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Free tax forms Publication 537 - Main Content Table of Contents What Is an Installment Sale?Special rule. Free tax forms General RulesFiguring Installment Sale Income Reporting Installment Sale Income Other RulesElecting Out of the Installment Method Payments Received or Considered Received Escrow Account Depreciation Recapture Income Sale to a Related Person Like-Kind Exchange Contingent Payment Sale Single Sale of Several Assets Sale of a Business Unstated Interest and Original Issue Discount (OID) Disposition of an Installment Obligation Repossession Interest on Deferred Tax Reporting an Installment SaleRelated person. Free tax forms Several assets. Free tax forms Special situations. Free tax forms Schedule D (Form 1040). Free tax forms Form 4797. Free tax forms How To Get Tax Help What Is an Installment Sale? An installment sale is a sale of property where you receive at least one payment after the tax year of the sale. Free tax forms The rules for installment sales do not apply if you elect not to use the installment method (see Electing Out of the Installment Method under Other Rules, later) or the transaction is one for which the installment method may not apply. Free tax forms The installment sales method cannot be used for the following. Free tax forms Sale of inventory. Free tax forms   The regular sale of inventory of personal property does not qualify as an installment sale even if you receive a payment after the year of sale. Free tax forms See Sale of a Business under Other Rules, later. Free tax forms Dealer sales. Free tax forms   Sales of personal property by a person who regularly sells or otherwise disposes of the same type of personal property on the installment plan are not installment sales. Free tax forms This rule also applies to real property held for sale to customers in the ordinary course of a trade or business. Free tax forms However, the rule does not apply to an installment sale of property used or produced in farming. Free tax forms Special rule. Free tax forms   Dealers of time-shares and residential lots can treat certain sales as installment sales and report them under the installment method if they elect to pay a special interest charge. Free tax forms For more information, see section 453(l). Free tax forms Stock or securities. Free tax forms   You cannot use the installment method to report gain from the sale of stock or securities traded on an established securities market. Free tax forms You must report the entire gain on the sale in the year in which the trade date falls. Free tax forms Installment obligation. Free tax forms   The buyer's obligation to make future payments to you can be in the form of a deed of trust, note, land contract, mortgage, or other evidence of the buyer's debt to you. Free tax forms General Rules If a sale qualifies as an installment sale, the gain must be reported under the installment method unless you elect out of using the installment method. Free tax forms See Electing Out of the Installment Method under Other Rules, later, for information on recognizing the entire gain in the year of sale. Free tax forms Sale at a loss. Free tax forms   If your sale results in a loss, you cannot use the installment method. Free tax forms If the loss is on an installment sale of business or investment property, you can deduct it only in the tax year of sale. Free tax forms Unstated interest. Free tax forms   If your sale calls for payments in a later year and the sales contract provides for little or no interest, you may have to figure unstated interest, even if you have a loss. Free tax forms See Unstated Interest and Original Issue Discount (OID) under Other Rules, later. Free tax forms Figuring Installment Sale Income You can use the following discussions or Form 6252 to help you determine gross profit, contract price, gross profit percentage, and installment sale income. Free tax forms Each payment on an installment sale usually consists of the following three parts. Free tax forms Interest income. Free tax forms Return of your adjusted basis in the property. Free tax forms Gain on the sale. Free tax forms In each year you receive a payment, you must include in income both the interest part and the part that is your gain on the sale. Free tax forms You do not include in income the part that is the return of your basis in the property. Free tax forms Basis is the amount of your investment in the property for installment sale purposes. Free tax forms Interest Income You must report interest as ordinary income. Free tax forms Interest is generally not included in a down payment. Free tax forms However, you may have to treat part of each later payment as interest, even if it is not called interest in your agreement with the buyer. Free tax forms Interest provided in the agreement is called stated interest. Free tax forms If the agreement does not provide for enough stated interest, there may be unstated interest or original issue discount. Free tax forms See Unstated Interest and Original Issue Discount (OID) under Other Rules, later. Free tax forms Adjusted Basis and Installment Sale Income (Gain on Sale) After you have determined how much of each payment to treat as interest, you treat the rest of each payment as if it were made up of two parts. Free tax forms A tax-free return of your adjusted basis in the property, and Your gain (referred to as installment sale income on Form 6252). Free tax forms Figuring adjusted basis for installment sale purposes. Free tax forms   You can use Worksheet A to figure your adjusted basis in the property for installment sale purposes. Free tax forms When you have completed the worksheet, you will also have determined the gross profit percentage necessary to figure your installment sale income (gain) for this year. Free tax forms Worksheet A. Free tax forms Figuring Adjusted Basis and Gross Profit Percentage 1. Free tax forms Enter the selling price for the property   2. Free tax forms Enter your adjusted basis for the property     3. Free tax forms Enter your selling expenses     4. Free tax forms Enter any depreciation recapture     5. Free tax forms Add lines 2, 3, and 4. Free tax forms  This is your adjusted basis for installment sale purposes   6. Free tax forms Subtract line 5 from line 1. Free tax forms If zero or less, enter -0-. Free tax forms  This is your gross profit     If the amount entered on line 6 is zero, stop here. Free tax forms You cannot use the installment method. Free tax forms   7. Free tax forms Enter the contract price for the property   8. Free tax forms Divide line 6 by line 7. Free tax forms This is your gross profit percentage   Selling price. Free tax forms   The selling price is the total cost of the property to the buyer and includes any of the following. Free tax forms Any money you are to receive. Free tax forms The fair market value (FMV) of any property you are to receive (FMV is discussed in Property Used As a Payment under Other Rules, later). Free tax forms Any existing mortgage or other debt the buyer pays, assumes, or takes (a note, mortgage, or any other liability, such as a lien, accrued interest, or taxes you owe on the property). Free tax forms Any of your selling expenses the buyer pays. Free tax forms   Do not include stated interest, unstated interest, any amount recomputed or recharacterized as interest, or original issue discount. Free tax forms Adjusted basis for installment sale purposes. Free tax forms   Your adjusted basis is the total of the following three items. Free tax forms Adjusted basis. Free tax forms Selling expenses. Free tax forms Depreciation recapture. Free tax forms Adjusted basis. Free tax forms   Basis is your investment in the property for installment sale purposes. Free tax forms The way you figure basis depends on how you acquire the property. Free tax forms The basis of property you buy is generally its cost. Free tax forms The basis of property you inherit, receive as a gift, build yourself, or receive in a tax-free exchange is figured differently. Free tax forms   While you own property, various events may change your original basis. Free tax forms Some events, such as adding rooms or making permanent improvements, increase basis. Free tax forms Others, such as deductible casualty losses or depreciation previously allowed or allowable, decrease basis. Free tax forms The result is adjusted basis. Free tax forms   For more information on how to figure basis and adjusted basis, see Publication 551. Free tax forms For more information regarding your basis in property you inherited from someone who died in 2010 and whose executor filed Form 8939, Allocation of Increase In Basis for Property Acquired From a Decedent, see Publication 4895. Free tax forms Selling expenses. Free tax forms   Selling expenses relate to the sale of the property. Free tax forms They include commissions, attorney fees, and any other expenses paid on the sale. Free tax forms Selling expenses are added to the basis of the sold property. Free tax forms Depreciation recapture. Free tax forms   If the property you sold was depreciable property, you may need to recapture part of the gain on the sale as ordinary income. Free tax forms See Depreciation Recapture Income under Other Rules, later. Free tax forms Gross profit. Free tax forms   Gross profit is the total gain you report on the installment method. Free tax forms   To figure your gross profit, subtract your adjusted basis for installment sale purposes from the selling price. Free tax forms If the property you sold was your home, subtract from the gross profit any gain you can exclude. Free tax forms See Sale of Your Home , later, under Reporting Installment Sale Income. Free tax forms Contract price. Free tax forms   Contract price equals: The selling price, minus The mortgages, debts, and other liabilities assumed or taken by the buyer, plus The amount by which the mortgages, debts, and other liabilities assumed or taken by the buyer exceed your adjusted basis for installment sale purposes. Free tax forms Gross profit percentage. Free tax forms   A certain percentage of each payment (after subtracting interest) is reported as installment sale income. Free tax forms This percentage is called the gross profit percentage and is figured by dividing your gross profit from the sale by the contract price. Free tax forms   The gross profit percentage generally remains the same for each payment you receive. Free tax forms However, see the Example under Selling Price Reduced, later, for a situation where the gross profit percentage changes. Free tax forms Example. Free tax forms You sell property at a contract price of $6,000 and your gross profit is $1,500. Free tax forms Your gross profit percentage is 25% ($1,500 ÷ $6,000). Free tax forms After subtracting interest, you report 25% of each payment, including the down payment, as installment sale income from the sale for the tax year you receive the payment. Free tax forms The remainder (balance) of each payment is the tax-free return of your adjusted basis. Free tax forms Amount to report as installment sale income. Free tax forms   Multiply the payments you receive each year (less interest) by the gross profit percentage. Free tax forms The result is your installment sale income for the tax year. Free tax forms In certain circumstances, you may be treated as having received a payment, even though you received nothing directly. Free tax forms A receipt of property or the assumption of a mortgage on the property sold may be treated as a payment. Free tax forms For a detailed discussion, see Payments Received or Considered Received under Other Rules, later. Free tax forms Selling Price Reduced If the selling price is reduced at a later date, the gross profit on the sale also will change. Free tax forms You then must refigure the gross profit percentage for the remaining payments. Free tax forms Refigure your gross profit using Worksheet B. Free tax forms You will spread any remaining gain over future installments. Free tax forms Worksheet B. Free tax forms New Gross Profit Percentage — Selling Price Reduced 1. Free tax forms Enter the reduced selling  price for the property   2. Free tax forms Enter your adjusted  basis for the  property     3. Free tax forms Enter your selling  expenses     4. Free tax forms Enter any depreciation  recapture     5. Free tax forms Add lines 2, 3, and 4. Free tax forms   6. Free tax forms Subtract line 5 from line 1. Free tax forms  This is your adjusted  gross profit   7. Free tax forms Enter any installment sale  income reported in  prior year(s)   8. Free tax forms Subtract line 7 from line 6   9. Free tax forms Future installments   10. Free tax forms Divide line 8 by line 9. Free tax forms  This is your new gross profit percentage*   * Apply this percentage to all future payments to determine how much of each of those payments is installment sale income. Free tax forms Example. Free tax forms In 2011, you sold land with a basis of $40,000 for $100,000. Free tax forms Your gross profit was $60,000. Free tax forms You received a $20,000 down payment and the buyer's note for $80,000. Free tax forms The note provides for four annual payments of $20,000 each, plus 8% interest, beginning in 2012. Free tax forms Your gross profit percentage is 60%. Free tax forms You reported a gain of $12,000 on each payment received in 2011 and 2012. Free tax forms In 2013, you and the buyer agreed to reduce the purchase price to $85,000 and payments during 2013, 2014, and 2015 are reduced to $15,000 for each year. Free tax forms The new gross profit percentage, 46. Free tax forms 67%, is figured on Example—Worksheet B. Free tax forms You will report a gain of $7,000 (46. Free tax forms 67% of $15,000) on each of the $15,000 installments due in 2013, 2014, and 2015. Free tax forms Example — Worksheet B. Free tax forms New Gross Profit Percentage — Selling Price Reduced 1. Free tax forms Enter the reduced selling  price for the property 85,000 2. Free tax forms Enter your adjusted  basis for the  property 40,000   3. Free tax forms Enter your selling  expenses -0-   4. Free tax forms Enter any depreciation  recapture -0-   5. Free tax forms Add lines 2, 3, and 4. Free tax forms 40,000 6. Free tax forms Subtract line 5 from line 1. Free tax forms  This is your adjusted  gross profit 45,000 7. Free tax forms Enter any installment sale  income reported in  prior year(s) 24,000 8. Free tax forms Subtract line 7 from line 6 21,000 9. Free tax forms Future installments 45,000 10. Free tax forms Divide line 8 by line 9. Free tax forms  This is your new gross profit percentage* 46. Free tax forms 67% * Apply this percentage to all future payments to determine how much of each of those payments is installment sale income. Free tax forms Reporting Installment Sale Income Generally, you will use Form 6252 to report installment sale income from casual sales of real or personal property during the tax year. Free tax forms You also will have to report the installment sale income on Schedule D (Form 1040), Capital Gains and Losses, or Form 4797, or both. Free tax forms See Schedule D (Form 1040) and Form 4797 , later. Free tax forms If the property was your main home, you may be able to exclude part or all of the gain. Free tax forms See Sale of Your Home , later. Free tax forms Form 6252 Use Form 6252 to report an installment sale in the year it takes place and to report payments received, or considered received because of related party resales, in later years. Free tax forms Attach it to your tax return for each year. Free tax forms Form 6252 will help you determine the gross profit, contract price, gross profit percentage, and installment sale income. Free tax forms Which parts to complete. Free tax forms   Which part to complete depends on whether you are filing the form for the year of sale or a later year. Free tax forms Year of sale. Free tax forms   Complete lines 1 through 4, Part I, and Part II. Free tax forms If you sold property to a related party during the year, also complete Part III. Free tax forms Later years. Free tax forms   Complete lines 1 through 4 and Part II for any year in which you receive a payment from an installment sale. Free tax forms   If you sold a marketable security to a related party after May 14, 1980, and before January 1, 1987, complete Form 6252 for each year of the installment agreement, even if you did not receive a payment. Free tax forms (After December 31, 1986, the installment method is not available for the sale of marketable securities. Free tax forms ) Complete lines 1 through 4 and Part II for any year in which you receive a payment from the sale. Free tax forms Complete Part III unless you received the final payment during the tax year. Free tax forms   If you sold property other than a marketable security to a related party after May 14, 1980, complete Form 6252 for the year of sale and for 2 years after the year of sale, even if you did not receive a payment. Free tax forms Complete lines 1 through 4 and Part II for any year during this 2-year period in which you receive a payment from the sale. Free tax forms Complete Part III for the 2 years after the year of sale unless you received the final payment during the tax year. Free tax forms Schedule D (Form 1040) Enter the gain figured on Form 6252 (line 26) for personal-use property (capital assets) on Schedule D (Form 1040), as a short-term gain (line 4) or long-term gain (line 11). Free tax forms If your gain from the installment sale qualifies for long-term capital gain treatment in the year of sale, it will continue to qualify in later tax years. Free tax forms Your gain is long-term if you owned the property for more than 1 year when you sold it. Free tax forms Form 4797 An installment sale of property used in your business or that earns rent or royalty income may result in a capital gain, an ordinary gain, or both. Free tax forms All or part of any gain from the disposition of the property may be ordinary gain from depreciation recapture. Free tax forms For trade or business property held for more than 1 year, enter the amount from line 26 of Form 6252 on Form 4797, line 4. Free tax forms If the property was held 1 year or less or you have an ordinary gain from the sale of a noncapital asset (even if the holding period is more than 1 year), enter this amount on Form 4797, line 10, and write “From Form 6252. Free tax forms ” Sale of Your Home If you sell your home, you may be able to exclude all or part of the gain on the sale. Free tax forms See Publication 523 for information about excluding the gain. Free tax forms If the sale is an installment sale, any gain you exclude is not included in gross profit when figuring your gross profit percentage. Free tax forms Seller-financed mortgage. Free tax forms   If you finance the sale of your home to an individual, both you and the buyer may have to follow special reporting procedures. Free tax forms   When you report interest income received from a buyer who uses the property as a personal residence, write the buyer's name, address, and social security number (SSN) on line 1 of Schedule B (Form 1040A or 1040), Interest and Ordinary Dividends. Free tax forms   When deducting the mortgage interest, the buyer must write your name, address, and SSN on line 11 of Schedule A (Form 1040), Itemized Deductions. Free tax forms   If either person fails to include the other person's SSN, a $50 penalty will be assessed. Free tax forms Other Rules The rules discussed in this part of the publication apply only in certain circumstances or to certain types of property. Free tax forms The following topics are discussed. Free tax forms Electing out of the installment method. Free tax forms Payments received or considered received. Free tax forms Escrow account. Free tax forms Depreciation recapture income. Free tax forms Sale to a related person. Free tax forms Like-kind exchange. Free tax forms Contingent payment sale. Free tax forms Single sale of several assets. Free tax forms Sale of a business. Free tax forms Unstated interest and original issue discount. Free tax forms Disposition of an installment obligation. Free tax forms Repossession. Free tax forms Interest on deferred tax. Free tax forms Electing Out of the Installment Method If you elect not to use the installment method, you generally report the entire gain in the year of sale, even though you do not receive all the sale proceeds in that year. Free tax forms To figure the amount of gain to report, use the fair market value (FMV) of the buyer's installment obligation that represents the buyer's debt to you. Free tax forms Notes, mortgages, and land contracts are examples of obligations that are included at FMV. Free tax forms You must figure the FMV of the buyer's installment obligation, whether or not you would actually be able to sell it. Free tax forms If you use the cash method of accounting, the FMV of the obligation will never be considered to be less than the FMV of the property sold (minus any other consideration received). Free tax forms Example. Free tax forms You sold a parcel of land for $50,000. Free tax forms You received a $10,000 down payment and will receive the balance over the next 10 years at $4,000 a year, plus 8% interest. Free tax forms The buyer gave you a note for $40,000. Free tax forms The note had an FMV of $40,000. Free tax forms You paid a commission of 6%, or $3,000, to a broker for negotiating the sale. Free tax forms The land cost $25,000, and you owned it for more than one year. Free tax forms You decide to elect out of the installment method and report the entire gain in the year of sale. Free tax forms Gain realized:     Selling price $50,000 Minus: Property's adj. Free tax forms basis $25,000     Commission 3,000 28,000 Gain realized $22,000 Gain recognized in year of sale:   Cash $10,000 Market value of note 40,000 Total realized in year of sale $50,000 Minus: Property's adj. Free tax forms basis $25,000     Commission 3,000 28,000 Gain recognized $22,000 The recognized gain of $22,000 is long-term capital gain. Free tax forms You include the entire gain in income in the year of sale, so you do not include in income any principal payments you receive in later tax years. Free tax forms The interest on the note is ordinary income and is reported as interest income each year. Free tax forms How to elect out. Free tax forms   To make this election, do not report your sale on Form 6252. Free tax forms Instead, report it on Form 8949, Sales and Other Dispositions of Capital Assets, Form 4797, or both. Free tax forms When to elect out. Free tax forms   Make this election by the due date, including extensions, for filing your tax return for the year the sale takes place. Free tax forms Automatic six-month extension. Free tax forms   If you timely file your tax return without making the election, you still can make the election by filing an amended return within 6 months of the due date of your return (excluding extensions). Free tax forms Write “Filed pursuant to section 301. Free tax forms 9100-2” at the top of the amended return and file it where the original return was filed. Free tax forms Revoking the election. Free tax forms   Once made, the election can be revoked only with IRS approval. Free tax forms A revocation is retroactive. Free tax forms You will not be allowed to revoke the election if either of the following applies. Free tax forms One of the purposes is to avoid federal income tax. Free tax forms The tax year in which any payment was received has closed. Free tax forms Payments Received or Considered Received You must figure your gain each year on the payments you receive, or are treated as receiving, from an installment sale. Free tax forms In certain situations, you are considered to have received a payment, even though the buyer does not pay you directly. Free tax forms These situations occur when the buyer assumes or pays any of your debts, such as a loan, or pays any of your expenses, such as a sales commission. Free tax forms However, as discussed later, the buyer's assumption of your debt is treated as a recovery of your basis rather than as a payment in many cases. Free tax forms Buyer Pays Seller's Expenses If the buyer pays any of your expenses related to the sale of your property, it is considered a payment to you in the year of sale. Free tax forms Include these expenses in the selling and contract prices when figuring the gross profit percentage. Free tax forms Buyer Assumes Mortgage If the buyer assumes or pays off your mortgage, or otherwise takes the property subject to the mortgage, the following rules apply. Free tax forms Mortgage not more than basis. Free tax forms   If the buyer assumes a mortgage that is not more than your installment sale basis in the property, it is not considered a payment to you. Free tax forms It is considered a recovery of your basis. Free tax forms The contract price is the selling price minus the mortgage. Free tax forms Example. Free tax forms You sell property with an adjusted basis of $19,000. Free tax forms You have selling expenses of $1,000. Free tax forms The buyer assumes your existing mortgage of $15,000 and agrees to pay you $10,000 (a cash down payment of $2,000 and $2,000 (plus 12% interest) in each of the next 4 years). Free tax forms The selling price is $25,000 ($15,000 + $10,000). Free tax forms Your gross profit is $5,000 ($25,000 − $20,000 installment sale basis). Free tax forms The contract price is $10,000 ($25,000 − $15,000 mortgage). Free tax forms Your gross profit percentage is 50% ($5,000 ÷ $10,000). Free tax forms You report half of each $2,000 payment received as gain from the sale. Free tax forms You also report all interest you receive as ordinary income. Free tax forms Mortgage more than basis. Free tax forms   If the buyer assumes a mortgage that is more than your installment sale basis in the property, you recover your entire basis. Free tax forms The part of the mortgage greater than your basis is treated as a payment received in the year of sale. Free tax forms   To figure the contract price, subtract the mortgage from the selling price. Free tax forms This is the total amount (other than interest) you will receive directly from the buyer. Free tax forms Add to this amount the payment you are considered to have received (the difference between the mortgage and your installment sale basis). Free tax forms The contract price is then the same as your gross profit from the sale. Free tax forms    If the mortgage the buyer assumes is equal to or more than your installment sale basis, the gross profit percentage always will be 100%. Free tax forms Example. Free tax forms The selling price for your property is $9,000. Free tax forms The buyer will pay you $1,000 annually (plus 8% interest) over the next 3 years and assume an existing mortgage of $6,000. Free tax forms Your adjusted basis in the property is $4,400. Free tax forms You have selling expenses of $600, for a total installment sale basis of $5,000. Free tax forms The part of the mortgage that is more than your installment sale basis is $1,000 ($6,000 − $5,000). Free tax forms This amount is included in the contract price and treated as a payment received in the year of sale. Free tax forms The contract price is $4,000: Selling price $9,000 Minus: Mortgage (6,000) Amount actually received $3,000 Add difference:   Mortgage $6,000   Minus: Installment sale basis 5,000 1,000 Contract price $4,000       Your gross profit on the sale is also $4,000: Selling price $9,000 Minus: Installment sale basis (5,000) Gross profit $4,000 Your gross profit percentage is 100%. Free tax forms Report 100% of each payment (less interest) as gain from the sale. Free tax forms Treat the $1,000 difference between the mortgage and your installment sale basis as a payment and report 100% of it as gain in the year of sale. Free tax forms Mortgage Canceled If the buyer of your property is the person who holds the mortgage on it, your debt is canceled, not assumed. Free tax forms You are considered to receive a payment equal to the outstanding canceled debt. Free tax forms Example. Free tax forms Mary Jones loaned you $45,000 in 2009 in exchange for a note and a mortgage in a tract of land you owned. Free tax forms On April 4, 2013, she bought the land for $70,000. Free tax forms At that time, $30,000 of her loan to you was outstanding. Free tax forms She agreed to forgive this $30,000 debt and to pay you $20,000 (plus interest) on August 1, 2013, and $20,000 on August 1, 2014. Free tax forms She did not assume an existing mortgage. Free tax forms She canceled the $30,000 debt you owed her. Free tax forms You are considered to have received a $30,000 payment at the time of the sale. Free tax forms Buyer Assumes Other Debts If the buyer assumes any other debts, such as a loan or back taxes, it may be considered a payment to you in the year of sale. Free tax forms If the buyer assumes the debt instead of paying it off, only part of it may have to be treated as a payment. Free tax forms Compare the debt to your installment sale basis in the property being sold. Free tax forms If the debt is less than your installment sale basis, none of it is treated as a payment. Free tax forms If it is more, only the difference is treated as a payment. Free tax forms If the buyer assumes more than one debt, any part of the total that is more than your installment sale basis is considered a payment. Free tax forms These rules are the same as the rules discussed earlier under Buyer Assumes Mortgage . Free tax forms However, they apply only to the following types of debt the buyer assumes. Free tax forms Those acquired from ownership of the property you are selling, such as a mortgage, lien, overdue interest, or back taxes. Free tax forms Those acquired in the ordinary course of your business, such as a balance due for inventory you purchased. Free tax forms If the buyer assumes any other type of debt, such as a personal loan or your legal fees relating to the sale, it is treated as if the buyer had paid off the debt at the time of the sale. Free tax forms The value of the assumed debt is then considered a payment to you in the year of sale. Free tax forms Property Used As a Payment If you receive property other than money from the buyer, it is still considered a payment in the year received. Free tax forms However, see Like-Kind Exchange , later. Free tax forms Generally, the amount of the payment is the property's FMV on the date you receive it. Free tax forms Exception. Free tax forms   If the property the buyer gives you is payable on demand or readily tradable, the amount you should consider as payment in the year received is: The FMV of the property on the date you receive it if you use the cash method of accounting, The face amount of the obligation on the date you receive it if you use the accrual method of accounting, or The stated redemption price at maturity less any original issue discount (OID) or, if there is no OID, the stated redemption price at maturity appropriately discounted to reflect total unstated interest. Free tax forms See Unstated Interest and Original Issue Discount (OID) , later. Free tax forms Debt not payable on demand. Free tax forms   Any evidence of debt you receive from the buyer not payable on demand is not considered a payment. Free tax forms This is true even if the debt is guaranteed by a third party, including a government agency. Free tax forms Fair market value (FMV). Free tax forms   This is the price at which property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having a reasonable knowledge of all the necessary facts. Free tax forms Third-party note. Free tax forms   If the property the buyer gives you is a third-party note (or other obligation of a third party), you are considered to have received a payment equal to the note's FMV. Free tax forms Because the FMV of the note is itself a payment on your installment sale, any payments you later receive from the third party are not considered payments on the sale. Free tax forms The excess of the note's face value over its FMV is interest. Free tax forms Exclude this interest in determining the selling price of the property. Free tax forms However, see Exception under Property Used As a Payment, earlier. Free tax forms Example. Free tax forms You sold real estate in an installment sale. Free tax forms As part of the down payment, the buyer assigned to you a $50,000, 8% interest third-party note. Free tax forms The FMV of the third-party note at the time of the sale was $30,000. Free tax forms This amount, not $50,000, is a payment to you in the year of sale. Free tax forms The third-party note had an FMV equal to 60% of its face value ($30,000 ÷ $50,000), so 60% of each principal payment you receive on this note is a nontaxable return of capital. Free tax forms The remaining 40% is interest taxed as ordinary income. Free tax forms Bond. Free tax forms   A bond or other evidence of debt you receive from the buyer that is payable on demand or readily tradable in an established securities market is treated as a payment in the year you receive it. Free tax forms For more information on the amount you should treat as a payment, see Exception under Property Used As a Payment, earlier. Free tax forms    If you receive a government or corporate bond for a sale before October 22, 2004, and the bond has interest coupons attached or can be readily traded in an established securities market, you are considered to have received payment equal to the bond's FMV. Free tax forms However, see Exception under Property Used As a Payment, earlier. Free tax forms Buyer's note. Free tax forms   The buyer's note (unless payable on demand) is not considered payment on the sale. Free tax forms However, its full face value is included when figuring the selling price and the contract price. Free tax forms Payments you receive on the note are used to figure your gain in the year received. Free tax forms Installment Obligation Used as Security (Pledge Rule) If you use an installment obligation to secure any debt, the net proceeds from the debt may be treated as a payment on the installment obligation. Free tax forms This is known as the pledge rule, and it applies if the selling price of the property is over $150,000. Free tax forms It does not apply to the following dispositions. Free tax forms Sales of property used or produced in farming. Free tax forms Sales of personal-use property. Free tax forms Qualifying sales of time-shares and residential lots. Free tax forms The net debt proceeds are the gross debt minus the direct expenses of getting the debt. Free tax forms The amount treated as a payment is considered received on the later of the following dates. Free tax forms The date the debt becomes secured. Free tax forms The date you receive the debt proceeds. Free tax forms A debt is secured by an installment obligation to the extent that payment of principal or interest on the debt is directly secured (under the terms of the loan or any underlying arrangement) by any interest in the installment obligation. Free tax forms For sales after December 16, 1999, payment on a debt is treated as directly secured by an interest in an installment obligation to the extent an arrangement allows you to satisfy all or part of the debt with the installment obligation. Free tax forms Limit. Free tax forms   The net debt proceeds treated as a payment on the pledged installment obligation cannot be more than the excess of item (1) over item (2), below. Free tax forms The total contract price on the installment sale. Free tax forms Any payments received on the installment obligation before the date the net debt proceeds are treated as a payment. Free tax forms Installment payments. Free tax forms   The pledge rule accelerates the reporting of the installment obligation payments. Free tax forms Do not report payments received on the obligation after it has been pledged until the payments received exceed the amount reported under the pledge rule. Free tax forms Exception. Free tax forms   The pledge rule does not apply to pledges made after December 17, 1987, to refinance a debt under the following circumstances. Free tax forms The debt was outstanding on December 17, 1987. Free tax forms The debt was secured by that installment sale obligation on that date and at all times thereafter until the refinancing occurred. Free tax forms   A refinancing as a result of the creditor's calling of the debt is treated as a continuation of the original debt so long as a person other than the creditor or a person related to the creditor provides the refinancing. Free tax forms   This exception applies only to refinancing that does not exceed the principal of the original debt immediately before the refinancing. Free tax forms Any excess is treated as a payment on the installment obligation. Free tax forms Escrow Account In some cases, the sales agreement or a later agreement may call for the buyer to establish an irrevocable escrow account from which the remaining installment payments (including interest) are to be made. Free tax forms These sales cannot be reported on the installment method. Free tax forms The buyer's obligation is paid in full when the balance of the purchase price is deposited into the escrow account. Free tax forms When an escrow account is established, you no longer rely on the buyer for the rest of the payments, but on the escrow arrangement. Free tax forms Example. Free tax forms You sell property for $100,000. Free tax forms The sales agreement calls for a down payment of $10,000 and payment of $15,000 in each of the next 6 years to be made from an irrevocable escrow account containing the balance of the purchase price plus interest. Free tax forms You cannot report the sale on the installment method because the full purchase price is considered received in the year of sale. Free tax forms You report the entire gain in the year of sale. Free tax forms Escrow established in a later year. Free tax forms   If you make an installment sale and in a later year an irrevocable escrow account is established to pay the remaining installments plus interest, the amount placed in the escrow account represents payment of the balance of the installment obligation. Free tax forms Substantial restriction. Free tax forms   If an escrow arrangement imposes a substantial restriction on your right to receive the sale proceeds, the sale can be reported on the installment method, provided it otherwise qualifies. Free tax forms For an escrow arrangement to impose a substantial restriction, it must serve a bona fide purpose of the buyer, that is, a real and definite restriction placed on the seller or a specific economic benefit conferred on the buyer. Free tax forms Depreciation Recapture Income If you sell property for which you claimed or could have claimed a depreciation deduction, you must report any depreciation recapture income in the year of sale, whether or not an installment payment was received that year. Free tax forms Figure your depreciation recapture income (including the section 179 deduction and the section 179A deduction recapture) in Part III of Form 4797. Free tax forms Report the recapture income in Part II of Form 4797 as ordinary income in the year of sale. Free tax forms The recapture income is also included in Part I of Form 6252. Free tax forms However, the gain equal to the recapture income is reported in full in the year of the sale. Free tax forms Only the gain greater than the recapture income is reported on the installment method. Free tax forms For more information on depreciation recapture, see chapter 3 in Publication 544. Free tax forms The recapture income reported in the year of sale is included in your installment sale basis in determining your gross profit on the installment sale. Free tax forms Determining gross profit is discussed under General Rules , earlier. Free tax forms Sale to a Related Person If you sell depreciable property to a related person and the sale is an installment sale, you may not be able to report the sale using the installment method. Free tax forms If you sell property to a related person and the related person disposes of the property before you receive all payments with respect to the sale, you may have to treat the amount realized by the related person as received by you when the related person disposes of the property. Free tax forms These rules are explained under Sale of Depreciable Property and under Sale and Later Disposition , later. Free tax forms Sale of Depreciable Property If you sell depreciable property to certain related persons, you generally cannot report the sale using the installment method. Free tax forms Instead, all payments to be received are considered received in the year of sale. Free tax forms However, see Exception , below. Free tax forms Depreciable property for this rule is any property the purchaser can depreciate. Free tax forms Payments to be received include the total of all noncontingent payments and the FMV of any payments contingent as to amount. Free tax forms In the case of contingent payments for which the FMV cannot be reasonably determined, your basis in the property is recovered proportionately. Free tax forms The purchaser cannot increase the basis of the property acquired in the sale before the seller includes a like amount in income. Free tax forms Exception. Free tax forms   You can use the installment method to report a sale of depreciable property to a related person if no significant tax deferral benefit will be derived from the sale. Free tax forms You must show to the satisfaction of the IRS that avoidance of federal income tax was not one of the principal purposes of the sale. Free tax forms Related person. Free tax forms   Related persons include the following. Free tax forms A person and all controlled entities with respect to that person. Free tax forms A taxpayer and any trust in which such taxpayer (or his spouse) is a beneficiary, unless that beneficiary's interest in the trust is a remote contingent interest. Free tax forms Except in the case of a sale or exchange in satisfaction of a pecuniary bequest, an executor of an estate and a beneficiary of that estate. Free tax forms Two or more partnerships in which the same person owns, directly or indirectly, more than 50% of the capital interests or the profits interests. Free tax forms   For information about which entities are controlled entities, see section 1239(c). Free tax forms Sale and Later Disposition Generally, a special rule applies if you sell or exchange property to a related person on the installment method (first disposition) who then sells, exchanges, or gives away the property (second disposition) under the following circumstances. Free tax forms The related person makes the second disposition before making all payments on the first disposition. Free tax forms The related person disposes of the property within 2 years of the first disposition. Free tax forms This rule does not apply if the property involved is marketable securities. Free tax forms Under this rule, you treat part or all of the amount the related person realizes (or the FMV if the disposed property is not sold or exchanged) from the second disposition as if you received it at the time of the second disposition. Free tax forms See Exception , later. Free tax forms Related person. Free tax forms   Related persons include the following. Free tax forms Members of a family, including only brothers and sisters (either whole or half), husband and wife, ancestors, and lineal descendants. Free tax forms A partnership or estate and a partner or beneficiary. Free tax forms A trust (other than a section 401(a) employees trust) and a beneficiary. Free tax forms A trust and an owner of the trust. Free tax forms Two corporations that are members of the same controlled group as defined in section 267(f). Free tax forms The fiduciaries of two different trusts, and the fiduciary and beneficiary of two different trusts, if the same person is the grantor of both trusts. Free tax forms A tax-exempt educational or charitable organization and a person (if an individual, including members of the individual's family) who directly or indirectly controls such an organization. Free tax forms An individual and a corporation when the individual owns, directly or indirectly, more than 50% of the value of the outstanding stock of the corporation. Free tax forms A fiduciary of a trust and a corporation when the trust or the grantor of the trust owns, directly or indirectly, more than 50% in value of the outstanding stock of the corporation. Free tax forms The grantor and fiduciary, and the fiduciary and beneficiary, of any trust. Free tax forms Any two S corporations if the same persons own more than 50% in value of the outstanding stock of each corporation. Free tax forms An S corporation and a corporation that is not an S corporation if the same persons own more than 50% in value of the outstanding stock of each corporation. Free tax forms A corporation and a partnership if the same persons own more than 50% in value of the outstanding stock of the corporation and more than 50% of the capital or profits interest in the partnership. Free tax forms An executor and a beneficiary of an estate unless the sale is in satisfaction of a pecuniary bequest. Free tax forms Example 1. Free tax forms In 2012, Harvey Green sold farm land to his son Bob for $500,000, which was to be paid in five equal payments over 5 years, plus adequate stated interest on the balance due. Free tax forms His installment sale basis for the farm land was $250,000 and the property was not subject to any outstanding liens or mortgages. Free tax forms His gross profit percentage is 50% (gross profit of $250,000 ÷ contract price of $500,000). Free tax forms He received $100,000 in 2012 and included $50,000 in income for that year ($100,000 × 0. Free tax forms 50). Free tax forms Bob made no improvements to the property and sold it to Alfalfa Inc. Free tax forms , in 2013 for $600,000 after making the payment for that year. Free tax forms The amount realized from the second disposition is $600,000. Free tax forms Harvey figures his installment sale income for 2013 as follows: Lesser of: 1) Amount realized on second disposition, or 2) Contract price on first disposition $500,000 Subtract: Sum of payments from Bob in 2012 and 2013 - 200,000 Amount treated as received because of second disposition $300,000 Add: Payment from Bob in 2013 + 100,000 Total payments received and treated as received for 2013 $400,000 Multiply by gross profit % × . Free tax forms 50 Installment sale income for 2013 $200,000 Harvey will not include in his installment sale income any principal payments he receives on the installment obligation for 2014, 2015, and 2016 because he has already reported the total payments of $500,000 from the first disposition ($100,000 in 2012 and $400,000 in 2013). Free tax forms Example 2. Free tax forms Assume the facts are the same as Example 1 except that Bob sells the property for only $400,000. Free tax forms The gain for 2013 is figured as follows: Lesser of: 1) Amount realized on second disposition, or 2) Contract price on first disposition $400,000 Subtract: Sum of payments from Bob in 2012 and 2013 − 200,000 Amount treated as received because of second disposition $200,000 Add: Payment from Bob in 2013 + 100,000 Total payments received and treated as received for 2013 $300,000 Multiply by gross profit % × . Free tax forms 50 Installment sale income for 2013 $150,000     Harvey receives a $100,000 payment in 2014 and another in 2015. Free tax forms They are not taxed because he treated the $200,000 from the disposition in 2013 as a payment received and paid tax on the installment sale income. Free tax forms In 2016, he receives the final $100,000 payment. Free tax forms He figures the installment sale income he must recognize in 2016 as follows: Total payments from the first disposition received by the end of 2016 $500,000 Minus the sum of:     Payment from 2012 $100,000   Payment from 2013 100,000   Amount treated as received in 2013 200,000   Total on which gain was previously recognized  − 400,000 Payment on which gain is recognized for 2016  $100,000 Multiply by gross profit % × . Free tax forms 50 Installment sale income for 2016 $ 50,000 Exception. Free tax forms   This rule does not apply to a second disposition, and any later transfer, if you can show to the satisfaction of the IRS that neither the first disposition (to the related person) nor the second disposition had as one of its principal purposes the avoidance of federal income tax. Free tax forms Generally, an involuntary second disposition will qualify under the nontax avoidance exception, such as when a creditor of the related person forecloses on the property or the related person declares bankruptcy. Free tax forms   The nontax avoidance exception also applies to a second disposition that is also an installment sale if the terms of payment under the installment resale are substantially equal to or longer than those for the first installment sale. Free tax forms However, the exception does not apply if the resale terms permit significant deferral of recognition of gain from the first sale. Free tax forms   In addition, any sale or exchange of stock to the issuing corporation is not treated as a first disposition. Free tax forms An involuntary conversion is not treated as a second disposition if the first disposition occurred before the threat of conversion. Free tax forms A transfer after the death of the person making the first disposition or the related person's death, whichever is earlier, is not treated as a second disposition. Free tax forms Like-Kind Exchange If you trade business or investment property solely for the same kind of property to be held as business or investment property, you can postpone reporting the gain. Free tax forms These trades are known as like-kind exchanges. Free tax forms The property you receive in a like-kind exchange is treated as if it were a continuation of the property you gave up. Free tax forms You do not have to report any part of your gain if you receive only like-kind property. Free tax forms However, if you also receive money or other property (boot) in the exchange, you must report your gain to the extent of the money and the FMV of the other property received. Free tax forms For more information on like-kind exchanges, see Like-Kind Exchanges in chapter 1 of Publication 544. Free tax forms Installment payments. Free tax forms   If, in addition to like-kind property, you receive an installment obligation in the exchange, the following rules apply to determine the installment sale income each year. Free tax forms The contract price is reduced by the FMV of the like-kind property received in the trade. Free tax forms The gross profit is reduced by any gain on the trade that can be postponed. Free tax forms Like-kind property received in the trade is not considered payment on the installment obligation. Free tax forms Example. Free tax forms In 2013, George Brown trades personal property with an installment sale basis of $400,000 for like-kind property having an FMV of $200,000. Free tax forms He also receives an installment note for $800,000 in the trade. Free tax forms Under the terms of the note, he is to receive $100,000 (plus interest) in 2014 and the balance of $700,000 (plus interest) in 2015. Free tax forms George's selling price is $1,000,000 ($800,000 installment note + $200,000 FMV of like-kind property received). Free tax forms His gross profit is $600,000 ($1,000,000 − $400,000 installment sale basis). Free tax forms The contract price is $800,000 ($1,000,000 − $200,000). Free tax forms The gross profit percentage is 75% ($600,000 ÷ $800,000). Free tax forms He reports no gain in 2013 because the like-kind property he receives is not treated as a payment for figuring gain. Free tax forms He reports $75,000 gain for 2014 (75% of $100,000 payment received) and $525,000 gain for 2015 (75% of $700,000 payment received). Free tax forms Deferred exchanges. Free tax forms   A deferred exchange is one in which you transfer property you use in business or hold for investment and receive like-kind property later that you will use in business or hold for investment. Free tax forms Under this type of exchange, the person receiving your property may be required to place funds in an escrow account or trust. Free tax forms If certain rules are met, these funds will not be considered a payment until you have the right to receive the funds or, if earlier, the end of the exchange period. Free tax forms See Regulations section 1. Free tax forms 1031(k)-1(j)(2) for these rules. Free tax forms Contingent Payment Sale A contingent payment sale is one in which the total selling price cannot be determined by the end of the tax year of sale. Free tax forms This happens, for example, if you sell your business and the selling price includes a percentage of its profits in future years. Free tax forms If the selling price cannot be determined by the end of the tax year, you must use different rules to figure the contract price and the gross profit percentage than those you use for an installment sale with a fixed selling price. Free tax forms For rules on using the installment method for a contingent payment sale, see Regulations section 15a. Free tax forms 453-1(c). Free tax forms Single Sale of Several Assets If you sell different types of assets in a single sale, you must identify each asset to determine whether you can use the installment method to report the sale of that asset. Free tax forms You also have to allocate part of the selling price to each asset. Free tax forms If you sell assets that constitute a trade or business, see Sale of a Business , later. Free tax forms Unless an allocation of the selling price has been agreed to by both parties in an arm's-length transaction, you must allocate the selling price to an asset based on its FMV. Free tax forms If the buyer assumes a debt, or takes the property subject to a debt, you must reduce the FMV of the property by the debt. Free tax forms This becomes the net FMV. Free tax forms A sale of separate and unrelated assets of the same type under a single contract is reported as one transaction for the installment method. Free tax forms However, if an asset is sold at a loss, its disposition cannot be reported on the installment method. Free tax forms It must be reported separately. Free tax forms The remaining assets sold at a gain are reported together. Free tax forms Example. Free tax forms You sold three separate and unrelated parcels of real property (A, B, and C) under a single contract calling for a total selling price of $130,000. Free tax forms The total selling price consisted of a cash payment of $20,000, the buyer's assumption of a $30,000 mortgage on parcel B, and an installment obligation of $80,000 payable in eight annual installments, plus interest at 8% a year. Free tax forms Your installment sale basis for each parcel was $15,000. Free tax forms Your net gain was $85,000 ($130,000 − $45,000). Free tax forms You report the gain on the installment method. Free tax forms The sales contract did not allocate the selling price or the cash payment received in the year of sale among the individual parcels. Free tax forms The FMV of parcels A, B, and C were $60,000, $60,000, and $10,000, respectively. Free tax forms The installment sale basis for parcel C was more than its FMV, so it was sold at a loss and must be treated separately. Free tax forms You must allocate the total selling price and the amounts received in the year of sale between parcel C and the remaining parcels. Free tax forms Of the total $130,000 selling price, you must allocate $120,000 to parcels A and B together and $10,000 to parcel C. Free tax forms You should allocate the cash payment of $20,000 received in the year of sale and the note receivable on the basis of their proportionate net FMV. Free tax forms The allocation is figured as follows:   Parcels   A and B Parcel C FMV $120,000 $10,000 Minus: Mortgage assumed 30,000 -0- Net FMV $ 90,000 $10,000 Proportionate net FMV:     Percentage of total 90% 10% Payments in year of sale:     $20,000 × 90% $18,000   $20,000 × 10%   $2,000 Excess of parcel B mortgage over installment sale basis 15,000 -0- Allocation of payments  received (or considered  received) in year of sale $ 33,000 $ 2,000 You cannot report the sale of parcel C on the installment method because the sale results in a loss. Free tax forms You report this loss of $5,000 ($10,000 selling price − $15,000 installment sale basis) in the year of sale. Free tax forms However, if parcel C was held for personal use, the loss is not deductible. Free tax forms You allocate the installment obligation of $80,000 to the properties sold based on their proportionate net FMVs (90% to parcels A and B, 10% to parcel C). Free tax forms Sale of a Business The installment sale of an entire business for one overall price under a single contract is not the sale of a single asset. Free tax forms Allocation of Selling Price To determine whether any of the gain on the sale of the business can be reported on the installment method, you must allocate the total selling price and the payments received in the year of sale between each of the following classes of assets. Free tax forms Assets sold at a loss. Free tax forms Real and personal property eligible for the installment method. Free tax forms Real and personal property ineligible for the installment method, including: Inventory, Dealer property, and Stocks and securities. Free tax forms Inventory. Free tax forms   The sale of inventories of personal property cannot be reported on the installment method. Free tax forms All gain or loss on their sale must be reported in the year of sale, even if you receive payment in later years. Free tax forms   If inventory items are included in an installment sale, you may have an agreement stating which payments are for inventory and which are for the other assets being sold. Free tax forms If you do not, each payment must be allocated between the inventory and the other assets sold. Free tax forms   Report the amount you receive (or will receive) on the sale of inventory items as ordinary business income. Free tax forms Use your basis in the inventory to figure the cost of goods sold. Free tax forms Deduct the part of the selling expenses allocated to inventory as an ordinary business expense. Free tax forms Residual method. Free tax forms   Except for assets exchanged under the like-kind exchange rules, both the buyer and seller of a business must use the residual method to allocate the sale price to each business asset sold. Free tax forms This method determines gain or loss from the transfer of each asset and the buyer's basis in the assets. Free tax forms   The residual method must be used for any transfer of a group of assets that constitutes a trade or business and for which the buyer's basis is determined only by the amount paid for the assets. Free tax forms This applies to both direct and indirect transfers, such as the sale of a business or the sale of a partnership interest in which the basis of the buyer's share of the partnership assets is adjusted for the amount paid under section 743(b). Free tax forms   A group of assets constitutes a trade or business if goodwill or going concern value could, under any circumstances, attach to the assets or if the use of the assets would constitute an active trade or business under section 355. Free tax forms   The residual method provides for the consideration to be reduced first by cash and general deposit accounts (including checking and savings accounts but excluding certificates of deposit). Free tax forms The consideration remaining after this reduction must be allocated among the various business assets in a certain order. Free tax forms   For asset acquisitions occurring after March 15, 2001, make the allocation among the following assets in proportion to (but not more than) their fair market value on the purchase date in the following order. Free tax forms Certificates of deposit, U. Free tax forms S. Free tax forms Government securities, foreign currency, and actively traded personal property, including stock and securities. Free tax forms Accounts receivable, other debt instruments, and assets that you mark to market at least annually for federal income tax purposes. Free tax forms However, see Regulations section 1. Free tax forms 338-6(b)(2)(iii) for exceptions that apply to debt instruments issued by persons related to a target corporation, contingent debt instruments, and debt instruments convertible into stock or other property. Free tax forms Property of a kind that would properly be included in inventory if on hand at the end of the tax year or property held by the taxpayer primarily for sale to customers in the ordinary course of business. Free tax forms All other assets except section 197 intangibles. Free tax forms Section 197 intangibles except goodwill and going concern value. Free tax forms Goodwill and going concern value (whether or not they qualify as section 197 intangibles). Free tax forms   If an asset described in (1) through (6) is includible in more than one category, include it in the lower number category. Free tax forms For example, if an asset is described in both (4) and (6), include it in (4). Free tax forms Agreement. Free tax forms   The buyer and seller may enter into a written agreement as to the allocation of any consideration or the fair market value of any of the assets. Free tax forms This agreement is binding on both parties unless the IRS determines the amounts are not appropriate. Free tax forms Reporting requirement. Free tax forms   Both the buyer and seller involved in the sale of business assets must report to the IRS the allocation of the sales price among section 197 intangibles and the other business assets. Free tax forms Use Form 8594, Asset Acquisition Statement Under Section 1060, to provide this information. Free tax forms The buyer and seller should each attach Form 8594 to their federal income tax return for the year in which the sale occurred. Free tax forms Sale of Partnership Interest A partner who sells a partnership interest at a gain may be able to report the sale on the installment method. Free tax forms The sale of a partnership interest is treated as the sale of a single capital asset. Free tax forms The part of any gain or loss from unrealized receivables or inventory items will be treated as ordinary income. Free tax forms (The term “unrealized receivables” includes depreciation recapture income, discussed earlier. Free tax forms ) The gain allocated to the unrealized receivables and the inventory cannot be reported under the installment method. Free tax forms The gain allocated to the other assets can be reported under the installment method. Free tax forms For more information on the treatment of unrealized receivables and inventory, see Publication 541. Free tax forms Example — Sale of a Business On June 4, 2013, you sold the machine shop you had operated since 2005. Free tax forms You received a $100,000 down payment and the buyer's note for $120,000. Free tax forms The note payments are $15,000 each, plus 10% interest, due every July 1 and January 1, beginning in 2014. Free tax forms The total selling price is $220,000. Free tax forms Your selling expenses are $11,000. Free tax forms The selling expenses are divided among all the assets sold, including inventory. Free tax forms Your selling expense for each asset is 5% of the asset's selling price ($11,000 selling expense ÷ $220,000 total selling price). Free tax forms The FMV, adjusted basis, and depreciation claimed on each asset sold are as follows:     Depre- ciation Adj. Free tax forms Asset FMV Claimed Basis Inventory $ 10,000 -0- $ 8,000 Land 42,000 -0- 15,000 Building 48,000 $9,000 36,000 Machine A 71,000 27,200 63,800 Machine B 24,000 12,960 22,040 Truck 6,500 18,624 5,376   $201,500 $67,784 $150,216         Under the residual method, you allocate the selling price to each of the assets based on their FMV ($201,500). Free tax forms The remaining $18,500 ($220,000 - $201,500) is allocated to your section 197 intangible, goodwill. Free tax forms The assets included in the sale, their selling prices based on their FMVs, the selling expense allocated to each asset, the adjusted basis, and the gain for each asset are shown in the following chart. Free tax forms   Sale  Price Sale   Exp. Free tax forms Adj. Free tax forms   Basis Gain Inventory $ 10,000 $ 500 $ 8,000 $ 1,500 Land 42,000 2,100 15,000 24,900 Building 48,000 2,400 36,000 9,600 Mch. Free tax forms A 71,000 3,550 63,800 3,650 Mch. Free tax forms B 24,000 1,200 22,040 760 Truck 6,500 325 5,376 799 Goodwill 18,500 925 -0- 17,575   $220,000 $11,000 $150,216 $58,784 The building was acquired in 2005, the year the business began, and it is section 1250 property. Free tax forms There is no depreciation recapture income because the building was depreciated using the straight line method. Free tax forms All gain on the truck, machine A, and machine B is depreciation recapture income since it is the lesser of the depreciation claimed or the gain on the sale. Free tax forms Figure depreciation recapture in Part III of Form 4797. Free tax forms The total depreciation recapture income reported in Part II of Form 4797 is $5,209. Free tax forms This consists of $3,650 on machine A, $799 on the truck, and $760 on machine B (the gain on each item because it was less than the depreciation claimed). Free tax forms These gains are reported in full in the year of sale and are not included in the installment sale computation. Free tax forms Of the $220,000 total selling price, the $10,000 for inventory assets cannot be reported using the installment method. Free tax forms The selling prices of the truck and machines are also removed from the total selling price because gain on these items is reported in full in the year of sale. Free tax forms The selling price equals the contract price for the installment sale ($108,500). Free tax forms The assets included in the installment sale, their selling price, and their installment sale bases are shown in the following chart. Free tax forms   Selling  Price Install- ment  Sale  Basis Gross  Profit Land $ 42,000 $17,100 $24,900 Building 48,000 38,400 9,600 Goodwill 18,500 925 17,575 Total $108,500 $56,425 $52,075         The gross profit percentage (gross profit ÷ contract price) for the installment sale is 48% ($52,075 ÷ $108,500). Free tax forms The gross profit percentage for each asset is figured as follows: Percentage Land— $24,900 ÷ $108,500 22. Free tax forms 95 Building— $9,600 ÷ $108,500 8. Free tax forms 85 Goodwill— $17,575 ÷ $108,500 16. Free tax forms 20 Total 48. Free tax forms 00 The sale includes assets sold on the installment method and assets for which the gain is reported in full in the year of sale, so payments must be allocated between the installment part of the sale and the part reported in the year of sale. Free tax forms The selling price for the installment sale is $108,500. Free tax forms This is 49. Free tax forms 3% of the total selling price of $220,000 ($108,500 ÷ $220,000). Free tax forms The selling price of assets not reported on the installment method is $111,500. Free tax forms This is 50. Free tax forms 7% ($111,500 ÷ $220,000) of the total selling price. Free tax forms Multiply principal payments by 49. Free tax forms 3% to determine the part of the payment for the installment sale. Free tax forms The balance, 50. Free tax forms 7%, is for the part reported in the year of the sale. Free tax forms The gain on the sale of the inventory, machines, and truck is reported in full in the year of sale. Free tax forms When you receive principal payments in later years, no part of the payment for the sale of these assets is included in gross income. Free tax forms Only the part for the installment sale (49. Free tax forms 3%) is used in the installment sale computation. Free tax forms The only payment received in 2013 is the down payment of $100,000. Free tax forms The part of the payment for the installment sale is $49,300 ($100,000 × 49. Free tax forms 3%). Free tax forms This amount is used in the installment sale computation. Free tax forms Installment income for 2013. Free tax forms   Your installment income for each asset is the gross profit percentage for that asset times $49,300, the installment income received in 2013. Free tax forms Income Land—22. Free tax forms 95% of $49,300 $11,314 Building—8. Free tax forms 85% of $49,300 4,363 Goodwill—16. Free tax forms 2% of $49,300 7,987 Total installment income for 2013 $23,664 Installment income after 2013. Free tax forms   You figure installment income for years after 2013 by applying the same gross profit percentages to 49. Free tax forms 3% of the total payments you receive on the buyer's note during the year. Free tax forms Unstated Interest and Original Issue Discount (OID) An installment sale contract may provide that each deferred payment on the sale will include interest or that there will be an interest payment in addition to the principal payment. Free tax forms Interest provided in the contract is called stated interest. Free tax forms If an installment sale contract does not provide for adequate stated interest, part of the stated principal amount of the contract may be recharacterized as interest. Free tax forms If section 483 applies to the contract, this interest is called unstated interest. Free tax forms If section 1274 applies to the contract, this interest is called original issue discount (OID). Free tax forms An installment sale contract does not provide for adequate stated interest if the stated interest rate is lower than the test rate (defined later). Free tax forms Treatment of unstated interest and OID. Free tax forms   Generally, if a buyer gives a debt in consideration for personal use property, the unstated interest rules do not apply. Free tax forms As a result, the buyer cannot deduct the unstated interest. Free tax forms The seller must report the unstated interest as income. Free tax forms   Personal-use property is any property in which substantially all of its use by the buyer is not in connection with a trade or business or an investment activity. Free tax forms   If the debt is subject to the section 483 rules and is also subject to the below-market loan rules, such as a gift loan, compensation-related loan, or corporation-shareholder loan, then both parties are subject to the below-market loan rules rather than the unstated interest rules. Free tax forms Rules for the seller. Free tax forms   If either section 1274 or section 483 applies to the installment sale contract, you must treat part of the installment sale price as interest, even though interest is not called for in the sales agreement. Free tax forms If either section applies, you must reduce the stated selling price of the property and increase your interest income by this unstated interest. Free tax forms   Include the unstated interest in income based on your regular method of accounting. Free tax forms Include OID in income over the term of the contract. Free tax forms   The OID includible in income each year is based on the constant yield method described in section 1272. Free tax forms (In some cases, the OID on an installment sale contract also may include all or part of the stated interest, especially if the stated interest is not paid at least annually. Free tax forms )   If you do not use the installment method to report the sale, report the entire gain under your method of accounting in the year of sale. Free tax forms Reduce the selling price by any stated principal treated as interest to determine the gain. Free tax forms   Report unstated interest or OID on your tax return, in addition to stated interest. Free tax forms Rules for the buyer. Free tax forms   Any part of the stated selling price of an installment sale contract treated by the buyer as interest reduces the buyer's basis in the property and increases the buyer's interest expense. Free tax forms These rules do not apply to personal-use property (for example, property not used in a trade or business). Free tax forms Adequate stated interest. Free tax forms   An installment sale contract generally provides for adequate stated interest if the contract's stated principal amount is at least equal to the sum of the present values of all principal and interest payments called for under the contract. Free tax forms The present value of a payment is determined based on the test rate of interest, defined next. Free tax forms (If section 483 applies to the contract, payments due within six months after the sale are taken into account at face value. Free tax forms ) In general, an installment sale contract provides for adequate stated interest if the stated interest rate (based on an appropriate compounding period) is at least equal to the test rate of interest. Free tax forms Test rate of interest. Free tax forms   The test rate of interest for a contract is the 3-month rate. Free tax forms The 3-month rate is the lower of the following applicable federal rates (AFRs). Free tax forms The lowest AFR (based on the appropriate compounding period) in effect during the 3-month period ending with the first month in which there is a binding written contract that substantially provides the terms under which the sale or exchange is ultimately completed. Free tax forms The lowest AFR (based on the appropriate compounding period) in effect during the 3-month period ending with the month in which the sale or exchange occurs. Free tax forms Applicable federal rate (AFR). Free tax forms   The AFR depends on the month the binding
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The Free Tax Forms

Free tax forms 1. Free tax forms   Filing and Paying Business Taxes Table of Contents Introduction Useful Items - You may want to see: Identification NumbersNew EIN. Free tax forms Employee. Free tax forms Other payee. Free tax forms Income TaxDo I Have To File an Income Tax Return? How Do I File? IRS e-file (Electronic Filing) When Is My Tax Return Due? How Do I Pay Income Tax? Self-Employment (SE) TaxHow to become insured under social security. Free tax forms Earning credits in 2013 and 2014. Free tax forms Employment Taxes Excise Taxes Information ReturnsWaiver of penalties. Free tax forms Penalties. Free tax forms Introduction This chapter explains the business taxes you may have to pay and the forms you may have to file. Free tax forms It also discusses taxpayer identification numbers. Free tax forms Table 1-1 lists the benefits of filing electronically. Free tax forms Table 1-2 lists the federal taxes you may have to pay, their due dates, and the forms you use to report them. Free tax forms Table 1-3 provides checklists that highlight the typical forms and schedules you may need to file if you ever go out of business. Free tax forms You may want to get Publication 509, Tax Calendars. Free tax forms It has tax calendars that tell you when to file returns and make tax payments. Free tax forms Useful Items - You may want to see: Publication 505 Tax Withholding and Estimated Tax Form (and Instructions) 1040 U. Free tax forms S. Free tax forms Individual Income Tax Return 1040-ES Estimated Tax for Individuals Sch C (Form 1040) Profit or Loss From Business Sch C-EZ (Form 1040) Net Profit From Business Sch SE (Form 1040) Self-Employment Tax See chapter 12 for information about getting publications and forms. Free tax forms Identification Numbers This section explains three types of taxpayer identification numbers, who needs them, when to use them, and how to get them. Free tax forms Social security number (SSN). Free tax forms   Generally, use your SSN as your taxpayer identification number. Free tax forms You must put this number on each of your individual income tax forms, such as Form 1040 and its schedules. Free tax forms   To apply for an SSN, use Form SS-5, Application for a Social Security Card. Free tax forms This form is available at Social Security Administration (SSA) offices or by calling 1-800-772-1213. Free tax forms It is also available from the SSA website at www. Free tax forms socialsecurity. Free tax forms gov. Free tax forms Individual taxpayer identification number (ITIN). Free tax forms   The IRS will issue an ITIN if you are a nonresident or resident alien and you do not have and are not eligible to get an SSN. Free tax forms In general, if you need to obtain an ITIN, you must attach Form W-7, Application for IRS Individual Taxpayer Identification Number, with your signed, original, completed tax return and any other required documentation and mail them to the following address. Free tax forms  Internal Revenue Service ITIN Operation P. Free tax forms O. Free tax forms Box 149342 Austin, TX 78714-9342 The exceptions are covered in detail in the instructions for Form W-7. Free tax forms If you must include another person's SSN on your return and that person does not have and cannot get an SSN, enter that person's ITIN. Free tax forms The application is also available in Spanish. Free tax forms The form is available at IRS. Free tax forms gov or you can call 1-800-829-3676 to order the form. Free tax forms    An ITIN is for tax use only. Free tax forms It does not entitle the holder to social security benefits or change the holder's employment or immigration status. Free tax forms Employer identification number (EIN). Free tax forms   You must also have an EIN to use as a taxpayer identification number if you do either of the following. Free tax forms Pay wages to one or more employees. Free tax forms File pension or excise tax returns. Free tax forms   If you must have an EIN, include it along with your SSN on your Schedule C or C-EZ. Free tax forms   You can apply for an EIN: Online by clicking on the Employer ID Numbers (EINs) link at www. Free tax forms irs. Free tax forms gov/businesses/small. Free tax forms The EIN is issued immediately once the application information is validated. Free tax forms By telephone at 1-800-829-4933. Free tax forms By mailing or faxing Form SS-4, Application for Employer Identification Number. Free tax forms New EIN. Free tax forms   You may need to get a new EIN if either the form or the ownership of your business changes. Free tax forms For more information, see Publication 1635, Understanding Your EIN. Free tax forms When you need identification numbers of other persons. Free tax forms   In operating your business, you will probably make certain payments you must report on information returns. Free tax forms These payments are discussed under Information Returns, later in this chapter. Free tax forms You must give the recipient of these payments (the payee) a statement showing the total amount paid during the year. Free tax forms You must include the payee's identification number and your identification number on the returns and statements. Free tax forms Employee. Free tax forms   If you have employees, you must get an SSN from each of them. Free tax forms Record the name and SSN of each employee exactly as they are shown on the employee's social security card. Free tax forms If the employee's name is not correct as shown on the card, the employee should request a new card from the SSA. Free tax forms This may occur if the employee's name was changed due to marriage or divorce. Free tax forms   Form W-4, Employee's Withholding Allowance Certificate, is completed by each employee so the correct federal income tax can be withheld from their pay. Free tax forms   If your employee does not have an SSN, he or she should file Form SS-5 with the SSA. Free tax forms Other payee. Free tax forms   If you make payments to someone who is not your employee and you must report the payments on an information return, get that person's SSN. Free tax forms If you must report payments to an organization, such as a corporation or partnership, you must get its EIN. Free tax forms   To get the payee's SSN or EIN, use Form W-9, Request for Taxpayer Identification Number and Certification. Free tax forms   A payee who does not provide you with an identification number may be subject to backup withholding. Free tax forms For information on backup withholding, see the Form W-9 instructions and the General Instructions for Certain Information Returns. Free tax forms Income Tax This part explains whether you have to file an income tax return and when you file it. Free tax forms It also explains how you pay the tax. Free tax forms Do I Have To File an Income Tax Return? You have to file an income tax return for 2013 if your net earnings from self-employment were $400 or more. Free tax forms If your net earnings from self-employment were less than $400, you still have to file an income tax return if you meet any other filing requirement listed in the Form 1040 instructions. Free tax forms How Do I File? File your income tax return on Form 1040 and attach Schedule C or Schedule C-EZ. Free tax forms Enter the net profit or loss from Schedule C or Schedule C-EZ on page 1 of Form 1040. Free tax forms Use Schedule C to figure your net profit or loss from your business. Free tax forms If you operated more than one business as a sole proprietorship, you must attach a separate Schedule C for each business. Free tax forms You can use the simpler Schedule C-EZ if you operated only one business as a sole proprietorship, you did not have a net loss, and you meet the other requirements listed in Part I of the schedule. Free tax forms IRS e-file (Electronic Filing) Please click here for the text description of the image. Free tax forms E-file logo You may be able to file your tax returns electronically using an IRS e-file option. Free tax forms Table 1-1 lists the benefits of IRS e-file. Free tax forms IRS e-file uses automation to replace most of the manual steps needed to process paper returns. Free tax forms As a result, the processing of e-file returns is faster and more accurate than the processing of paper returns. Free tax forms As with a paper return, you are responsible for making sure your return contains accurate information and is filed on time. Free tax forms Using e-file does not affect your chances of an IRS examination of your return. Free tax forms You can file most commonly used business forms using IRS e-file. Free tax forms For more information, visit IRS. Free tax forms gov. Free tax forms Electronic signatures. Free tax forms   Paperless filing is easier than you think and it's available to most taxpayers who file electronically—including those first-time filers who were 16 or older at the end of 2013. Free tax forms If you file electronically using tax preparation software or a tax professional, you will participate in the Self-Select PIN (personal identification number) program. Free tax forms If you are married filing jointly, you and your spouse will each need to create a PIN and enter these PINs as your electronic signatures. Free tax forms    To create a PIN, you must know your adjusted gross income (AGI) from your originally filed 2012 income tax return (not from an amended return, Form 1040X, or any math error notice from the IRS). Free tax forms You will also need to provide your date of birth (DOB). Free tax forms Make sure your DOB is accurate and matches the information on record with the Social Security Administration before you e-file. Free tax forms To do this, check your annual Social Security Statement. Free tax forms   With a Self-Select PIN, there is nothing to sign and nothing to mail—not even your Forms W-2. Free tax forms For more details on the Self-Select PIN program, visit IRS. Free tax forms gov. Free tax forms State returns. Free tax forms   In most states, you can file an electronic state return simultaneously with your federal return. Free tax forms For more information, check with your local IRS office, state tax agency, tax professional, or IRS. Free tax forms gov. Free tax forms Refunds. Free tax forms   You can have your refund check mailed to you, or you can have your refund deposited directly to your checking or savings account. Free tax forms   With e-file, your refund will be issued in half the time as when filing on paper. Free tax forms Most refunds are issued within 3 weeks. Free tax forms If you choose Direct Deposit, you can receive your refund in as few as 10 days. Free tax forms Offset against debts. Free tax forms   As with a paper return, you may not get all of your refund if you owe certain past-due amounts, such as federal tax, state tax, a student loan, or child support. Free tax forms You will be notified if the refund you claimed has been offset against your debts. Free tax forms Refund inquiries. Free tax forms   You can check the status of your refund if it has been at least 24 hours (4 weeks if you mailed a paper return) from the date you filed your return. Free tax forms Be sure to have a copy of your tax return available because you will need to know the filing status, the first social security number shown on the return, and the exact whole-dollar amount of the refund. Free tax forms To check on your refund, do one of the following. Free tax forms Go to IRS. Free tax forms gov and click on Where's My Refund. Free tax forms Call 1-800-829-4477 for automated refund information, and follow the recorded instructions. Free tax forms Call 1-800-829-1954 during the hours shown in your form instructions. Free tax forms Balance due. Free tax forms   If you owe tax, you must pay it by April 15, 2014, to avoid late-payment penalties and interest. Free tax forms You can make your payment electronically by scheduling an electronic funds withdrawal from your checking or savings account or by credit card. Free tax forms Using an Authorized IRS e-file Provider Many tax professionals can electronically file paperless returns for their clients. Free tax forms You have two options. Free tax forms You can prepare your return, take it to an authorized IRS e-file provider, and have the provider transmit it electronically to the IRS. Free tax forms You can have an authorized IRS e-file provider prepare your return and transmit it for you electronically. Free tax forms You will be asked to complete Form 8879, IRS e-file Signature Authorization, to authorize the provider to enter your self-selected PIN on your return. Free tax forms Depending on the provider and the specific services requested, a fee may be charged. Free tax forms To find an authorized IRS e-file provider near you, go to IRS. Free tax forms gov or look for an “Authorized IRS e-file Provider” sign. Free tax forms Using Your Personal Computer A computer with Internet access is all you need to file your tax return using IRS e-file. Free tax forms When you use your personal computer, you can e-file your return from your home any time of the day or night. Free tax forms Sign your return electronically using a self-selected PIN to complete the process. Free tax forms There is no signature form to submit or Forms W-2 to send in. Free tax forms Free Internet filing options. Free tax forms   More taxpayers can now prepare and e-file their individual income tax returns free using commercial tax preparation software accessible through IRS. Free tax forms gov or www. Free tax forms usa. Free tax forms gov. Free tax forms The IRS is partnering with the tax software industry to offer free preparation and filing services to a significant number of taxpayers. Free tax forms Security and privacy certificate programs will assure tax data is safe and secure. Free tax forms To see if you qualify for these services, visit the Return Preparation and Filing Options page at IRS. Free tax forms gov. Free tax forms   If you cannot use the free services, you can buy tax preparation software at various electronics stores or computer and office supply stores. Free tax forms You can also download software from the Internet or prepare and file your return completely online by using tax preparation software available on the Internet. Free tax forms Filing Through Employers and Financial Institutions Some businesses offer free e-file to their employees, members, or customers. Free tax forms Others offer it for a fee. Free tax forms Ask your employer or financial institution if they offer IRS e-file as an employee, member, or customer benefit. Free tax forms Free Help With Your Return Free help in preparing your return is available nationwide from IRS-trained volunteers. Free tax forms The Volunteer Income Tax Assistance (VITA) program is designed to help low-income taxpayers, and the Tax Counseling for the Elderly (TCE) program is designed to assist taxpayers age 60 or older with their tax returns. Free tax forms Some locations offer free electronic filing. Free tax forms Table 1-1. Free tax forms Benefits of IRS e-file Accuracy • Your chance of getting an error notice from the IRS is significantly reduced. Free tax forms Security • Your privacy and security are assured. Free tax forms Electronic signatures • Create your own personal identification number (PIN) and file a completely paperless return through your tax preparation software or tax professional. Free tax forms There is nothing to mail. Free tax forms Proof of acceptance • You receive an electronic acknowledgment within 48 hours that the IRS has accepted your return for processing. Free tax forms Fast refunds • You get your refund faster with Direct Deposit—in as few as 10 days. Free tax forms Free Internet filing options • Use IRS. Free tax forms gov to access commercial tax preparation and e-file services available at no cost to eligible taxpayers. Free tax forms Electronic payment options • Convenient, safe, and secure electronic payment options are available. Free tax forms E-file and pay your taxes in a single step. Free tax forms Schedule an electronic funds withdrawal from your checking or savings account (up to and including April 15, 2014) or pay by credit card. Free tax forms Federal/State filing • Prepare and file your federal and state tax returns together and double the benefits you get from e-file. Free tax forms When Is My Tax Return Due? Form 1040 for calendar year 2013 is due by April 15, 2014. Free tax forms If you use a fiscal year (explained in chapter 2), your return is due by the 15th day of the 4th month after the end of your fiscal year. Free tax forms If you file late, you may have to pay penalties and interest. Free tax forms If you cannot file your return on time, use Form 4868, Application for Automatic Extension of Time To File U. Free tax forms S. Free tax forms Individual Income Tax Return, to request an automatic 6-month extension. Free tax forms For calendar year taxpayers, this will extend the tax filing due date until October 15. Free tax forms Filing an extension does not extend the time to pay your taxes, only the time to file the tax return. Free tax forms How Do I Pay Income Tax? Federal income tax is a pay-as-you-go tax. Free tax forms You must pay it as you earn or receive income during the year. Free tax forms An employee usually has income tax withheld from his or her pay. Free tax forms If you do not pay your tax through withholding, or do not pay enough tax that way, you might have to pay estimated tax. Free tax forms You generally have to make estimated tax payments if you expect to owe taxes, including self-employment tax (discussed later), of $1,000 or more when you file your return. Free tax forms Use Form 1040-ES to figure and pay the tax. Free tax forms If you do not have to make estimated tax payments, you can pay any tax due when you file your return. Free tax forms For more information on estimated tax, see Publication 505, Tax Withholding and Estimated Tax. Free tax forms What are my payment options?   You can pay your estimated tax electronically using various options. Free tax forms If you pay electronically, there is no need to mail in Form 1040-ES payment vouchers. Free tax forms These options include: Paying electronically through the Electronic Federal Tax Payment System (EFTPS). Free tax forms Paying by authorizing an electronic funds withdrawal when you file Form 1040 electronically. Free tax forms Paying by credit or debit card over the phone or by Internet. Free tax forms Other options include crediting an overpayment from your 2013 return to your 2014 estimated tax, or mailing a check or money order with a Form 1040-ES payment voucher. Free tax forms EFTPS    To enroll in EFTPS, go to www. Free tax forms eftps. Free tax forms gov or call 1-800-555-4477. Free tax forms When you request a new EIN and you will have a tax obligation, you are automatically enrolled in EFTPS. Free tax forms Benefits of EFTPS: The chance of an error in making your payments is reduced. Free tax forms You receive immediate confirmation of every transaction. Free tax forms Penalty for underpayment of tax. Free tax forms   If you did not pay enough income tax and self-employment tax for 2013 by withholding or by making estimated tax payments, you may have to pay a penalty on the amount not paid. Free tax forms The IRS will figure the penalty for you and send you a bill. Free tax forms Or you can use Form 2210, Underpayment of Estimated Tax by Individuals, Estates, and Trusts, to see if you have to pay a penalty and to figure the penalty amount. Free tax forms For more information, see Publication 505. Free tax forms Self-Employment (SE) Tax Self-employment tax (SE tax) is a social security and Medicare tax primarily for individuals who work for themselves. Free tax forms It is similar to the social security and Medicare taxes withheld from the pay of most wage earners. Free tax forms If you earned income as a statutory employee, you do not pay SE tax on that income. Free tax forms Social security coverage. Free tax forms   Social security benefits are available to self-employed persons just as they are to wage earners. Free tax forms Your payments of SE tax contribute to your coverage under the social security system. Free tax forms Social security coverage provides you with retirement benefits, disability benefits, survivor benefits, and hospital insurance (Medicare) benefits. Free tax forms By not reporting all of your self-employment income, you could cause your social security benefits to be lower when you retire. Free tax forms How to become insured under social security. Free tax forms   You must be insured under the social security system before you begin receiving social security benefits. Free tax forms You are insured if you have the required number of credits (also called quarters of coverage), discussed next. Free tax forms Earning credits in 2013 and 2014. Free tax forms   For 2013, you received one credit, up to a maximum of four credits, for each $1,160 ($1,200 for 2014) of income subject to social security taxes. Free tax forms Therefore, for 2013, if you had income (self-employment and wages) of $4,640 that was subject to social security taxes, you receive four credits ($4,640 ÷ $1,160). Free tax forms   For an explanation of the number of credits you must have to be insured and the benefits available to you and your family under the social security program, consult your nearest Social Security Administration (SSA) office. Free tax forms    Making false statements to get or to increase social security benefits may subject you to penalties. Free tax forms The Social Security Administration (SSA) time limit for posting self-employment income. Free tax forms   Generally, the SSA will give you credit only for self-employment income reported on a tax return filed within 3 years, 3 months, and 15 days after the tax year you earned the income. Free tax forms If you file your tax return or report a change in your self-employment income after this time limit, the SSA may change its records, but only to remove or reduce the amount. Free tax forms The SSA will not change its records to increase your self-employment income. Free tax forms Who must pay self-employment tax. Free tax forms   You must pay SE tax and file Schedule SE (Form 1040) if either of the following applies. Free tax forms Your net earnings from self-employment (excluding church employee income) were $400 or more. Free tax forms You had church employee income of $108. Free tax forms 28 or more. Free tax forms The SE tax rules apply no matter how old you are and even if you are already receiving social security or Medicare benefits. Free tax forms SE tax rate. Free tax forms   For 2013, the SE tax rate on net earnings is 15. Free tax forms 3% (12. Free tax forms 4% social security tax plus 2. Free tax forms 9% Medicare tax). Free tax forms Maximum earnings subject to SE tax. Free tax forms   Only the first $113,700 of your combined wages, tips, and net earnings in 2013 is subject to any combination of the 12. Free tax forms 4% social security part of SE tax, social security tax, or railroad retirement (tier 1) tax. Free tax forms   All your combined wages, tips, and net earnings in 2013 are subject to any combination of the 2. Free tax forms 9% Medicare part of SE tax, social security tax, or railroad retirement (tier 1) tax. Free tax forms   If wages and tips you receive as an employee are subject to either social security or railroad retirement (tier 1) tax, or both, and total at least $113,700, do not pay the 12. Free tax forms 4% social security part of the SE tax on any of your net earnings. Free tax forms However, you must pay the 2. Free tax forms 9% Medicare part of the SE tax on all your net earnings. Free tax forms Deduct one-half of your SE tax as an adjustment to income on line 27 of Form 1040. Free tax forms   More information. Free tax forms   For information on methods of calculating SE tax, see Chapter 10, Self-Employment Tax. Free tax forms Table 1-2. Free tax forms Which Forms Must I File? IF you are liable for: THEN use Form: DUE by:1 Income tax 1040 and Schedule C or C-EZ2 15th day of 4th month after end of  tax year. Free tax forms Self-employment tax Schedule SE File with Form 1040. Free tax forms Estimated tax 1040-ES 15th day of 4th, 6th, and 9th months of tax year, and 15th day of 1st month after the end of tax year. Free tax forms Social security and Medicare taxes and income tax withholding 941 or 944 April 30, July 31, October 31, and January 313. Free tax forms     See Publication 15. Free tax forms Providing information on social security and Medicare taxes and income tax withholding W-2 (to employee)  W-2 and W-3 (to the Social Security Administration) January 313. Free tax forms   Last day of February (March 31 if filing electronically)3. Free tax forms Federal unemployment (FUTA) tax 940 January 313. Free tax forms     April 30, July 31, October 31, and January 31, but only if the liability for unpaid tax is more than $500. Free tax forms Filing information returns for payments to nonemployees and transactions with other persons See Information Returns Forms 1099 – to the recipient by January 31 and to the IRS by February 28 (March 31 if filing electronically). Free tax forms     Other forms – see the General Instructions for Certain Information Returns. Free tax forms Excise tax See Excise Taxes See the instructions to the forms. Free tax forms 1 If a due date falls on a Saturday, Sunday, or legal holiday, file by the next day that is not a Saturday, Sunday, or legal holiday. Free tax forms For more information, see Publication 509, Tax Calendars. Free tax forms 2 File a separate schedule for each business. Free tax forms 3 See the form instructions if you go out of business, change the form of your business, or stop paying wages. Free tax forms     Employment Taxes If you have employees, you will need to file forms to report employment taxes. Free tax forms Employment taxes include the following items. Free tax forms Social security and Medicare taxes. Free tax forms Federal income tax withholding. Free tax forms Federal unemployment (FUTA) tax. Free tax forms For more information, see Publication 15 (Circular E), Employer's Tax Guide. Free tax forms That publication explains your tax responsibilities as an employer. Free tax forms To help you determine whether the people working for you are your employees, see Publication 15-A, Employer's Supplemental Tax Guide. Free tax forms That publication has information to help you determine whether an individual is an independent contractor or an employee. Free tax forms If you incorrectly classify an employee as an independent contractor, you may be held liable for employment taxes for that worker plus a penalty. Free tax forms An independent contractor is someone who is self-employed. Free tax forms You do not generally have to withhold or pay any taxes on payments made to an independent contractor. Free tax forms Excise Taxes This section identifies some of the excise taxes you may have to pay and the forms you have to file if you do any of the following. Free tax forms Manufacture or sell certain products. Free tax forms Operate certain kinds of businesses. Free tax forms Use various kinds of equipment, facilities, or products. Free tax forms Receive payment for certain services. Free tax forms For more information on excise taxes, see Publication 510, Excise Taxes. Free tax forms Form 720. Free tax forms   The federal excise taxes reported on Form 720, Quarterly Federal Excise Tax Return, consist of several broad categories of taxes, including the following. Free tax forms Environmental taxes on the sale or use of ozone-depleting chemicals and imported products containing or manufactured with these chemicals. Free tax forms Communications and air transportation taxes. Free tax forms Fuel taxes. Free tax forms Tax on the first retail sale of heavy trucks, trailers, and tractors. Free tax forms Manufacturers taxes on the sale or use of a variety of different articles. Free tax forms Tax on indoor tanning services. Free tax forms Form 2290. Free tax forms   There is a federal excise tax on the use of certain trucks, truck tractors, and buses on public highways. Free tax forms The tax applies to vehicles having a taxable gross weight of 55,000 pounds or more. Free tax forms Report the tax on Form 2290, Heavy Highway Vehicle Use Tax Return. Free tax forms For more information, see the Instructions for Form 2290. Free tax forms Depositing excise taxes. Free tax forms   If you have to file a quarterly excise tax return on Form 720, you may have to deposit your excise taxes before the return is due. Free tax forms For details on depositing excise taxes, see the Instructions for Form 720. Free tax forms Information Returns If you make or receive payments in your business, you may have to report them to the IRS on information returns. Free tax forms The IRS compares the payments shown on the information returns with each person's income tax return to see if the payments were included in income. Free tax forms You must give a copy of each information return you are required to file to the recipient or payer. Free tax forms In addition to the forms described below, you may have to use other returns to report certain kinds of payments or transactions. Free tax forms For more details on information returns and when you have to file them, see the General Instructions for Certain Information Returns. Free tax forms Form 1099-MISC. Free tax forms   Use Form 1099-MISC, Miscellaneous Income, to report certain payments you make in your business. Free tax forms These payments include the following items. Free tax forms Payments of $600 or more for services performed for your business by people not treated as your employees, such as fees to subcontractors, attorneys, accountants, or directors. Free tax forms Rent payments of $600 or more, other than rents paid to real estate agents. Free tax forms Prizes and awards of $600 or more that are not for services, such as winnings on TV or radio shows. Free tax forms Royalty payments of $10 or more. Free tax forms Payments to certain crew members by operators of fishing boats. Free tax forms You also use Form 1099-MISC to report your sales of $5,000 or more of consumer goods to a person for resale anywhere other than in a permanent retail establishment. Free tax forms Form W-2. Free tax forms   You must file Form W-2, Wage and Tax Statement, to report payments to your employees, such as wages, tips, and other compensation, withheld income, social security, and Medicare taxes. Free tax forms You can file Form W-2 online. Free tax forms For more information about Form W-2, see the General Instructions for Forms W-2 and W-3. Free tax forms Penalties. Free tax forms   The law provides for the following penalties if you do not file Form 1099-MISC or Form W-2 or do not correctly report the information. Free tax forms For more information, see the General Instructions for Certain Information Returns. Free tax forms Failure to file information returns. Free tax forms This penalty applies if you do not file information returns by the due date, do not include all required information, or report incorrect information. Free tax forms Failure to furnish correct payee statements. Free tax forms This penalty applies if you do not furnish a required statement to a payee by the required date, do not include all required information, or report incorrect information. Free tax forms Waiver of penalties. Free tax forms   These penalties will not apply if you can show that the failure was due to reasonable cause and not willful neglect. Free tax forms   In addition, there is no penalty for failure to include all required information, or for including incorrect information, on a de minimis (small) number of information returns if you correct the errors by August 1 of the year the returns are due. Free tax forms (A de minimis number of returns is the greater of 10 or ½ of 1% of the total number of returns you are required to file for the year. Free tax forms ) Form 8300. Free tax forms   You must file Form 8300, Report of Cash Payments Over $10,000 Received in a Trade or Business, if you receive more than $10,000 in cash in one transaction, or two or more related business transactions. Free tax forms Cash includes U. Free tax forms S. Free tax forms and foreign coin and currency. Free tax forms It also includes certain monetary instruments such as cashier's and traveler's checks and money orders. Free tax forms Cash does not include a check drawn on an individual's personal account (personal check). Free tax forms For more information, see Publication 1544, Reporting Cash Payments of Over $10,000 (Received in a Trade or Business). Free tax forms Penalties. Free tax forms   There are civil and criminal penalties, including up to 5 years in prison, for not filing Form 8300, filing (or causing the filing of) a false or fraudulent Form 8300, or structuring a transaction to evade reporting requirements. Free tax forms Table 1-3. Free tax forms Going Out of Business Checklists (Note. Free tax forms The following checklists highlight the typical final forms and schedules you may need to file if you ever go out of business. Free tax forms For more information, see the instructions for the listed forms. Free tax forms ) IF you are liable for:   THEN you may need to: Income tax □ File Schedule C or C-EZ with your Form 1040 for the year in which you go out of business. Free tax forms   □ File Form 4797 with your Form 1040 for each year in which you sell or exchange property used in your business or in which the business use of certain section 179 or listed property drops to 50% or less. Free tax forms   □ File Form 8594 with your Form 1040 if you sold your business. Free tax forms Self-employment tax □ File Schedule SE with your Form 1040 for the year in which you go out of business. Free tax forms Employment taxes □ File Form 941 (or Form 944) for the calendar quarter in which you make final wage payments. Free tax forms Note. Free tax forms Do not forget to check the box and enter the date final wages were paid on line 15 of Form 941 or line 14 of Form 944. Free tax forms   □ File Form 940 for the calendar year in which final wages were paid. Free tax forms Note. Free tax forms Do not forget to check box d, Final: Business closed or stopped paying wages, under Type of Return. Free tax forms Information returns □ Provide Forms W-2 to your employees for the calendar year in which you make final wage payments. Free tax forms Note. Free tax forms These forms are generally due by the due date of your final Form 941 or Form 944. Free tax forms   □ File Form W-3 to file Forms W-2. Free tax forms Note. Free tax forms These forms are generally due within 1 month after the due date of your final Form 941 or Form 944. Free tax forms   □ Provide Forms 1099-MISC to each person to whom you have paid at least $600 for services (including parts and materials) during the calendar year in which you go out of business. Free tax forms   □ File Form 1096 to file Forms 1099-MISC. Free tax forms Prev  Up  Next   Home   More Online Publications