Filing Your Taxes Online is Fast, Easy and Secure.
Start now and receive your tax refund in as little as 7 days.

1. Get Answers

Your online questions are customized to your unique tax situation.

2. Maximize your Refund

Find tax credits for everything from school tuition to buying a hybri

3. E-File for FREE

E-file free with direct deposit to get your refund in as few as 7 days.

Filing your taxes with paper mail can be difficult and it could take weeks for your refund to arrive. IRS e-file is easy, fast and secure. There is no paperwork going to the IRS so tax refunds can be processed in as little as 7 days with direct deposit. As you prepare your taxes online, you can see your tax refund in real time.

FREE audit support and representation from an enrolled agent – NEW and only from H&R Block

E File 2011 Federal Taxes

Ez 1040 FormFile Tax 1040ez Free OnlineIrs Free Tax FileTurbo Tax 2010How Do I File A 2012 Tax ReturnStudent Income Tax ReturnHrblockfree Com1040 Estimated Tax FormIrs1040ez FormH&rblockCan I Efile My 2011 Tax Return1040x Irs FormAmendment Tax Return 2012How To Do 1040xWww H&r BlockTaxact Login Tax Return Taxact Login Page Taxact Sign PageIrs Gov File 2009 TaxesIrs Gov FreefileFreefileHow Can I Amend My 2012 Tax ReturnHow To Ammend 2010 Tax ReturnMypay ComOnline 1040 EzFill 1040x Form OnlineHow To File A State Tax Return2011 Tax Filing2012 Tax Form 940Filing Back Taxes On TurbotaxHow Do I Get 2012 Tax FormsFree E File IrsIrs Form 1040x Tax ReturnFile 1040nr OnlineTax AmendmentsWhen Is The Last Day To File Taxes 2012Federal Income Tax Ez Form 20112012 1040a FormI Need To File My 2012 Taxes1040x Fillable FormsIncome Tax Filing OnlineHow To Fill Out A 1040ez

E File 2011 Federal Taxes

E file 2011 federal taxes Publication 538 - Main Content Table of Contents Accounting PeriodsCalendar Year Fiscal Year Short Tax Year Improper Tax Year Change in Tax Year Individuals Partnerships, S Corporations, and Personal Service Corporations (PSCs) Corporations (Other Than S Corporations and PSCs) Accounting MethodsSpecial methods. E file 2011 federal taxes Hybrid method. E file 2011 federal taxes Cash Method Accrual Method Inventories Change in Accounting Method How To Get Tax HelpLow Income Taxpayer Clinics (LITCs). E file 2011 federal taxes Accounting Periods You must use a tax year to figure your taxable income. E file 2011 federal taxes A tax year is an annual accounting period for keeping records and reporting income and expenses. E file 2011 federal taxes An annual accounting period does not include a short tax year (discussed later). E file 2011 federal taxes You can use the following tax years: A calendar year; or A fiscal year (including a 52-53-week tax year). E file 2011 federal taxes Unless you have a required tax year, you adopt a tax year by filing your first income tax return using that tax year. E file 2011 federal taxes A required tax year is a tax year required under the Internal Revenue Code or the Income Tax Regulations. E file 2011 federal taxes You cannot adopt a tax year by merely: Filing an application for an extension of time to file an income tax return; Filing an application for an employer identification number (Form SS-4); or Paying estimated taxes. E file 2011 federal taxes This section discusses: A calendar year. E file 2011 federal taxes A fiscal year (including a period of 52 or 53 weeks). E file 2011 federal taxes A short tax year. E file 2011 federal taxes An improper tax year. E file 2011 federal taxes A change in tax year. E file 2011 federal taxes Special situations that apply to individuals. E file 2011 federal taxes Restrictions that apply to the accounting period of a partnership, S corporation, or personal service corporation. E file 2011 federal taxes Special situations that apply to corporations. E file 2011 federal taxes Calendar Year A calendar year is 12 consecutive months beginning on January 1st and ending on December 31st. E file 2011 federal taxes If you adopt the calendar year, you must maintain your books and records and report your income and expenses from January 1st through December 31st of each year. E file 2011 federal taxes If you file your first tax return using the calendar tax year and you later begin business as a sole proprietor, become a partner in a partnership, or become a shareholder in an S corporation, you must continue to use the calendar year unless you obtain approval from the IRS to change it, or are otherwise allowed to change it without IRS approval. E file 2011 federal taxes See Change in Tax Year, later. E file 2011 federal taxes Generally, anyone can adopt the calendar year. E file 2011 federal taxes However, you must adopt the calendar year if: You keep no books or records; You have no annual accounting period; Your present tax year does not qualify as a fiscal year; or You are required to use a calendar year by a provision in the Internal Revenue Code or the Income Tax Regulations. E file 2011 federal taxes Fiscal Year A fiscal year is 12 consecutive months ending on the last day of any month except December 31st. E file 2011 federal taxes If you are allowed to adopt a fiscal year, you must consistently maintain your books and records and report your income and expenses using the time period adopted. E file 2011 federal taxes 52-53-Week Tax Year You can elect to use a 52-53-week tax year if you keep your books and records and report your income and expenses on that basis. E file 2011 federal taxes If you make this election, your 52-53-week tax year must always end on the same day of the week. E file 2011 federal taxes Your 52-53-week tax year must always end on: Whatever date this same day of the week last occurs in a calendar month, or Whatever date this same day of the week falls that is nearest to the last day of the calendar month. E file 2011 federal taxes For example, if you elect a tax year that always ends on the last Monday in March, your 2012 tax year will end on March 25, 2013. E file 2011 federal taxes Election. E file 2011 federal taxes   To make the election for the 52-53-week tax year, attach a statement with the following information to your tax return. E file 2011 federal taxes The month in which the new 52-53-week tax year ends. E file 2011 federal taxes The day of the week on which the tax year always ends. E file 2011 federal taxes The date the tax year ends. E file 2011 federal taxes It can be either of the following dates on which the chosen day: Last occurs in the month in (1), above, or Occurs nearest to the last day of the month in (1), above. E file 2011 federal taxes   When you figure depreciation or amortization, a 52-53-week tax year is generally considered a year of 12 calendar months. E file 2011 federal taxes   To determine an effective date (or apply provisions of any law) expressed in terms of tax years beginning, including, or ending on the first or last day of a specified calendar month, a 52-53-week tax year is considered to: Begin on the first day of the calendar month beginning nearest to the first day of the 52-53-week tax year, and End on the last day of the calendar month ending nearest to the last day of the 52-53-week tax year. E file 2011 federal taxes Example. E file 2011 federal taxes Assume a tax provision applies to tax years beginning on or after July 1, 2012, which happens to be a Sunday. E file 2011 federal taxes For this purpose, a 52-53-week tax year that begins on the last Tuesday of June, which falls on June 26, 2012, is treated as beginning on July 1, 2012. E file 2011 federal taxes Short Tax Year A short tax year is a tax year of less than 12 months. E file 2011 federal taxes A short period tax return may be required when you (as a taxable entity): Are not in existence for an entire tax year, or Change your accounting period. E file 2011 federal taxes Tax on a short period tax return is figured differently for each situation. E file 2011 federal taxes Not in Existence Entire Year Even if a taxable entity was not in existence for the entire year, a tax return is required for the time it was in existence. E file 2011 federal taxes Requirements for filing the return and figuring the tax are generally the same as the requirements for a return for a full tax year (12 months) ending on the last day of the short tax year. E file 2011 federal taxes Example 1. E file 2011 federal taxes XYZ Corporation was organized on July 1, 2012. E file 2011 federal taxes It elected the calendar year as its tax year. E file 2011 federal taxes Therefore, its first tax return was due March 15, 2013. E file 2011 federal taxes This short period return will cover the period from July 1, 2012, through December 31, 2012. E file 2011 federal taxes Example 2. E file 2011 federal taxes A calendar year corporation dissolved on July 23, 2012. E file 2011 federal taxes Its final return is due by October 15, 2012. E file 2011 federal taxes It will cover the short period from January 1, 2012, through July 23, 2012. E file 2011 federal taxes Death of individual. E file 2011 federal taxes   When an individual dies, a tax return must be filed for the decedent by the 15th day of the 4th month after the close of the individual's regular tax year. E file 2011 federal taxes The decedent's final return will be a short period tax return that begins on January 1st, and ends on the date of death. E file 2011 federal taxes In the case of a decedent who dies on December 31st, the last day of the regular tax year, a full calendar-year tax return is required. E file 2011 federal taxes Example. E file 2011 federal taxes   Agnes Green was a single, calendar year taxpayer. E file 2011 federal taxes She died on March 6, 2012. E file 2011 federal taxes Her final income tax return must be filed by April 15, 2013. E file 2011 federal taxes It will cover the short period from January 1, 2012, to March 6, 2012. E file 2011 federal taxes Figuring Tax for Short Year If the IRS approves a change in your tax year or you are required to change your tax year, you must figure the tax and file your return for the short tax period. E file 2011 federal taxes The short tax period begins on the first day after the close of your old tax year and ends on the day before the first day of your new tax year. E file 2011 federal taxes Figure tax for a short year under the general rule, explained below. E file 2011 federal taxes You may then be able to use a relief procedure, explained later, and claim a refund of part of the tax you paid. E file 2011 federal taxes General rule. E file 2011 federal taxes   Income tax for a short tax year must be annualized. E file 2011 federal taxes However, self-employment tax is figured on the actual self-employment income for the short period. E file 2011 federal taxes Individuals. E file 2011 federal taxes   An individual must figure income tax for the short tax year as follows. E file 2011 federal taxes Determine your adjusted gross income (AGI) for the short tax year and then subtract your actual itemized deductions for the short tax year. E file 2011 federal taxes You must itemize deductions when you file a short period tax return. E file 2011 federal taxes Multiply the dollar amount of your exemptions by the number of months in the short tax year and divide the result by 12. E file 2011 federal taxes Subtract the amount in (2) from the amount in (1). E file 2011 federal taxes The result is your modified taxable income. E file 2011 federal taxes Multiply the modified taxable income in (3) by 12, then divide the result by the number of months in the short tax year. E file 2011 federal taxes The result is your annualized income. E file 2011 federal taxes Figure the total tax on your annualized income using the appropriate tax rate schedule. E file 2011 federal taxes Multiply the total tax by the number of months in the short tax year and divide the result by 12. E file 2011 federal taxes The result is your tax for the short tax year. E file 2011 federal taxes Relief procedure. E file 2011 federal taxes   Individuals and corporations can use a relief procedure to figure the tax for the short tax year. E file 2011 federal taxes It may result in less tax. E file 2011 federal taxes Under this procedure, the tax is figured by two separate methods. E file 2011 federal taxes If the tax figured under both methods is less than the tax figured under the general rule, you can file a claim for a refund of part of the tax you paid. E file 2011 federal taxes For more information, see section 443(b)(2) of the Internal Revenue Code. E file 2011 federal taxes Alternative minimum tax. E file 2011 federal taxes   To figure the alternative minimum tax (AMT) due for a short tax year: Figure the annualized alternative minimum taxable income (AMTI) for the short tax period by completing the following steps. E file 2011 federal taxes Multiply the AMTI by 12. E file 2011 federal taxes Divide the result by the number of months in the short tax year. E file 2011 federal taxes Multiply the annualized AMTI by the appropriate rate of tax under section 55(b)(1) of the Internal Revenue Code. E file 2011 federal taxes The result is the annualized AMT. E file 2011 federal taxes Multiply the annualized AMT by the number of months in the short tax year and divide the result by 12. E file 2011 federal taxes   For information on the AMT for individuals, see the Instructions for Form 6251, Alternative Minimum Tax–Individuals. E file 2011 federal taxes For information on the AMT for corporations, see the Instructions to Form 4626, Alternative Minimum Tax–Corporations. E file 2011 federal taxes Tax withheld from wages. E file 2011 federal taxes   You can claim a credit against your income tax liability for federal income tax withheld from your wages. E file 2011 federal taxes Federal income tax is withheld on a calendar year basis. E file 2011 federal taxes The amount withheld in any calendar year is allowed as a credit for the tax year beginning in the calendar year. E file 2011 federal taxes Improper Tax Year Taxpayers that have adopted an improper tax year must change to a proper tax year. E file 2011 federal taxes For example, if a taxpayer began business on March 15 and adopted a tax year ending on March 14 (a period of exactly 12 months), this would be an improper tax year. E file 2011 federal taxes See Accounting Periods, earlier, for a description of permissible tax years. E file 2011 federal taxes To change to a proper tax year, you must do one of the following. E file 2011 federal taxes If you are requesting a change to a calendar tax year, file an amended income tax return based on a calendar tax year that corrects the most recently filed tax return that was filed on the basis of an improper tax year. E file 2011 federal taxes Attach a completed Form 1128 to the amended tax return. E file 2011 federal taxes Write “FILED UNDER REV. E file 2011 federal taxes PROC. E file 2011 federal taxes 85-15” at the top of Form 1128 and file the forms with the Internal Revenue Service Center where you filed your original return. E file 2011 federal taxes If you are requesting a change to a fiscal tax year, file Form 1128 in accordance with the form instructions to request IRS approval for the change. E file 2011 federal taxes Change in Tax Year Generally, you must file Form 1128 to request IRS approval to change your tax year. E file 2011 federal taxes See the Instructions for Form 1128 for exceptions. E file 2011 federal taxes If you qualify for an automatic approval request, a user fee is not required. E file 2011 federal taxes Individuals Generally, individuals must adopt the calendar year as their tax year. E file 2011 federal taxes An individual can adopt a fiscal year provided that the individual maintains his or her books and records on the basis of the adopted fiscal year. E file 2011 federal taxes Partnerships, S Corporations, and Personal Service Corporations (PSCs) Generally, partnerships, S corporations (including electing S corporations), and PSCs must use a required tax year. E file 2011 federal taxes A required tax year is a tax year that is required under the Internal Revenue Code and Income Tax Regulations. E file 2011 federal taxes The entity does not have to use the required tax year if it receives IRS approval to use another permitted tax year or makes an election under section 444 of the Internal Revenue Code (discussed later). E file 2011 federal taxes The following discussions provide the rules for partnerships, S corporations, and PSCs. E file 2011 federal taxes Partnership A partnership must conform its tax year to its partners' tax years unless any of the following apply. E file 2011 federal taxes The partnership makes an election under section 444 of the Internal Revenue Code to have a tax year other than a required tax year by filing Form 8716. E file 2011 federal taxes The partnership elects to use a 52-53-week tax year that ends with reference to either its required tax year or a tax year elected under section 444. E file 2011 federal taxes The partnership can establish a business purpose for a different tax year. E file 2011 federal taxes The rules for the required tax year for partnerships are as follows. E file 2011 federal taxes If one or more partners having the same tax year own a majority interest (more than 50%) in partnership profits and capital, the partnership must use the tax year of those partners. E file 2011 federal taxes If there is no majority interest tax year, the partnership must use the tax year of all its principal partners. E file 2011 federal taxes A principal partner is one who has a 5% or more interest in the profits or capital of the partnership. E file 2011 federal taxes If there is no majority interest tax year and the principal partners do not have the same tax year, the partnership generally must use a tax year that results in the least aggregate deferral of income to the partners. E file 2011 federal taxes If a partnership changes to a required tax year because of these rules, it can get automatic approval by filing Form 1128. E file 2011 federal taxes Least aggregate deferral of income. E file 2011 federal taxes   The tax year that results in the least aggregate deferral of income is determined as follows. E file 2011 federal taxes Figure the number of months of deferral for each partner using one partner's tax year. E file 2011 federal taxes Find the months of deferral by counting the months from the end of that tax year forward to the end of each other partner's tax year. E file 2011 federal taxes Multiply each partner's months of deferral figured in step (1) by that partner's share of interest in the partnership profits for the year used in step (1). E file 2011 federal taxes Add the amounts in step (2) to get the aggregate (total) deferral for the tax year used in step (1). E file 2011 federal taxes Repeat steps (1) through (3) for each partner's tax year that is different from the other partners' years. E file 2011 federal taxes   The partner's tax year that results in the lowest aggregate (total) number is the tax year that must be used by the partnership. E file 2011 federal taxes If the calculation results in more than one tax year qualifying as the tax year with the least aggregate deferral, the partnership can choose any one of those tax years as its tax year. E file 2011 federal taxes However, if one of the tax years that qualifies is the partnership's existing tax year, the partnership must retain that tax year. E file 2011 federal taxes Example. E file 2011 federal taxes A and B each have a 50% interest in partnership P, which uses a fiscal year ending June 30. E file 2011 federal taxes A uses the calendar year and B uses a fiscal year ending November 30. E file 2011 federal taxes P must change its tax year to a fiscal year ending November 30 because this results in the least aggregate deferral of income to the partners, as shown in the following table. E file 2011 federal taxes Year End 12/31: Year End Profits Interest Months of Deferral Interest × Deferral A 12/31 0. E file 2011 federal taxes 5 -0- -0- B 11/30 0. E file 2011 federal taxes 5 11 5. E file 2011 federal taxes 5 Total Deferral 5. E file 2011 federal taxes 5 Year End 11/30: Year End Profits Interest Months of Deferral Interest × Deferral A 12/31 0. E file 2011 federal taxes 5 1 0. E file 2011 federal taxes 5 B 11/30 0. E file 2011 federal taxes 5 -0- -0- Total Deferral 0. E file 2011 federal taxes 5 When determination is made. E file 2011 federal taxes   The determination of the tax year under the least aggregate deferral rules must generally be made at the beginning of the partnership's current tax year. E file 2011 federal taxes However, the IRS can require the partnership to use another day or period that will more accurately reflect the ownership of the partnership. E file 2011 federal taxes This could occur, for example, if a partnership interest was transferred for the purpose of qualifying for a particular tax year. E file 2011 federal taxes Short period return. E file 2011 federal taxes   When a partnership changes its tax year, a short period return must be filed. E file 2011 federal taxes The short period return covers the months between the end of the partnership's prior tax year and the beginning of its new tax year. E file 2011 federal taxes   If a partnership changes to the tax year resulting in the least aggregate deferral, it must file a Form 1128 with the short period return showing the computations used to determine that tax year. E file 2011 federal taxes The short period return must indicate at the top of page 1, “FILED UNDER SECTION 1. E file 2011 federal taxes 706-1. E file 2011 federal taxes ” More information. E file 2011 federal taxes   For more information about changing a partnership's tax year, and information about ruling requests, see the Instructions for Form 1128. E file 2011 federal taxes S Corporation All S corporations, regardless of when they became an S corporation, must use a permitted tax year. E file 2011 federal taxes A permitted tax year is any of the following. E file 2011 federal taxes The calendar year. E file 2011 federal taxes A tax year elected under section 444 of the Internal Revenue Code. E file 2011 federal taxes See Section 444 Election, below for details. E file 2011 federal taxes A 52-53-week tax year ending with reference to the calendar year or a tax year elected under section 444. E file 2011 federal taxes Any other tax year for which the corporation establishes a business purpose. E file 2011 federal taxes If an electing S corporation wishes to adopt a tax year other than a calendar year, it must request IRS approval using Form 2553, instead of filing Form 1128. E file 2011 federal taxes For information about changing an S corporation's tax year and information about ruling requests, see the Instructions for Form 1128. E file 2011 federal taxes Personal Service Corporation (PSC) A PSC must use a calendar tax year unless any of the following apply. E file 2011 federal taxes The corporation makes an election under section 444 of the Internal Revenue Code. E file 2011 federal taxes See Section 444 Election, below for details. E file 2011 federal taxes The corporation elects to use a 52-53-week tax year ending with reference to the calendar year or a tax year elected under section 444. E file 2011 federal taxes The corporation establishes a business purpose for a fiscal year. E file 2011 federal taxes See the Instructions for Form 1120 for general information about PSCs. E file 2011 federal taxes For information on adopting or changing tax years for PSCs and information about ruling requests, see the Instructions for Form 1128. E file 2011 federal taxes Section 444 Election A partnership, S corporation, electing S corporation, or PSC can elect under section 444 of the Internal Revenue Code to use a tax year other than its required tax year. E file 2011 federal taxes Certain restrictions apply to the election. E file 2011 federal taxes A partnership or an S corporation that makes a section 444 election must make certain required payments and a PSC must make certain distributions (discussed later). E file 2011 federal taxes The section 444 election does not apply to any partnership, S corporation, or PSC that establishes a business purpose for a different period, explained later. E file 2011 federal taxes A partnership, S corporation, or PSC can make a section 444 election if it meets all the following requirements. E file 2011 federal taxes It is not a member of a tiered structure (defined in section 1. E file 2011 federal taxes 444-2T of the regulations). E file 2011 federal taxes It has not previously had a section 444 election in effect. E file 2011 federal taxes It elects a year that meets the deferral period requirement. E file 2011 federal taxes Deferral period. E file 2011 federal taxes   The determination of the deferral period depends on whether the partnership, S corporation, or PSC is retaining its tax year or adopting or changing its tax year with a section 444 election. E file 2011 federal taxes Retaining tax year. E file 2011 federal taxes   Generally, a partnership, S corporation, or PSC can make a section 444 election to retain its tax year only if the deferral period of the new tax year is 3 months or less. E file 2011 federal taxes This deferral period is the number of months between the beginning of the retained year and the close of the first required tax year. E file 2011 federal taxes Adopting or changing tax year. E file 2011 federal taxes   If the partnership, S corporation, or PSC is adopting or changing to a tax year other than its required year, the deferral period is the number of months from the end of the new tax year to the end of the required tax year. E file 2011 federal taxes The IRS will allow a section 444 election only if the deferral period of the new tax year is less than the shorter of: Three months, or The deferral period of the tax year being changed. E file 2011 federal taxes This is the tax year immediately preceding the year for which the partnership, S corporation, or PSC wishes to make the section 444 election. E file 2011 federal taxes If the partnership, S corporation, or PSC's tax year is the same as its required tax year, the deferral period is zero. E file 2011 federal taxes Example 1. E file 2011 federal taxes BD Partnership uses a calendar year, which is also its required tax year. E file 2011 federal taxes BD cannot make a section 444 election because the deferral period is zero. E file 2011 federal taxes Example 2. E file 2011 federal taxes E, a newly formed partnership, began operations on December 1. E file 2011 federal taxes E is owned by calendar year partners. E file 2011 federal taxes E wants to make a section 444 election to adopt a September 30 tax year. E file 2011 federal taxes E's deferral period for the tax year beginning December 1 is 3 months, the number of months between September 30 and December 31. E file 2011 federal taxes Making the election. E file 2011 federal taxes   Make a section 444 election by filing Form 8716 with the Internal Revenue Service Center where the entity will file its tax return. E file 2011 federal taxes Form 8716 must be filed by the earlier of: The due date (not including extensions) of the income tax return for the tax year resulting from the section 444 election, or The 15th day of the 6th month of the tax year for which the election will be effective. E file 2011 federal taxes For this purpose, count the month in which the tax year begins, even if it begins after the first day of that month. E file 2011 federal taxes Note. E file 2011 federal taxes If the due date falls on a Saturday, Sunday, or legal holiday, file on the next business day. E file 2011 federal taxes   Attach a copy of Form 8716 to Form 1065, Form 1120S, or Form 1120 for the first tax year for which the election is made. E file 2011 federal taxes Example 1. E file 2011 federal taxes AB, a partnership, begins operations on September 13, 2012, and is qualified to make a section 444 election to use a September 30 tax year for its tax year beginning September 13, 2012. E file 2011 federal taxes AB must file Form 8716 by January 15, 2013, which is the due date of the partnership's tax return for the period from September 13, 2012, to September 30, 2012. E file 2011 federal taxes Example 2. E file 2011 federal taxes The facts are the same as in Example 1 except that AB begins operations on October 21, 2012. E file 2011 federal taxes AB must file Form 8716 by March 17, 2013. E file 2011 federal taxes Example 3. E file 2011 federal taxes B is a corporation that first becomes a PSC for its tax year beginning September 1, 2012. E file 2011 federal taxes B qualifies to make a section 444 election to use a September 30 tax year for its tax year beginning September 1, 2012. E file 2011 federal taxes B must file Form 8716 by December 17, 2012, the due date of the income tax return for the short period from September 1, 2012, to September 30, 2012. E file 2011 federal taxes Note. E file 2011 federal taxes The due dates in Examples 2 and 3 are adjusted because the dates fall on a Saturday, Sunday or legal holiday. E file 2011 federal taxes Extension of time for filing. E file 2011 federal taxes   There is an automatic extension of 12 months to make this election. E file 2011 federal taxes See the Form 8716 instructions for more information. E file 2011 federal taxes Terminating the election. E file 2011 federal taxes   The section 444 election remains in effect until it is terminated. E file 2011 federal taxes If the election is terminated, another section 444 election cannot be made for any tax year. E file 2011 federal taxes   The election ends when any of the following applies to the partnership, S corporation, or PSC. E file 2011 federal taxes The entity changes to its required tax year. E file 2011 federal taxes The entity liquidates. E file 2011 federal taxes The entity becomes a member of a tiered structure. E file 2011 federal taxes The IRS determines that the entity willfully failed to comply with the required payments or distributions. E file 2011 federal taxes   The election will also end if either of the following events occur. E file 2011 federal taxes An S corporation's S election is terminated. E file 2011 federal taxes However, if the S corporation immediately becomes a PSC, the PSC can continue the section 444 election of the S corporation. E file 2011 federal taxes A PSC ceases to be a PSC. E file 2011 federal taxes If the PSC elects to be an S corporation, the S corporation can continue the election of the PSC. E file 2011 federal taxes Required payment for partnership or S corporation. E file 2011 federal taxes   A partnership or an S corporation must make a required payment for any tax year: The section 444 election is in effect. E file 2011 federal taxes The required payment for that year (or any preceding tax year) is more than $500. E file 2011 federal taxes    This payment represents the value of the tax deferral the owners receive by using a tax year different from the required tax year. E file 2011 federal taxes   Form 8752, Required Payment or Refund Under Section 7519, must be filed each year the section 444 election is in effect, even if no payment is due. E file 2011 federal taxes If the required payment is more than $500 (or the required payment for any prior year was more than $500), the payment must be made when Form 8752 is filed. E file 2011 federal taxes If the required payment is $500 or less and no payment was required in a prior year, Form 8752 must be filed showing a zero amount. E file 2011 federal taxes Applicable election year. E file 2011 federal taxes   Any tax year a section 444 election is in effect, including the first year, is called an applicable election year. E file 2011 federal taxes Form 8752 must be filed and the required payment made (or zero amount reported) by May 15th of the calendar year following the calendar year in which the applicable election year begins. E file 2011 federal taxes Required distribution for PSC. E file 2011 federal taxes   A PSC with a section 444 election in effect must distribute certain amounts to employee-owners by December 31 of each applicable year. E file 2011 federal taxes If it fails to make these distributions, it may be required to defer certain deductions for amounts paid to owner-employees. E file 2011 federal taxes The amount deferred is treated as paid or incurred in the following tax year. E file 2011 federal taxes   For information on the minimum distribution, see the instructions for Part I of Schedule H (Form 1120), Section 280H Limitations for a Personal Service Corporation (PSC). E file 2011 federal taxes Back-up election. E file 2011 federal taxes   A partnership, S corporation, or PSC can file a back-up section 444 election if it requests (or plans to request) permission to use a business purpose tax year, discussed later. E file 2011 federal taxes If the request is denied, the back-up section 444 election must be activated (if the partnership, S corporation, or PSC otherwise qualifies). E file 2011 federal taxes Making back-up election. E file 2011 federal taxes   The general rules for making a section 444 election, as discussed earlier, apply. E file 2011 federal taxes When filing Form 8716, type or print “BACK-UP ELECTION” at the top of the form. E file 2011 federal taxes However, if Form 8716 is filed on or after the date Form 1128 (or Form 2553) is filed, type or print “FORM 1128 (or FORM 2553) BACK-UP ELECTION” at the top of Form 8716. E file 2011 federal taxes Activating election. E file 2011 federal taxes   A partnership or S corporation activates its back-up election by filing the return required and making the required payment with Form 8752. E file 2011 federal taxes The due date for filing Form 8752 and making the payment is the later of the following dates. E file 2011 federal taxes May 15 of the calendar year following the calendar year in which the applicable election year begins. E file 2011 federal taxes 60 days after the partnership or S corporation has been notified by the IRS that the business year request has been denied. E file 2011 federal taxes   A PSC activates its back-up election by filing Form 8716 with its original or amended income tax return for the tax year in which the election is first effective and printing on the top of the income tax return, “ACTIVATING BACK-UP ELECTION. E file 2011 federal taxes ” 52-53-Week Tax Year A partnership, S corporation, or PSC can use a tax year other than its required tax year if it elects a 52-53-week tax year (discussed earlier) that ends with reference to either its required tax year or a tax year elected under section 444 (discussed earlier). E file 2011 federal taxes A newly formed partnership, S corporation, or PSC can adopt a 52-53-week tax year ending with reference to either its required tax year or a tax year elected under section 444 without IRS approval. E file 2011 federal taxes However, if the entity wishes to change to a 52-53-week tax year or change from a 52-53-week tax year that references a particular month to a non-52-53-week tax year that ends on the last day of that month, it must request IRS approval by filing Form 1128. E file 2011 federal taxes Business Purpose Tax Year A partnership, S corporation, or PSC establishes the business purpose for a tax year by filing Form 1128. E file 2011 federal taxes See the Instructions for Form 1128 for details. E file 2011 federal taxes Corporations (Other Than S Corporations and PSCs) A new corporation establishes its tax year when it files its first tax return. E file 2011 federal taxes A newly reactivated corporation that has been inactive for a number of years is treated as a new taxpayer for the purpose of adopting a tax year. E file 2011 federal taxes An S corporation or a PSC must use the required tax year rules, discussed earlier, to establish a tax year. E file 2011 federal taxes Generally, a corporation that wants to change its tax year must obtain approval from the IRS under either the: (a) automatic approval procedures; or (b) ruling request procedures. E file 2011 federal taxes See the Instructions for Form 1128 for details. E file 2011 federal taxes Accounting Methods An accounting method is a set of rules used to determine when income and expenses are reported on your tax return. E file 2011 federal taxes Your accounting method includes not only your overall method of accounting, but also the accounting treatment you use for any material item. E file 2011 federal taxes You choose an accounting method when you file your first tax return. E file 2011 federal taxes If you later want to change your accounting method, you must get IRS approval. E file 2011 federal taxes See Change in Accounting Method, later. E file 2011 federal taxes No single accounting method is required of all taxpayers. E file 2011 federal taxes You must use a system that clearly reflects your income and expenses and you must maintain records that will enable you to file a correct return. E file 2011 federal taxes In addition to your permanent accounting books, you must keep any other records necessary to support the entries on your books and tax returns. E file 2011 federal taxes You must use the same accounting method from year to year. E file 2011 federal taxes An accounting method clearly reflects income only if all items of gross income and expenses are treated the same from year to year. E file 2011 federal taxes If you do not regularly use an accounting method that clearly reflects your income, your income will be refigured under the method that, in the opinion of the IRS, does clearly reflect income. E file 2011 federal taxes Methods you can use. E file 2011 federal taxes   In general, you can compute your taxable income under any of the following accounting methods. E file 2011 federal taxes Cash method. E file 2011 federal taxes Accrual method. E file 2011 federal taxes Special methods of accounting for certain items of income and expenses. E file 2011 federal taxes A hybrid method which combines elements of two or more of the above accounting methods. E file 2011 federal taxes The cash and accrual methods of accounting are explained later. E file 2011 federal taxes Special methods. E file 2011 federal taxes   This publication does not discuss special methods of accounting for certain items of income or expenses. E file 2011 federal taxes For information on reporting income using one of the long-term contract methods, see section 460 of the Internal Revenue Code and the related regulations. E file 2011 federal taxes The following publications also discuss special methods of reporting income or expenses. E file 2011 federal taxes Publication 225, Farmer's Tax Guide. E file 2011 federal taxes Publication 535, Business Expenses. E file 2011 federal taxes Publication 537, Installment Sales. E file 2011 federal taxes Publication 946, How To Depreciate Property. E file 2011 federal taxes Hybrid method. E file 2011 federal taxes   Generally, you can use any combination of cash, accrual, and special methods of accounting if the combination clearly reflects your income and you use it consistently. E file 2011 federal taxes However, the following restrictions apply. E file 2011 federal taxes If an inventory is necessary to account for your income, you must use an accrual method for purchases and sales. E file 2011 federal taxes See Exceptions under Inventories, later. E file 2011 federal taxes Generally, you can use the cash method for all other items of income and expenses. E file 2011 federal taxes See Inventories, later. E file 2011 federal taxes If you use the cash method for reporting your income, you must use the cash method for reporting your expenses. E file 2011 federal taxes If you use an accrual method for reporting your expenses, you must use an accrual method for figuring your income. E file 2011 federal taxes Any combination that includes the cash method is treated as the cash method for purposes of section 448 of the Internal Revenue Code. E file 2011 federal taxes Business and personal items. E file 2011 federal taxes   You can account for business and personal items using different accounting methods. E file 2011 federal taxes For example, you can determine your business income and expenses under an accrual method, even if you use the cash method to figure personal items. E file 2011 federal taxes Two or more businesses. E file 2011 federal taxes   If you operate two or more separate and distinct businesses, you can use a different accounting method for each business. E file 2011 federal taxes No business is separate and distinct, unless a complete and separate set of books and records is maintained for each business. E file 2011 federal taxes Note. E file 2011 federal taxes If you use different accounting methods to create or shift profits or losses between businesses (for example, through inventory adjustments, sales, purchases, or expenses) so that income is not clearly reflected, the businesses will not be considered separate and distinct. E file 2011 federal taxes Cash Method Most individuals and many small businesses use the cash method of accounting. E file 2011 federal taxes Generally, if you produce, purchase, or sell merchandise, you must keep an inventory and use an accrual method for sales and purchases of merchandise. E file 2011 federal taxes See Inventories, later, for exceptions to this rule. E file 2011 federal taxes Income Under the cash method, you include in your gross income all items of income you actually or constructively receive during the tax year. E file 2011 federal taxes If you receive property and services, you must include their fair market value (FMV) in income. E file 2011 federal taxes Constructive receipt. E file 2011 federal taxes   Income is constructively received when an amount is credited to your account or made available to you without restriction. E file 2011 federal taxes You need not have possession of it. E file 2011 federal taxes If you authorize someone to be your agent and receive income for you, you are considered to have received it when your agent receives it. E file 2011 federal taxes Income is not constructively received if your control of its receipt is subject to substantial restrictions or limitations. E file 2011 federal taxes Example. E file 2011 federal taxes You are a calendar year taxpayer. E file 2011 federal taxes Your bank credited, and made available, interest to your bank account in December 2012. E file 2011 federal taxes You did not withdraw it or enter it into your books until 2013. E file 2011 federal taxes You must include the amount in gross income for 2012, the year you constructively received it. E file 2011 federal taxes You cannot hold checks or postpone taking possession of similar property from one tax year to another to postpone paying tax on the income. E file 2011 federal taxes You must report the income in the year the property is received or made available to you without restriction. E file 2011 federal taxes Expenses Under the cash method, generally, you deduct expenses in the tax year in which you actually pay them. E file 2011 federal taxes This includes business expenses for which you contest liability. E file 2011 federal taxes However, you may not be able to deduct an expense paid in advance. E file 2011 federal taxes Instead, you may be required to capitalize certain costs, as explained later under Uniform Capitalization Rules. E file 2011 federal taxes Expense paid in advance. E file 2011 federal taxes   An expense you pay in advance is deductible only in the year to which it applies, unless the expense qualifies for the 12-month rule. E file 2011 federal taxes   Under the 12-month rule, a taxpayer is not required to capitalize amounts paid to create certain rights or benefits for the taxpayer that do not extend beyond the earlier of the following. E file 2011 federal taxes 12 months after the right or benefit begins, or The end of the tax year after the tax year in which payment is made. E file 2011 federal taxes   If you have not been applying the general rule (an expense paid in advance is deductible only in the year to which it applies) and/or the 12-month rule to the expenses you paid in advance, you must obtain approval from the IRS before using the general rule and/or the 12-month rule. E file 2011 federal taxes See Change in Accounting Method, later. E file 2011 federal taxes Example 1. E file 2011 federal taxes You are a calendar year taxpayer and pay $3,000 in 2012 for a business insurance policy that is effective for three years (36 months), beginning on July 1, 2012. E file 2011 federal taxes The general rule that an expense paid in advance is deductible only in the year to which it applies is applicable to this payment because the payment does not qualify for the 12-month rule. E file 2011 federal taxes Therefore, only $500 (6/36 x $3,000) is deductible in 2012, $1,000 (12/36 x $3,000) is deductible in 2013, $1,000 (12/36 x $3,000) is deductible in 2014, and the remaining $500 is deductible in 2015. E file 2011 federal taxes Example 2. E file 2011 federal taxes You are a calendar year taxpayer and pay $10,000 on July 1, 2012, for a business insurance policy that is effective for only one year beginning on July 1, 2012. E file 2011 federal taxes The 12-month rule applies. E file 2011 federal taxes Therefore, the full $10,000 is deductible in 2012. E file 2011 federal taxes Excluded Entities The following entities cannot use the cash method, including any combination of methods that includes the cash method. E file 2011 federal taxes (See Special rules for farming businesses, later. E file 2011 federal taxes ) A corporation (other than an S corporation) with average annual gross receipts exceeding $5 million. E file 2011 federal taxes See Gross receipts test, below. E file 2011 federal taxes A partnership with a corporation (other than an S corporation) as a partner, and with the partnership having average annual gross receipts exceeding $5 million. E file 2011 federal taxes See Gross receipts test, below. E file 2011 federal taxes A tax shelter. E file 2011 federal taxes Exceptions The following entities are not prohibited from using the cash method of accounting. E file 2011 federal taxes Any corporation or partnership, other than a tax shelter, that meets the gross receipts test for all tax years after 1985. E file 2011 federal taxes A qualified personal service corporation (PSC). E file 2011 federal taxes Gross receipts test. E file 2011 federal taxes   A corporation or partnership, other than a tax shelter, that meets the gross receipts test can generally use the cash method. E file 2011 federal taxes A corporation or a partnership meets the test if, for each prior tax year beginning after 1985, its average annual gross receipts are $5 million or less. E file 2011 federal taxes    An entity's average annual gross receipts for a prior tax year is determined by: Adding the gross receipts for that tax year and the 2 preceding tax years; and Dividing the total by 3. E file 2011 federal taxes See Gross receipts test for qualifying taxpayers, for more information. E file 2011 federal taxes Generally, a partnership applies the test at the partnership level. E file 2011 federal taxes Gross receipts for a short tax year are annualized. E file 2011 federal taxes Aggregation rules. E file 2011 federal taxes   Organizations that are members of an affiliated service group or a controlled group of corporations treated as a single employer for tax purposes are required to aggregate their gross receipts to determine whether the gross receipts test is met. E file 2011 federal taxes Change to accrual method. E file 2011 federal taxes   A corporation or partnership that fails to meet the gross receipts test for any tax year is prohibited from using the cash method and must change to an accrual method of accounting, effective for the tax year in which the entity fails to meet this test. E file 2011 federal taxes Special rules for farming businesses. E file 2011 federal taxes   Generally, a taxpayer engaged in the trade or business of farming is allowed to use the cash method for its farming business. E file 2011 federal taxes However, certain corporations (other than S corporations) and partnerships that have a partner that is a corporation must use an accrual method for their farming business. E file 2011 federal taxes For this purpose, farming does not include the operation of a nursery or sod farm or the raising or harvesting of trees (other than fruit and nut trees). E file 2011 federal taxes   There is an exception to the requirement to use an accrual method for corporations with gross receipts of $1 million or less for each prior tax year after 1975. E file 2011 federal taxes For family corporations engaged in farming, the exception applies if gross receipts were $25 million or less for each prior tax year after 1985. E file 2011 federal taxes See chapter 2 of Publication 225, Farmer's Tax Guide, for more information. E file 2011 federal taxes Qualified PSC. E file 2011 federal taxes   A PSC that meets the following function and ownership tests can use the cash method. E file 2011 federal taxes Function test. E file 2011 federal taxes   A corporation meets the function test if at least 95% of its activities are in the performance of services in the fields of health, veterinary services, law, engineering (including surveying and mapping), architecture, accounting, actuarial science, performing arts, or consulting. E file 2011 federal taxes Ownership test. E file 2011 federal taxes   A corporation meets the ownership test if at least 95% of its stock is owned, directly or indirectly, at all times during the year by one or more of the following. E file 2011 federal taxes Employees performing services for the corporation in a field qualifying under the function test. E file 2011 federal taxes Retired employees who had performed services in those fields. E file 2011 federal taxes The estate of an employee described in (1) or (2). E file 2011 federal taxes Any other person who acquired the stock by reason of the death of an employee referred to in (1) or (2), but only for the 2-year period beginning on the date of death. E file 2011 federal taxes   Indirect ownership is generally taken into account if the stock is owned indirectly through one or more partnerships, S corporations, or qualified PSCs. E file 2011 federal taxes Stock owned by one of these entities is considered owned by the entity's owners in proportion to their ownership interest in that entity. E file 2011 federal taxes Other forms of indirect stock ownership, such as stock owned by family members, are generally not considered when determining if the ownership test is met. E file 2011 federal taxes   For purposes of the ownership test, a person is not considered an employee of a corporation unless that person performs more than minimal services for the corporation. E file 2011 federal taxes Change to accrual method. E file 2011 federal taxes   A corporation that fails to meet the function test for any tax year; or fails to meet the ownership test at any time during any tax year must change to an accrual method of accounting, effective for the year in which the corporation fails to meet either test. E file 2011 federal taxes A corporation that fails to meet the function test or the ownership test is not treated as a qualified PSC for any part of that tax year. E file 2011 federal taxes Accrual Method Under the accrual method of accounting, generally you report income in the year it is earned and deduct or capitalize expenses in the year incurred. E file 2011 federal taxes The purpose of an accrual method of accounting is to match income and expenses in the correct year. E file 2011 federal taxes Income Generally, you include an amount in gross income for the tax year in which all events that fix your right to receive the income have occurred and you can determine the amount with reasonable accuracy. E file 2011 federal taxes Under this rule, you report an amount in your gross income on the earliest of the following dates. E file 2011 federal taxes When you receive payment. E file 2011 federal taxes When the income amount is due to you. E file 2011 federal taxes When you earn the income. E file 2011 federal taxes When title has passed. E file 2011 federal taxes Estimated income. E file 2011 federal taxes   If you include a reasonably estimated amount in gross income and later determine the exact amount is different, take the difference into account in the tax year you make that determination. E file 2011 federal taxes Change in payment schedule. E file 2011 federal taxes   If you perform services for a basic rate specified in a contract, you must accrue the income at the basic rate, even if you agree to receive payments at a reduced rate. E file 2011 federal taxes Continue this procedure until you complete the services, then account for the difference. E file 2011 federal taxes Advance Payment for Services Generally, you report an advance payment for services to be performed in a later tax year as income in the year you receive the payment. E file 2011 federal taxes However, if you receive an advance payment for services you agree to perform by the end of the next tax year, you can elect to postpone including the advance payment in income until the next tax year. E file 2011 federal taxes However, you cannot postpone including any payment beyond that tax year. E file 2011 federal taxes Service agreement. E file 2011 federal taxes   You can postpone reporting income from an advance payment you receive for a service agreement on property you sell, lease, build, install, or construct. E file 2011 federal taxes This includes an agreement providing for incidental replacement of parts or materials. E file 2011 federal taxes However, this applies only if you offer the property without a service agreement in the normal course of business. E file 2011 federal taxes Postponement not allowed. E file 2011 federal taxes   Generally, one cannot postpone including an advance payment in income for services if either of the following applies. E file 2011 federal taxes You are to perform any part of the service after the end of the tax year immediately following the year you receive the advance payment. E file 2011 federal taxes You are to perform any part of the service at any unspecified future date that may be after the end of the tax year immediately following the year you receive the advance payment. E file 2011 federal taxes Examples. E file 2011 federal taxes   In each of the following examples, assume the tax year is a calendar year and that the accrual method of accounting is used. E file 2011 federal taxes Example 1. E file 2011 federal taxes You manufacture, sell, and service computers. E file 2011 federal taxes You received payment in 2012 for a one-year contingent service contract on a computer you sold. E file 2011 federal taxes You can postpone including in income the part of the payment you did not earn in 2012 if, in the normal course of your business, you offer computers for sale without a contingent service contract. E file 2011 federal taxes Example 2. E file 2011 federal taxes You are in the television repair business. E file 2011 federal taxes You received payments in 2012 for one-year contracts under which you agree to repair or replace certain parts that fail to function properly in television sets manufactured and sold by unrelated parties. E file 2011 federal taxes You include the payments in gross income as you earn them. E file 2011 federal taxes Example 3. E file 2011 federal taxes You own a dance studio. E file 2011 federal taxes On October 1, 2012, you receive payment for a one-year contract for 48 one-hour lessons beginning on that date. E file 2011 federal taxes You give eight lessons in 2012. E file 2011 federal taxes Under this method of including advance payments, you must include one-sixth (8/48) of the payment in income for 2012, and five-sixths (40/48) of the payment in 2013, even if you do not give all the lessons by the end of 2013. E file 2011 federal taxes Example 4. E file 2011 federal taxes Assume the same facts as in Example 3, except the payment is for a two-year contract for 96 lessons. E file 2011 federal taxes You must include the entire payment in income in 2012 since part of the services may be performed after the following year. E file 2011 federal taxes Guarantee or warranty. E file 2011 federal taxes   Generally, you cannot postpone reporting income you receive under a guarantee or warranty contract. E file 2011 federal taxes Prepaid rent. E file 2011 federal taxes   You cannot postpone reporting income from prepaid rent. E file 2011 federal taxes Prepaid rent does not include payment for the use of a room or other space when significant service is also provided for the occupant. E file 2011 federal taxes You provide significant service when you supply space in a hotel, boarding house, tourist home, motor court, motel, or apartment house that furnishes hotel services. E file 2011 federal taxes Books and records. E file 2011 federal taxes   Any advance payment you include in gross receipts on your tax return for the year you receive payment must not be less than the payment you include in income for financial reports under the method of accounting used for those reports. E file 2011 federal taxes Financial reports include reports to shareholders, partners, beneficiaries, and other proprietors for credit purposes and consolidated financial statements. E file 2011 federal taxes IRS approval. E file 2011 federal taxes   You must file Form 3115 to obtain IRS approval to change your method of accounting for advance payment for services. E file 2011 federal taxes Advance Payment for Sales Special rules apply to including income from advance payments on agreements for future sales or other dispositions of goods held primarily for sale to customers in the ordinary course of your trade or business. E file 2011 federal taxes However, the rules do not apply to a payment (or part of a payment) for services that are not an integral part of the main activities covered under the agreement. E file 2011 federal taxes An agreement includes a gift certificate that can be redeemed for goods. E file 2011 federal taxes Amounts due and payable are considered received. E file 2011 federal taxes How to report payments. E file 2011 federal taxes   Generally, include an advance payment in income in the year in which you receive it. E file 2011 federal taxes However, you can use the alternative method, discussed next. E file 2011 federal taxes Alternative method of reporting. E file 2011 federal taxes   Under the alternative method, generally include an advance payment in income in the earlier tax year in which you: Include advance payments in gross receipts under the method of accounting you use for tax purposes, or Include any part of advance payments in income for financial reports under the method of accounting used for those reports. E file 2011 federal taxes Financial reports include reports to shareholders, partners, beneficiaries, and other proprietors for credit purposes and consolidated financial statements. E file 2011 federal taxes Example 1. E file 2011 federal taxes You are a retailer. E file 2011 federal taxes You use an accrual method of accounting and account for the sale of goods when you ship the goods. E file 2011 federal taxes You use this method for both tax and financial reporting purposes. E file 2011 federal taxes You can include advance payments in gross receipts for tax purposes in either: (a) the tax year in which you receive the payments; or (b) the tax year in which you ship the goods. E file 2011 federal taxes However, see Exception for inventory goods, later. E file 2011 federal taxes Example 2. E file 2011 federal taxes You are a calendar year taxpayer. E file 2011 federal taxes You manufacture household furniture and use an accrual method of accounting. E file 2011 federal taxes Under this method, you accrue income for your financial reports when you ship the furniture. E file 2011 federal taxes For tax purposes, you do not accrue income until the furniture has been delivered and accepted. E file 2011 federal taxes In 2012, you received an advance payment of $8,000 for an order of furniture to be manufactured for a total price of $20,000. E file 2011 federal taxes You shipped the furniture to the customer in December 2012, but it was not delivered and accepted until January 2013. E file 2011 federal taxes For tax purposes, you include the $8,000 advance payment in gross income for 2012; and include the remaining $12,000 of the contract price in gross income for 2013. E file 2011 federal taxes Information schedule. E file 2011 federal taxes   If you use the alternative method of reporting advance payments, you must attach a statement with the following information to your tax return each year. E file 2011 federal taxes Total advance payments received in the current tax year. E file 2011 federal taxes Total advance payments received in earlier tax years and not included in income before the current tax year. E file 2011 federal taxes Total payments received in earlier tax years included in income for the current tax year. E file 2011 federal taxes Exception for inventory goods. E file 2011 federal taxes   If you have an agreement to sell goods properly included in inventory, you can postpone including the advance payment in income until the end of the second tax year following the year you receive an advance payment if, on the last day of the tax year, you meet the following requirements. E file 2011 federal taxes You account for the advance payment under the alternative method (discussed earlier). E file 2011 federal taxes You have received a substantial advance payment on the agreement (discussed next). E file 2011 federal taxes You have enough substantially similar goods on hand, or available through your normal source of supply, to satisfy the agreement. E file 2011 federal taxes These rules also apply to an agreement, such as a gift certificate, that can be satisfied with goods that cannot be identified in the tax year you receive an advance payment. E file 2011 federal taxes   If you meet these conditions, all advance payments you receive by the end of the second tax year, including payments received in prior years but not reported, must be included in income by the second tax year following the tax year of receipt of substantial advance payments. E file 2011 federal taxes You must also deduct in that second year all actual or estimated costs for the goods required to satisfy the agreement. E file 2011 federal taxes If you estimated the cost, you must take into account any difference between the estimate and the actual cost when the goods are delivered. E file 2011 federal taxes Note. E file 2011 federal taxes You must report any advance payments you receive after the second year in the year received. E file 2011 federal taxes No further deferral is allowed. E file 2011 federal taxes Substantial advance payments. E file 2011 federal taxes   Under an agreement for a future sale, you have substantial advance payments if, by the end of the tax year, the total advance payments received during that year and preceding tax years are equal to or more than the total costs reasonably estimated to be includible in inventory because of the agreement. E file 2011 federal taxes Example. E file 2011 federal taxes You are a calendar year, accrual method taxpayer who accounts for advance payments under the alternative method. E file 2011 federal taxes In 2008, you entered into a contract for the sale of goods properly includible in your inventory. E file 2011 federal taxes The total contract price is $50,000 and you estimate that your total inventoriable costs for the goods will be $25,000. E file 2011 federal taxes You receive the following advance payments under the contract. E file 2011 federal taxes 2009 $17,500 2010 10,000 2011 7,500 2012 5,000 2013 5,000 2014 5,000 Total contract price $50,000   Your customer asked you to deliver the goods in 2015. E file 2011 federal taxes In your 2010 closing inventory, you had on hand enough of the type of goods specified in the contract to satisfy the contract. E file 2011 federal taxes Since the advance payments you had received by the end of 2010 were more than the costs you estimated, the payments are substantial advance payments. E file 2011 federal taxes   For 2012, include in income all payments you received by the end of 2012, the second tax year following the tax year in which you received substantial advance payments. E file 2011 federal taxes You must include $40,000 in sales for 2012 (the total amounts received from 2009 through 2012) and include in inventory the cost of the goods (or similar goods) on hand. E file 2011 federal taxes If no such goods are on hand, then estimate the cost necessary to satisfy the contract. E file 2011 federal taxes   No further deferral is allowed. E file 2011 federal taxes You must include in gross income the advance payment you receive each remaining year of the contract. E file 2011 federal taxes Take into account the difference between any estimated cost of goods sold and the actual cost when you deliver the goods in 2015. E file 2011 federal taxes IRS approval. E file 2011 federal taxes   You must file Form 3115 to obtain IRS approval to change your method of accounting for advance payments for sales. E file 2011 federal taxes Expenses Under an accrual method of accounting, you generally deduct or capitalize a business expense when both the following apply. E file 2011 federal taxes The all-events test has been met. E file 2011 federal taxes The test is met when: All events have occurred that fix the fact of liability, and The liability can be determined with reasonable accuracy. E file 2011 federal taxes Economic performance has occurred. E file 2011 federal taxes Economic Performance Generally, you cannot deduct or capitalize a business expense until economic performance occurs. E file 2011 federal taxes If your expense is for property or services provided to you, or for your use of property, economic performance occurs as the property or services are provided or the property is used. E file 2011 federal taxes If your expense is for property or services you provide to others, economic performance occurs as you provide the property or services. E file 2011 federal taxes Example. E file 2011 federal taxes You are a calendar year taxpayer. E file 2011 federal taxes You buy office supplies in December 2012. E file 2011 federal taxes You receive the supplies and the bill in December, but you pay the bill in January 2013. E file 2011 federal taxes You can deduct the expense in 2012 because all events have occurred to fix the liability, the amount of the liability can be determined, and economic performance occurred in 2012. E file 2011 federal taxes Your office supplies may qualify as a recurring item, discussed later. E file 2011 federal taxes If so, you can deduct them in 2012, even if the supplies are not delivered until 2013 (when economic performance occurs). E file 2011 federal taxes Workers' compensation and tort liability. E file 2011 federal taxes   If you are required to make payments under workers' compensation laws or in satisfaction of any tort liability, economic performance occurs as you make the payments. E file 2011 federal taxes If you are required to make payments to a special designated settlement fund established by court order for a tort liability, economic performance occurs as you make the payments. E file 2011 federal taxes Taxes. E file 2011 federal taxes   Economic performance generally occurs as estimated income tax, property taxes, employment taxes, etc. E file 2011 federal taxes are paid. E file 2011 federal taxes However, you can elect to treat taxes as a recurring item, discussed later. E file 2011 federal taxes You can also elect to ratably accrue real estate taxes. E file 2011 federal taxes See chapter 5 of Publication 535 for information about real estate taxes. E file 2011 federal taxes Other liabilities. E file 2011 federal taxes   Other liabilities for which economic performance occurs as you make payments include liabilities for breach of contract (to the extent of incidental, consequential, and liquidated damages), violation of law, rebates and refunds, awards, prizes, jackpots, insurance, and warranty and service contracts. E file 2011 federal taxes Interest. E file 2011 federal taxes   Economic performance occurs with the passage of time (as the borrower uses, and the lender forgoes use of, the lender's money) rather than as payments are made. E file 2011 federal taxes Compensation for services. E file 2011 federal taxes   Generally, economic performance occurs as an employee renders service to the employer. E file 2011 federal taxes However, deductions for compensation or other benefits paid to an employee in a year subsequent to economic performance are subject to the rules governing deferred compensation, deferred benefits, and funded welfare benefit plans. E file 2011 federal taxes For information on employee benefit programs, see Publication 15-B, Employer's Tax Guide to Fringe Benefits. E file 2011 federal taxes Vacation pay. E file 2011 federal taxes   You can take a current deduction for vacation pay earned by your employees if you pay it during the year or, if the amount is vested, within 2½ months after the end of the year. E file 2011 federal taxes If you pay it later than this, you must deduct it in the year actually paid. E file 2011 federal taxes An amount is vested if your right to it cannot be nullified or cancelled. E file 2011 federal taxes Exception for recurring items. E file 2011 federal taxes   An exception to the economic performance rule allows certain recurring items to be treated as incurred during the tax year even though economic performance has not occurred. E file 2011 federal taxes The exception applies if all the following requirements are met. E file 2011 federal taxes The all-events test, discussed earlier, is met. E file 2011 federal taxes Economic performance occurs by the earlier of the following dates. E file 2011 federal taxes 8½ months after the close of the year. E file 2011 federal taxes The date you file a timely return (including extensions) for the year. E file 2011 federal taxes The item is recurring in nature and you consistently treat similar items as incurred in the tax year in which the all-events test is met. E file 2011 federal taxes Either: The item is not material, or Accruing the item in the year in which the all-events test is met results in a better match against income than accruing the item in the year of economic performance. E file 2011 federal taxes This exception does not apply to workers' compensation or tort liabilities. E file 2011 federal taxes Amended return. E file 2011 federal taxes   You may be able to file an amended return and treat a liability as incurred under the recurring item exception. E file 2011 federal taxes You can do so if economic performance for the liability occurs after you file your tax return for the year, but within 8½ months after the close of the tax year. E file 2011 federal taxes Recurrence and consistency. E file 2011 federal taxes   To determine whether an item is recurring and consistently reported, consider the frequency with which the item and similar items are incurred (or expected to be incurred) and how you report these items for tax purposes. E file 2011 federal taxes A new expense or an expense not incurred every year can be treated as recurring if it is reasonable to expect that it will be incurred regularly in the future. E file 2011 federal taxes Materiality. E file 2011 federal taxes   Factors to consider in determining the materiality of a recurring item include the size of the item (both in absolute terms and in relation to your income and other expenses) and the treatment of the item on your financial statements. E file 2011 federal taxes   An item considered material for financial statement purposes is also considered material for tax purposes. E file 2011 federal taxes However, in certain situations an immaterial item for financial accounting purposes is treated as material for purposes of economic performance. E file 2011 federal taxes Matching expenses with income. E file 2011 federal taxes   Costs directly associated with the revenue of a period are properly allocable to that period. E file 2011 federal taxes To determine whether the accrual of an expense in a particular year results in a better match with the income to which it relates, generally accepted accounting principles (GAAP; visit www. E file 2011 federal taxes fasab. E file 2011 federal taxes gov/accepted. E file 2011 federal taxes html) are an important factor. E file 2011 federal taxes   For example, if you report sales income in the year of sale, but you do not ship the goods until the following year, the shipping costs are more properly matched to income in the year of sale than the year the goods are shipped. E file 2011 federal taxes Expenses that cannot be practically associated with income of a particular period, such as advertising costs, should be assigned to the period the costs are incurred. E file 2011 federal taxes However, the matching requirement is considered met for certain types of expenses. E file 2011 federal taxes These expenses include taxes, payments under insurance, warranty, and service contracts, rebates, refunds, awards, prizes, and jackpots. E file 2011 federal taxes Expenses Paid in Advance An expense you pay in advance is deductible only in the year to which it applies, unless the expense qualifies for the 12-month rule. E file 2011 federal taxes Under the 12-month rule, a taxpayer is not required to capitalize amounts paid to create certain rights or benefits for the taxpayer that do not extend beyond the earlier of the following. E file 2011 federal taxes 12 months after the right or benefit begins, or The end of the tax year after the tax year in which payment is made. E file 2011 federal taxes If you have not been applying the general rule (an expense paid in advance is deductible only in the year to which it applies) and/or the 12-month rule to the expenses you paid in advance, you must get IRS approval before using the general rule and/or the 12-month rule. E file 2011 federal taxes See Change in Accounting Method, later, for information on how to get IRS approval. E file 2011 federal taxes See Expense paid in advance under Cash Method, earlier, for examples illustrating the application of the general and 12-month rules. E file 2011 federal taxes Related Persons Business expenses and interest owed to a related person who uses the cash method of accounting are not deductible until you make the payment and the corresponding amount is includible in the related person's gross income. E file 2011 federal taxes Determine the relationship for this rule as of the end of the tax year for which the expense or interest would otherwise be deductible. E file 2011 federal taxes See section 267 of the Internal Revenue Code and Publication 542, Corporations, for the definition of related person. E file 2011 federal taxes Inventories An inventory is necessary to clearly show income when the production, purchase, or sale of merchandise is an income-producing factor. E file 2011 federal taxes If you must account for an inventory in your business, you must use an accrual method of accounting for your purchases and sales. E file 2011 federal taxes However, see Exceptions, next. E file 2011 federal taxes See also Accrual Method, earlier. E file 2011 federal taxes To figure taxable income, you must value your inventory at the beginning and end of each tax year. E file 2011 federal taxes To determine the value, you need a method for identifying the items in your inventory and a method for valuing these items. E file 2011 federal taxes See Identifying Cost and Valuing Inventory, later. E file 2011 federal taxes The rules for valuing inventory are not the same for all businesses. E file 2011 federal taxes The method you use must conform to generally accepted accounting principles for similar businesses and must clearly reflect income. E file 2011 federal taxes Your inventory practices must be consistent from year to year. E file 2011 federal taxes The rules discussed here apply only if they do not conflict with the uniform capitalization rules of section 263A and the mark-to-market rules of section 475. E file 2011 federal taxes Exceptions The following taxpayers can use the cash method of accounting even if they produce, purchase, or sell merchandise. E file 2011 federal taxes These taxpayers can also account for inventoriable items as materials and supplies that are not incidental (discussed later). E file 2011 federal taxes A qualifying taxpayer under Revenue Procedure 2001-10 on page 272 of Internal Revenue Bulletin 2001-2, available at www. E file 2011 federal taxes irs. E file 2011 federal taxes gov/pub/irs-irbs/irb01–02. E file 2011 federal taxes pdf. E file 2011 federal taxes A qualifying small business taxpayer under Revenue Procedure 2002-28, on page 815 of Internal Revenue Bulletin 2002-18, available at www. E file 2011 federal taxes irs. E file 2011 federal taxes gov/pub/irs-irbs/irb02–18. E file 2011 federal taxes pdf. E file 2011 federal taxes In addition to the information provided in this publication, you should see the revenue procedures referenced in the list, above, and the instructions for Form 3115 for information you will need to adopt or change to these accounting methods (see Changing methods, later). E file 2011 federal taxes Qualifying taxpayer. E file 2011 federal taxes   You are a qualifying taxpayer under Revenue Procedure 2001-10 only if: You satisfy the gross receipts test for each prior tax year ending on or after December 17, 1998 (see Gross receipts test for qualifying taxpayers, next). E file 2011 federal taxes Your average annual gross receipts for each test year (explained in Step 1, listed next) must be $1 million or less. E file 2011 federal taxes You are not a tax shelter as defined under section 448(d)(3) of the Internal Revenue Code. E file 2011 federal taxes Gross receipts test for qualifying taxpayers. E file 2011 federal taxes   To determine if you meet the gross receipts test for qualifying taxpayers, use the following steps: Step 1. E file 2011 federal taxes List each of the test years. E file 2011 federal taxes For qualifying taxpayers under Revenue Procedure 2001-10, the test years are each prior tax year ending on or after December 17, 1998. E file 2011 federal taxes Step 2. E file 2011 federal taxes Determine your average annual gross receipts for each test year listed in Step 1. E file 2011 federal taxes Your average annual gross receipts for a tax year is determined by adding the gross receipts for that tax year and the 2 preceding tax years and dividing the total by 3. E file 2011 federal taxes Step 3. E file 2011 federal taxes You meet the gross receipts test for qualifying taxpayers if your average annual gross receipts for each test year listed in Step 1 is $1 million or less. E file 2011 federal taxes Qualifying small business taxpayer. E file 2011 federal taxes   You are a qualifying small business taxpayer under Revenue Procedure 2002-28 only if: You satisfy the gross receipts test for each prior tax year ending on or after December 31, 2000 (see Gross receipts test for qualifying small business taxpayers, next). E file 2011 federal taxes Your average annual gross receipts for each test year (explained in Step 1, listed next) must be $10 million or less. E file 2011 federal taxes You are not prohibited from using the cash method under section 448 of the Internal Revenue Code. E file 2011 federal taxes Your principle business activity is an eligible business. E file 2011 federal taxes See Eligible business, later. E file 2011 federal taxes You have not changed (or have not been required to change) from the cash method because you became ineligible to use the cash method under Revenue Procedure 2002-28. E file 2011 federal taxes Note. E file 2011 federal taxes Revenue Procedure 2002-28 does not apply to a farming business of a qualifying small business taxpayer. E file 2011 federal taxes A taxpayer engaged in the trade or business of farming generally is allowed to use the cash method for any farming business. E file 2011 federal taxes See Special rules for farming businesses under Cash Method, earlier. E file 2011 federal taxes Gross receipts test for qualifying small business taxpayers. E file 2011 federal taxes   To determine if you meet the gross receipts test for qualifying small business taxpayers, use the following steps: Step 1. E file 2011 federal taxes List each of the test years. E file 2011 federal taxes For qualifying small business taxpayers under Revenue Procedure 2002-28, the test years are each prior tax year ending on or after December 31, 2000. E file 2011 federal taxes Step 2. E file 2011 federal taxes Determine your average annual gross receipts for each test year listed in Step 1. E file 2011 federal taxes Your average annual gross receipts for a tax year is determined by adding the gross receipts for that tax year and the 2 preceding tax years and dividing the total by 3. E file 2011 federal taxes Step 3. E file 2011 federal taxes You meet the gross receipts test for qualifying small business taxpayers if your average annual gross receipts for each test year listed in Step 1 is $10 million or less. E file 2011 federal taxes Eligible business. E file 2011 federal taxes   An eligible business is any business for which a qualified small business taxpayer can use the cash method and choose to not keep an inventory. E file 2011 federal taxes You have an eligible business if you meet any of the following requirements. E file 2011 federal taxes Your principal business activity is described in a North American Industry Classification System (NAICS) code other than any of the following NAICS subsector codes: NAICS codes 211 and 212 (mining activities). E file 2011 federal taxes NAICS codes 31-33 (manufacturing). E file 2011 federal taxes NAICS code 42 (wholesale trade). E file 2011 federal taxes NAICS codes 44-45 (retail trade). E file 2011 federal taxes NAICS codes 5111 and 5122 (information industries). E file 2011 federal taxes Your principal business activity is the provision of services, including the provision of property incident to those services. E file 2011 federal taxes Your principal business activity is the fabrication or modification of tangible personal property upon demand in accordance with customer design or specifications. E file 2011 federal taxes   Information about the NAICS codes can be found at http://www. E file 2011 federal taxes census. E file 2011 federal taxes gov/naics or in the instructions for your federal income tax return. E file 2011 federal taxes Gross receipts. E file 2011 federal taxes   In general, gross receipts must include all receipts from all your trades or businesses that must be recognized under the method of accounting you used for that tax year for federal income tax purposes. E file 2011 federal taxes See the definit
Print - Click this link to Print this page

If You Send Us Information Online

Our website offers the opportunity to ask questions, request information, or to obtain other services. Use of these options is voluntary. By furnishing the requested information, you are deemed to have consented to use of your data. We will use the information you provide only for the reasons you provided it.

To enable us to respond to your requests, you may need to provide personal or tax information. Please read the supplemental Privacy statements that appear and know that whenever we request such information, it will be used only for the purposes you provide it.

Your personal information will not be retained any longer than is necessary to provide the service. Your personal information will not be sold or shared with any other party except as required by law. The information will be disposed of in accordance with National Archives' records management rules relating to the maintenance of electronic data.

The confidentiality of Internet transactions is not guaranteed. You must decide if you want to assume the risk that an unauthorized person may learn your e-mail address or other information you may provide as it is transmitted. Once received by IRS your information is secured.

We will not e-mail refund information, account data, tax data, or other personal information as part of our response to you. If you would like us to answer a question that requires this type of information, please call us toll-free, 1-800-829-1040. You may also visit How to Contact Us in order to locate a specific IRS office that is convenient to you.

Return to Privacy Policy page
Page Last Reviewed or Updated: 22-Apr-2013

The E File 2011 Federal Taxes

E file 2011 federal taxes Publication 547 - Main Content Table of Contents CasualtyFamily pet. E file 2011 federal taxes Progressive deterioration. E file 2011 federal taxes Special Procedure for Damage From Corrosive Drywall Theft Loss on Deposits Proof of Loss Figuring a LossGain from reimbursement. E file 2011 federal taxes Business or income-producing property. E file 2011 federal taxes Loss of inventory. E file 2011 federal taxes Leased property. E file 2011 federal taxes Exception for personal-use real property. E file 2011 federal taxes Decrease in Fair Market Value Adjusted Basis Insurance and Other Reimbursements Deduction Limits2% Rule $100 Rule 10% Rule Figuring the Deduction Figuring a GainPostponement of Gain When To Report Gains and LossesLoss on deposits. E file 2011 federal taxes Lessee's loss. E file 2011 federal taxes Disaster Area LossesDisaster loss to inventory. E file 2011 federal taxes Main home in disaster area. E file 2011 federal taxes Unsafe home. E file 2011 federal taxes Time limit for making choice. E file 2011 federal taxes Revoking your choice. E file 2011 federal taxes Figuring the loss deduction. E file 2011 federal taxes How to report the loss on Form 1040X. E file 2011 federal taxes Records. E file 2011 federal taxes Need a copy of your tax return for the preceding year? Postponed Tax Deadlines Contacting the Federal Emergency Management Agency (FEMA) How To Report Gains and LossesProperty held 1 year or less. E file 2011 federal taxes Property held more than 1 year. E file 2011 federal taxes Depreciable property. E file 2011 federal taxes Adjustments to Basis If Deductions Are More Than Income How To Get Tax HelpLow Income Taxpayer Clinics Casualty A casualty is the damage, destruction, or loss of property resulting from an identifiable event that is sudden, unexpected, or unusual. E file 2011 federal taxes A sudden event is one that is swift, not gradual or progressive. E file 2011 federal taxes An unexpected event is one that is ordinarily unanticipated and unintended. E file 2011 federal taxes An unusual event is one that is not a day-to-day occurrence and that is not typical of the activity in which you were engaged. E file 2011 federal taxes Generally, casualty losses are deductible during the taxable year that the loss occurred. E file 2011 federal taxes See Table 3, later. E file 2011 federal taxes Deductible losses. E file 2011 federal taxes   Deductible casualty losses can result from a number of different causes, including the following. E file 2011 federal taxes Car accidents (but see Nondeductible losses , next, for exceptions). E file 2011 federal taxes Earthquakes. E file 2011 federal taxes Fires (but see Nondeductible losses , next, for exceptions). E file 2011 federal taxes Floods. E file 2011 federal taxes Government-ordered demolition or relocation of a home that is unsafe to use because of a disaster as discussed under Disaster Area Losses , later. E file 2011 federal taxes Mine cave-ins. E file 2011 federal taxes Shipwrecks. E file 2011 federal taxes Sonic booms. E file 2011 federal taxes Storms, including hurricanes and tornadoes. E file 2011 federal taxes Terrorist attacks. E file 2011 federal taxes Vandalism. E file 2011 federal taxes Volcanic eruptions. E file 2011 federal taxes Nondeductible losses. E file 2011 federal taxes   A casualty loss is not deductible if the damage or destruction is caused by the following. E file 2011 federal taxes Accidentally breaking articles such as glassware or china under normal conditions. E file 2011 federal taxes A family pet (explained below). E file 2011 federal taxes A fire if you willfully set it, or pay someone else to set it. E file 2011 federal taxes A car accident if your willful negligence or willful act caused it. E file 2011 federal taxes The same is true if the willful act or willful negligence of someone acting for you caused the accident. E file 2011 federal taxes Progressive deterioration (explained below). E file 2011 federal taxes However, see Special Procedure for Damage From Corrosive Drywall , later. E file 2011 federal taxes Family pet. E file 2011 federal taxes   Loss of property due to damage by a family pet is not deductible as a casualty loss unless the requirements discussed earlier under Casualty are met. E file 2011 federal taxes Example. E file 2011 federal taxes Your antique oriental rug was damaged by your new puppy before it was housebroken. E file 2011 federal taxes Because the damage was not unexpected and unusual, the loss is not deductible as a casualty loss. E file 2011 federal taxes Progressive deterioration. E file 2011 federal taxes   Loss of property due to progressive deterioration is not deductible as a casualty loss. E file 2011 federal taxes This is because the damage results from a steadily operating cause or a normal process, rather than from a sudden event. E file 2011 federal taxes The following are examples of damage due to progressive deterioration. E file 2011 federal taxes The steady weakening of a building due to normal wind and weather conditions. E file 2011 federal taxes The deterioration and damage to a water heater that bursts. E file 2011 federal taxes However, the rust and water damage to rugs and drapes caused by the bursting of a water heater does qualify as a casualty. E file 2011 federal taxes Most losses of property caused by droughts. E file 2011 federal taxes To be deductible, a drought-related loss generally must be incurred in a trade or business or in a transaction entered into for profit. E file 2011 federal taxes Termite or moth damage. E file 2011 federal taxes The damage or destruction of trees, shrubs, or other plants by a fungus, disease, insects, worms, or similar pests. E file 2011 federal taxes However, a sudden destruction due to an unexpected or unusual infestation of beetles or other insects may result in a casualty loss. E file 2011 federal taxes Special Procedure for Damage From Corrosive Drywall Under a special procedure, you can deduct the amounts you paid to repair damage to your home and household appliances due to corrosive drywall. E file 2011 federal taxes Under this procedure, you treat the amounts paid for repairs as a casualty loss in the year of payment. E file 2011 federal taxes For example, amounts you paid for repairs in 2013 are deductible on your 2013 tax return and amounts you paid for repairs in 2012 are deductible on your 2012 tax return. E file 2011 federal taxes Note. E file 2011 federal taxes If you paid for any repairs before 2013 and you choose to follow this special procedure, you can amend your return for the earlier year by filing Form 1040X, Amended U. E file 2011 federal taxes S. E file 2011 federal taxes Individual Income Tax Return, and attaching a completed Form 4684 for the appropriate year. E file 2011 federal taxes Form 4684 for the appropriate year can be found at IRS. E file 2011 federal taxes gov. E file 2011 federal taxes Generally, Form 1040X must be filed within 3 years after the date the original return was filed or within 2 years after the date the tax was paid, whichever is later. E file 2011 federal taxes Corrosive drywall. E file 2011 federal taxes   For purposes of this special procedure, “corrosive drywall” means drywall that is identified as problem drywall under the two-step identification method published by the Consumer Product Safety Commission (CPSC) and the Department of Housing and Urban Development (HUD) in their interim guidance dated January 28, 2010, as revised by the CPSC and HUD. E file 2011 federal taxes The revised identification guidance and remediation guidelines are available at www. E file 2011 federal taxes cpsc. E file 2011 federal taxes gov/Safety-Education/Safety-Education-Centers/Drywall. E file 2011 federal taxes Special instructions for completing Form 4684. E file 2011 federal taxes   If you choose to follow this special procedure, complete Form 4684, Section A, according to the instructions below. E file 2011 federal taxes The IRS will not challenge your treatment of damage resulting from corrosive drywall as a casualty loss if you determine and report the loss as explained below. E file 2011 federal taxes Top margin of Form 4684. E file 2011 federal taxes   Enter “Revenue Procedure 2010-36”. E file 2011 federal taxes Line 1. E file 2011 federal taxes   Enter the information required by the line 1 instructions. E file 2011 federal taxes Line 2. E file 2011 federal taxes   Skip this line. E file 2011 federal taxes Line 3. E file 2011 federal taxes   Enter the amount of insurance or other reimbursements you received (including through litigation). E file 2011 federal taxes If none, enter -0-. E file 2011 federal taxes Lines 4–7. E file 2011 federal taxes   Skip these lines. E file 2011 federal taxes Line 8. E file 2011 federal taxes   Enter the amount you paid to repair the damage to your home and household appliances due to corrosive drywall. E file 2011 federal taxes Enter only the amounts you paid to restore your home to the condition existing immediately before the damage. E file 2011 federal taxes Do not enter any amounts you paid for improvements or additions that increased the value of your home above its pre-loss value. E file 2011 federal taxes If you replaced a household appliance instead of repairing it, enter the lesser of: The current cost to replace the original appliance, or The basis of the original appliance (generally its cost). E file 2011 federal taxes Line 9. E file 2011 federal taxes   If line 8 is more than line 3, do one of the following. E file 2011 federal taxes If you have a pending claim for reimbursement (or you intend to pursue reimbursement), enter 75% of the difference between lines 3 and 8. E file 2011 federal taxes If item (1) does not apply to you, enter the full amount of the difference between lines 3 and 8. E file 2011 federal taxes If line 8 is less than or equal to line 3, you cannot claim a casualty loss deduction using this special procedure. E file 2011 federal taxes    If you have a pending claim for reimbursement (or you intend to pursue reimbursement), you may have income or an additional deduction in a later tax year depending on the actual amount of reimbursement received. E file 2011 federal taxes See Reimbursement Received After Deducting Loss, later. E file 2011 federal taxes Lines 10–18. E file 2011 federal taxes   Complete these lines according to the Instructions for Form 4684. E file 2011 federal taxes Choosing not to follow this special procedure. E file 2011 federal taxes   If you choose not to follow this special procedure, you are subject to all of the provisions that apply to the deductibility of casualty losses, and you must complete lines 1–9 according to the Instructions for Form 4684. E file 2011 federal taxes This means, for example, that you must establish that the damage, destruction, or loss of property resulted from an identifiable event as defined earlier under Casualty . E file 2011 federal taxes Furthermore, you must have proof that shows the following. E file 2011 federal taxes The loss is properly deductible in the tax year you claimed it and not in some other year. E file 2011 federal taxes See When To Report Gains and Losses , later. E file 2011 federal taxes The amount of the claimed loss. E file 2011 federal taxes See Proof of Loss , later. E file 2011 federal taxes No claim for reimbursement of any portion of the loss exists for which there is a reasonable prospect of recovery. E file 2011 federal taxes See When To Report Gains and Losses , later. E file 2011 federal taxes Theft A theft is the taking and removing of money or property with the intent to deprive the owner of it. E file 2011 federal taxes The taking of property must be illegal under the law of the state where it occurred and it must have been done with criminal intent. E file 2011 federal taxes You do not need to show a conviction for theft. E file 2011 federal taxes Theft includes the taking of money or property by the following means. E file 2011 federal taxes Blackmail. E file 2011 federal taxes Burglary. E file 2011 federal taxes Embezzlement. E file 2011 federal taxes Extortion. E file 2011 federal taxes Kidnapping for ransom. E file 2011 federal taxes Larceny. E file 2011 federal taxes Robbery. E file 2011 federal taxes The taking of money or property through fraud or misrepresentation is theft if it is illegal under state or local law. E file 2011 federal taxes Decline in market value of stock. E file 2011 federal taxes   You cannot deduct as a theft loss the decline in market value of stock acquired on the open market for investment if the decline is caused by disclosure of accounting fraud or other illegal misconduct by the officers or directors of the corporation that issued the stock. E file 2011 federal taxes However, you can deduct as a capital loss the loss you sustain when you sell or exchange the stock or the stock becomes completely worthless. E file 2011 federal taxes You report a capital loss on Schedule D (Form 1040). E file 2011 federal taxes For more information about stock sales, worthless stock, and capital losses, see chapter 4 of Publication 550. E file 2011 federal taxes Mislaid or lost property. E file 2011 federal taxes    The simple disappearance of money or property is not a theft. E file 2011 federal taxes However, an accidental loss or disappearance of property can qualify as a casualty if it results from an identifiable event that is sudden, unexpected, or unusual. E file 2011 federal taxes Sudden, unexpected, and unusual events were defined earlier under Casualty . E file 2011 federal taxes Example. E file 2011 federal taxes A car door is accidentally slammed on your hand, breaking the setting of your diamond ring. E file 2011 federal taxes The diamond falls from the ring and is never found. E file 2011 federal taxes The loss of the diamond is a casualty. E file 2011 federal taxes Losses from Ponzi-type investment schemes. E file 2011 federal taxes   The IRS has issued the following guidance to assist taxpayers who are victims of losses from Ponzi-type investment schemes: Revenue Ruling 2009-9, 2009-14 I. E file 2011 federal taxes R. E file 2011 federal taxes B. E file 2011 federal taxes 735 (available at www. E file 2011 federal taxes irs. E file 2011 federal taxes gov/irb/2009-14_IRB/ar07. E file 2011 federal taxes html). E file 2011 federal taxes Revenue Procedure 2009-20, 2009-14 I. E file 2011 federal taxes R. E file 2011 federal taxes B. E file 2011 federal taxes 749 (available at www. E file 2011 federal taxes irs. E file 2011 federal taxes gov/irb/2009-14_IRB/ar11. E file 2011 federal taxes html). E file 2011 federal taxes Revenue Procedure 2011-58, 2011-50 I. E file 2011 federal taxes R. E file 2011 federal taxes B. E file 2011 federal taxes 847 (available at www. E file 2011 federal taxes irs. E file 2011 federal taxes gov/irb/2011-50_IRB/ar11. E file 2011 federal taxes html). E file 2011 federal taxes If you qualify to use Revenue Procedure 2009-20, as modified by Revenue Procedure 2011-58, and you choose to follow the procedures in the guidance, first fill out Section C of Form 4684 to determine the amount to enter on Section B, line 28. E file 2011 federal taxes Skip lines 19 to 27, but you must fill out Section B, lines 29 to 39, as appropriate. E file 2011 federal taxes Section C of Form 4684 replaces Appendix A in Revenue Procedure 2009-20. E file 2011 federal taxes You do not need to complete Appendix A. E file 2011 federal taxes For more information, see the above revenue ruling and revenue procedures, and the Instructions for Form 4684. E file 2011 federal taxes   If you choose not to use the procedures in Revenue Procedure 2009-20, as modified by Revenue Procedure 2011-58, you may claim your theft loss by filling out Section B, lines 19 to 39, as appropriate. E file 2011 federal taxes Loss on Deposits A loss on deposits can occur when a bank, credit union, or other financial institution becomes insolvent or bankrupt. E file 2011 federal taxes If you incurred this type of loss, you can choose one of the following ways to deduct the loss. E file 2011 federal taxes As a casualty loss. E file 2011 federal taxes As an ordinary loss. E file 2011 federal taxes As a nonbusiness bad debt. E file 2011 federal taxes Casualty loss or ordinary loss. E file 2011 federal taxes   You can choose to deduct a loss on deposits as a casualty loss or as an ordinary loss for any year in which you can reasonably estimate how much of your deposits you have lost in an insolvent or bankrupt financial institution. E file 2011 federal taxes The choice generally is made on the return you file for that year and applies to all your losses on deposits for the year in that particular financial institution. E file 2011 federal taxes If you treat the loss as a casualty or ordinary loss, you cannot treat the same amount of the loss as a nonbusiness bad debt when it actually becomes worthless. E file 2011 federal taxes However, you can take a nonbusiness bad debt deduction for any amount of loss that is more than the estimated amount you deducted as a casualty or ordinary loss. E file 2011 federal taxes Once you make the choice, you cannot change it without permission from the Internal Revenue Service. E file 2011 federal taxes   If you claim an ordinary loss, report it as a miscellaneous itemized deduction on Schedule A (Form 1040), line 23. E file 2011 federal taxes The maximum amount you can claim is $20,000 ($10,000 if you are married filing separately) reduced by any expected state insurance proceeds. E file 2011 federal taxes Your loss is subject to the 2%-of-adjusted-gross-income limit. E file 2011 federal taxes You cannot choose to claim an ordinary loss if any part of the deposit is federally insured. E file 2011 federal taxes Nonbusiness bad debt. E file 2011 federal taxes   If you do not choose to deduct the loss as a casualty loss or as an ordinary loss, you must wait until the year the actual loss is determined and deduct the loss as a nonbusiness bad debt in that year. E file 2011 federal taxes How to report. E file 2011 federal taxes   The kind of deduction you choose for your loss on deposits determines how you report your loss. E file 2011 federal taxes See Table 1. E file 2011 federal taxes More information. E file 2011 federal taxes   For more information, see Special Treatment for Losses on Deposits in Insolvent or Bankrupt Financial Institutions in the Instructions for Form 4684. E file 2011 federal taxes Deducted loss recovered. E file 2011 federal taxes   If you recover an amount you deducted as a loss in an earlier year, you may have to include the amount recovered in your income for the year of recovery. E file 2011 federal taxes If any part of the original deduction did not reduce your tax in the earlier year, you do not have to include that part of the recovery in your income. E file 2011 federal taxes For more information, see Recoveries in Publication 525. E file 2011 federal taxes Proof of Loss To deduct a casualty or theft loss, you must be able to show that there was a casualty or theft. E file 2011 federal taxes You also must be able to support the amount you take as a deduction. E file 2011 federal taxes Casualty loss proof. E file 2011 federal taxes   For a casualty loss, you should be able to show all of the following. E file 2011 federal taxes The type of casualty (car accident, fire, storm, etc. E file 2011 federal taxes ) and when it occurred. E file 2011 federal taxes That the loss was a direct result of the casualty. E file 2011 federal taxes That you were the owner of the property, or if you leased the property from someone else, that you were contractually liable to the owner for the damage. E file 2011 federal taxes Whether a claim for reimbursement exists for which there is a reasonable expectation of recovery. E file 2011 federal taxes Theft loss proof. E file 2011 federal taxes   For a theft loss, you should be able to show all of the following. E file 2011 federal taxes When you discovered that your property was missing. E file 2011 federal taxes That your property was stolen. E file 2011 federal taxes That you were the owner of the property. E file 2011 federal taxes Whether a claim for reimbursement exists for which there is a reasonable expectation of recovery. E file 2011 federal taxes    It is important that you have records that will prove your deduction. E file 2011 federal taxes If you do not have the actual records to support your deduction, you can use other satisfactory evidence to support it. E file 2011 federal taxes Figuring a Loss To determine your deduction for a casualty or theft loss, you must first figure your loss. E file 2011 federal taxes Table 1. E file 2011 federal taxes Reporting Loss on Deposits IF you choose to report the loss as a(n). E file 2011 federal taxes . E file 2011 federal taxes . E file 2011 federal taxes   THEN report it on. E file 2011 federal taxes . E file 2011 federal taxes . E file 2011 federal taxes casualty loss   Form 4684 and Schedule A  (Form 1040). E file 2011 federal taxes ordinary loss   Schedule A (Form 1040). E file 2011 federal taxes nonbusiness bad debt   Form 8949 and Schedule D (Form 1040). E file 2011 federal taxes Amount of loss. E file 2011 federal taxes   Figure the amount of your loss using the following steps. E file 2011 federal taxes Determine your adjusted basis in the property before the casualty or theft. E file 2011 federal taxes Determine the decrease in fair market value (FMV) of the property as a result of the casualty or theft. E file 2011 federal taxes From the smaller of the amounts you determined in (1) and (2), subtract any insurance or other reimbursement you received or expect to receive. E file 2011 federal taxes For personal-use property and property used in performing services as an employee, apply the deduction limits, discussed later, to determine the amount of your deductible loss. E file 2011 federal taxes Gain from reimbursement. E file 2011 federal taxes   If your reimbursement is more than your adjusted basis in the property, you have a gain. E file 2011 federal taxes This is true even if the decrease in the FMV of the property is smaller than your adjusted basis. E file 2011 federal taxes If you have a gain, you may have to pay tax on it, or you may be able to postpone reporting the gain. E file 2011 federal taxes See Figuring a Gain , later. E file 2011 federal taxes Business or income-producing property. E file 2011 federal taxes   If you have business or income-producing property, such as rental property, and it is stolen or completely destroyed, the decrease in FMV is not considered. E file 2011 federal taxes Your loss is figured as follows:   Your adjusted basis in the property     MINUS     Any salvage value     MINUS     Any insurance or other reimbursement you  receive or expect to receive   Loss of inventory. E file 2011 federal taxes   There are two ways you can deduct a casualty or theft loss of inventory, including items you hold for sale to customers. E file 2011 federal taxes   One way is to deduct the loss through the increase in the cost of goods sold by properly reporting your opening and closing inventories. E file 2011 federal taxes Do not claim this loss again as a casualty or theft loss. E file 2011 federal taxes If you take the loss through the increase in the cost of goods sold, include any insurance or other reimbursement you receive for the loss in gross income. E file 2011 federal taxes   The other way is to deduct the loss separately. E file 2011 federal taxes If you deduct it separately, eliminate the affected inventory items from the cost of goods sold by making a downward adjustment to opening inventory or purchases. E file 2011 federal taxes Reduce the loss by the reimbursement you received. E file 2011 federal taxes Do not include the reimbursement in gross income. E file 2011 federal taxes If you do not receive the reimbursement by the end of the year, you may not claim a loss to the extent you have a reasonable prospect of recovery. E file 2011 federal taxes Leased property. E file 2011 federal taxes   If you are liable for casualty damage to property you lease, your loss is the amount you must pay to repair the property minus any insurance or other reimbursement you receive or expect to receive. E file 2011 federal taxes Separate computations. E file 2011 federal taxes   Generally, if a single casualty or theft involves more than one item of property, you must figure the loss on each item separately. E file 2011 federal taxes Then combine the losses to determine the total loss from that casualty or theft. E file 2011 federal taxes Exception for personal-use real property. E file 2011 federal taxes   In figuring a casualty loss on personal-use real property, the entire property (including any improvements, such as buildings, trees, and shrubs) is treated as one item. E file 2011 federal taxes Figure the loss using the smaller of the following. E file 2011 federal taxes The decrease in FMV of the entire property. E file 2011 federal taxes The adjusted basis of the entire property. E file 2011 federal taxes   See Real property under Figuring the Deduction, later. E file 2011 federal taxes Decrease in Fair Market Value Fair market value (FMV) is the price for which you could sell your property to a willing buyer when neither of you has to sell or buy and both of you know all the relevant facts. E file 2011 federal taxes The decrease in FMV used to figure the amount of a casualty or theft loss is the difference between the property's fair market value immediately before and immediately after the casualty or theft. E file 2011 federal taxes FMV of stolen property. E file 2011 federal taxes   The FMV of property immediately after a theft is considered to be zero because you no longer have the property. E file 2011 federal taxes Example. E file 2011 federal taxes Several years ago, you purchased silver dollars at face value for $150. E file 2011 federal taxes This is your adjusted basis in the property. E file 2011 federal taxes Your silver dollars were stolen this year. E file 2011 federal taxes The FMV of the coins was $1,000 just before they were stolen, and insurance did not cover them. E file 2011 federal taxes Your theft loss is $150. E file 2011 federal taxes Recovered stolen property. E file 2011 federal taxes   Recovered stolen property is your property that was stolen and later returned to you. E file 2011 federal taxes If you recovered property after you had already taken a theft loss deduction, you must refigure your loss using the smaller of the property's adjusted basis (explained later) or the decrease in FMV from the time just before it was stolen until the time it was recovered. E file 2011 federal taxes Use this amount to refigure your total loss for the year in which the loss was deducted. E file 2011 federal taxes   If your refigured loss is less than the loss you deducted, you generally have to report the difference as income in the recovery year. E file 2011 federal taxes But report the difference only up to the amount of the loss that reduced your tax. E file 2011 federal taxes For more information on the amount to report, see Recoveries in Publication 525. E file 2011 federal taxes Figuring Decrease in FMV — Items To Consider To figure the decrease in FMV because of a casualty or theft, you generally need a competent appraisal. E file 2011 federal taxes However, other measures also can be used to establish certain decreases. E file 2011 federal taxes See Appraisal and Cost of cleaning up or making repairs , next. E file 2011 federal taxes Appraisal. E file 2011 federal taxes   An appraisal to determine the difference between the FMV of the property immediately before a casualty or theft and immediately afterwards should be made by a competent appraiser. E file 2011 federal taxes The appraiser must recognize the effects of any general market decline that may occur along with the casualty. E file 2011 federal taxes This information is needed to limit any deduction to the actual loss resulting from damage to the property. E file 2011 federal taxes   Several factors are important in evaluating the accuracy of an appraisal, including the following. E file 2011 federal taxes The appraiser's familiarity with your property before and after the casualty or theft. E file 2011 federal taxes The appraiser's knowledge of sales of comparable property in the area. E file 2011 federal taxes The appraiser's knowledge of conditions in the area of the casualty. E file 2011 federal taxes The appraiser's method of appraisal. E file 2011 federal taxes You may be able to use an appraisal that you used to get a federal loan (or a federal loan guarantee) as the result of a federally declared disaster to establish the amount of your disaster loss. E file 2011 federal taxes For more information on disasters, see Disaster Area Losses, later. E file 2011 federal taxes Cost of cleaning up or making repairs. E file 2011 federal taxes   The cost of repairing damaged property is not part of a casualty loss. E file 2011 federal taxes Neither is the cost of cleaning up after a casualty. E file 2011 federal taxes But you can use the cost of cleaning up or of making repairs after a casualty as a measure of the decrease in FMV if you meet all the following conditions. E file 2011 federal taxes The repairs are actually made. E file 2011 federal taxes The repairs are necessary to bring the property back to its condition before the casualty. E file 2011 federal taxes The amount spent for repairs is not excessive. E file 2011 federal taxes The repairs take care of the damage only. E file 2011 federal taxes The value of the property after the repairs is not, due to the repairs, more than the value of the property before the casualty. E file 2011 federal taxes Landscaping. E file 2011 federal taxes   The cost of restoring landscaping to its original condition after a casualty may indicate the decrease in FMV. E file 2011 federal taxes You may be able to measure your loss by what you spend on the following. E file 2011 federal taxes Removing destroyed or damaged trees and shrubs, minus any salvage you receive. E file 2011 federal taxes Pruning and other measures taken to preserve damaged trees and shrubs. E file 2011 federal taxes Replanting necessary to restore the property to its approximate value before the casualty. E file 2011 federal taxes Car value. E file 2011 federal taxes   Books issued by various automobile organizations that list your car may be useful in figuring the value of your car. E file 2011 federal taxes You can use the books' retail values and modify them by factors such as the mileage and condition of your car to figure its value. E file 2011 federal taxes The prices are not official, but they may be useful in determining value and suggesting relative prices for comparison with current sales and offerings in your area. E file 2011 federal taxes If your car is not listed in the books, determine its value from other sources. E file 2011 federal taxes A dealer's offer for your car as a trade-in on a new car is not usually a measure of its true value. E file 2011 federal taxes Figuring Decrease in FMV — Items Not To Consider You generally should not consider the following items when attempting to establish the decrease in FMV of your property. E file 2011 federal taxes Cost of protection. E file 2011 federal taxes   The cost of protecting your property against a casualty or theft is not part of a casualty or theft loss. E file 2011 federal taxes The amount you spend on insurance or to board up your house against a storm is not part of your loss. E file 2011 federal taxes If the property is business property, these expenses are deductible as business expenses. E file 2011 federal taxes   If you make permanent improvements to your property to protect it against a casualty or theft, add the cost of these improvements to your basis in the property. E file 2011 federal taxes An example would be the cost of a dike to prevent flooding. E file 2011 federal taxes Exception. E file 2011 federal taxes   You cannot increase your basis in the property by, or deduct as a business expense, any expenditures you made with respect to qualified disaster mitigation payments (discussed later under Disaster Area Losses ). E file 2011 federal taxes Related expenses. E file 2011 federal taxes   The incidental expenses due to a casualty or theft, such as expenses for the treatment of personal injuries, for temporary housing, or for a rental car, are not part of your casualty or theft loss. E file 2011 federal taxes However, they may be deductible as business expenses if the damaged or stolen property is business property. E file 2011 federal taxes Replacement cost. E file 2011 federal taxes   The cost of replacing stolen or destroyed property is not part of a casualty or theft loss. E file 2011 federal taxes Example. E file 2011 federal taxes You bought a new chair 4 years ago for $300. E file 2011 federal taxes In April, a fire destroyed the chair. E file 2011 federal taxes You estimate that it would cost $500 to replace it. E file 2011 federal taxes If you had sold the chair before the fire, you estimate that you could have received only $100 for it because it was 4 years old. E file 2011 federal taxes The chair was not insured. E file 2011 federal taxes Your loss is $100, the FMV of the chair before the fire. E file 2011 federal taxes It is not $500, the replacement cost. E file 2011 federal taxes Sentimental value. E file 2011 federal taxes   Do not consider sentimental value when determining your loss. E file 2011 federal taxes If a family portrait, heirloom, or keepsake is damaged, destroyed, or stolen, you must base your loss on its FMV, as limited by your adjusted basis in the property. E file 2011 federal taxes Decline in market value of property in or near casualty area. E file 2011 federal taxes   A decrease in the value of your property because it is in or near an area that suffered a casualty, or that might again suffer a casualty, is not to be taken into consideration. E file 2011 federal taxes You have a loss only for actual casualty damage to your property. E file 2011 federal taxes However, if your home is in a federally declared disaster area, see Disaster Area Losses , later. E file 2011 federal taxes Costs of photographs and appraisals. E file 2011 federal taxes   Photographs taken after a casualty will be helpful in establishing the condition and value of the property after it was damaged. E file 2011 federal taxes Photographs showing the condition of the property after it was repaired, restored, or replaced may also be helpful. E file 2011 federal taxes   Appraisals are used to figure the decrease in FMV because of a casualty or theft. E file 2011 federal taxes See Appraisal , earlier, under Figuring Decrease in FMV — Items To Consider, for information about appraisals. E file 2011 federal taxes   The costs of photographs and appraisals used as evidence of the value and condition of property damaged as a result of a casualty are not a part of the loss. E file 2011 federal taxes They are expenses in determining your tax liability. E file 2011 federal taxes You can claim these costs as a miscellaneous itemized deduction subject to the 2%-of-adjusted-gross-income limit on Schedule A (Form 1040). E file 2011 federal taxes Adjusted Basis The measure of your investment in the property you own is its basis. E file 2011 federal taxes For property you buy, your basis is usually its cost to you. E file 2011 federal taxes For property you acquire in some other way, such as inheriting it, receiving it as a gift, or getting it in a nontaxable exchange, you must figure your basis in another way, as explained in Publication 551. E file 2011 federal taxes If you inherited the property from someone who died in 2010 and the executor of the decedent's estate made the election to file Form 8939, refer to the information provided by the executor or see Publication 4895, Tax Treatment of Property Acquired From a Decedent Dying in 2010. E file 2011 federal taxes Adjustments to basis. E file 2011 federal taxes    While you own the property, various events may take place that change your basis. E file 2011 federal taxes Some events, such as additions or permanent improvements to the property, increase basis. E file 2011 federal taxes Others, such as earlier casualty losses and depreciation deductions, decrease basis. E file 2011 federal taxes When you add the increases to the basis and subtract the decreases from the basis, the result is your adjusted basis. E file 2011 federal taxes See Publication 551 for more information on figuring the basis of your property. E file 2011 federal taxes Insurance and Other Reimbursements If you receive an insurance or other type of reimbursement, you must subtract the reimbursement when you figure your loss. E file 2011 federal taxes You do not have a casualty or theft loss to the extent you are reimbursed. E file 2011 federal taxes If you expect to be reimbursed for part or all of your loss, you must subtract the expected reimbursement when you figure your loss. E file 2011 federal taxes You must reduce your loss even if you do not receive payment until a later tax year. E file 2011 federal taxes See Reimbursement Received After Deducting Loss , later. E file 2011 federal taxes Failure to file a claim for reimbursement. E file 2011 federal taxes   If your property is covered by insurance, you must file a timely insurance claim for reimbursement of your loss. E file 2011 federal taxes Otherwise, you cannot deduct this loss as a casualty or theft. E file 2011 federal taxes The portion of the loss usually not covered by insurance (for example, a deductible) is not subject to this rule. E file 2011 federal taxes Example. E file 2011 federal taxes You have a car insurance policy with a $1,000 deductible. E file 2011 federal taxes Because your insurance did not cover the first $1,000 of an auto collision, the $1,000 would be deductible (subject to the $100 and 10% rules, discussed later). E file 2011 federal taxes This is true, even if you do not file an insurance claim, because your insurance policy would never have reimbursed you for the deductible. E file 2011 federal taxes Types of Reimbursements The most common type of reimbursement is an insurance payment for your stolen or damaged property. E file 2011 federal taxes Other types of reimbursements are discussed next. E file 2011 federal taxes Also see the Instructions for Form 4684. E file 2011 federal taxes Employer's emergency disaster fund. E file 2011 federal taxes   If you receive money from your employer's emergency disaster fund and you must use that money to rehabilitate or replace property on which you are claiming a casualty loss deduction, you must take that money into consideration in computing the casualty loss deduction. E file 2011 federal taxes Take into consideration only the amount you used to replace your destroyed or damaged property. E file 2011 federal taxes Example. E file 2011 federal taxes Your home was extensively damaged by a tornado. E file 2011 federal taxes Your loss after reimbursement from your insurance company was $10,000. E file 2011 federal taxes Your employer set up a disaster relief fund for its employees. E file 2011 federal taxes Employees receiving money from the fund had to use it to rehabilitate or replace their damaged or destroyed property. E file 2011 federal taxes You received $4,000 from the fund and spent the entire amount on repairs to your home. E file 2011 federal taxes In figuring your casualty loss, you must reduce your unreimbursed loss ($10,000) by the $4,000 you received from your employer's fund. E file 2011 federal taxes Your casualty loss before applying the deduction limits (discussed later) is $6,000. E file 2011 federal taxes Cash gifts. E file 2011 federal taxes   If you receive excludable cash gifts as a disaster victim and there are no limits on how you can use the money, you do not reduce your casualty loss by these excludable cash gifts. E file 2011 federal taxes This applies even if you use the money to pay for repairs to property damaged in the disaster. E file 2011 federal taxes Example. E file 2011 federal taxes Your home was damaged by a hurricane. E file 2011 federal taxes Relatives and neighbors made cash gifts to you that were excludable from your income. E file 2011 federal taxes You used part of the cash gifts to pay for repairs to your home. E file 2011 federal taxes There were no limits or restrictions on how you could use the cash gifts. E file 2011 federal taxes It was an excludable gift, so the money you received and used to pay for repairs to your home does not reduce your casualty loss on the damaged home. E file 2011 federal taxes Insurance payments for living expenses. E file 2011 federal taxes   You do not reduce your casualty loss by insurance payments you receive to cover living expenses in either of the following situations. E file 2011 federal taxes You lose the use of your main home because of a casualty. E file 2011 federal taxes Government authorities do not allow you access to your main home because of a casualty or threat of one. E file 2011 federal taxes Inclusion in income. E file 2011 federal taxes   If these insurance payments are more than the temporary increase in your living expenses, you must include the excess in your income. E file 2011 federal taxes Report this amount on Form 1040, line 21. E file 2011 federal taxes However, if the casualty occurs in a federally declared disaster area, none of the insurance payments are taxable. E file 2011 federal taxes See Qualified disaster relief payments , later, under Disaster Area Losses. E file 2011 federal taxes   A temporary increase in your living expenses is the difference between the actual living expenses you and your family incurred during the period you could not use your home and your normal living expenses for that period. E file 2011 federal taxes Actual living expenses are the reasonable and necessary expenses incurred because of the loss of your main home. E file 2011 federal taxes Generally, these expenses include the amounts you pay for the following. E file 2011 federal taxes Renting suitable housing. E file 2011 federal taxes Transportation. E file 2011 federal taxes Food. E file 2011 federal taxes Utilities. E file 2011 federal taxes Miscellaneous services. E file 2011 federal taxes Normal living expenses consist of these same expenses that you would have incurred but did not because of the casualty or the threat of one. E file 2011 federal taxes Example. E file 2011 federal taxes As a result of a fire, you vacated your apartment for a month and moved to a motel. E file 2011 federal taxes You normally pay $525 a month for rent. E file 2011 federal taxes None was charged for the month the apartment was vacated. E file 2011 federal taxes Your motel rent for this month was $1,200. E file 2011 federal taxes You normally pay $200 a month for food. E file 2011 federal taxes Your food expenses for the month you lived in the motel were $400. E file 2011 federal taxes You received $1,100 from your insurance company to cover your living expenses. E file 2011 federal taxes You determine the payment you must include in income as follows. E file 2011 federal taxes 1. E file 2011 federal taxes Insurance payment for living expenses $1,100 2. E file 2011 federal taxes Actual expenses during the month you are unable to use your home because of the fire $1,600   3. E file 2011 federal taxes Normal living expenses 725   4. E file 2011 federal taxes Temporary increase in living expenses: Subtract line 3  from line 2 875 5. E file 2011 federal taxes Amount of payment includible in income: Subtract line 4 from line 1 $ 225 Tax year of inclusion. E file 2011 federal taxes   You include the taxable part of the insurance payment in income for the year you regain the use of your main home or, if later, for the year you receive the taxable part of the insurance payment. E file 2011 federal taxes Example. E file 2011 federal taxes Your main home was destroyed by a tornado in August 2011. E file 2011 federal taxes You regained use of your home in November 2012. E file 2011 federal taxes The insurance payments you received in 2011 and 2012 were $1,500 more than the temporary increase in your living expenses during those years. E file 2011 federal taxes You include this amount in income on your 2012 Form 1040. E file 2011 federal taxes If, in 2013, you receive further payments to cover the living expenses you had in 2011 and 2012, you must include those payments in income on your 2013 Form 1040. E file 2011 federal taxes Disaster relief. E file 2011 federal taxes   Food, medical supplies, and other forms of assistance you receive do not reduce your casualty loss, unless they are replacements for lost or destroyed property. E file 2011 federal taxes Table 2. E file 2011 federal taxes Deduction Limit Rules for Personal-Use and Employee Property       $100 Rule 10% Rule 2% Rule General Application You must reduce each casualty or theft loss by $100 when figuring your deduction. E file 2011 federal taxes Apply this rule to personal-use property after you have figured the amount of your loss. E file 2011 federal taxes You must reduce your total casualty or theft loss by 10% of your adjusted gross income. E file 2011 federal taxes Apply this rule to personal-use property after you reduce each loss by $100 (the $100 rule). E file 2011 federal taxes You must reduce your total casualty or theft loss by 2% of your adjusted gross income. E file 2011 federal taxes Apply this rule to property you used in performing services as an employee after you have figured the amount of your loss and added it to your job expenses and most other miscellaneous itemized deductions. E file 2011 federal taxes Single Event Apply this rule only once, even if many pieces of property are affected. E file 2011 federal taxes Apply this rule only once, even if many pieces of property are affected. E file 2011 federal taxes Apply this rule only once, even if many pieces of property are affected. E file 2011 federal taxes More Than One Event Apply to the loss from each event. E file 2011 federal taxes Apply to the total of all your losses from all events. E file 2011 federal taxes Apply to the total of all your losses from all events. E file 2011 federal taxes More Than One Person— With Loss From the   Same Event  (other than a married couple  filing jointly) Apply separately to each person. E file 2011 federal taxes Apply separately to each person. E file 2011 federal taxes Apply separately to each person. E file 2011 federal taxes Married Couple—  With Loss From the  Same Event Filing Joint Return Apply as if you were one person. E file 2011 federal taxes Apply as if you were one person. E file 2011 federal taxes Apply as if you were one person. E file 2011 federal taxes Filing Separate Return Apply separately to each spouse. E file 2011 federal taxes Apply separately to each spouse. E file 2011 federal taxes Apply separately to each spouse. E file 2011 federal taxes More Than One Owner (other than a married couple filing jointly) Apply separately to each owner of jointly owned property. E file 2011 federal taxes Apply separately to each owner of jointly owned property. E file 2011 federal taxes Apply separately to each owner of jointly owned property. E file 2011 federal taxes    Qualified disaster relief payments you receive for expenses you incurred as a result of a federally declared disaster, are not taxable income to you. E file 2011 federal taxes For more information, see Qualified disaster relief payments under Disaster Area Losses, later. E file 2011 federal taxes   Disaster unemployment assistance payments are unemployment benefits that are taxable. E file 2011 federal taxes   Generally, disaster relief grants received under the Robert T. E file 2011 federal taxes Stafford Disaster Relief and Emergency Assistance Act are not included in your income. E file 2011 federal taxes See Federal disaster relief grants , later, under Disaster Area Losses. E file 2011 federal taxes Loan proceeds. E file 2011 federal taxes   Do not reduce your casualty loss by loan proceeds you use to rehabilitate or replace property on which you are claiming a casualty loss deduction. E file 2011 federal taxes If you have a federal loan that is canceled (forgiven), see Federal loan canceled , later, under Disaster Area Losses. E file 2011 federal taxes Reimbursement Received After Deducting Loss If you figured your casualty or theft loss using the amount of your expected reimbursement, you may have to adjust your tax return for the tax year in which you get your actual reimbursement. E file 2011 federal taxes This section explains the adjustment you may have to make. E file 2011 federal taxes Actual reimbursement less than expected. E file 2011 federal taxes   If you later receive less reimbursement than you expected, include that difference as a loss with your other losses (if any) on your return for the year in which you can reasonably expect no more reimbursement. E file 2011 federal taxes Example. E file 2011 federal taxes Your personal car had a FMV of $2,000 when it was destroyed in a collision with another car in 2012. E file 2011 federal taxes The accident was due to the negligence of the other driver. E file 2011 federal taxes At the end of 2012, there was a reasonable prospect that the owner of the other car would reimburse you in full. E file 2011 federal taxes You did not have a deductible loss in 2012. E file 2011 federal taxes In January 2013, the court awards you a judgment of $2,000. E file 2011 federal taxes However, in July it becomes apparent that you will be unable to collect any amount from the other driver. E file 2011 federal taxes Since this is your only casualty or theft loss, you can deduct the loss in 2013 that is figured by applying the Deduction Limits (discussed later). E file 2011 federal taxes Actual reimbursement more than expected. E file 2011 federal taxes   If you later receive more reimbursement than you expected, after you have claimed a deduction for the loss, you may have to include the extra reimbursement in your income for the year you receive it. E file 2011 federal taxes However, if any part of the original deduction did not reduce your tax for the earlier year, do not include that part of the reimbursement in your income. E file 2011 federal taxes You do not refigure your tax for the year you claimed the deduction. E file 2011 federal taxes See Recoveries in Publication 525 to find out how much extra reimbursement to include in income. E file 2011 federal taxes Example. E file 2011 federal taxes In 2012, a hurricane destroyed your motorboat. E file 2011 federal taxes Your loss was $3,000, and you estimated that your insurance would cover $2,500 of it. E file 2011 federal taxes You did not itemize deductions on your 2012 return, so you could not deduct the loss. E file 2011 federal taxes When the insurance company reimburses you for the loss, you do not report any of the reimbursement as income. E file 2011 federal taxes This is true even if it is for the full $3,000 because you did not deduct the loss on your 2012 return. E file 2011 federal taxes The loss did not reduce your tax. E file 2011 federal taxes    If the total of all the reimbursements you receive is more than your adjusted basis in the destroyed or stolen property, you will have a gain on the casualty or theft. E file 2011 federal taxes If you have already taken a deduction for a loss and you receive the reimbursement in a later year, you may have to include the gain in your income for the later year. E file 2011 federal taxes Include the gain as ordinary income up to the amount of your deduction that reduced your tax for the earlier year. E file 2011 federal taxes You may be able to postpone reporting any remaining gain as explained under Postponement of Gain, later. E file 2011 federal taxes Actual reimbursement same as expected. E file 2011 federal taxes   If you receive exactly the reimbursement you expected to receive, you do not have to include any of the reimbursement in your income and you cannot deduct any additional loss. E file 2011 federal taxes Example. E file 2011 federal taxes In December 2013, you had a collision while driving your personal car. E file 2011 federal taxes Repairs to the car cost $950. E file 2011 federal taxes You had $100 deductible collision insurance. E file 2011 federal taxes Your insurance company agreed to reimburse you for the rest of the damage. E file 2011 federal taxes Because you expected a reimbursement from the insurance company, you did not have a casualty loss deduction in 2013. E file 2011 federal taxes Due to the $100 rule, you cannot deduct the $100 you paid as the deductible. E file 2011 federal taxes When you receive the $850 from the insurance company in 2014, do not report it as income. E file 2011 federal taxes Deduction Limits After you have figured your casualty or theft loss, you must figure how much of the loss you can deduct. E file 2011 federal taxes The deduction for casualty and theft losses of employee property and personal-use property is limited. E file 2011 federal taxes A loss on employee property is subject to the 2% rule, discussed next. E file 2011 federal taxes With certain exceptions, a loss on property you own for your personal use is subject to the $100 and 10% rules, discussed later. E file 2011 federal taxes The 2%, $100, and 10% rules are also summarized in Table 2 . E file 2011 federal taxes Losses on business property (other than employee property) and income-producing property are not subject to these rules. E file 2011 federal taxes However, if your casualty or theft loss involved a home you used for business or rented out, your deductible loss may be limited. E file 2011 federal taxes See the Instructions for Form 4684, Section B. E file 2011 federal taxes If the casualty or theft loss involved property used in a passive activity, see Form 8582, Passive Activity Loss Limitations, and its instructions. E file 2011 federal taxes 2% Rule The casualty and theft loss deduction for employee property, when added to your job expenses and most other miscellaneous itemized deductions on Schedule A (Form 1040) or Form 1040NR, Schedule A, must be reduced by 2% of your adjusted gross income. E file 2011 federal taxes Employee property is property used in performing services as an employee. E file 2011 federal taxes $100 Rule After you have figured your casualty or theft loss on personal-use property, as discussed earlier, you must reduce that loss by $100. E file 2011 federal taxes This reduction applies to each total casualty or theft loss. E file 2011 federal taxes It does not matter how many pieces of property are involved in an event. E file 2011 federal taxes Only a single $100 reduction applies. E file 2011 federal taxes Example. E file 2011 federal taxes You have $750 deductible collision insurance on your car. E file 2011 federal taxes The car is damaged in a collision. E file 2011 federal taxes The insurance company pays you for the damage minus the $750 deductible. E file 2011 federal taxes The amount of the casualty loss is based solely on the deductible. E file 2011 federal taxes The casualty loss is $650 ($750 − $100) because the first $100 of a casualty loss on personal-use property is not deductible. E file 2011 federal taxes Single event. E file 2011 federal taxes   Generally, events closely related in origin cause a single casualty. E file 2011 federal taxes It is a single casualty when the damage is from two or more closely related causes, such as wind and flood damage caused by the same storm. E file 2011 federal taxes A single casualty may also damage two or more pieces of property, such as a hailstorm that damages both your home and your car parked in your driveway. E file 2011 federal taxes Example 1. E file 2011 federal taxes A thunderstorm destroyed your pleasure boat. E file 2011 federal taxes You also lost some boating equipment in the storm. E file 2011 federal taxes Your loss was $5,000 on the boat and $1,200 on the equipment. E file 2011 federal taxes Your insurance company reimbursed you $4,500 for the damage to your boat. E file 2011 federal taxes You had no insurance coverage on the equipment. E file 2011 federal taxes Your casualty loss is from a single event and the $100 rule applies once. E file 2011 federal taxes Figure your loss before applying the 10% rule (discussed later) as follows. E file 2011 federal taxes     Boat Equipment 1. E file 2011 federal taxes Loss $5,000 $1,200 2. E file 2011 federal taxes Subtract insurance 4,500 -0- 3. E file 2011 federal taxes Loss after reimbursement $ 500 $1,200 4. E file 2011 federal taxes Total loss $1,700 5. E file 2011 federal taxes Subtract $100 100 6. E file 2011 federal taxes Loss before 10% rule $1,600 Example 2. E file 2011 federal taxes Thieves broke into your home in January and stole a ring and a fur coat. E file 2011 federal taxes You had a loss of $200 on the ring and $700 on the coat. E file 2011 federal taxes This is a single theft. E file 2011 federal taxes The $100 rule applies to the total $900 loss. E file 2011 federal taxes Example 3. E file 2011 federal taxes In September, hurricane winds blew the roof off your home. E file 2011 federal taxes Flood waters caused by the hurricane further damaged your home and destroyed your furniture and personal car. E file 2011 federal taxes This is considered a single casualty. E file 2011 federal taxes The $100 rule is applied to your total loss from the flood waters and the wind. E file 2011 federal taxes More than one loss. E file 2011 federal taxes   If you have more than one casualty or theft loss during your tax year, you must reduce each loss by $100. E file 2011 federal taxes Example. E file 2011 federal taxes Your family car was damaged in an accident in January. E file 2011 federal taxes Your loss after the insurance reimbursement was $75. E file 2011 federal taxes In February, your car was damaged in another accident. E file 2011 federal taxes This time your loss after the insurance reimbursement was $90. E file 2011 federal taxes Apply the $100 rule to each separate casualty loss. E file 2011 federal taxes Since neither accident resulted in a loss of over $100, you are not entitled to any deduction for these accidents. E file 2011 federal taxes More than one person. E file 2011 federal taxes   If two or more individuals (other than a husband and wife filing a joint return) have losses from the same casualty or theft, the $100 rule applies separately to each individual. E file 2011 federal taxes Example. E file 2011 federal taxes A fire damaged your house and also damaged the personal property of your house guest. E file 2011 federal taxes You must reduce your loss by $100. E file 2011 federal taxes Your house guest must reduce his or her loss by $100. E file 2011 federal taxes Married taxpayers. E file 2011 federal taxes   If you and your spouse file a joint return, you are treated as one individual in applying the $100 rule. E file 2011 federal taxes It does not matter whether you own the property jointly or separately. E file 2011 federal taxes   If you and your spouse have a casualty or theft loss and you file separate returns, each of you must reduce your loss by $100. E file 2011 federal taxes This is true even if you own the property jointly. E file 2011 federal taxes If one spouse owns the property, only that spouse can figure a loss deduction on a separate return. E file 2011 federal taxes   If the casualty or theft loss is on property you own as tenants by the entirety, each of you can figure your deduction on only one-half of the loss on separate returns. E file 2011 federal taxes Neither of you can figure your deduction on the entire loss on a separate return. E file 2011 federal taxes Each of you must reduce the loss by $100. E file 2011 federal taxes More than one owner. E file 2011 federal taxes   If two or more individuals (other than a husband and wife filing a joint return) have a loss on property jointly owned, the $100 rule applies separately to each. E file 2011 federal taxes For example, if two sisters live together in a home they own jointly and they have a casualty loss on the home, the $100 rule applies separately to each sister. E file 2011 federal taxes 10% Rule You must reduce the total of all your casualty or theft losses on personal-use property by 10% of your adjusted gross income. E file 2011 federal taxes Apply this rule after you reduce each loss by $100. E file 2011 federal taxes For more information, see the Form 4684 instructions. E file 2011 federal taxes If you have both gains and losses from casualties or thefts, see Gains and losses , later in this discussion. E file 2011 federal taxes Example. E file 2011 federal taxes In June, you discovered that your house had been burglarized. E file 2011 federal taxes Your loss after insurance reimbursement was $2,000. E file 2011 federal taxes Your adjusted gross income for the year you discovered the theft is $29,500. E file 2011 federal taxes Figure your theft loss as follows. E file 2011 federal taxes 1. E file 2011 federal taxes Loss after insurance $2,000 2. E file 2011 federal taxes Subtract $100 100 3. E file 2011 federal taxes Loss after $100 rule $1,900 4. E file 2011 federal taxes Subtract 10% of $29,500 AGI $2,950 5. E file 2011 federal taxes Theft loss deduction $-0- You do not have a theft loss deduction because your loss ($1,900) is less than 10% of your adjusted gross income ($2,950). E file 2011 federal taxes More than one loss. E file 2011 federal taxes   If you have more than one casualty or theft loss during your tax year, reduce each loss by any reimbursement and by $100. E file 2011 federal taxes Then you must reduce the total of all your losses by 10% of your adjusted gross income. E file 2011 federal taxes Example. E file 2011 federal taxes In March, you had a car accident that totally destroyed your car. E file 2011 federal taxes You did not have collision insurance on your car, so you did not receive any insurance reimbursement. E file 2011 federal taxes Your loss on the car was $1,800. E file 2011 federal taxes In November, a fire damaged your basement and totally destroyed the furniture, washer, dryer, and other items you had stored there. E file 2011 federal taxes Your loss on the basement items after reimbursement was $2,100. E file 2011 federal taxes Your adjusted gross income for the year that the accident and fire occurred is $25,000. E file 2011 federal taxes You figure your casualty loss deduction as follows. E file 2011 federal taxes     Car Basement 1. E file 2011 federal taxes Loss $1,800 $2,100 2. E file 2011 federal taxes Subtract $100 per incident 100 100 3. E file 2011 federal taxes Loss after $100 rule $1,700 $2,000 4. E file 2011 federal taxes Total loss $3,700 5. E file 2011 federal taxes Subtract 10% of $25,000 AGI 2,500 6. E file 2011 federal taxes Casualty loss deduction $1,200 Married taxpayers. E file 2011 federal taxes   If you and your spouse file a joint return, you are treated as one individual in applying the 10% rule. E file 2011 federal taxes It does not matter if you own the property jointly or separately. E file 2011 federal taxes   If you file separate returns, the 10% rule applies to each return on which a loss is claimed. E file 2011 federal taxes More than one owner. E file 2011 federal taxes   If two or more individuals (other than husband and wife filing a joint return) have a loss on property that is owned jointly, the 10% rule applies separately to each. E file 2011 federal taxes Gains and losses. E file 2011 federal taxes   If you have casualty or theft gains as well as losses to personal-use property, you must compare your total gains to your total losses. E file 2011 federal taxes Do this after you have reduced each loss by any reimbursements and by $100 but before you have reduced the losses by 10% of your adjusted gross income. E file 2011 federal taxes Casualty or theft gains do not include gains you choose to postpone. E file 2011 federal taxes See Postponement of Gain, later. E file 2011 federal taxes Losses more than gains. E file 2011 federal taxes   If your losses are more than your recognized gains, subtract your gains from your losses and reduce the result by 10% of your adjusted gross income. E file 2011 federal taxes The rest, if any, is your deductible loss from personal-use property. E file 2011 federal taxes Example. E file 2011 federal taxes Your theft loss after reducing it by reimbursements and by $100 is $2,700. E file 2011 federal taxes Your casualty gain is $700. E file 2011 federal taxes Your loss is more than your gain, so you must reduce your $2,000 net loss ($2,700 − $700) by 10% of your adjusted gross income. E file 2011 federal taxes Gains more than losses. E file 2011 federal taxes   If your recognized gains are more than your losses, subtract your losses from your gains. E file 2011 federal taxes The difference is treated as a capital gain and must be reported on Schedule D (Form 1040). E file 2011 federal taxes The 10% rule does not apply to your gains. E file 2011 federal taxes Example. E file 2011 federal taxes Your theft loss is $600 after reducing it by reimbursements and by $100. E file 2011 federal taxes Your casualty gain is $1,600. E file 2011 federal taxes Because your gain is more than your loss, you must report the $1,000 net gain ($1,600 − $600) on Schedule D (Form 1040). E file 2011 federal taxes More information. E file 2011 federal taxes   For information on how to figure recognized gains, see Figuring a Gain , later. E file 2011 federal taxes Figuring the Deduction Generally, you must figure your loss separately for each item stolen, damaged, or destroyed. E file 2011 federal taxes However, a special rule applies to real property you own for personal use. E file 2011 federal taxes Real property. E file 2011 federal taxes   In figuring a loss to real estate you own for personal use, all improvements (such as buildings and ornamental trees and the land containing the improvements) are considered together. E file 2011 federal taxes Example 1. E file 2011 federal taxes In June, a fire destroyed your lakeside cottage, which cost $144,800 (including $14,500 for the land) several years ago. E file 2011 federal taxes (Your land was not damaged. E file 2011 federal taxes ) This was your only casualty or theft loss for the year. E file 2011 federal taxes The FMV of the property immediately before the fire was $180,000 ($145,000 for the cottage and $35,000 for the land). E file 2011 federal taxes The FMV immediately after the fire was $35,000 (value of the land). E file 2011 federal taxes You collected $130,000 from the insurance company. E file 2011 federal taxes Your adjusted gross income for the year the fire occurred is $80,000. E file 2011 federal taxes Your deduction for the casualty loss is $6,700, figured in the following manner. E file 2011 federal taxes 1. E file 2011 federal taxes Adjusted basis of the entire property (cost in this example) $144,800 2. E file 2011 federal taxes FMV of entire property  before fire $180,000 3. E file 2011 federal taxes FMV of entire property after fire 35,000 4. E file 2011 federal taxes Decrease in FMV of entire property (line 2 − line 3) $145,000 5. E file 2011 federal taxes Loss (smaller of line 1 or line 4) $144,800 6. E file 2011 federal taxes Subtract insurance 130,000 7. E file 2011 federal taxes Loss after reimbursement $14,800 8. E file 2011 federal taxes Subtract $100 100 9. E file 2011 federal taxes Loss after $100 rule $14,700 10. E file 2011 federal taxes Subtract 10% of $80,000 AGI 8,000 11. E file 2011 federal taxes Casualty loss deduction $ 6,700 Example 2. E file 2011 federal taxes You bought your home a few years ago. E file 2011 federal taxes You paid $150,000 ($10,000 for the land and $140,000 for the house). E file 2011 federal taxes You also spent an additional $2,000 for landscaping. E file 2011 federal taxes This year a fire destroyed your home. E file 2011 federal taxes The fire also damaged the shrubbery and trees in your yard. E file 2011 federal taxes The fire was your only casualty or theft loss this year. E file 2011 federal taxes Competent appraisers valued the property as a whole at $175,000 before the fire, but only $50,000 after the fire. E file 2011 federal taxes Shortly after the fire, the insurance company paid you $95,000 for the loss. E file 2011 federal taxes Your adjusted gross income for this year is $70,000. E file 2011 federal taxes You figure your casualty loss deduction as follows. E file 2011 federal taxes 1. E file 2011 federal taxes Adjusted basis of the entire property (cost of land, building, and landscaping) $152,000 2. E file 2011 federal taxes FMV of entire property  before fire $175,000 3. E file 2011 federal taxes FMV of entire property after fire 50,000 4. E file 2011 federal taxes Decrease in FMV of entire property (line 2 − line 3) $125,000 5. E file 2011 federal taxes Loss (smaller of line 1 or line 4) $125,000 6. E file 2011 federal taxes Subtract insurance 95,000 7. E file 2011 federal taxes Loss after reimbursement $30,000 8. E file 2011 federal taxes Subtract $100 100 9. E file 2011 federal taxes Loss after $100 rule $29,900 10. E file 2011 federal taxes Subtract 10% of $70,000 AGI 7,000 11. E file 2011 federal taxes Casualty loss deduction $ 22,900 Personal property. E file 2011 federal taxes   Personal property is any property that is not real property. E file 2011 federal taxes If your personal property is stolen or is damaged or destroyed by a casualty, you must figure your loss separately for each item of property. E file 2011 federal taxes Then combine these separate losses to figure the total loss. E file 2011 federal taxes Reduce the total loss by $100 and 10% of your adjusted gross income to figure the loss deduction. E file 2011 federal taxes Example 1. E file 2011 federal taxes In August, a storm destroyed your pleasure boat, which cost $18,500. E file 2011 federal taxes This was your only casualty or theft loss for the year. E file 2011 federal taxes Its FMV immediately before the storm was $17,000. E file 2011 federal taxes You had no insurance, but were able to salvage the motor of the boat and sell it for $200. E file 2011 federal taxes Your adjusted gross income for the year the casualty occurred is $70,000. E file 2011 federal taxes Although the motor was sold separately, it is part of the boat and not a separate item of property. E file 2011 federal taxes You figure your casualty loss deduction as follows. E file 2011 federal taxes 1. E file 2011 federal taxes Adjusted basis (cost in this example) $18,500 2. E file 2011 federal taxes FMV before storm $17,000 3. E file 2011 federal taxes FMV after storm 200 4. E file 2011 federal taxes Decrease in FMV  (line 2 − line 3) $16,800 5. E file 2011 federal taxes Loss (smaller of line 1 or line 4) $16,800 6. E file 2011 federal taxes Subtract insurance -0- 7. E file 2011 federal taxes Loss after reimbursement $16,800 8. E file 2011 federal taxes Subtract $100 100 9. E file 2011 federal taxes Loss after $100 rule $16,700 10. E file 2011 federal taxes Subtract 10% of $70,000 AGI 7,000 11. E file 2011 federal taxes Casualty loss deduction $ 9,700 Example 2. E file 2011 federal taxes In June, you were involved in an auto accident that totally destroyed your personal car and your antique pocket watch. E file 2011 federal taxes You had bought the car for $30,000. E file 2011 federal taxes The FMV of the car just before the accident was $17,500. E file 2011 federal taxes Its FMV just after the accident was $180 (scrap value). E file 2011 federal taxes Your insurance company reimbursed you $16,000. E file 2011 federal taxes Your watch was not insured. E file 2011 federal taxes You had purchased it for $250. E file 2011 federal taxes Its FMV just before the accident was $500. E file 2011 federal taxes Your adjusted gross income for the year the accident occurred is $97,000. E file 2011 federal taxes Your casualty loss deduction is zero, figured as follows. E file 2011 federal taxes     Car Watch 1. E file 2011 federal taxes Adjusted basis (cost) $30,000 $250 2. E file 2011 federal taxes FMV before accident $17,500 $500 3. E file 2011 federal taxes FMV after accident 180 -0- 4. E file 2011 federal taxes Decrease in FMV (line 2 − line 3) $17,320 $500 5. E file 2011 federal taxes Loss (smaller of line 1 or line 4) $17,320 $250 6. E file 2011 federal taxes Subtract insurance 16,000 -0- 7. E file 2011 federal taxes Loss after reimbursement $1,320 $250 8. E file 2011 federal taxes Total loss $1,570 9. E file 2011 federal taxes Subtract $100 100 10. E file 2011 federal taxes Loss after $100 rule $1,470 11. E file 2011 federal taxes Subtract 10% of $97,000 AGI 9,700 12. E file 2011 federal taxes Casualty loss deduction $ -0- Both real and personal properties. E file 2011 federal taxes   When a casualty involves both real and personal properties, you must figure the loss separately for each type of property. E file 2011 federal taxes However, you apply a single $100 reduction to the total loss. E file 2011 federal taxes Then, you apply the 10% rule to figure the casualty loss deduction. E file 2011 federal taxes Example. E file 2011 federal taxes In July, a hurricane damaged your home, which cost you $164,000 including land. E file 2011 federal taxes The FMV of the property (both building and land) immediately before the storm was $170,000 and its FMV immediately after the storm was $100,000. E file 2011 federal taxes Your household furnishings were also damaged. E file 2011 federal taxes You separately figured the loss on each damaged household item and arrived at a total loss of $600. E file 2011 federal taxes You collected $50,000 from the insurance company for the damage to your home, but your household furnishings were not insured. E file 2011 federal taxes Your adjusted gross income for the year the hurricane occurred is $65,000. E file 2011 federal taxes You figure your casualty loss deduction from the hurricane in the following manner. E file 2011 federal taxes 1. E file 2011 federal taxes Adjusted basis of real property (cost in this example) $164,000 2. E file 2011 federal taxes FMV of real property before hurricane $170,000 3. E file 2011 federal taxes FMV of real property after hurricane 100,000 4. E file 2011 federal taxes Decrease in FMV of real property (line 2 − line 3) $70,000 5. E file 2011 federal taxes Loss on real property (smaller of line 1 or line 4) $70,000 6. E file 2011 federal taxes Subtract insurance 50,000 7. E file 2011 federal taxes Loss on real property after reimbursement $20,000 8. E file 2011 federal taxes Loss on furnishings $600 9. E file 2011 federal taxes Subtract insurance -0- 10. E file 2011 federal taxes Loss on furnishings after reimbursement $600 11. E file 2011 federal taxes Total loss (line 7 plus line 10) $20,600 12. E file 2011 federal taxes Subtract $100 100 13. E file 2011 federal taxes Loss after $100 rule $20,500 14. E file 2011 federal taxes Subtract 10% of $65,000 AGI 6,500 15. E file 2011 federal taxes Casualty loss deduction $14,000 Property used partly for business and partly for personal purposes. E file 2011 federal taxes   When property is used partly for personal purposes and partly for business or income-producing purposes, the casualty or theft loss deduction must be figured separately for the personal-use portion and for the business or income-producing portion. E file 2011 federal taxes You must figure each loss separately because the losses attributed to these two uses are figured in two different ways. E file 2011 federal taxes When figuring each loss, allocate the total cost or basis, the FMV before and after the casualty or theft loss, and the insurance or other reimbursement between the business and personal use of the property. E file 2011 federal taxes The $100 rule and the 10% rule apply only to the casualty or theft loss on the personal-use portion of the property. E file 2011 federal taxes Example. E file 2011 federal taxes You own a building that you constructed on leased land. E file 2011 federal taxes You use half of the building for your business and you live in the other half. E file 2011 federal taxes The cost of the building was $400,000. E file 2011 federal taxes You made no further improvements or additions to it. E file 2011 federal taxes A flood in March damaged the entire building. E file 2011 federal taxes The FMV of the building was $380,000 immediately before the flood and $320,000 afterwards. E file 2011 federal taxes Your insurance company reimbursed you $40,000 for the flood damage. E file 2011 federal taxes Depreciation on the business part of the building before the flood totaled $24,000. E file 2011 federal taxes Your adjusted gross income for the year the flood occurred is $125,000. E file 2011 federal taxes You have a deductible business casualty loss of $10,000. E file 2011 federal taxes You do not have a deductible personal casualty loss because of the 10% rule. E file 2011 federal taxes You figure your loss as follows. E file 2011 federal taxes     Business   Personal     Part   Part 1. E file 2011 federal taxes Cost (total $400,000) $200,000   $200,000 2. E file 2011 federal taxes Subtract depreciation 24,000   -0- 3. E file 2011 federal taxes Adjusted basis $176,000   $200,000 4. E file 2011 federal taxes FMV before flood (total $380,000) $190,000   $190,000 5. E file 2011 federal taxes FMV after flood (total $320,000) 160,000   160,000 6. E file 2011 federal taxes Decrease in FMV  (line 4 − line 5) $30,000   $30,000 7. E file 2011 federal taxes Loss (smaller of line 3 or line 6) $30,000   $30,000 8. E file 2011 federal taxes Subtract insurance 20,000   20,000 9. E file 2011 federal taxes Loss after reimbursement $10,000   $10,000 10. E file 2011 federal taxes Subtract $100 on personal-use property -0-   100 11. E file 2011 federal taxes Loss after $100 rule $10,000   $9,900 12. E file 2011 federal taxes Subtract 10% of $125,000 AGI on personal-use property -0-   12,500 13. E file 2011 federal taxes Deductible business loss $10,000     14. E file 2011 federal taxes Deductible personal loss $-0- Figuring a Gain If you receive an insurance payment or other reimbursement that is more than your adjusted basis in the destroyed, damaged, or stolen property, you have a gain from the casualty or theft. E file 2011 federal taxes Your gain is figured as follows. E file 2011 federal taxes The amount you receive (discussed next), minus Your adjusted basis in the property at the time of the casualty or theft. E file 2011 federal taxes See Adjusted Basis , earlier, for information on adjusted basis. E file 2011 federal taxes Even if the decrease in FMV of your property is smaller than the adjusted basis of your property, use your adjusted basis to figure the gain. E file 2011 federal taxes Amount you receive. E file 2011 federal taxes   The amount you receive includes any money plus the value of any property you receive minus any expenses you have in obtaining reimbursement. E file 2011 federal taxes It also includes any reimbursement used to pay off a mortgage or other lien on the damaged, destroyed, or stolen property. E file 2011 federal taxes Example. E file 2011 federal taxes A hurricane destroyed your personal residence and the insurance company awarded you $145,000. E file 2011 federal taxes You received $140,000 in cash. E file 2011 federal taxes The remaining $5,000 was paid directly to the holder of a mortgage on the property. E file 2011 federal taxes The amount you received includes the $5,000 reimbursement paid on the mortgage. E file 2011 federal taxes Main home destroyed. E file 2011 federal taxes   If you have a gain because your main home was destroyed, you generally can exclude the gain from your income as if you had sold or exchanged your home. E file 2011 federal taxes You may be able to exclude up to $250,000 of the gain (up to $500,000 if married filing jointly). E file 2011 federal taxes To exclude a gain, you generally must have owned and lived in the property as your main home for at least 2 years during the 5-year period ending on the date it was destroyed. E file 2011 federal taxes For information on this exclusion, see Publication 523. E file 2011 federal taxes If your gain is more than the amount you can exclude, but you buy replacement property, you may be able to postpone reporting the excess gain. E file 2011 federal taxes See Postponement of Gain , later. E file 2011 federal taxes Reporting a gain. E file 2011 federal taxes   You generally must report your gain as income in the year you receive the reimbursement. E file 2011 federal taxes However, you do not have to report your gain if you meet certain requirements and choose to postpone reporting the gain according to the rules explained under Postponement of Gain, next. E file 2011 federal taxes   For information on how to report a gain, see How To Report Gains and Losses , later. E file 2011 federal taxes    If you have a casualty or theft gain on personal-use property that you choose to postpone reporting (as explained next) and you also have another casualty or theft loss on personal-use property, do not consider the gain you are postponing when figuring your casualty or theft loss deduction. E file 2011 federal taxes See 10% Rule under Deduction Limits, earlier. E file 2011 federal taxes Postponement of Gain Do not report a gain if you receive reimbursement in the form of property similar or related in service or use to the destroyed or stolen property. E file 2011 federal taxes Your basis in the new property is generally the same as your adjusted basis in the property it replaces. E file 2011 federal taxes You must ordinarily report the gain on your stolen or destroyed property if you receive money or unlike property as reimbursement. E file 2011 federal taxes However, you can choose to postpone reporting the gain if you purchase property that is similar or related in service or use to the stolen or destroyed property within a specified replacement period, discussed later. E file 2011 federal taxes You also can choose to postpone reporting the gain if you purchase a controlling interest (at least 80%) in a corporation owning property that is similar or related in service or use to the property. E file 2011 federal taxes See Controlling interest in a corporation , later. E file 2011 federal taxes If you have a gain on damaged property, you can postpone reporting the gain if you spend the reimbursement to restore the property. E file 2011 federal taxes To postpone reporting all the gain, the cost of your replacement property must be at least as much as the reimbursement you receive. E file 2011 federal taxes If the cost of the replacement property is less than the reimbursement, you must include the gain in your income up to the amount of the unspent reimbursement. E file 2011 federal taxes Example. E file 2011 federal taxes In 1970, you bought an oceanfront cottage for your personal use at a cost of $18,000. E file 2011 federal taxes You made no further improvements or additions to it. E file 2011 federal taxes When a storm destroyed the cottage this January, the cottage was worth $250,000. E file 2011 federal taxes You received $146,000 from the insurance company in March. E file 2011 federal taxes You had a gain of $128,000 ($146,000 − $18,000). E file 2011 federal taxes You spent $144,000 to rebuild the cottage. E file 2011 federal taxes Since this is less than the insurance proceeds received, you must include $2,000 ($146,000 − $144,000) in your income. E file 2011 federal taxes Buying replacement property from a related person. E file 2011 federal taxes   You cannot postpone reporting a gain from a casualty or theft if you buy the replacement property from a related person (discussed later). E file 2011 federal taxes This rule applies to the following taxpayers. E file 2011 federal taxes C corporations. E file 2011 federal taxes Partnerships in which more than 50% of the capital or profits interests is owned by C corporations. E file 2011 federal taxes All others (including individuals, partnerships — other than those in (2) — and S corporations) if the total realized gain for the tax year on all destroyed or stolen properties on which there are realized gains is more than $100,000. E file 2011 federal taxes For casualties and thefts described in (3) above, gains cannot be offset by any losses when determining whether the total gain is more than $100,000. E file 2011 federal taxes If the property is owned by a partnership, the $100,000 limit applies to the partnership and each partner. E file 2011 federal taxes If the property is owned by an S corporation, the $100,000 limit applies to the S corporation and each shareholder. E file 2011 federal taxes Exception. E file 2011 federal taxes   This rule does not apply if the related person acquired the property from an unrelated person within the period of time allowed for replacing the destroyed or stolen property. E file 2011 federal taxes Related persons. E file 2011 federal taxes   Under this rule, related persons include, for example, a parent and child, a brother and sister, a corporation and an individual who owns more than 50% of its outstanding stock, and two partnerships in which the same C corporations own more than 50% of the capital or profits interests. E file 2011 federal taxes For more information on related persons, see Nondeductible Loss under Sales and Exchanges Between Related Persons in chapter 2 of Publication 544. E file 2011 federal taxes Death of a taxpayer. E file 2011 federal taxes   If a taxpayer dies after having a gain but before buying replacement property, the gain must be reported for the year in which the decedent realized the gain. E file 2011 federal taxes The executor of the estate or the person succeeding to the funds from the casualty or theft cannot postpone reporting the gain by buying replacement property. E file 2011 federal taxes Replacement Property You must buy replacement property for the specific purpose of replacing your destroyed or stolen property. E file 2011 federal taxes Property you acquire as a gift or inheritance does not qualify. E file 2011 federal taxes You do not have to use the same funds you receive as