adjusted gross income (AGI) from Form 1040 (For purposes of this worksheet, figure your AGI without taking into account any social security benefits from Form SSA-1099 or RRB-1099, any deduction for contributions to a traditional IRA, any student loan interest deduction, any domestic production activities deduction or, or any exclusion of interest from savings bonds to be reported on Form 8815.) . . . . . . . . . . . . . . . 1. 90,500 2. Enter the amount in box 5 of all Forms SSA-1099 and Forms RRB-1099 . . . . . . . . . . . . . . . . . . 2. 12,000 3. Enter one-half of line 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. 6,000 4. Enter the amount of any foreign earned income exclusion, foreign housing exclusion, U.S. possessions income exclusion, exclusion of income from Puerto Rico you claimed as a bona fide resident of Puerto Rico, or exclusion of employer-provided adoption benefits . . . . . . . . . . 4. 0 5. Enter the amount of any tax-exempt interest reported on Form 1040, line 2a . . . . . . . . . . . . . . . 5. 0 6. Add lines 1, 3, 4, and 5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6. 96,500 7. Enter the amount listed below for your filing status. • $32,000 if you checked box A above. • $25,000 if you checked box B above. • $0 if you checked box C above. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7. 32,000 8. Subtract line 7 from line 6. If zero or less, enter -0- on this line . . . . . . . . . . . . . . . . . . . . . . . . . . . 8. 64,500 9. If line 8 is zero, skip to line 17, enter -0-, and continue with line 18. If line 8 is more than zero, enter the amount listed below for your filing status. • $12,000 if you checked box A above. • $9,000 if you checked box B above. • $0 if you checked box C above . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . 9. 12,000 10. Subtract line 9 from line 8. If zero or less, enter -0- . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10. 52,500 11. Enter the smaller of line 8 or line 9 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11. 12,000 12. Enter one-half of line 11 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12. 6,000 13. Enter the smaller of line 3 or line 12 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13. 6,000 14. Multiply line 10 by 0.85. If line 10 is zero, enter -0- . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14. 44,625 15. Add lines 13 and 14 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15. 50,625 16. Multiply line 2 by 0.85 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16. 10,200 17. Taxable benefits to be included in modified AGI for traditional IRA deduction purposes. Enter the smaller of line 15 or line 16 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17. 10,200 18. Enter the amount of any employer-provided adoption benefits exclusion and any foreign earned income exclusion and foreign housing exclusion or deduction that you claimed . . . . . 18. 0 19. Modified AGI for determining your reduced traditional IRA deduction—add lines 1, 17, and 18. Enter here and on line 2 of Worksheet 2 next . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19. 100,700 Page 56 Publication 590-A (2018)

(p590a)(page-58)Page 58#

Appendix B. (Continued) Keep for Your Records Worksheet 2 Computation of Traditional IRA Deduction for 2018 (For use only by taxpayers who receive social security benefits) IF your filing status is ... AND your modified AGI is over ... THEN enter on line 1 below ... married filing jointly or qualifying widow(er) $101,000* $121,000 married filing jointly (you aren’t covered by an employer plan but your spouse is) $189,000* $199,000 single, or head of household $63,000* $73,000 married filing separately** $0* $10,000 *If your modified AGI isn’t over this amount, you can take an IRA deduction for your contributions of up to the lesser of $5,500 ($6,500 if you are age 50 or older) or your taxable compensation. Skip this worksheet, proceed to Worksheet 3, and enter your IRA deduction on line 2 of Worksheet 3. **If you didn’t live with your spouse at any time during the year, consider your filing status as single. Note. If you were married and you or your spouse worked and you both contributed to IRAs, figure the deduction for each of you separately. 1. Enter the applicable amount from above . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. 121,000 2. Enter your modified AGI from Worksheet 1, line 19 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. 102,700 Note. If line 2 is equal to or more than the amount on line 1, stop here; your traditional IRA contributions aren’t deductible. Proceed to Worksheet 3. 3. Subtract line 2 from line 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. 18,300 4. Multiply line 3 by the percentage below that applies to you. If the result isn’t a multiple of $10, round it to the next highest multiple of $10. (For example, $611.40 is rounded to $620.) However, if the result is less than $200, enter $200. • Married filing jointly or qualifying widow(er) and you are covered by an employer plan, multiply line 3 by 27.5% (0.275) (by 32.5% (0.325) if you are age 50 or older). • All others, multiply line 3 by 55% (0.55) (by 65% (0.65) if you are age 50 or older). . . . . . . . . . . . . . . . . . . 4. 5,950 5. Enter your compensation minus any deductions on Schedule 1 (Form 1040), line 27; or Form 1040NR, line 27 (deductible part of self-employment tax) and Schedule 1 (Form 1040), line 28; or Form 1040NR, line 28 (self-employed SEP, SIMPLE, and qualified plans). If you are the lower-income spouse, include your spouse's compensation reduced by his or her traditional IRA and Roth IRA contributions for this year . . . . . . . . . . . 5. 90,500 6. Enter contributions you made, or plan to make, to your traditional IRA for 2017, but don’t enter more than $5,500 ($6,500 if you are age 50 or older) . . . . . . . . . . . . . . . . . . . . . . . . . . 6. 6,000 7. Deduction. Compare lines 4, 5, and 6. Enter the smallest amount here (or a smaller amount if you choose). Enter this amount on the Form 1040 line for your IRA. (If the amount on line 6 is more than the amount on line 7, complete line 8.) . . . . . . . . . . . . . . . . . 7. 5,950 8. Nondeductible contributions. Subtract line 7 from line 5 or 6, whichever is smaller. Enter the result here and on line 1 of your Form 8606, Nondeductible IRAs . . . . . . . . . . . . 8. 50 Publication 590-A (2018) Page 57

(p590a)(page-59)Page 59#

Appendix B. (Continued) Keep for Your Records Worksheet 3 Computation of Taxable Social Security Benefits (For use by taxpayers who receive social security benefits and take a traditional IRA deduction) Filing Status—Check only one box: A. Married filing jointly B. Single, Head of Household, Qualifying Widow(er), or Married filing separately and lived apart from your spouse during the entire year C. Married filing separately and lived with your spouse at any time during the year 1. Adjusted gross income (AGI) from Form 1040 (For purposes of this worksheet, figure your AGI without taking into account any IRA deduction, any student loan interest deduction, any social security benefits from Form SSA-1099 or RRB-1099, any domestic production activities deduction or any exclusion of interest from savings bonds to be reported on Form 8815.) . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. 90,500 2. Deduction(s) from line 7 of Worksheet(s) 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. 5,950 3. Subtract line 2 from line 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. 84,550 4. Enter amount in box 5 of all Forms SSA-1099 and Forms RRB-1099 . . . . . . . . . . . . . . . . . . 4. 12,000 5. Enter one-half of line 4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5. 6,000 6. Enter the amount of any foreign earned income exclusion, foreign housing exclusion, exclusion of income from U.S. possessions, exclusion of income from Puerto Rico you claimed as a bona fide resident of Puerto Rico, or exclusion of employer-provided adoption benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6. 0 7. Enter the amount of any tax-exempt interest reported on Form 1040, line 2a . . . . . . . . . . . 7. 0 8. Add lines 3, 5, 6, and 7 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8. 90,550 9. Enter the amount listed below for your filing status. • $32,000 if you checked box A above. • $25,000 if you checked box B above. • $0 if you checked box C above. . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . 9. 32,000 10. Subtract line 9 from line 8. If zero or less, enter -0- on this line. . . . . . . . . . . . . . . . . . . . . . . . . 10. 58,550 11. If line 10 is zero, stop here. None of your social security benefits are taxable. If line 10 is more than zero, enter the amount listed below for your filing status. • $12,000 if you checked box A above. • $9,000 if you checked box B above. • $0 if you checked box C above . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11. 12,000 12. Subtract line 11 from line 10. If zero or less, enter -0- . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12. 46,550 13. Enter the smaller of line 10 or line 11 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13. 12,000 14. Enter one-half of line 13 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14. 6,000 15. Enter the smaller of line 5 or line 14 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15. 6,000 16. Multiply line 12 by 0.85. If line 12 is zero, enter -0- . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16. 39,570 17. Add lines 15 and 16 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17. 45,570 18. Multiply line 4 by 0.85 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18. 10,200 19. Taxable social security benefits. Enter the smaller of line 17 or line 18 . . . . . . . . . . . . . . 19. 10,200 Page 58 Publication 590-A (2018)

(p590a)(page-60)Page 60#

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

10% additional tax 32 20% withholding 25 6% excise tax on excess contributions to Roth IRAs 43 60-day period for rollovers 21 A Additional taxes 33 (See also Penalties) Reporting 38 Adjusted gross income (AGI) 13, 39 (See also Modified adjusted gross income (AGI)) Retirement savings contributions credit 46 Age 50: Contributions 8 Age 70 1/2 rule 10 Age limit: Traditional IRA 9 Airline payments 27 Alimony 6 Annuity contracts 9 Borrowing on 33 Assistance (See Tax help) B Basis: Traditional IRAs 16 Bond purchase plans: Rollovers from 27 Bonds, retirement (See Individual retirement bonds) Broker's commissions 8, 10 C Collectibles 34 Community property 8 Compensation: Alimony 6 Defined 6 Income included (Table 1-1) 6 Nontaxable combat pay 6 Self-employment 6 Wages, salaries, etc. 6 Conduit IRAs 26 Contribution limits: More than one IRA 9 Contributions: Designating the year 10 Distributions in same year as 14 Excess (See Excess contributions) Less than maximum 9 Nondeductible (See Nondeductible contributions) Not required 10 Qualified reservist repayments 8 Recharacterizing (See Recharacteri zation) Retirement savings contributions credit 47 Roth IRAs 39–44 Traditional IRAs 8, 9 When to contribute 9 Withdrawing before due date of return 31 Conversions: To Roth IRAs 44 Credits: Retirement savings contributions credit 46, 47 D Deductions: Figuring reduced IRA deduction 15 Phaseout 12 Traditional IRAs 10–16 Deemed IRAs 38 Defined benefit plans 11 Defined contribution plans 11 Distributions: Contributions in same year as 14 Income from 14 Inherited IRAs (See Inherited IRAs) Divorce: Rollovers by former spouse 27 Transfers incident to 28 E Early distributions 33 (See also Penalties) Tax 32 Employer and employee association trust accounts 7 Employer plans: Covered by 11 Year(s) covered 11 Employer retirement plans 11 Defined benefit plans 11 Defined contribution plans 11 Effect of modified AGI on deduction (Table 1-2) 13 Limit if covered by 12 Prohibited transactions 33 Endowment contracts (See Annuity contracts) Excess contributions 34–38 Closed tax year 38 Deducted in earlier year 35 Deductible this year (Worksheet 1-6) 36 Deductible this year if any were deducted in closed tax year (Worksheet 1-7) 38 Deducting in a later year 36 Due to incorrect rollover information 36 Recharacterizing 30 Roth IRAs 43 Tax 32 Withdrawn after due date of return 35 Withdrawn by due date of return 35 Exempt transactions 33 Exxon Valdez settlement income 28, 46 F Federal judges 11 Fiduciaries: Prohibited transactions 33 Filing before IRA contribution is made 10 Filing status 9 Deduction phaseout and 13 Firefighters, volunteer 12 Form 1040: Modified AGI calculation from 14 Form 1099-R: Distribution code 1 used on 38 Withdrawal of excess contribution 35 Form 5329 38 Form 8606 15 Failure to file, penalty 16 Form 8880 47 Form W-2: Employer retirement plans 11 Frozen deposits 23 Full-time student: Retirement savings contributions credit 46 H How to: Set up an IRA 6 Treat withdrawn contributions 35 I Identity theft 49 Individual retirement accounts 7 Individual retirement annuities 7 Individual retirement arrangements (IRAs): How to set up 6 Publication 590-A (2018) Page 59

(p590a)(page-61)Page 61#

When to set up 6 Individual retirement bonds 7 Inherited IRAs 20 Rollovers 24 Interest on IRA 2 Investment in collectibles: Collectibles defined 34 Exception 34 K Kay Bailey Hutchison Spousal IRAs: Contribution limits 9 Deductions 10 Roth IRA contribution limits 39 Keogh plans: Rollovers from 27 L Last-in first-out rule 32 Life insurance 27 M Military death gratuities 45 Missing children, photographs of 2 Modified adjusted gross income (AGI): Employer retirement plan coverage and deduction (Table 1-2) 13 Figuring (Worksheet 1-1) 15 No employer retirement plan coverage and deduction (Table 1-3) 13 Roth IRAs 39 Effect on contribution amount (Table 2-1) 42 More than one IRA 9 Recharacterization 31 N Nondeductible contributions 15 Failure to report 15 Overstatement penalty 16 Notice: Qualified employer plan to provide prior to rollover distribution 25 Rollovers 21 P Partial rollovers 24, 26 Penalties 33–38 Excess contributions 34–38 Roth IRAs 43 Exempt transactions 33, 34 Failure to file Form 8606 16 Overstatement of nondeductible contributions 16 Prohibited transactions 33, 34 Reporting 38 Phaseout of deduction 12 Pledging account as security 33 Prohibited transactions 33, 34 Taxes on 33 Publications (See Tax help) Q Qualified domestic relations orders (QDROs) 27 Qualified settlement income 28, 46 R Recharacterization 29–31 Determining amount of net income due to contribution and total amount to be recharacterized (Worksheet 1-3) 30 Reporting 31 Timing of 30 Recordkeeping requirements: Summary record of traditional IRAs for 2018 (Appendix A) 52 Traditional IRAs 16 Reporting: Additional taxes 38 Deductible contributions 15 Recharacterization 31 Rollovers: From employer plans 27 From IRAs 24 Reservists 12 Qualified reservist repayments 8 Retirement bonds (See Individual retirement bonds) Retirement savings contributions credit 46, 47 Rollovers 21–27 Airline payments 27 Amount 23 Choosing an option (Table 1-5) 26 Completed after 60-day period 21 Conduit IRAs 26 Direct rollover option 25 Extension of period 23 From bond purchase plan 27 From employer's plan into an IRA 24 From employer's plan into a Roth IRA 45 From Keogh plans 27 From one IRA into another 23 From Roth IRAs 45 From traditional IRA 21 Inherited IRAs 24 Nonspouse beneficiary 25 Notice 21 Partial 24, 26 Tax treatment of rollover from traditional IRA to eligible retirement plan other than an IRA 21 Time limit 21 To Roth IRAs 44 To traditional IRA 21 Waiting period between 23, 26 Withholding (See Withholding) Roth IRAs 38 Age limit 39 Contribution limit reduced 41 Determining reduced limit (Worksheet 2-2) 43 Contributions 39–44 Timing of 43 To traditional IRAs and to Roth IRAs 39 Conversion 29, 44 Defined 39 Excess contributions 43 Modified AGI: Effect on contribution amount (Table 2-1) 42 Figuring (Worksheet 2-1) 40 Rollovers from 45 Setting up 39 Spouse 39 Traditional IRAs converted into 29 S Section 501(c)(18) plan 9 Self-certification 23 Self-employed persons: Deductible contributions 15 Income of 6 Separated taxpayers: Filing status of 13 Servicemembers group life insurance 45 Services received at reduced or no cost 34 SIMPLE IRAs 7 Traditional IRA, mistakenly moved to 29 Simplified employee pensions (SEPs) 7 Social Security recipients 12 Contributions to traditional IRAs, worksheet (Appendix B) 53, 56 Spousal IRAs (See Kay Bailey Hutchison Spousal IRAs or Inherited IRAs) Students: Retirement savings contributions credit 46 Surviving spouse: Rollovers by 27 Page 60 Publication 590-A (2018)

(p590a)(page-62)Page 62#

T Tables: Compensation, types of (Table 1-1) 6 Modified AGI: Employer retirement plan coverage and deduction (Table 1-2) 13 No employer retirement plan coverage and deduction (Table 1-3) 13 Roth IRAs, effect on contribution (Table 2-1) 42 Rollover vs. direct payment to taxpayer (Table 1-5) 26 Using this publication (Table I-1) 4 Tax advantages of IRAs 3 Tax credits: Retirement savings contributions credit 46, 47 Tax help 48 Tax-sheltered annuities: Rollovers from 27 Tax year 11 Traditional IRAs 5–38 Contribution limits 8, 9 Contributions 8, 9 Due date 10 To Roth IRAs and to traditional IRAs 39 Converting into Roth IRA 29 Cost basis 16 Deductions 10–16 Defined 5 Disclosures 7 Excess contributions 34–38 Inherited IRAs 20 Loss of IRA status 33 Mistakenly moved to SIMPLE IRA 29 Recordkeeping 16 Reduced IRA deduction for 2018 16 Rollovers (See Rollovers) Setting up 5–8 Social Security recipients 12, 53, 56 Summary record for 2018 (Appendix A) 52 Transfers 20 Types of 7 Withdrawing or using assets 31, 32 Transfers 20 Divorce 28 To Roth IRAs 20, 44 Trustee to trustee 21, 44 Trustees' fees 8, 10 Trustee-to-trustee transfers 21 To Roth IRAs 44 U Unrelated Business Income 34 V Volunteer firefighters 12 W Withdrawing or using assets: Contribution withdrawal, before due date of return 31 Determining total amount to be withdrawn (Worksheet 1-4) 32 Traditional IRAs 31, 32 Withholding: Direct rollover option 25 Eligible rollover distribution paid to taxpayer 25 Worksheets: Excess contributions deductible this year (Worksheet 1-6) 36 If any were deducted in closed tax year (Worksheet 1-7) 38 Figuring amount of net income due to IRA contribution and total amount to be recharacterized (Worksheet 1-3) 30 Figuring amount of net income due to IRA contribution and total amount to be withdrawn (Worksheet 1-4) 32 Figuring modified AGI (Worksheet 1-1) 15 Roth IRAs: Figuring modified AGI (Worksheet 2-1) 40 Figuring reduced contribution limit (Worksheet 2-2) 43 Social Security recipients who contribute to traditional IRAs (Appendix B) 53, 56 Publication 590-A (2018) Page 61

(f8880)Form 8880, Credit for Qualified Retirement Savings Contributions (2018)#

(f8880)(document-1)#

(f8880)Form 8880, Credit for Qualified Retirement Savings Contributions (2018)#

(f8880)(document-1)#

(i1040sca)Instructions for Schedule A (Form 1040), Itemized Deductions (2018)#

(i1040sca)(page-1)Page 1#

(i1040sca)(page-2)Page 2#

(i1040sca)(page-3)Page 3#

(i1040sca)(page-4)Page 4#

(i1040sca)(page-5)Page 5#

(i1040sca)(page-6)Page 6#

(i1040sca)(page-7)Page 7#

(i1040sca)(page-8)Page 8#

(i1040sca)(page-9)Page 9#

(i1040sca)(page-10)Page 10#

(i1040sca)(page-11)Page 11#

(i1040sca)(page-12)Page 12#

(i1040sca)(page-13)Page 13#

(i1040sca)(page-14)Page 14#

(i1040sca)(page-15)Page 15#

(i1040sca)(page-16)Page 16#

(i1040sca)(page-17)Page 17#

(i1040sca)(page-18)Page 18#

(p535)Publication 535 (2018), Business Expenses#

(p535)(page-1)Page 1#

(p535)(page-2)Page 2#

(p535)(page-3)Page 3#

(p535)(page-4)Page 4#

(p535)(page-5)Page 5#

(p535)(page-6)Page 6#

(p535)(page-7)Page 7#

(p535)(page-8)Page 8#

(p535)(page-9)Page 9#

(p535)(page-10)Page 10#

(p535)(page-11)Page 11#

(p535)(page-12)Page 12#

(p535)(page-13)Page 13#

(p535)(page-14)Page 14#

(p535)(page-15)Page 15#

(p535)(page-16)Page 16#

(p535)(page-17)Page 17#

(p535)(page-18)Page 18#

(p535)(page-19)Page 19#

(p535)(page-20)Page 20#

(p535)(page-21)Page 21#

(p535)(page-22)Page 22#

(p535)(page-23)Page 23#

(p535)(page-24)Page 24#

(p535)(page-25)Page 25#

(p535)(page-26)Page 26#

(p535)(page-27)Page 27#

(p535)(page-28)Page 28#

(p535)(page-29)Page 29#

(p535)(page-30)Page 30#

(p535)(page-31)Page 31#

(p535)(page-32)Page 32#

(p535)(page-33)Page 33#

(p535)(page-34)Page 34#

(p535)(page-35)Page 35#

(p535)(page-36)Page 36#

(p535)(page-37)Page 37#

(p535)(page-38)Page 38#

(p535)(page-39)Page 39#

(p535)(page-40)Page 40#

(p535)(page-41)Page 41#

(p535)(page-42)Page 42#

(p535)(page-43)Page 43#

(p535)(page-44)Page 44#

(p535)(page-45)Page 45#

(p535)(page-46)Page 46#

(p535)(page-47)Page 47#

(p535)(page-48)Page 48#

(p535)(page-49)Page 49#

(p535)(page-50)Page 50#

(p535)(page-51)Page 51#

(p535)(page-52)Page 52#

(p535)(page-53)Page 53#

(p535)(page-54)Page 54#

(p535)(page-55)Page 55#

(p535)(page-56)Page 56#