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File 2010 State Taxes

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File 2010 State Taxes

File 2010 state taxes 4. File 2010 state taxes   Farm Business Expenses Table of Contents What's New for 2013 Introduction Topics - This chapter discusses: Useful Items - You may want to see: Deductible ExpensesReasonable allocation. File 2010 state taxes Prepaid Farm Supplies Prepaid Livestock Feed Labor Hired Repairs and Maintenance Interest Breeding Fees Fertilizer and Lime Taxes Insurance Rent and Leasing Depreciation Business Use of Your Home Truck and Car Expenses Travel Expenses Marketing Quota Penalties Tenant House Expenses Items Purchased for Resale Other Expenses Domestic Production Activities Deduction Capital ExpensesForestation and reforestation costs. File 2010 state taxes Nondeductible ExpensesPersonal, Living, and Family Expenses Other Nondeductible Items Losses From Operating a FarmAt-Risk Limits Passive Activity Limits Excess Farm Loss Limit Not-for-Profit FarmingUsing the presumption later. File 2010 state taxes Category 1. File 2010 state taxes Category 2. File 2010 state taxes Category 3. File 2010 state taxes What's New for 2013 Standard mileage rate. File 2010 state taxes  For 2013, the standard mileage rate for the cost of operating your car, van, pickup, or panel truck for each mile of business use is 56. File 2010 state taxes 5 cents. File 2010 state taxes See Truck and Car Expenses , later. File 2010 state taxes Simplified method for business use of home deduction. File 2010 state taxes  The IRS now provides a simplified method to determine your expenses for business use of your home. File 2010 state taxes For more information, see Schedule C (Form 1040), Part II, and its instructions. File 2010 state taxes Introduction You can generally deduct the current costs of operating your farm. File 2010 state taxes Current costs are expenses you do not have to capitalize or include in inventory costs. File 2010 state taxes However, your deduction for the cost of livestock feed and certain other supplies may be limited. File 2010 state taxes If you have an operating loss, you may not be able to deduct all of it. File 2010 state taxes Topics - This chapter discusses: Deductible expenses Domestic production activities deduction Capital expenses Nondeductible expenses Losses from operating a farm Not-for-profit farming Useful Items - You may want to see: Publication 463 Travel, Entertainment, Gift, and Car Expenses 535 Business Expenses 587 Business Use of Your Home 925 Passive Activity and At-Risk Rules 936 Home Mortgage Interest Deduction Form (and Instructions) Sch A (Form 1040) Itemized Deductions Sch F (Form 1040) Profit or Loss From Farming 1045 Application for Tentative Refund 5213 Election To Postpone Determination as To Whether the Presumption Applies That an Activity Is Engaged in for Profit 8903 Domestic Production Activities Deduction See chapter 16 for information about getting publications and forms. File 2010 state taxes Deductible Expenses The ordinary and necessary costs of operating a farm for profit are deductible business expenses. File 2010 state taxes “Ordinary” means what most farmers do and “necessary” means what is useful and helpful in farming. File 2010 state taxes Schedule F, Part II, lists some common farm expenses that are typically deductible. File 2010 state taxes This chapter discusses many of these expenses, as well as others not listed on Schedule F. File 2010 state taxes Reimbursed expenses. File 2010 state taxes   If the reimbursement is received in the same year that the expense is claimed, reduce the expense by the amount of the reimbursement. File 2010 state taxes If the reimbursement is received in a year after the expense is claimed, include the reimbursement amount in income. File 2010 state taxes See Refund or reimbursement under Income From Other Sources in chapter 3. File 2010 state taxes Personal and business expenses. File 2010 state taxes   Some expenses you pay during the tax year may be part personal and part business. File 2010 state taxes These may include expenses for gasoline, oil, fuel, water, rent, electricity, telephone, automobile upkeep, repairs, insurance, interest, and taxes. File 2010 state taxes   You must allocate these mixed expenses between their business and personal parts. File 2010 state taxes Generally, the personal part of these expenses is not deductible. File 2010 state taxes The business portion of the expenses is deductible on Schedule F. File 2010 state taxes Example. File 2010 state taxes You paid $1,500 for electricity during the tax year. File 2010 state taxes You used 1/3 of the electricity for personal purposes and 2/3 for farming. File 2010 state taxes Under these circumstances, you can deduct $1,000 (2/3 of $1,500) of your electricity expense as a farm business expense. File 2010 state taxes Reasonable allocation. File 2010 state taxes   It is not always easy to determine the business and nonbusiness parts of an expense. File 2010 state taxes There is no method of allocation that applies to all mixed expenses. File 2010 state taxes Any reasonable allocation is acceptable. File 2010 state taxes What is reasonable depends on the circumstances in each case. File 2010 state taxes Prepaid Farm Supplies Prepaid farm supplies include the following items if paid for during the year. File 2010 state taxes Feed, seed, fertilizer, and similar farm supplies not used or consumed during the year, but not including farm supplies that you would have consumed during the year if not for a fire, storm, flood, other casualty, disease, or drought. File 2010 state taxes Poultry (including egg-laying hens and baby chicks) bought for use (or for both use and resale) in your farm business. File 2010 state taxes However, include only the amount that would be deductible in the following year if you had capitalized the cost and deducted it ratably over the lesser of 12 months or the useful life of the poultry. File 2010 state taxes Poultry bought for resale and not resold during the year. File 2010 state taxes Deduction limit. File 2010 state taxes   If you use the cash method of accounting to report your income and expenses, your deduction for prepaid farm supplies in the year you pay for them may be limited to 50% of your other deductible farm expenses for the year (all Schedule F deductions except prepaid farm supplies). File 2010 state taxes This limit does not apply if you meet one of the exceptions described later. File 2010 state taxes See Chapter 2 for a discussion of the cash method of accounting. File 2010 state taxes   If the limit applies, you can deduct the excess cost of farm supplies other than poultry in the year you use or consume the supplies. File 2010 state taxes The excess cost of poultry bought for use (or for both use and resale) in your farm business is deductible in the year following the year you pay for it. File 2010 state taxes The excess cost of poultry bought for resale is deductible in the year you sell or otherwise dispose of that poultry. File 2010 state taxes Example. File 2010 state taxes You may not qualify for the exception described next. File 2010 state taxes During 2013, you bought fertilizer ($4,000), feed ($1,000), and seed ($500) for use on your farm in the following year. File 2010 state taxes Your total prepaid farm supplies expense for 2013 is $5,500. File 2010 state taxes Your other deductible farm expenses totaled $10,000 for 2013. File 2010 state taxes Therefore, your deduction for prepaid farm supplies cannot be more than $5,000 (50% of $10,000) for 2013. File 2010 state taxes The excess prepaid farm supplies expense of $500 ($5,500 − $5,000) is deductible in a later tax year when you use or consume the supplies. File 2010 state taxes Exceptions. File 2010 state taxes   This limit on the deduction for prepaid farm supplies expense does not apply if you are a farm-related taxpayer and either of the following apply. File 2010 state taxes Your prepaid farm supplies expense is more than 50% of your other deductible farm expenses because of a change in business operations caused by unusual circumstances. File 2010 state taxes Your total prepaid farm supplies expense for the preceding 3 tax years is less than 50% of your total other deductible farm expenses for those 3 tax years. File 2010 state taxes   You are a farm-related taxpayer if any of the following tests apply. File 2010 state taxes Your main home is on a farm. File 2010 state taxes Your principal business is farming. File 2010 state taxes A member of your family meets (1) or (2). File 2010 state taxes For this purpose, your family includes your brothers and sisters, half-brothers and half-sisters, spouse, parents, grandparents, children, grandchildren, and aunts and uncles and their children. File 2010 state taxes    Whether or not the deduction limit for prepaid farm supplies applies, your expenses for prepaid livestock feed may be subject to the rules for advance payment of livestock feed, discussed next. File 2010 state taxes Prepaid Livestock Feed If you report your income and expenses under the cash method of accounting, you cannot deduct in the year paid the cost of feed your livestock will consume in a later year unless you meet all the following tests. File 2010 state taxes The payment is for the purchase of feed rather than a deposit. File 2010 state taxes The prepayment has a business purpose and is not merely for tax avoidance. File 2010 state taxes Deducting the prepayment does not result in a material distortion of your income. File 2010 state taxes If you meet all three tests, you can deduct the prepaid feed, subject to the limit on prepaid farm supplies discussed earlier. File 2010 state taxes If you fail any of these tests, you can deduct the prepaid feed only in the year it is consumed. File 2010 state taxes This rule does not apply to the purchase of commodity futures contracts. File 2010 state taxes Payment for the purchase of feed. File 2010 state taxes   Whether a payment is for the purchase of feed or a deposit depends on the facts and circumstances in each case. File 2010 state taxes It is for the purchase of feed if you can show you made it under a binding commitment to accept delivery of a specific quantity of feed at a fixed price and you are not entitled, by contract or business custom, to a refund or repurchase. File 2010 state taxes   The following are some factors that show a payment is a deposit rather than for the purchase of feed. File 2010 state taxes The absence of specific quantity terms. File 2010 state taxes The right to a refund of any unapplied payment credit at the end of the contract. File 2010 state taxes The seller's treatment of the payment as a deposit. File 2010 state taxes The right to substitute other goods or products for those specified in the contract. File 2010 state taxes   A provision permitting substitution of ingredients to vary the particular feed mix to meet your livestock's current diet requirements will not suggest a deposit. File 2010 state taxes Further, a price adjustment to reflect market value at the date of delivery is not, by itself, proof of a deposit. File 2010 state taxes Business purpose. File 2010 state taxes   The prepayment has a business purpose only if you have a reasonable expectation of receiving some business benefit from prepaying the cost of livestock feed. File 2010 state taxes The following are some examples of business benefits. File 2010 state taxes Fixing maximum prices and securing an assured feed supply. File 2010 state taxes Securing preferential treatment in anticipation of a feed shortage. File 2010 state taxes   Other factors considered in determining the existence of a business purpose are whether the prepayment was a condition imposed by the seller and whether that condition was meaningful. File 2010 state taxes No material distortion of income. File 2010 state taxes   The following are some factors considered in determining whether deducting prepaid livestock feed materially distorts income. File 2010 state taxes Your customary business practice in conducting your livestock operations. File 2010 state taxes The expense in relation to past purchases. File 2010 state taxes The time of year you made the purchase. File 2010 state taxes The expense in relation to your income for the year. File 2010 state taxes Labor Hired You can deduct reasonable wages paid for regular farm labor, piecework, contract labor, and other forms of labor hired to perform your farming operations. File 2010 state taxes You can pay wages in cash or in noncash items such as inventory, capital assets, or assets used in your business. File 2010 state taxes The cost of boarding farm labor is a deductible labor cost. File 2010 state taxes Other deductible costs you incur for farm labor include health insurance, workers' compensation insurance, and other benefits. File 2010 state taxes If you must withhold social security, Medicare, and income taxes from your employees' cash wages, you can still deduct the full amount of wages before withholding. File 2010 state taxes See chapter 13 for more information on employment taxes. File 2010 state taxes Also, deduct the employer's share of the social security and Medicare taxes you must pay on your employees' wages as a farm business expense on Schedule F, line 29. File 2010 state taxes See Taxes , later. File 2010 state taxes Property for services. File 2010 state taxes   If you transfer property to an employee in payment for services, you can deduct as wages paid the fair market value of the property on the date of transfer. File 2010 state taxes If the employee pays you anything for the property, deduct as wages the fair market value of the property minus the payment by the employee for the property. File 2010 state taxes   Treat the wages deducted as an amount received for the property. File 2010 state taxes You may have a gain or loss to report if the property's adjusted basis on the date of transfer is different from its fair market value. File 2010 state taxes Any gain or loss has the same character the exchanged property had in your hands. File 2010 state taxes For more information, see chapter 8. File 2010 state taxes Child as an employee. File 2010 state taxes   You can deduct reasonable wages or other compensation you pay to your child for doing farmwork if a true employer-employee relationship exists between you and your child. File 2010 state taxes Include these wages in the child's income. File 2010 state taxes The child may have to file an income tax return. File 2010 state taxes These wages may also be subject to social security and Medicare taxes if your child is age 18 or older. File 2010 state taxes For more information, see Family Employees in chapter 13. File 2010 state taxes    A Form W-2, Wage and Tax Statement, should be issued to the child employee. File 2010 state taxes   The fact that your child spends the wages to buy clothes or other necessities you normally furnish does not prevent you from deducting your child's wages as a farm expense. File 2010 state taxes The amount of wages paid to the child could cause a loss of the dependency exemption depending on how the child uses the money. File 2010 state taxes Spouse as an employee. File 2010 state taxes   You can deduct reasonable wages or other compensation you pay to your spouse if a true employer-employee relationship exists between you and your spouse. File 2010 state taxes Wages you pay to your spouse are subject to social security and Medicare taxes. File 2010 state taxes For more information, see Family Employees in chapter 13. File 2010 state taxes Nondeductible Pay You cannot deduct wages paid for certain household work, construction work, and maintenance of your home. File 2010 state taxes However, those wages may be subject to the employment taxes discussed in chapter 13. File 2010 state taxes Household workers. File 2010 state taxes   Do not deduct amounts paid to persons engaged in household work, except to the extent their services are used in boarding or otherwise caring for farm laborers. File 2010 state taxes Construction labor. File 2010 state taxes   Do not deduct wages paid to hired help for the construction of new buildings or other improvements. File 2010 state taxes These wages are part of the cost of the building or other improvement. File 2010 state taxes You must capitalize them. File 2010 state taxes Maintaining your home. File 2010 state taxes   If your farm employee spends time maintaining or repairing your home, the wages and employment taxes you pay for that work are nondeductible personal expenses. File 2010 state taxes For example, assume you have a farm employee for the entire tax year and the employee spends 5% of the time maintaining your home. File 2010 state taxes The employee devotes the remaining time to work on your farm. File 2010 state taxes You cannot deduct 5% of the wages and employment taxes you pay for that employee. File 2010 state taxes Employment Credits Reduce your deduction for wages by the amount of any employment credits you claim such as the work opportunity credit for qualified tax-exempt organizations hiring qualified veterans (Form 5884-C). File 2010 state taxes Repairs and Maintenance You can deduct most expenses for the repair and maintenance of your farm property. File 2010 state taxes Common items of repair and maintenance are repainting, replacing shingles and supports on farm buildings, and periodic or routine maintenance of trucks, tractors, and other farm machinery. File 2010 state taxes However, repairs to, or overhauls of, depreciable property that substantially prolong the life of the property, increase its value, or adapt it to a different use are capital expenses. File 2010 state taxes For example, if you repair the barn roof, the cost is deductible. File 2010 state taxes But if you replace the roof, it is a capital expense. File 2010 state taxes For more information, see Capital Expenses , later. File 2010 state taxes Interest You can deduct as a farm business expense interest paid on farm mortgages and other obligations you incur in your farm business. File 2010 state taxes Cash method. File 2010 state taxes   If you use the cash method of accounting, you can generally deduct interest paid during the tax year. File 2010 state taxes You cannot deduct interest paid with funds received from the original lender through another loan, advance, or other arrangement similar to a loan. File 2010 state taxes You can, however, deduct the interest when you start making payments on the new loan. File 2010 state taxes For more information, see Cash Method in chapter 2. File 2010 state taxes Prepaid interest. File 2010 state taxes   Under the cash method, you generally cannot deduct any interest paid before the year it is due. File 2010 state taxes Interest paid in advance may be deducted only in the tax year in which it is due. File 2010 state taxes Accrual method. File 2010 state taxes   If you use an accrual method of accounting, you can deduct only interest that has accrued during the tax year. File 2010 state taxes However, you cannot deduct interest owed to a related person who uses the cash method until payment is made and the interest is includible in the gross income of that person. File 2010 state taxes For more information, see Accrual Method in chapter 2. File 2010 state taxes Allocation of interest. File 2010 state taxes   If you use the proceeds of a loan for more than one purpose, you must allocate the interest on that loan to each use. File 2010 state taxes Allocate the interest to the following categories. File 2010 state taxes Trade or business interest. File 2010 state taxes Passive activity interest. File 2010 state taxes Investment interest. File 2010 state taxes Portfolio interest. File 2010 state taxes Personal interest. File 2010 state taxes   You generally allocate interest on a loan the same way you allocate the loan proceeds. File 2010 state taxes You allocate loan proceeds by tracing disbursements to specific uses. File 2010 state taxes The easiest way to trace disbursements to specific uses is to keep the proceeds of a particular loan separate from any other funds. File 2010 state taxes Secured loan. File 2010 state taxes   The allocation of loan proceeds and the related interest is generally not affected by the use of property that secures the loan. File 2010 state taxes Example. File 2010 state taxes You secure a loan with property used in your farming business. File 2010 state taxes You use the loan proceeds to buy a car for personal use. File 2010 state taxes You must allocate interest expense on the loan to personal use (purchase of the car) even though the loan is secured by farm business property. File 2010 state taxes If the property that secures the loan is your home, you generally do not allocate the loan proceeds or the related interest. File 2010 state taxes The interest is usually deductible as qualified home mortgage interest, regardless of how the loan proceeds are used. File 2010 state taxes However, you can choose to treat the loan as not secured by your home. File 2010 state taxes For more information, see Publication 936. File 2010 state taxes Allocation period. File 2010 state taxes   The period for which a loan is allocated to a particular use begins on the date the proceeds are used and ends on the earlier of the following dates. File 2010 state taxes The date the loan is repaid. File 2010 state taxes The date the loan is reallocated to another use. File 2010 state taxes More information. File 2010 state taxes   For more information on interest, see chapter 4 in Publication 535. File 2010 state taxes Breeding Fees You can deduct breeding fees as a farm business expense. File 2010 state taxes However, if you use an accrual method of accounting, you must capitalize breeding fees and allocate them to the cost basis of the calf, foal, etc. File 2010 state taxes For more information on who must use an accrual method of accounting, see Accrual Method Required under Accounting Methods in chapter 2. File 2010 state taxes Fertilizer and Lime You can deduct in the year paid or incurred the cost of fertilizer, lime, and other materials applied to farmland to enrich, neutralize, or condition it if the benefits last a year or less. File 2010 state taxes You can also deduct the cost of applying these materials in the year you pay or incur it. File 2010 state taxes However, see Prepaid Farm Supplies , earlier, for a rule that may limit your deduction for these materials. File 2010 state taxes If the benefits of the fertilizer, lime, or other materials last substantially more than one year, you generally capitalize their cost and deduct a part each year the benefits last. File 2010 state taxes However, you can choose to deduct these expenses in the year paid or incurred. File 2010 state taxes If you make this choice, you will need IRS approval if you later decide to capitalize the cost of previously deducted items. File 2010 state taxes If you sell farmland on which fertilizer or lime has been applied and if the selling price of the land includes part or all of the cost of the fertilizer or lime, you report the sale amount attributable to the fertilizer or lime as ordinary income. File 2010 state taxes Farmland, for these purposes, is land used for producing crops, fruits, or other agricultural products or for sustaining livestock. File 2010 state taxes It does not include land you have never used previously for producing crops or sustaining livestock. File 2010 state taxes You cannot deduct initial land preparation costs. File 2010 state taxes (See Capital Expenses , later. File 2010 state taxes ) Include government payments you receive for lime or fertilizer in income. File 2010 state taxes See Fertilizer and Lime under Agricultural Program Payments in chapter 3. File 2010 state taxes Taxes You can deduct as a farm business expense the real estate and personal property taxes on farm business assets, such as farm equipment, animals, farmland, and farm buildings. File 2010 state taxes You also can deduct the social security and Medicare taxes you pay to match the amount withheld from the wages of farm employees and any federal unemployment tax you pay. File 2010 state taxes For information on employment taxes, see chapter 13. File 2010 state taxes Allocation of taxes. File 2010 state taxes   The taxes on the part of your farm you use as your home (including the furnishings and surrounding land not used for farming) are nonbusiness taxes. File 2010 state taxes You may be able to deduct these nonbusiness taxes as itemized deductions on Schedule A (Form 1040). File 2010 state taxes To determine the nonbusiness part, allocate the taxes between the farm assets and nonbusiness assets. File 2010 state taxes The allocation can be done from the assessed valuations. File 2010 state taxes If your tax statement does not show the assessed valuations, you can usually get them from the tax assessor. File 2010 state taxes State and local general sales taxes. File 2010 state taxes   State and local general sales taxes on nondepreciable farm business expense items are deductible as part of the cost of those items. File 2010 state taxes Include state and local general sales taxes imposed on the purchase of assets for use in your farm business as part of the cost you depreciate. File 2010 state taxes Also treat the taxes as part of your cost if they are imposed on the seller and passed on to you. File 2010 state taxes State and federal income taxes. File 2010 state taxes   Individuals cannot deduct state and federal income taxes as farm business expenses. File 2010 state taxes Individuals can deduct state and local income taxes only as an itemized deduction on Schedule A (Form 1040). File 2010 state taxes However, you cannot deduct federal income tax. File 2010 state taxes Highway use tax. File 2010 state taxes   You can deduct the federal use tax on highway motor vehicles paid on a truck or truck tractor used in your farm business. File 2010 state taxes For information on the tax itself, including information on vehicles subject to the tax, see the Instructions for Form 2290, Heavy Highway Vehicle Use Tax Return. File 2010 state taxes Self-employment tax deduction. File 2010 state taxes   You can deduct as an adjustment to income on Form 1040 one-half of your self-employment tax in figuring your adjusted gross income. File 2010 state taxes For more information, see chapter 12. File 2010 state taxes Insurance You generally can deduct the ordinary and necessary cost of insurance for your farm business as a business expense. File 2010 state taxes This includes premiums you pay for the following types of insurance. File 2010 state taxes Fire, storm, crop, theft, liability, and other insurance on farm business assets. File 2010 state taxes Health and accident insurance on your farm employees. File 2010 state taxes Workers' compensation insurance set by state law that covers any claims for job-related bodily injuries or diseases suffered by employees on your farm, regardless of fault. File 2010 state taxes Business interruption insurance. File 2010 state taxes State unemployment insurance on your farm employees (deductible as taxes if they are considered taxes under state law). File 2010 state taxes Insurance to secure a loan. File 2010 state taxes   If you take out a policy on your life or on the life of another person with a financial interest in your farm business to get or protect a business loan, you cannot deduct the premiums as a business expense. File 2010 state taxes In the event of death, the proceeds of the policy are not taxed as income even if they are used to liquidate the debt. File 2010 state taxes Advance premiums. File 2010 state taxes   Deduct advance payments of insurance premiums only in the year to which they apply, regardless of your accounting method. File 2010 state taxes Example. File 2010 state taxes On June 28, 2013, you paid a premium of $3,000 for fire insurance on your barn. File 2010 state taxes The policy will cover a period of 3 years beginning on July 1, 2013. File 2010 state taxes Only the cost for the 6 months in 2013 is deductible as an insurance expense on your 2013 calendar year tax return. File 2010 state taxes Deduct $500, which is the premium for 6 months of the 36-month premium period, or 6/36 of $3,000. File 2010 state taxes In both 2014 and 2015, deduct $1,000 (12/36 of $3,000). File 2010 state taxes Deduct the remaining $500 in 2016. File 2010 state taxes Had the policy been effective on January 1, 2013, the deductible expense would have been $1,000 for each of the years 2013, 2014, and 2015, based on one-third of the premium used each year. File 2010 state taxes Business interruption insurance. File 2010 state taxes   Use and occupancy and business interruption insurance premiums are deductible as a business expense. File 2010 state taxes This insurance pays for lost profits if your business is shut down due to a fire or other cause. File 2010 state taxes Report any proceeds in full on Schedule F, Part I. File 2010 state taxes Self-employed health insurance deduction. File 2010 state taxes   If you are self-employed, you can deduct as an adjustment to income on Form 1040 your payments for medical, dental, and qualified long-term care insurance coverage for yourself, your spouse, and your dependents when figuring your adjusted gross income on your Form 1040. File 2010 state taxes Effective March 30, 2010, the insurance can also cover any child of yours under age 27 at the end of 2013, even if the child was not your dependent. File 2010 state taxes Generally, this deduction cannot be more than the net profit from the business under which the plan was established. File 2010 state taxes   If you or your spouse is also an employee of another person, you cannot take the deduction for any month in which you are eligible to participate in a subsidized health plan maintained by your employer or your spouse's employer. File 2010 state taxes   Generally, use the Self-Employed Health Insurance Deduction Worksheet in the Instructions for Form 1040 to figure your deduction. File 2010 state taxes Include the remaining part of the insurance payment in your medical expenses on Schedule A (Form 1040) if you itemize your deductions. File 2010 state taxes   For more information, see Deductible Premiums in Publication 535, chapter 6. File 2010 state taxes Rent and Leasing If you lease property for use in your farm business, you can generally deduct the rent you pay on Schedule F. File 2010 state taxes However, you cannot deduct rent you pay in crop shares if you deduct the cost of raising the crops as farm expenses. File 2010 state taxes Advance payments. File 2010 state taxes   Deduct advance payments of rent only in the year to which they apply, regardless of your accounting method. File 2010 state taxes Farm home. File 2010 state taxes   If you rent a farm, do not deduct the part of the rental expense that represents the fair rental value of the farm home in which you live. File 2010 state taxes Lease or Purchase If you lease a farm building or equipment, you must determine whether or not the agreement must be treated as a conditional sales contract rather than a lease. File 2010 state taxes If the agreement is treated as a conditional sales contract, the payments under the agreement (so far as they do not represent interest or other charges) are payments for the purchase of the property. File 2010 state taxes Do not deduct these payments as rent, but capitalize the cost of the property and recover this cost through depreciation. File 2010 state taxes Conditional sales contract. File 2010 state taxes   Whether an agreement is a conditional sales contract depends on the intent of the parties. File 2010 state taxes Determine intent based on the provisions of the agreement and the facts and circumstances that exist when you make the agreement. File 2010 state taxes No single test, or special combination of tests, always applies. File 2010 state taxes However, in general, an agreement may be considered a conditional sales contract rather than a lease if any of the following is true. File 2010 state taxes The agreement applies part of each payment toward an equity interest you will receive. File 2010 state taxes You get title to the property after you make a stated amount of required payments. File 2010 state taxes The amount you must pay to use the property for a short time is a large part of the amount you would pay to get title to the property. File 2010 state taxes You pay much more than the current fair rental value of the property. File 2010 state taxes You have an option to buy the property at a nominal price compared to the value of the property when you may exercise the option. File 2010 state taxes Determine this value when you make the agreement. File 2010 state taxes You have an option to buy the property at a nominal price compared to the total amount you have to pay under the agreement. File 2010 state taxes The agreement designates part of the payments as interest, or part of the payments can be easily recognized as interest. File 2010 state taxes Example. File 2010 state taxes You lease new farm equipment from a dealer who both sells and leases. File 2010 state taxes The agreement includes an option to purchase the equipment for a specified price. File 2010 state taxes The lease payments and the specified option price equal the sales price of the equipment plus interest. File 2010 state taxes Under the agreement, you are responsible for maintenance, repairs, and the risk of loss. File 2010 state taxes For federal income tax purposes, the agreement is a conditional sales contract. File 2010 state taxes You cannot deduct any of the lease payments as rent. File 2010 state taxes You can deduct interest, repairs, insurance, depreciation, and other expenses related to the equipment. File 2010 state taxes Motor vehicle leases. File 2010 state taxes   Special rules apply to lease agreements that have a terminal rental adjustment clause. File 2010 state taxes In general, this is a clause that provides for a rental price adjustment based on the amount the lessor is able to sell the vehicle for at the end of the lease. File 2010 state taxes If your rental agreement contains a terminal rental adjustment clause, treat the agreement as a lease if the agreement otherwise qualifies as a lease. File 2010 state taxes For more information, see Internal Revenue Code (IRC) section 7701(h). File 2010 state taxes Leveraged leases. File 2010 state taxes   Special rules apply to leveraged leases of equipment (arrangements in which the equipment is financed by a nonrecourse loan from a third party). File 2010 state taxes For more information, see Publication 535, chapter 3, and Revenue Procedure 2001-28, which begins on page 1156 of Internal Revenue Bulletin 2001-19 at www. File 2010 state taxes irs. File 2010 state taxes gov/pub/irs-irbs/irb01-19. File 2010 state taxes pdf. File 2010 state taxes Depreciation If property you acquire to use in your farm business is expected to last more than one year, you generally cannot deduct the entire cost in the year you acquire it. File 2010 state taxes You must recover the cost over more than one year and deduct part of it each year on Schedule F as depreciation or amortization. File 2010 state taxes However, you can choose to deduct part or all of the cost of certain qualifying property, up to a limit, as a section 179 deduction in the year you place it in service. File 2010 state taxes Depreciation, amortization, and the section 179 deduction are discussed in chapter 7. File 2010 state taxes Business Use of Your Home You can deduct expenses for the business use of your home if you use part of your home exclusively and regularly: As the principal place of business for any trade or business in which you engage, As a place to meet or deal with patients, clients, or customers in the normal course of your trade or business, or In connection with your trade or business, if you are using a separate structure that is not attached to your home. File 2010 state taxes Your home office will qualify as your principal place of business for deducting expenses for its use if you meet both of the following requirements. File 2010 state taxes You use it exclusively and regularly for the administrative or management activities of your trade or business. File 2010 state taxes You have no other fixed location where you conduct substantial administrative or management activities of your trade or business. File 2010 state taxes If you use part of your home for business, you must divide the expenses of operating your home between personal and business use. File 2010 state taxes The IRS now provides a simplified method to determine your expenses for business use of your home. File 2010 state taxes For more information, see Schedule C (Form 1040), Part II, and its instructions. File 2010 state taxes Deduction limit. File 2010 state taxes   If your gross income from farming equals or exceeds your total farm expenses (including expenses for the business use of your home), you can deduct all your farm expenses. File 2010 state taxes But if your gross income from farming is less than your total farm expenses, your deduction for certain expenses for the use of your home in your farming business is limited. File 2010 state taxes   Your deduction for otherwise nondeductible expenses, such as utilities, insurance, and depreciation (with depreciation taken last), cannot be more than the gross income from farming minus the following expenses. File 2010 state taxes The business part of expenses you could deduct even if you did not use your home for business (such as deductible mortgage interest, real estate taxes, and casualty and theft losses). File 2010 state taxes Farm expenses other than expenses that relate to the use of your home. File 2010 state taxes If you are self-employed, do not include your deduction for half of your self-employment tax. File 2010 state taxes   Deductions over the current year's limit can be carried over to your next tax year. File 2010 state taxes They are subject to the deduction limit for the next tax year. File 2010 state taxes More information. File 2010 state taxes   See Publication 587 for more information on deducting expenses for the business use of your home. File 2010 state taxes Telephone expense. File 2010 state taxes   You cannot deduct the cost of basic local telephone service (including any taxes) for the first telephone line you have in your home, even if you have an office in your home. File 2010 state taxes However, charges for business long-distance phone calls on that line, as well as the cost of a second line into your home used exclusively for your farm business, are deductible business expenses. File 2010 state taxes Cell phone charges for calls relating to your farm business are deductible. File 2010 state taxes If the cell phone you use for your farm business is part of a family cell phone plan, you must allocate and deduct only the portion of the charges attributable to farm business calls. File 2010 state taxes Truck and Car Expenses You can deduct the actual cost of operating a truck or car in your farm business. File 2010 state taxes Only expenses for business use are deductible. File 2010 state taxes These include such items as gasoline, oil, repairs, license tags, insurance, and depreciation (subject to certain limits). File 2010 state taxes Standard mileage rate. File 2010 state taxes   Instead of using actual costs, under certain conditions you can use the standard mileage rate. File 2010 state taxes The standard mileage rate for each mile of business use is 56. File 2010 state taxes 5 cents in 2013. File 2010 state taxes You can use the standard mileage rate for a car or a light truck, such as a van, pickup, or panel truck, you own or lease. File 2010 state taxes   You cannot use the standard mileage rate if you operate five or more cars or light trucks at the same time. File 2010 state taxes You are not using five or more vehicles at the same time if you alternate using the vehicles (you use them at different times) for business. File 2010 state taxes Example. File 2010 state taxes Maureen owns a car and four pickup trucks that are used in her farm business. File 2010 state taxes Her farm employees use the trucks and she uses the car for business. File 2010 state taxes Maureen cannot use the standard mileage rate for the car or the trucks. File 2010 state taxes This is because all five vehicles are used in Maureen's farm business at the same time. File 2010 state taxes She must use actual expenses for all vehicles. File 2010 state taxes Business use percentage. File 2010 state taxes   You can claim 75% of the use of a car or light truck as business use without any records if you used the vehicle during most of the normal business day directly in connection with the business of farming. File 2010 state taxes You choose this method of substantiating business use the first year the vehicle is placed in service. File 2010 state taxes Once you make this choice, you may not change to another method later. File 2010 state taxes The following are uses directly connected with the business of farming. File 2010 state taxes Cultivating land. File 2010 state taxes Raising or harvesting any agricultural or horticultural commodity. File 2010 state taxes Raising, shearing, feeding, caring for, training, and managing animals. File 2010 state taxes Driving to the feed or supply store. File 2010 state taxes   If you keep records and they show that your business use was more than 75%, you may be able to claim more. File 2010 state taxes See Recordkeeping requirements under Travel Expenses , below. File 2010 state taxes More information. File 2010 state taxes   For more information on deductible truck and car expenses, see Publication 463, chapter 4. File 2010 state taxes If you pay your employees for the use of their truck or car in your farm business, see Reimbursements to employees under Travel Expenses next. File 2010 state taxes Travel Expenses You can deduct ordinary and necessary expenses you incur while traveling away from home for your farm business. File 2010 state taxes You cannot deduct lavish or extravagant expenses. File 2010 state taxes Usually, the location of your farm business is considered your home for tax purposes. File 2010 state taxes You are traveling away from home if: Your duties require you to be absent from your farm substantially longer than an ordinary work day, and You need to get sleep or rest to meet the demands of your work while away from home. File 2010 state taxes If you meet these requirements and can prove the time, place, and business purpose of your travel, you can deduct your ordinary and necessary travel expenses. File 2010 state taxes The following are some types of deductible travel expenses. File 2010 state taxes Air, rail, bus, and car transportation; Meals and lodging; Dry cleaning and laundry; Telephone and fax; Transportation between your hotel and your temporary work or business meeting location; and Tips for any of the above expenses. File 2010 state taxes Meals. File 2010 state taxes   You ordinarily can deduct only 50% of your business-related meals expenses. File 2010 state taxes You can deduct the cost of your meals while traveling on business only if your business trip is overnight or long enough to require you to stop for sleep or rest to properly perform your duties. File 2010 state taxes You cannot deduct any of the cost of meals if it is not necessary for you to rest, unless you meet the rules for business entertainment. File 2010 state taxes For information on entertainment expenses, see Publication 463, chapter 2. File 2010 state taxes   The expense of a meal includes amounts you spend for your food, beverages, taxes, and tips relating to the meal. File 2010 state taxes You can deduct either 50% of the actual cost or 50% of a standard meal allowance that covers your daily meal and incidental expenses. File 2010 state taxes    Recordkeeping requirements. File 2010 state taxes You must be able to prove your deductions for travel by adequate records or other evidence that will support your own statement. File 2010 state taxes Estimates or approximations do not qualify as proof of an expense. File 2010 state taxes   You should keep an account book or similar record, supported by adequate documentary evidence, such as receipts, that together support each element of an expense. File 2010 state taxes Generally, it is best to record the expense and get documentation of it at the time you pay it. File 2010 state taxes   If you choose to deduct a standard meal allowance rather than the actual expense, you do not have to keep records to prove amounts spent for meals and incidental items. File 2010 state taxes However, you must still keep records to prove the actual amount of other travel expenses, and the time, place, and business purpose of your travel. File 2010 state taxes More information. File 2010 state taxes   For detailed information on travel, recordkeeping, and the standard meal allowance, see Publication 463. File 2010 state taxes Reimbursements to employees. File 2010 state taxes   You generally can deduct reimbursements you pay to your employees for travel and transportation expenses they incur in the conduct of your business. File 2010 state taxes Employees may be reimbursed under an accountable or nonaccountable plan. File 2010 state taxes Under an accountable plan, the employee must provide evidence of expenses. File 2010 state taxes Under a nonaccountable plan, no evidence of expenses is required. File 2010 state taxes If you reimburse expenses under an accountable plan, deduct them as travel and transportation expenses. File 2010 state taxes If you reimburse expenses under a nonaccountable plan, you must report the reimbursements as wages on Form W-2 and deduct them as wages. File 2010 state taxes For more information, see Publication 535, chapter 11. File 2010 state taxes Marketing Quota Penalties You can deduct as Other expenses on Schedule F penalties you pay for marketing crops in excess of farm marketing quotas. File 2010 state taxes However, if you do not pay the penalty, but instead the purchaser of your crop deducts it from the payment to you, include in gross income only the amount you received. File 2010 state taxes Do not take a separate deduction for the penalty. File 2010 state taxes Tenant House Expenses You can deduct the costs of maintaining houses and their furnishings for tenants or hired help as farm business expenses. File 2010 state taxes These costs include repairs, utilities, insurance, and depreciation. File 2010 state taxes The value of a dwelling you furnish to a tenant under the usual tenant-farmer arrangement is not taxable income to the tenant. File 2010 state taxes Items Purchased for Resale If you use the cash method of accounting, you ordinarily deduct the cost of livestock and other items purchased for resale only in the year of sale. File 2010 state taxes You deduct this cost, including freight charges for transporting the livestock to the farm, on Schedule F, Part I. File 2010 state taxes However, see Chickens, seeds, and young plants , below. File 2010 state taxes Example. File 2010 state taxes You use the cash method of accounting. File 2010 state taxes In 2013, you buy 50 steers you will sell in 2014. File 2010 state taxes You cannot deduct the cost of the steers on your 2013 tax return. File 2010 state taxes You deduct their cost on your 2014 Schedule F, Part I. File 2010 state taxes Chickens, seeds, and young plants. File 2010 state taxes   If you are a cash method farmer, you can deduct the cost of hens and baby chicks bought for commercial egg production, or for raising and resale, as an expense on Schedule F, Part I, in the year paid if you do it consistently and it does not distort income. File 2010 state taxes You also can deduct the cost of seeds and young plants bought for further development and cultivation before sale as an expense on Schedule F, Part I, when paid if you do this consistently and you do not figure your income on the crop method. File 2010 state taxes However, see Prepaid Farm Supplies , earlier, for a rule that may limit your deduction for these items. File 2010 state taxes   If you deduct the cost of chickens, seeds, and young plants as an expense, report their entire selling price as income. File 2010 state taxes You cannot also deduct the cost from the selling price. File 2010 state taxes   You cannot deduct the cost of seeds and young plants for Christmas trees and timber as an expense. File 2010 state taxes Deduct the cost of these seeds and plants through depletion allowances. File 2010 state taxes For more information, see Depletion in chapter 7. File 2010 state taxes   The cost of chickens and plants used as food for your family is never deductible. File 2010 state taxes   Capitalize the cost of plants with a preproductive period of more than 2 years, unless you can elect out of the uniform capitalization rules. File 2010 state taxes These rules are discussed in chapter 6. File 2010 state taxes Example. File 2010 state taxes You use the cash method of accounting. File 2010 state taxes In 2013, you buy 500 baby chicks to raise for resale in 2014. File 2010 state taxes You also buy 50 bushels of winter wheat seed in 2013 that you sow in the fall. File 2010 state taxes Unless you previously adopted the method of deducting these costs in the year you sell the chickens or the harvested crops, you can deduct the cost of both the baby chicks and the seed wheat in 2013. File 2010 state taxes Election to use crop method. File 2010 state taxes   If you use the crop method, you can delay deducting the cost of seeds and young plants until you sell them. File 2010 state taxes You must get IRS approval to use the crop method. File 2010 state taxes If you follow this method, deduct the cost from the selling price to determine your profit on Schedule F, Part I. File 2010 state taxes For more information, see Crop method under Special Methods of Accounting in chapter 2. File 2010 state taxes Choosing a method. File 2010 state taxes   You can adopt either the crop method or the cash method for deducting the cost in the first year you buy egg-laying hens, pullets, chicks, or seeds and young plants. File 2010 state taxes   Although you must use the same method for egg-laying hens, pullets, and chicks, you can use a different method for seeds and young plants. File 2010 state taxes Once you use a particular method for any of these items, use it for those items until you get IRS approval to change your method. File 2010 state taxes For more information, see Change in Accounting Method in chapter 2. File 2010 state taxes Other Expenses The following list, while not all-inclusive, shows some expenses you can deduct as other farm expenses on Schedule F, Part II. File 2010 state taxes These expenses must be for business purposes and  (1) paid, if you use the cash method of accounting, or (2) incurred, if you use an accrual method of accounting. File 2010 state taxes Accounting fees. File 2010 state taxes Advertising. File 2010 state taxes Business travel and meals. File 2010 state taxes Commissions. File 2010 state taxes Consultant fees. File 2010 state taxes Crop scouting expenses. File 2010 state taxes Dues to cooperatives. File 2010 state taxes Educational expenses (to maintain and improve farming skills). File 2010 state taxes Farm-related attorney fees. File 2010 state taxes Farm magazines. File 2010 state taxes Ginning. File 2010 state taxes Insect sprays and dusts. File 2010 state taxes Litter and bedding. File 2010 state taxes Livestock fees. File 2010 state taxes Marketing fees. File 2010 state taxes Milk assessment. File 2010 state taxes Recordkeeping expenses. File 2010 state taxes Service charges. File 2010 state taxes Small tools expected to last one year or less. File 2010 state taxes Stamps and stationery. File 2010 state taxes Subscriptions to professional, technical, and trade journals that deal with farming. File 2010 state taxes Tying material and containers. File 2010 state taxes Loan expenses. File 2010 state taxes   You prorate and deduct loan expenses, such as legal fees and commissions, you pay to get a farm loan over the term of the loan. File 2010 state taxes Tax preparation fees. File 2010 state taxes   You can deduct as a farm business expense on Schedule F the cost of preparing that part of your tax return relating to your farm business. File 2010 state taxes You may be able to deduct the remaining cost on Schedule A (Form 1040) if you itemize your deductions. File 2010 state taxes   You also can deduct on Schedule F the amount you pay or incur in resolving tax issues relating to your farm business. File 2010 state taxes Domestic Production Activities Deduction Generally, you are allowed a deduction for income attributable to domestic production activities. File 2010 state taxes You can deduct 9% of the lesser of your qualified production activities income or your taxable income (adjusted gross income for individuals) for the tax year. File 2010 state taxes Your deduction is limited to 50% of the Form W-2 wages you paid for the tax year that are properly allocable to domestic production gross receipts. File 2010 state taxes For this purpose, Form W-2 wages do not include noncash wages paid for agricultural labor, such as compensation paid as commodities. File 2010 state taxes Also, excluded from Form W-2 wages are wages paid to your children under age 18 and nontaxable fringe benefits. File 2010 state taxes Income from cooperatives. File 2010 state taxes   If you receive a patronage dividend or qualified per-unit retain allocation from a cooperative which is engaged in the manufacturing, production, growth, or extraction in whole or in significant part of any agricultural or horticultural product or in the marketing of agricultural or horticultural products, your income from the cooperative can give rise to a domestic production activities deduction. File 2010 state taxes This deduction amount is reported on Form 1099-PATR, box 6. File 2010 state taxes In order for you to qualify for the deduction, the cooperative is required to send you a written notice designating your portion of the domestic production activities deduction. File 2010 state taxes More information. File 2010 state taxes   For more information on the domestic production activities deduction, see the Instructions for Form 8903. File 2010 state taxes Capital Expenses A capital expense is a payment, or a debt incurred, for the acquisition, improvement, or restoration of an asset that is expected to last more than one year. File 2010 state taxes You include the expense in the basis of the asset. File 2010 state taxes Uniform capitalization rules also require you to capitalize or include in inventory certain other expenses. File 2010 state taxes See chapters 2  and 6. File 2010 state taxes Capital expenses are generally not deductible, but they may be depreciable. File 2010 state taxes However, you can elect to deduct certain capital expenses, such as the following. File 2010 state taxes The cost of fertilizer, lime, etc. File 2010 state taxes (See Fertilizer and Lime under Deductible Expenses , earlier. File 2010 state taxes ) Soil and water conservation expenses. File 2010 state taxes (See chapter 5. File 2010 state taxes ) The cost of property that qualifies for a deduction under section 179. File 2010 state taxes (See chapter 7. File 2010 state taxes ) Business start-up costs. File 2010 state taxes (See Business start-up and organizational costs , later. File 2010 state taxes ) Forestation and reforestation costs. File 2010 state taxes (See Forestation and reforestation costs , later. File 2010 state taxes ) Generally, the costs of the following items, including the costs of material, hired labor, and installation, are capital expenses. File 2010 state taxes Land and buildings. File 2010 state taxes Additions, alterations, and improvements to buildings, etc. File 2010 state taxes Cars and trucks. File 2010 state taxes Equipment and machinery. File 2010 state taxes Fences. File 2010 state taxes Draft, breeding, sport, and dairy livestock. File 2010 state taxes Repairs to machinery, equipment, trucks, and cars that prolong their useful life, increase their value, or adapt them to different use. File 2010 state taxes Water wells, including drilling and equipping costs. File 2010 state taxes Land preparation costs, such as: Clearing land for farming, Leveling and conditioning land, Purchasing and planting trees, Building irrigation canals and ditches, Laying irrigation pipes, Installing drain tile, Modifying channels or streams, Constructing earthen, masonry, or concrete tanks, reservoirs, or dams, and Building roads. File 2010 state taxes Business start-up and organizational costs. File 2010 state taxes   You can elect to deduct up to $5,000 of business start-up costs and $5,000 of organizational costs paid or incurred after October 22, 2004. File 2010 state taxes The $5,000 deduction is reduced by the amount your total start-up or organizational costs exceed $50,000. File 2010 state taxes Any remaining costs must be amortized. File 2010 state taxes See chapter 7. File 2010 state taxes   You elect to deduct start-up or organizational costs by claiming the deduction on the income tax return filed by the due date (including extensions) for the tax year in which the active trade or business begins. File 2010 state taxes However, if you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). File 2010 state taxes Clearly indicate the election on your amended return and write “Filed pursuant to section 301. File 2010 state taxes 9100-2” at the top of the amended return. File 2010 state taxes File the amended return at the same address you filed the original return. File 2010 state taxes The election applies when figuring taxable income for the current tax year and all subsequent years. File 2010 state taxes   You can choose to forgo the election by clearly electing to capitalize your start-up or organizational costs on an income tax return filed by the due date (including extensions) for the tax year in which the active trade or business begins. File 2010 state taxes For more information about start-up and organizational costs, see chapter 7. File 2010 state taxes Crop production expenses. File 2010 state taxes   The uniform capitalization rules generally require you to capitalize expenses incurred in producing plants. File 2010 state taxes However, except for certain taxpayers required to use an accrual method of accounting, the capitalization rules do not apply to plants with a preproductive period of 2 years or less. File 2010 state taxes For more information, see Uniform Capitalization Rules in chapter 6. File 2010 state taxes Timber. File 2010 state taxes   Capitalize the cost of acquiring timber. File 2010 state taxes Do not include the cost of land in the cost of the timber. File 2010 state taxes You must generally capitalize direct costs incurred in reforestation. File 2010 state taxes However, you can elect to deduct some forestation and reforestation costs. File 2010 state taxes See Forestation and reforestation costs next. File 2010 state taxes Reforestation costs include the following. File 2010 state taxes Site preparation costs, such as: Girdling, Applying herbicide, Baiting rodents, and Clearing and controlling brush. File 2010 state taxes The cost of seed or seedlings. File 2010 state taxes Labor and tool expenses. File 2010 state taxes Depreciation on equipment used in planting or seeding. File 2010 state taxes Costs incurred in replanting to replace lost seedlings. File 2010 state taxes You can choose to capitalize certain indirect reforestation costs. File 2010 state taxes   These capitalized amounts are your basis for the timber. File 2010 state taxes Recover your basis when you sell the timber or take depletion allowances when you cut the timber. File 2010 state taxes See Depletion in chapter 7. File 2010 state taxes Forestation and reforestation costs. File 2010 state taxes   You can elect to deduct up to $10,000 ($5,000 if married filing separately; $0 for a trust) of qualifying reforestation costs paid or incurred after October 22, 2004, for each qualified timber property. File 2010 state taxes Any remaining costs can be amortized over an 84-month period. File 2010 state taxes See chapter 7. File 2010 state taxes If you make an election to deduct or amortize qualifying reforestation costs, you should create and maintain separate timber accounts for each qualified timber property. File 2010 state taxes The accounts should include all reforestation treatments and the dates they were applied. File 2010 state taxes Any qualified timber property that is subject to the deduction or amortization election cannot be included in any other timber account for which depletion is allowed. File 2010 state taxes The timber account should be maintained until the timber is disposed of. File 2010 state taxes For more information, see Notice 2006-47, 2006-20 I. File 2010 state taxes R. File 2010 state taxes B. File 2010 state taxes 892, available at  www. File 2010 state taxes irs. File 2010 state taxes gov/irb/2006-20_IRB/ar11. File 2010 state taxes html. File 2010 state taxes   You elect to deduct forestation and reforestation costs by claiming the deduction on the income tax return filed by the due date (including extensions) for the tax year in which the expenses were paid or incurred. File 2010 state taxes If you are filing Form T (Timber), Forest Activities Schedule, also complete Form T (Timber), Part IV. File 2010 state taxes If you are not filing Form T (Timber), attach a statement to your return with the following information. File 2010 state taxes The unique stand identification numbers. File 2010 state taxes The total number of acres reforested during the tax year. File 2010 state taxes The nature of the reforestation treatments. File 2010 state taxes The total amounts of the qualified reforestation expenditures eligible to be amortized or deducted. File 2010 state taxes   However, if you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). File 2010 state taxes Clearly indicate the election on your amended return and write “Filed pursuant to section 301. File 2010 state taxes 9100-2” at the top of the amended return. File 2010 state taxes File the amended return at the same address you filed the original return. File 2010 state taxes    For more information about forestation and reforestation costs, see chapter 7. File 2010 state taxes    For more information about timber, see Agriculture Handbook Number 731, Forest Landowners' Guide to the Federal Income Tax. File 2010 state taxes You can view this publication on the Internet at  www. File 2010 state taxes fs. File 2010 state taxes fed. File 2010 state taxes us/publications. File 2010 state taxes Christmas tree cultivation. File 2010 state taxes   If you are in the business of planting and cultivating Christmas trees to sell when they are more than 6 years old, capitalize expenses incurred for planting and stump culture and add them to the basis of the standing trees. File 2010 state taxes Recover these expenses as part of your adjusted basis when you sell the standing trees or as depletion allowances when you cut the trees. File 2010 state taxes For more information, see Timber Depletion under Depletion in chapter 7. File 2010 state taxes   You can deduct as business expenses the costs incurred for shearing and basal pruning of these trees. File 2010 state taxes Expenses incurred for silvicultural practices, such as weeding or cleaning, and noncommercial thinning are also deductible as business expenses. File 2010 state taxes   Capitalize the cost of land improvements, such as road grading, ditching, and fire breaks, that have a useful life beyond the tax year. File 2010 state taxes If the improvements do not have a determinable useful life, add their cost to the basis of the land. File 2010 state taxes The cost is recovered when you sell or otherwise dispose of it. File 2010 state taxes If the improvements have a determinable useful life, recover their cost through depreciation. File 2010 state taxes Capitalize the cost of equipment and other depreciable assets, such as culverts and fences, to the extent you do not use them in planting Christmas trees. File 2010 state taxes Recover these costs through depreciation. File 2010 state taxes Nondeductible Expenses You cannot deduct personal expenses and certain other items on your tax return even if they relate to your farm. File 2010 state taxes Personal, Living, and Family Expenses You cannot deduct certain personal, living, and family expenses as business expenses. File 2010 state taxes These include rent and insurance premiums paid on property used as your home, life insurance premiums on yourself or your family, the cost of maintaining cars, trucks, or horses for personal use, allowances to minor children, attorneys' fees and legal expenses incurred in personal matters, and household expenses. File 2010 state taxes Likewise, the cost of purchasing or raising produce or livestock consumed by you or your family is not deductible. File 2010 state taxes Other Nondeductible Items You cannot deduct the following items on your tax return. File 2010 state taxes Loss of growing plants, produce, and crops. File 2010 state taxes   Losses of plants, produce, and crops raised for sale are generally not deductible. File 2010 state taxes However, you may have a deductible loss on plants with a preproductive period of more than 2 years. File 2010 state taxes See chapter 11 for more information. File 2010 state taxes Repayment of loans. File 2010 state taxes   You cannot deduct the repayment of a loan. File 2010 state taxes However, if you use the proceeds of a loan for farm business expenses, you can deduct the interest on the loan. File 2010 state taxes See Interest , earlier. File 2010 state taxes Estate, inheritance, legacy, succession, and gift taxes. File 2010 state taxes   You cannot deduct estate, inheritance, legacy, succession, and gift taxes. File 2010 state taxes Loss of livestock. File 2010 state taxes   You cannot deduct as a loss the value of raised livestock that die if you deducted the cost of raising them as an expense. File 2010 state taxes Losses from sales or exchanges between related persons. File 2010 state taxes   You cannot deduct losses from sales or exchanges of property between you and certain related persons, including your spouse, brother, sister, ancestor, or lineal descendant. File 2010 state taxes For more information, see chapter 2 of Publication 544, Sales and Other Dispositions of Assets. File 2010 state taxes Cost of raising unharvested crops. File 2010 state taxes   You cannot deduct the cost of raising unharvested crops sold with land owned more than one year if you sell both at the same time and to the same person. File 2010 state taxes Add these costs to the basis of the land to determine the gain or loss on the sale. File 2010 state taxes For more information, see Section 1231 Gains and Losses in chapter 9. File 2010 state taxes Cost of unharvested crops bought with land. File 2010 state taxes   Capitalize the purchase price of land, including the cost allocable to unharvested crops. File 2010 state taxes You cannot deduct the cost of the crops at the time of purchase. File 2010 state taxes However, you can deduct this cost in figuring net profit or loss in the tax year you sell the crops. File 2010 state taxes Cost related to gifts. File 2010 state taxes   You cannot deduct costs related to your gifts of agricultural products or property held for sale in the ordinary course of your business. File 2010 state taxes The costs are not deductible in the year of the gift or any later year. File 2010 state taxes For example, you cannot deduct the cost of raising cattle or the cost of planting and raising unharvested wheat on parcels of land given as a gift to your children. File 2010 state taxes Club dues and membership fees. File 2010 state taxes   Generally, you cannot deduct amounts you pay or incur for membership in any club organized for business, pleasure, recreation, or any other social purpose. File 2010 state taxes This includes country clubs, golf and athletic clubs, hotel clubs, sporting clubs, airline clubs, and clubs operated to provide meals under circumstances generally considered to be conducive to business discussions. File 2010 state taxes Exception. File 2010 state taxes   The following organizations will not be treated as a club organized for business, pleasure, recreation, or other social purposes, unless one of its main purposes is to conduct entertainment activities for members or their guests or to provide members or their guests with access to entertainment facilities. File 2010 state taxes Boards of trade. File 2010 state taxes Business leagues. File 2010 state taxes Chambers of commerce. File 2010 state taxes Civic or public service organizations. File 2010 state taxes Professional associations. File 2010 state taxes Trade associations. File 2010 state taxes Real estate boards. File 2010 state taxes Fines and penalties. File 2010 state taxes   You cannot deduct fines and penalties, except penalties for exceeding marketing quotas, discussed earlier. File 2010 state taxes Losses From Operating a Farm If your deductible farm expenses are more than your farm income, you have a loss from the operation of your farm. File 2010 state taxes The amount of the loss you can deduct when figuring your taxable income may be limited. File 2010 state taxes To figure your deductible loss, you must apply the following limits. File 2010 state taxes The at-risk limits. File 2010 state taxes The passive activity limits. File 2010 state taxes The following discussions explain these limits. File 2010 state taxes If your deductible loss after applying these limits is more than your other income for the year, you may have a net operating loss. File 2010 state taxes See Publication 536, Net Operating Losses (NOLs) for Individuals, Estates, and Trusts. File 2010 state taxes If you do not carry on your farming activity to make a profit, your loss deduction may be limited by the not-for-profit rules. File 2010 state taxes See Not-for-Profit Farming, later. File 2010 state taxes At-Risk Limits The at-risk rules limit your deduction for losses from most business or income-producing activities, including farming. File 2010 state taxes These rules limit the losses you can deduct when figuring your taxable income. File 2010 state taxes The deductible loss from an activity is limited to the amount you have at risk in the activity. File 2010 state taxes You are at risk in any activity for: The money and adjusted basis of property you contribute to the activity, and Amounts you borrow for use in the activity if: You are personally liable for repayment, or You pledge property (other than property used in the activity) as security for the loan. File 2010 state taxes You are not at risk, however, for amounts you borrow for use in a farming activity from a person who has an interest in the activity (other than as a creditor) or a person related to someone (other than you) having such an interest. File 2010 state taxes For more information, see Publication 925. File 2010 state taxes Passive Activity Limits A passive activity is generally any activity involving the conduct of any trade or business in which you do not materially participate. File 2010 state taxes Generally, a rental activity is a passive activity. File 2010 state taxes If you have a passive activity, special rules limit the loss you can deduct in the tax year. File 2010 state taxes You generally can deduct losses from passive activities only up to income from passive activities. File 2010 state taxes Credits are similarly limited. File 2010 state taxes For more information, see Publication 925. File 2010 state taxes Excess Farm Loss Limit For tax years beginning after 2009, excess farm losses (defined below) are not deductible if you received certain applicable subsidies. File 2010 state taxes This limit applies to any farming businesses, other than a C corporation, that received a direct or counter-cyclical payment (or any payment in lieu of such payments) under title I of the Food, Conservation, and Energy Act of 2008, or from a Commodity Credit Corporation loan. File 2010 state taxes Your farming losses are limited to the greater of: $300,000 ($150,000 for a married person filing a separate return), or The total net farm income for the prior five tax years. File 2010 state taxes Farming losses from casualty losses or losses by reason of disease or drought are disregarded for purposes of figuring this limitation. File 2010 state taxes Also, the limitation on farm losses should be applied before the passive activity loss rules are applied. File 2010 state taxes For more details, see IRC section 461(j). File 2010 state taxes Excess farm loss. File 2010 state taxes   Generally, an excess farm loss is the amount of your farming loss that exceeds the amount of the limitation (as described above). File 2010 state taxes This loss can be determined by taking the excess of: The total deductions for the tax year from your farming businesses, over The total gross income or gain for the tax year from your farming businesses, plus the greater of: $300,000 ($150,000 for a married person filing a separate return), or The excess (if any) of the total gross income or gain from your farming businesses for the prior five tax years over the total deductions from your farming businesses for the prior five tax years. File 2010 state taxes   Excess farm losses that are disallowed can be carried forward to the next tax year and treated as a deduction from that year. File 2010 state taxes Not-for-Profit Farming If you operate a farm for profit, you can deduct all the ordinary and necessary expenses of carrying on the business of farming on Schedule F. File 2010 state taxes However, if you do not carry on your farming activity, or other activity you engage or invest in, to make a profit, you report the income from the activity on Form 1040, line 21, and you can deduct expenses of carrying on the activity only if you itemize your deductions on Schedule A (Form 1040). File 2010 state taxes Also, there is a limit on the deductions you can take. File 2010 state taxes You cannot use a loss from that activity to offset income from other activities. File 2010 state taxes Activities you do as a hobby, or mainly for sport or recreation, come under this limit. File 2010 state taxes An investment activity intended only to produce tax losses for the investors also comes under this limit. File 2010 state taxes The limit on not-for-profit losses applies to individuals, partnerships, estates, trusts, and S corporations. File 2010 state taxes It does not apply to corporations other than S corporations. File 2010 state taxes In determining whether you are carrying on your farming activity for profit, all the facts are taken into account. File 2010 state taxes No one factor alone is decisive. File 2010 state taxes Among the factors to consider are whether: You operate your farm in a businesslike manner; The time and effort you spend on farming indicate you intend to make it profitable; You depend on income from farming for your livelihood; Your losses are due to circumstances beyond your control or are normal in the start-up phase of farming; You change your methods of operation in an attempt to improve profitability; You, or your advisors, have the knowledge needed to carry on the farming activity as a successful business; You were successful in making a profit in similar activities in the past; You make a profit from farming in some years and the amount of profit you make; and You can expect to make a future profit from the appreciation of the assets used in the farming activity. File 2010 state taxes Presumption of profit. File 2010 state taxes   Your farming or other activity is presumed carried on for profit if it produced a profit in at least 3 of the last 5 tax years, including the current year. File 2010 state taxes Activities that consist primarily of breeding, training, showing, or racing horses are presumed carried on for profit if they produced a profit in at least 2 of the last 7 tax years, including the current year. File 2010 state taxes The activity must be substantially the same for each year within this period. File 2010 state taxes You have a profit when the gross income from an activity is more than the deductions for it. File 2010 state taxes   If a taxpayer dies before the end of the 5-year (or 7-year) period, the period ends on the date of the taxpayer's death. File 2010 state taxes   If your business or investment activity passes this 3- (or 2-) years-of-profit test, presume it is carried on for profit. File 2010 state taxes This means the limits discussed here do not apply. File 2010 state taxes You can take all your business deductions from the activity on Schedule F, even for the years that you have a loss. File 2010 state taxes You can rely on this presumption in every case, unless the IRS shows it is not valid. File 2010 state taxes   If you fail the 3- (or 2-) years-of-profit test, you still may be considered to operate your farm for profit by considering the factors listed earlier. File 2010 state taxes Using the presumption later. File 2010 state taxes   If you are starting out in farming and do not have 3 (or 2) years showing a profit, you may want to take advantage of this presumption later, after you have had the 5 (or 7) years of experience allowed by the test. File 2010 state taxes   You can choose to do this by filing Form 5213. File 2010 state taxes Filing this form postpones any determination that your farming activity is not carried on for profit until 5 (or 7) years have passed since you first started farming. File 2010 state taxes You must file Form 5213 within 3 years after the due date of your return for the year in which you first carried on the activity, or, if earlier, within 60 days after receiving a written notice from the IRS proposing to disallow deductions attributable to the activity. File 2010 state taxes   The benefit gained by making this choice is that the IRS will not immediately question whether your farming activity is engaged in for profit. File 2010 state taxes Accordingly, it will not limit your deductions. File 2010 state taxes Rather, you will gain time to earn a profit in 3 (or 2) out of the first 5 (or 7) years you carry on the farming activity. File 2010 state taxes If you show 3 (or 2) years of profit at the end of this period, your deductions are not limited under these rules. File 2010 state taxes If you do not have 3 (or 2) years of profit (and cannot otherwise show that you operated your farm for profit), the limit applies retroactively to any year in the 5-year (or 7-year) period with a loss. File 2010 state taxes   Filing Form 5213 automatically extends the period of limitations on any year
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The File 2010 State Taxes

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