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Efile 1040ez

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Efile 1040ez

Efile 1040ez 6. Efile 1040ez   Insurance Table of Contents What's New Introduction Topics - This chapter discusses: Useful Items - You may want to see: Deductible PremiumsSelf-Employed Health Insurance Deduction Nondeductible Premiums Capitalized Premiums When To Deduct Premiums What's New Retiree drug subsidy. Efile 1040ez  Beginning in 2013, sponsors of certain qualified retiree prescription drug plans must account for the subsidy received by reducing the amount of qualified retiree prescription drug plans expense by the subsidy received (taking into account the taxpayer's accounting method). Efile 1040ez For more information, see the retiree drug subsidy frequently asked questions on IRS. Efile 1040ez gov. Efile 1040ez Introduction You generally can deduct the ordinary and necessary cost of insurance as a business expense if it is for your trade, business, or profession. Efile 1040ez However, you may have to capitalize certain insurance costs under the uniform capitalization rules. Efile 1040ez For more information, see Capitalized Premiums , later. Efile 1040ez Topics - This chapter discusses: Deductible premiums Nondeductible premiums Capitalized premiums When to deduct premiums Useful Items - You may want to see: Publication 15-B Employer's Tax Guide to Fringe Benefits 525 Taxable and Nontaxable Income 538 Accounting Periods and Methods 547 Casualties, Disasters, and Thefts Form (and Instructions) 1040 U. Efile 1040ez S. Efile 1040ez Individual Income Tax Return See chapter 12 for information about getting publications and forms. Efile 1040ez Deductible Premiums You generally can deduct premiums you pay for the following kinds of insurance related to your trade or business. Efile 1040ez Insurance that covers fire, storm, theft, accident, or similar losses. Efile 1040ez Credit insurance that covers losses from business bad debts. Efile 1040ez Group hospitalization and medical insurance for employees, including long-term care insurance. Efile 1040ez If a partnership pays accident and health insurance premiums for its partners, it generally can deduct them as guaranteed payments to partners. Efile 1040ez If an S corporation pays accident and health insurance premiums for its more-than-2% shareholder-employees, it generally can deduct them, but must also include them in the shareholder's wages subject to federal income tax withholding. Efile 1040ez See Publication 15-B. Efile 1040ez Liability insurance. Efile 1040ez Malpractice insurance that covers your personal liability for professional negligence resulting in injury or damage to patients or clients. Efile 1040ez Workers' compensation insurance set by state law that covers any claims for bodily injuries or job-related diseases suffered by employees in your business, regardless of fault. Efile 1040ez If a partnership pays workers' compensation premiums for its partners, it generally can deduct them as guaranteed payments to partners. Efile 1040ez If an S corporation pays workers' compensation premiums for its more-than-2% shareholder-employees, it generally can deduct them, but must also include them in the shareholder's wages. Efile 1040ez Contributions to a state unemployment insurance fund are deductible as taxes if they are considered taxes under state law. Efile 1040ez Overhead insurance that pays for business overhead expenses you have during long periods of disability caused by your injury or sickness. Efile 1040ez Car and other vehicle insurance that covers vehicles used in your business for liability, damages, and other losses. Efile 1040ez If you operate a vehicle partly for personal use, deduct only the part of the insurance premium that applies to the business use of the vehicle. Efile 1040ez If you use the standard mileage rate to figure your car expenses, you cannot deduct any car insurance premiums. Efile 1040ez Life insurance covering your officers and employees if you are not directly or indirectly a beneficiary under the contract. Efile 1040ez Business interruption insurance that pays for lost profits if your business is shut down due to a fire or other cause. Efile 1040ez Self-Employed Health Insurance Deduction You may be able to deduct premiums paid for medical and dental insurance and qualified long-term care insurance for yourself, your spouse, and your dependents. Efile 1040ez The insurance can also cover your child who was under age 27 at the end of 2013, even if the child was not your dependent. Efile 1040ez A child includes your son, daughter, stepchild, adopted child, or foster child. Efile 1040ez A foster child is any child placed with you by an authorized placement agency or by judgment, decree, or other order of any court of competent jurisdiction. Efile 1040ez One of the following statements must be true. Efile 1040ez You were self-employed and had a net profit for the year reported on Schedule C (Form 1040), Profit or Loss From Business; Schedule C-EZ (Form 1040), Net Profit From Business; or Schedule F (Form 1040), Profit or Loss From Farming. Efile 1040ez You were a partner with net earnings from self-employment for the year reported on Schedule K-1 (Form 1065), Partner's Share of Income, Deductions, Credits, etc. Efile 1040ez , box 14, code A. Efile 1040ez You used one of the optional methods to figure your net earnings from self-employment on Schedule SE. Efile 1040ez You received wages in 2013 from an S corporation in which you were a more-than-2% shareholder. Efile 1040ez Health insurance premiums paid or reimbursed by the S corporation are shown as wages on Form W-2, Wage and Tax Statement. Efile 1040ez The insurance plan must be established, or considered to be established as discussed in the following bullets, under your business. Efile 1040ez For self-employed individuals filing a Schedule C, C-EZ, or F, a policy can be either in the name of the business or in the name of the individual. Efile 1040ez For partners, a policy can be either in the name of the partnership or in the name of the partner. Efile 1040ez You can either pay the premiums yourself or your partnership can pay them and report the premium amounts on Schedule K-1 (Form 1065) as guaranteed payments to be included in your gross income. Efile 1040ez However, if the policy is in your name and you pay the premiums yourself, the partnership must reimburse you and report the premium amounts on Schedule K-1 (Form 1065) as guaranteed payments to be included in your gross income. Efile 1040ez Otherwise, the insurance plan will not be considered to be established under your business. Efile 1040ez For more-than-2% shareholders, a policy can be either in the name of the S corporation or in the name of the shareholder. Efile 1040ez You can either pay the premiums yourself or your S corporation can pay them and report the premium amounts on Form W-2 as wages to be included in your gross income. Efile 1040ez However, if the policy is in your name and you pay the premiums yourself, the S corporation must reimburse you and report the premium amounts on Form W-2 as wages to be included in your gross income. Efile 1040ez Otherwise, the insurance plan will not be considered to be established under your business. Efile 1040ez Medicare premiums you voluntarily pay to obtain insurance in your name that is similar to qualifying private health insurance can be used to figure the deduction. Efile 1040ez If you previously filed returns without using Medicare premiums to figure the deduction, you can file timely amended returns to refigure the deduction. Efile 1040ez For more information, see Form 1040X, Amended U. Efile 1040ez S. Efile 1040ez Individual Income Tax Return. Efile 1040ez Amounts paid for health insurance coverage from retirement plan distributions that were nontaxable because you are a retired public safety officer cannot be used to figure the deduction. Efile 1040ez Take the deduction on Form 1040, line 29. Efile 1040ez Qualified long-term care insurance. Efile 1040ez   You can include premiums paid on a qualified long-term care insurance contract when figuring your deduction. Efile 1040ez But, for each person covered, you can include only the smaller of the following amounts. Efile 1040ez The amount paid for that person. Efile 1040ez The amount shown below. Efile 1040ez Use the person's age at the end of the tax year. Efile 1040ez Age 40 or younger–$360 Age 41 to 50–$680 Age 51 to 60–$1,360 Age 61 to 70–$3,640 Age 71 or older–$4,550 Qualified long-term care insurance contract. Efile 1040ez   A qualified long-term care insurance contract is an insurance contract that only provides coverage of qualified long-term care services. Efile 1040ez The contract must meet all the following requirements. Efile 1040ez It must be guaranteed renewable. Efile 1040ez It must provide that refunds, other than refunds on the death of the insured or complete surrender or cancellation of the contract, and dividends under the contract may be used only to reduce future premiums or increase future benefits. Efile 1040ez It must not provide for a cash surrender value or other money that can be paid, assigned, pledged, or borrowed. Efile 1040ez It generally must not pay or reimburse expenses incurred for services or items that would be reimbursed under Medicare, except where Medicare is a secondary payer or the contract makes per diem or other periodic payments without regard to expenses. Efile 1040ez Qualified long-term care services. Efile 1040ez   Qualified long-term care services are: Necessary diagnostic, preventive, therapeutic, curing, treating, mitigating, and rehabilitative services, and Maintenance or personal care services. Efile 1040ez The services must be required by a chronically ill individual and prescribed by a licensed health care practitioner. Efile 1040ez Worksheet 6-A. Efile 1040ez Self-Employed Health Insurance Deduction Worksheet Note. Efile 1040ez Use a separate worksheet for each trade or business under which an insurance plan is established. Efile 1040ez 1. Efile 1040ez Enter the total amount paid in 2013 for health insurance coverage established under your business for 2013 for you, your spouse, and your dependents. Efile 1040ez Your insurance can also cover your child who was under age 27 at the end of 2013, even if the child was not your dependent. Efile 1040ez But do not include the following. Efile 1040ez   Amounts for any month you were eligible to participate in a health plan subsidized by your or your spouse's employer or the employer of either your dependent or your child who was under the age of 27 at the end of 2013. Efile 1040ez Any amounts paid from retirement plan distributions that were nontaxable because you are a retired public safety officer. Efile 1040ez Any amounts you included on Form 8885, line 4. Efile 1040ez Any qualified health insurance premiums you paid to “U. Efile 1040ez S. Efile 1040ez Treasury-HCTC. Efile 1040ez ” Any health coverage tax credit advance payments shown in box 1 of Form 1099-H. Efile 1040ez Any payments for qualified long-term care insurance (see line 2) 1. Efile 1040ez   2. Efile 1040ez For coverage under a qualified long-term care insurance contract, enter for each person covered the smaller of the following amounts. Efile 1040ez       a) Total payments made for that person during the year. Efile 1040ez       b) The amount shown below. Efile 1040ez Use the person's age at the end of the tax year. Efile 1040ez         $360— if that person is age 40 or younger          $680— if age 41 to 50         $1,360— if age 51 to 60         $3,640— if age 61 to 70         $4,550— if age 71 or older         Do not include payments for any month you were eligible to participate in a long-term care insurance plan subsidized by your or your spouse’s employer or the employer of either your dependent or your child who was under the age of 27 at the end of 2013. Efile 1040ez If more than one person is covered, figure separately the amount to enter for each person. Efile 1040ez Then enter the total of those amounts 2. Efile 1040ez   3. Efile 1040ez Add lines 1 and 2 3. Efile 1040ez   4. Efile 1040ez Enter your net profit* and any other earned income** from the trade or business under which the insurance plan is established. Efile 1040ez Do not include Conservation Reserve Program payments exempt from self-employment tax. Efile 1040ez If the business is an S corporation, skip to line 11 4. Efile 1040ez   5. Efile 1040ez Enter the total of all net profits* from: Schedule C (Form 1040), line 31; Schedule C-EZ (Form 1040), line 3; Schedule F (Form 1040), line 34; or Schedule K-1 (Form 1065), box 14, code A; plus any other income allocable to the profitable businesses. Efile 1040ez Do not include Conservation Reserve Program payments exempt from self-employment tax. Efile 1040ez See the Instructions for Schedule SE (Form 1040). Efile 1040ez Do not include any net losses shown on these schedules. Efile 1040ez 5. Efile 1040ez   6. Efile 1040ez Divide line 4 by line 5 6. Efile 1040ez   7. Efile 1040ez Multiply Form 1040, line 27, by the percentage on line 6 7. Efile 1040ez   8. Efile 1040ez Subtract line 7 from line 4 8. Efile 1040ez   9. Efile 1040ez Enter the amount, if any, from Form 1040, line 28, attributable to the same trade or business in which the insurance plan is established 9. Efile 1040ez   10. Efile 1040ez Subtract line 9 from line 8 10. Efile 1040ez   11. Efile 1040ez Enter your Medicare wages (Form W-2, box 5) from an S corporation in which you are a more-than-2% shareholder and in which the insurance plan is established 11. Efile 1040ez   12. Efile 1040ez Enter any amount from Form 2555, line 45, attributable to the amount entered on line 4 or 11 above, or any amount from Form 2555-EZ, line 18, attributable to the amount entered on line 11 above 12. Efile 1040ez   13. Efile 1040ez Subtract line 12 from line 10 or 11, whichever applies 13. Efile 1040ez   14. Efile 1040ez Enter the smaller of line 3 or line 13 here and on Form 1040, line 29. Efile 1040ez Do not include this amount when figuring any medical expense deduction on Schedule A (Form 1040). Efile 1040ez 14. Efile 1040ez   * If you used either optional method to figure your net earnings from self-employment from any business, do not enter your net profit from the business. Efile 1040ez Instead, enter the amount attributable to that business from Schedule SE (Form 1040), Section B, line 4b. Efile 1040ez * *Earned income includes net earnings and gains from the sale, transfer, or licensing of property you created. Efile 1040ez However, it does not include capital gain income. Efile 1040ez Chronically ill individual. Efile 1040ez   A chronically ill individual is a person who has been certified as one of the following. Efile 1040ez An individual who has been unable, due to loss of functional capacity for at least 90 days, to perform at least two activities of daily living without substantial assistance from another individual. Efile 1040ez Activities of daily living are eating, toileting, transferring (general mobility), bathing, dressing, and continence. Efile 1040ez An individual who requires substantial supervision to be protected from threats to health and safety due to severe cognitive impairment. Efile 1040ez The certification must have been made by a licensed health care practitioner within the previous 12 months. Efile 1040ez Benefits received. Efile 1040ez   For information on excluding benefits you receive from a long-term care contract from gross income, see Publication 525. Efile 1040ez Other coverage. Efile 1040ez   You cannot take the deduction for any month you were eligible to participate in any employer (including your spouse's) subsidized health plan at any time during that month, even if you did not actually participate. Efile 1040ez In addition, if you were eligible for any month or part of a month to participate in any subsidized health plan maintained by the employer of either your dependent or your child who was under age 27 at the end of 2013, do not use amounts paid for coverage for that month to figure the deduction. Efile 1040ez   These rules are applied separately to plans that provide long-term care insurance and plans that do not provide long-term care insurance. Efile 1040ez However, any medical insurance payments not deductible on Form 1040, line 29, can be included as medical expenses on Schedule A (Form 1040), Itemized Deductions, if you itemize deductions. Efile 1040ez Effect on itemized deductions. Efile 1040ez   Subtract the health insurance deduction from your medical insurance when figuring medical expenses on Schedule A (Form 1040) if you itemize deductions. Efile 1040ez Effect on self-employment tax. Efile 1040ez   For tax years beginning before or after 2010, you cannot subtract the self-employed health insurance deduction when figuring net earnings for your self-employment tax from the business under which the insurance plan is established, or considered to be established as discussed earlier. Efile 1040ez For more information, see Schedule SE (Form 1040). Efile 1040ez How to figure the deduction. Efile 1040ez   Generally, you can use the worksheet in the Form 1040 instructions to figure your deduction. Efile 1040ez However, if any of the following apply, you must use Worksheet 6-A in this chapter. Efile 1040ez You had more than one source of income subject to self-employment tax. Efile 1040ez You file Form 2555, Foreign Earned Income, or Form 2555-EZ, Foreign Earned Income Exclusion. Efile 1040ez You are using amounts paid for qualified long-term care insurance to figure the deduction. Efile 1040ez If you are claiming the health coverage tax credit, complete Form 8885, Health Coverage Tax Credit, before you figure this deduction. Efile 1040ez Health coverage tax credit. Efile 1040ez   You may be able to take this credit only if you were an eligible trade adjustment assistance (TAA) recipient, alternative TAA (ATAA) recipient, reemployment trade adjustment assistance (RTAA) recipient, or Pension Benefit Guaranty Corporation (PBGC) pension recipient. Efile 1040ez Use Form 8885 to figure the amount, if any, of this credit. Efile 1040ez   When figuring the amount to enter on line 1 of Worksheet 6-A, do not include the following. Efile 1040ez Any amounts you included on Form 8885, line 4. Efile 1040ez Any qualified health insurance premiums you paid to “U. Efile 1040ez S. Efile 1040ez Treasury-HCTC. Efile 1040ez ” Any health coverage tax credit advance payments shown in box 1 of Form 1099-H, Health Coverage Tax Credit (HCTC) Advance Payments. Efile 1040ez More than one health plan and business. Efile 1040ez   If you have more than one health plan during the year and each plan is established under a different business, you must use separate worksheets (Worksheet 6-A) to figure each plan's net earnings limit. Efile 1040ez Include the premium you paid under each plan on line 1 or line 2 of that separate worksheet and your net profit (or wages) from that business on line 4 (or line 11). Efile 1040ez For a plan that provides long-term care insurance, the total of the amounts entered for each person on line 2 of all worksheets cannot be more than the appropriate limit shown on line 2 for that person. Efile 1040ez Nondeductible Premiums You cannot deduct premiums on the following kinds of insurance. Efile 1040ez Self-insurance reserve funds. Efile 1040ez You cannot deduct amounts credited to a reserve set up for self-insurance. Efile 1040ez This applies even if you cannot get business insurance coverage for certain business risks. Efile 1040ez However, your actual losses may be deductible. Efile 1040ez See Publication 547. Efile 1040ez Loss of earnings. Efile 1040ez You cannot deduct premiums for a policy that pays for lost earnings due to sickness or disability. Efile 1040ez However, see the discussion on overhead insurance, item (8), under Deductible Premiums , earlier. Efile 1040ez Certain life insurance and annuities. Efile 1040ez For contracts issued before June 9, 1997, you cannot deduct the premiums on a life insurance policy covering you, an employee, or any person with a financial interest in your business if you are directly or indirectly a beneficiary of the policy. Efile 1040ez You are included among possible beneficiaries of the policy if the policy owner is obligated to repay a loan from you using the proceeds of the policy. Efile 1040ez A person has a financial interest in your business if the person is an owner or part owner of the business or has lent money to the business. Efile 1040ez For contracts issued after June 8, 1997, you generally cannot deduct the premiums on any life insurance policy, endowment contract, or annuity contract if you are directly or indirectly a beneficiary. Efile 1040ez The disallowance applies without regard to whom the policy covers. Efile 1040ez Partners. Efile 1040ez If, as a partner in a partnership, you take out an insurance policy on your own life and name your partners as beneficiaries to induce them to retain their investments in the partnership, you are considered a beneficiary. Efile 1040ez You cannot deduct the insurance premiums. Efile 1040ez Insurance to secure a loan. Efile 1040ez If you take out a policy on your life or on the life of another person with a financial interest in your business to get or protect a business loan, you cannot deduct the premiums as a business expense. Efile 1040ez Nor can you deduct the premiums as interest on business loans or as an expense of financing loans. Efile 1040ez In the event of death, the proceeds of the policy are generally not taxed as income even if they are used to liquidate the debt. Efile 1040ez Capitalized Premiums Under the uniform capitalization rules, you must capitalize the direct costs and part of the indirect costs for certain production or resale activities. Efile 1040ez Include these costs in the basis of property you produce or acquire for resale, rather than claiming them as a current deduction. Efile 1040ez You recover the costs through depreciation, amortization, or cost of goods sold when you use, sell, or otherwise dispose of the property. Efile 1040ez Indirect costs include premiums for insurance on your plant or facility, machinery, equipment, materials, property produced, or property acquired for resale. Efile 1040ez Uniform capitalization rules. Efile 1040ez   You may be subject to the uniform capitalization rules if you do any of the following, unless the property is produced for your use other than in a business or an activity carried on for profit. Efile 1040ez Produce real property or tangible personal property. Efile 1040ez For this purpose, tangible personal property includes a film, sound recording, video tape, book, or similar property. Efile 1040ez Acquire property for resale. Efile 1040ez However, these rules do not apply to the following property. Efile 1040ez Personal property you acquire for resale if your average annual gross receipts are $10 million or less for the 3 prior tax years. Efile 1040ez Property you produce if you meet either of the following conditions. Efile 1040ez Your indirect costs of producing the property are $200,000 or less. Efile 1040ez You use the cash method of accounting and do not account for inventories. Efile 1040ez More information. Efile 1040ez   For more information on these rules, see Uniform Capitalization Rules in Publication 538 and the regulations under Internal Revenue Code section 263A. Efile 1040ez When To Deduct Premiums You can usually deduct insurance premiums in the tax year to which they apply. Efile 1040ez Cash method. Efile 1040ez   If you use the cash method of accounting, you generally deduct insurance premiums in the tax year you actually paid them, even if you incurred them in an earlier year. Efile 1040ez However, see Prepayment , later. Efile 1040ez Accrual method. Efile 1040ez   If you use an accrual method of accounting, you cannot deduct insurance premiums before the tax year in which you incur a liability for them. Efile 1040ez In addition, you cannot deduct insurance premiums before the tax year in which you actually pay them (unless the exception for recurring items applies). Efile 1040ez For more information about the accrual method of accounting, see chapter 1. Efile 1040ez For information about the exception for recurring items, see Publication 538. Efile 1040ez Prepayment. Efile 1040ez   You cannot deduct expenses in advance, even if you pay them in advance. Efile 1040ez This rule applies to any expense paid far enough in advance to, in effect, create an asset with a useful life extending substantially beyond the end of the current tax year. Efile 1040ez   Expenses such as insurance are generally allocable to a period of time. Efile 1040ez You can deduct insurance expenses for the year to which they are allocable. Efile 1040ez Example. Efile 1040ez In 2013, you signed a 3-year insurance contract. Efile 1040ez Even though you paid the premiums for 2013, 2014, and 2015 when you signed the contract, you can only deduct the premium for 2013 on your 2013 tax return. Efile 1040ez You can deduct in 2014 and 2015 the premium allocable to those years. Efile 1040ez Dividends received. Efile 1040ez   If you receive dividends from business insurance and you deducted the premiums in prior years, at least part of the dividends generally are income. Efile 1040ez For more information, see Recovery of amount deducted (tax benefit rule) in chapter 1 under How Much Can I Deduct. Efile 1040ez Prev  Up  Next   Home   More Online Publications
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IRS Extends Tax Relief to Some New Jersey and New York Victims of Hurricane Sandy; Return Filing and Tax Payment Deadline Extended to April 1, 2013

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IR-2013-16, Feb. 1, 2013

WASHINGTON –– In the aftermath of Hurricane Sandy, the Internal Revenue Service announced additional tax relief to affected individuals and businesses. The IRS today is further extending tax deadlines of that relief until April 1 for the following localities:

  • In New Jersey (starting Oct. 26): Monmouth and Ocean counties.
  • In New York (starting Oct. 27): Nassau, Queens, Richmond and Suffolk counties.

Beyond the relief provided by law to taxpayers in the FEMA-designated counties, the IRS will work with any taxpayer who resides outside the disaster area but whose books, records or tax professional are located in the areas affected by Hurricane Sandy. All workers assisting the relief activities in the covered disaster areas who are affiliated with a recognized government or philanthropic organization are eligible for relief. Taxpayers who live outside of the impacted area and think they may qualify for this relief need to contact the IRS at 866-562-5227.

The IRS also announced today that Taxpayer Assistance Centers in several New York and New Jersey locations will be open additional hours to provide help to taxpayers impacted by Hurricane Sandy. There will also be special assistance available at several New Jersey and New York locations on Saturday, February 23 from 9 a.m. until 2 p.m. More information will be available on irs.gov.

The tax relief postpones various tax filing and payment deadlines that occurred starting in late October. As a result, affected individuals and businesses will have until April 1, 2013, to file these returns and pay any taxes due. This includes the fourth quarter individual estimated tax payment, normally due Jan. 15, 2013. It also includes payroll and excise tax returns and accompanying payments for the third and fourth quarters, normally due on Oct. 31, 2012 and Jan. 31, 2013 respectively, and calendar year corporate income tax returns due March 15. It also applies to tax-exempt organizations required to file Form 990 series returns with an original or extended deadline falling during this period.  

The IRS will abate any interest, late-payment or late-filing penalty that would otherwise apply. The IRS automatically provides this relief to any taxpayer located in the disaster area. Taxpayers need not contact the IRS to get this relief.

The tax relief is part of a coordinated federal response to the damage caused by the hurricane and is based on local damage assessments by FEMA. For information on disaster recovery, individuals should visit disasterassistance.gov

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Page Last Reviewed or Updated: 05-Nov-2013

The Efile 1040ez

Efile 1040ez 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. Efile 1040ez Hybrid method. Efile 1040ez Cash Method Accrual Method Inventories Change in Accounting Method How To Get Tax HelpLow Income Taxpayer Clinics (LITCs). Efile 1040ez Accounting Periods You must use a tax year to figure your taxable income. Efile 1040ez A tax year is an annual accounting period for keeping records and reporting income and expenses. Efile 1040ez An annual accounting period does not include a short tax year (discussed later). Efile 1040ez You can use the following tax years: A calendar year; or A fiscal year (including a 52-53-week tax year). Efile 1040ez Unless you have a required tax year, you adopt a tax year by filing your first income tax return using that tax year. Efile 1040ez A required tax year is a tax year required under the Internal Revenue Code or the Income Tax Regulations. Efile 1040ez 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. Efile 1040ez This section discusses: A calendar year. Efile 1040ez A fiscal year (including a period of 52 or 53 weeks). Efile 1040ez A short tax year. Efile 1040ez An improper tax year. Efile 1040ez A change in tax year. Efile 1040ez Special situations that apply to individuals. Efile 1040ez Restrictions that apply to the accounting period of a partnership, S corporation, or personal service corporation. Efile 1040ez Special situations that apply to corporations. Efile 1040ez Calendar Year A calendar year is 12 consecutive months beginning on January 1st and ending on December 31st. Efile 1040ez 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. Efile 1040ez 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. Efile 1040ez See Change in Tax Year, later. Efile 1040ez Generally, anyone can adopt the calendar year. Efile 1040ez 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. Efile 1040ez Fiscal Year A fiscal year is 12 consecutive months ending on the last day of any month except December 31st. Efile 1040ez 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. Efile 1040ez 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. Efile 1040ez If you make this election, your 52-53-week tax year must always end on the same day of the week. Efile 1040ez 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. Efile 1040ez 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. Efile 1040ez Election. Efile 1040ez   To make the election for the 52-53-week tax year, attach a statement with the following information to your tax return. Efile 1040ez The month in which the new 52-53-week tax year ends. Efile 1040ez The day of the week on which the tax year always ends. Efile 1040ez The date the tax year ends. Efile 1040ez 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. Efile 1040ez   When you figure depreciation or amortization, a 52-53-week tax year is generally considered a year of 12 calendar months. Efile 1040ez   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. Efile 1040ez Example. Efile 1040ez Assume a tax provision applies to tax years beginning on or after July 1, 2012, which happens to be a Sunday. Efile 1040ez 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. Efile 1040ez Short Tax Year A short tax year is a tax year of less than 12 months. Efile 1040ez 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. Efile 1040ez Tax on a short period tax return is figured differently for each situation. Efile 1040ez 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. Efile 1040ez 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. Efile 1040ez Example 1. Efile 1040ez XYZ Corporation was organized on July 1, 2012. Efile 1040ez It elected the calendar year as its tax year. Efile 1040ez Therefore, its first tax return was due March 15, 2013. Efile 1040ez This short period return will cover the period from July 1, 2012, through December 31, 2012. Efile 1040ez Example 2. Efile 1040ez A calendar year corporation dissolved on July 23, 2012. Efile 1040ez Its final return is due by October 15, 2012. Efile 1040ez It will cover the short period from January 1, 2012, through July 23, 2012. Efile 1040ez Death of individual. Efile 1040ez   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. Efile 1040ez The decedent's final return will be a short period tax return that begins on January 1st, and ends on the date of death. Efile 1040ez 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. Efile 1040ez Example. Efile 1040ez   Agnes Green was a single, calendar year taxpayer. Efile 1040ez She died on March 6, 2012. Efile 1040ez Her final income tax return must be filed by April 15, 2013. Efile 1040ez It will cover the short period from January 1, 2012, to March 6, 2012. Efile 1040ez 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. Efile 1040ez 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. Efile 1040ez Figure tax for a short year under the general rule, explained below. Efile 1040ez You may then be able to use a relief procedure, explained later, and claim a refund of part of the tax you paid. Efile 1040ez General rule. Efile 1040ez   Income tax for a short tax year must be annualized. Efile 1040ez However, self-employment tax is figured on the actual self-employment income for the short period. Efile 1040ez Individuals. Efile 1040ez   An individual must figure income tax for the short tax year as follows. Efile 1040ez Determine your adjusted gross income (AGI) for the short tax year and then subtract your actual itemized deductions for the short tax year. Efile 1040ez You must itemize deductions when you file a short period tax return. Efile 1040ez Multiply the dollar amount of your exemptions by the number of months in the short tax year and divide the result by 12. Efile 1040ez Subtract the amount in (2) from the amount in (1). Efile 1040ez The result is your modified taxable income. Efile 1040ez Multiply the modified taxable income in (3) by 12, then divide the result by the number of months in the short tax year. Efile 1040ez The result is your annualized income. Efile 1040ez Figure the total tax on your annualized income using the appropriate tax rate schedule. Efile 1040ez Multiply the total tax by the number of months in the short tax year and divide the result by 12. Efile 1040ez The result is your tax for the short tax year. Efile 1040ez Relief procedure. Efile 1040ez   Individuals and corporations can use a relief procedure to figure the tax for the short tax year. Efile 1040ez It may result in less tax. Efile 1040ez Under this procedure, the tax is figured by two separate methods. Efile 1040ez 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. Efile 1040ez For more information, see section 443(b)(2) of the Internal Revenue Code. Efile 1040ez Alternative minimum tax. Efile 1040ez   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. Efile 1040ez Multiply the AMTI by 12. Efile 1040ez Divide the result by the number of months in the short tax year. Efile 1040ez Multiply the annualized AMTI by the appropriate rate of tax under section 55(b)(1) of the Internal Revenue Code. Efile 1040ez The result is the annualized AMT. Efile 1040ez Multiply the annualized AMT by the number of months in the short tax year and divide the result by 12. Efile 1040ez   For information on the AMT for individuals, see the Instructions for Form 6251, Alternative Minimum Tax–Individuals. Efile 1040ez For information on the AMT for corporations, see the Instructions to Form 4626, Alternative Minimum Tax–Corporations. Efile 1040ez Tax withheld from wages. Efile 1040ez   You can claim a credit against your income tax liability for federal income tax withheld from your wages. Efile 1040ez Federal income tax is withheld on a calendar year basis. Efile 1040ez The amount withheld in any calendar year is allowed as a credit for the tax year beginning in the calendar year. Efile 1040ez Improper Tax Year Taxpayers that have adopted an improper tax year must change to a proper tax year. Efile 1040ez 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. Efile 1040ez See Accounting Periods, earlier, for a description of permissible tax years. Efile 1040ez To change to a proper tax year, you must do one of the following. Efile 1040ez 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. Efile 1040ez Attach a completed Form 1128 to the amended tax return. Efile 1040ez Write “FILED UNDER REV. Efile 1040ez PROC. Efile 1040ez 85-15” at the top of Form 1128 and file the forms with the Internal Revenue Service Center where you filed your original return. Efile 1040ez 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. Efile 1040ez Change in Tax Year Generally, you must file Form 1128 to request IRS approval to change your tax year. Efile 1040ez See the Instructions for Form 1128 for exceptions. Efile 1040ez If you qualify for an automatic approval request, a user fee is not required. Efile 1040ez Individuals Generally, individuals must adopt the calendar year as their tax year. Efile 1040ez 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. Efile 1040ez Partnerships, S Corporations, and Personal Service Corporations (PSCs) Generally, partnerships, S corporations (including electing S corporations), and PSCs must use a required tax year. Efile 1040ez A required tax year is a tax year that is required under the Internal Revenue Code and Income Tax Regulations. Efile 1040ez 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). Efile 1040ez The following discussions provide the rules for partnerships, S corporations, and PSCs. Efile 1040ez Partnership A partnership must conform its tax year to its partners' tax years unless any of the following apply. Efile 1040ez 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. Efile 1040ez 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. Efile 1040ez The partnership can establish a business purpose for a different tax year. Efile 1040ez The rules for the required tax year for partnerships are as follows. Efile 1040ez 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. Efile 1040ez If there is no majority interest tax year, the partnership must use the tax year of all its principal partners. Efile 1040ez A principal partner is one who has a 5% or more interest in the profits or capital of the partnership. Efile 1040ez 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. Efile 1040ez If a partnership changes to a required tax year because of these rules, it can get automatic approval by filing Form 1128. Efile 1040ez Least aggregate deferral of income. Efile 1040ez   The tax year that results in the least aggregate deferral of income is determined as follows. Efile 1040ez Figure the number of months of deferral for each partner using one partner's tax year. Efile 1040ez 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. Efile 1040ez 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). Efile 1040ez Add the amounts in step (2) to get the aggregate (total) deferral for the tax year used in step (1). Efile 1040ez Repeat steps (1) through (3) for each partner's tax year that is different from the other partners' years. Efile 1040ez   The partner's tax year that results in the lowest aggregate (total) number is the tax year that must be used by the partnership. Efile 1040ez 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. Efile 1040ez However, if one of the tax years that qualifies is the partnership's existing tax year, the partnership must retain that tax year. Efile 1040ez Example. Efile 1040ez A and B each have a 50% interest in partnership P, which uses a fiscal year ending June 30. Efile 1040ez A uses the calendar year and B uses a fiscal year ending November 30. Efile 1040ez 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. Efile 1040ez Year End 12/31: Year End Profits Interest Months of Deferral Interest × Deferral A 12/31 0. Efile 1040ez 5 -0- -0- B 11/30 0. Efile 1040ez 5 11 5. Efile 1040ez 5 Total Deferral 5. Efile 1040ez 5 Year End 11/30: Year End Profits Interest Months of Deferral Interest × Deferral A 12/31 0. Efile 1040ez 5 1 0. Efile 1040ez 5 B 11/30 0. Efile 1040ez 5 -0- -0- Total Deferral 0. Efile 1040ez 5 When determination is made. Efile 1040ez   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. Efile 1040ez However, the IRS can require the partnership to use another day or period that will more accurately reflect the ownership of the partnership. Efile 1040ez This could occur, for example, if a partnership interest was transferred for the purpose of qualifying for a particular tax year. Efile 1040ez Short period return. Efile 1040ez   When a partnership changes its tax year, a short period return must be filed. Efile 1040ez 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. Efile 1040ez   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. Efile 1040ez The short period return must indicate at the top of page 1, “FILED UNDER SECTION 1. Efile 1040ez 706-1. Efile 1040ez ” More information. Efile 1040ez   For more information about changing a partnership's tax year, and information about ruling requests, see the Instructions for Form 1128. Efile 1040ez S Corporation All S corporations, regardless of when they became an S corporation, must use a permitted tax year. Efile 1040ez A permitted tax year is any of the following. Efile 1040ez The calendar year. Efile 1040ez A tax year elected under section 444 of the Internal Revenue Code. Efile 1040ez See Section 444 Election, below for details. Efile 1040ez A 52-53-week tax year ending with reference to the calendar year or a tax year elected under section 444. Efile 1040ez Any other tax year for which the corporation establishes a business purpose. Efile 1040ez 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. Efile 1040ez For information about changing an S corporation's tax year and information about ruling requests, see the Instructions for Form 1128. Efile 1040ez Personal Service Corporation (PSC) A PSC must use a calendar tax year unless any of the following apply. Efile 1040ez The corporation makes an election under section 444 of the Internal Revenue Code. Efile 1040ez See Section 444 Election, below for details. Efile 1040ez 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. Efile 1040ez The corporation establishes a business purpose for a fiscal year. Efile 1040ez See the Instructions for Form 1120 for general information about PSCs. Efile 1040ez For information on adopting or changing tax years for PSCs and information about ruling requests, see the Instructions for Form 1128. Efile 1040ez 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. Efile 1040ez Certain restrictions apply to the election. Efile 1040ez 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). Efile 1040ez 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. Efile 1040ez A partnership, S corporation, or PSC can make a section 444 election if it meets all the following requirements. Efile 1040ez It is not a member of a tiered structure (defined in section 1. Efile 1040ez 444-2T of the regulations). Efile 1040ez It has not previously had a section 444 election in effect. Efile 1040ez It elects a year that meets the deferral period requirement. Efile 1040ez Deferral period. Efile 1040ez   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. Efile 1040ez Retaining tax year. Efile 1040ez   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. Efile 1040ez This deferral period is the number of months between the beginning of the retained year and the close of the first required tax year. Efile 1040ez Adopting or changing tax year. Efile 1040ez   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. Efile 1040ez 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. Efile 1040ez This is the tax year immediately preceding the year for which the partnership, S corporation, or PSC wishes to make the section 444 election. Efile 1040ez If the partnership, S corporation, or PSC's tax year is the same as its required tax year, the deferral period is zero. Efile 1040ez Example 1. Efile 1040ez BD Partnership uses a calendar year, which is also its required tax year. Efile 1040ez BD cannot make a section 444 election because the deferral period is zero. Efile 1040ez Example 2. Efile 1040ez E, a newly formed partnership, began operations on December 1. Efile 1040ez E is owned by calendar year partners. Efile 1040ez E wants to make a section 444 election to adopt a September 30 tax year. Efile 1040ez E's deferral period for the tax year beginning December 1 is 3 months, the number of months between September 30 and December 31. Efile 1040ez Making the election. Efile 1040ez   Make a section 444 election by filing Form 8716 with the Internal Revenue Service Center where the entity will file its tax return. Efile 1040ez 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. Efile 1040ez For this purpose, count the month in which the tax year begins, even if it begins after the first day of that month. Efile 1040ez Note. Efile 1040ez If the due date falls on a Saturday, Sunday, or legal holiday, file on the next business day. Efile 1040ez   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. Efile 1040ez Example 1. Efile 1040ez 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. Efile 1040ez 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. Efile 1040ez Example 2. Efile 1040ez The facts are the same as in Example 1 except that AB begins operations on October 21, 2012. Efile 1040ez AB must file Form 8716 by March 17, 2013. Efile 1040ez Example 3. Efile 1040ez B is a corporation that first becomes a PSC for its tax year beginning September 1, 2012. Efile 1040ez B qualifies to make a section 444 election to use a September 30 tax year for its tax year beginning September 1, 2012. Efile 1040ez 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. Efile 1040ez Note. Efile 1040ez The due dates in Examples 2 and 3 are adjusted because the dates fall on a Saturday, Sunday or legal holiday. Efile 1040ez Extension of time for filing. Efile 1040ez   There is an automatic extension of 12 months to make this election. Efile 1040ez See the Form 8716 instructions for more information. Efile 1040ez Terminating the election. Efile 1040ez   The section 444 election remains in effect until it is terminated. Efile 1040ez If the election is terminated, another section 444 election cannot be made for any tax year. Efile 1040ez   The election ends when any of the following applies to the partnership, S corporation, or PSC. Efile 1040ez The entity changes to its required tax year. Efile 1040ez The entity liquidates. Efile 1040ez The entity becomes a member of a tiered structure. Efile 1040ez The IRS determines that the entity willfully failed to comply with the required payments or distributions. Efile 1040ez   The election will also end if either of the following events occur. Efile 1040ez An S corporation's S election is terminated. Efile 1040ez However, if the S corporation immediately becomes a PSC, the PSC can continue the section 444 election of the S corporation. Efile 1040ez A PSC ceases to be a PSC. Efile 1040ez If the PSC elects to be an S corporation, the S corporation can continue the election of the PSC. Efile 1040ez Required payment for partnership or S corporation. Efile 1040ez   A partnership or an S corporation must make a required payment for any tax year: The section 444 election is in effect. Efile 1040ez The required payment for that year (or any preceding tax year) is more than $500. Efile 1040ez    This payment represents the value of the tax deferral the owners receive by using a tax year different from the required tax year. Efile 1040ez   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. Efile 1040ez 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. Efile 1040ez 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. Efile 1040ez Applicable election year. Efile 1040ez   Any tax year a section 444 election is in effect, including the first year, is called an applicable election year. Efile 1040ez 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. Efile 1040ez Required distribution for PSC. Efile 1040ez   A PSC with a section 444 election in effect must distribute certain amounts to employee-owners by December 31 of each applicable year. Efile 1040ez If it fails to make these distributions, it may be required to defer certain deductions for amounts paid to owner-employees. Efile 1040ez The amount deferred is treated as paid or incurred in the following tax year. Efile 1040ez   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). Efile 1040ez Back-up election. Efile 1040ez   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. Efile 1040ez If the request is denied, the back-up section 444 election must be activated (if the partnership, S corporation, or PSC otherwise qualifies). Efile 1040ez Making back-up election. Efile 1040ez   The general rules for making a section 444 election, as discussed earlier, apply. Efile 1040ez When filing Form 8716, type or print “BACK-UP ELECTION” at the top of the form. Efile 1040ez 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. Efile 1040ez Activating election. Efile 1040ez   A partnership or S corporation activates its back-up election by filing the return required and making the required payment with Form 8752. Efile 1040ez The due date for filing Form 8752 and making the payment is the later of the following dates. Efile 1040ez May 15 of the calendar year following the calendar year in which the applicable election year begins. Efile 1040ez 60 days after the partnership or S corporation has been notified by the IRS that the business year request has been denied. Efile 1040ez   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. Efile 1040ez ” 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). Efile 1040ez 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. Efile 1040ez 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. Efile 1040ez Business Purpose Tax Year A partnership, S corporation, or PSC establishes the business purpose for a tax year by filing Form 1128. Efile 1040ez See the Instructions for Form 1128 for details. Efile 1040ez Corporations (Other Than S Corporations and PSCs) A new corporation establishes its tax year when it files its first tax return. Efile 1040ez 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. Efile 1040ez An S corporation or a PSC must use the required tax year rules, discussed earlier, to establish a tax year. Efile 1040ez 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. Efile 1040ez See the Instructions for Form 1128 for details. Efile 1040ez Accounting Methods An accounting method is a set of rules used to determine when income and expenses are reported on your tax return. Efile 1040ez Your accounting method includes not only your overall method of accounting, but also the accounting treatment you use for any material item. Efile 1040ez You choose an accounting method when you file your first tax return. Efile 1040ez If you later want to change your accounting method, you must get IRS approval. Efile 1040ez See Change in Accounting Method, later. Efile 1040ez No single accounting method is required of all taxpayers. Efile 1040ez 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. Efile 1040ez In addition to your permanent accounting books, you must keep any other records necessary to support the entries on your books and tax returns. Efile 1040ez You must use the same accounting method from year to year. Efile 1040ez An accounting method clearly reflects income only if all items of gross income and expenses are treated the same from year to year. Efile 1040ez 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. Efile 1040ez Methods you can use. Efile 1040ez   In general, you can compute your taxable income under any of the following accounting methods. Efile 1040ez Cash method. Efile 1040ez Accrual method. Efile 1040ez Special methods of accounting for certain items of income and expenses. Efile 1040ez A hybrid method which combines elements of two or more of the above accounting methods. Efile 1040ez The cash and accrual methods of accounting are explained later. Efile 1040ez Special methods. Efile 1040ez   This publication does not discuss special methods of accounting for certain items of income or expenses. Efile 1040ez 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. Efile 1040ez The following publications also discuss special methods of reporting income or expenses. Efile 1040ez Publication 225, Farmer's Tax Guide. Efile 1040ez Publication 535, Business Expenses. Efile 1040ez Publication 537, Installment Sales. Efile 1040ez Publication 946, How To Depreciate Property. Efile 1040ez Hybrid method. Efile 1040ez   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. Efile 1040ez However, the following restrictions apply. Efile 1040ez If an inventory is necessary to account for your income, you must use an accrual method for purchases and sales. Efile 1040ez See Exceptions under Inventories, later. Efile 1040ez Generally, you can use the cash method for all other items of income and expenses. Efile 1040ez See Inventories, later. Efile 1040ez If you use the cash method for reporting your income, you must use the cash method for reporting your expenses. Efile 1040ez If you use an accrual method for reporting your expenses, you must use an accrual method for figuring your income. Efile 1040ez Any combination that includes the cash method is treated as the cash method for purposes of section 448 of the Internal Revenue Code. Efile 1040ez Business and personal items. Efile 1040ez   You can account for business and personal items using different accounting methods. Efile 1040ez 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. Efile 1040ez Two or more businesses. Efile 1040ez   If you operate two or more separate and distinct businesses, you can use a different accounting method for each business. Efile 1040ez No business is separate and distinct, unless a complete and separate set of books and records is maintained for each business. Efile 1040ez Note. Efile 1040ez 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. Efile 1040ez Cash Method Most individuals and many small businesses use the cash method of accounting. Efile 1040ez Generally, if you produce, purchase, or sell merchandise, you must keep an inventory and use an accrual method for sales and purchases of merchandise. Efile 1040ez See Inventories, later, for exceptions to this rule. Efile 1040ez Income Under the cash method, you include in your gross income all items of income you actually or constructively receive during the tax year. Efile 1040ez If you receive property and services, you must include their fair market value (FMV) in income. Efile 1040ez Constructive receipt. Efile 1040ez   Income is constructively received when an amount is credited to your account or made available to you without restriction. Efile 1040ez You need not have possession of it. Efile 1040ez 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. Efile 1040ez Income is not constructively received if your control of its receipt is subject to substantial restrictions or limitations. Efile 1040ez Example. Efile 1040ez You are a calendar year taxpayer. Efile 1040ez Your bank credited, and made available, interest to your bank account in December 2012. Efile 1040ez You did not withdraw it or enter it into your books until 2013. Efile 1040ez You must include the amount in gross income for 2012, the year you constructively received it. Efile 1040ez You cannot hold checks or postpone taking possession of similar property from one tax year to another to postpone paying tax on the income. Efile 1040ez You must report the income in the year the property is received or made available to you without restriction. Efile 1040ez Expenses Under the cash method, generally, you deduct expenses in the tax year in which you actually pay them. Efile 1040ez This includes business expenses for which you contest liability. Efile 1040ez However, you may not be able to deduct an expense paid in advance. Efile 1040ez Instead, you may be required to capitalize certain costs, as explained later under Uniform Capitalization Rules. Efile 1040ez Expense paid in advance. Efile 1040ez   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. Efile 1040ez   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. Efile 1040ez 12 months after the right or benefit begins, or The end of the tax year after the tax year in which payment is made. Efile 1040ez   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. Efile 1040ez See Change in Accounting Method, later. Efile 1040ez Example 1. Efile 1040ez 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. Efile 1040ez 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. Efile 1040ez 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. Efile 1040ez Example 2. Efile 1040ez 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. Efile 1040ez The 12-month rule applies. Efile 1040ez Therefore, the full $10,000 is deductible in 2012. Efile 1040ez Excluded Entities The following entities cannot use the cash method, including any combination of methods that includes the cash method. Efile 1040ez (See Special rules for farming businesses, later. Efile 1040ez ) A corporation (other than an S corporation) with average annual gross receipts exceeding $5 million. Efile 1040ez See Gross receipts test, below. Efile 1040ez 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. Efile 1040ez See Gross receipts test, below. Efile 1040ez A tax shelter. Efile 1040ez Exceptions The following entities are not prohibited from using the cash method of accounting. Efile 1040ez Any corporation or partnership, other than a tax shelter, that meets the gross receipts test for all tax years after 1985. Efile 1040ez A qualified personal service corporation (PSC). Efile 1040ez Gross receipts test. Efile 1040ez   A corporation or partnership, other than a tax shelter, that meets the gross receipts test can generally use the cash method. Efile 1040ez 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. Efile 1040ez    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. Efile 1040ez See Gross receipts test for qualifying taxpayers, for more information. Efile 1040ez Generally, a partnership applies the test at the partnership level. Efile 1040ez Gross receipts for a short tax year are annualized. Efile 1040ez Aggregation rules. Efile 1040ez   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. Efile 1040ez Change to accrual method. Efile 1040ez   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. Efile 1040ez Special rules for farming businesses. Efile 1040ez   Generally, a taxpayer engaged in the trade or business of farming is allowed to use the cash method for its farming business. Efile 1040ez 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. Efile 1040ez 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). Efile 1040ez   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. Efile 1040ez For family corporations engaged in farming, the exception applies if gross receipts were $25 million or less for each prior tax year after 1985. Efile 1040ez See chapter 2 of Publication 225, Farmer's Tax Guide, for more information. Efile 1040ez Qualified PSC. Efile 1040ez   A PSC that meets the following function and ownership tests can use the cash method. Efile 1040ez Function test. Efile 1040ez   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. Efile 1040ez Ownership test. Efile 1040ez   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. Efile 1040ez Employees performing services for the corporation in a field qualifying under the function test. Efile 1040ez Retired employees who had performed services in those fields. Efile 1040ez The estate of an employee described in (1) or (2). Efile 1040ez 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. Efile 1040ez   Indirect ownership is generally taken into account if the stock is owned indirectly through one or more partnerships, S corporations, or qualified PSCs. Efile 1040ez Stock owned by one of these entities is considered owned by the entity's owners in proportion to their ownership interest in that entity. Efile 1040ez 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. Efile 1040ez   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. Efile 1040ez Change to accrual method. Efile 1040ez   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. Efile 1040ez 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. Efile 1040ez 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. Efile 1040ez The purpose of an accrual method of accounting is to match income and expenses in the correct year. Efile 1040ez 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. Efile 1040ez Under this rule, you report an amount in your gross income on the earliest of the following dates. Efile 1040ez When you receive payment. Efile 1040ez When the income amount is due to you. Efile 1040ez When you earn the income. Efile 1040ez When title has passed. Efile 1040ez Estimated income. Efile 1040ez   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. Efile 1040ez Change in payment schedule. Efile 1040ez   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. Efile 1040ez Continue this procedure until you complete the services, then account for the difference. Efile 1040ez 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. Efile 1040ez 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. Efile 1040ez However, you cannot postpone including any payment beyond that tax year. Efile 1040ez Service agreement. Efile 1040ez   You can postpone reporting income from an advance payment you receive for a service agreement on property you sell, lease, build, install, or construct. Efile 1040ez This includes an agreement providing for incidental replacement of parts or materials. Efile 1040ez However, this applies only if you offer the property without a service agreement in the normal course of business. Efile 1040ez Postponement not allowed. Efile 1040ez   Generally, one cannot postpone including an advance payment in income for services if either of the following applies. Efile 1040ez 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. Efile 1040ez 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. Efile 1040ez Examples. Efile 1040ez   In each of the following examples, assume the tax year is a calendar year and that the accrual method of accounting is used. Efile 1040ez Example 1. Efile 1040ez You manufacture, sell, and service computers. Efile 1040ez You received payment in 2012 for a one-year contingent service contract on a computer you sold. Efile 1040ez 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. Efile 1040ez Example 2. Efile 1040ez You are in the television repair business. Efile 1040ez 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. Efile 1040ez You include the payments in gross income as you earn them. Efile 1040ez Example 3. Efile 1040ez You own a dance studio. Efile 1040ez On October 1, 2012, you receive payment for a one-year contract for 48 one-hour lessons beginning on that date. Efile 1040ez You give eight lessons in 2012. Efile 1040ez 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. Efile 1040ez Example 4. Efile 1040ez Assume the same facts as in Example 3, except the payment is for a two-year contract for 96 lessons. Efile 1040ez You must include the entire payment in income in 2012 since part of the services may be performed after the following year. Efile 1040ez Guarantee or warranty. Efile 1040ez   Generally, you cannot postpone reporting income you receive under a guarantee or warranty contract. Efile 1040ez Prepaid rent. Efile 1040ez   You cannot postpone reporting income from prepaid rent. Efile 1040ez Prepaid rent does not include payment for the use of a room or other space when significant service is also provided for the occupant. Efile 1040ez 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. Efile 1040ez Books and records. Efile 1040ez   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. Efile 1040ez Financial reports include reports to shareholders, partners, beneficiaries, and other proprietors for credit purposes and consolidated financial statements. Efile 1040ez IRS approval. Efile 1040ez   You must file Form 3115 to obtain IRS approval to change your method of accounting for advance payment for services. Efile 1040ez 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. Efile 1040ez 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. Efile 1040ez An agreement includes a gift certificate that can be redeemed for goods. Efile 1040ez Amounts due and payable are considered received. Efile 1040ez How to report payments. Efile 1040ez   Generally, include an advance payment in income in the year in which you receive it. Efile 1040ez However, you can use the alternative method, discussed next. Efile 1040ez Alternative method of reporting. Efile 1040ez   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. Efile 1040ez Financial reports include reports to shareholders, partners, beneficiaries, and other proprietors for credit purposes and consolidated financial statements. Efile 1040ez Example 1. Efile 1040ez You are a retailer. Efile 1040ez You use an accrual method of accounting and account for the sale of goods when you ship the goods. Efile 1040ez You use this method for both tax and financial reporting purposes. Efile 1040ez 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. Efile 1040ez However, see Exception for inventory goods, later. Efile 1040ez Example 2. Efile 1040ez You are a calendar year taxpayer. Efile 1040ez You manufacture household furniture and use an accrual method of accounting. Efile 1040ez Under this method, you accrue income for your financial reports when you ship the furniture. Efile 1040ez For tax purposes, you do not accrue income until the furniture has been delivered and accepted. Efile 1040ez 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. Efile 1040ez You shipped the furniture to the customer in December 2012, but it was not delivered and accepted until January 2013. Efile 1040ez 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. Efile 1040ez Information schedule. Efile 1040ez   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. Efile 1040ez Total advance payments received in the current tax year. Efile 1040ez Total advance payments received in earlier tax years and not included in income before the current tax year. Efile 1040ez Total payments received in earlier tax years included in income for the current tax year. Efile 1040ez Exception for inventory goods. Efile 1040ez   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. Efile 1040ez You account for the advance payment under the alternative method (discussed earlier). Efile 1040ez You have received a substantial advance payment on the agreement (discussed next). Efile 1040ez You have enough substantially similar goods on hand, or available through your normal source of supply, to satisfy the agreement. Efile 1040ez 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. Efile 1040ez   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. Efile 1040ez You must also deduct in that second year all actual or estimated costs for the goods required to satisfy the agreement. Efile 1040ez If you estimated the cost, you must take into account any difference between the estimate and the actual cost when the goods are delivered. Efile 1040ez Note. Efile 1040ez You must report any advance payments you receive after the second year in the year received. Efile 1040ez No further deferral is allowed. Efile 1040ez Substantial advance payments. Efile 1040ez   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. Efile 1040ez Example. Efile 1040ez You are a calendar year, accrual method taxpayer who accounts for advance payments under the alternative method. Efile 1040ez In 2008, you entered into a contract for the sale of goods properly includible in your inventory. Efile 1040ez The total contract price is $50,000 and you estimate that your total inventoriable costs for the goods will be $25,000. Efile 1040ez You receive the following advance payments under the contract. Efile 1040ez 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. Efile 1040ez In your 2010 closing inventory, you had on hand enough of the type of goods specified in the contract to satisfy the contract. Efile 1040ez 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. Efile 1040ez   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. Efile 1040ez 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. Efile 1040ez If no such goods are on hand, then estimate the cost necessary to satisfy the contract. Efile 1040ez   No further deferral is allowed. Efile 1040ez You must include in gross income the advance payment you receive each remaining year of the contract. Efile 1040ez Take into account the difference between any estimated cost of goods sold and the actual cost when you deliver the goods in 2015. Efile 1040ez IRS approval. Efile 1040ez   You must file Form 3115 to obtain IRS approval to change your method of accounting for advance payments for sales. Efile 1040ez Expenses Under an accrual method of accounting, you generally deduct or capitalize a business expense when both the following apply. Efile 1040ez The all-events test has been met. Efile 1040ez The test is met when: All events have occurred that fix the fact of liability, and The liability can be determined with reasonable accuracy. Efile 1040ez Economic performance has occurred. Efile 1040ez Economic Performance Generally, you cannot deduct or capitalize a business expense until economic performance occurs. Efile 1040ez 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. Efile 1040ez If your expense is for property or services you provide to others, economic performance occurs as you provide the property or services. Efile 1040ez Example. Efile 1040ez You are a calendar year taxpayer. Efile 1040ez You buy office supplies in December 2012. Efile 1040ez You receive the supplies and the bill in December, but you pay the bill in January 2013. Efile 1040ez 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. Efile 1040ez Your office supplies may qualify as a recurring item, discussed later. Efile 1040ez If so, you can deduct them in 2012, even if the supplies are not delivered until 2013 (when economic performance occurs). Efile 1040ez Workers' compensation and tort liability. Efile 1040ez   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. Efile 1040ez 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. Efile 1040ez Taxes. Efile 1040ez   Economic performance generally occurs as estimated income tax, property taxes, employment taxes, etc. Efile 1040ez are paid. Efile 1040ez However, you can elect to treat taxes as a recurring item, discussed later. Efile 1040ez You can also elect to ratably accrue real estate taxes. Efile 1040ez See chapter 5 of Publication 535 for information about real estate taxes. Efile 1040ez Other liabilities. Efile 1040ez   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. Efile 1040ez Interest. Efile 1040ez   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. Efile 1040ez Compensation for services. Efile 1040ez   Generally, economic performance occurs as an employee renders service to the employer. Efile 1040ez 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. Efile 1040ez For information on employee benefit programs, see Publication 15-B, Employer's Tax Guide to Fringe Benefits. Efile 1040ez Vacation pay. Efile 1040ez   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. Efile 1040ez If you pay it later than this, you must deduct it in the year actually paid. Efile 1040ez An amount is vested if your right to it cannot be nullified or cancelled. Efile 1040ez Exception for recurring items. Efile 1040ez   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. Efile 1040ez The exception applies if all the following requirements are met. Efile 1040ez The all-events test, discussed earlier, is met. Efile 1040ez Economic performance occurs by the earlier of the following dates. Efile 1040ez 8½ months after the close of the year. Efile 1040ez The date you file a timely return (including extensions) for the year. Efile 1040ez 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. Efile 1040ez 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. Efile 1040ez This exception does not apply to workers' compensation or tort liabilities. Efile 1040ez Amended return. Efile 1040ez   You may be able to file an amended return and treat a liability as incurred under the recurring item exception. Efile 1040ez 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. Efile 1040ez Recurrence and consistency. Efile 1040ez   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. Efile 1040ez 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. Efile 1040ez Materiality. Efile 1040ez   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. Efile 1040ez   An item considered material for financial statement purposes is also considered material for tax purposes. Efile 1040ez However, in certain situations an immaterial item for financial accounting purposes is treated as material for purposes of economic performance. Efile 1040ez Matching expenses with income. Efile 1040ez   Costs directly associated with the revenue of a period are properly allocable to that period. Efile 1040ez 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. Efile 1040ez fasab. Efile 1040ez gov/accepted. Efile 1040ez html) are an important factor. Efile 1040ez   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. Efile 1040ez 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. Efile 1040ez However, the matching requirement is considered met for certain types of expenses. Efile 1040ez These expenses include taxes, payments under insurance, warranty, and service contracts, rebates, refunds, awards, prizes, and jackpots. Efile 1040ez 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. Efile 1040ez 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. Efile 1040ez 12 months after the right or benefit begins, or The end of the tax year after the tax year in which payment is made. Efile 1040ez 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. Efile 1040ez See Change in Accounting Method, later, for information on how to get IRS approval. Efile 1040ez See Expense paid in advance under Cash Method, earlier, for examples illustrating the application of the general and 12-month rules. Efile 1040ez 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. Efile 1040ez Determine the relationship for this rule as of the end of the tax year for which the expense or interest would otherwise be deductible. Efile 1040ez See section 267 of the Internal Revenue Code and Publication 542, Corporations, for the definition of related person. Efile 1040ez Inventories An inventory is necessary to clearly show income when the production, purchase, or sale of merchandise is an income-producing factor. Efile 1040ez If you must account for an inventory in your business, you must use an accrual method of accounting for your purchases and sales. Efile 1040ez However, see Exceptions, next. Efile 1040ez See also Accrual Method, earlier. Efile 1040ez To figure taxable income, you must value your inventory at the beginning and end of each tax year. Efile 1040ez To determine the value, you need a method for identifying the items in your inventory and a method for valuing these items. Efile 1040ez See Identifying Cost and Valuing Inventory, later. Efile 1040ez The rules for valuing inventory are not the same for all businesses. Efile 1040ez The method you use must conform to generally accepted accounting principles for similar businesses and must clearly reflect income. Efile 1040ez Your inventory practices must be consistent from year to year. Efile 1040ez 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. Efile 1040ez Exceptions The following taxpayers can use the cash method of accounting even if they produce, purchase, or sell merchandise. Efile 1040ez These taxpayers can also account for inventoriable items as materials and supplies that are not incidental (discussed later). Efile 1040ez A qualifying taxpayer under Revenue Procedure 2001-10 on page 272 of Internal Revenue Bulletin 2001-2, available at www. Efile 1040ez irs. Efile 1040ez gov/pub/irs-irbs/irb01–02. Efile 1040ez pdf. Efile 1040ez A qualifying small business taxpayer under Revenue Procedure 2002-28, on page 815 of Internal Revenue Bulletin 2002-18, available at www. Efile 1040ez irs. Efile 1040ez gov/pub/irs-irbs/irb02–18. Efile 1040ez pdf. Efile 1040ez 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). Efile 1040ez Qualifying taxpayer. Efile 1040ez   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). Efile 1040ez Your average annual gross receipts for each test year (explained in Step 1, listed next) must be $1 million or less. Efile 1040ez You are not a tax shelter as defined under section 448(d)(3) of the Internal Revenue Code. Efile 1040ez Gross receipts test for qualifying taxpayers. Efile 1040ez   To determine if you meet the gross receipts test for qualifying taxpayers, use the following steps: Step 1. Efile 1040ez List each of the test years. Efile 1040ez For qualifying taxpayers under Revenue Procedure 2001-10, the test years are each prior tax year ending on or after December 17, 1998. Efile 1040ez Step 2. Efile 1040ez Determine your average annual gross receipts for each test year listed in Step 1. Efile 1040ez 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. Efile 1040ez Step 3. Efile 1040ez 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. Efile 1040ez Qualifying small business taxpayer. Efile 1040ez   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). Efile 1040ez Your average annual gross receipts for each test year (explained in Step 1, listed next) must be $10 million or less. Efile 1040ez You are not prohibited from using the cash method under section 448 of the Internal Revenue Code. Efile 1040ez Your principle business activity is an eligible business. Efile 1040ez See Eligible business, later. Efile 1040ez 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. Efile 1040ez Note. Efile 1040ez Revenue Procedure 2002-28 does not apply to a farming business of a qualifying small business taxpayer. Efile 1040ez A taxpayer engaged in the trade or business of farming generally is allowed to use the cash method for any farming business. Efile 1040ez See Special rules for farming businesses under Cash Method, earlier. Efile 1040ez Gross receipts test for qualifying small business taxpayers. Efile 1040ez   To determine if you meet the gross receipts test for qualifying small business taxpayers, use the following steps: Step 1. Efile 1040ez List each of the test years. Efile 1040ez 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. Efile 1040ez Step 2. Efile 1040ez Determine your average annual gross receipts for each test year listed in Step 1. Efile 1040ez 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. Efile 1040ez Step 3. Efile 1040ez 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. Efile 1040ez Eligible business. Efile 1040ez   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. Efile 1040ez You have an eligible business if you meet any of the following requirements. Efile 1040ez 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). Efile 1040ez NAICS codes 31-33 (manufacturing). Efile 1040ez NAICS code 42 (wholesale trade). Efile 1040ez NAICS codes 44-45 (retail trade). Efile 1040ez NAICS codes 5111 and 5122 (information industries). Efile 1040ez Your principal business activity is the provision of services, including the provision of property incident to those services. Efile 1040ez Your principal business activity is the fabrication or modification of tangible personal property upon demand in accordance with customer design or specifications. Efile 1040ez   Information about the NAICS codes can be found at http://www. Efile 1040ez census. Efile 1040ez gov/naics or in the instructions for your federal income tax return. Efile 1040ez Gross receipts. Efile 1040ez   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. Efile 1040ez See the definit