Quickfinder ®

Small Business
Quickfinder® Handbook
(2017 Tax Year)
Updates for the Tax Cuts and Jobs Act of 2017
and Other Recent Guidance

Replacement Pages for Two-Sided (Duplex) Printing

Instructions: This packet contains “marked up” changes to the pages in the Small Busi-
ness Quickfinder® Handbook that were affected by the Tax Cuts and Jobs Act of 2017,
which was enacted after the Handbook was published. Additionally, changes were made
based on other guidance issued after the Handbook was published.

This is a specially designed update packet for owners of the 3-ring binder version of the
Handbook who have access to a printer that prints two-sided (duplex). Simply print the
entire PDF file (make sure to select two-sided or duplex printing), three-hole punch the
pages, and then replace the pages in your Handbook. It’s that easy.
 2017 Tax Year

Small Business
TAX PREPARATION

Quickfinder Handbook
®
Forms: 1065, 1120,
1120S, 1041, 706,
709 and 990
Form 1120 Forms 706 and 709
Corporation Tax Rate Schedule Estate and Gift Tax Rate Schedule
—Quick Tax Method— and before 2018 —Quick Tax Method—
For tax years beginning after December 31, 1992 For gifts made and estates of decedents dying after 2012
Taxable Income × % Minus $ = Tax Taxable Amount × % Minus $ = Tax1
$ 0 –$ 50,000 × 15% minus $ 0 = Tax $ 0 – $ 10,000 × 18% minus $ 0 = Tax
50,001 – 75,000 × 25 minus 5,000 = Tax 10,001 – 20,000 × 20 minus 200 = Tax
75,001 – 100,000 × 34 minus 11,750 = Tax 20,001 – 40,000 × 22 minus 600 = Tax
100,001 – 335,000 × 39 minus 16,750 = Tax 40,001 – 60,000 × 24 minus 1,400 = Tax
335,001 – 10,000,000 × 34 minus 0 = Tax 60,001 – 80,000 × 26 minus 2,600 = Tax
10,000,001 – 15,000,000 × 35 minus 100,000 = Tax 80,001 – 100,000 × 28 minus 4,200 = Tax
15,000,001 – 18,333,333 × 38 minus 550,000 = Tax 100,001 – 150,000 × 30 minus 6,200 = Tax
18,333,334 and over × 35 minus 0 = Tax 150,001 – 250,000 × 32 minus 9,200 = Tax
Note: See Basics of Corporations on Page C-1 for exceptions to above tax rates 250,001 – 500,000 × 34 minus 14,200 = Tax
and an example of how to use the Quick Tax Method. 500,001 – 750,000 × 37 minus 29,200 = Tax
750,001 – 1,000,000 × 39 minus 44,200 = Tax
Form 1041
1,000,001 and over × 40 minus 54,200 = Tax
2017 Fiduciary Tax Rate Schedule
—Quick Tax Method—
1
Less applicable credit amount. See the charts at the beginning of Tab H.

Taxable Income × % Minus $ = Tax

2017 Estate and Gift Tax Exclusion Amounts
$ 0 – $ 2,550 × 15% minus $ 0.00 = Tax
Estate Tax Gift Tax Annual Gift
2,551 – 6,000 × 25 minus 255.00 = Tax
Exclusion1 Exclusion1 Exclusion
6,001 – 9,150 × 28 minus 435.00 = Tax
$5,490,000 $5,490,000 $14,000
9,151 – 12,500 × 33 minus 892.50 = Tax
1
Plus the amount of any deceased spousal unused exclusion and/or any restored
12,501 and over × 39.6 minus 1,717.50 = Tax exclusion related to lifetime gifts to a same-sex spouse—see Tab H.
Note: The 10% tax bracket that applies to individuals does not apply to estates
and trusts. 2017 Business Quick Facts
Section 179 Deduction:
Filing Information
Maximum deduction......................................................................... $ 510,000
Tax Return Return Due Extensions
Qualifying property limit.................................................................... 2,030,000
Form 1065: 15th day of third month Form 7004 extends deadline
Partnership/LLC following close of tax year. six months. SUV deduction limit.......................................................................... 25,000

Form 1120: 15th day of fourth (third if Form 7004 extends deadline Depreciation Limits (First Year):
Corporation 6/30 FY) month following six if CY (seven if 6/30 FY; six
close of tax year. if other FY) months. Luxury autos..................................................................................... $ 3,1601

Form 1120S: 15th day of third month Form 7004 extends deadline Light trucks and vans........................................................................ 3,5601
S Corporation following close of tax year. six months.
Standard Mileage Rate:
Form 1041: 15th day of fourth month Form 7004 extends deadline
Business miles.................................................................................. $ .535
Estates and Trusts following close of tax year. five-and-one-half months.
Depreciation component................................................................... .25
Form 706: Estates Nine months after date of Form 4768 extends deadline
decedent’s death. six months. Charitable......................................................................................... .14
Form 709: Gift Tax April 15th following close of Form 4868 or 8892 extends Medical and moving.......................................................................... .17
Patent Pending

tax year of gift. deadline six months. 1

Plus $8,000 if special (bonus) depreciation is claimed.
Form 990: Exempt 15th day of fifth month Form 8868 extends deadline
Organizations following close of tax year. six months.
Note: CY—calendar year end; FY—fiscal year end.
Replacement Page 1/2018
Small Business Quickfinder® Handbook Employer Identification Numbers (EINs)
© 2017 Thomson Reuters/Tax & Accounting. Thomson Reuters, Responsible Parties
Checkpoint, Quickfinder and the Kinesis logo are trademarks All EIN applications (online, telephone, fax or mail) must disclose the name and
taxpayer identification number (TIN) (that is, an SSN, EIN or ITIN) of the true
of Thomson Reuters and its affiliated companies.
principal officer, general partner, grantor, owner or trustor (responsible party). This
ISSN 1945-2748 is the individual or entity that controls, manages or directs the applicant entity and
ISBN 978-0-7646-7997-X the disposition of its funds and assets. A nominee (someone given limited author-
P.O. Box 115008 ity to act on behalf of an entity, usually for a limited period of time such as during
Carrollton, TX 75011-5008 formation) is not a responsible party, is not authorized by the IRS to obtain EINs
Phone 800-510-8997 • Fax 888-286-9070 and should not be listed on the Form SS-4. Only one EIN per responsible party per
day may be requested.
tax.thomsonreuters.com
The Small Business Quickfinder® Handbook is published by Thomson Reuters. Online
Reproduction is prohibited without written permission of the publisher. Not assign- The internet EIN application is the IRS’s preferred method for taxpayers to apply for
able without consent. and obtain an EIN. Go to the “Apply for an Employer Identification Number (EIN)
Online” section of the IRS website. Once the application is completed, the informa-
The Small Business Quickfinder® Handbook is to be used as a first-source, quick tion is validated during the online session, and an EIN is issued immediately. The
reference to basic tax principles used in preparing business tax returns. This hand- online application process is available for all entities whose principal business,
book’s focus is to present often-needed reference information in a concise, easy- office or agency, or legal residence (in the case of an individual), is located in the
to-use format. The summaries, highlights, examples, tax tips and other information U.S. or U.S. territories. The principal officer, general partner, grantor, owner, trustor,
included herein are intended to apply to the average small business taxpayer only. etc. must have a valid TIN (SSN, EIN or ITIN) in order to use the online application.
Information included is general in nature and we acknowledge the existence of many
exceptions in the area of business taxes. The information this handbook contains Fax
has been carefully compiled from sources believed to be reliable, but its accuracy An EIN can be received by fax within four business days. Complete and fax Form
is not guaranteed. The author/publisher is not engaged in rendering legal, account- SS-4 to the IRS using the Fax numbers listed in the “Where to File Your Taxes (for
ing or other advice and will not be held liable for any actions or suit based on this Form SS-4)” section of the IRS website.
handbook. For further information regarding a specific situation, see applicable IRS
Mail
publications, rulings, regulations, court cases and Code sections applicable to that
Complete Form SS-4 and mail to the IRS using the addresses listed in the “Where
situation. This handbook is not intended to be used as your only reference source.
to File Your Taxes (for Form SS-4)” section of the IRS website. The processing time
frame for an EIN application received by mail is four weeks.
2017 Employer Retirement Plan Contribution Limits Telephone—International Applicants Only
Profit Sharing 401(k) SIMPLE IRA SEP International applicants may call 267-941-1099 between 6:00 a.m. and 11:00 p.m.
Employee Elective Deferral: (ET) M–F to obtain their EIN. The person making the call must be authorized to
receive the EIN and answer questions concerning Form SS-4.
< Age 50 N/A $18,000 $12,500 N/A
≥ Age 50 N/A $24,000 $15,500 N/A
Employer Contribution:
Payroll Deposit Deadlines (Form 941)
Per Lesser of: Lesser of: N/A Lesser of: Type of Monthly Semiweekly
Participant 100% of comp 100% of comp 25%1 of comp Depositor
or $54,000 or $54,000 or $54,000 Deposit Due 15th day of following month Payday on: Due on:
Total 25% of total 25% of total Either: 25% of total Dates Wednesday, Following
Deductible comp2 paid to comp2 paid to 1) 100% match comp2 paid to Thursday, Friday Wednesday
Contribution all participants all participants up to 3% of all participants Payday on: Due on:
(excluding comp or Saturday, Sunday, Following
employee 2) 2% of comp2 Monday, Tuesday Friday
deferrals) Reason 1) Total federal payroll Total federal payroll taxes were
1
20% of net SE income for self-employed. Classified taxes were $50,000 or more than $50,000 in the lookback
less in the lookback period.
2
Limited to $270,000 per participant.
period or
2) New employer.
IRS Hotlines and Toll-Free Numbers Exceptions:
Abusive Tax Shelter Hotline 801-620-5122 (fax) • Employer accumulates less than $2,500 in taxes during the current or preceding
Business and Specialty Tax Line 800-829-4933 quarter: Deposit as above or send payment with quarterly tax return.
• Employer accumulates $100,000 or more in taxes during deposit period: Deposit
E-Help Desk 866-255-0654 due on next day (that is not a Saturday, Sunday or legal holiday) after the day on
EFTPS Hotline 800-555-4477 which the $100,000 threshold is reached.
FBAR Help Line 866-270-0733 • Employers notified by the IRS to file Form 944 that accumulate less than $2,500
in taxes during the fourth quarter: Pay fourth quarter tax liability with Form 944.
Forms 706 and 709 Help Line 866-699-4083 • See IRS Pub. 15 for deposit penalties and exceptions under Depositing Taxes.
Forms and Publications 800-829-3676
Information Return Reporting 866-455-7438 Updates
Practitioner Priority Service 866-860-4259 For supplemental information to the material in this handbook,
Refund Hotline 800-829-1954 please refer to the Handbook Updates section of our website:
tax.thomsonreuters.com/quickfinder.
Tax-Exempt and Government Entities 877-829-5500
Taxpayer Advocate 877-777-4778
If you have any questions
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 Reference Materials and Worksheets

Where to File: Business Returns Filing
Tab A Topics
Addresses—2017 Returns....................................Page A-1
Principal Business Activity Codes—Forms 1065,
1120 and 1120S.....................................................Page A-1
Business Quick Facts Data Sheet...........................Page A-1
Types of Payments—Where to Report....................Page A-2
Guide to Information Returns...................................Page A-3
Cash and Accrual Accounting Methods—Treating
Commonly Encountered Items..............................Page A-6
S Corporation Shareholder’s Adjusted Basis
Worksheet.............................................................Page A-7
Partner’s Adjusted Basis Worksheet........................Page A-8
Tax Info for Partnership, Corporation, LLC and
LLP Returns...........................................................Page A-9
Transferor’s Section 351 Statement...................... Page A-11
Tax Info Sheet for Gift Tax Returns........................Page A-12
Estate Inventory Worksheet...................................Page A-13
Reconciliation of Income Reported on Final
Form 1040 and Estate’s Fiduciary Return
(or Beneficiary’s Return)......................................Page A-14
Allocation of Indirect Costs to Ending Inventory
Under IRC Sec. 263A..........................................Page A-15
Business Valuation Worksheet..............................Page A-16
Foreign Asset Reporting—Forms 8938 and
FinCEN 1141.......................................................Page A-17
Types of Foreign Assets and Whether
They are Reportable............................................Page A-17
Worksheet to Allocate Purchase/Sale Price
to Specific Assets................................................Page A-18

Where to File: Business Returns Filing Addresses—2017 Returns

Note: At the time of publication, the IRS had not released the 2017 filing addresses for business returns. This information will be posted to the Handbook Updates section
of tax.thomsonreuters.com/quickfinder when available.

Principal Business Activity Codes—Forms 1065, 1120 and 1120S

Note:  At the time of publication, the IRS had not released the 2017 principal business activity codes for business returns. This information will be posted to the Handbook
Updates section of tax.thomsonreuters.com/quickfinder when available.

Business Quick Facts Data Sheet1

2018 2017 2016 2015 2014
FICA/SE Taxes
Maximum earnings subject to tax:
Social Security tax $  128,400 $   127,200 $ 118,500 $  118,500 $ 117,000
Medicare tax No Limit No Limit No Limit No Limit No Limit
Maximum tax paid by:
Employee—Social Security $  7,960.80 $  7,886.40 $ 7,347.00 $ 7,347.00 $ 7,254.00
SE—Social Security 15,921.60 15,772.80 14,694.00 14,694.00 14,508.00
Employee or SE—Medicare No Limit No Limit No Limit No Limit No Limit
Business Deductions
Section 179 deduction—limit $  1,000,000 $   510,000 $ 500,000 $ 500,000 $ 500,000
Section 179 deduction—SUV limit (per vehicle) 25,000 25,000 25,000 25,000 25,000
Section 179 deduction—qualifying property phase-out threshold 2,500,000 2,030,000 2,010,000 2,000,000 2,000,000
Depreciation limit—autos (1st year with special depreciation) 18,000 11,160 11,160 11,160 11,160
Depreciation limit—autos (1st year with no special depreciation) 10,000 3,160 3,160 3,160 3,160
Depreciation limit—trucks and vans (1st year with special depreciation) 18,000 11,560 11,560 11,460 11,460
Depreciation limit—trucks and vans (1st year with no special depreciation) 10,000 3,560 3,560 3,460 3,460
Retirement Plans
SIMPLE IRA plan elective deferral limits:
Under age 50 at year end $  12,500 $    12,500 $  12,500  $  12,500 $  12,000
Age 50 or older at year end 15,500 15,500 15,500 15,500 14,500
401(k), 403(b), 457 and SARSEP elective deferral limits:
Under age 50 at year end $  18,500 $    18,000 $  18,000  $  18,000 $  17,500
Age 50 or older at year end 24,500 24,000 24,000 24,000 23,000
Profit-sharing plan/SEP contribution limits 55,000 54,000 53,000 53,000 52,000
Compensation limit (for employer contributions to profit-sharing plans) 275,000 270,000 265,000 265,000 260,000
Defined benefit plans—annual benefit limit 220,000 215,000 210,000 210,000 210,000
Key employee compensation threshold 175,000 175,000 170,000 170,000 170,000
Highly compensated threshold 120,000 120,000 120,000 120,000 115,000
Estate and Gift Taxes
Estate tax exclusion $11,200,0003 $ 5,490,0003 $5,450,0003 $5,430,0003 $5,340,0003
Gift tax exclusion 11,200,0003 5,490,0003 5,450,0003 5,430,0003 5,340,0003
GST tax exemption 11,200,000 5,490,000 5,450,000 5,430,000 5,340,000
Gift tax annual exclusion 15,000 14,000 14,000 14,000 14,000
1
See Tab 3 in the 1040 Quickfinder® Handbook for an expanded Quick Facts Data Sheet. Not used.
2
Amount not released by IRS at publication time. Tax professionals should watch for developments.
3
Plus the amount of any deceased spousal unused exclusion and/or any restored exclusion related to lifetime gifts to a same-sex spouse—see Tab H.
Replacement Page 1/2018 2017 Tax Year  |  Small Business Quickfinder ® Handbook A-1
 Types of Payments—Where to Report
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A-2 2017 Tax Year | Small Business Quickfinder ® Handbook

 After December 22, 2017, any contribution made by a governmental entity or civic group also is tax-
able to the corporation.
• Instead of four equal installment payments, estimates can be
based on an annualized income method or the adjusted seasonal C
apital ontributions C
installment method. See Annualized Income Methods below.
Contributions to capital of a corporation are called paid-in capital.
For more on the adjusted seasonal installment method, see the
• A corporation does not recognize gain or loss when it issues
instructions to Form 2220 and IRS Pub. 542.
stock in exchange for cash or property. (IRC Sec. 1032)
• Estimated payments must be made by the following dates: • Shareholders do not recognize gain or loss upon contribution of
First payment................... 15th day of the fourth month cash in exchange for stock. Shareholders may recognize gain
or loss upon exchange of property for stock.
Second payment............. 15th day of the sixth month
• When services are performed in exchange for stock, the fair
Third payment................. 15th day of the ninth month market value (FMV) of the service is taxable compensation. The
amount included in income becomes the shareholder’s stock
Fourth payment............... 15th day of the 12th month
basis.
For calendar-year corporations, those dates are April 15, June 15, Contributions to capital by nonshareholders. The basis of
September 15 and December 15. property contributed to a corporation by a nonshareholder is zero.
• If the 15th of the month due date falls on a Saturday, Sunday or For example, if a municipality gives land to a corporation as induce-
legal holiday, the installment is due on the next business day. ment to locate there, the corporation accounts for the property as
a contribution to capital with zero basis. If cash is contributed by
a nonshareholder, basis in the corporation’s assets is reduced by
Annualized Income Methods the amount of the contribution.
Corporations can compute current-year tax for each
estimated tax installment under one of three annualized  Note:  Contributions made by a customer or potential customer
income methods: (1) Standard, (2) Option 1 and (3) are taxable income to the corporation, not capital contributions.
Option 2. [IRC Sec. 6655(e)] See IRS Pub. 542 for more information about contributions from
An election to use either of the optional periods is effec- nonshareholders.
tive only for the tax year for which it is made. The election
must be made on or before the date required for paying Transfers of Property
the first installment for the tax year. Generally, when property is transferred to a corporation in ex-
change for stock, the transaction is treated as if the property were
Corporate Annualization Methods and Periods sold to the corporation at FMV.
Methods Form Installment Periods Example: Ed exchanges property with FMV of $10,000 and adjusted basis
8842
Number Name First Second Third Fourth of $4,000 for 70% of PIE Corporation’s stock. Ed recognizes $6,000 gain on
Required
the transaction. His basis in stock received is $10,000.
1 Standard No 3 3 6 9
2 Option 1 Yes 2 4 7 10 Nontaxable Exchange of Property for
3 Option 2 Yes 3 5 8 11 Stock—Section 351 Transfers
Note: Each installment is based on annualized income for the number of months In a nontaxable Section 351 exchange, the corporation takes the
given the method. For example, if using the Standard method the third installment transferor’s basis in the transferred property. No gain or loss is
is based on annualized income from the first six months. recognized if one or more persons transfer cash or property to a
corporation solely in exchange for stock if the person or persons
Related forms: control the corporation immediately after the exchange. Control
• Form 8842 (Election To Use Different Annualization Periods is defined as owning at least 80% of the voting stock and 80% of
for Corporate Estimated Tax) is filed to make the all other classes of stock.
election to use optional methods 1 or 2. Example: Mr. Bean owns a sole proprietorship, which contains assets with
• Form 1120-W. Used by corporations to estimate FMV of $10,000 and basis of $2,000. He changes the business entity to
amount of required payments. This form is retained a corporation, and transfers the assets from the sole proprietorship to the
in the corporation’s records and not filed with the corporation in exchange for 100% of the corporation’s stock. The exchange
IRS. qualifies under IRC Sec. 351, and no gain is recognized on the transaction.
• Form 2220. Used to figure underpayment penalty or
to show exception to penalty under the annualized  Note:  Nonrecognition treatment under IRC Sec. 351 does
income method. not apply to: (1) transfer of property to an investment company,
(2) transfer of property in a bankruptcy in exchange for stock used
to pay creditors or (3) stock received in exchange for the corpora-
Quick Refund of Estimated Tax tion’s debt or for interest on the corporation’s debt that accrued
A corporation that has overpaid its estimated tax may apply for a
while the transferor held the debt.
quick refund if the overpayment is:
Basis. See Basis of Property Exchanged for Corporate Stock on
1) At least 10% of its expected income tax liability and
Page C-4. Generally, a corporation’s basis in property received
2) At least $500. under IRC Sec. 351 is equal to the transferor’s basis. However,
To apply for a quick refund, complete Form 4466 (Corporation Ap- IRC Sec. 362(e) includes a carryover basis limitation to prevent
plication for Quick Refund of Overpayment of Estimated Tax). Mail (1) the importation of built-in losses into the U.S. by transferors
Form 4466 to the IRS service center specified in the instructions of who are not subject to U.S. tax and (2) the double deduction of
Form 4466 before the 16th day of the fourth month after the end a single economic loss by transferring built-in loss property to a
of the tax year, and before the tax return is filed. Attach a second corporation in a carryover basis transaction with the transferee
copy to the corporation’s tax return. An extension of time to file the deducting a loss on the sale of the property and the transferor
tax return will not extend the time to file Form 4466. deducting a loss on the sale of stock.

Replacement Page 1/2018 2017 Tax Year  |  Small Business Quickfinder ® Handbook C-3
 Basis of Property Exchanged for Corporate Stock
Tax-Free Exchanges Under Section 351
Taxable Exchanges That Do Not Qualify Under Section 351
—Transferors have at least 80% control after the exchange—
Shareholder’s basis in stock received Corporation’s basis in property received Shareholder’s basis in stock received Corporation’s basis in property received
equals: [IRC Sec. 358(a)] equals: [IRC Sec. 362(a)] equals FMV of stock received which is equals FMV of the property received,
measured by: which is measured by:
+ Adjusted basis of property transferred + Adjusted basis of the property in the + FMV of property transferred (adjusted + Adjusted basis of the property in the
+ Recognized gain hands of the transferor basis plus or minus gain or loss hands of the transferor
+ Cash paid + Gain recognized by the transferor recognized by the transferor) + Gain recognized by the transferor
+ Liabilities assumed + Cash paid – Loss recognized by the transferor
– Cash received Note: The general rule of Section 1001
– FMV of property received (gain or loss equals difference between
– Liabilities transferred amount realized and adjusted basis)
applies.
Note: Shareholders who transfer property to a corporation in a Section 351 Notes:
exchange recognize gain only up to the amount of boot received (money or • Shareholders who are not in control of a corporation immediately after a transfer
property other than the corporation’s stock). Liability relief is not considered boot recognize gain or loss as if they sold the property at its FMV to the corporation.
for determining gain under these rules [IRC Sec. 357(a)]. However, gain may be • Corporations never recognize gain or loss on the receipt of money or property in
recognized if liabilities exceed basis of the contributed property [IRC Sec. 357(c)]. exchange for their own stock. (IRC Sec. 1032)
See Property Subject to Liabilities below.

Group transfers. The 80% control test may be met

Example: Wilbur and Orville enter into an agreement to purchase 100% of
by a group of investors, and the group can
the stock of Wright Corporation. Wilbur agrees to contribute $6,000 cash
include current shareholders. However, a
on July 31 in exchange for 50 shares of stock. Orville agrees to contribute
transfer from a current shareholder is not
property with a FMV of $6,000 and an adjusted basis of $2,000 on October 31
recognized for purposes of the 80% rule if
in exchange for 50 shares of stock. Since Wilbur and Orville control Wright
(1) a small amount is transferred, and (2) the purpose is to qualify
Corporation immediately after the transfer and since the exchanges were
the other transferors for nonrecognition treatment [Reg. 1.351-
made in accordance with a predetermined agreement, Section 351 treatment
1(a)(1)(ii)]. The amount transferred will not be considered a small
applies. Neither shareholder recognizes gain on the exchange. Wilbur’s basis
amount if the amount transferred equals or exceeds 10% of the
in stock is $6,000. Orville’s basis in stock is $2,000.
FMV of stock already owned or to be received for services by the
transferor. (Rev. Proc. 77-37, Sec. 3.07) Holding period. A corporation’s holding period for an asset re-
ceived in a Section 351 transfer includes the time the asset was
Example: Al owns 100% of Offline, Inc., which has stock valued at $25,000.
held by the transferor. Likewise, a shareholder’s holding period for
Bob wants to purchase a 50% ownership interest in the corporation by means
stock acquired in a 351 transfer includes the period the shareholder
of contributing equipment with a FMV of $25,000 in exchange for stock. Bob’s
held the property before the exchange. (IRC Sec. 1223)
basis in the equipment is $5,000.
Al and Bob want the transaction to qualify for nonrecognition treatment under
IRC Sec. 351 so that Bob will not have a taxable gain. Al contributes $2,500 Property Subject to Liabilities
in cash for additional stock. It is necessary for Al (the existing shareholder) to In a Section 351 exchange, if a shareholder contrib-
transfer an asset with a FMV of at least 10% of the FMV of the corporation utes property subject to liabilities, the shareholder’s
in order to include his stock in the 80% control test and have the transaction basis in the stock received is reduced by the amount
be recognized under IRC Sec. 351. As a group, Al and Bob meet the 80% of liability relief (IRC Sec. 358). If liabilities exceed
ownership rule, and the transaction qualifies for nonrecognition treatment. the shareholder’s adjusted basis in the property, gain
is recognized on the excess and the shareholder’s
If Al does not make a capital contribution in exchange for stock, or if he pur-
basis in the stock is zero. Exception: Under IRC Sec.
chases only a small amount, the 80% control test will not be met and Bob will
357(c)(3), liability relief is not included in the computation if the
recognize a $20,000 gain on the transaction.
payment of the liability “would give rise to a deduction.”
Solely in exchange for stock. Nonrecognition of gain applies
only to amounts transferred solely in exchange for stock. If the
shareholder receives cash or other property, gain is recognized up
to the amount of cash or FMV of other property received. Securities
are considered property for purposes of IRC Sec. 351.

Example: Shelly transfers property with FMV of $20,000 and adjusted basis of
$12,000 to Magnolia Corporation in exchange for 80% of its stock. In addition
to stock, she receives $3,000 in cash. Although the transfer qualifies under IRC
Sec. 351, Shelly recognizes gain of $3,000. Her basis in the stock is $12,000
(adjusted basis of property transferred, plus gain, less cash received). The
corporation’s basis in the property is $15,000 (transferor’s basis plus gain
recognized by transferor).

Immediately after the exchange. The phrase immediately after

the exchange does not necessarily require simultaneous exchang-
es as long as the transfers are made pursuant to a predetermined
agreement. [Reg. 1.351-1(a)(1)]

C-4 2017 Tax Year | Small Business Quickfinder ® Handbook

 Under the Tax Cuts and Jobs Act, special allocation rules apply to PTTP distributions if the terminated S corporation (1) was an
S corporation before December 22, 2017; (2) revoked its S corporation election during the two-year period beginning on December
22, 2017 and (3) had the same owners on December 22, 2017 and the revocation date.
Election to distribute AE&P first. An election is available to make the S corporation must reduce its accumulated adjustments
distributions first from AE&P. The election is made on a year-by-year account. (CCA 201421015)
basis. See Reg. 1.1368-1(f).
 Note:  Some S corporations have a retained earnings account Comparing AAA and Stock Basis
called previously taxed income (PTI). PTI represents undistributed How items affect a shareholder’s basis in stock vs. the corporate
earnings from pre-1983 S corporation years. See the instructions AAA is illustrated in the following chart.
for Schedule M-2, Form 1120S, for more information.
Item Stock Basis AAA
Original basis in stock Increase No Effect
Post-Termination Transition Period
When a corporation’s S status terminates, a post-termination tran- Stock purchase Increase No Effect
sition period (PTTP) begins [IRC Sec. 1377(b)]. During the PTTP, Taxable income Increase Increase
distributions from the AAA retain their character as nontaxable Nontaxable income Increase No Effect
distributions (to the extent of stock basis). The distributions reduce Capital gains Increase Increase
the shareholder’s basis [IRC Sec. 1371(e)(1)]. Any AAA remaining Deductible expenses Decrease Decrease
after the PTTP ends can no longer be distributed tax free. Nondeductible expenses Decrease Decrease
Election. With the consent of all shareholders to whom distributions Tax-exempt related expenses Decrease No Effect
are made during the PTTP, the corporation can elect to treat distribu- Ordinary and capital losses Decrease Decrease
tions as dividends up to the AE&P of the corporation. The election is
Depletion in excess of basis Increase Increase
made by attaching a statement to Form 1120 for the year the PTTP
Depletion not in excess Decrease Decrease
ends. The statement should contain a declaration that
the corporation elects to have IRC Sec. 1371(e) Nontaxable distributions (FMV) Decrease Decrease
(2) apply to distributions during the period, and Taxable distributions of AE&P No Effect No Effect
should be signed by a corporate officer, with all
shareholders who received PTTP distributions
 Notes: 
• The shareholder’s stock basis cannot be decreased below zero;
signing the consent. (Reg. 18.1371-1)
however, the corporate AAA can be negative.
The PTTP ends the later of [IRC Sec. 1377(b)]:
• The chart above assumes the S corporation has AE&P. Tax-
• One year after the PTTP begins, exempt income and related expenses are recorded in the OAA,
• Due date for last S corporation return, including extensions or not in AAA. If the corporation has no AE&P, the OAA is not used
• 120 days after a court decision, agreement with the IRS or audit and the taxability of distributions is not determined by reference
determination stating that the corporation did not qualify as an S to AAA, but by the amount of stock basis (nontaxable to extent
corporation. of basis; capital gain in excess of basis).

Deemed Dividends S Corporation Example

If an S corporation wants to make dividend distributions, but lacks
sufficient capital, the corporation may elect to make a deemed divi-
dend. The dividend is considered to have been made on the last day
of the tax year, even though no money is distributed. The amount
of the deemed dividend is treated by the shareholder as dividend
income, and a subsequent capital contribution that increases the
basis of his stock.
Election. The election is made by attaching a statement to the S
corporation’s timely filed original or amended Form 1120S for the
year in which the distributions are made. The election is irrevocable
and made on a year-by-year basis. See Reg. 1.1368-1(f).
Property Distributions
When property is distributed, the shareholder uses the
FMV of the property to figure the tax effect and the
adjustment to basis of his stock. If the property is
appreciated property, the S corporation is consid-
ered to have sold the property to the shareholder
at FMV, and recognizes gain accordingly. [IRC
Sec. 311(b)]
Reporting. An S corporation that distributes property other than
cash to shareholders attaches a statement to its Form 1120S pro-
viding (1) the date the property was acquired, (2) the date of the
distribution, (3) the property’s FMV on the date of the distribution
and (4) the corporation’s basis in the property.
 Note:  In an informal Chief Counsel Advice, the IRS says that
an S corporation’s disallowed loss under IRC Sec. 311(a) for dis-
tributions of stock or property that aren’t in complete liquidation of
its stock will be treated as a nondeductible, noncapital expense
under IRC Sec. 1367(a)(2)(D). Thus, the Section 311(a) loss
will reduce the shareholders’ bases in S corporation stock, and
Replacement Page 1/2018
A comprehensive S corporation example with line-by-line in-
structions to help in the preparation of Form 1120S
Compare with Forms 1065 and 1120. This example reflects the
same business activity as the examples in Tab B (Partnerships) and
Tab C (C Corporations). Compare the differences in tax reporting
for each type of business entity.
History. Jerry and Bob agreed to go into business together operat-
ing a skydiver training facility called “Shout and Jump.”
Organizational costs and start-up costs/amortization. Jerry
and Bob met with an accountant and an attorney to discuss which
business entity would best fit their needs. After determining they
preferred the corporate form of business but wanted flow-through
treatment because they expect to generate significant profits that
won’t be left in the business, these professionals advised them to
form an S corporation (see the Entity Comparison Chart on Pages
M-2 and M-3). The accountant helped establish a bookkeeping
system. The attorney drafted an incorporation agreement. The
accountant’s fee was $1,200; the attorney’s fee was $1,800. Both
are considered organizational costs. The corporation paid advertis-
ing costs of $2,016 before its grand opening, which is considered
a start-up cost.
The expenses for the accountant, attorney and advertising are con-
sidered capital expenses because the costs were incurred before
the start of business operations. Such expenses may be deducted
as business expenses in an amount not exceeding $5,000 for
start-up costs and $5,000 for organizational costs. Expenditures
in excess of $5,000 for each type of cost are amortized over a
period of 180 months. Taxpayers are deemed to elect to deduct
(and, if applicable, amortize) start-up and organizational costs in
the year the business begins. No election statement is required.
2017 Tax Year  |  Small Business Quickfinder ® Handbook D-11
Instead, deduct/amortize costs in the year business begins (Regs.
Income Statement per Books
1.195-1, 1.248-1 and 1.709-1). Shout and Jump, Inc., deducts May 1 – December 31, 2017
both the organizational costs of $3,000 and the start-up costs of
Income:
$2,016. These two expenses are deducted on Form 1120S, page
Jump Fees ............................................ $ 242,600.00
1, line 19, Other deductions. See the Other Deductions schedule Merchandise Sales ............................... 129,280.00
on Page D-21. Training Fees ........................................ 41,812.00
S corporation election (Form 2553). To elect S corporation status, Interest Earned ..................................... 316.04
a corporation must file Form 2553 (Election by a Small Business Gross Income .......................................................................... $ 414,008.04
Corporation). See S Corporation Election (Form 2553) on Page Cost of Goods Sold:
Beginning Inventory .............................. $ 0.00
D-3 for more information about making the election. Purchases............................................. 67,418.00
Provisions of the Shout and Jump, Inc., incorporation agree- Ending Inventory................................... ( 5,726.00 )
ment: Cost of Goods Sold ................................................................... $ 61,692.00
Gross Profit................................................................................ $ 352,316.04
• Shout and Jump, Inc., elects to be taxed as an S corporation.
Expenses:
• The corporation authorizes one million shares of stock at par Accounting ($4,200 – $1,200) .............. $ 3,000.00
value $100 per share. Jerry makes a capital contribution of Advertising ($13,183 – $2,016) ............ 11,167.00
$69,000 in exchange for 690 shares of common stock. Bob Bank Charges ....................................... 280.00
contributes $46,000 in exchange for 460 shares. Business Insurance .............................. 3,440.00
Depreciation ......................................... 47,800.00
• The corporation pays for an airplane, hangar rental, office equip- Fuel....................................................... 20,840.00
ment, rental parachutes, inventory and any other expenses Health Insurance .................................. 8,000.00
directly associated with business operations. Interest Expense................................... 6,174.58
• The corporation pays group medical insurance premiums for all Meals and Entertainment...................... 560.00
Miscellaneous ....................................... 404.00
employees.
Office Supplies ..................................... 490.00
• Employees pay for their own safety equipment, uniforms, trade Organizational and Start-up.................. 5,016.00
publications, licenses and professional education. Note: These Payroll Taxes ........................................ 10,934.37
expenses are deductible as employee business expenses on Rent ...................................................... 14,200.00
Schedule A of Forms 1040, subject to the 2%-of-AGI floor. Repairs and Maintenance..................... 1,986.00
Utilities .................................................. 5,270.00
Compare with the same expenses for partners (see Partnership Wages .................................................. 115,482.00
agreement on Page B-12), which reduce SE tax and are not Total Expenses .......................................................................... $ 255,043.95
subject to the 2% floor. Net Income per Books............................................................. $ 97,272.09
• The corporation adopts a calendar tax year.
• The corporation uses the cash method of accounting. Note: Un- Balance Sheet as of December 31, 2017
der the general rule, a business that holds inventory must use the Assets:
accrual method of accounting for purchases and sales. However, Cash ..................................................... $ 172,329.31
Inventory ............................................... 5,726.00
an exception exists for taxpayers with average annual gross Computer .............................................. 6,000.00
receipts of $1 million or less. Shout and Jump, Inc., is eligible to Office Equipment .................................. 15,000.00
use the cash method under this exception. Inventory is accounted Airplane ................................................ 175,000.00
for in the same manner as nonincidental materials and supplies. Accumulated Depreciation.................... ( 47,800.00 )
See Small Businesses Eligible for Cash Method on Page L-2. Total Assets.............................................................................. $ 326,255.31
• Shareholder wages are as follows: Jerry received $36,500 and Liabilities:
Bob received $30,800. The corporation also paid group medical Sales Tax Payable ................................ $ 1,288.00
Bank Loan Payable .............................. 132,695.22
insurance premiums of $1,600 for each shareholder-employee.
Total Liabilities ......................................................................... $ 133,983.22
The three other employees received combined wages of $48,182,
Equity:
and $4,800 of combined group medical insurance premiums were Common Stock ..................................... $ 115,000.00
paid for them. Note: Jerry and Bob are paid as employees of Current Earnings .................................. 97,272.09
the corporation. Compare wages paid to shareholder-employ- Distributions .......................................... ( 20,000.00 )
ees with guaranteed payments to partners in the Partnership Total Equity .............................................................................. $ 192,272.09
Example on Page B-10. Total Liabilities + Equity.......................................................... $ 326,255.31

Depreciation Schedule
Asset Placed in Service Cost Section 179 Depreciable Basis
Computer ................................... May 1, 2017 $ 6,000 $ 6,000 $ 0
Office Equipment ....................... May 1, 2017 15,000 15,000 0
Airplane ..................................... May 1, 2017 175,000 4,0001 171,000
Totals $ 196,000 $ 25,000 $ 171,000
Airplane: Book and Tax Depreciation—MACRS AMT Depreciation
5-year MACRS
5-year AMT Section 179.............................................................. $ 25,000 Section 179............................................. $ 25,000
Depreciable Basis Regular Depreciation ............................................... 22,800 AMT Depreciation ................................... 17,100
$171,000 Total Depreciation .................................................... $ 47,800 Total AMT Depreciation .......................... $ 42,100
AMT Adjustment: $47,800 – $42,100 = $5,700
Short-Year Depreciation Calculation2
May 1 – December 31 (8 months) Book and Tax: 200% DB AMT: 150% DB
Midpoint September 1 $171,000 × 1⁄5 × 200% × 4⁄12 = $22,800 $171,000 × 1⁄5 × 150% × 4⁄12 = $17,100
1
Amount corporation chose to elect—could have elected up to $175,000 for this asset.
2
See Short Tax Year—MACRS on Page J-4.
D-12 2017 Tax Year | Small Business Quickfinder ® Handbook
 Income and Expense Chart for a Decedent (Continued)
—Cash Method of Accounting—
Category Where to Report Explanation
Charitable Final Form 1040 Amounts contributed before death. (IRC Sec. 170)
Contributions Form 1041, Schedule A Contributions are deductible only if decedent’s will requires that contribution be made from gross taxable
income [Reg. 1.642(c)-1]. AGI limitations applicable to individuals do not apply to estates.
Form 706, Schedule O Value of property in decedent’s estate that was transferred by decedent (via his will) or by qualified disclaimer
to a charity described in IRC Sec. 2055(a).
Claims Against Estate Form 706, Schedule K Enforceable personal obligations of decedent at time of death plus interest accrued up to time of death.
Credit for the Elderly Final Form 1040, Schedule R Calculate as though decedent lived full year.
or the Disabled
Deductions in Respect Form 706 and Form 1041 (or Business expenses, income-producing expenses, interest and taxes for which decedent was liable but which
of a Decedent (DRD) beneficiary’s return) are not deductible on final Form 1040.
Depreciation Final Form 1040 Depreciation for period ending on date of death. Short tax year rules apply; see Tab J.
Form 1041, Form 4562 If estate continues to operate decedent’s business or rental property, depreciation is allocated between estate
and income beneficiaries (assuming estate is claiming an income distribution deduction) on basis of income
allocated to each. Estate is not allowed Section 179 deduction. Short tax year rules apply for any tax year of the
estate less than 12 months. See Tab J for short tax year rules.
Dividend Income Final Form 1040, Schedule B Dividends received through date of death.
Form 1041, Schedule B (or Dividends received after date of death. Estates and trusts are subject to same reduced tax rate on qualified
beneficiary’s return) dividends as individuals (20% maximum rate for trusts and estates in the 39.6% tax rate bracket).
Form 706, Schedule B and Form Dividends declared to shareholders of record before death, but not available or received until after death (IRD).
1041 (or beneficiary’s return)
Earned Income Credit Final Form 1040, Schedule Available even if decedent’s return covers only a part year and decedent would not have qualified with a full
(EIC) EIC year’s income. A decedent’s credit is refundable.
Estate Tax Deduction Form 1041 (or beneficiary’s If federal estate tax was paid on IRD, a deduction can be claimed on the income tax return that reports the IRD.
Form 1040, Schedule A)
Exemptions Final Form 1040 Full amount allowed for decedent; no proration required. For decedent to claim exemption of a dependent,
decedent must have furnished over one-half of support for entire year.
Form 1041 An estate is allowed a $600 exemption even if first return period is less than 12 months.
Funeral Expenses Form 706, Schedule J Allowed only on Form 706. State law generally determines which items are deductible funeral expenses. Reg.
20.2053-2 classifies the following as funeral expenses if allowable under local law: tombstone, monument,
mausoleum, burial lot for decedent or family (including costs for future care) and transportation of the person
bringing body to burial place.
Income and Expenses Final Form 1040 Income received and expenses paid before death.
Generally Form 1041 (or beneficiary’s Income received and expenses paid after death, including income and expenses in respect of a decedent.
return)
Form 706 Income and expenses in respect of decedent (also reported on Form 1041 or beneficiary’s return).
Income in Respect of a Form 706 and Form 1041 (or All gross income that the decedent had the right to receive and is not includable on final Form 1040. If estate tax
Decedent (IRD) beneficiary’s return) is paid on this income, a deduction for estate tax paid can be claimed on the income tax return that reports income.
Income Tax Due on Form 706, Schedule K Federal and state income taxes unpaid at date of death, including tax due on final Form 1040 prepared and
Final Form 1040 filed after death.
Installment Sale Final Form 1040, Form 6252 Payments received through date of death.
Contracts Held Form 706 and Form 1041 (or If note cancels at death under decedent’s will, date-of-death value is reported on Form 706 and unrecognized
by Decedent beneficiary’s return) gain on Form 1041 (as IRD). If decedent and obligor are related, FMV of installment note cannot be less than
its face value.
Form 1041 (or beneficiary’s If note is self-canceling at death (referred to as a self-canceling installment note or SCIN), unrecognized gain is
return) included on Form 1041 (as IRD).
Form 706 and Form 1041 (or If contract is not canceled at death, difference between face amount of obligation and decedent’s basis is
beneficiary’s return) (attach reported on Form 706 and is considered IRD [IRC Sec. 691(a)(4)]. As payments are collected, recipient reports
Form 6252) income using decedent’s gross profit percentage.
Interest Earned Final Form 1040, Schedule B Interest received through date of death plus original issue discount (OID) earned through date of death.
Form 706, Schedule B and Interest accrued but unpaid at date of death is IRD.
Form 1041 (or beneficiary’s
return)
Form 1041 (or beneficiary’s Interest earned and received after date of death.
return)
Interest Expense Final Form 1040 Deductible interest paid before death.
Form 706 and Form 1041 (or Deductible interest expense accrued before death but paid after death (DRD). Nondeductible personal interest
beneficiary’s return) accrued before death but paid after death is allowed as a debt of estate on Form 706, Schedule K.
Form 1041 (or beneficiary’s Interest paid after death. Use Form 4952 for investment interest expense. Interest expense on decedent’s
return) personal residence is qualified residential interest only if a beneficiary uses it as a residence during estate
administration [IRC Sec. 163(h)(4)]. Otherwise, the interest is either investment interest (subject to limitations
on Form 4952), rental interest expense or nondeductible personal interest. Investment interest expense
attributable to tax-exempt income is not deductible.
IRA, SEP, SIMPLE, Form 706, Schedule I The account balance of all tax-deferred benefits at the time of death. Benefits are taxable to the beneficiary
Keogh, 401(k), etc. when distributed (IRD). Beneficiaries can roll over IRA funds.
Final Form 1040 Amounts actually received before death.
Form 1041 (or beneficiary’s Distributions made after death (IRD). These distributions are not subject to the 10% early withdrawal penalty.
return) [IRC Sec. 72(t)(2)(A)(ii)]
Table continued on the next page
2017 Tax Year | Small Business Quickfinder ® Handbook H-3
 Income and Expense Chart for a Decedent (Continued)
—Cash Method of Accounting—
Category Where to Report Explanation
Medical Expenses Final Form 1040, Schedule A Medical expenses paid before death. Can elect to deduct medical expenses incurred before death but paid
from the estate within one year of the day following death [Reg. 1.213-1(d)]. Election does not apply to medical
expenses for a decedent’s dependents. To elect, attach a statement to Form 1040 stating the estate has waived
the right to claim medical expense for estate tax. With the election, deduction is taken on Form 1040, Schedule
A in year costs were incurred (a Form 1040X may be needed). Amounts not allowed due to 10%-of-AGI
threshold cannot be claimed on Form 706.
Form 706, Schedule K Unpaid medical expenses at death are reported on Form 706 as a claim against the estate, unless an election
is made to report on decedent’s final Form 1040. Amounts deducted on Form 706 are not subject to the 10%
of AGI deduction threshold. If deduction taken on Form 1040, amount not allowed due to 10% of AGI threshold
cannot be claimed on Form 706. 7.5%
Form 1041 Any insurance reimbursements after death of amounts previously deducted on Form 1040. Report as IRD.
Miscellaneous Final Form 1040, Schedule A Miscellaneous itemized deductions paid before death.
Itemized Deductions Form 706, Schedule J or Form Unpaid miscellaneous itemized deductions at date of death are reported on Form 706. When paid, deduct on
1041 Form 1041 as DRD.
Form 1041 Incurred and paid after death: may be subject to 2% AGI limit. See Deductions on Page G-5.
Net Investment Form 8960 Estates are subject to the 3.8% net investment income tax. See Tab G for additional discussion.
Income Tax
Partnership Income Final Form 1040, Schedule E Income (or loss) up to date of death using any reasonable method of allocating income (loss). Allocation is often
(Loss) based on pro rata amount for year or interim closing of books.
Form 1041 (or beneficiary’s Income (or loss) after death not included on final Form 1040.
return)
Passive Losses Final Form 1040 Losses are allowed to extent of passive income, plus accumulated unused losses to extent they exceed any
increase in basis allocated to the activity. For example, if a passive activity’s basis is increased $6,000 upon
taxpayer’s death, and unused passive activity losses as of date of death are $8,000, decedent’s deduction is
$2,000 ($8,000 – $6,000).
Form 1041 Estates are subject to the same passive loss limitation rules as individuals. The fiduciary’s level of participation
determines the classification. If decedent actively participated in a rental real estate activity before death, the
estate will be allowed the special $25,000 rental real estate exemption for up to two years after decedent’s death.
Personal Residence Form 1041 The Section 121 exclusion of gain from sale of personal residence does not apply to estates. If personal
residence is a capital asset to the estate (either held for investment or rental purposes), estate can deduct loss
on sale. If property is used by estate beneficiaries for personal purposes, loss on sale is not deductible. If home
was not subject to probate and passed directly to heirs, sale of home is reported on beneficiaries’ Form 1040.
Real Estate, Final Form 1040, Schedule A Paid before death. General sales taxes deductible if state and local income taxes not deducted. [IRC Sec. 164(b)(5)]
State and Local Form 706, Schedule K and Real estate taxes accrued before death but paid after death.
Income Taxes Form 1041 (or beneficiary’s
return)
Form 1041 (or beneficiary’s Accrued and paid after death.
return)
Rental Income Final Form 1040, Schedule E Income and expenses received or paid before death.
and Expenses Form 706 and Form 1041 (or Income and expenses accrued before death but not actually received or paid until after death (IRD and DRD).
beneficiary’s return) Passive activity loss rules apply to estates (for Form 1041 reporting).
Form 1041 (use Schedule E of Income and expenses accrued and received or paid after death. Passive loss rules apply to estates.
Form 1040)
S Corporation Income Final Form 1040, Schedule E Pro rata share of income (or loss) up to death. Generally, amount of income (or loss) is computed as follows:
(Loss) S corporation income or loss for the year, divided by number of days in S corporation’s year, multiplied by number
of days shareholder was alive. Can elect under Section 1377(a)(2) to close S corporation books on day of death.
Form 1041 (or beneficiary’s Income (or loss) after date of death and not included on final Form 1040.
return)
Savings Bond Interest Final Form 1040 or Form 1041 Two options: (Rev. Rul. 68-145)
(Decedent did not 1) Executor elects to report interest accrued before death on final Form 1040. Interest accrued after death is
elect to report reported on Form 1041 (or beneficiary’s return) in year bond is redeemed or matures.
interest annually) 2) All interest (both before and after death) is reported on Form 1041 (or beneficiary’s return) in year bond is
redeemed, matures or an election is made to report income. Interest accrued before death is IRD. Alter-
natively, recipient of an inherited bond can elect to report interest annually. (Rev. Rul. 64-104)
Form 706, Schedule B FMV of bonds, including interest accrued up to date of death, which may be IRD.
Savings Bond Interest Final Form 1040 Interest accrued up to date of death.
(Decedent elected to Form 1041 (or beneficiary’s Interest accrued after death. Note that the last Series E bonds matured in 2010 and the last Series H bonds
report return) matured in 2009. These bonds stopped paying interest at that time and any deferred interest should have been
interest annually) recognized on the 1040 in the year the bond matured.
Form 706, Schedule B FMV of bonds as of date of death. No IRD.
Social Security Final Form 1040 Payments cease at death; therefore, subject to reporting on final Form 1040.
Standard Deduction Final Form 1040 Full amount allowed. No proration required.
Wages Final Form 1040 Wages received before death.
Form 706, Schedule F and Wages earned before death but received after death (IRD).
Form 1041 (or beneficiary’s
return)

H-4  2017 Tax Year  |  Small Business Quickfinder ® Handbook Replacement Page 1/2018
 Determining the Midpoint of Each Quarter in a Short Tax Year Short tax year depreciation is:
$100 × 1⁄5 × 2 × 5⁄12 = $17
Years consisting of anything other than four or eight months
For AMT Purposes. AMT depreciation allowed is:
1) Number of days in the short tax year .................................... 1) $100 × 1⁄5 × 1.5 × 5⁄12 = $13
2) Number of days in each quarter (line 1 divided by four)........ 2)
3) Number of days to midpoint (line 2 divided by two) .................. 3) Example #3: Bismarck Inc., with a short tax year beginning March 15 and
ending on December 31, placed in service on October 16 an item of five-year
4) Starting on the first day of the year, add the number of days property with a basis of $100. This is the only property the corporation placed
in each quarter (line 2) to determine the beginning and end-
in service during the short tax year. The depreciation method for this property
ing dates of each quarter. Then, find the midpoint of each
quarter. If a midpoint of a quarter is on a day other than the is the 200% DB method. The mid-quarter convention is used because the
first day or midpoint of a month, treat the property as placed property was placed in service in the last three months of the tax year.
in service or disposed of on the nearest preceding first day The property is treated as placed in service on September 1. (See chart in
or midpoint of that month ...................................................... 4) Example #1.) Bismarck Inc. is entitled to four months of depreciation for the
short tax year that consists of 10 months.
Example #1: Bismarck Inc., a calendar-year taxpayer, was incorporated on Short tax year depreciation is:
March 15. It has a short tax year of 91/2 months, ending on December 31. $100 × 1⁄5 × 2 × 4⁄12 = $13
During December of its first year, it placed property in service for which it must
use the mid-quarter convention.
Because this is a short tax year of other than four or eight full calendar months,
Computing Depreciation After Short Tax Year
For the tax years after the first short year, depreciation may be
the tax year consists of 292 days (including 17 days in March). Each quarter is
computed using either the simplified method or the allocation
73 days (292 days ÷ 4) and the midpoint of each quarter is the 37th day (73 ÷ 2).
method. The method chosen must be consistently used until the tax
The table below shows the quarters of the short year, the midpoint and the year that a switch to the MACRS SL method is required because it
date that property is treated as placed in service in each quarter. produces a larger depreciation deduction. Usually, both methods
Quarter Midpoint Date Placed in Service produce the same depreciation allowance.
March 15 – May 26 April 20 April 15 Simplified method. Depreciation for subsequent tax years is
May 27 – August 7 July 2 July 1 figured by multiplying the unrecovered basis of the property at
the beginning of the tax year by the applicable depreciation rate.
August 8 – October 19 September 13 September 1
October 20 – December 31 November 25 November 15 Example #4: The ABC Corporation had a short tax year starting August 1,
The last quarter of the short year begins on October 20, which is 73 days from 20X1 and ending December 31, 20X1. On August 9, 20X1, it placed in service
December 31, the end of the tax year. Day 37 of the quarter is November 25. seven-year property with a basis of $2,000.
Since the midpoint of the quarter is not the first or the midpoint of November, 20X1: First-year depreciation using the 200% DB method with the half-year
the property is treated as placed in service in the middle of November. convention calculation:
$2,000 × 1⁄7 × 2 × 2.5⁄12 = $119
Computing Depreciation for Short Tax Year Depreciation for 20X2 (a full 12 months) calculation:
MACRS percentage tables cannot be 20X2: ($2,000 – $ 119) = $ 1,881
used to determine depreciation for a $1,881 × (1⁄7 × 2) = $ 537
short tax year. Depreciation for the first Depreciation for 20X3 through 20X5 calculation:
recovery year in the recovery period is 20X3: ($2,000 – $ 656) × (1⁄7 × 2) = $384
computed by multiplying the taxpayer’s basis
20X4: ($2,000 – $ 1,040) × (1⁄7 × 2) = $274
in the property by the applicable depreciation rate.
20X5: ($2,000 – $ 1,314) × (1⁄7 × 2) = $196
Depreciation for the first tax year is computed by multiplying the
depreciation for a full first year by a fraction (that is, pro-rated). The Starting in the year 20X6, the method switches to SL depreciation.
numerator is the number of months (including parts of a month) SL Depreciation = Adjusted Basis/Remaining Life.
the property is treated as in service during the tax year (applying 20X6: ($2,000 – $ 1,510) ÷ 33.5 months × 12 = $176
the applicable convention), and the denominator is 12. 20X7: ($2,000 – $ 1,686) ÷ 21.5 months × 12 = $175
In 20X8, the remaining depreciation equals the remaining basis. 20X8: $2,000
When the half-year convention is used: – $1,861 = $139
 200% DB formula:
1 Midpoint Allocation method. Depreciation for each recovery year, or por-
Adjusted Basis × × 2 ×
Life 12 tion thereof, that falls within a tax year, whether the tax year is a
 150% DB formula for AMT purposes: 12-month year or a short tax year, is allocated to such tax year.
1 Midpoint For each recovery year included, depreciation attributable to such
Adjusted Basis × × 1.5 × recovery year is multiplied by a fraction, the numerator of which is
Life 12
the number of months (including parts of months) of the recovery
year that falls within the tax year and the denominator of which is
Example #2: Bismarck Inc., with a short tax year beginning March 15 and
12. The allowable depreciation for the tax year is the sum of the
ending on December 31, placed in service on March 16 an item of five-year
depreciation figured for each recovery year.
property with a basis of $100. This is the only property the corporation placed
in service during the short tax year. The depreciation method for the property
is the 200% DB method. Straight-Line Method
The property is treated as placed in service on August 1. Bismarck Inc. is To avoid complex calculations in figuring depreciation for years after
entitled to five months of depreciation for the short tax year that consists of a short tax year, the taxpayer may elect under IRC Sec. 168(g)(7)
10 months. to depreciate all assets placed in service during the short year
under the SL method.
2017 Tax Year | Small Business Quickfinder ® Handbook J-5
Under SL, depreciation after the short tax year is determined by
dividing the number one by the years remaining in the recovery
period at the beginning of a year, then multiplying the result by the
unrecovered adjusted basis. When figuring the number of years
remaining, consider the convention used in the year the property
is placed in service. If the number of years remaining is less than
one, the depreciation rate for that tax year is 1.0 (100%).
Example #5. Same facts as Example #4 except that SL is elected.
Short tax year depreciation in first year is:
20X1: $ 2,000 × 1⁄7 × 1 × 2.5 ÷ 12 = $60
Depreciation for years 20X1 through 20X7 is as follows:
20X2: $ 2,000 – $ 60 = $ 1,940 × 1 ÷ 6.7917 yrs = $286
(6.7917 years is equal to 6 years + 9.5 months)
20X3: $ 1,940 – $ 286 = $ 1,654 × 1 ÷ 5.7917 yrs = $286
20X4: $ 1,654 – $ 286 = $ 1,368 × 1 ÷ 4.7917 yrs = $285
20X5: $ 1,368 – $ 285 = $ 1,083 × 1 ÷ 3.7917 yrs = $286
20X6: $ 1,083 – $ 286 = $ 797 × 1 ÷ 2.7917 yrs = $285
20X7: $ 797 – $ 285 = $ 512 × 1 ÷ 1.7917 yrs = $286
20X8: $ 512 – $ 286 = $ 226 × 100% = $226
Except for the first and last year, SL will thus produce the same results as if
the short year rules were not used.
20X1: Using short year rules = $60
20X2 through 20X7: $2,000 ÷ 7 = $286
20X8: Remaining unrecovered adjusted basis  ×  100% = $224
(100% for property acquired and placed in service after
September 27, 2017)
Special (Bonus) Depreciation
For 2017, a special (bonus) depreciation allowance equal to 50%
of the qualified property’s depreciable basis (cost or other basis
less Section 179 deduction and credits) is available.
The amount of the special depreciation allowance is not affected by
a short tax year or by the applicable convention. However, assets
for which the special depreciation allowance is claimed are still
counted for determining whether the mid-quarter convention ap-
plies for the normal MACRS deduction. If the special depreciation
allowance is taken, there are no AMT adjustments for depreciation
for that asset for the year placed in service or any later year.
See Special (Bonus) Depreciation in Tab 10 of the 1040 Quick-
finder® Handbook for more information.
Section 179 Deduction in a Short Tax Year
When a Section 179 deduction is elected in a short year, no prora-
tion is required. Section 179 yearly limitations apply as if the short
year was a full tax year. [Reg. 1.179-1(c)(1)]
Allowed or Allowable Depreciation
Taxpayers must reduce the basis of depreciable property by the great-
er of allowed or allowable depreciation [IRC Sec. 1016(a)(2)]. Allowed
depreciation is the depreciation deduction claimed on an income tax
return accepted by the IRS. Allowable depreciation is the amount a
taxpayer is entitled to deduct under the Code and regulations, etc.
Sometimes a taxpayer will discover upon disposition of an as-
set that not all allowable depreciation was claimed, because the
amount on the returns was less than that allowable. If so, the
taxpayer may automatically change the depreciation accounting
method for the under-depreciated assets, so as not to lose the
benefit of the full allowable depreciation. (Rev. Proc. 2007-16)
This does not mean that depreciation should be corrected only
upon asset disposition. It means that a taxpayer that discovers at
disposition that it has under depreciated an asset has automatic
IRS consent at that time to correct the depreciation and claim the
remainder allowable in the disposition year.
See Tab L for more information on accounting method changes.
J-6  2017 Tax Year  |  Small Business Quickfinder ® Handbook
Depreciation Recapture
Ordinary Income Treatment
When depreciation is recaptured, some or all of the gain may be
treated as ordinary income. The depreciation recapture rules often
convert what would otherwise have been a Section 1231 gain
(potentially taxed as a long-term capital gain) to ordinary income.
U Caution:  Any ordinary income due to Section 1245 or 1250
recapture cannot be reported on the installment method. The entire
recapture income is recognized in the year of sale, regardless of
the amount of payments received that year.
Section 1245 Depreciation Recapture
Section 1245 property is generally personal property (either tan-
gible or intangible) that is (or has been) subject to depreciation
or amortization. Examples include machinery, furniture, vehicles,
livestock, franchises, covenants not to compete and Section 197
goodwill.
When Section 1245 property is disposed of (whether by sale,
exchange or involuntary conversion) at a gain, the gain is treated
as ordinary income up to the lesser of: [IRC Sec. 1245(a)]
• The sum of all depreciation or amortization deductions allowed or
allowable (see Allowed or Allowable Depreciation in the previous
column) or
• Gain realized on the disposition.
Any gain recognized that is more than the ordinary income from
depreciation recapture is a Section 1231 gain.
Section 1250 Depreciation Recapture
Section 1250 property is any depreciable real property that is not
and never has been Section 1245 property [Reg. 1.1250-1(e)].
Section 1250 property includes a depreciable leasehold of land or
of Section 1250 property. However, a fee simple interest in land is
not included because it is not depreciable.
Gain on the disposition of Section 1250 property is treated as
ordinary income to the extent of additional depreciation allowed
or allowable on the property.
Additional Depreciation
Section 1250 Property
Held one year or less Held longer than one year
All the depreciation allowed or Excess of the depreciation allowed or
allowable is additional depreciation. allowable over the amount that would
have been allowed using the SL method.
Unrecaptured Section 1250 Gain
The term unrecaptured Section 1250 gain generally refers to gain
attributable to SL depreciation on real property. For noncorporate
taxpayers, this gain is treated as a capital gain subject to the
maximum 25% rate [IRC Sec. 1(h)(1)(E)]. For how to calculate
unrecaptured Section 1250 gain, see Tab 7 in the 1040 Quick-
finder® Handbook.
Depreciation Recapture—C Corporations
Section 1245 recapture is computed the same way for corporations
and individuals. However, Section 1250 recapture is different for C
corporations [and S corporations that were C corporations in the
last three years—IRC Sec. 1363(b)(4)].
Under IRC Sec. 291(a)(1) for a sale of depreciable real estate that
is Section 1250 property, 20% of the excess of the amount that
would be treated as ordinary income if the property were Section
1245 property, over the amount treated as ordinary income under
IRC Sec. 1250, is additional ordinary income.
Replacement Page 1/2018
Tax Cuts and Jobs Act of 2017
Enacted on December 22, 2017, the Act makes significant changes to individual and business taxes. Most provisions are effective
beginning after 2017. See the Handbook Updates section of the Quickfinder website (tax.thomsonreuters.com/quickfinder) for a
table summarizing the Act’s key provisions.
What’s New

Tab Q Topics
Inflation-Adjusted Amounts..................................... Page Q-1
Tax Legislation........................................................ Page Q-1
Additional Tax Relief for Hurricane Victims............. Page Q-1
Disaster Tax Relief Act............................................ Page Q-2
Expired Tax Breaks................................................. Page Q-4
Key 2017 IRS Rulings and Tax Cases.................... Page Q-5
Quick List of Key 2017 IRS Rulings and
Tax Cases............................................................. Page Q-5
Identity Theft—Safeguarding Client Information..... Page Q-6
Responding to a Security Breach of Client Data.... Page Q-6
Inflation-Adjusted Amounts
For a summary of inflation-adjusted amounts for 2017 (plus 2018
and 2016 and prior years) see the Business Quick Facts Data
Sheet on Page A-1.
Tax Legislation
Cures Act
Enacted on December 13, 2016, the 21st Century Cures Act (Cures
Act) was designed to help accelerate medical product development
and bring new innovations and advances to patients who need
them faster and more efficiently. But it also included a provision that
is good news for small employers wanting to help employees with
medical expenses. It added IRC Sec. 9831(d) exempting qualified
small employer health reimbursement arrangements (QSEHRAs)
from the Affordable Care Act’s market reform penalty, effective for
tax years after 2016. See Qualified Small Employer Health Reim-
bursement Arrangements (QSEHRAs) on Page K-10 for details.
Disaster Tax Relief Act
Enacted on September 29, 2017, the Disaster Tax Relief and
Airport and Airway Extension Act of 2017 (Disaster Tax Relief
Act) provides tax relief related to Hurricanes Harvey, Irma and
Maria. Most of these tax provisions apply to hurricane victims and
taxpayers located or doing business in the related disaster areas.
However, the charitable contribution relief provisions benefit any
taxpayer (including both individuals and corporations) that makes
a qualifying charitable contribution for Hurricanes Harvey, Irma
and Maria relief.
Disaster relief provisions. See the table Disaster Tax
Relief Act on Page Q-2 for the specific provisions.
Disaster zones and disaster areas. The Disaster
Tax Relief Act uses two terms when defining which
taxpayers are eligible for the special provisions.
• Disaster area. The area with respect to which a major disaster
has been declared by the President before September 21, 2017,
under section 401 of the Robert T. Stafford Disaster Relief and
Emergency Assistance Act by reason of the hurricane.
• Disaster zone. That portion of the hurricane disaster area de-
termined by the President to warrant individual or individual and
public assistance from the federal government under the Robert
T. Stafford Disaster Relief and Emergency Assistance Act by
reason of the hurricane.
Replacement Page 1/2018
U Caution:  In many cases, an eligible individual not only has to
reside in the designated area or zone but also have sustained an
economic loss or hardship because of the hurricane.
Hurricanes Harvey and Irma
Federally Declared Disaster Areas and Zones
Hurricane Harvey Texas counties: Aransas, Austin, Bastrop, Bee, Brazoria,
Disaster Zone Caldwell, Calhoun, Chambers, Colorado, DeWitt, Fayette,
Fort Bend, Galveston, Goliad, Gonzales, Grimes, Hardin,
Harris, Jackson, Jasper, Jefferson, Karnes, Kleberg,
Lavaca, Lee, Liberty, Matagorda, Montgomery, Newton,
Nueces, Orange, Polk, Refugio, Sabine, San Jacinto, San
Patricio, Tyler, Victoria, Walker, Waller and Wharton.
Hurricane Harvey Above counties plus the following: Bexar, Burleson, Comal,
Disaster Area Dallas, Guadalupe, Jim Wells, Madison, Milam, San
Augustine, Tarrant, Travis and Washington.
Hurricane Irma Florida counties: Alachua, Baker, Bradford, Brevard,
Broward, Charlotte, Citrus, Clay, Collier, Columbia,
Disaster Zone
DeSoto, Dixie, Duval, Flagler, Gilchrist, Glades, Hardee,
Hendry, Hernando, Highlands, Hillsborough, Indian River,
Lafayette, Lake, Lee, Levy, Manatee, Marion, Martin,
Miami-Dade, Monroe, Nassau, Okeechobee, Orange,
Osceola, Palm Beach, Pasco, Pinellas, Polk, Putnam,
Sarasota, Seminole, St. Johns, St. Lucie, Sumter,
Suwannee, Union and Volusia.
Georgia counties: Camden, Charlton, Chatham, Coffee,
Glynn, Liberty and McIntosh.
Hurricane Irma Above counties plus the following:
Disaster Area Florida counties: All remaining counties.
Georgia counties: All remaining counties.
Note: Counties shown are as of the date of publication. See https://www.fema.
gov/disasters for Hurricane Maria disaster areas as well as locations in Puerto
Rico and the U.S. Virgin Islands included in the Hurricane Irma disaster area.
Additional Tax Relief for
Hurricane Victims
In addition to the Disaster Tax Relief Act enacted by Congress,
the IRS provided various relief provisions that may be available to
taxpayers affected by Hurricanes Harvey, Irma and Maria.
In general, the IRS is providing some relief to individuals and
businesses anywhere in Florida, Georgia, Puerto Rico and the
Virgin Islands, as well as in parts of Texas, Louisiana and South
Carolina. For some of the IRS relief provisions, eligible taxpayers
include individuals residing in and businesses located in counties
qualifying for individual assistance. Other IRS relief provisions
are less restrictive, with eligible taxpayers including individuals
residing in, and businesses located in, counties qualifying for
either individual assistance or public assistance (this includes
all counties in Florida and Georgia and certain counties in
Texas—see Hurricane Harvey Disaster Area in the table above).
Because this relief that applies with regard to both individual and
public assistance counties includes postponement of various tax
deadlines, individuals residing in and businesses located in such
counties have until January 31, 2018 to file any returns and pay any
taxes due. Those eligible for the extra time include: (IR-2017-160)
• Individual filers whose tax-filing extension ran out on October 16,
2017. Because tax payments related to these 2016 returns were
originally due on April 18, 2017, those payments are not eligible for
this relief.
• Business filers, such as calendar-year partnerships, whose
extensions ran out on September 15, 2017.
Continued on the next page
2017 Tax Year  |  Small Business Quickfinder ® Handbook Q-1
• Filers of quarterly estimated tax payments due on September
15, 2017 and January 16, 2018.
• Filers of quarterly payroll and excise tax returns due on October
31, 2017.
• Calendar-year tax-exempt organizations whose 2016 extensions
ran out on November 15, 2017.
A variety of other returns, payments and tax-related actions also
qualify for additional time. See TX-2017-09 (Texas), FL-2017-04
(Florida), GA-2017-02 (Georgia), LA-2017-03 (Louisiana) and
SC-2017-01 (South Carolina) and the disaster relief page at www.
irs.gov for details.
Besides extra time to file and pay, the IRS offers other special as-
sistance to disaster-area taxpayers. This includes the following:
(IR-2017-160)
• Special relief helps employer-sponsored leave-based donation
programs aid hurricane victims. Under these programs, employ-
ees may forgo their vacation, sick or personal leave in exchange
for cash payments the employer makes, before January 1, 2019,
to charities providing relief. Donated leave is not included in the
employee’s income, and employers may deduct these cash
payments to charity as a business expense. (Notices 2017-48,
2017-52 and 2017-62)
• 401(k) plans and similar employer-sponsored retirement plans
can make loans and hardship distributions to hurricane victims
and members of their families. Under this broad-based relief, a
Disaster Tax Relief Act
Act Sec. General Rule
Retirement Plans and IRAs
502(a) Distributions from qualified retirement plans
and IRAs are generally taxable unless they
are rolled over to an eligible retirement plan
or IRA within 60 days after the funds are
received. [IRC Secs. 402(c)(3)(A) and
408(d)(3)(A)]
Unless an exception applies, taxable distri-
butions from qualified retirement plans and
IRAs before the taxpayer reaches age 591/2
are subject to an early withdrawal penalty.
[IRC Sec. 72(t)]
Mandatory 20% federal income tax (FIT)
withholding is normally required on the tax-
able portion of a distribution from a qualified
retirement plan, unless the distribution is
rolled over tax-free via a direct trustee-to-
trustee transfer. [IRC Sec. 3405(c)]
502(b) If the plan permits, 401(k) and 403(b) plans
can distribute elective deferrals on account
of hardship before the participant reaches
age 591/2 or terminates employment. Hard-
ship distributions are taxable and cannot be
rolled over. [IRC Sec. 402(c)(4)]
A qualified first-time homebuyer distribution
is an IRA distribution of up to $10,000 that is
used within 120 days to buy, build or rebuild
the first home of a first-time homebuyer. Such
distributions are taxable, but not subject to the
early withdrawal penalty. [IRC Sec. 72(t)(8)]
Q-2 2017 Tax Year | Small Business Quickfinder ® Handbook
retirement plan can allow a hurricane victim to take a hardship
distribution or borrow up to the specified statutory limits from the
victim’s retirement plan. It also means that a person who lives
outside the disaster area can take out a retirement plan loan or
hardship distribution and use it to assist a son, daughter, parent,
grandparent or dependent who lived or worked in the disaster
area. Hardship withdrawals must be made by January 31, 2018.
(See Anns. 2017-11 and 2017-13, which specifically provide
that these relief provisions apply only with regard to individuals
whose principal residence or place of employment was located
in a county identified for individual assistance by FEMA.)
• The IRS is waiving late-deposit penalties for federal payroll and
excise tax deposits normally due during the first 15 days of the
disaster period. Check the IRS disaster relief page for the time
periods that apply to each jurisdiction.
• The IRS is waiving the usual fees and expediting requests for
copies of previously filed tax returns for disaster area taxpayers.
This relief can be especially helpful to anyone whose copies of
these documents were lost or destroyed by the hurricane.
• If disaster-area taxpayers are contacted by the IRS on a collection
or examination matter, they should be sure to explain how the
disaster impacts them so that the IRS can provide appropriate
consideration to their case.
† Note: For special rules that apply to casualty losses claimed by
victims of federally declared disasters, see Casualties on Page N-15.
Disaster Act Relief Provision
The following tax relief is provided for qualified hurricane distributions:
• Up to $100,000 of such distributions are exempted from the early with-
drawal penalty.
• All or a part of a distribution can be recontributed tax-free (rolled over) to
eligible retirement plans or IRAs any time during the three-year period
beginning on the day after the distribution is received.
• To the extent a distribution is not recontributed, the taxable amount is
taken into gross income ratably over three years beginning with the
year in which the distribution is received unless the taxpayer elects out
of this treatment.
• Such distributions are not subject to the mandatory 20% FIT withholding
requirement.
A qualified hurricane distribution is a distribution from most types of
tax-favored retirement plans, including IRAs, made during the following
periods to individuals whose principal residence was in the applicable
hurricane disaster area1 at the beginning of such periods and who
sustained economic loss due to the hurricane:
• Hurricane Harvey: August 23, 2017–December 31, 2018.
• Hurricane Irma: September 4, 2017–December 31, 2018.
• Hurricane Maria: September 16, 2017–December 31, 2018.
Any individual who received a qualified distribution to buy or build a
home can roll the money back into an eligible retirement plan (including
an IRA) from August 23, 2017 through February 28, 2018 tax free.
A qualified distribution is a hardship distribution from a 401(k) or 403(b)
plan or a qualified first-time homebuyer distribution from an IRA that
was: (1) received after February 28, 2017 and before September 21,
2017 and (2) intended for the purchase or construction of a principal
residence within the Hurricane Harvey, Irma or Maria disaster area1
that didn’t take place due to the hurricane.