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Federal Tax Form 1040x

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Federal Tax Form 1040x

Federal tax form 1040x 4. Federal tax form 1040x   Reporting Gains and Losses Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Information Returns Schedule D and Form 8949Long and Short Term Net Gain or Loss Treatment of Capital Losses Capital Gains Tax Rates Form 4797Mark-to-market election. Federal tax form 1040x Introduction This chapter explains how to report capital gains and losses and ordinary gains and losses from sales, exchanges, and other dispositions of property. Federal tax form 1040x Although this discussion refers to Schedule D (Form 1040) and Form 8949, many of the rules discussed here also apply to taxpayers other than individuals. Federal tax form 1040x However, the rules for property held for personal use usually will not apply to taxpayers other than individuals. Federal tax form 1040x Topics - This chapter discusses: Information returns Schedule D (Form 1040) Form 4797 Form 8949 Useful Items - You may want to see: Publication 550 Investment Income and Expenses 537 Installment Sales Form (and Instructions) Schedule D (Form 1040) Capital Gains and Losses 1099-B Proceeds From Broker and Barter Exchange Transactions 1099-S Proceeds From Real Estate Transactions 4684 Casualties and Thefts 4797 Sales of Business Property 6252 Installment Sale Income 6781 Gains and Losses from Section 1256 Contracts and Straddles 8824 Like-Kind Exchanges 8949 Sales and Other Dispositions of Capital Assets See chapter 5 for information about getting publications and forms. Federal tax form 1040x Information Returns If you sell or exchange certain assets, you should receive an information return showing the proceeds of the sale. Federal tax form 1040x This information is also provided to the IRS. Federal tax form 1040x Form 1099-B. Federal tax form 1040x   If you sold property, such as stocks, bonds, or certain commodities, through a broker, you should receive Form 1099-B, Proceeds From Broker and Barter Exchange Transactions, or a substitute statement from the broker. Federal tax form 1040x Use the Form 1099-B or a substitute statement to complete Form 8949 and/or Schedule D. Federal tax form 1040x Whether or not you receive 1099-B, you must report all taxable sales of stock, bonds, commodities, etc. Federal tax form 1040x on Form 8949 and/or Schedule D, as applicable. Federal tax form 1040x For more information on figuring gains and losses from these transactions, see chapter 4 in Publication 550. Federal tax form 1040x For information on reporting the gains and losses, see the Instructions for Form 8949 and the Instructions for Schedule D (Form 1040). Federal tax form 1040x Form 1099-S. Federal tax form 1040x   An information return must be provided on certain real estate transactions. Federal tax form 1040x Generally, the person responsible for closing the transaction (the “real estate reporting person”) must report on Form 1099-S sales or exchanges of the following types of property. Federal tax form 1040x Land (improved or unimproved), including air space. Federal tax form 1040x An inherently permanent structure, including any residential, commercial, or industrial building. Federal tax form 1040x A condominium unit and its related fixtures and common elements (including land). Federal tax form 1040x Stock in a cooperative housing corporation. Federal tax form 1040x If you sold or exchanged any of the above types of property, the “real estate reporting person” must give you a copy of Form 1099-S or a statement containing the same information as the Form 1099-S. Federal tax form 1040x The “real estate reporting person” could include the buyer's attorney, your attorney, the title or escrow company, a mortgage lender, your broker, the buyer's broker, or the person acquiring the biggest interest in the property. Federal tax form 1040x   For more information see chapter 4 in Publication 550. Federal tax form 1040x Also, see the Instructions for Form 8949. Federal tax form 1040x Schedule D and Form 8949 Form 8949. Federal tax form 1040x   Individuals, corporations, and partnerships, use Form 8949 to report the following. Federal tax form 1040x    Sales or exchanges of capital assets, including stocks, bonds, etc. Federal tax form 1040x , and real estate (if not reported on another form or schedule such as Form 4684, 4797, 6252, 6781, or 8824). Federal tax form 1040x Include these transactions even if you did not receive a Form 1099-B or 1099-S. Federal tax form 1040x Gains from involuntary conversions (other than from casualty or theft) of capital assets not held for business or profit. Federal tax form 1040x Nonbusiness bad debts. Federal tax form 1040x   Individuals, If you are filing a joint return, complete as many copies of Form 8949 as you need to report all of your and your spouse's transactions. Federal tax form 1040x You and your spouse may list your transactions on separate forms or you may combine them. Federal tax form 1040x However, you must include on your Schedule D the totals from all Forms 8949 for both you and your spouse. Federal tax form 1040x    Corporations and electing large partnerships also use Form 8949 to report their share of gain or loss from a partnership, S Corporation, estate or trust. Federal tax form 1040x   Business entities meeting certain criteria, may have an exception to some of the normal requirements for completing Form 8949. Federal tax form 1040x See the Instructions for Form 8949. Federal tax form 1040x Schedule D. Federal tax form 1040x    Use Schedule D (Form 1040) to figure the overall gain or loss from transactions reported on Form 8949, and to report certain transactions you do not have to report on Form 8949. Federal tax form 1040x Before completing Schedule D, you may have to complete other forms as shown below. Federal tax form 1040x    Complete all applicable lines of Form 8949 before completing lines 1b, 2, 3, 8b, 9, or 10 of your applicable Schedule D. Federal tax form 1040x Enter on Schedule D the combined totals from all your Forms 8949. Federal tax form 1040x For a sale, exchange, or involuntary conversion of business property, complete Form 4797 (discussed later). Federal tax form 1040x For a like-kind exchange, complete Form 8824. Federal tax form 1040x See Reporting the exchange under Like-Kind Exchanges in chapter 1. Federal tax form 1040x For an installment sale, complete Form 6252. Federal tax form 1040x See Publication 537. Federal tax form 1040x For an involuntary conversion due to casualty or theft, complete Form 4684. Federal tax form 1040x See Publication 547, Casualties, Disasters, and Thefts. Federal tax form 1040x For a disposition of an interest in, or property used in, an activity to which the at-risk rules apply, complete Form 6198, At-Risk Limitations. Federal tax form 1040x See Publication 925, Passive Activity and At-Risk Rules. Federal tax form 1040x For a disposition of an interest in, or property used in, a passive activity, complete Form 8582, Passive Activity Loss Limitations. Federal tax form 1040x See Publication 925. Federal tax form 1040x For gains and losses from section 1256 contracts and straddles, complete Form 6781. Federal tax form 1040x See Publication 550. Federal tax form 1040x Personal-use property. Federal tax form 1040x   Report gain on the sale or exchange of property held for personal use (such as your home) on Form 8949 and Schedule D (Form 1040), as applicable. Federal tax form 1040x Loss from the sale or exchange of property held for personal use is not deductible. Federal tax form 1040x But if you had a loss from the sale or exchange of real estate held for personal use for which you received a Form 1099-S, report the transaction on Form 8949 and Schedule D, even though the loss is not deductible. Federal tax form 1040x See the Instructions for Schedule D (Form 1040) and the Instructions for Form 8949 for information on how to report the transaction. Federal tax form 1040x Long and Short Term Where you report a capital gain or loss depends on how long you own the asset before you sell or exchange it. Federal tax form 1040x The time you own an asset before disposing of it is the holding period. Federal tax form 1040x If you received a Form 1099-B, (or substitute statement) box 1c may help you determine whether the gain or loss is short-term or long-term. Federal tax form 1040x If you hold a capital asset 1 year or less, the gain or loss from its disposition is short term. Federal tax form 1040x Report it in Part I of Form 8949 and/or Schedule D, as applicable. Federal tax form 1040x If you hold a capital asset longer than 1 year, the gain or loss from its disposition is long term. Federal tax form 1040x Report it in Part II of Form 8949 and/or Schedule D, as applicable. Federal tax form 1040x   Table 4-1. Federal tax form 1040x Do I Have a Short-Term or Long-Term Gain or Loss? IF you hold the property. Federal tax form 1040x . Federal tax form 1040x . Federal tax form 1040x  THEN you have a. Federal tax form 1040x . Federal tax form 1040x . Federal tax form 1040x 1 year or less, Short-term capital gain or  loss. Federal tax form 1040x More than 1 year, Long-term capital gain or  loss. Federal tax form 1040x These distinctions are essential to correctly arrive at your net capital gain or loss. Federal tax form 1040x Capital losses are allowed in full against capital gains plus up to $3,000 of ordinary income. Federal tax form 1040x See Capital Gains Tax Rates, later. Federal tax form 1040x Holding period. Federal tax form 1040x   To figure if you held property longer than 1 year, start counting on the day following the day you acquired the property. Federal tax form 1040x The day you disposed of the property is part of your holding period. Federal tax form 1040x Example. Federal tax form 1040x If you bought an asset on June 19, 2012, you should start counting on June 20, 2012. Federal tax form 1040x If you sold the asset on June 19, 2013, your holding period is not longer than 1 year, but if you sold it on June 20, 2013, your holding period is longer than 1 year. Federal tax form 1040x Patent property. Federal tax form 1040x   If you dispose of patent property, you generally are considered to have held the property longer than 1 year, no matter how long you actually held it. Federal tax form 1040x For more information, see Patents in chapter 2. Federal tax form 1040x Inherited property. Federal tax form 1040x   If you inherit property, you are considered to have held the property longer than 1 year, regardless of how long you actually held it. Federal tax form 1040x Installment sale. Federal tax form 1040x   The gain from an installment sale of an asset qualifying for long-term capital gain treatment in the year of sale continues to be long term in later tax years. Federal tax form 1040x If it is short term in the year of sale, it continues to be short term when payments are received in later tax years. Federal tax form 1040x    The date the installment payment is received determines the capital gains rate that should be applied not the date the asset was sold under an installment contract. Federal tax form 1040x Nontaxable exchange. Federal tax form 1040x   If you acquire an asset in exchange for another asset and your basis for the new asset is figured, in whole or in part, by using your basis in the old property, the holding period of the new property includes the holding period of the old property. Federal tax form 1040x That is, it begins on the same day as your holding period for the old property. Federal tax form 1040x Example. Federal tax form 1040x You bought machinery on December 4, 2012. Federal tax form 1040x On June 4, 2013, you traded this machinery for other machinery in a nontaxable exchange. Federal tax form 1040x On December 5, 2013, you sold the machinery you got in the exchange. Federal tax form 1040x Your holding period for this machinery began on December 5, 2012. Federal tax form 1040x Therefore, you held it longer than 1 year. Federal tax form 1040x Corporate liquidation. Federal tax form 1040x   The holding period for property you receive in a liquidation generally starts on the day after you receive it if gain or loss is recognized. Federal tax form 1040x Profit-sharing plan. Federal tax form 1040x   The holding period of common stock withdrawn from a qualified contributory profit-sharing plan begins on the day following the day the plan trustee delivered the stock to the transfer agent with instructions to reissue the stock in your name. Federal tax form 1040x Gift. Federal tax form 1040x   If you receive a gift of property and your basis in it is figured using the donor's basis, your holding period includes the donor's holding period. Federal tax form 1040x For more information on basis, see Publication 551, Basis of Assets. Federal tax form 1040x Real property. Federal tax form 1040x   To figure how long you held real property, start counting on the day after you received title to it or, if earlier, the day after you took possession of it and assumed the burdens and privileges of ownership. Federal tax form 1040x   However, taking possession of real property under an option agreement is not enough to start the holding period. Federal tax form 1040x The holding period cannot start until there is an actual contract of sale. Federal tax form 1040x The holding period of the seller cannot end before that time. Federal tax form 1040x Repossession. Federal tax form 1040x   If you sell real property but keep a security interest in it and then later repossess it, your holding period for a later sale includes the period you held the property before the original sale, as well as the period after the repossession. Federal tax form 1040x Your holding period does not include the time between the original sale and the repossession. Federal tax form 1040x That is, it does not include the period during which the first buyer held the property. Federal tax form 1040x Nonbusiness bad debts. Federal tax form 1040x   Nonbusiness bad debts are short-term capital losses. Federal tax form 1040x For information on nonbusiness bad debts, see chapter 4 of Publication 550. Federal tax form 1040x    Net Gain or Loss The totals for short-term capital gains and losses and the totals for long-term capital gains and losses must be figured separately. Federal tax form 1040x Net short-term capital gain or loss. Federal tax form 1040x   Combine your short-term capital gains and losses, including your share of short-term capital gains or losses from partnerships, S corporations, and fiduciaries and any short-term capital loss carryover. Federal tax form 1040x Do this by adding all your short-term capital gains. Federal tax form 1040x Then add all your short-term capital losses. Federal tax form 1040x Subtract the lesser total from the other. Federal tax form 1040x The result is your net short-term capital gain or loss. Federal tax form 1040x Net long-term capital gain or loss. Federal tax form 1040x   Follow the same steps to combine your long-term capital gains and losses. Federal tax form 1040x Include the following items. Federal tax form 1040x Net section 1231 gain from Part I, Form 4797, after any adjustment for nonrecaptured section 1231 losses from prior tax years. Federal tax form 1040x Capital gain distributions from regulated investment companies (mutual funds) and real estate investment trusts. Federal tax form 1040x Your share of long-term capital gains or losses from partnerships, S corporations, and fiduciaries. Federal tax form 1040x Any long-term capital loss carryover. Federal tax form 1040x The result from combining these items with other long-term capital gains and losses is your net long-term capital gain or loss. Federal tax form 1040x Net gain. Federal tax form 1040x   If the total of your capital gains is more than the total of your capital losses, the difference is taxable. Federal tax form 1040x Different tax rates may apply to the part that is a net capital gain. Federal tax form 1040x See Capital Gains Tax Rates, later. Federal tax form 1040x Net loss. Federal tax form 1040x   If the total of your capital losses is more than the total of your capital gains, the difference is deductible. Federal tax form 1040x But there are limits on how much loss you can deduct and when you can deduct it. Federal tax form 1040x See Treatment of Capital Losses, next. Federal tax form 1040x    Treatment of Capital Losses If your capital losses are more than your capital gains, you can deduct the difference as a capital loss deduction even if you do not have ordinary income to offset it. Federal tax form 1040x The yearly limit on the amount of the capital loss you can deduct is $3,000 ($1,500 if you are married and file a separate return). Federal tax form 1040x Table 4-2. Federal tax form 1040x Holding Period for Different Types of Acquisitions Type of acquisition: When your holding period starts: Stocks and bonds bought on a securities market Day after trading date you bought security. Federal tax form 1040x Ends on trading date you sold security. Federal tax form 1040x U. Federal tax form 1040x S. Federal tax form 1040x Treasury notes and bonds If bought at auction, day after notification of bid acceptance. Federal tax form 1040x If bought through subscription, day after subscription was submitted. Federal tax form 1040x Nontaxable exchanges Day after date you acquired old property. Federal tax form 1040x Gift If your basis is giver's adjusted basis, same day as giver's holding period began. Federal tax form 1040x If your basis is FMV, day after date of gift. Federal tax form 1040x Real property bought Generally, day after date you received title to the property. Federal tax form 1040x Real property repossessed Day after date you originally received title to the property, but does not include time between the original sale and date of repossession. Federal tax form 1040x Capital loss carryover. Federal tax form 1040x   Generally, you have a capital loss carryover if either of the following situations applies to you. Federal tax form 1040x Your net loss is more than the yearly limit. Federal tax form 1040x Your taxable income without your deduction for exemptions is less than zero. Federal tax form 1040x If either of these situations applies to you for 2013, see Capital Losses under Reporting Capital Gains and Losses in chapter 4 of Publication 550 to figure the amount you can carryover to 2014. Federal tax form 1040x Example. Federal tax form 1040x Bob and Gloria Sampson sold property in 2013. Federal tax form 1040x The sale resulted in a capital loss of $7,000. Federal tax form 1040x The Sampsons had no other capital transactions. Federal tax form 1040x On their joint 2013 return, the Sampsons deduct $3,000, the yearly limit. Federal tax form 1040x They had taxable income of $2,000. Federal tax form 1040x The unused part of the loss, $4,000 ($7,000 − $3,000), is carried over to 2014. Federal tax form 1040x If the Sampsons' capital loss had been $2,000, it would not have been more than the yearly limit. Federal tax form 1040x Their capital loss deduction would have been $2,000. Federal tax form 1040x They would have no carryover to 2014. Federal tax form 1040x Short-term and long-term losses. Federal tax form 1040x   When you carry over a loss, it retains its original character as either long term or short term. Federal tax form 1040x A short-term loss you carry over to the next tax year is added to short-term losses occurring in that year. Federal tax form 1040x A long-term loss you carry over to the next tax year is added to long-term losses occurring in that year. Federal tax form 1040x A long-term capital loss you carry over to the next year reduces that year's long-term gains before its short-term gains. Federal tax form 1040x   If you have both short-term and long-term losses, your short-term losses are used first against your allowable capital loss deduction. Federal tax form 1040x If, after using your short-term losses, you have not reached the limit on the capital loss deduction, use your long-term losses until you reach the limit. Federal tax form 1040x To figure your capital loss carryover from 2013 to 2014 use the Capital Loss Carryover Worksheet in the 2013 Instructions for Schedule D (Form 1040). Federal tax form 1040x Joint and separate returns. Federal tax form 1040x   On a joint return, the capital gains and losses of spouses are figured as the gains and losses of an individual. Federal tax form 1040x If you are married and filing a separate return, your yearly capital loss deduction is limited to $1,500. Federal tax form 1040x Neither you nor your spouse can deduct any part of the other's loss. Federal tax form 1040x   If you and your spouse once filed separate returns and are now filing a joint return, combine your separate capital loss carryovers. Federal tax form 1040x However, if you and your spouse once filed jointly and are now filing separately, any capital loss carryover from the joint return can be deducted only on the return of the spouse who actually had the loss. Federal tax form 1040x Death of taxpayer. Federal tax form 1040x   Capital losses cannot be carried over after a taxpayer's death. Federal tax form 1040x They are deductible only on the final income tax return filed on the decedent's behalf. Federal tax form 1040x The yearly limit discussed earlier still applies in this situation. Federal tax form 1040x Even if the loss is greater than the limit, the decedent's estate cannot deduct the difference or carry it over to following years. Federal tax form 1040x Corporations. Federal tax form 1040x   A corporation can deduct capital losses only up to the amount of its capital gains. Federal tax form 1040x In other words, if a corporation has a net capital loss, it cannot be deducted in the current tax year. Federal tax form 1040x It must be carried to other tax years and deducted from capital gains occurring in those years. Federal tax form 1040x For more information, see Publication 542. Federal tax form 1040x Capital Gains Tax Rates The tax rates that apply to a net capital gain are generally lower than the tax rates that apply to other income. Federal tax form 1040x These lower rates are called the maximum capital gains rates. Federal tax form 1040x The term “net capital gain” means the amount by which your net long-term capital gain for the year is more than your net short-term capital loss. Federal tax form 1040x For 2013, the maximum tax rates for individuals are 0%, 15%, 20%, 25%, and 28%. Federal tax form 1040x Also, individuals, use the Qualified Dividends and Capital Gain Worksheet in the Instructions for Form 1040, or the Schedule D Tax Computation Worksheet in the Instructions for Schedule D (Form 1040) (whichever applies) to figure your tax if you have qualified dividends or net capital gain. Federal tax form 1040x For more information, see chapter 4 of Publication 550. Federal tax form 1040x Also see the Instructions for Schedule D (Form 1040). Federal tax form 1040x Unrecaptured section 1250 gain. Federal tax form 1040x   Generally, this is the part of any long-term capital gain on section 1250 property (real property) that is due to depreciation. Federal tax form 1040x Unrecaptured section 1250 gain cannot be more than the net section 1231 gain or include any gain otherwise treated as ordinary income. Federal tax form 1040x Use the worksheet in the Schedule D instructions to figure your unrecaptured section 1250 gain. Federal tax form 1040x For more information about section 1250 property and net section 1231 gain, see chapter 3. Federal tax form 1040x Form 4797 Use Form 4797 to report: The sale or exchange of: Property used in your trade or business; Depreciable and amortizable property; Oil, gas, geothermal, or other mineral properties; and Section 126 property. Federal tax form 1040x The involuntary conversion (from other than casualty or theft) of property used in your trade or business and capital assets held in connection with a trade or business or a transaction entered into for profit. Federal tax form 1040x The disposition of noncapital assets (other than inventory or property held primarily for sale to customers in the ordinary course of your trade or business). Federal tax form 1040x The disposition of capital assets not reported on Schedule D. Federal tax form 1040x The gain or loss (including any related recapture) for partners and S corporation shareholders from certain section 179 property dispositions by partnerships (other than electing large partnerships) and S corporations. Federal tax form 1040x The computation of recapture amounts under sections 179 and 280F(b)(2) when the business use of section 179 or listed property decreases to 50% or less. Federal tax form 1040x Gains or losses treated as ordinary gains or losses, if you are a trader in securities or commodities and made a mark-to-market election under Internal Revenue Code section 475(f). Federal tax form 1040x You can use Form 4797 with Form 1040, 1065, 1120, or 1120S. Federal tax form 1040x Section 1231 gains and losses. Federal tax form 1040x   Show any section 1231 gains and losses in Part I. Federal tax form 1040x Carry a net gain to Schedule D (Form 1040) as a long-term capital gain. Federal tax form 1040x Carry a net loss to Part II of Form 4797 as an ordinary loss. Federal tax form 1040x   If you had any nonrecaptured net section 1231 losses from the preceding 5 tax years, reduce your net gain by those losses and report the amount of the reduction as an ordinary gain in Part II. Federal tax form 1040x Report any remaining gain on Schedule D (Form 1040). Federal tax form 1040x See Section 1231 Gains and Losses in chapter 3. Federal tax form 1040x Ordinary gains and losses. Federal tax form 1040x   Show any ordinary gains and losses in Part II. Federal tax form 1040x This includes a net loss or a recapture of losses from prior years figured in Part I of Form 4797. Federal tax form 1040x It also includes ordinary gain figured in Part III. Federal tax form 1040x Mark-to-market election. Federal tax form 1040x   If you made a mark-to-market election, you should report all gains and losses from trading as ordinary gains and losses in Part II of Form 4797, instead of as capital gains and losses on Form 8949 and Schedule D (Form 1040). Federal tax form 1040x See the Instructions for Form 4797. Federal tax form 1040x Also see Special Rules for Traders in Securities, in chapter 4 of Publication 550. Federal tax form 1040x Ordinary income from depreciation. Federal tax form 1040x   Figure the ordinary income from depreciation on personal property and additional depreciation on real property (as discussed in chapter 3) in Part III. Federal tax form 1040x Carry the ordinary income to Part II of Form 4797 as an ordinary gain. Federal tax form 1040x Carry any remaining gain to Part I as section 1231 gain, unless it is from a casualty or theft. Federal tax form 1040x Carry any remaining gain from a casualty or theft to Form 4684. Federal tax form 1040x Prev  Up  Next   Home   More Online Publications
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IRS Commissioner Addresses Nation's Taxpayers on 2014 Filing Season; YouTube Video Released

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Message to Taxpayers: English| Spanish| ASL

IR-2014-12, Feb. 10, 2014

WASHINGTON – The Internal Revenue Service today released a YouTube message from Commissioner John Koskinen to the nation's taxpayers providing tips and help for the 2014 filing season.

In the YouTube video, now available at IRS.gov and the IRS YouTube channel, Koskinen also discusses how the IRS and its employees will approach the 2014 tax season.

“I can assure you we are all dedicated to doing whatever we can to help you file your taxes this filing season,” Koskinen said in the video, which runs just under three minutes.

“We want to provide you with the assistance you need to get your taxes filed accurately and on time,” Koskinen added. “And we will work hard to issue refunds quickly while increasing our efforts to stop tax fraud and identity thieves.”

Koskinen also cautioned taxpayers that phone lines will be busy this year. “Given our very limited resources, our phone lines are going to be extremely busy this year – and there will frequently be extensive wait times,” Koskinen said. “We are working to limit these waiting times as much as possible, and I apologize that we can’t do more in that regard this year.”

As an alternative, he encouraged taxpayers to consider the following options:

  • Visit IRS.gov to find a wide range of information, including the Where’s My Refund? tool to check on tax refund status.
  • Download the newly redesigned IRS smartphone app IRS2Go to check on tax refund status and get the latest tax news and information, available in English and Spanish for Apple and Android devices.
  • Visit the IRS YouTube channel to get information from over a hundred short instructional IRS videos. IRS YouTube channels have been viewed more than 6 million times.

The IRS also offers subscription to daily tax tips during the filing season as well as other useful resources year-round through a variety of social media platforms such as Twitter, @IRSnews, @IRSenEspanol and @IRStaxpros, Facebook and Tumblr. For more IRS social media links, go to IRS Social Media.

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Page Last Reviewed or Updated: 10-Feb-2014

The Federal Tax Form 1040x

Federal tax form 1040x 2. Federal tax form 1040x   Accounting Methods Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Accounting MethodsCash Method Accrual Method Farm Inventory Cash Versus Accrual Method Special Methods of Accounting Combination Method Changes in Methods of Accounting Introduction You must use an accounting method that clearly shows your income and expenses. Federal tax form 1040x You must also figure your taxable income and file an income tax return for an annual accounting period called a tax year. Federal tax form 1040x This chapter discusses accounting methods. Federal tax form 1040x For information on accounting periods, see Publication 538, Accounting Periods and Methods, and the Instructions for Form 1128, Application To Adopt, Change, or Retain a Tax Year. Federal tax form 1040x Topics - This chapter discusses: Cash method Accrual method Farm inventory Special methods of accounting Changes in methods of accounting Useful Items - You may want to see: Publication 538 Accounting Periods and Methods 535 Business Expenses Form (and Instructions) 1128 Application To Adopt, Change, or Retain a Tax Year 3115 Application for Change in Accounting Method See chapter 16 for information about getting publications and forms. Federal tax form 1040x Accounting Methods An accounting method is a set of rules used to determine when and how your income and expenses are reported on your tax return. Federal tax form 1040x Your accounting method includes not only your overall method of accounting, but also the accounting treatment you use for any material item. Federal tax form 1040x A material item is one that affects the proper time for inclusion of income or allowance of a deduction. Federal tax form 1040x An item considered material for financial statement purposes is generally also considered material for income tax purposes. Federal tax form 1040x See Publication 538 for more information. Federal tax form 1040x You generally choose an accounting method for your farm business when you file your first income tax return that includes a Schedule F (Form 1040), Profit or Loss From Farming. Federal tax form 1040x If you later want to change your accounting method, you generally must get IRS approval. Federal tax form 1040x How to obtain IRS approval is discussed later under Changes in Methods of Accounting . Federal tax form 1040x Types of accounting methods. Federal tax form 1040x   Generally, you can use any of the following accounting methods. Federal tax form 1040x Each method is discussed in detail below. Federal tax form 1040x Cash method. Federal tax form 1040x Accrual method. Federal tax form 1040x Special methods of accounting for certain items of income and expenses. Federal tax form 1040x Combination (hybrid) method using elements of two or more of the above. Federal tax form 1040x Business and other items. Federal tax form 1040x   You can account for business and personal items using different accounting methods. Federal tax form 1040x For example, you can figure your business income under an accrual method, even if you use the cash method to figure personal items. Federal tax form 1040x Two or more businesses. Federal tax form 1040x   If you operate two or more separate and distinct businesses, you can use a different accounting method for each business. Federal tax form 1040x Generally, no business is separate and distinct unless a complete and separate set of books and records is maintained for each business. Federal tax form 1040x Cash Method Most farmers use the cash method because they find it easier to keep records using the cash method. Federal tax form 1040x However, certain farm corporations and partnerships and all tax shelters must use an accrual method of accounting. Federal tax form 1040x See Accrual Method Required , later. Federal tax form 1040x Income Under the cash method, include in your gross income all items of income you actually or constructively received during the tax year. Federal tax form 1040x Items of income include money received as well as property or services received. Federal tax form 1040x If you receive property or services, you must include the fair market value (FMV) of the property or services in income. Federal tax form 1040x See chapter 3 for information on how to report farm income on your income tax return. Federal tax form 1040x Constructive receipt. Federal tax form 1040x   Income is constructively received when an amount is credited to your account or made available to you without restriction. Federal tax form 1040x You do not need to have possession of the income for it to be treated as income for the tax year. Federal tax form 1040x If you authorize someone to be your agent and receive income for you, you are considered to have received the income when your agent receives it. Federal tax form 1040x Income is not constructively received if your receipt of the income is subject to substantial restrictions or limitations. Federal tax form 1040x Direct payments and counter-cyclical payments. Federal tax form 1040x   If you received direct payments or counter-cyclical payments under Subtitle A or C of the Farm Security and Rural Investment Act of 2002, you will not be considered to have constructively received a payment merely because you had the option to receive it in the year before it is required to be paid. Federal tax form 1040x Delaying receipt of income. Federal tax form 1040x   You cannot hold checks or postpone taking possession of similar property from one tax year to another to avoid paying tax on the income. Federal tax form 1040x You must report the income in the year the money or property is received or made available to you without restriction. Federal tax form 1040x Example. Federal tax form 1040x Frances Jones, a farmer, was entitled to receive a $10,000 payment on a grain contract in December 2013. Federal tax form 1040x She was told in December that her payment was available. Federal tax form 1040x She requested not to be paid until January 2014. Federal tax form 1040x However, she must still include this payment in her 2013 income because it was made available to her in 2013. Federal tax form 1040x Debts paid by another person or canceled. Federal tax form 1040x   If your debts are paid by another person or are canceled by your creditors, you may have to report part or all of this debt relief as income. Federal tax form 1040x If you receive income in this way, you constructively receive the income when the debt is canceled or paid. Federal tax form 1040x See Cancellation of Debt in chapter 3. Federal tax form 1040x Deferred payment contract. Federal tax form 1040x   If you sell an item under a deferred payment contract that calls for payment in a future year, there is no constructive receipt in the year of sale. Federal tax form 1040x However, if the sales contract states that you have the right to the proceeds of the sale from the buyer at any time after delivery of the item, then you must include the sales price in income in the year of the sale, regardless of when you actually receive payment. Federal tax form 1040x Example. Federal tax form 1040x You are a farmer who uses the cash method and a calendar tax year. Federal tax form 1040x You sell grain in December 2013 under a bona fide arm's-length contract that calls for payment in 2014. Federal tax form 1040x You include the proceeds from the sale in your 2014 gross income since that is the year payment is received. Federal tax form 1040x However, if the contract states that you have the right to the proceeds from the buyer at any time after the grain is delivered, you must include the sales price in your 2013 income, regardless of when you actually receive payment. Federal tax form 1040x Repayment of income. Federal tax form 1040x   If you include an amount in income and in a later year you have to repay all or part of it, then you can usually deduct the repayment in the year repaid. Federal tax form 1040x If the repayment is more than $3,000, a special rule applies. Federal tax form 1040x For details, see Repayments in chapter 11 of Publication 535, Business Expenses. Federal tax form 1040x Expenses Under the cash method, generally you deduct expenses in the tax year you pay them. Federal tax form 1040x This includes business expenses for which you contest liability. Federal tax form 1040x However, you may not be able to deduct an expense paid in advance or you may be required to capitalize certain costs, as explained under Uniform Capitalization Rules in chapter 6. Federal tax form 1040x See chapter 4 for information on how to deduct farm business expenses on your income tax return. Federal tax form 1040x Prepayment. Federal tax form 1040x   Generally, you cannot deduct expenses paid in advance. Federal tax form 1040x This rule applies to any expense paid far enough in advance to, in effect, create an asset with a useful life extending substantially beyond the end of the current tax year. Federal tax form 1040x Example. Federal tax form 1040x On November 1, 2013, you signed and paid $3,600 for a 3-year (36-month) insurance contract for equipment. Federal tax form 1040x In 2013, you are allowed to deduct only $200 (2/36 x $3,600) of the cost of the policy that is attributable to 2013. Federal tax form 1040x In 2014, you'll be able to deduct $1,200 (12/36 x $3,600); in 2015, you'll be able to deduct $1,200 (12/36 x $3,600); and in 2016 you'll be able to deduct the remaining balance of $1,000. Federal tax form 1040x An exception applies if the expense qualifies for the 12-month rule. Federal tax form 1040x See Publication 538 for more information and examples. Federal tax form 1040x See chapter 4 for special rules for prepaid farm supplies and prepaid livestock feed. Federal tax form 1040x Accrual Method Under an accrual method of accounting, you generally report income in the year earned and deduct or capitalize expenses in the year incurred. Federal tax form 1040x The purpose of an accrual method of accounting is to correctly match income and expenses. Federal tax form 1040x Certain businesses engaged in farming must use an accrual method of accounting for its farm business and for sales and purchases of inventory items. Federal tax form 1040x See Accrual Method Required and Farm Inventory , later. Federal tax form 1040x Income Generally, you include an amount in 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. Federal tax form 1040x Under this rule, include an amount in income on the earliest of the following dates. Federal tax form 1040x When you receive payment. Federal tax form 1040x When the income amount is due to you. Federal tax form 1040x When you earn the income. Federal tax form 1040x When title passes. Federal tax form 1040x If you use an accrual method of accounting, complete Part III of Schedule F (Form 1040) to report your income. Federal tax form 1040x Inventory. Federal tax form 1040x   If you keep an inventory, generally you must use an accrual method of accounting to determine your gross income. Federal tax form 1040x An inventory is necessary to clearly show income when the production, purchase, or sale of merchandise is an income-producing factor. Federal tax form 1040x See Publication 538 for more information. Federal tax form 1040x Also see Farm Inventory , later, for more information on items that must be included in inventory by farmers and inventory valuation methods for farmers. Federal tax form 1040x Expenses Under an accrual method of accounting, you generally deduct or capitalize a business expense when both of the following apply. Federal tax form 1040x The all-events test has been met. Federal tax form 1040x This test is met when: All events have occurred that fix the fact that you have a liability, and The amount of the liability can be determined with reasonable accuracy. Federal tax form 1040x Economic performance has occurred. Federal tax form 1040x Economic performance. Federal tax form 1040x   Generally, you cannot deduct or capitalize a business expense until economic performance occurs. Federal tax form 1040x 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 as the property is used. Federal tax form 1040x If your expense is for property or services you provide to others, economic performance occurs as you provide the property or services. Federal tax form 1040x Example. Federal tax form 1040x Jane, who is a farmer, uses a calendar tax year and an accrual method of accounting. Federal tax form 1040x She entered into a contract with ABC Farm Consulting in 2012. Federal tax form 1040x The contract stated that Jane pay ABC Farm Consulting $2,000 in December 2012. Federal tax form 1040x It further stipulates that ABC Farm Consulting will develop a plan for integrating her farm with a larger farm operation based in a neighboring state by March 1, 2013. Federal tax form 1040x Jane paid ABC Farm Consulting $2,000 in December 2012. Federal tax form 1040x Integration of operations according to the plan began in May 2013 and they completed the integration in December 2013. Federal tax form 1040x Economic performance for Jane's liability in the contract occurs as the services are provided. Federal tax form 1040x Jane incurs the $2,000 cost in 2013. Federal tax form 1040x An exception to the economic performance rule allows certain recurring items to be treated as incurred during a tax year even though economic performance has not occurred. Federal tax form 1040x For more information, see Economic Performance in Publication 538. Federal tax form 1040x Special rule for related persons. Federal tax form 1040x   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. Federal tax form 1040x Determine the relationship for this rule as of the end of the tax year for which the expense or interest would otherwise be deductible. Federal tax form 1040x For more information, see Internal Revenue Code section 267. Federal tax form 1040x Accrual Method Required Generally, the following businesses, if engaged in farming, must use an accrual method of accounting. Federal tax form 1040x A corporation (other than a family corporation) that had gross receipts of more than $1,000,000 for any tax year beginning after 1975. Federal tax form 1040x A family corporation that had gross receipts of more than $25,000,000 for any tax year beginning after 1985. Federal tax form 1040x A partnership with a corporation as a partner, if that corporation meets the requirements of (1) or (2) above. Federal tax form 1040x A tax shelter. Federal tax form 1040x Note. Federal tax form 1040x Items (1), (2), and (3) above do not apply to an S corporation or a business operating a nursery or sod farm, or the raising or harvesting of trees (other than fruit and nut trees). Federal tax form 1040x Family corporation. Federal tax form 1040x   A family corporation is generally a corporation that meets one of the following ownership requirements. Federal tax form 1040x Members of the same family own at least 50% of the total combined voting power of all classes of stock entitled to vote and at least 50% of the total shares of all other classes of stock of the corporation. Federal tax form 1040x Members of two families have owned, directly or indirectly, since October 4, 1976, at least 65% of the total combined voting power of all classes of voting stock and at least 65% of the total shares of all other classes of the corporation's stock. Federal tax form 1040x Members of three families have owned, directly or indirectly, since October 4, 1976, at least 50% of the total combined voting power of all classes of voting stock and at least 50% of the total shares of all other classes of the corporation's stock. Federal tax form 1040x For more information on family corporations, see Internal Revenue Code section 447. Federal tax form 1040x Tax shelter. Federal tax form 1040x   A tax shelter is a partnership, noncorporate enterprise, or S corporation that meets either of the following tests. Federal tax form 1040x Its principal purpose is the avoidance or evasion of federal income tax. Federal tax form 1040x It is a farming syndicate. Federal tax form 1040x A farming syndicate is an entity that meets either of the following tests. Federal tax form 1040x Interests in the activity have been offered for sale in an offering required to be registered with a federal or state agency with the authority to regulate the offering of securities for sale. Federal tax form 1040x More than 35% of the losses during the tax year are allocable to limited partners or limited entrepreneurs. Federal tax form 1040x   A “limited partner” is one whose personal liability for partnership debts is limited to the money or other property the partner contributed or is required to contribute to the partnership. Federal tax form 1040x   A “limited entrepreneur” is one who has an interest in an enterprise other than as a limited partner and does not actively participate in the management of the enterprise. Federal tax form 1040x Farm Inventory If you are required to keep an inventory, you should keep a complete record of your inventory as part of your farm records. Federal tax form 1040x This record should show the actual count or measurement of the inventory. Federal tax form 1040x It should also show all factors that enter into its valuation, including quality and weight, if applicable. Federal tax form 1040x Hatchery business. Federal tax form 1040x   If you are in the hatchery business, and use an accrual method of accounting, you must include in inventory eggs in the process of incubation. Federal tax form 1040x Products held for sale. Federal tax form 1040x   All harvested and purchased farm products held for sale or for feed or seed, such as grain, hay, silage, concentrates, cotton, tobacco, etc. Federal tax form 1040x , must be included in inventory. Federal tax form 1040x Supplies. Federal tax form 1040x   Supplies acquired for sale or that become a physical part of items held for sale must be included in inventory. Federal tax form 1040x Deduct the cost of supplies in the year used or consumed in operations. Federal tax form 1040x Do not include incidental supplies in inventory as these are deductible in the year of purchase. Federal tax form 1040x Livestock. Federal tax form 1040x   Livestock held primarily for sale must be included in inventory. Federal tax form 1040x Livestock held for draft, breeding, or dairy purposes can either be depreciated or included in inventory. Federal tax form 1040x See also Unit-livestock-price method , later. Federal tax form 1040x If you are in the business of breeding and raising chinchillas, mink, foxes, or other fur-bearing animals, these animals are livestock for inventory purposes. Federal tax form 1040x Growing crops. Federal tax form 1040x   Generally, growing crops are not required to be included in inventory. Federal tax form 1040x However, if the crop has a preproductive period of more than 2 years, you may have to capitalize (or include in inventory) costs associated with the crop. Federal tax form 1040x See Uniform capitalization rules below. Federal tax form 1040x Also see Uniform Capitalization Rules in  chapter 6. Federal tax form 1040x Items to include in inventory. Federal tax form 1040x   Your inventory should include all items held for sale, or for use as feed, seed, etc. Federal tax form 1040x , whether raised or purchased, that are unsold at the end of the year. Federal tax form 1040x Uniform capitalization rules. Federal tax form 1040x   The following applies if you are required to use an accrual method of accounting. Federal tax form 1040x The uniform capitalization rules apply to all costs of raising a plant, even if the preproductive period of raising a plant is 2 years or less. Federal tax form 1040x The costs of animals are subject to the uniform capitalization rules. Federal tax form 1040x Inventory valuation methods. Federal tax form 1040x   The following methods, described below, are those generally available for valuing inventory. Federal tax form 1040x The method you use must conform to generally accepted accounting principles for similar businesses and must clearly reflect income. Federal tax form 1040x Cost. Federal tax form 1040x Lower of cost or market. Federal tax form 1040x Farm-price method. Federal tax form 1040x Unit-livestock-price method. Federal tax form 1040x Cost and lower of cost or market methods. Federal tax form 1040x   See Publication 538 for information on these valuation methods. Federal tax form 1040x If you value your livestock inventory at cost or the lower of cost or market, you do not need IRS approval to change to the unit-livestock-price method. Federal tax form 1040x However, if you value your livestock inventory using the farm-price method, then you must obtain permission from the IRS to change to the unit-livestock-price method. Federal tax form 1040x Farm-price method. Federal tax form 1040x   Under this method, each item, whether raised or purchased, is valued at its market price less the direct cost of disposition. Federal tax form 1040x Market price is the current price at the nearest market in the quantities you usually sell. Federal tax form 1040x Cost of disposition includes broker's commissions, freight, hauling to market, and other marketing costs. Federal tax form 1040x If you use this method, you must use it for your entire inventory, except that livestock can be inventoried under the unit-livestock-price method. Federal tax form 1040x Unit-livestock-price method. Federal tax form 1040x   This method recognizes the difficulty of establishing the exact costs of producing and raising each animal. Federal tax form 1040x You group or classify livestock according to type and age and use a standard unit price for each animal within a class or group. Federal tax form 1040x The unit price you assign should reasonably approximate the normal costs incurred in producing the animals in such classes. Federal tax form 1040x Unit prices and classifications are subject to approval by the IRS on examination of your return. Federal tax form 1040x You must annually reevaluate your unit livestock prices and adjust the prices upward or downward to reflect increases or decreases in the costs of raising livestock. Federal tax form 1040x IRS approval is not required for these adjustments. Federal tax form 1040x Any other changes in unit prices or classifications do require IRS approval. Federal tax form 1040x   If you use this method, include all raised livestock in inventory, regardless of whether they are held for sale or for draft, breeding, sport, or dairy purposes. Federal tax form 1040x This method accounts only for the increase in cost of raising an animal to maturity. Federal tax form 1040x It does not provide for any decrease in the animal's market value after it reaches maturity. Federal tax form 1040x Also, if you raise cattle, you are not required to inventory hay you grow to feed your herd. Federal tax form 1040x   Do not include sold or lost animals in the year-end inventory. Federal tax form 1040x If your records do not show which animals were sold or lost, treat the first animals acquired as sold or lost. Federal tax form 1040x The animals on hand at the end of the year are considered those most recently acquired. Federal tax form 1040x   You must include in inventory all livestock purchased primarily for sale. Federal tax form 1040x You can choose either to include in inventory or depreciate livestock purchased for draft, breeding, sport or dairy purposes. Federal tax form 1040x However, you must be consistent from year to year, regardless of the method you have chosen. Federal tax form 1040x You cannot change your method without obtaining approval from the IRS. Federal tax form 1040x   You must include in inventory animals purchased after maturity or capitalize them at their purchase price. Federal tax form 1040x If the animals are not mature at purchase, increase the cost at the end of each tax year according to the established unit price. Federal tax form 1040x However, in the year of purchase, do not increase the cost of any animal purchased during the last 6 months of the year. Federal tax form 1040x This “no increase” rule does not apply to tax shelters which must make an adjustment for any animal purchased during the year. Federal tax form 1040x It also does not apply to taxpayers that must make an adjustment to reasonably reflect the particular period in the year in which animals are purchased, if necessary to avoid significant distortions in income. Federal tax form 1040x Uniform capitalization rules. Federal tax form 1040x   A farmer can determine costs required to be allocated under the uniform capitalization rules by using the farm-price or unit-livestock-price inventory method. Federal tax form 1040x This applies to any plant or animal, even if the farmer does not hold or treat the plant or animal as inventory property. Federal tax form 1040x Cash Versus Accrual Method The following examples compare the cash and accrual methods of accounting. Federal tax form 1040x Example 1. Federal tax form 1040x You are a farmer who uses an accrual method of accounting. Federal tax form 1040x You keep your books on the calendar year basis. Federal tax form 1040x You sell grain in December 2013 but you are not paid until January 2014. Federal tax form 1040x Because the accrual method was used and 2013 was the tax year in which the grain was sold, you must both include the sales proceeds and deduct the costs incurred in producing the grain on your 2013 tax return. Federal tax form 1040x Example 2. Federal tax form 1040x Assume the same facts as in Example 1 except that you use the cash method and there was no constructive receipt of the sales proceeds in 2013. Federal tax form 1040x Under this method, you include the sales proceeds in income for 2014, the year you receive payment. Federal tax form 1040x Deduct the costs of producing the grain in the year you pay for them. Federal tax form 1040x Special Methods of Accounting There are special methods of accounting for certain items of income and expense. Federal tax form 1040x Crop method. Federal tax form 1040x   If you do not harvest and dispose of your crop in the same tax year that you plant it, you can, with IRS approval, use the crop method of accounting. Federal tax form 1040x You cannot use the crop method for any tax return, including your first tax return, unless you receive approval from the IRS. Federal tax form 1040x Under this method, you deduct the entire cost of producing the crop, including the expense of seed or young plants, in the year you realize income from the crop. Federal tax form 1040x    See chapter 4 for details on deducting the costs of operating a farm. Federal tax form 1040x Also see Regulations section 1. Federal tax form 1040x 162-12. Federal tax form 1040x Other special methods. Federal tax form 1040x   Other special methods of accounting apply to the following items. Federal tax form 1040x Amortization, see chapter 7. Federal tax form 1040x Casualties, see chapter 11. Federal tax form 1040x Condemnations, see chapter 11. Federal tax form 1040x Depletion, see chapter 7. Federal tax form 1040x Depreciation, see chapter 7. Federal tax form 1040x Farm business expenses, see chapter 4. Federal tax form 1040x Farm income, see chapter 3. Federal tax form 1040x Installment sales, see chapter 10. Federal tax form 1040x Soil and water conservation expenses, see chapter 5. Federal tax form 1040x Thefts, see chapter 11. Federal tax form 1040x Combination Method Generally, you can use any combination of cash, accrual, and special methods of accounting if the combination clearly shows your income and expenses and you use it consistently. Federal tax form 1040x However, the following restrictions apply. Federal tax form 1040x If you use the cash method for figuring your income, you must use the cash method for reporting your expenses. Federal tax form 1040x If you use an accrual method for reporting your expenses, you must use an accrual method for figuring your income. Federal tax form 1040x Changes in Methods of Accounting A change in your method of accounting includes a change in: Your overall method, such as from the cash method to an accrual method, and Your treatment of any material item, such as a change in your method of valuing inventory (for example, a change from the farm-price method to the unit-livestock-price method, discussed earlier). Federal tax form 1040x Generally, once you have set up your accounting method, you must receive approval from the IRS before you can change to another method of accounting. Federal tax form 1040x You may also have to pay a fee. Federal tax form 1040x To obtain approval, you must generally file Form 3115. Federal tax form 1040x There are instances when you can obtain automatic consent to change certain methods of accounting. Federal tax form 1040x See the List of Automatic Accounting Method Changes located in the Instructions for Form 3115. Federal tax form 1040x For more information on changes in methods of accounting, see Form 3115 and the Instructions for Form 3115. Federal tax form 1040x Also see Publication 538. Federal tax form 1040x Prev  Up  Next   Home   More Online Publications