The penalty is calculated based on each partial month the return is late times the number of shareholders or partners. If you have an S corporation or other partnership, either file an extension or submit your tax return on time. Remember, an extension gives you six months to file and you do not owe the tax until the flow-through tax return due date typically April 15th.
Learn more about how to file small business back tax returns. Or get help from a trusted IRS expert. Learn how to file your business back tax returns with the IRS and resolve any related tax issues, such as business back taxes and IRS penalties. The IRS grants four types of penalty relief, but many taxpayers don't ever ask. Learn how to request penalty abatement from the IRS. Understand the most common types of IRS business tax penalties for filing and paying late, and your possible options for requesting IRS penalty relief.
If you haven't filed required tax returns, find out how far back you may need to file, and get the nine tips you need to know about filing back tax returns. Requesting your tax transcripts is the best way to research your IRS tax account. You can also authorize your tax pro to communicate with the IRS for you. Learn the three main benefits of engaging a power of attorney to research your IRS account and resolve your tax problems. This link is to make the transition more convenient for you.
You should know that we do not endorse or guarantee any products or services you may view on other sites. Tax information center : IRS : Audits and tax notices. If the corporation has net income from a passive equity-financed lending activity, the smaller of the net passive income or the equity-financed interest income from the activity is nonpassive income. Rental of property incidental to a development activity. Net rental activity income is the excess of passive activity gross income from renting or disposing of property over passive activity deductions current year deductions and prior year unallowed losses that are reasonably allocable to the rented property.
Net rental activity income is nonpassive income for a shareholder if all of the following apply. The corporation recognizes gain from the sale, exchange, or other disposition of the rental property during the tax year.
The use of the item of property in the rental activity started less than 12 months before the date of disposition. The use of an item of rental property begins on the first day on which a the corporation owns an interest in the property, b substantially all of the property is either rented or held out for rent and ready to be rented, and c no significant value-enhancing services remain to be performed.
The shareholder materially or significantly participated for any tax year in an activity that involved performing services to enhance the value of the property or any other item of property, if the basis of the property disposed of is determined in whole or in part by reference to the basis of that item of property.
Because the corporation can't determine a shareholder's level of participation, the corporation must identify net income from property described above without regard to the shareholder's level of participation as income that may be subject to recharacterization. Rental of property to a nonpassive activity. If a taxpayer rents property to a trade or business activity in which the taxpayer materially participates, the taxpayer's net rental activity income defined in item 4 from the property is nonpassive income.
Acquisition of an interest in a pass-through entity that licenses intangible property. Generally, net royalty income from intangible property is nonpassive income if the taxpayer acquired an interest in the pass-through entity after the pass-through entity created the intangible property or performed substantial services or incurred substantial costs in developing or marketing the intangible property.
Net royalty income is the excess of passive activity gross income from licensing or transferring any right in intangible property over passive activity deductions current year deductions and prior year unallowed losses that are reasonably allocable to the intangible property.
To allow shareholders to correctly apply the passive activity loss and credit limitation rules, the corporation must do the following. If the corporation carries on more than one activity, provide an attached statement for each activity conducted through the corporation that identifies the type of activity conducted trade or business, rental real estate, or rental activity other than rental real estate.
See Grouping Activities , earlier. The attachment s must identify each group. The attached group activity description must be sufficient for the shareholders to determine if their other activities qualify to be added to any groups provided by the corporation.
On the attached statement for each activity, provide a statement, using the same box numbers as shown on Schedule K-1, detailing the net income loss , credits, and all items required to be separately stated under section a 1 from each trade or business activity, from each rental real estate activity, from each rental activity other than a rental real estate activity, and from investments. Identify the net income loss and the shareholder's share of interest expense from each activity of trading personal property conducted through the corporation.
For any gain loss from the disposition of an interest in an activity or of an interest in property used in an activity including dispositions before from which gain is being recognized after :. If the property was used in more than one activity during the 12 months preceding the disposition, identify the activities in which the property was used and the adjusted basis allocated to each activity; and. For gains only, if the property was substantially appreciated at the time of the disposition and the applicable holding period specified in Regulations section 1.
Specify the amount of gross portfolio income, the interest expense properly allocable to portfolio income, and expenses other than interest expense that are clearly and directly allocable to portfolio income.
Identify the ratable portion of any section adjustment whether a net positive or a net negative adjustment allocable to each corporate activity. Identify any gross income from sources specifically excluded from passive activity gross income, including:. Income from intangible property, if the shareholder is an individual whose personal efforts significantly contributed to the creation of the property;. Income from a covenant not to compete, if the shareholder is an individual who contributed the covenant to the corporation.
Identify the following items from activities that may be subject to the recharacterization rules see Recharacterization of Passive Income , earlier. The smaller of equity-financed interest income or net passive income from an equity-financed lending activity.
Net rental activity income from property developed by the shareholder or the corporation , rented, and sold within 12 months after the rental of the property commenced. Net rental activity income from the rental of property by the corporation to a trade or business activity in which the shareholder had an interest either directly or indirectly. Net royalty income from intangible property if the shareholder acquired the shareholder's interest in the corporation after the corporation created the intangible property or performed substantial services, or incurred substantial costs in developing or marketing the intangible property.
Identify the shareholder's pro rata share of the corporation's self-charged interest income or expense see Self-Charged Interest , earlier. Loans between a shareholder and the corporation.
Identify the lending or borrowing shareholder's share of the self-charged interest income or expense. If the shareholder made the loan to the corporation, also identify the activity in which the loan proceeds were used. If the proceeds were used in more than one activity, allocate the interest to each activity based on the amount of the proceeds used in each activity. Loans between the corporation and another S corporation or partnership. If the corporation's shareholders have the same proportional ownership interest in the corporation and the other S corporation or partnership, identify each shareholder's share of the interest income or expense from the loan.
If the corporation was the borrower, also identify the activity in which the loan proceeds were used. The information described in this section should be given directly to the shareholder and shouldn't be reported by the corporation to the IRS.
To allow shareholders to correctly figure the net investment income tax where a shareholder disposes of stock in the corporation during the tax year, the corporation may be required to provide the shareholder with certain information.
The net investment income tax is a tax imposed on an individual's, trust's, or estate's net investment income. Net investment income includes the net gains or losses from the sale of stock in the corporation. A shareholder who is actively involved in one or more of the corporation or subsidiary pass-through entities' trades or businesses other than trading in financial instruments or commodities can reduce the amount of the gain or loss included in its net investment income.
However, to figure its net investment income, the active shareholder needs certain information from the corporation. Generally, the corporation must provide certain information to the shareholder if the corporation knows, or has reason to know, the following. The shareholder materially participates within the meaning of the passive activity loss rules section in one or more of the trades or businesses within the meaning of section of the corporation or a subsidiary pass-through entity other than trading in financial instruments or commodities.
The shareholder doesn't qualify for the optional simplified reporting method for figuring its net investment income associated with the disposition of the stock. For more information, see the instructions for Form , line 5c. Generally, the corporation must provide the shareholder with its pro rata share of the net gain and loss from the deemed sale for fair market value of the corporation's property, other than property that relates to the trades or businesses in which the shareholder materially participates, as determined under the passive activity loss rules applicable to the transfer of an interest in a pass-through entity.
If a shareholder, who qualifies for the optional simplified reporting method, prefers to determine net gain or loss under the general calculation, the corporation may, but isn't obligated to, provide the information to the shareholder at the shareholder's request.
Generally, no exclusion is allowed for transactions after However, transactions that meet the transition rules may still be eligible for the exclusion. For details and to figure the amount of the exclusion, see Form , Extraterritorial Income Exclusion, and its separate instructions. The corporation must report the extraterritorial income exclusion on its return as follows. If the corporation met the foreign economic process requirements explained in the Instructions for Form , it can report the exclusion as a nonseparately stated item on whichever of the following lines apply to that activity.
In addition, the corporation must report as an item of information on Schedule K-1, box 14, using code S, the shareholder's pro rata share of foreign trading gross receipts from Form , line Instead, the corporation must report the following separately stated items to the shareholders on Schedule K-1, box Foreign trading gross receipts code S. Report each shareholder's pro rata share of foreign trading gross receipts from line 15 of Form in box 14 using code S.
Extraterritorial income exclusion code T. Report each shareholder's pro rata share of the extraterritorial income exclusion from line 52 of Form in box 14 using code T and identify on an attached statement the activity to which the exclusion relates.
If the corporation is required to complete more than one Form , combine the exclusions and report a single exclusion amount in box Upon request of a shareholder, the corporation should furnish a copy of the corporation's Form if that shareholder has a reduction for international boycott operations, illegal bribes, kickbacks, etc. File the return for calendar year and fiscal years that begin in and end in For a fiscal or short tax year return, fill in the tax year space at the top of the form.
The corporation must show its tax year on the Form S and take into account any tax law changes that are effective for tax years beginning after December 31, Enter the corporation's true name as set forth in the charter or other legal document creating it and address on the appropriate lines. Enter the address of the corporation's principal office or place of business.
Include the suite, room, or other unit number after the street address. If the post office doesn't deliver mail to the street address and the corporation has a P. Don't use the address of the registered agent for the state in which the corporation is incorporated.
For example, if a business is incorporated in Delaware or Nevada and the corporation's principal office is located in Little Rock, Arkansas, the corporation should enter the Little Rock address.
If the corporation has a foreign address, include the city or town, state or province, country, and foreign postal code. Don't abbreviate the country name. Follow the country's practice for entering the name of the state or province and postal code. If you are filing Schedule M-3, check the "Check if Sch.
M-3 attached" box. See the Instructions for Schedule M-3 for more details. Enter the corporation's EIN. If the corporation doesn't have an EIN, it must apply for one. An EIN can be applied for in the following ways.
Online—Go to IRS. The EIN is issued immediately once the application information is validated. If the corporation hasn't received its EIN by the time the return is due, enter "Applied for" and the date the corporation applied in the space for the EIN. However, if the corporation is filing its returns electronically, an EIN is required at the time the return is filed. For more information, see the Instructions for Form SS Enter the corporation's total assets as determined by the accounting method regularly used in keeping the corporation's books and records at the end of the tax year.
If there were no assets at the end of the tax year, enter If the corporation is required to complete Schedule L, enter total assets from Schedule L, line 15, column d , on page 1, item F. If the S election terminated during the tax year, see the instructions for Schedule L, later, for special rules that may apply when figuring the corporation's year-end assets. If this is the corporation's final return and it will no longer exist, check the "Final return" box. Also check the "Final K-1" box on each Schedule K If the corporation changed its name since it last filed a return, check the "Name change" box.
Generally, a corporation must also have amended its articles of incorporation and filed the amendment with the state in which it was incorporated. If the corporation has changed its address since it last filed a return including a change to an "in care of" address , check the "Address change" box. If this amends a previously filed return, check the "Amended return" box. If the corporation has terminated or revoked its S election, check the "S election termination or revocation" box.
See Termination of Election , earlier. See the Instructions for Form B for details. For information about aggregating at-risk activities, see Aggregation of Activities under At-Risk Limitations , earlier. For information about grouping passive activities, see Grouping Activities under Passive Activity Limitations , earlier. Report only trade or business activity income on lines 1a through 5. Don't report rental activity income or portfolio income on these lines. See Passive Activity Limitations, earlier, for definitions of rental income and portfolio income.
Rental activity income and portfolio income are reported on Schedules K and K Rental real estate activities are also reported on Form Don't include any tax-exempt income on lines 1a through 5. A corporation that receives any tax-exempt income other than interest, or holds any property or engages in any activity that produces tax-exempt income, reports this income on line 16b of Schedule K and in box 16 of Schedule K-1 using code B. Report tax-exempt interest income, including exempt-interest dividends received as a shareholder in a mutual fund or other regulated investment company, on line 16a of Schedule K and in box 16 of Schedule K-1 using code A.
See Deductions , later, for information on how to report expenses related to tax-exempt income. If the corporation has had debt discharged resulting from a title 11 bankruptcy proceeding or while insolvent, see Form , Reduction of Tax Attributes Due to Discharge of Indebtedness, and Pub. Enter on line 1a gross receipts or sales from all business operations except for amounts that must be reported on lines 4 and 5.
In general, advance payments are reported in the year of receipt. For exceptions to this general rule for corporations that use an accrual method of accounting, see the following. For permissible methods for reporting advance payments for goods and services, see the "Applicability Dates" discussion in the final section c regulations, T.
For information on adopting or changing to a permissible method for reporting advance payments for goods and services by an accrual method corporation, see the Instructions for Form Generally, the installment method can't be used for dealer dispositions of property. A "dealer disposition" is any disposition of:. Personal property by a person who regularly sells or otherwise disposes of personal property of the same type on the installment plan, or.
Real property held for sale to customers in the ordinary course of the taxpayer's trade or business. These restrictions on using the installment method don't apply to dispositions of property used or produced in a farming business or sales of timeshares and residential lots for which the corporation elects to pay interest under section l 3.
For sales of timeshares and residential lots reported under the installment method, each shareholder's income tax is increased by the shareholder's pro rata share of the interest payable under section l 3.
Enter on line 1a the gross profit on collections from installment sales for any of the following. Dispositions of property used or produced in the trade or business of farming. Certain dispositions of timeshares and residential lots reported under the installment method. Attach a statement showing the following information for the current and the 3 preceding years. Enter cash and credit refunds the corporation made to customers for returned merchandise, rebates, and other allowances made on gross receipts or sales.
Enter on line 2 the amount from Form A, line 8. See Form A and its instructions. Include only ordinary gains or losses from the sale, exchange, or involuntary conversion of assets used in a trade or business activity. Ordinary gains or losses from the sale, exchange, or involuntary conversion of rental activity assets are reported separately on line 19 of Form , or line 3 of Schedule K, and box 3 of Schedule K-1, generally as a part of the net income loss from the rental activity.
A corporation that is a partner in a partnership must include on Form , Sales of Business Property, its share of ordinary gains losses from sales, exchanges, or involuntary conversions other than casualties or thefts of the partnership's trade or business assets. Corporations shouldn't use Form to report the sale or other disposition of property if a section expense deduction was previously passed through to any of its shareholders for that property.
Instead, report it in box 17 of Schedule K-1 using code K. See Dispositions of property with section deductions code K , later, for details.
Enter any other trade or business income loss not included on lines 1a through 4. List the type and amount of income on an attached statement. Interest income derived in the ordinary course of the corporation's trade or business, such as interest charged on receivable balances. To figure the recapture amount, complete Part IV of Form All section income adjustments resulting from changes in accounting methods.
Show the computation of the section adjustments on an attached statement. Part or all of the proceeds received from certain corporate-owned life insurance contracts issued after August 17, Corporations that own one or more employer-owned life insurance contracts issued after this date must file Form , Report of Employer-Owned Life Insurance Contracts.
See section j for details. The amount of payroll tax credit taken by an employer for qualified paid sick leave and qualified paid family leave under sections and of the Families First Coronavirus Response Act, as amended. See Form , lines 11b and 13c; Form , lines 8b and 10d; or Form , lines 12b and 14d. Don't include items requiring separate computations by shareholders that must be reported on Schedules K and K See the instructions for Schedules K and K-1 later in these instructions.
Enter the ordinary income loss shown on Schedule K-1 Form or Schedule K-1 Form , or other ordinary income loss from a foreign partnership, estate, or trust.
Show the partnership's, estate's, or trust's name, address, and EIN on a separate statement attached to this return. If the amount entered is from more than one source, identify the amount from each source. Don't include portfolio income or rental activity income loss from a partnership, estate, or trust on this line. Instead, report these amounts on Schedules K and K-1, or on line 20a of Form if the amount is from a rental real estate activity.
Ordinary income or loss from a partnership that is a publicly traded partnership isn't reported on this line. Instead, report the amount separately on line 10 of Schedule K and in box 10 of Schedule K-1 using code H. Treat shares of other items separately reported on Schedule K-1 issued by the other entity as if the items were realized or incurred by this corporation.
If there is a loss from a partnership, the amount of the loss that may be claimed by the S corporation is subject to the basis limitations. If the tax year of the S corporation doesn't coincide with the tax year of the partnership, estate, or trust, include the ordinary income loss from the other entity in the tax year in which the other entity's tax year ends.
Report only trade or business activity deductions on lines 7 through Deductions allocable to portfolio income. Nondeductible expenses for example, expenses connected with the production of tax-exempt income.
Qualified expenditures to which an election under section 59 e may apply. The instructions for line 12c of Schedule K and for Schedule K-1, box 12, code J, explain how to report these amounts. Items the corporation must state separately that require separate computations by the shareholders.
Examples include expenses incurred for the production of income instead of in a trade or business, charitable contributions, foreign taxes paid or accrued, intangible drilling and development costs, soil and water conservation expenditures, amortizable basis of reforestation expenditures, and exploration expenditures.
The pro rata shares of these expenses are reported separately to each shareholder on Schedule K The uniform capitalization rules of section A generally require corporations to capitalize, or include in inventory, certain costs incurred in connection with the following.
The production of real property and tangible personal property held in inventory or held for sale in the ordinary course of business. Real property or personal property tangible and intangible acquired for resale. The production of real property and tangible personal property by a corporation for use in its trade or business or in an activity engaged in for profit. Tangible personal property produced by a corporation includes a film, sound recording, videotape, book, or similar property.
The costs required to be capitalized under section A aren't deductible until the property to which the costs relate is sold, used, or otherwise disposed of by the corporation. Inventoriable items accounted for in the same manner as materials and supplies that aren't incidental.
See Form A and its instructions for more details. A taxpayer that wants to discontinue capitalizing costs under section A must change its method of accounting. See section A i and Change in accounting method , earlier. Certain property produced in a farming business. See Special rules for certain corporations engaged in farming , later. Certain plants bearing fruits and nuts depreciated under section k 5. The corporation must report the following costs separately to the shareholders for purposes of determinations under section 59 e.
Corporations subject to the uniform capitalization rules are required to capitalize not only direct costs but an allocable part of most indirect costs including taxes that benefit the assets produced or acquired for resale, or are incurred because of the performance of production or resale activities.
For inventory, indirect costs that must be capitalized include the following. Contributions to pension, stock bonus, and certain profit-sharing, annuity, or deferred compensation plans. Interest expense paid or incurred during the production period of designated property must be capitalized and is governed by special rules. For more details, see Regulations sections 1. For more details on the uniform capitalization rules, see Regulations sections 1.
For S corporations not required to use an accrual method of accounting, the rules of section A don't apply to expenses of raising any:. Shareholders of S corporations not required to use an accrual method of accounting may elect to currently deduct the preproductive period expenses of certain plants that have a preproductive period of more than 2 years.
Because each shareholder makes the election to deduct these expenses, the corporation shouldn't capitalize them. Instead, the corporation should report the expenses separately on line 12d of Schedule K and report each shareholder's pro rata share in box 12 of Schedule K-1 using code M. See Uniform Capitalization Rules in chapter 6 of Pub. Generally, an accrual basis S corporation can deduct business expenses and interest owed to a related party including any shareholder only in the tax year of the corporation that includes the day on which the payment is includible in the income of the related party.
Related party amounts paid or accrued in hybrid transactions or with hybrid entities. See section A for more information. Business interest expense may be limited. See section j and Form Also see Schedule B, questions 9 and 10, and the related instructions for question 9 and question 10, later.
If the S corporation was a C corporation for any of the 3 immediately preceding years, the corporation may be required to adjust items such as deductions for depletion of iron ore and coal, and the amortizable basis of pollution control facilities. If this applies, see section to figure the adjustment. A corporation can elect to deduct a limited amount of start-up and organizational costs it paid or incurred.
Any remaining costs must generally be amortized over a month period. See sections and and the related regulations. The corporation generally elects to deduct start-up or organizational costs by claiming the deduction on its income tax return filed by the due date including extensions for the tax year in which the active trade or business begins.
However, for start-up or organizational costs paid or incurred before September 9, , the corporation is required to attach a statement to its return to elect to deduct such costs. For more details, including special rules for costs paid or incurred before September 9, , see the Instructions for Form Also see Pub. If the corporation timely filed its return for the year without making an election, it can still make an election by filing an amended return within 6 months of the due date of the return excluding extensions.
Clearly indicate the election on the amended return and write "Filed pursuant to section File the amended return at the same address the corporation filed its original return. The election applies when figuring taxable income for the current tax year and all subsequent years. The corporation can choose to forgo the elections above by clearly electing to capitalize its start-up or organizational costs on its income tax return filed by the due date including extensions for the tax year in which the active trade or business begins.
The election to either amortize or capitalize start-up costs is irrevocable and applies to all start-up costs that are related to the trade or business. Report the deductible amount of start-up and organizational costs and any amortization on line For amortization that begins during the current tax year, complete and attach Form , Depreciation and Amortization. If the corporation claims certain credits, it may need to reduce the otherwise allowable deductions for expenses used to figure the credit.
This applies to credits such as the following. Credit for employer social security and Medicare taxes paid on certain employee tips Form Credit for small employer pension plan startup costs and auto-enrollment Form Credit for employer-provided childcare facilities and services Form If the corporation has any of the credits listed above, figure the current year credit before figuring the deduction for expenses on which the credit is based.
If the corporation capitalized any costs on which it figured the credit, it may need to reduce the amount capitalized by the credit attributable to these costs.
See the instructions for the form used to figure the applicable credit for more details. Distributions and other payments by an S corporation to a corporate officer must be treated as wages to the extent the amounts are reasonable compensation for services rendered to the corporation. Enter on line 7 the total compensation of all officers paid or incurred in the trade or business activities of the corporation.
The corporation determines who is an officer under the laws of the state where it is incorporated. Enter on line 8 the total salaries and wages paid or incurred to employees other than officers during the tax year. If the corporation claims a credit for any wages paid or incurred, it may need to reduce the amounts on lines 7 and 8.
See Reducing certain expenses for which credits are allowable , earlier. Also reduce the amounts reported on lines 7 and 8 by the nonrefundable and refundable portions of the new CARES Act employee retention credit claimed on the corporation's employment tax return s.
Don't include salaries and wages reported elsewhere on the return, such as amounts included in cost of goods sold, elective contributions to a section k cash or deferred arrangement, or amounts contributed under a salary reduction SEP agreement or a SIMPLE IRA plan.
Enter on Form S, line 7, the amount from Form E, line 4. Also report these fringe benefits as wages in box 1 of Form W These amounts are reported on line See the instructions for that line for information on the types of expenditures that are treated as fringe benefits and for the stock ownership rules. To find out if the shareholder can claim this deduction, see Self-Employed Health Insurance Deduction in chapter 6 of Pub. See section e. Enter the cost of repairs and maintenance not claimed elsewhere on the return, such as labor and supplies, that don't add to the value of the property or appreciably prolong its life.
The corporation can deduct these repairs only to the extent they relate to a trade or business activity. The corporation may elect to capitalize certain repair and maintenance costs consistent with its books and records.
New buildings, machinery, or permanent improvements that increase the value of the property aren't deductible as repair and maintenance expenses. These expenses must be capitalized and depreciated or amortized.
However, amounts paid for routine maintenance on property, including buildings, may be deductible. Enter the total debts that became worthless in whole or in part during the tax year, but only to the extent such debts relate to a trade or business activity. Report deductible nonbusiness bad debts as a short-term capital loss on Form , Sales and Other Dispositions of Capital Assets. A corporation that uses the cash method of accounting can't claim a bad debt deduction unless the amount was previously included in income.
Enter rent paid on business property used in a trade or business activity. Don't deduct rent for a dwelling unit occupied by any shareholder for personal use. If the corporation rented or leased a vehicle, enter the total annual rent or lease expense paid or incurred in the trade or business activities of the corporation during the tax year.
Also complete Part V of Form If the corporation leased a vehicle for a term of 30 days or more, the deduction for vehicle lease expense may have to be reduced by including in gross income an amount called the "inclusion amount. Enter taxes and licenses paid or incurred in the trade or business activities of the corporation, unless they are reflected elsewhere on the return.
Federal import duties and federal excise and stamp taxes are deductible only if paid or incurred in carrying on the trade or business of the corporation.
Do not reduce your deduction for social security and Medicare taxes by the following amounts claimed on the corporation's employment tax returns: 1 the nonrefundable and refundable portions of the new CARES Act employee retention credit, and 2 the nonrefundable and refundable portions of the new FFCRA credits for qualified sick and family leave wages.
Instead, item 1 reduces your deduction for wages on lines 7 and 8, and item 2 must be reported as income on line 5. Federal income taxes except for the portion of built-in gains tax allocable to ordinary income or taxes reported elsewhere on the return. Section foreign taxes.
Taxes allocable to a rental activity. Report taxes allocable to a rental real estate activity on Form Report taxes allocable to a rental activity other than a rental real estate activity on line 3b of Schedule K. Taxes paid or incurred for the production or collection of income, or for the management, conservation, or maintenance of property held to produce income.
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