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Ez form online Publication 598 - Introductory Material Table of Contents What's New Introduction Useful Items - You may want to see: What's New Federal tax deposits must be made by electronic funds transfer. Ez form online Beginning January 1, 2011, you must use electronic funds transfer to make all federal tax deposits. Ez form online Forms 8109 and 8109-B, Federal Tax Deposit Coupon, cannot be used after 2010. Ez form online See Federal Tax Deposits Must be Made by Electronic Funds Transfer on page 3. Ez form online For large corporations, special rules apply for estimated tax payments that are required to be made for the period that includes July, August, or September of 2012, and the period that immediately follows these months. Ez form online See the instructions for line 12 on the 2012 Form 990-W (Worksheet), Estimated Tax on Unrelated Business Taxable Income for Tax-Exempt Organizations. Ez form online The maximum cost of a low-cost article, for organizations eligible to receive charitable contributions, was increased to $9. Ez form online 70 for 2011. Ez form online See Distribution of low-cost articles on page 8. Ez form online The annual limit on associate member dues received by an agricultural or horticultural organization not treated as gross income was increased to $148 for 2011. Ez form online See Exception under Dues of Agricultural Organizations and Business Leagues on page 10. Ez form online The IRS has created a page on IRS. Ez form online gov that includes information about Pub. Ez form online 598 at www. Ez form online irs. Ez form online gov/pub598. Ez form online Introduction An exempt organization is not taxed on its income from an activity substantially related to the charitable, educational, or other purpose that is the basis for the organization's exemption. Ez form online Such income is exempt even if the activity is a trade or business. Ez form online However, if an exempt organization regularly carries on a trade or business not substantially related to its exempt purpose, except that it provides funds to carry out that purpose, the organization is subject to tax on its income from that unrelated trade or business. Ez form online This publication covers the rules for the tax on unrelated business income of exempt organizations. Ez form online It explains: Which organizations are subject to the tax (chapter 1), What the requirements are for filing a tax return (chapter 2), What an unrelated trade or business is (chapter 3), and How to figure unrelated business taxable income (chapter 4). Ez form online All section references in this publication are to the Internal Revenue Code. Ez form online Useful Items - You may want to see: Publication 557 Tax-Exempt Status for Your Organization Form (and Instructions) 990-T Exempt Organization Business Income Tax Return See chapter 5 for information about getting these publications and forms. Ez form online Comments and suggestions. Ez form online   We welcome your comments about this publication and your suggestions for future editions. Ez form online   You can write to us at: Internal Revenue Service Individual Forms and Publications Branch SE:W:CAR:MP:T:I 1111 Constitution Ave. Ez form online NW, IR-6526 Washington, DC 20224   We respond to many letters by telephone. Ez form online Therefore, it would be helpful if you would include your daytime phone number, including the area code, in your correspondence. Ez form online   You can email us at taxforms@irs. Ez form online gov. Ez form online Please put “publications Comment” on the subject line. Ez form online You can also send us comments from www. Ez form online irs. Ez form online gov/formspubs/, select “Comment on Tax Forms and Publications” under “Information about. Ez form online ”   Although we cannot respond individually to each comment received, we do appreciate your feedback and will consider your comments as we revise our tax products. Ez form online Prev  Up  Next   Home   More Online Publications
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Ez form online 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. Ez form online Hybrid method. Ez form online Cash Method Accrual Method Inventories Change in Accounting Method How To Get Tax HelpLow Income Taxpayer Clinics (LITCs). Ez form online Accounting Periods You must use a tax year to figure your taxable income. Ez form online A tax year is an annual accounting period for keeping records and reporting income and expenses. Ez form online An annual accounting period does not include a short tax year (discussed later). Ez form online You can use the following tax years: A calendar year; or A fiscal year (including a 52-53-week tax year). Ez form online Unless you have a required tax year, you adopt a tax year by filing your first income tax return using that tax year. Ez form online A required tax year is a tax year required under the Internal Revenue Code or the Income Tax Regulations. Ez form online 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. Ez form online This section discusses: A calendar year. Ez form online A fiscal year (including a period of 52 or 53 weeks). Ez form online A short tax year. Ez form online An improper tax year. Ez form online A change in tax year. Ez form online Special situations that apply to individuals. Ez form online Restrictions that apply to the accounting period of a partnership, S corporation, or personal service corporation. Ez form online Special situations that apply to corporations. Ez form online Calendar Year A calendar year is 12 consecutive months beginning on January 1st and ending on December 31st. Ez form online 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. Ez form online 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. Ez form online See Change in Tax Year, later. Ez form online Generally, anyone can adopt the calendar year. Ez form online 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. Ez form online Fiscal Year A fiscal year is 12 consecutive months ending on the last day of any month except December 31st. Ez form online 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. Ez form online 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. Ez form online If you make this election, your 52-53-week tax year must always end on the same day of the week. Ez form online 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. Ez form online 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. Ez form online Election. Ez form online   To make the election for the 52-53-week tax year, attach a statement with the following information to your tax return. Ez form online The month in which the new 52-53-week tax year ends. Ez form online The day of the week on which the tax year always ends. Ez form online The date the tax year ends. Ez form online 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. Ez form online   When you figure depreciation or amortization, a 52-53-week tax year is generally considered a year of 12 calendar months. Ez form online   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. Ez form online Example. Ez form online Assume a tax provision applies to tax years beginning on or after July 1, 2012, which happens to be a Sunday. Ez form online 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. Ez form online Short Tax Year A short tax year is a tax year of less than 12 months. Ez form online 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. Ez form online Tax on a short period tax return is figured differently for each situation. Ez form online 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. Ez form online 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. Ez form online Example 1. Ez form online XYZ Corporation was organized on July 1, 2012. Ez form online It elected the calendar year as its tax year. Ez form online Therefore, its first tax return was due March 15, 2013. Ez form online This short period return will cover the period from July 1, 2012, through December 31, 2012. Ez form online Example 2. Ez form online A calendar year corporation dissolved on July 23, 2012. Ez form online Its final return is due by October 15, 2012. Ez form online It will cover the short period from January 1, 2012, through July 23, 2012. Ez form online Death of individual. Ez form online   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. Ez form online The decedent's final return will be a short period tax return that begins on January 1st, and ends on the date of death. Ez form online 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. Ez form online Example. Ez form online   Agnes Green was a single, calendar year taxpayer. Ez form online She died on March 6, 2012. Ez form online Her final income tax return must be filed by April 15, 2013. Ez form online It will cover the short period from January 1, 2012, to March 6, 2012. Ez form online 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. Ez form online 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. Ez form online Figure tax for a short year under the general rule, explained below. Ez form online You may then be able to use a relief procedure, explained later, and claim a refund of part of the tax you paid. Ez form online General rule. Ez form online   Income tax for a short tax year must be annualized. Ez form online However, self-employment tax is figured on the actual self-employment income for the short period. Ez form online Individuals. Ez form online   An individual must figure income tax for the short tax year as follows. Ez form online Determine your adjusted gross income (AGI) for the short tax year and then subtract your actual itemized deductions for the short tax year. Ez form online You must itemize deductions when you file a short period tax return. Ez form online Multiply the dollar amount of your exemptions by the number of months in the short tax year and divide the result by 12. Ez form online Subtract the amount in (2) from the amount in (1). Ez form online The result is your modified taxable income. Ez form online Multiply the modified taxable income in (3) by 12, then divide the result by the number of months in the short tax year. Ez form online The result is your annualized income. Ez form online Figure the total tax on your annualized income using the appropriate tax rate schedule. Ez form online Multiply the total tax by the number of months in the short tax year and divide the result by 12. Ez form online The result is your tax for the short tax year. Ez form online Relief procedure. Ez form online   Individuals and corporations can use a relief procedure to figure the tax for the short tax year. Ez form online It may result in less tax. Ez form online Under this procedure, the tax is figured by two separate methods. Ez form online 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. Ez form online For more information, see section 443(b)(2) of the Internal Revenue Code. Ez form online Alternative minimum tax. Ez form online   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. Ez form online Multiply the AMTI by 12. Ez form online Divide the result by the number of months in the short tax year. Ez form online Multiply the annualized AMTI by the appropriate rate of tax under section 55(b)(1) of the Internal Revenue Code. Ez form online The result is the annualized AMT. Ez form online Multiply the annualized AMT by the number of months in the short tax year and divide the result by 12. Ez form online   For information on the AMT for individuals, see the Instructions for Form 6251, Alternative Minimum Tax–Individuals. Ez form online For information on the AMT for corporations, see the Instructions to Form 4626, Alternative Minimum Tax–Corporations. Ez form online Tax withheld from wages. Ez form online   You can claim a credit against your income tax liability for federal income tax withheld from your wages. Ez form online Federal income tax is withheld on a calendar year basis. Ez form online The amount withheld in any calendar year is allowed as a credit for the tax year beginning in the calendar year. Ez form online Improper Tax Year Taxpayers that have adopted an improper tax year must change to a proper tax year. Ez form online 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. Ez form online See Accounting Periods, earlier, for a description of permissible tax years. Ez form online To change to a proper tax year, you must do one of the following. Ez form online 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. Ez form online Attach a completed Form 1128 to the amended tax return. Ez form online Write “FILED UNDER REV. Ez form online PROC. Ez form online 85-15” at the top of Form 1128 and file the forms with the Internal Revenue Service Center where you filed your original return. Ez form online 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. Ez form online Change in Tax Year Generally, you must file Form 1128 to request IRS approval to change your tax year. Ez form online See the Instructions for Form 1128 for exceptions. Ez form online If you qualify for an automatic approval request, a user fee is not required. Ez form online Individuals Generally, individuals must adopt the calendar year as their tax year. Ez form online 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. Ez form online Partnerships, S Corporations, and Personal Service Corporations (PSCs) Generally, partnerships, S corporations (including electing S corporations), and PSCs must use a required tax year. Ez form online A required tax year is a tax year that is required under the Internal Revenue Code and Income Tax Regulations. Ez form online 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). Ez form online The following discussions provide the rules for partnerships, S corporations, and PSCs. Ez form online Partnership A partnership must conform its tax year to its partners' tax years unless any of the following apply. Ez form online 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. Ez form online 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. Ez form online The partnership can establish a business purpose for a different tax year. Ez form online The rules for the required tax year for partnerships are as follows. Ez form online 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. Ez form online If there is no majority interest tax year, the partnership must use the tax year of all its principal partners. Ez form online A principal partner is one who has a 5% or more interest in the profits or capital of the partnership. Ez form online 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. Ez form online If a partnership changes to a required tax year because of these rules, it can get automatic approval by filing Form 1128. Ez form online Least aggregate deferral of income. Ez form online   The tax year that results in the least aggregate deferral of income is determined as follows. Ez form online Figure the number of months of deferral for each partner using one partner's tax year. Ez form online 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. Ez form online 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). Ez form online Add the amounts in step (2) to get the aggregate (total) deferral for the tax year used in step (1). Ez form online Repeat steps (1) through (3) for each partner's tax year that is different from the other partners' years. Ez form online   The partner's tax year that results in the lowest aggregate (total) number is the tax year that must be used by the partnership. Ez form online 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. Ez form online However, if one of the tax years that qualifies is the partnership's existing tax year, the partnership must retain that tax year. Ez form online Example. Ez form online A and B each have a 50% interest in partnership P, which uses a fiscal year ending June 30. Ez form online A uses the calendar year and B uses a fiscal year ending November 30. Ez form online 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. Ez form online Year End 12/31: Year End Profits Interest Months of Deferral Interest × Deferral A 12/31 0. Ez form online 5 -0- -0- B 11/30 0. Ez form online 5 11 5. Ez form online 5 Total Deferral 5. Ez form online 5 Year End 11/30: Year End Profits Interest Months of Deferral Interest × Deferral A 12/31 0. Ez form online 5 1 0. Ez form online 5 B 11/30 0. Ez form online 5 -0- -0- Total Deferral 0. Ez form online 5 When determination is made. Ez form online   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. Ez form online However, the IRS can require the partnership to use another day or period that will more accurately reflect the ownership of the partnership. Ez form online This could occur, for example, if a partnership interest was transferred for the purpose of qualifying for a particular tax year. Ez form online Short period return. Ez form online   When a partnership changes its tax year, a short period return must be filed. Ez form online 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. Ez form online   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. Ez form online The short period return must indicate at the top of page 1, “FILED UNDER SECTION 1. Ez form online 706-1. Ez form online ” More information. Ez form online   For more information about changing a partnership's tax year, and information about ruling requests, see the Instructions for Form 1128. Ez form online S Corporation All S corporations, regardless of when they became an S corporation, must use a permitted tax year. Ez form online A permitted tax year is any of the following. Ez form online The calendar year. Ez form online A tax year elected under section 444 of the Internal Revenue Code. Ez form online See Section 444 Election, below for details. Ez form online A 52-53-week tax year ending with reference to the calendar year or a tax year elected under section 444. Ez form online Any other tax year for which the corporation establishes a business purpose. Ez form online 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. Ez form online For information about changing an S corporation's tax year and information about ruling requests, see the Instructions for Form 1128. Ez form online Personal Service Corporation (PSC) A PSC must use a calendar tax year unless any of the following apply. Ez form online The corporation makes an election under section 444 of the Internal Revenue Code. Ez form online See Section 444 Election, below for details. Ez form online 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. Ez form online The corporation establishes a business purpose for a fiscal year. Ez form online See the Instructions for Form 1120 for general information about PSCs. Ez form online For information on adopting or changing tax years for PSCs and information about ruling requests, see the Instructions for Form 1128. Ez form online 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. Ez form online Certain restrictions apply to the election. Ez form online 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). Ez form online 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. Ez form online A partnership, S corporation, or PSC can make a section 444 election if it meets all the following requirements. Ez form online It is not a member of a tiered structure (defined in section 1. Ez form online 444-2T of the regulations). Ez form online It has not previously had a section 444 election in effect. Ez form online It elects a year that meets the deferral period requirement. Ez form online Deferral period. Ez form online   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. Ez form online Retaining tax year. Ez form online   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. Ez form online This deferral period is the number of months between the beginning of the retained year and the close of the first required tax year. Ez form online Adopting or changing tax year. Ez form online   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. Ez form online 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. Ez form online This is the tax year immediately preceding the year for which the partnership, S corporation, or PSC wishes to make the section 444 election. Ez form online If the partnership, S corporation, or PSC's tax year is the same as its required tax year, the deferral period is zero. Ez form online Example 1. Ez form online BD Partnership uses a calendar year, which is also its required tax year. Ez form online BD cannot make a section 444 election because the deferral period is zero. Ez form online Example 2. Ez form online E, a newly formed partnership, began operations on December 1. Ez form online E is owned by calendar year partners. Ez form online E wants to make a section 444 election to adopt a September 30 tax year. Ez form online E's deferral period for the tax year beginning December 1 is 3 months, the number of months between September 30 and December 31. Ez form online Making the election. Ez form online   Make a section 444 election by filing Form 8716 with the Internal Revenue Service Center where the entity will file its tax return. Ez form online 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. Ez form online For this purpose, count the month in which the tax year begins, even if it begins after the first day of that month. Ez form online Note. Ez form online If the due date falls on a Saturday, Sunday, or legal holiday, file on the next business day. Ez form online   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. Ez form online Example 1. Ez form online 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. Ez form online 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. Ez form online Example 2. Ez form online The facts are the same as in Example 1 except that AB begins operations on October 21, 2012. Ez form online AB must file Form 8716 by March 17, 2013. Ez form online Example 3. Ez form online B is a corporation that first becomes a PSC for its tax year beginning September 1, 2012. Ez form online B qualifies to make a section 444 election to use a September 30 tax year for its tax year beginning September 1, 2012. Ez form online 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. Ez form online Note. Ez form online The due dates in Examples 2 and 3 are adjusted because the dates fall on a Saturday, Sunday or legal holiday. Ez form online Extension of time for filing. Ez form online   There is an automatic extension of 12 months to make this election. Ez form online See the Form 8716 instructions for more information. Ez form online Terminating the election. Ez form online   The section 444 election remains in effect until it is terminated. Ez form online If the election is terminated, another section 444 election cannot be made for any tax year. Ez form online   The election ends when any of the following applies to the partnership, S corporation, or PSC. Ez form online The entity changes to its required tax year. Ez form online The entity liquidates. Ez form online The entity becomes a member of a tiered structure. Ez form online The IRS determines that the entity willfully failed to comply with the required payments or distributions. Ez form online   The election will also end if either of the following events occur. Ez form online An S corporation's S election is terminated. Ez form online However, if the S corporation immediately becomes a PSC, the PSC can continue the section 444 election of the S corporation. Ez form online A PSC ceases to be a PSC. Ez form online If the PSC elects to be an S corporation, the S corporation can continue the election of the PSC. Ez form online Required payment for partnership or S corporation. Ez form online   A partnership or an S corporation must make a required payment for any tax year: The section 444 election is in effect. Ez form online The required payment for that year (or any preceding tax year) is more than $500. Ez form online    This payment represents the value of the tax deferral the owners receive by using a tax year different from the required tax year. Ez form online   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. Ez form online 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. Ez form online 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. Ez form online Applicable election year. Ez form online   Any tax year a section 444 election is in effect, including the first year, is called an applicable election year. Ez form online 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. Ez form online Required distribution for PSC. Ez form online   A PSC with a section 444 election in effect must distribute certain amounts to employee-owners by December 31 of each applicable year. Ez form online If it fails to make these distributions, it may be required to defer certain deductions for amounts paid to owner-employees. Ez form online The amount deferred is treated as paid or incurred in the following tax year. Ez form online   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). Ez form online Back-up election. Ez form online   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. Ez form online If the request is denied, the back-up section 444 election must be activated (if the partnership, S corporation, or PSC otherwise qualifies). Ez form online Making back-up election. Ez form online   The general rules for making a section 444 election, as discussed earlier, apply. Ez form online When filing Form 8716, type or print “BACK-UP ELECTION” at the top of the form. Ez form online 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. Ez form online Activating election. Ez form online   A partnership or S corporation activates its back-up election by filing the return required and making the required payment with Form 8752. Ez form online The due date for filing Form 8752 and making the payment is the later of the following dates. Ez form online May 15 of the calendar year following the calendar year in which the applicable election year begins. Ez form online 60 days after the partnership or S corporation has been notified by the IRS that the business year request has been denied. Ez form online   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. Ez form online ” 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). Ez form online 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. Ez form online 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. Ez form online Business Purpose Tax Year A partnership, S corporation, or PSC establishes the business purpose for a tax year by filing Form 1128. Ez form online See the Instructions for Form 1128 for details. Ez form online Corporations (Other Than S Corporations and PSCs) A new corporation establishes its tax year when it files its first tax return. Ez form online 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. Ez form online An S corporation or a PSC must use the required tax year rules, discussed earlier, to establish a tax year. Ez form online 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. Ez form online See the Instructions for Form 1128 for details. Ez form online Accounting Methods An accounting method is a set of rules used to determine when income and expenses are reported on your tax return. Ez form online Your accounting method includes not only your overall method of accounting, but also the accounting treatment you use for any material item. Ez form online You choose an accounting method when you file your first tax return. Ez form online If you later want to change your accounting method, you must get IRS approval. Ez form online See Change in Accounting Method, later. Ez form online No single accounting method is required of all taxpayers. Ez form online 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. Ez form online In addition to your permanent accounting books, you must keep any other records necessary to support the entries on your books and tax returns. Ez form online You must use the same accounting method from year to year. Ez form online An accounting method clearly reflects income only if all items of gross income and expenses are treated the same from year to year. Ez form online 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. Ez form online Methods you can use. Ez form online   In general, you can compute your taxable income under any of the following accounting methods. Ez form online Cash method. Ez form online Accrual method. Ez form online Special methods of accounting for certain items of income and expenses. Ez form online A hybrid method which combines elements of two or more of the above accounting methods. Ez form online The cash and accrual methods of accounting are explained later. Ez form online Special methods. Ez form online   This publication does not discuss special methods of accounting for certain items of income or expenses. Ez form online 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. Ez form online The following publications also discuss special methods of reporting income or expenses. Ez form online Publication 225, Farmer's Tax Guide. Ez form online Publication 535, Business Expenses. Ez form online Publication 537, Installment Sales. Ez form online Publication 946, How To Depreciate Property. Ez form online Hybrid method. Ez form online   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. Ez form online However, the following restrictions apply. Ez form online If an inventory is necessary to account for your income, you must use an accrual method for purchases and sales. Ez form online See Exceptions under Inventories, later. Ez form online Generally, you can use the cash method for all other items of income and expenses. Ez form online See Inventories, later. Ez form online If you use the cash method for reporting your income, you must use the cash method for reporting your expenses. Ez form online If you use an accrual method for reporting your expenses, you must use an accrual method for figuring your income. Ez form online Any combination that includes the cash method is treated as the cash method for purposes of section 448 of the Internal Revenue Code. Ez form online Business and personal items. Ez form online   You can account for business and personal items using different accounting methods. Ez form online 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. Ez form online Two or more businesses. Ez form online   If you operate two or more separate and distinct businesses, you can use a different accounting method for each business. Ez form online No business is separate and distinct, unless a complete and separate set of books and records is maintained for each business. Ez form online Note. Ez form online 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. Ez form online Cash Method Most individuals and many small businesses use the cash method of accounting. Ez form online Generally, if you produce, purchase, or sell merchandise, you must keep an inventory and use an accrual method for sales and purchases of merchandise. Ez form online See Inventories, later, for exceptions to this rule. Ez form online Income Under the cash method, you include in your gross income all items of income you actually or constructively receive during the tax year. Ez form online If you receive property and services, you must include their fair market value (FMV) in income. Ez form online Constructive receipt. Ez form online   Income is constructively received when an amount is credited to your account or made available to you without restriction. Ez form online You need not have possession of it. Ez form online 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. Ez form online Income is not constructively received if your control of its receipt is subject to substantial restrictions or limitations. Ez form online Example. Ez form online You are a calendar year taxpayer. Ez form online Your bank credited, and made available, interest to your bank account in December 2012. Ez form online You did not withdraw it or enter it into your books until 2013. Ez form online You must include the amount in gross income for 2012, the year you constructively received it. Ez form online You cannot hold checks or postpone taking possession of similar property from one tax year to another to postpone paying tax on the income. Ez form online You must report the income in the year the property is received or made available to you without restriction. Ez form online Expenses Under the cash method, generally, you deduct expenses in the tax year in which you actually pay them. Ez form online This includes business expenses for which you contest liability. Ez form online However, you may not be able to deduct an expense paid in advance. Ez form online Instead, you may be required to capitalize certain costs, as explained later under Uniform Capitalization Rules. Ez form online Expense paid in advance. Ez form online   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. Ez form online   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. Ez form online 12 months after the right or benefit begins, or The end of the tax year after the tax year in which payment is made. Ez form online   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. Ez form online See Change in Accounting Method, later. Ez form online Example 1. Ez form online 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. Ez form online 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. Ez form online 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. Ez form online Example 2. Ez form online 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. Ez form online The 12-month rule applies. Ez form online Therefore, the full $10,000 is deductible in 2012. Ez form online Excluded Entities The following entities cannot use the cash method, including any combination of methods that includes the cash method. Ez form online (See Special rules for farming businesses, later. Ez form online ) A corporation (other than an S corporation) with average annual gross receipts exceeding $5 million. Ez form online See Gross receipts test, below. Ez form online 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. Ez form online See Gross receipts test, below. Ez form online A tax shelter. Ez form online Exceptions The following entities are not prohibited from using the cash method of accounting. Ez form online Any corporation or partnership, other than a tax shelter, that meets the gross receipts test for all tax years after 1985. Ez form online A qualified personal service corporation (PSC). Ez form online Gross receipts test. Ez form online   A corporation or partnership, other than a tax shelter, that meets the gross receipts test can generally use the cash method. Ez form online 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. Ez form online    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. Ez form online See Gross receipts test for qualifying taxpayers, for more information. Ez form online Generally, a partnership applies the test at the partnership level. Ez form online Gross receipts for a short tax year are annualized. Ez form online Aggregation rules. Ez form online   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. Ez form online Change to accrual method. Ez form online   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. Ez form online Special rules for farming businesses. Ez form online   Generally, a taxpayer engaged in the trade or business of farming is allowed to use the cash method for its farming business. Ez form online 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. Ez form online 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). Ez form online   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. Ez form online For family corporations engaged in farming, the exception applies if gross receipts were $25 million or less for each prior tax year after 1985. Ez form online See chapter 2 of Publication 225, Farmer's Tax Guide, for more information. Ez form online Qualified PSC. Ez form online   A PSC that meets the following function and ownership tests can use the cash method. Ez form online Function test. Ez form online   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. Ez form online Ownership test. Ez form online   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. Ez form online Employees performing services for the corporation in a field qualifying under the function test. Ez form online Retired employees who had performed services in those fields. Ez form online The estate of an employee described in (1) or (2). Ez form online 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. Ez form online   Indirect ownership is generally taken into account if the stock is owned indirectly through one or more partnerships, S corporations, or qualified PSCs. Ez form online Stock owned by one of these entities is considered owned by the entity's owners in proportion to their ownership interest in that entity. Ez form online 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. Ez form online   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. Ez form online Change to accrual method. Ez form online   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. Ez form online 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. Ez form online 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. Ez form online The purpose of an accrual method of accounting is to match income and expenses in the correct year. Ez form online 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. Ez form online Under this rule, you report an amount in your gross income on the earliest of the following dates. Ez form online When you receive payment. Ez form online When the income amount is due to you. Ez form online When you earn the income. Ez form online When title has passed. Ez form online Estimated income. Ez form online   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. Ez form online Change in payment schedule. Ez form online   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. Ez form online Continue this procedure until you complete the services, then account for the difference. Ez form online 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. Ez form online 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. Ez form online However, you cannot postpone including any payment beyond that tax year. Ez form online Service agreement. Ez form online   You can postpone reporting income from an advance payment you receive for a service agreement on property you sell, lease, build, install, or construct. Ez form online This includes an agreement providing for incidental replacement of parts or materials. Ez form online However, this applies only if you offer the property without a service agreement in the normal course of business. Ez form online Postponement not allowed. Ez form online   Generally, one cannot postpone including an advance payment in income for services if either of the following applies. Ez form online 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. Ez form online 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. Ez form online Examples. Ez form online   In each of the following examples, assume the tax year is a calendar year and that the accrual method of accounting is used. Ez form online Example 1. Ez form online You manufacture, sell, and service computers. Ez form online You received payment in 2012 for a one-year contingent service contract on a computer you sold. Ez form online 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. Ez form online Example 2. Ez form online You are in the television repair business. Ez form online 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. Ez form online You include the payments in gross income as you earn them. Ez form online Example 3. Ez form online You own a dance studio. Ez form online On October 1, 2012, you receive payment for a one-year contract for 48 one-hour lessons beginning on that date. Ez form online You give eight lessons in 2012. Ez form online 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. Ez form online Example 4. Ez form online Assume the same facts as in Example 3, except the payment is for a two-year contract for 96 lessons. Ez form online You must include the entire payment in income in 2012 since part of the services may be performed after the following year. Ez form online Guarantee or warranty. Ez form online   Generally, you cannot postpone reporting income you receive under a guarantee or warranty contract. Ez form online Prepaid rent. Ez form online   You cannot postpone reporting income from prepaid rent. Ez form online Prepaid rent does not include payment for the use of a room or other space when significant service is also provided for the occupant. Ez form online 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. Ez form online Books and records. Ez form online   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. Ez form online Financial reports include reports to shareholders, partners, beneficiaries, and other proprietors for credit purposes and consolidated financial statements. Ez form online IRS approval. Ez form online   You must file Form 3115 to obtain IRS approval to change your method of accounting for advance payment for services. Ez form online 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. Ez form online 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. Ez form online An agreement includes a gift certificate that can be redeemed for goods. Ez form online Amounts due and payable are considered received. Ez form online How to report payments. Ez form online   Generally, include an advance payment in income in the year in which you receive it. Ez form online However, you can use the alternative method, discussed next. Ez form online Alternative method of reporting. Ez form online   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. Ez form online Financial reports include reports to shareholders, partners, beneficiaries, and other proprietors for credit purposes and consolidated financial statements. Ez form online Example 1. Ez form online You are a retailer. Ez form online You use an accrual method of accounting and account for the sale of goods when you ship the goods. Ez form online You use this method for both tax and financial reporting purposes. Ez form online 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. Ez form online However, see Exception for inventory goods, later. Ez form online Example 2. Ez form online You are a calendar year taxpayer. Ez form online You manufacture household furniture and use an accrual method of accounting. Ez form online Under this method, you accrue income for your financial reports when you ship the furniture. Ez form online For tax purposes, you do not accrue income until the furniture has been delivered and accepted. Ez form online 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. Ez form online You shipped the furniture to the customer in December 2012, but it was not delivered and accepted until January 2013. Ez form online 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. Ez form online Information schedule. Ez form online   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. Ez form online Total advance payments received in the current tax year. Ez form online Total advance payments received in earlier tax years and not included in income before the current tax year. Ez form online Total payments received in earlier tax years included in income for the current tax year. Ez form online Exception for inventory goods. Ez form online   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. Ez form online You account for the advance payment under the alternative method (discussed earlier). Ez form online You have received a substantial advance payment on the agreement (discussed next). Ez form online You have enough substantially similar goods on hand, or available through your normal source of supply, to satisfy the agreement. Ez form online 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. Ez form online   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. Ez form online You must also deduct in that second year all actual or estimated costs for the goods required to satisfy the agreement. Ez form online If you estimated the cost, you must take into account any difference between the estimate and the actual cost when the goods are delivered. Ez form online Note. Ez form online You must report any advance payments you receive after the second year in the year received. Ez form online No further deferral is allowed. Ez form online Substantial advance payments. Ez form online   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. Ez form online Example. Ez form online You are a calendar year, accrual method taxpayer who accounts for advance payments under the alternative method. Ez form online In 2008, you entered into a contract for the sale of goods properly includible in your inventory. Ez form online The total contract price is $50,000 and you estimate that your total inventoriable costs for the goods will be $25,000. Ez form online You receive the following advance payments under the contract. Ez form online 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. Ez form online In your 2010 closing inventory, you had on hand enough of the type of goods specified in the contract to satisfy the contract. Ez form online 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. Ez form online   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. Ez form online 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. Ez form online If no such goods are on hand, then estimate the cost necessary to satisfy the contract. Ez form online   No further deferral is allowed. Ez form online You must include in gross income the advance payment you receive each remaining year of the contract. Ez form online Take into account the difference between any estimated cost of goods sold and the actual cost when you deliver the goods in 2015. Ez form online IRS approval. Ez form online   You must file Form 3115 to obtain IRS approval to change your method of accounting for advance payments for sales. Ez form online Expenses Under an accrual method of accounting, you generally deduct or capitalize a business expense when both the following apply. Ez form online The all-events test has been met. Ez form online The test is met when: All events have occurred that fix the fact of liability, and The liability can be determined with reasonable accuracy. Ez form online Economic performance has occurred. Ez form online Economic Performance Generally, you cannot deduct or capitalize a business expense until economic performance occurs. Ez form online 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. Ez form online If your expense is for property or services you provide to others, economic performance occurs as you provide the property or services. Ez form online Example. Ez form online You are a calendar year taxpayer. Ez form online You buy office supplies in December 2012. Ez form online You receive the supplies and the bill in December, but you pay the bill in January 2013. Ez form online 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. Ez form online Your office supplies may qualify as a recurring item, discussed later. Ez form online If so, you can deduct them in 2012, even if the supplies are not delivered until 2013 (when economic performance occurs). Ez form online Workers' compensation and tort liability. Ez form online   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. Ez form online 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. Ez form online Taxes. Ez form online   Economic performance generally occurs as estimated income tax, property taxes, employment taxes, etc. Ez form online are paid. Ez form online However, you can elect to treat taxes as a recurring item, discussed later. Ez form online You can also elect to ratably accrue real estate taxes. Ez form online See chapter 5 of Publication 535 for information about real estate taxes. Ez form online Other liabilities. Ez form online   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. Ez form online Interest. Ez form online   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. Ez form online Compensation for services. Ez form online   Generally, economic performance occurs as an employee renders service to the employer. Ez form online 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. Ez form online For information on employee benefit programs, see Publication 15-B, Employer's Tax Guide to Fringe Benefits. Ez form online Vacation pay. Ez form online   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. Ez form online If you pay it later than this, you must deduct it in the year actually paid. Ez form online An amount is vested if your right to it cannot be nullified or cancelled. Ez form online Exception for recurring items. Ez form online   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. Ez form online The exception applies if all the following requirements are met. Ez form online The all-events test, discussed earlier, is met. Ez form online Economic performance occurs by the earlier of the following dates. Ez form online 8½ months after the close of the year. Ez form online The date you file a timely return (including extensions) for the year. Ez form online 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. Ez form online 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. Ez form online This exception does not apply to workers' compensation or tort liabilities. Ez form online Amended return. Ez form online   You may be able to file an amended return and treat a liability as incurred under the recurring item exception. Ez form online 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. Ez form online Recurrence and consistency. Ez form online   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. Ez form online 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. Ez form online Materiality. Ez form online   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. Ez form online   An item considered material for financial statement purposes is also considered material for tax purposes. Ez form online However, in certain situations an immaterial item for financial accounting purposes is treated as material for purposes of economic performance. Ez form online Matching expenses with income. Ez form online   Costs directly associated with the revenue of a period are properly allocable to that period. Ez form online 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. Ez form online fasab. Ez form online gov/accepted. Ez form online html) are an important factor. Ez form online   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. Ez form online 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. Ez form online However, the matching requirement is considered met for certain types of expenses. Ez form online These expenses include taxes, payments under insurance, warranty, and service contracts, rebates, refunds, awards, prizes, and jackpots. Ez form online 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. Ez form online 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. Ez form online 12 months after the right or benefit begins, or The end of the tax year after the tax year in which payment is made. Ez form online 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. Ez form online See Change in Accounting Method, later, for information on how to get IRS approval. Ez form online See Expense paid in advance under Cash Method, earlier, for examples illustrating the application of the general and 12-month rules. Ez form online 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. Ez form online Determine the relationship for this rule as of the end of the tax year for which the expense or interest would otherwise be deductible. Ez form online See section 267 of the Internal Revenue Code and Publication 542, Corporations, for the definition of related person. Ez form online Inventories An inventory is necessary to clearly show income when the production, purchase, or sale of merchandise is an income-producing factor. Ez form online If you must account for an inventory in your business, you must use an accrual method of accounting for your purchases and sales. Ez form online However, see Exceptions, next. Ez form online See also Accrual Method, earlier. Ez form online To figure taxable income, you must value your inventory at the beginning and end of each tax year. Ez form online To determine the value, you need a method for identifying the items in your inventory and a method for valuing these items. Ez form online See Identifying Cost and Valuing Inventory, later. Ez form online The rules for valuing inventory are not the same for all businesses. Ez form online The method you use must conform to generally accepted accounting principles for similar businesses and must clearly reflect income. Ez form online Your inventory practices must be consistent from year to year. Ez form online 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. Ez form online Exceptions The following taxpayers can use the cash method of accounting even if they produce, purchase, or sell merchandise. Ez form online These taxpayers can also account for inventoriable items as materials and supplies that are not incidental (discussed later). Ez form online A qualifying taxpayer under Revenue Procedure 2001-10 on page 272 of Internal Revenue Bulletin 2001-2, available at www. Ez form online irs. Ez form online gov/pub/irs-irbs/irb01–02. Ez form online pdf. Ez form online A qualifying small business taxpayer under Revenue Procedure 2002-28, on page 815 of Internal Revenue Bulletin 2002-18, available at www. Ez form online irs. Ez form online gov/pub/irs-irbs/irb02–18. Ez form online pdf. Ez form online 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). Ez form online Qualifying taxpayer. Ez form online   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). Ez form online Your average annual gross receipts for each test year (explained in Step 1, listed next) must be $1 million or less. Ez form online You are not a tax shelter as defined under section 448(d)(3) of the Internal Revenue Code. Ez form online Gross receipts test for qualifying taxpayers. Ez form online   To determine if you meet the gross receipts test for qualifying taxpayers, use the following steps: Step 1. Ez form online List each of the test years. Ez form online For qualifying taxpayers under Revenue Procedure 2001-10, the test years are each prior tax year ending on or after December 17, 1998. Ez form online Step 2. Ez form online Determine your average annual gross receipts for each test year listed in Step 1. Ez form online 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. Ez form online Step 3. Ez form online 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. Ez form online Qualifying small business taxpayer. Ez form online   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). Ez form online Your average annual gross receipts for each test year (explained in Step 1, listed next) must be $10 million or less. Ez form online You are not prohibited from using the cash method under section 448 of the Internal Revenue Code. Ez form online Your principle business activity is an eligible business. Ez form online See Eligible business, later. Ez form online 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. Ez form online Note. Ez form online Revenue Procedure 2002-28 does not apply to a farming business of a qualifying small business taxpayer. Ez form online A taxpayer engaged in the trade or business of farming generally is allowed to use the cash method for any farming business. Ez form online See Special rules for farming businesses under Cash Method, earlier. Ez form online Gross receipts test for qualifying small business taxpayers. Ez form online   To determine if you meet the gross receipts test for qualifying small business taxpayers, use the following steps: Step 1. Ez form online List each of the test years. Ez form online 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. Ez form online Step 2. Ez form online Determine your average annual gross receipts for each test year listed in Step 1. Ez form online 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. Ez form online Step 3. Ez form online 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. Ez form online Eligible business. Ez form online   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. Ez form online You have an eligible business if you meet any of the following requirements. Ez form online 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). Ez form online NAICS codes 31-33 (manufacturing). Ez form online NAICS code 42 (wholesale trade). Ez form online NAICS codes 44-45 (retail trade). Ez form online NAICS codes 5111 and 5122 (information industries). Ez form online Your principal business activity is the provision of services, including the provision of property incident to those services. Ez form online Your principal business activity is the fabrication or modification of tangible personal property upon demand in accordance with customer design or specifications. Ez form online   Information about the NAICS codes can be found at http://www. Ez form online census. Ez form online gov/naics or in the instructions for your federal income tax return. Ez form online Gross receipts. Ez form online   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. Ez form online See the definit