2018 Taxable Income Beyond Wages and Salaries

Canceled Debt – Is It Taxable or Not?

If you borrow money and are legally obligated to repay a fixed or determinable amount at a future date, you have a debt. You may be personally liable for a debt or may own a property that's subject to a debt.

Not always. There are some exceptions. The most common situations when cancellation of debt income is not taxable involve:

Consequences for Evading Taxes on Foreign Source Income

You will face serious consequences if the IRS finds you have unreported income or undisclosed foreign financial accounts. These consequences can include not only the additional taxes, but also substantial penalties, interest, fines and even imprisonment.

Reporting Promoters of Off-Shore Tax Avoidance Schemes

The IRS encourages you to report promoters of off-shore tax avoidance schemes. Whistleblowers who provide allegations of fraud to the IRS may be eligible for a reward by filing Form 211, Application for Award for Original Information, and following the procedures outlined in Notice 2008-4, Claims Submitted to the IRS Whistleblower Office under Section 7623.

Independent contractors

If you perform personal services as an independent contractor (rather than an employee) and you can claim an exemption from withholding on that personal service income because of a tax treaty, submit Form 8233, Exemption From Withholding on Compensation for Independent (and Certain Dependent) Personal Services of a Nonresident Alien Individual, to each withholding agent from whom amounts will be received.

Students, trainees, teachers, and researchers

Alien students, trainees, teachers, and researchers who perform dependent personal services (as employees) can also use Form 8233 to claim exemption from withholding of tax on compensation for services that is exempt from U.S. tax under a U.S. tax treaty.

Generally, you must be a nonresident alien student, apprentice, or trainee in order to claim a tax treaty exemption for remittances from abroad (including scholarship and fellowship grants) for study and maintenance in the United States. However, if you entered the United States as a nonresident alien, but you are now a resident alien for U.S. tax purposes, the treaty exemption will continue to apply if the tax treaty has an exception to the treaty's saving clause. If you qualify under an exception to the treaty's saving clause and the payor intends to withhold U.S. income tax on the scholarship, fellowship, or other remittance, you can avoid income tax withholding by giving the payor a Form W-9, Request for Taxpayer Identification Number and Certification, with an attachment that includes the following information:

Your name and U.S. identification number.

A statement that you are a resident alien and whether you are a resident alien under the green card test, the substantial presence test, or a tax treaty provision. Tax treaty and article number under which you are claiming a tax treaty exemption, and description of the article. A statement that you are relying on an exception to the saving clause of the tax treaty under which you are claiming the tax treaty exemption. This applies under the rules for resident alien claiming a treaty exemption for a scholarship or fellowship.

Employees

If you are not a student, trainee, teacher, or researcher, but you perform services as an employee and your pay is exempt from U.S. income tax under a tax treaty, you may be able to eliminate or reduce the amount of tax withheld from your wages. Provide your employer with a properly completed Form 8233 for the tax year. The Form 8233 must report your Taxpayer Identification Number (TIN), generally your U.S. Social Security Number or your Individual Taxpayer Identification Number (ITIN).

Exemption on Your Tax Return

If you claim treaty benefits that override or modify any provision of the Internal Revenue Code, and by claiming these benefits your tax is, or might be, reduced, you must attach a fully completed Form 8833, Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b), to your tax return.

1. A reduction or modification in the taxation of gain or loss from the disposition of a U.S. real property interest based on a treaty,
2. A change to the source of an item of income or a deduction based on a treaty or
3. A credit for a specific foreign tax for which foreign tax credit would not be allowed by the Internal Revenue Code.

You must also file Form 8833 if you receive payments or income items totaling more than $100,000 and you determine your country of residence under a treaty and not under the rules for determining alien tax status.

Exceptions

You do not have to file Form 8833 if

1. You claim a reduced rate of withholding tax under a treaty on interest, dividends, rent, royalties, or other fixed or determinable annual or periodic income ordinarily subject to the 30% rate,
2. You claim a treaty exemption that reduces or modifies the taxation of income from dependent personal services, pensions, annuities, social security and other public pensions, or income of artists, athletes, students, trainees, or teachers. This includes taxable scholarship and fellowship grants,
3. You claim a reduction or modification of taxation of income under an International Social Security Agreement or a Diplomatic or Consular Agreement,
4. You are a partner in a partnership or a beneficiary of an estate or trust and the partnership, estate, or trust reports the required information on its return, or
5. The payments or items of income that are otherwise required to be disclosed total no more than $10,000.

Penalty for failure to provide required information on Form 8833

If you are required to report the treaty benefits but do not, you are subject to a penalty of $1,000 for each failure.

The United States has income tax treaties with a number of foreign countries. Under these treaties, residents (not necessarily citizens) of foreign countries are taxed at a reduced rate, or are exempt from U.S. income taxes on certain items of income they receive from sources within the United States. These reduced rates and exemptions vary among countries and specific items of income.

1. Determining Alien Tax Status
2. Researching Tax Treaties
3. Claiming Tax Treaty Benefits
4. Competent Authority Agreements
5. Competent Authority Assistance
6. New Procedures for APA and LOB User Fees

U.S. citizens and U.S. residents who are officers, directors, or shareholders in certain foreign corporations are responsible for filing Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations. The form and attached schedules are used to satisfy the reporting requirements of transactions between foreign corporations and U.S. persons. Substantial penalties exist for U.S. citizens and U.S. residents who are liable for filing Form 5471 and who failed to do so.

The filing requirements for Form 5471 relate to persons who have a certain level of control in certain foreign corporations may also be required. Form 5471 should be filed as an attachment to the taxpayer’s federal income tax, partnership or exempt organization return, and filed by the due date (including extensions) for that return.

Tax Treatment of Alimony currently.  

Amounts paid to a spouse or a former spouse under a divorce or separation instrument (including a divorce decree, a separate maintenance decree, or a written separation agreement) may be alimony for federal tax purposes. Alimony is deductible by the payer spouse, and the recipient spouse must include it in income.

Alimony Requirements

1. The spouses don't file a joint return with each other;
2. The payment is in cash (including checks or money orders);
3. The payment is to or for a spouse or a former spouse made under a divorce or separation instrument;
4. The divorce or separation instrument doesn't designate the payment as not alimony;
5. The spouses aren't members of the same household when the payment is made (This requirement applies only if the spouses are legally separated under a decree of divorce or of separate maintenance.);
6. There's no liability to make the payment (in cash or property) after the death of the recipient spouse; and
7. The payment isn't treated as child support or a property settlement.

You will receive the exclusion for months you served in a combat zone, including partial months of service. One or more days served in a combat zone during any month counts as a full month.

Limits

The following limits are placed on your exclusion:

Enlisted Members

You can exclude all military pay for each month present in a combat zone.

Warrant Officers

You can exclude all military pay for each month present in a combat zone.

Commissioned Warrant Officers

You can exclude all military pay for each month present in a combat zone.

Commissioned Officers

You are limited to the highest rate of enlisted pay plus imminent danger/hostile fire pay for each month present in a combat zone.

Married Personnel

The following exclusion combinations are authorized:

One is Military and Served in a Combat Zone – The spouse who served in a combat zone may receive the tax exclusion for the months they were present in the combat zone.

Hospitalization

You can exclude military pay earned during hospitalization (in or out of a combat zone) due to wounds, disease, or injury incurred in a combat zone. Military pay received for hospitalization that extends beyond two years from the last month of presence in a combat zone is not excluded.

Eligibility for Military Tax Benefits

You must be serving or have served in one of the following organizations to be eligible for military tax benefits.

United States Armed Forces

If you are an active duty or reserve member of an armed force listed below, you may be eligible for military tax benefits. Recently retired or separated members may also be eligible for benefits.

1. If the child's interest, dividends, and other unearned income total more than $2,100, part of that income may be subject to tax at the parent's tax rate instead of the child's tax rate. Tax for Certain Children Who Have Unearned Income, or
2. If the child's only income is interest and dividend income (including capital gain distributions) and totals less than $10,500, the child's parent may be able to elect to include that income on the parent's return rather than file a return for the child.

Virtual Currencies

Under the accrual method, you generally report income in the tax year you earn it, regardless of when payment is received. You deduct expenses in the tax year you incur them, regardless of when payment is made.

Accounting Periods

You must use a tax year to figure your taxable income. A tax year is an annual accounting period for keeping records and reporting income and expenses. An annual accounting period does not include a short tax year. You can use the tax years available to you. You can use a calendar year, which is the year most of us celebrate. Alternative, you can use a fiscal year which includes any period of your choice that is a 52-53-week tax year. As long as it imitates the normal year with its 52-53 weeks, then you can pick any time it starts and any time you want it to end. Therefore, if your year starts May 1st it only makes sense that would end April 30th. Right?

How do you select your customized year?

You adopt a tax year by filing your first income tax return using that tax year. If the industry you are has a common year, then you may have to use a required tax year which is set by regulation. A required tax year is a tax year required under the Internal Revenue Code or the Income Tax Regulations which does not give the taxpayer too much of a choice.

There are other years too. There is, for example, an improper tax year which is no year at all.

There are special situations that apply to individuals. There are also restrictions that apply to the accounting period of a partnership, S corporation, or personal service corporation. There are also special situations that apply to corporations.

Calendar Year

A calendar year is 12 consecutive months beginning on January 1st and ending on December 31st. If you adopt the calendar year, you must maintain your books and records and report your income and expenses from January 1st through December 31st of each year.

Generally, anyone can adopt the calendar year. However, you must adopt the calendar year if you keep no books or records, you have no annual accounting period, your present tax year does not qualify as a fiscal year, or you are required to use a calendar year by a provision in the Internal Revenue Code or Income Tax Regulations.

The year you select must be a full year - it is your own invention, but nevertheless, a year. It would actually be nice to be able to select a year that is not conventional such as a year that is only 7 months. Yes, that is right. What about if you only want to work seven months out of the year and hybernate the other five months? Oh, wait, we're human not bears.

You will have restrictions such as you can elect to use a 52-53-week tax year if you keep your books and records and report your income and expenses on that basis. If you make this election, your 52-53-week tax year must always end on the same day of the week. Your 52-53-week tax year must always end on whatever date this same day of the week last occurs in a calendar month, or whatever date this same day of the week falls that is nearest to the last day of the calendar month.

A short tax year is a tax year of less than 12 months. A short period tax return may be required when you (as a taxable entity) are not in existence for an entire tax year, or change your accounting period.

1. An S corporation's S election is terminated. However, if the S corporation immediately becomes a PSC, the PSC can continue the section 444 election of the S corporation.
2. A PSC ceases to be a PSC. If the PSC elects to be an S corporation, the S corporation can continue the election of the PSC.

Required payment for partnership or S corporation.

A partnership or an S corporation must make a required payment for any tax year:

Form 8752, Required Payment or Refund Under Section 7519, must be filed each year the section 444 election is in effect, even if no payment is due. If the required payment is more than $500 (or the required payment for any prior year was more than $500), the payment must be made when Form 8752 is filed. If the required payment is $500 or less and no payment was required in a prior year, Form 8752 must be filed showing a zero amount.

Applicable election year.

Any tax year a section 444 election is in effect, including the first year, is called an applicable election year. Form 8752 must be filed and the required payment made (or zero amount reported) by May 15th of the calendar year following the calendar year in which the applicable election year begins.

Required distribution for PSC.

A PSC with a section 444 election in effect must distribute certain amounts to employee-owners by December 31 of each applicable year. If it fails to make these distributions, it may be required to defer certain deductions for amounts paid to owner-employees. The amount deferred is treated as paid or incurred in the following tax year.

Back-up election.

A partnership, S corporation, or PSC can file a back-up section 444 election if it requests (or plans to request) permission to use a business purpose tax year, discussed later. If the request is denied, the back-up section 444 election must be activated (if the partnership, S corporation, or PSC otherwise qualifies).

The general rules for making a section 444 election, as discussed earlier, apply. When filing Form 8716, type or print "BACK-UP ELECTION" at the top of the form. However, if Form 8716 is filed on or after the date Form 1128 (or Form 2553) is filed, type or print "FORM 1128 (or FORM 2553) BACK-UP ELECTION" at the top of Form 8716.

Activating election.

A partnership or S corporation activates its back-up election by filing the return required and making the required payment with Form 8752. The due date for filing Form 8752 and making the payment is the later of the following dates.

A PSC activates its back-up election by filing Form 8716 with its original or amended income tax return for the tax year in which the election is first effective and printing on the top of the income tax return, "ACTIVATING BACK-UP ELECTION."

52-53-Week Tax Year

A partnership, S corporation, or PSC can use a tax year other than its required tax year if it elects a 52-53-week tax year that ends with reference to either its required tax year or a tax year elected under section 444.

A newly formed partnership, S corporation, or PSC can adopt a 52-53-week tax year ending with reference to either its required tax year or a tax year elected under section 444 without IRS approval. However, if the entity wishes to change to a 52-53-week tax year or change from a 52-53-week tax year that references a particular month to a non-52-53-week tax year that ends on the last day of that month, it must request IRS approval by filing Form 1128.

Business Purpose Tax Year

A partnership, S corporation, or PSC establishes the business purpose for a tax year by filing Form 1128.

Corporations (Other Than S Corporations and PSCs)

A new corporation establishes its tax year when it files its first tax return. A newly reactivated corporation that has been inactive for a number of years is treated as a new taxpayer for the purpose of adopting a tax year. An S corporation or a PSC must use the required tax year rules, discussed earlier, to establish a tax year. Generally, a corporation that wants to change its tax year must obtain approval from the IRS under either the: (a) automatic approval procedures; or (b) ruling request procedures.

Accounting Methods

An accounting method is a set of rules used to determine when and how income and expenses are reported on your tax return. Your accounting method includes not only your overall method of accounting, but also the accounting treatment you use for any material item.

If you do not regularly use an accounting method that clearly reflects your income, your income will be refigured under the method that, in the opinion of the IRS, does clearly reflect income.

Methods you can use.

Generally, you can figure your taxable income under any of the following accounting methods.

• Cash method.
• Accrual method.
• Special methods of accounting for certain items of income and expenses.
• A hybrid method which combines elements of two or more of the above accounting methods.

Special methods.

There is another method which we will not really into further. These are considered special methods of accounting for certain items of income or expenses. The Internal Revenue Code provides for alternative methods for reporting income such as using one of the long-term contract methods.

Hybrid method.

Generally, you can use any combination of cash, accrual, and special methods of accounting if the combination clearly reflects your income and you use it consistently. However, certain restrictions apply. First, if an inventory is necessary to account for your income, you must use an accrual method for purchases and sales. Generally, you can use the cash method for all other items of income and expenses. Second, if you use the cash method for reporting your income, you must use the cash method for reporting your expenses. Third, if you use an accrual method for reporting your expenses, you must use an accrual method for figuring your income. The method you use for reporting income must be the same method used for reporting expenses - they must match. Any combination that includes the cash method is treated as the cash method for purposes of section 448 of the Internal Revenue Code.

Business and personal items.

You can account for business and personal items using different accounting methods. For example, you can determine your business income and expenses under an accrual method, even if you use the cash method to figure personal items.

Two or more businesses.

If you operate two or more separate and distinct businesses, you can use a different accounting method for each business. No business is separate and distinct, unless a complete and separate set of books and records is maintained for each business.

You cannot hold checks or postpone taking possession of similar property from one tax year to another to postpone paying tax on the income. You must report the income in the year the property is received or made available to you without restriction.

Expenses

Under the cash method, generally, you deduct expenses in the tax year in which you actually pay them. This includes business expenses for which you contest liability. However, you may not be able to deduct an expense paid in advance. Instead, you may be required to capitalize certain costs, as explained later under Uniform Capitalization Rules.

Expense paid in advance.

An expense you pay in advance is deductible only in the year to which it applies, unless the expense qualifies for the 12-month rule. Under the 12-month rule, a taxpayer is not required to capitalize amounts paid to create certain rights or benefits for the taxpayer that do not extend beyond the earlier of 12 months after the right or benefit begins, or the end of the tax year after the tax year in which payment is made.

Exceptions

The following entities are not prohibited from using the cash method of accounting.

• Any corporation or partnership, other than a tax shelter, that meets the gross receipts test for all tax years after 1985.
• A qualified personal service corporation (PSC).

Gross receipts test.

A corporation or partnership, other than a tax shelter, that meets the gross receipts test can generally use the cash method. A corporation or a partnership meets the test if, for each prior tax year beginning after 1985, its average annual gross receipts are $5 million or less.

Generally, a partnership applies the test at the partnership level. Gross receipts for a short tax year are annualized.

Aggregation rules.

Organizations that are members of an affiliated service group or a controlled group of corporations treated as a single employer for tax purposes are required to aggregate their gross receipts to determine whether the gross receipts test is met.

Change to accrual method.

A corporation or partnership that fails to meet the gross receipts test for any tax year is prohibited from using the cash method and must change to an accrual method of accounting, effective for the tax year in which the entity fails to meet this test.

Special rules for farming businesses.

Generally, a taxpayer engaged in the trade or business of farming is allowed to use the cash method for its farming business. However, certain corporations (other than S corporations) and partnerships that have a partner that is a corporation must use an accrual method for their farming business.

Qualified Personal Service Corporation (PSC).

A qualified PSC is a corporation that meets the following function and ownership tests can use the cash method.

Function test.

A corporation meets the function test if at least 95% of its activities are in the performance of services in the fields of health, veterinary services, law, engineering (including surveying and mapping), architecture, accounting, actuarial science, performing arts, or consulting.

Ownership test.

A corporation meets the ownership test if at least 95% of its stock is owned, directly or indirectly, at all times during the year by one or more of the following.

Indirect ownership is generally taken into account if the stock is owned indirectly through one or more partnerships, S corporations, or qualified PSCs. Stock owned by one of these entities is considered owned by the entity's owners in proportion to their ownership interest in that entity. Other forms of indirect stock ownership, such as stock owned by family members, are generally not considered when determining if the ownership test is met. For purposes of the ownership test, a person is not considered an employee of a corporation unless that person performs more than minimal services for the corporation.

Change to accrual method.

A corporation that fails to meet the function test for any tax year; or fails to meet the ownership test at any time during any tax year must change to an accrual method of accounting, effective for the year in which the corporation fails to meet either test. A corporation that fails to meet the function test or the ownership test is not treated as a qualified PSC for any part of that tax year.

Accrual Method

Under an accrual method of accounting, you generally report income in the year it is earned and deduct or capitalize expenses in the year incurred. The purpose of an accrual method of accounting is to match income and expenses in the correct year.

Income

Generally, you include an amount in gross income for the tax year in which all events that fix your right to receive the income have occurred and you can determine the amount with reasonable accuracy. Under this rule, you report an amount in your gross income on the earliest of the following dates.

• When you receive payment.
• When the income amount is due to you.
• When you earn the income.
• When title passes.

Estimated income.

If you include a reasonably estimated amount in gross income and later determine the exact amount is different, take the difference into account in the tax year you make that determination.

Change in payment schedule.

If you perform services for a basic rate specified in a contract, you must accrue the income at the basic rate, even if you agree to receive payments at a reduced rate. Continue this procedure until you complete the services, then account for the difference.

Advance Payment for Services

Generally, you report an advance payment for services to be performed in a later tax year as income in the year you receive the payment. However, if you receive advance payments for certain services you agree to perform by the end of the next tax year, you can elect to postpone including the advance payment in income until the next tax year. However, you cannot postpone including any payment beyond that tax year.

Books and records.

Any advance payment you include in gross receipts on your tax return for the year you receive payment must not be less than the payment you include in income for financial reports under the method of accounting used for those reports. Financial reports include reports to shareholders, partners, beneficiaries, and other proprietors for credit purposes and consolidated financial statements.

IRS approval.

You must file Form 3115 to obtain IRS approval to change your method of accounting for advance payment for services.

Advance Payment for Sales

Special rules apply to including income from advance payments on agreements for future sales or other dispositions of goods held primarily for sale to customers in the ordinary course of your trade or business. However, the rules do not apply to a payment (or part of a payment) for services that are not an integral part of the main activities covered under the agreement. An agreement includes a gift certificate that can be redeemed for goods. Amounts due and payable are considered received.

Economic performance has occurred.

Generally, you cannot deduct or capitalize a business expense until economic performance occurs. If your expense is for property or services provided to you, or for your use of property, economic performance occurs as the property or services are provided or the property is used. If your expense is for property or services you provide to others, economic performance occurs as you provide the property or services.

If you have not been applying the general rule (an expense paid in advance is deductible only in the year to which it applies) and/or the 12-month rule to the expenses you paid in advance, you must get IRS approval before using the general rule and/or the 12-month rule.

Related Persons

Business expenses and interest owed to a related person who uses the cash method of accounting are not deductible until you make the payment and the corresponding amount is includible in the related person's gross income. Determine the relationship for this rule as of the end of the tax year for which the expense or interest would otherwise be deductible.

Inventories

An inventory is necessary to clearly show income when the production, purchase, or sale of merchandise is an income-producing factor. If you must account for an inventory in your business, you must use an accrual method of accounting for your purchases and sales. However, you should take into account the exceptions.

To figure taxable income, you must value your inventory at the beginning and end of each tax year. To determine the value, you need a method for identifying the items in your inventory and a method for valuing these items.

The rules discussed here apply only if they do not conflict with the uniform capitalization rules of section 263A and the mark-to-market rules of section 475.

Exceptions

The following taxpayers can use the cash method of accounting even if they produce, purchase, or sell merchandise. These taxpayers can also account for inventoriable items as materials and supplies that are not incidental.

You are a qualifying small business taxpayer under Revenue Procedure 2002-28 only if you satisfy the gross receipts test for each prior tax year ending on or after December 31, 2000. Your average annual gross receipts for each test year must be $10 million or less  and if you are not prohibited from using the cash method under section 448 of the Internal Revenue Code. Also, your principle business activity must be an eligible business and you have not changed (or have not been required to change) from the cash method because you became ineligible to use the cash method under Revenue Procedure 2002-28.

Do not include merchandise in inventory that are goods you have sold, but only if title has passed to the buyer, goods consigned to you or goods ordered for future delivery if you do not yet have title.

Resellers who use the retail method of pricing inventories can determine their tax on that basis. To use this method, you must do all of the following.

As a general rule, passive activity loss rules are applied at the individual level. Although Internal Revenue Code Section 469 was enacted to discourage abusive tax shelters, its impact extends far beyond shelters to virtually every business or rental activity whether reported on Schedules C, F, or E, as well as to flow through income and losses from partnerships, S- Corporations, and trusts. Generally, the law does not apply to regular C-Corporations although it does have limited application to closely held corporations.

Kinds of Passive Activities

There are two kinds of passive activities and they are

1. Rentals, including both equipment and rental real estate, regardless of the level of participation.
2. Businesses in which the taxpayer does not materially participate on a regular, continuous, and substantial basis.

If you have more than three rental real estate or royalty properties, complete and attach as many Schedules E as you need to list them. But fill in lines 23a through 26 on only one Schedule E. The figures on lines 23a through 26 on that Schedule E should be the combined totals for all properties reported on your Schedules E. Once made, the election can be revoked only with the permission of the IRS. However, the election technically remains in effect only for as long as the spouses filing as a qualified joint venture continue to meet the requirements to be treated as a qualified joint venture. If the spouses fail to meet the qualified joint venture requirements for a year, a new election will be necessary for any future year in which the spouses meet the requirements to be treated as a qualified joint venture. Rental real estate income generally is not included in net earnings from self-employment subject to self-employment tax and generally is subject to passive loss limitation rules. Electing qualified joint venture status does not alter the application of the self-employment tax or the passive loss limitation rules.

Reportable Transaction Disclosure Statement Use Form 8886 to disclose information for each reportable transaction in which you participated. Form 8886 must be filed for each tax year that your federal income tax liability is affected by your participation in the transaction. You may have to pay a penalty if you are required to file Form 8886 but do not do so. You may also have to pay interest and penalties on any reportable transaction understatements.

• Any listed transaction that is the same as or substantially similar to tax avoidance transactions identified by the IRS.
• Any transaction offered to you or a related party under conditions of confidentiality for which you paid an advisor a fee of at least $50,000.
• Certain transactions for which you or a related party have contractual protection against disallowance of the tax benefits.
• Certain transactions resulting in a loss of at least $2 million in any single tax year or $4 million in any combination of tax years (at least $50,000 for a single tax year if the loss arose from a foreign currency transaction defined in section 988(c)(1), whether or not the loss flows through from an S corporation or partnership).
• Certain transactions of interest entered into after November 1, 2006, that are the same or substantially similar to transactions that the IRS has identified by notice, regulation, or other form of published guidance as transactions of interest.

Limitation on Losses

If you report a loss from rental real estate or royalties in Part I or you report a loss from a partnership or S corporation in Part II, your loss may be reduced or not allowed this year.

• Basis rules apply to losses from a partnership or S corporation.
• Excess farm loss rules apply to losses from a partnership or S corporation.
• At-risk rules apply to losses from rental real estate or royalties. They also apply to losses from a partnership or S corporation.

Cash, property, or borrowed amounts used in the activity (or contributed to the activity, or used to acquire your interest in the activity) that are protected against loss by a guarantee, stop-loss agreement, or other similar arrangement (excluding casualty insurance and insurance against tort liability). Amounts borrowed for use in the activity from a person who has an interest in the activity (other than as a creditor) or who is related under section 465(b)(3)(C) to a person (other than you) having such an interest.

Qualified nonrecourse financing.

Qualified nonrecourse financing is treated as an amount at risk if it is secured by real property used in an activity of holding real property subject to the at-risk rules. Qualified nonrecourse financing is financing for which no one is personally liable for repayment and is:

1. Borrowed by you in connection with the activity of holding real property (other than mineral property),
2. Not convertible from a debt obligation to an ownership interest, and
3. Loaned or guaranteed by any federal, state, or local government, or borrowed by you from a qualified person.

Qualified person.

A qualified person is a person who actively and regularly engages in the business of lending money, such as a bank or savings and loan association.

1. Related to you (unless the nonrecourse financing obtained is commercially reasonable and on substantially the same terms as loans involving unrelated persons),
2. The seller of the property (or a person related to the seller), or
3. A person who receives a fee due to your investment in real property (or a person related to that person).

Passive Activity Loss Rules

The passive activity loss rules may limit the amount of losses you can deduct. These rules apply to losses in Parts I, II, and III, and line 40 of Schedule E. Losses from passive activities may be subject first to the at-risk rules. Losses deductible under the at-risk rules are then subject to the passive activity loss rules. You can deduct losses from passive activities in most cases only to the extent of income from passive activities. An Exception for Certain Rental Real Estate Activities may apply.

Passive Activity

If your rental of property is not treated as a rental activity, you must determine whether it is a trade or business activity, and if so, whether you materially participated in the activity for the tax year.

Activities That Are Not Passive Activities.

Certain activities are not passive activities regarless of their nature. It all has to do with the individual perfoming the activity. Just like a business can be considered a passive activity although it is not passive in nature, so can an activity that is normally passive in nature, be considered nonpassive.

Activities of real estate professionals.

If you were a real estate professional for 2017, any rental real estate activity in which you materially participated is not a passive activity. You were a real estate professional for the year only if you met both of the following conditions. More than half of the personal services you performed in trades or businesses during the year were performed in real property trades or businesses in which you materially participated. You performed more than 750 hours of services during the year in real property trades or businesses in which you materially participated. If you are married filing jointly, either you or your spouse must meet both of the above conditions without taking into account services performed by the other spouse. A real property trade or business is any real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing, or brokerage trade or business.

A working interest in an oil or gas well you held directly or through an entity that did not limit your liability is not a passive activity even if you did not materially participate. Royalty income not derived in the ordinary course of a trade or business reported on Schedule E in most cases is not considered income from a passive activity.

Exception for Certain Rental Real Estate Activities

If you meet all of the following conditions, your rental real estate losses are not limited by the passive activity loss rules, and you do not need to complete Form 8582. However, if you do not meet all of these conditions, you may have to complete and attach Form 8582 to figure any losses allowed.

a. You actively participated (defined later) in all of the rental real estate activities;

b. If married filing separately, you lived apart from your spouse all year;

c. Your overall net loss from these activities is $25,000 or less ($12,500 or less if married filing separately);

d. You have no current or prior year unallowed credits from passive activities;

e. Your modified adjusted gross in- come is $100,000 or less ($50,000 or less if married filing separately); and

f. You do not hold any interest in a rental real estate activity as a limited partner or as a beneficiary of an estate or a trust.

Active participation.

You are not considered to actively participate if, at any time during the tax year, your interest (including your spouse's interest) in the activity was less than 10% by value of all interests in the activity. If you are a limited partner, you are also not treated as actively participating in a partnership's rental real estate activities.

Modified adjusted gross income.

This is your adjusted gross income from Form 1040, line 38, or Form 1040NR, line 37, without taking into account:

You must keep records to support items reported on Schedule E in case the IRS has questions about them. If the IRS examines your tax return, you may be asked to explain the items reported. Good records will help you explain any item and arrive at the correct tax with a minimum of effort. If you do not have records, you may have to spend time getting statements and receipts from various sources. If you cannot produce the correct documents, you may have to pay additional tax and be subject to penalties.

Specific Instructions for Filers of Form 1041.

If you are a fiduciary filing Schedule E with Form 1041, enter the estate's or trust's employer identification number (EIN) in the space for “Your social security number.” Part I Before you begin, see Line 3 and Line 4, to determine if you should report your rental real estate and royalty income on Schedule C, Schedule C-EZ, or Form 4835, instead of Schedule E.

If you made any payments in 2017 that would require you to file any Forms 1099, check the “Yes” box on Line A. Otherwise, check the “No” box.

Certain Information Returns may required you to file Forms 1099.

Generally, you must file Form 1099-MISC if you paid at least $600 in rents, services, prizes, medical and health care payments, and other income payments. Be careful to file by the due dates for the various information returns.

Income or Loss From Rental Real Estate and Royalties

Use Part I to report the following.

For an estate or trust only, farm rental income and expenses based on crops or livestock produced by the tenant. Estates and trusts do not use Form 4835 or Schedule F (Form 1040) for this purpose. If you own a part interest in a rental real estate property, report only your part of the income and expenses on Schedule E. Complete lines 1a, 1b, and 2 for each rental real estate property. For royalty property, enter code “6” on line 1b and leave lines 1a and 2 blank for that property. If you have more than three rental real estate or royalty properties, complete and attach as many Schedules E as you need to list them. But answer lines A and B and fill in lines 23a through 26 on only one Schedule E. The figures on lines 23a through 26 on that Schedule E should be the combined totals for all properties reported on your Schedules E. If you are also using page 2 of Schedule E, use the same Schedule E on which you entered the combined totals for Part I.

Personal property.

Do not use Schedule E to report income and expenses from the rental of personal property, such as equipment or vehicles. Instead, use Schedule C or C-EZ if you are in the business of renting personal property. You are in the business of renting personal property if the primary purpose for renting the property is income or profit and you are involved in the rental activi- ty with continuity and regularity. Different rules apply if your rental of personal property is not a business and you must know how to report the income and expenses.

Extraterritorial income exclusion.

Except as otherwise provided in the Internal Revenue Code, gross income includes all income from whatever source derived. Gross income, however, does not include extraterritorial income that is qualifying foreign trade income under certain circumstances. Use Form 8873 to figure the extraterritorial income exclusion. Report it on Schedule E.

Land rental.

Enter code “5” for rental of land. Land would fall under the category of rental of nondepreciable property.

Self-rental.

Enter code “7” for self-rental if you rent property to a trade or business in which you materially participated. Rental of property to a nonpassive activity has a different tax treatment because you usually participate for this type of rental.

Other.

Enter code “8” if the property is not one of the other types listed on the form. Attach a statement to your return describing the property. Line 2 If you rented out a dwelling unit that you also used for personal purposes during the year, you may not be able to deduct all the expenses for the rental part. “Dwelling unit” (unit) means a house, apartment, condominium, mobile home, boat, or similar property. For each property listed on line 1a, report the number of days in the year each property was rented at fair rental value and the number of days of personal use. A day of personal use is any day, or part of a day, that the unit was used by:

• You for personal purposes,
• Any other person for personal purposes, if that person owns part of the unit (unless rented to that person under a “shared equity” financing agreement),
• Anyone in your family (or in the family of someone else who owns part of the unit), unless the unit is rented at a fair rental price to that person as his or her main home,
• Anyone who pays less than a fair rental price for the unit, or
• Anyone under an agreement that lets you use some other unit.

Do not count as personal use:

Do not count as personal use any day you spent working substantially full time repairing and maintaining the unit, even if family members used it for recreational purposes on that day, or Any days you used the unit as your main home before or after renting it or offering it for rent, if you rented or tried to rent it for at least 12 consecutive months (or for a period of less than 12 consecutive months at the end of which you sold or exchanged it). Whether or not you can deduct expenses for the unit depends on whether or not you used the unit as a home in 2017. You used the unit as a home if your personal use of the unit was more than the greater of: 14 days, or 10% of the total days it was rented to others at a fair rental price. If you did not use the unit as a home, you can deduct all your expenses for the rental part, subject to the at-risk rules and the passive activity loss rules.

For example, you used your property for personal use for 7 days and rented it for 63 days. In most cases, 10% (7÷70) of your expenses are not rental expenses and cannot be deducted on Schedule E.

QJV.

Check the box for “QJV” if you owned the property as a member of a qualified joint venture reporting income not subject to self-employment tax.

If you were a real estate dealer, include only the rent received from real estate (including personal property leased with this real estate) you held for the primary purpose of renting to produce income. Do not use Schedule E to report income and expenses from rentals of real estate you held for sale to customers in the ordinary course of your business as a real estate dealer. Instead, use Schedule C or C-EZ for those rentals.

Rental income from farm production or crop shares.

Report farm rental income and expenses on Form 4835 if:

• You are an individual,
• You received rental income based on crops or livestock produced by the tenant, and
• You did not materially participate in the management or operation of the farm.

Royalties from oil, gas or mineral properties

Report on line 4 royalties from oil, gas, or mineral properties (not including operating interests); copyrights; and patents. Use a separate column (A, B, or C) for each royalty property. If you received $10 or more in royalties during 2017, the payer should send you a Form 1099-MISC or similar statement by January 31, 2018, showing the amount you received. Report this amount on line 4.

Enter on line 4 the gross amount of royalty income, even if state or local taxes were withheld from oil or gas payments you received. Include taxes withheld by the producer on line 16.

General Instructions for Lines 5 Through 21

Enter your rental and royalty expenses for each property in the appropriate column. You can deduct all ordinary and necessary expenses, such as taxes, interest, repairs, insurance, management fees, agents' commissions, and depreciation. Do not deduct the value of your own labor or amounts paid for capital investments or capital improvements. Enter your total expenses for mortgage interest (line 12), depreciation expenses and depletion (line 18), and total expenses (line 20) on lines 23c through 23e, respectively, even if you have only one property.

Renting out part of your home.

If you rent out only part of your home or other property, deduct the part of your expenses that applies to the rented part. Credit or deduction for access expenditures. You may be able to claim a tax credit for eligible expenditures paid or incurred in 2017 to provide access to your business for individuals with disabilities.

If you take the standard mileage rate, multiply the number of miles driven in connection with your rental activities by 53.5 cents a mile. Include this amount and your parking fees and tolls on line 6. You cannot deduct rental or lease payments, depreciation, or your actual auto expenses if you use the standard mileage rate.

If you deduct actual auto expenses:

Include on line 6 the rental activity portion of the cost of gasoline, oil, repairs, insurance, tires, license plates, etc., and Show auto rental or lease payments on line 19 and depreciation on line 18. If you claim any auto expenses (actual or the standard mileage rate), you must complete Part V of Form 4562 and attach Form 4562 to your tax return.

Line 17 You can deduct the cost of ordinary and necessary telephone calls related to your rental activities or royalty income (for example, calls to the renter). However, the base rate (including taxes and other charges) for local telephone service for the first telephone line into your residence is a personal expense and is not deductible. Line 18 Depreciation is the annual deduction you must take to recover the cost or other basis of business or investment property having a useful life substantially beyond the tax year.

Land is not depreciable.

Depreciation starts when you first use the property in your business or for the production of income. It ends when you deduct all your depreciable cost or other basis or no longer use the property in your business or for the production of income.

If you have an economic interest in mineral property, you may be able to take a deduction for depletion. Mineral property includes oil and gas wells, mines, and other natural deposits (in- cluding geothermal deposits).

Separating cost of land and buildings.

If you buy buildings and your cost includes the cost of the land on which they stand, you must divide the cost between the land and the buildings to figure the basis for depreciation of the buildings. The part of the cost that you allocate to each asset is the ratio of the fair market value of that asset to the fair market value of the whole property at the time you buy it. If you are not certain of the fair market values of the land and the buildings, you can divide the cost between them based on their assessed values for real estate tax purposes.

You must figure out on Form 8582 if your loss is limited. If your rental real estate loss is not from a passive activity or you meet the Exception for Certain Rental Real Estate Activities, you do not have to complete Form 8582. Enter the loss from line 21 on line 22. If you have an unallowed rental real estate loss from a prior year that after completing Form 8582 you can deduct this year, include that loss on line 22. Parts II and III If you need more space in Part II or III to list your income or losses, attach a continuation sheet using the same format as shown in Part II or III. However, be sure to complete the “Totals” columns for lines 29a and 29b, or lines 34a and 34b, as appropriate. If you also completed Part I on more than one Schedule E, use the same Schedule E on which you entered the combined totals in Part I.

Tax preference items.

If you are a partner, a shareholder in an S corporation, or a beneficiary of an estate or trust, you must take into account your share of preferences and adjustments from these entities for the alternative minimum tax on Form 6251 or Schedule I (Form 1041).

Part II Income or Loss From Partnerships and S Corporations

If you are a member of a partnership or joint venture or a shareholder in an S corporation, use Part II to report your share of the partnership or S corporation income (even if not received) or loss. If you elected to be taxed as a qualified joint venture instead of a partnership, follow the reporting rules for QJVs - qualified joint ventures. You should receive a Schedule K-1 from the partnership or S corporation. You should also receive a copy of the Partner's or Shareholder's Instructions for Schedule K-1. Your copy of Schedule K-1 and its instructions will tell you where on your return to report your share of the items.

Schedule K-1 keep for your records

Do not attach Schedules K-1 to your return. Keep them for your records. If you are treating items on your tax return differently from the way the partnership (other than an electing large partnership) or S corporation reported them on its return, you may have to file Form 8082. If you are a partner in an electing large partnership, you must report the items shown on Schedule K-1 (Form 1065-B) on your tax return the same way the partnership reported the items on Schedule K-1.

Special Rules That Limit Losses

If you report a loss from a partnership or S corporation, your loss may be reduced or not allowed this year. Apply the basis rules, excess farm loss rules, at-risk rules, and passive activity loss rules to your loss.

Basis rules for partnerships.

Generally, you may not claim your share of a partnership loss (including a capital loss) to the extent that it is greater than the adjusted basis of your partnership interest at the end of the partnership's tax year. Any losses and deductions not allowed this year because of the basis limit can be carried forward indefinitely and deducted in a later year subject to the basis limit for that year.

If you had a loss from a partnership that was not allowed last year because of the basis rules, but all or part is allowed this year you must report it. After applying the basis rules, your loss may be further reduced by the excess farm loss rules, at-risk rules, and passive activity loss rules.

Basis rules for S corporations.

Generally, the deduction for your share of aggregate losses and deductions reported on Schedule K-1 (Form 1120S) is limited to the basis of your stock (determined with regard to distributions received during the tax year) and loans from you to the corporation. The basis of your stock is generally figured at the end of the corporation's tax year. Any losses and deductions not allowed this year because of the basis limit can be carried forward indefinitely and deducted in a later year subject to the basis limit for that year.

 If you are claiming a deduction for your share of an aggregate loss, attach to your return a computation of the adjusted basis of your corporate stock and of any debt the corporation owes you. If you had a loss from an S corporation that was not allowed last year because of the basis rules, but all or part is allowed this year, you must report it on Line 27. After applying the basis rules, your loss may be further reduced by the excess farm loss rules, at-risk rules, and passive activity loss rules.

Excess farm loss rules.

You may have other farming businesses requiring you to file Schedule F or any Schedule C activity of processing a farm commodity. You may have to report a loss from the partnership or S corporation that was not allowed last year because of the excess farm loss rules, but all or part is allowed this year. After applying the excess farm loss rules, your loss may be further reduced by the at-risk rules and passive activity loss rules.

At-risk rules.

Your loss may be limited if you have

Use Form 6198 to figure the amount of any deductible loss. If the activity is nonpassive, enter any deductible loss from Form 6198 on the appropriate line in Part II, column (h) of Schedule E. You may have to report a loss from the partnership or S corporation that was not allowed last year because of the at-risk rules, but all or part is allowed this year. After applying the at-risk rules, your loss may be further reduced by the passive activity loss rules.

Passive activity loss rules.

If you have a passive activity loss, in most cases you need to complete Form 8582 to figure the amount of the allowable loss to enter in Part II, column (f), for that activity. But if you are a general partner or an S corporation shareholder reporting your share of a partnership or an S corporation loss from a rental real estate activity and you meet all of the conditions for the exception for certain rental real estate activities , you do not have to complete Form 8582. Instead, enter your allowable loss in Part II, column (f). If you have passive activity income, complete Part II, column (g), for that activity. If you have nonpassive income or losses, complete Part II, columns (h) through (j), as appropriate. You may have to report a loss from the partnership or S corporation that was not allowed last year because of the passive activity loss rules, but all or part is allowed this year.

Domestic Partnerships

Schedule K-1 instructions will indicate how to enter on your return other partnership items from a passive activity or income or loss from any publicly traded partnership. You can deduct unreimbursed ordinary and necessary expenses you paid on behalf of the partnership if you were required to pay these expenses under the partnership agreement. If you used loan proceeds to buy an interest in, or make a contribution to the capital of, a partnership (debt-financed acquisition), report your share of deductible partnership interest expense on either Schedule A or Schedule E, depending on the type of asset (or expenditure if the allocation is based on the tracing of loan proceeds) to which the interest expense is allocated. If you claimed a credit for federal tax on gasoline or other fuels on your 2016 Form 1040 or Form 1040NR based on information received from the partnership, enter as income in column (g) or column (j), whichever applies, the amount of the credit claimed for 2016. Part or all of your share of partnership income or loss from the operation of the business may be considered net earnings from self-employment that must be reported on Schedule SE. Enter the amount from Schedule K-1 (Form 1065), box 14, code A (or from Schedule K-1 (Form 1065-B), box 9 (code J1)), on Schedule SE, after you reduce this amount by any allowable expenses attributable to that income.

Foreign Partnerships

If you are a U.S. person, you may have received Forms 1099-B, 1099-DIV, and 1099-INT reporting your share of certain partnership income, because payors of income to the foreign partnership in most cases are required to allocate and report payments of that income directly to each of the partners of the foreign partnership. If you received both Schedule K-1 and Form 1099 for the same type and source of partnership income, report only the income shown on Schedule K-1. If you are not a U.S. person, you may have received Forms 1042-S reporting your share of certain partnership income, because payors of income to the foreign partnership in most cases are required to allocate and report payments of that income directly to each of the partners of the foreign partnership.

If you received both Schedule K-1 and Form 1042-S for the same type and source of partnership income, report the income on your return as follows. For all income effectively connected with the conduct of a trade or business in the United States, report only the income shown on Schedule K-1 in accordance with its instructions. For all income not effectively connected with the conduct of a trade or business in the United States, report on page 4 of Form 1040NR only the income shown on Form 1042-S (if you are required to file Form 1040NR).

Requirement to file Form 8865.

If you are a U.S. person, you may have to file Form 8865 if any of the following applies.

Also, you may have to file Form 8865 to report certain dispositions by a foreign partnership of property you pre- viously contributed to that partnership if you were a partner at the time of the dis- position.

S Corporations

Distributions of prior year accumulated earnings and profits of S corporations are dividends and are reported on Form 1040, line 9a. If you used loan proceeds to buy an interest in, or make a contribution to the capital of, an S corporation (debt-financed acquisition), report your share of deductible S corporation interest expense on either Schedule A or Schedule E, depending on the type of asset (or expenditure if the allocation is based on the tracing of loan proceeds) to which the interest expense is allocated.

If you answered “Yes” on line 27, follow the instructions below. If you do not follow these instructions, the IRS may send you a notice of additional tax due because the amounts reported by the partnership or S corporation on Schedule K-1 do not match the amounts you reported on your tax return.

Losses Not Allowed in Prior Years Due to the Basis, Excess Farm Loss, or At-Risk Rules

Enter your total prior year unallowed losses that are now deductible on a separate line in column (h) of line 28. Do not combine these losses with, or net them against, any current year amounts from the partnership or S corporation. Enter “PYA” in column (a) of the same line. Prior Year Unallowed Losses From a Passive Activity Not Reported on Form 8582 Enter on a separate line in column (f) of line 28 your total prior year unallowed losses not reported on Form 8582. Such losses include prior year unallowed losses now deductible because you did not have an overall loss from all passive activities or you disposed of your entire interest in a passive activity in a fully taxable transaction. Do not combine these losses with, or net them against, any current year amounts from the partnership or S corporation. Enter “PYA” in column (a) of the same line.

Unreimbursed Partnership Expenses

You can deduct unreimbursed ordinary and necessary partnership expenses you paid on behalf of the partnership on Schedule E if you were required to pay these expenses under the partnership agreement (except amounts deductible only as itemized deductions, which you must enter on Schedule A). Enter unreimbursed partnership expenses from nonpassive activities on a separate line in column (h) of line 28. Do not combine these expenses with, or net them against, any other amounts from the partnership. If the expenses are from a passive activity and you are not required to file Form 8582, enter the expenses related to a passive activity on a separate line in column (f) of line 28. Do not combine these expenses with, or net them against, any other amounts from the partnership. Enter “UPE” in column (a) of the same line.

For nonpassive income or loss (and passive income or losses for which you are not filing Form 8582), enter in the applicable column of line 28 your current year ordinary income or loss from the partnership or S corporation. Report each related item required to be reported on Schedule E (including items of income or loss stated separately on Sched- ule K-1) in the applicable column of a separate line following the line on which you reported the current year ordinary income or loss. Also enter a description of the related item (for example, depletion) in column (a) of the same line. If you are required to file Form 8582, complete Form 8582 before completing Schedule E.

Debt-financed acquisition.

A debt-financed acquisition is the use of loan proceeds to buy an interest in, or to make a contribution to the capital of, a partnership or S corporation. You must allocate the loan proceeds and the rela- ted interest expense among all the assets of the entity. You can use any reasonable method. For interest allocated to trade or business assets (or expenditures), report the interest on a separate line of your Schedule E, Part II. Put "business interest" and the name of the partnership or S corporation in column (a) and the amount in column (h). For interest allocated to passive activity use, enter the interest on Form 8582 as a deduction from the passive activity of the partnership or S corporation. Show any deductible amount on a separate line on your Schedule E, Part II. Put "passive interest" and the name of the entity in column (a) and the amount in column (f). For interest allocated to investment use, enter the interest on Form 4952. Carry any deductible amount allocated to royalties to a separate line of your Schedule E, Part II. Put "investment interest" and the name of the entity in column (a) and the amount in column (h). Carry the balance of the deductible amount to Schedule A, line 14. Any interest allocated to proceeds used for personal purposes is generally not deductible.

Part III Income or Loss From Estates and Trusts

If you are a beneficiary of an estate or trust, use Part III to report your part of the income (even if not received) or loss. You should receive a Schedule K-1 (Form 1041) from the fiduciary. Your copy of Schedule K-1 and its instruc- tions will tell you where on your return to report the items from Schedule K-1. Do not attach Schedule K-1 to your re- turn. Keep it for your records. If you are treating items on your tax return differently from the way the estate or trust reported them on its return, you may have to file Form 8082.

An individual who received a distribution from, or who was the grantor of or transferor to, a foreign trust must also complete Part III of Schedule B (Form 1040A or 1040) and may have to file Form 3520. In addition, the owner of a foreign trust must ensure that the trust files an annual information return on Form 3520-A.

Part IV Income or Loss From Real Estate Mortgage Investment Conduits (REMICs)

If you are the holder of a residual interest in a REMIC, use Part IV to report your total share of the REMIC's taxable income or loss for each quarter included in your tax year. You should receive Schedule Q (Form 1066) and instructions from the REMIC for each quarter. Do not attach Schedule(s) Q to your return. Keep them for your records. If you are treating REMIC items on your tax return differently from the way the REMIC reported them on its return, you may have to file Form 8082. If you are the holder of a residual interest in more than one REMIC, attach a continuation sheet using the same format as in Part IV. Enter the combined totals of columns (d) and (e) on Schedule E, line 39. If you also completed Part I on more than one Schedule E, use the same Schedule E on which you entered the combined totals in Part I. REMIC income or loss is not income or loss from a passive activity.

2. You file your 2017 tax return and pay the tax due by March 1, 2018.

If your employer's reimbursement arrangement doesn't meet all three requirements, it's a nonaccountable plan and the payments you receive should be included in the wages shown on your Form W-2. You must report the payments as income, and you must complete Form 2106, Employee Business Expenses, or Form 2106-EZ, Unreimbursed Employee Business Expenses, and itemize your deductions to deduct your employee business expenses. Your employer has strict reporting requirement for business expenses and you may also be required to report these expenses on your tax return.

• The legal services are provided to the payer,
• The attorney is the exclusive payee (for example, the attorney's and claimant's names are on one check) and even if other information returns are required for some or all of a payment under section 6041A(a)(1).

2nd TIN not correct.

You do not have to complete this box. However, if you complete this box, enter the total amount deferred during the year of at least $600 for the nonemployee under all nonqualified plans. The deferrals during the year include earnings on the current year and prior year deferrals.

If a state tax department requires that you send them a paper copy of this form, use Copy 1 to provide information to the state tax department. Give Copy 2 to the recipient for use in filing the recipient's state income tax return.