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The Ez 1040
Ez 1040 5. Ez 1040 Business Income Table of Contents Introduction Kinds of IncomeBartering for Property or Services Real Estate Rents Personal Property Rents Interest and Dividend Income Canceled Debt Other Income Items That Are Not IncomeAmount you can exclude. Ez 1040 Short-term lease. Ez 1040 Retail space. Ez 1040 Qualified long-term real property. Ez 1040 Guidelines for Selected Occupations Accounting for Your Income Introduction This chapter primarily explains business income and how to account for it on your tax return, what items are not considered income, and gives guidelines for selected occupations. Ez 1040 If there is a connection between any income you receive and your business, the income is business income. Ez 1040 A connection exists if it is clear that the payment of income would not have been made if you did not have the business. Ez 1040 You can have business income even if you are not involved in the activity on a regular full-time basis. Ez 1040 Income from work you do on the side in addition to your regular job can be business income. Ez 1040 You report most business income, such as income from selling your products or services, on Schedule C or C-EZ. Ez 1040 But you report the income from the sale of business assets, such as land and office buildings, on other forms instead of Schedule C or C-EZ. Ez 1040 For information on selling business assets, see chapter 3. Ez 1040 Nonemployee compensation. Ez 1040 Business income includes amounts you received in your business that were properly shown on Forms 1099-MISC. Ez 1040 This includes amounts reported as nonemployee compensation in box 7 of the form. Ez 1040 You can find more information in the instructions on the back of the Form 1099-MISC you received. Ez 1040 Kinds of Income You must report on your tax return all income you receive from your business unless it is excluded by law. Ez 1040 In most cases, your business income will be in the form of cash, checks, and credit card charges. Ez 1040 But business income can be in other forms, such as property or services. Ez 1040 These and other types of income are explained next. Ez 1040 If you are a U. Ez 1040 S. Ez 1040 citizen who has business income from sources outside the United States (foreign income), you must report that income on your tax return unless it is exempt from tax under U. Ez 1040 S. Ez 1040 law. Ez 1040 If you live outside the United States, you may be able to exclude part or all of your foreign-source business income. Ez 1040 For details, see Publication 54, Tax Guide for U. Ez 1040 S. Ez 1040 Citizens and Resident Aliens Abroad. Ez 1040 Bartering for Property or Services Bartering is an exchange of property or services. Ez 1040 You must include in your gross receipts, at the time received, the fair market value of property or services you receive in exchange for something else. Ez 1040 If you exchange services with another person and you both have agreed ahead of time on the value of the services, that value will be accepted as the fair market value unless the value can be shown to be otherwise. Ez 1040 Example 1. Ez 1040 You are a self-employed lawyer. Ez 1040 You perform legal services for a client, a small corporation. Ez 1040 In payment for your services, you receive shares of stock in the corporation. Ez 1040 You must include the fair market value of the shares in income. Ez 1040 Example 2. Ez 1040 You are an artist and create a work of art to compensate your landlord for the rent-free use of your apartment. Ez 1040 You must include the fair rental value of the apartment in your gross receipts. Ez 1040 Your landlord must include the fair market value of the work of art in his or her rental income. Ez 1040 Example 3. Ez 1040 You are a self-employed accountant. Ez 1040 Both you and a house painter are members of a barter club, an organization that each year gives its members a directory of members and the services each member provides. Ez 1040 Members get in touch with other members directly and bargain for the value of the services to be performed. Ez 1040 In return for accounting services you provided for the house painter's business, the house painter painted your home. Ez 1040 You must include in gross receipts the fair market value of the services you received from the house painter. Ez 1040 The house painter must include the fair market value of your accounting services in his or her gross receipts. Ez 1040 Example 4. Ez 1040 You are a member of a barter club that uses credit units to credit or debit members' accounts for goods or services provided or received. Ez 1040 As soon as units are credited to your account, you can use them to buy goods or services or sell or transfer the units to other members. Ez 1040 You must include the value of credit units you received in your gross receipts for the tax year in which the units are credited to your account. Ez 1040 The dollar value of units received for services by an employee of the club, who can use the units in the same manner as other members, must be included in the employee's gross income for the tax year in which received. Ez 1040 It is wages subject to social security and Medicare taxes (FICA), federal unemployment taxes (FUTA), and income tax withholding. Ez 1040 See Publication 15 (Circular E), Employer's Tax Guide. Ez 1040 Example 5. Ez 1040 You operate a plumbing business and use the cash method of accounting. Ez 1040 You join a barter club and agree to provide plumbing services to any member for a specified number of hours. Ez 1040 Each member has access to a directory that lists the members of the club and the services available. Ez 1040 Members contact each other directly and request services to be performed. Ez 1040 You are not required to provide services unless requested by another member, but you can use as many of the offered services as you wish without paying a fee. Ez 1040 You must include the fair market value of any services you receive from club members in your gross receipts when you receive them even if you have not provided any services to club members. Ez 1040 Information returns. Ez 1040 If you are involved in a bartering transaction, you may have to file either of the following forms. Ez 1040 Form 1099-B, Proceeds From Broker and Barter Exchange Transactions. Ez 1040 Form 1099-MISC, Miscellaneous Income. Ez 1040 For information about these forms, see the General Instructions for Certain Information Returns. Ez 1040 Real Estate Rents If you are a real estate dealer who receives income from renting real property or an owner of a hotel, motel, etc. Ez 1040 , who provides services (maid services, etc. Ez 1040 ) for guests, report the rental income and expenses on Schedule C or C-EZ. Ez 1040 If you are not a real estate dealer or the kind of owner described in the preceding sentence, report the rental income and expenses on Schedule E. Ez 1040 For more information, see Publication 527, Residential Rental Property (Including Rental of Vacation Homes). Ez 1040 Real estate dealer. Ez 1040 You are a real estate dealer if you are engaged in the business of selling real estate to customers with the purpose of making a profit from those sales. Ez 1040 Rent you receive from real estate held for sale to customers is subject to SE tax. Ez 1040 However, rent you receive from real estate held for speculation or investment is not subject to SE tax. Ez 1040 Trailer park owner. Ez 1040 Rental income from a trailer park is subject to SE tax if you are a self-employed trailer park owner who provides trailer lots and facilities and substantial services for the convenience of your tenants. Ez 1040 You generally are considered to provide substantial services for tenants if they are primarily for the tenants' convenience and normally are not provided to maintain the lots in a condition for occupancy. Ez 1040 Services are substantial if the compensation for the services makes up a material part of the tenants' rental payments. Ez 1040 Examples of services that are not normally provided for the tenants' convenience include supervising and maintaining a recreational hall provided by the park, distributing a monthly newsletter to tenants, operating a laundry facility, and helping tenants buy or sell their trailers. Ez 1040 Examples of services that are normally provided to maintain the lots in a condition for tenant occupancy include city sewerage, electrical connections, and roadways. Ez 1040 Hotels, boarding houses, and apartments. Ez 1040 Rental income you receive for the use or occupancy of hotels, boarding houses, or apartment houses is subject to SE tax if you provide services for the occupants. Ez 1040 Generally, you are considered to provide services for the occupants if the services are primarily for their convenience and are not services normally provided with the rental of rooms for occupancy only. Ez 1040 An example of a service that is not normally provided for the convenience of the occupants is maid service. Ez 1040 However, providing heat and light, cleaning stairways and lobbies, and collecting trash are services normally provided for the occupants' convenience. Ez 1040 Prepaid rent. Ez 1040 Advance payments received under a lease that does not put any restriction on their use or enjoyment are income in the year you receive them. Ez 1040 This is true no matter what accounting method or period you use. Ez 1040 Lease bonus. Ez 1040 A bonus you receive from a lessee for granting a lease is an addition to the rent. Ez 1040 Include it in your gross receipts in the year received. Ez 1040 Lease cancellation payments. Ez 1040 Report payments you receive from your lessee for canceling a lease in your gross receipts in the year received. Ez 1040 Payments to third parties. Ez 1040 If your lessee makes payments to someone else under an agreement to pay your debts or obligations, include the payments in your gross receipts when the lessee makes the payments. Ez 1040 A common example of this kind of income is a lessee's payment of your property taxes on leased real property. Ez 1040 Settlement payments. Ez 1040 Payments you receive in settlement of a lessee's obligation to restore the leased property to its original condition are income in the amount that the payments exceed the adjusted basis of the leasehold improvements destroyed, damaged, removed, or disconnected by the lessee. Ez 1040 Personal Property Rents If you are in the business of renting personal property (equipment, vehicles, formal wear, etc. Ez 1040 ), include the rental amount you receive in your gross receipts on Schedule C or C-EZ. Ez 1040 Prepaid rent and other payments described in the preceding Real Estate Rents discussion can also be received for renting personal property. Ez 1040 If you receive any of those payments, include them in your gross receipts as explained in that discussion. Ez 1040 Interest and Dividend Income Interest and dividends may be considered business income. Ez 1040 Interest. Ez 1040 Interest received on notes receivable that you have accepted in the ordinary course of business is business income. Ez 1040 Interest received on loans is business income if you are in the business of lending money. Ez 1040 Uncollectible loans. Ez 1040 If a loan payable to you becomes uncollectible during the tax year and you use an accrual method of accounting, you must include in gross income interest accrued up to the time the loan became uncollectible. Ez 1040 If the accrued interest later becomes uncollectible, you may be able to take a bad debt deduction. Ez 1040 See Bad Debts in chapter 8. Ez 1040 Unstated interest. Ez 1040 If little or no interest is charged on an installment sale, you may have to treat a part of each payment as unstated interest. Ez 1040 See Unstated Interest and Original Issue Discount (OID) in Publication 537, Installment Sales. Ez 1040 Dividends. Ez 1040 Generally, dividends are business income to dealers in securities. Ez 1040 For most sole proprietors and statutory employees, however, dividends are nonbusiness income. Ez 1040 If you hold stock as a personal investment separately from your business activity, the dividends from the stock are nonbusiness income. Ez 1040 If you receive dividends from business insurance premiums you deducted in an earlier year, you must report all or part of the dividend as business income on your return. Ez 1040 To find out how much you have to report, see Recovery of items previously deducted under Other Income, later. Ez 1040 Canceled Debt The following explains the general rule for including canceled debt in income and the exceptions to the general rule. Ez 1040 General Rule Generally, if your debt is canceled or forgiven, other than as a gift or bequest to you, you must include the canceled amount in your gross income for tax purposes. Ez 1040 Report the canceled amount on line 6 of Schedule C if you incurred the debt in your business. Ez 1040 If the debt is a nonbusiness debt, report the canceled amount on line 21 of Form 1040. Ez 1040 Exceptions The following discussion covers some exceptions to the general rule for canceled debt. Ez 1040 Price reduced after purchase. Ez 1040 If you owe a debt to the seller for property you bought and the seller reduces the amount you owe, you generally do not have income from the reduction. Ez 1040 Unless you are bankrupt or insolvent, treat the amount of the reduction as a purchase price adjustment and reduce your basis in the property. Ez 1040 Deductible debt. Ez 1040 You do not realize income from a canceled debt to the extent the payment of the debt would have led to a deduction. Ez 1040 Example. Ez 1040 You get accounting services for your business on credit. Ez 1040 Later, you have trouble paying your business debts, but you are not bankrupt or insolvent. Ez 1040 Your accountant forgives part of the amount you owe for the accounting services. Ez 1040 How you treat the canceled debt depends on your method of accounting. Ez 1040 Cash method — You do not include the canceled debt in income because payment of the debt would have been deductible as a business expense. Ez 1040 Accrual method — You include the canceled debt in income because the expense was deductible when you incurred the debt. Ez 1040 For information on the cash and accrual methods of accounting, see chapter 2. Ez 1040 Exclusions Do not include canceled debt in income in the following situations. Ez 1040 However, you may be required to file Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness. Ez 1040 For more information, see Form 982. Ez 1040 The cancellation takes place in a bankruptcy case under title 11 of the U. Ez 1040 S. Ez 1040 Code (relating to bankruptcy). Ez 1040 See Publication 908, Bankruptcy Tax Guide. Ez 1040 The cancellation takes place when you are insolvent. Ez 1040 You can exclude the canceled debt to the extent you are insolvent. Ez 1040 See Publication 908. Ez 1040 The canceled debt is a qualified farm debt owed to a qualified person. Ez 1040 See chapter 3 in Publication 225, Farmer's Tax Guide. Ez 1040 The canceled debt is a qualified real property business debt. Ez 1040 This situation is explained later. Ez 1040 The canceled debt is qualified principal residence indebtedness which is discharged after 2006. Ez 1040 See Form 982. Ez 1040 If a canceled debt is excluded from income because it takes place in a bankruptcy case, the exclusions in situations 2 through 5 do not apply. Ez 1040 If it takes place when you are insolvent, the exclusions in situations 3 and 4 do not apply to the extent you are insolvent. Ez 1040 Debt. Ez 1040 For purposes of this discussion, debt includes any debt for which you are liable or which attaches to property you hold. Ez 1040 Qualified real property business debt. Ez 1040 You can elect to exclude (up to certain limits) the cancellation of qualified real property business debt. Ez 1040 If you make the election, you must reduce the basis of your depreciable real property by the amount excluded. Ez 1040 Make this reduction at the beginning of your tax year following the tax year in which the cancellation occurs. Ez 1040 However, if you dispose of the property before that time, you must reduce its basis immediately before the disposition. Ez 1040 Cancellation of qualified real property business debt. Ez 1040 Qualified real property business debt is debt (other than qualified farm debt) that meets all the following conditions. Ez 1040 It was incurred or assumed in connection with real property used in a trade or business. Ez 1040 It was secured by such real property. Ez 1040 It was incurred or assumed at either of the following times. Ez 1040 Before January 1, 1993. Ez 1040 After December 31, 1992, if incurred or assumed to acquire, construct, or substantially improve the real property. Ez 1040 It is debt to which you choose to apply these rules. Ez 1040 Qualified real property business debt includes refinancing of debt described in (3) earlier, but only to the extent it does not exceed the debt being refinanced. Ez 1040 You cannot exclude more than either of the following amounts. Ez 1040 The excess (if any) of: The outstanding principal of qualified real property business debt (immediately before the cancellation), over The fair market value (immediately before the cancellation) of the business real property that is security for the debt, reduced by the outstanding principal amount of any other qualified real property business debt secured by this property immediately before the cancellation. Ez 1040 The total adjusted bases of depreciable real property held by you immediately before the cancellation. Ez 1040 These adjusted bases are determined after any basis reduction due to a cancellation in bankruptcy, insolvency, or of qualified farm debt. Ez 1040 Do not take into account depreciable real property acquired in contemplation of the cancellation. Ez 1040 Election. Ez 1040 To make this election, complete Form 982 and attach it to your income tax return for the tax year in which the cancellation occurs. Ez 1040 You must file your return by the due date (including extensions). Ez 1040 If you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). Ez 1040 For more information, see When To File in the form instructions. Ez 1040 Other Income The following discussion explains how to treat other types of business income you may receive. Ez 1040 Restricted property. Ez 1040 Restricted property is property that has certain restrictions that affect its value. Ez 1040 If you receive restricted stock or other property for services performed, the fair market value of the property in excess of your cost is included in your income on Schedule C or C-EZ when the restriction is lifted. Ez 1040 However, you can choose to be taxed in the year you receive the property. Ez 1040 For more information on including restricted property in income, see Publication 525, Taxable and Nontaxable Income. Ez 1040 Gains and losses. Ez 1040 Do not report on Schedule C or C-EZ a gain or loss from the disposition of property that is neither stock in trade nor held primarily for sale to customers. Ez 1040 Instead, you must report these gains and losses on other forms. Ez 1040 For more information, see chapter 3. Ez 1040 Promissory notes. Ez 1040 Report promissory notes and other evidences of debt issued to you in a sale or exchange of property that is stock in trade or held primarily for sale to customers on Schedule C or C-EZ. Ez 1040 In general, you report them at their stated principal amount (minus any unstated interest) when you receive them. Ez 1040 Lost income payments. Ez 1040 If you reduce or stop your business activities, report on Schedule C or C-EZ any payment you receive for the lost income of your business from insurance or other sources. Ez 1040 Report it on Schedule C or C-EZ even if your business is inactive when you receive the payment. Ez 1040 Damages. Ez 1040 You must include in gross income compensation you receive during the tax year as a result of any of the following injuries connected with your business. Ez 1040 Patent infringement. Ez 1040 Breach of contract or fiduciary duty. Ez 1040 Antitrust injury. Ez 1040 Economic injury. Ez 1040 You may be entitled to a deduction against the income if it compensates you for actual economic injury. Ez 1040 Your deduction is the smaller of the following amounts. Ez 1040 The amount you receive or accrue for damages in the tax year reduced by the amount you pay or incur in the tax year to recover that amount. Ez 1040 Your loss from the injury that you have not yet deducted. Ez 1040 Punitive damages. Ez 1040 You must also include punitive damages in income. Ez 1040 Kickbacks. Ez 1040 If you receive any kickbacks, include them in your income on Schedule C or C-EZ. Ez 1040 However, do not include them if you properly treat them as a reduction of a related expense item, a capital expenditure, or cost of goods sold. Ez 1040 Recovery of items previously deducted. Ez 1040 If you recover a bad debt or any other item deducted in a previous year, include the recovery in income on Schedule C or C-EZ. Ez 1040 However, if all or part of the deduction in earlier years did not reduce your tax, you can exclude the part that did not reduce your tax. Ez 1040 If you exclude part of the recovery from income, you must include with your return a computation showing how you figured the exclusion. Ez 1040 Example. Ez 1040 Joe Smith, a sole proprietor, had gross income of $8,000, a bad debt deduction of $300, and other allowable deductions of $7,700. Ez 1040 He also had 2 personal exemptions for a total of $7,800. Ez 1040 He would not pay income tax even if he did not deduct the bad debt. Ez 1040 Therefore, he will not report as income any part of the $300 he may recover in any future year. Ez 1040 Exception for depreciation. Ez 1040 This rule does not apply to depreciation. Ez 1040 You recover depreciation using the rules explained next. Ez 1040 Recapture of depreciation. Ez 1040 In the following situations, you have to recapture the depreciation deduction. Ez 1040 This means you include in income part or all of the depreciation you deducted in previous years. Ez 1040 Listed property. Ez 1040 If your business use of listed property (explained in chapter 8 under Depreciation ) falls to 50% or less in a tax year after the tax year you placed the property in service, you may have to recapture part of the depreciation deduction. Ez 1040 You do this by including in income on Schedule C part of the depreciation you deducted in previous years. Ez 1040 Use Part IV of Form 4797, Sales of Business Property, to figure the amount to include on Schedule C. Ez 1040 For more information, see What is the Business-Use Requirement? in chapter 5 of Publication 946, How To Depreciate Property. Ez 1040 That chapter explains how to determine whether property is used more than 50% in your business. Ez 1040 Section 179 property. Ez 1040 If you take a section 179 deduction (explained in chapter 8 under Depreciation ) for an asset and before the end of the asset's recovery period the percentage of business use drops to 50% or less, you must recapture part of the section 179 deduction. Ez 1040 You do this by including in income on Schedule C part of the deduction you took. Ez 1040 Use Part IV of Form 4797 to figure the amount to include on Schedule C. Ez 1040 See chapter 2 in Publication 946 to find out when you recapture the deduction. Ez 1040 Sale or exchange of depreciable property. Ez 1040 If you sell or exchange depreciable property at a gain, you may have to treat all or part of the gain due to depreciation as ordinary income. Ez 1040 You figure the income due to depreciation recapture in Part III of Form 4797. Ez 1040 For more information, see chapter 4 in Publication 544, Sales and Other Dispositions of Assets. Ez 1040 Items That Are Not Income In some cases the property or money you receive is not income. Ez 1040 Appreciation. Ez 1040 Increases in value of your property are not income until you realize the increases through a sale or other taxable disposition. Ez 1040 Consignments. Ez 1040 Consignments of merchandise to others to sell for you are not sales. Ez 1040 The title of merchandise remains with you, the consignor, even after the consignee possesses the merchandise. Ez 1040 Therefore, if you ship goods on consignment, you have no profit or loss until the consignee sells the merchandise. Ez 1040 Merchandise you have shipped out on consignment is included in your inventory until it is sold. Ez 1040 Do not include merchandise you receive on consignment in your inventory. Ez 1040 Include your profit or commission on merchandise consigned to you in your income when you sell the merchandise or when you receive your profit or commission, depending upon the method of accounting you use. Ez 1040 Construction allowances. Ez 1040 If you enter into a lease after August 5, 1997, you can exclude from income the construction allowance you receive (in cash or as a rent reduction) from your landlord if you receive it under both the following conditions. Ez 1040 Under a short-term lease of retail space. Ez 1040 For the purpose of constructing or improving qualified long-term real property for use in your business at that retail space. Ez 1040 Amount you can exclude. Ez 1040 You can exclude the construction allowance to the extent it does not exceed the amount you spent for construction or improvements. Ez 1040 Short-term lease. Ez 1040 A short-term lease is a lease (or other agreement for occupancy or use) of retail space for 15 years or less. Ez 1040 The following rules apply in determining whether the lease is for 15 years or less. Ez 1040 Take into account options to renew when figuring whether the lease is for 15 years or less. Ez 1040 But do not take into account any option to renew at fair market value determined at the time of renewal. Ez 1040 Two or more successive leases that are part of the same transaction (or a series of related transactions) for the same or substantially similar retail space are treated as one lease. Ez 1040 Retail space. Ez 1040 Retail space is real property leased, occupied, or otherwise used by you as a tenant in your business of selling tangible personal property or services to the general public. Ez 1040 Qualified long-term real property. Ez 1040 Qualified long-term real property is nonresidential real property that is part of, or otherwise present at, your retail space and that reverts to the landlord when the lease ends. Ez 1040 Exchange of like-kind property. Ez 1040 If you exchange your business property or property you hold for investment solely for property of a like kind to be used in your business or to be held for investment, no gain or loss is recognized. Ez 1040 This means that the gain is not taxable and the loss is not deductible. Ez 1040 A common type of nontaxable exchange is the trade-in of a business automobile for another business automobile. Ez 1040 For more information, see Form 8824. Ez 1040 Leasehold improvements. Ez 1040 If a tenant erects buildings or makes improvements to your property, the increase in the value of the property due to the improvements is not income to you. Ez 1040 However, if the facts indicate that the improvements are a payment of rent to you, then the increase in value would be income. Ez 1040 Loans. Ez 1040 Money borrowed through a bona fide loan is not income. Ez 1040 Sales tax. Ez 1040 State and local sales taxes imposed on the buyer, which you were required to collect and pay over to state or local governments, are not income. Ez 1040 Guidelines for Selected Occupations This section provides information to determine whether your earnings should be reported on Schedule C (Form 1040) or C-EZ (Form 1040). Ez 1040 Direct seller. Ez 1040 You must report all income you receive as a direct seller on Schedule C or C-EZ. Ez 1040 This includes any of the following. Ez 1040 Income from sales—payments you receive from customers for products they buy from you. Ez 1040 Commissions, bonuses, or percentages you receive for sales and the sales of others who work under you. Ez 1040 Prizes, awards, and gifts you receive from your selling business. Ez 1040 You must report this income regardless of whether it is reported to you on an information return. Ez 1040 You are a direct seller if you meet all the following conditions. Ez 1040 You are engaged in one of the following trades or businesses. Ez 1040 Selling or soliciting the sale of consumer products either in a home or other place that is not a permanent retail establishment, or to any buyer on a buy-sell basis or a deposit-commission basis for resale in a home or other place of business that is not a permanent retail establishment. Ez 1040 Delivering or distributing newspapers or shopping news (including any services directly related to that trade or business). Ez 1040 Substantially all your pay (whether paid in cash or not) for services described above is directly related to sales or other output (including performance of services) rather than to the number of hours worked. Ez 1040 Your services are performed under a written contract between you and the person for whom you perform the services, and the contract provides that you will not be treated as an employee for federal tax purposes. Ez 1040 Executor or administrator. Ez 1040 If you administer a deceased person's estate, your fees are reported on Schedule C or C-EZ if you are one of the following: A professional fiduciary. Ez 1040 A nonprofessional fiduciary (personal representative) and both of the following apply. Ez 1040 The estate includes an active trade or business in which you actively participate. Ez 1040 Your fees are related to the operation of that trade or business. Ez 1040 A nonprofessional fiduciary of a single estate that requires extensive managerial activities on your part for a long period of time, provided these activities are enough to be considered a trade or business. Ez 1040 If the fees do not meet the above requirements, report them on line 21 of Form 1040. Ez 1040 Fishing crew member. Ez 1040 If you are a member of the crew that catches fish or other water life, your earnings are reported on Schedule C or C-EZ if you meet all the requirements shown in chapter 10 under Fishing crew member . Ez 1040 Insurance agent, former. Ez 1040 Termination payments you receive as a former self-employed insurance agent from an insurance company because of services you performed for that company are not reported on Schedule C or C-EZ if all the following conditions are met. Ez 1040 You received payments after your agreement to perform services for the company ended. Ez 1040 You did not perform any services for the company after your service agreement ended and before the end of the year in which you received the payment. Ez 1040 You entered into a covenant not to compete against the company for at least a 1-year period beginning on the date your service agreement ended. Ez 1040 The amount of the payments depended primarily on policies sold by you or credited to your account during the last year of your service agreement or the extent to which those policies remain in force for some period after your service agreement ended, or both. Ez 1040 The amount of the payment did not depend to any extent on length of service or overall earnings from services performed for the company (regardless of whether eligibility for the payments depended on length of service). Ez 1040 Insurance agent, retired. Ez 1040 Income paid by an insurance company to a retired self-employed insurance agent based on a percentage of commissions received before retirement is reported on Schedule C or C-EZ. Ez 1040 Also, renewal commissions and deferred commissions for sales made before retirement are generally reported on Schedule C or C-EZ. Ez 1040 However, renewal commissions paid to the survivor of an insurance agent are not reported on Schedule C or C-EZ. Ez 1040 Newspaper carrier or distributor. Ez 1040 You are a direct seller and your earnings are reported on Schedule C or C-EZ if all the following conditions apply. Ez 1040 You are in the business of delivering or distributing newspapers or shopping news (including directly related services such as soliciting customers and collecting receipts). Ez 1040 Substantially all your pay for these services directly relates to your sales or other output rather than to the number of hours you work. Ez 1040 You perform the services under a written contract that says you will not be treated as an employee for federal tax purposes. Ez 1040 This rule applies whether or not you hire others to help you make deliveries. Ez 1040 It also applies whether you buy the papers from the publisher or are paid based on the number of papers you deliver. Ez 1040 Newspaper or magazine vendor. Ez 1040 If you are 18 or older and you sell newspapers or magazines, your earnings are reported on Schedule C or C-EZ if all the following conditions apply. Ez 1040 You sell newspapers or magazines to ultimate consumers. Ez 1040 You sell them at a fixed price. Ez 1040 Your earnings are based on the difference between the sales price and your cost of goods sold. Ez 1040 This rule applies whether or not you are guaranteed a minimum amount of earnings. Ez 1040 It also applies whether or not you receive credit for unsold newspapers or magazines you return to your supplier. Ez 1040 Notary public. Ez 1040 Fees you receive for services you perform as a notary public are reported on Schedule C or C-EZ. Ez 1040 These payments are not subject to self-employment tax (see the instructions for Schedule SE (Form 1040)). Ez 1040 Public official. Ez 1040 Public officials generally do not report what they earn for serving in public office on Schedule C or C-EZ. Ez 1040 This rule applies to payments received by an elected tax collector from state funds on the basis of a fixed percentage of the taxes collected. Ez 1040 Public office includes any elective or appointive office of the United States or its possessions, the District of Columbia, a state or its political subdivisions, or a wholly owned instrumentality of any of these. Ez 1040 Public officials of state or local governments report their fees on Schedule C or C-EZ if they are paid solely on a fee basis and if their services are eligible for, but not covered by, social security under a federal-state agreement. Ez 1040 Real estate agent or direct seller. Ez 1040 If you are a licensed real estate agent or a direct seller, your earnings are reported on Schedule C or C-EZ if both the following apply. Ez 1040 Substantially all your pay for services as a real estate agent or direct seller directly relates to your sales or other output rather than to the number of hours you work. Ez 1040 You perform the services under a written contract that says you will not be treated as an employee for federal tax purposes. Ez 1040 Securities dealer. Ez 1040 If you are a dealer in options or commodities, your gains and losses from dealing or trading in section 1256 contracts (regulated futures contracts, foreign currency contracts, nonequity options, dealer equity options, and dealer securities futures contracts) or property related to those contracts (such as stock used to hedge options) are reported on Schedule C or C-EZ. Ez 1040 For more information, see sections 1256 and 1402(i). Ez 1040 Securities trader. Ez 1040 You are a trader in securities if you are engaged in the business of buying and selling securities for your own account. Ez 1040 As a trader in securities, your gain or loss from the disposition of securities is not reported on Schedule C or C-EZ. Ez 1040 However, see Securities dealer , earlier, for an exception that applies to section 1256 contracts. Ez 1040 For more information about securities traders, see Publication 550, Investment Income and Expenses. Ez 1040 Accounting for Your Income Accounting for your income for income tax purposes differs at times from accounting for financial purposes. Ez 1040 This section discusses some of the more common differences that may affect business transactions. Ez 1040 Figure your business income on the basis of a tax year and according to your regular method of accounting (see chapter 2). Ez 1040 If the sale of a product is an income-producing factor in your business, you usually have to use inventories to clearly show your income. Ez 1040 Dealers in real estate are not allowed to use inventories. Ez 1040 For more information on inventories, see chapter 2. Ez 1040 Income paid to a third party. Ez 1040 All income you earn is taxable to you. Ez 1040 You cannot avoid tax by having the income paid to a third party. Ez 1040 Example. Ez 1040 You rent out your property and the rental agreement directs the lessee to pay the rent to your son. Ez 1040 The amount paid to your son is gross income to you. Ez 1040 Cash discounts. Ez 1040 These are amounts the seller permits you to deduct from the invoice price for prompt payment. Ez 1040 For income tax purposes, you can use either of the following two methods to account for cash discounts. Ez 1040 Deduct the cash discount from purchases (see Line 36, Purchases Less Cost of Items Withdrawn for Personal Use in chapter 6). Ez 1040 Credit the cash discount to a discount income account. Ez 1040 You must use the chosen method every year for all your purchase discounts. Ez 1040 If you use the second method, the credit balance in the account at the end of your tax year is business income. Ez 1040 Under this method, you do not reduce the cost of goods sold by the cash discounts you received. Ez 1040 When valuing your closing inventory, you cannot reduce the invoice price of merchandise on hand at the close of the tax year by the average or estimated discounts received on the merchandise. Ez 1040 Trade discounts. Ez 1040 These are reductions from list or catalog prices and usually are not written into the invoice or charged to the customer. Ez 1040 Do not enter these discounts on your books of account. Ez 1040 Instead, use only the net amount as the cost of the merchandise purchased. Ez 1040 For more information, see Trade discounts in chapter 6. Ez 1040 Payment placed in escrow. Ez 1040 If the buyer of your property places part or all of the purchase price in escrow, you do not include any part of it in gross sales until you actually or constructively receive it. Ez 1040 However, upon completion of the terms of the contract and the escrow agreement, you will have taxable income, even if you do not accept the money until the next year. Ez 1040 Sales returns and allowances. Ez 1040 Credits you allow customers for returned merchandise and any other allowances you make on sales are deductions from gross sales in figuring net sales. Ez 1040 Advance payments. Ez 1040 Special rules dealing with an accrual method of accounting for payments received in advance are discussed in chapter 2 under Accrual Method. Ez 1040 Insurance proceeds. Ez 1040 If you receive insurance or another type of reimbursement for a casualty or theft loss, you must subtract it from the loss when you figure your deduction. Ez 1040 You cannot deduct the reimbursed part of a casualty or theft loss. Ez 1040 For information on casualty or theft losses, see Publication 547, Casualties, Disasters, and Thefts. Ez 1040 Prev Up Next Home More Online Publications