Filing Your Taxes Online is Fast, Easy and Secure.
Start now and receive your tax refund in as little as 7 days.

1. Get Answers

Your online questions are customized to your unique tax situation.

2. Maximize your Refund

Find tax credits for everything from school tuition to buying a hybri

3. E-File for FREE

E-file free with direct deposit to get your refund in as few as 7 days.

Filing your taxes with paper mail can be difficult and it could take weeks for your refund to arrive. IRS e-file is easy, fast and secure. There is no paperwork going to the IRS so tax refunds can be processed in as little as 7 days with direct deposit. As you prepare your taxes online, you can see your tax refund in real time.

FREE audit support and representation from an enrolled agent – NEW and only from H&R Block

Free Electronic Tax Filing

1040ez 2011 InstructionsFile Taxes Online Free Federal And StateIrs ExtensionIrs 2009Free 2011 Tax Return OnlineAmend Federal Tax Return 2011Free Filing For 2012 TaxesFile State Return OnlyFile Past Year TaxesFile 2010 Tax Return LateWww Myfreetaxes Com PhillyHr Block Taxes OnlineFile State Taxes Only Online FreeIrs 1040v FormI Need To File My 2009 Tax ReturnIrs 1040ez 2012 InstructionsFile My 2012 Tax ReturnFree File State Income TaxFree TaxesHow To File 1040ez Online1040ez 2011 File Online1040ez Instructions 2012Back Taxes10 40 EzFree Federal Tax FilingFree 2012 Tax FormsFile An Amended Tax Return For 20112012 Tax Forms 1040 Ez2011 Federal Tax Forms2012 Free Taxes OnlineFree Irs EfileI Need To Amend My 2011 TaxesFree Tax Form 1040ezHr Block Free TaxesFree Federal And State Tax Filing 2014Amend State TaxesFree Tax PrepH&r Block Free Tax FormEz FormState Income Tax Form 2012

Free Electronic Tax Filing

Free electronic tax filing 7. Free electronic tax filing   Costs You Can Deduct or Capitalize Table of Contents What's New Introduction Topics - This chapter discusses: Useful Items - You may want to see: Carrying Charges Research and Experimental CostsProduct. Free electronic tax filing Costs not included. Free electronic tax filing Intangible Drilling Costs Exploration CostsPartnerships and S corporations. Free electronic tax filing Development Costs Circulation Costs Business Start-Up and Organizational Costs Reforestation Costs Retired Asset Removal Costs Barrier Removal CostsOther barrier removals. Free electronic tax filing Film and Television Production Costs What's New Film and television productions costs. Free electronic tax filing  The election to expense film and television production costs does not apply to productions that begin after December 31, 2013. Free electronic tax filing See Film and Television Production Costs , later. Free electronic tax filing Introduction This chapter discusses costs you can elect to deduct or capitalize. Free electronic tax filing You generally deduct a cost as a current business expense by subtracting it from your income in either the year you incur it or the year you pay it. Free electronic tax filing If you capitalize a cost, you may be able to recover it over a period of years through periodic deductions for amortization, depletion, or depreciation. Free electronic tax filing When you capitalize a cost, you add it to the basis of property to which it relates. Free electronic tax filing A partnership, corporation, estate, or trust makes the election to deduct or capitalize the costs discussed in this chapter except for exploration costs for mineral deposits. Free electronic tax filing Each individual partner, shareholder, or beneficiary elects whether to deduct or capitalize exploration costs. Free electronic tax filing You may be subject to the alternative minimum tax (AMT) if you deduct research and experimental, intangible drilling, exploration, development, circulation, or business organizational costs. Free electronic tax filing For more information on the alternative minimum tax, see the instructions for the following forms. Free electronic tax filing Form 6251, Alternative Minimum Tax—Individuals. Free electronic tax filing Form 4626, Alternative Minimum Tax—Corporations. Free electronic tax filing Topics - This chapter discusses: Carrying charges Research and experimental costs Intangible drilling costs Exploration costs Development costs Circulation costs Qualified disaster expenses Business start-up and organizational costs Reforestation costs Retired asset removal costs Barrier removal costs Film and television production costs Useful Items - You may want to see: Publication 544 Sales and Other Dispositions of Assets Form (and Instructions) 3468 Investment Credit 8826 Disabled Access Credit See chapter 12 for information about getting publications and forms. Free electronic tax filing Carrying Charges Carrying charges include the taxes and interest you pay to carry or develop real property or to carry, transport, or install personal property. Free electronic tax filing Certain carrying charges must be capitalized under the uniform capitalization rules. Free electronic tax filing (For information on capitalization of interest, see chapter 4 . Free electronic tax filing ) You can elect to capitalize carrying charges not subject to the uniform capitalization rules, but only if they are otherwise deductible. Free electronic tax filing You can elect to capitalize carrying charges separately for each project you have and for each type of carrying charge. Free electronic tax filing For unimproved and unproductive real property, your election is good for only 1 year. Free electronic tax filing You must decide whether to capitalize carrying charges each year the property remains unimproved and unproductive. Free electronic tax filing For other real property, your election to capitalize carrying charges remains in effect until construction or development is completed. Free electronic tax filing For personal property, your election is effective until the date you install or first use it, whichever is later. Free electronic tax filing How to make the election. Free electronic tax filing   To make the election to capitalize a carrying charge, attach a statement to your original tax return for the year the election is to be effective indicating which charges you are electing to capitalize. Free electronic tax filing 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). Free electronic tax filing Attach the statement to the amended return and write “Filed pursuant to section 301. Free electronic tax filing 9100-2” on the statement. Free electronic tax filing File the amended return at the same address you filed the original return. Free electronic tax filing Research and Experimental Costs The costs of research and experimentation are generally capital expenses. Free electronic tax filing However, you can elect to deduct these costs as a current business expense. Free electronic tax filing Your election to deduct these costs is binding for the year it is made and for all later years unless you get IRS approval to make a change. Free electronic tax filing If you meet certain requirements, you may elect to defer and amortize research and experimental costs. Free electronic tax filing For information on electing to defer and amortize these costs, see Research and Experimental Costs in chapter 8. Free electronic tax filing Research and experimental costs defined. Free electronic tax filing   Research and experimental costs are reasonable costs you incur in your trade or business for activities intended to provide information that would eliminate uncertainty about the development or improvement of a product. Free electronic tax filing Uncertainty exists if the information available to you does not establish how to develop or improve a product or the appropriate design of a product. Free electronic tax filing Whether costs qualify as research and experimental costs depends on the nature of the activity to which the costs relate rather than on the nature of the product or improvement being developed or the level of technological advancement. Free electronic tax filing      The costs of obtaining a patent, including attorneys' fees paid or incurred in making and perfecting a patent application, are research and experimental costs. Free electronic tax filing However, costs paid or incurred to obtain another's patent are not research and experimental costs. Free electronic tax filing Product. Free electronic tax filing   The term “product” includes any of the following items. Free electronic tax filing Formula. Free electronic tax filing Invention. Free electronic tax filing Patent. Free electronic tax filing Pilot model. Free electronic tax filing Process. Free electronic tax filing Technique. Free electronic tax filing Property similar to the items listed above. Free electronic tax filing It also includes products used by you in your trade or business or held for sale, lease, or license. Free electronic tax filing Costs not included. Free electronic tax filing   Research and experimental costs do not include expenses for any of the following activities. Free electronic tax filing Advertising or promotions. Free electronic tax filing Consumer surveys. Free electronic tax filing Efficiency surveys. Free electronic tax filing Management studies. Free electronic tax filing Quality control testing. Free electronic tax filing Research in connection with literary, historical, or similar projects. Free electronic tax filing The acquisition of another's patent, model, production, or process. Free electronic tax filing When and how to elect. Free electronic tax filing   You make the election to deduct research and experimental costs by deducting them on your tax return for the year in which you first pay or incur research and experimental costs. Free electronic tax filing If you do not make the election to deduct research and experimental costs in the first year in which you pay or incur the costs, you can deduct the costs in a later year only with approval from the IRS. Free electronic tax filing Deducting or Amortizing Research and Experimentation Costs IF you . Free electronic tax filing . Free electronic tax filing . Free electronic tax filing THEN . Free electronic tax filing . Free electronic tax filing . Free electronic tax filing Elect to deduct research and experimental costs as a current business expense Deduct all research and experimental costs in the first year you pay or incur the costs and all later years. Free electronic tax filing Do not deduct research and experimental costs as a current business expense If you meet the requirements, amortize them over at least 60 months, starting with the month you first receive an economic benefit from the research. Free electronic tax filing See Research and Experimental Costs in chapter 8. Free electronic tax filing Research credit. Free electronic tax filing   If you pay or incur qualified research expenses, you may be able to take the research credit. Free electronic tax filing For more information see Form 6765, Credit for Increasing Research Activities and its instructions. Free electronic tax filing Intangible Drilling Costs The costs of developing oil, gas, or geothermal wells are ordinarily capital expenditures. Free electronic tax filing You can usually recover them through depreciation or depletion. Free electronic tax filing However, you can elect to deduct intangible drilling costs (IDCs) as a current business expense. Free electronic tax filing These are certain drilling and development costs for wells in the United States in which you hold an operating or working interest. Free electronic tax filing You can deduct only costs for drilling or preparing a well for the production of oil, gas, or geothermal steam or hot water. Free electronic tax filing You can elect to deduct only the costs of items with no salvage value. Free electronic tax filing These include wages, fuel, repairs, hauling, and supplies related to drilling wells and preparing them for production. Free electronic tax filing Your cost for any drilling or development work done by contractors under any form of contract is also an IDC. Free electronic tax filing However, see Amounts paid to contractor that must be capitalized , later. Free electronic tax filing You can also elect to deduct the cost of drilling exploratory bore holes to determine the location and delineation of offshore hydrocarbon deposits if the shaft is capable of conducting hydrocarbons to the surface on completion. Free electronic tax filing It does not matter whether there is any intent to produce hydrocarbons. Free electronic tax filing If you do not elect to deduct your IDCs as a current business expense, you can elect to deduct them over the 60-month period beginning with the month they were paid or incurred. Free electronic tax filing Amounts paid to contractor that must be capitalized. Free electronic tax filing   Amounts paid to a contractor must be capitalized if they are either: Amounts properly allocable to the cost of depreciable property, or Amounts paid only out of production or proceeds from production if these amounts are depletable income to the recipient. Free electronic tax filing How to make the election. Free electronic tax filing   You elect to deduct IDCs as a current business expense by taking the deduction on your income tax return for the first tax year you have eligible costs. Free electronic tax filing No formal statement is required. Free electronic tax filing If you file Schedule C (Form 1040), enter these costs under “Other expenses. Free electronic tax filing ”   For oil and gas wells, your election is binding for the year it is made and for all later years. Free electronic tax filing For geothermal wells, your election can be revoked by the filing of an amended return on which you do not take the deduction. Free electronic tax filing You can file the amended return for the year up to the normal time of expiration for filing a claim for credit or refund, generally, within 3 years after the date you filed the original return or within 2 years after the date you paid the tax, whichever is later. Free electronic tax filing Energy credit for costs of geothermal wells. Free electronic tax filing   If you capitalize the drilling and development costs of geothermal wells that you place in service during the tax year, you may be able to claim a business energy credit. Free electronic tax filing See the Instructions for Form 3468 for more information. Free electronic tax filing Nonproductive well. Free electronic tax filing   If you capitalize your IDCs, you have another option if the well is nonproductive. Free electronic tax filing You can deduct the IDCs of the nonproductive well as an ordinary loss. Free electronic tax filing You must indicate and clearly state your election on your tax return for the year the well is completed. Free electronic tax filing Once made, the election for oil and gas wells is binding for all later years. Free electronic tax filing You can revoke your election for a geothermal well by filing an amended return that does not claim the loss. Free electronic tax filing Costs incurred outside the United States. Free electronic tax filing   You cannot deduct as a current business expense all the IDCs paid or incurred for an oil, gas, or geothermal well located outside the United States. Free electronic tax filing However, you can elect to include the costs in the adjusted basis of the well to figure depletion or depreciation. Free electronic tax filing If you do not make this election, you can deduct the costs over the 10-year period beginning with the tax year in which you paid or incurred them. Free electronic tax filing These rules do not apply to a nonproductive well. Free electronic tax filing Exploration Costs The costs of determining the existence, location, extent, or quality of any mineral deposit are ordinarily capital expenditures if the costs lead to the development of a mine. Free electronic tax filing You recover these costs through depletion as the mineral is removed from the ground. Free electronic tax filing However, you can elect to deduct domestic exploration costs paid or incurred before the beginning of the development stage of the mine (except those for oil and gas wells). Free electronic tax filing How to make the election. Free electronic tax filing   You elect to deduct exploration costs by taking the deduction on your income tax return, or on an amended income tax return, for the first tax year for which you wish to deduct the costs paid or incurred during the tax year. Free electronic tax filing Your return must adequately describe and identify each property or mine, and clearly state how much is being deducted for each one. Free electronic tax filing The election applies to the tax year you make this election and all later tax years. Free electronic tax filing Partnerships and S corporations. Free electronic tax filing   Each partner, not the partnership, elects whether to capitalize or to deduct that partner's share of exploration costs. Free electronic tax filing Each shareholder, not the S corporation, elects whether to capitalize or to deduct that shareholder's share of exploration costs. Free electronic tax filing Reduced corporate deductions for exploration costs. Free electronic tax filing   A corporation (other than an S corporation) can deduct only 70% of its domestic exploration costs. Free electronic tax filing It must capitalize the remaining 30% of costs and amortize them over the 60-month period starting with the month the exploration costs are paid or incurred. Free electronic tax filing A corporation may also elect to capitalize and amortize mining exploration costs over a 10-year period. Free electronic tax filing For more information on this method of amortization, see Internal Revenue Code section 59(e). Free electronic tax filing   The 30% the corporation capitalizes cannot be added to its basis in the property to figure cost depletion. Free electronic tax filing However, the amount amortized is treated as additional depreciation and is subject to recapture as ordinary income on a disposition of the property. Free electronic tax filing See Section 1250 Property under Depreciation Recapture in chapter 3 of Publication 544. Free electronic tax filing   These rules also apply to the deduction of development costs by corporations. Free electronic tax filing See Development Costs , later. Free electronic tax filing Recapture of exploration expenses. Free electronic tax filing   When your mine reaches the producing stage, you must recapture any exploration costs you elected to deduct. Free electronic tax filing Use either of the following methods. Free electronic tax filing Method 1—Include the deducted costs in gross income for the tax year the mine reaches the producing stage. Free electronic tax filing Your election must be clearly indicated on the return. Free electronic tax filing Increase your adjusted basis in the mine by the amount included in income. Free electronic tax filing Generally, you must elect this recapture method by the due date (including extensions) of your return. Free electronic tax filing 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). Free electronic tax filing Make the election on your amended return and write “Filed pursuant to section 301. Free electronic tax filing 9100-2” on the form where you are including the income. Free electronic tax filing File the amended return at the same address you filed the original return. Free electronic tax filing Method 2—Do not claim any depletion deduction for the tax year the mine reaches the producing stage and any later tax years until the depletion you would have deducted equals the exploration costs you deducted. Free electronic tax filing   You also must recapture deducted exploration costs if you receive a bonus or royalty from mine property before it reaches the producing stage. Free electronic tax filing Do not claim any depletion deduction for the tax year you receive the bonus or royalty and any later tax years until the depletion you would have deducted equals the exploration costs you deducted. Free electronic tax filing   Generally, if you dispose of the mine before you have fully recaptured the exploration costs you deducted, recapture the balance by treating all or part of your gain as ordinary income. Free electronic tax filing Under these circumstances, you generally treat as ordinary income all of your gain if it is less than your adjusted exploration costs with respect to the mine. Free electronic tax filing If your gain is more than your adjusted exploration costs, treat as ordinary income only a part of your gain, up to the amount of your adjusted exploration costs. Free electronic tax filing Foreign exploration costs. Free electronic tax filing   If you pay or incur exploration costs for a mine or other natural deposit located outside the United States, you cannot deduct all the costs in the current year. Free electronic tax filing You can elect to include the costs (other than for an oil, gas, or geothermal well) in the adjusted basis of the mineral property to figure cost depletion. Free electronic tax filing (Cost depletion is discussed in chapter 9 . Free electronic tax filing ) If you do not make this election, you must deduct the costs over the 10-year period beginning with the tax year in which you pay or incur them. Free electronic tax filing These rules also apply to foreign development costs. Free electronic tax filing Development Costs You can deduct costs paid or incurred during the tax year for developing a mine or any other natural deposit (other than an oil or gas well) located in the United States. Free electronic tax filing These costs must be paid or incurred after the discovery of ores or minerals in commercially marketable quantities. Free electronic tax filing Development costs also include depreciation on improvements used in the development of ores or minerals and costs incurred for you by a contractor. Free electronic tax filing Development costs do not include the costs for the acquisition or improvement of depreciable property. Free electronic tax filing Instead of deducting development costs in the year paid or incurred, you can elect to treat the cost as deferred expenses and deduct them ratably as the units of produced ores or minerals benefited by the expenses are sold. Free electronic tax filing This election applies each tax year to expenses paid or incurred in that year. Free electronic tax filing Once made, the election is binding for the year and cannot be revoked for any reason. Free electronic tax filing How to make the election. Free electronic tax filing   The election to deduct development costs ratably as the ores or minerals are sold must be made for each mine or other natural deposit by a clear indication on your return or by a statement filed with the IRS office where you file your return. Free electronic tax filing Generally, you must make the election by the due date of the return (including extensions). Free electronic tax filing 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). Free electronic tax filing Clearly indicate the election on your amended return and write “Filed pursuant to section 301. Free electronic tax filing 9100-2. Free electronic tax filing ” File the amended return at the same address you filed the original return. Free electronic tax filing Foreign development costs. Free electronic tax filing   The rules discussed earlier for foreign exploration costs apply to foreign development costs. Free electronic tax filing Reduced corporate deductions for development costs. Free electronic tax filing   The rules discussed earlier for reduced corporate deductions for exploration costs also apply to corporate deductions for development costs. Free electronic tax filing Circulation Costs A publisher can deduct as a current business expense the costs of establishing, maintaining, or increasing the circulation of a newspaper, magazine, or other periodical. Free electronic tax filing For example, a publisher can deduct the cost of hiring extra employees for a limited time to get new subscriptions through telephone calls. Free electronic tax filing Circulation costs are deductible even if they normally would be capitalized. Free electronic tax filing This rule does not apply to the following costs that must be capitalized. Free electronic tax filing The purchase of land or depreciable property. Free electronic tax filing The acquisition of circulation through the purchase of any part of the business of another publisher of a newspaper, magazine, or other periodical, including the purchase of another publisher's list of subscribers. Free electronic tax filing Other treatment of circulation costs. Free electronic tax filing   If you do not want to deduct circulation costs as a current business expense, you can elect one of the following ways to recover these costs. Free electronic tax filing Capitalize all circulation costs that are properly chargeable to a capital account (see chapter 1 ). Free electronic tax filing Amortize circulation costs over the 3-year period beginning with the tax year they were paid or incurred. Free electronic tax filing How to make the election. Free electronic tax filing   You elect to capitalize circulation costs by attaching a statement to your return for the first tax year the election applies. Free electronic tax filing Your election is binding for the year it is made and for all later years, unless you get IRS approval to revoke it. Free electronic tax filing Business Start-Up and Organizational Costs Business start-up and organizational costs are generally capital expenditures. Free electronic tax filing However, you can elect to deduct up to $5,000 of business start-up and $5,000 of organizational costs paid or incurred after October 22, 2004. Free electronic tax filing The $5,000 deduction is reduced by the amount your total start-up or organizational costs exceed $50,000. Free electronic tax filing Any remaining costs must be amortized. Free electronic tax filing For information about amortizing start-up and organizational costs, see chapter 8 . Free electronic tax filing Start-up costs include any amounts paid or incurred in connection with creating an active trade or business or investigating the creation or acquisition of an active trade or business. Free electronic tax filing Organizational costs include the costs of creating a corporation. Free electronic tax filing For more information on start-up and organizational costs, see chapter 8 . Free electronic tax filing How to make the election. Free electronic tax filing   You elect to deduct the start-up or organizational costs by claiming the deduction on your income tax return (filed by the due date including extensions) for the tax year in which the active trade or business begins. Free electronic tax filing 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). Free electronic tax filing Clearly indicate the election on your amended return and write “Filed pursuant to section 301. Free electronic tax filing 9100-2. Free electronic tax filing ” File the amended return at the same address you filed the original return. Free electronic tax filing The election applies when computing taxable income for the current tax year and all subsequent years. Free electronic tax filing Reforestation Costs Reforestation costs are generally capital expenditures. Free electronic tax filing However, 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. Free electronic tax filing The remaining costs can be amortized over an 84-month period. Free electronic tax filing For information about amortizing reforestation costs, see chapter 8 . Free electronic tax filing Qualifying reforestation costs are the direct costs of planting or seeding for forestation or reforestation. Free electronic tax filing Qualified timber property is property that contains trees in significant commercial quantities. Free electronic tax filing See chapter 8 for more information on qualifying reforestation costs and qualified timber property. Free electronic tax filing If you elect to deduct qualified reforestation costs, create and maintain separate timber accounts for each qualified timber property and include all reforestation costs and the dates each was applied. Free electronic tax filing Do not include this qualified timber property in any account (for example, depletion block) for which depletion is allowed. Free electronic tax filing How to make the election. Free electronic tax filing   You elect to deduct qualifying reforestation costs by claiming the deduction on your timely filed income tax return (including extensions) for the tax year the expenses were paid or incurred. Free electronic tax filing If Form T (Timber), Forest Activities Schedule, is required, complete Part IV of Form T. Free electronic tax filing If Form T is not required, attach a statement containing the following information for each qualified timber property for which an election is being made. Free electronic tax filing The unique stand identification numbers. Free electronic tax filing The total number of acres reforested during the tax year. Free electronic tax filing The nature of the reforestation treatments. Free electronic tax filing The total amounts of qualified reforestation expenditures eligible to be amortized or deducted. Free electronic tax filing   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). Free electronic tax filing Clearly indicate the election on your amended return and write “Filed pursuant to section 301. Free electronic tax filing 9100-2. Free electronic tax filing ” File the amended return at the same address you filed the original return. Free electronic tax filing The election applies when computing taxable income for the current tax year and all subsequent years. Free electronic tax filing   For additional information on reforestation costs, see chapter 8 . Free electronic tax filing Recapture. Free electronic tax filing   This deduction may have to be recaptured as ordinary income under section 1245 when you sell or otherwise dispose of the property that would have received an addition to basis if you had not elected to deduct the expenditure. Free electronic tax filing For more information on recapturing the deduction, see Depreciation Recapture in Publication 544. Free electronic tax filing Retired Asset Removal Costs If you retire and remove a depreciable asset in connection with the installation or production of a replacement asset, you can deduct the costs of removing the retired asset. Free electronic tax filing However, if you replace a component (part) of a depreciable asset, capitalize the removal costs if the replacement is an improvement and deduct the costs if the replacement is a repair. Free electronic tax filing Barrier Removal Costs The cost of an improvement to a business asset is normally a capital expense. Free electronic tax filing However, you can elect to deduct the costs of making a facility or public transportation vehicle more accessible to and usable by those who are disabled or elderly. Free electronic tax filing You must own or lease the facility or vehicle for use in connection with your trade or business. Free electronic tax filing A facility is all or any part of buildings, structures, equipment, roads, walks, parking lots, or similar real or personal property. Free electronic tax filing A public transportation vehicle is a vehicle, such as a bus or railroad car, that provides transportation service to the public (including service for your customers, even if you are not in the business of providing transportation services). Free electronic tax filing You cannot deduct any costs that you paid or incurred to completely renovate or build a facility or public transportation vehicle or to replace depreciable property in the normal course of business. Free electronic tax filing Deduction limit. Free electronic tax filing   The most you can deduct as a cost of removing barriers to the disabled and the elderly for any tax year is $15,000. Free electronic tax filing However, you can add any costs over this limit to the basis of the property and depreciate these excess costs. Free electronic tax filing Partners and partnerships. Free electronic tax filing   The $15,000 limit applies to a partnership and also to each partner in the partnership. Free electronic tax filing A partner can allocate the $15,000 limit in any manner among the partner's individually incurred costs and the partner's distributive share of partnership costs. Free electronic tax filing If the partner cannot deduct the entire share of partnership costs, the partnership can add any costs not deducted to the basis of the improved property. Free electronic tax filing   A partnership must be able to show that any amount added to basis was not deducted by the partner and that it was over a partner's $15,000 limit (as determined by the partner). Free electronic tax filing If the partnership cannot show this, it is presumed that the partner was able to deduct the distributive share of the partnership's costs in full. Free electronic tax filing Example. Free electronic tax filing Emilio Azul's distributive share of ABC partnership's deductible expenses for the removal of architectural barriers was $14,000. Free electronic tax filing Emilio had $12,000 of similar expenses in his sole proprietorship. Free electronic tax filing He elected to deduct $7,000 of them. Free electronic tax filing Emilio allocated the remaining $8,000 of the $15,000 limit to his share of ABC's expenses. Free electronic tax filing Emilio can add the excess $5,000 of his own expenses to the basis of the property used in his business. Free electronic tax filing Also, if ABC can show that Emilio could not deduct $6,000 ($14,000 – $8,000) of his share of the partnership's expenses because of how Emilio applied the limit, ABC can add $6,000 to the basis of its property. Free electronic tax filing Qualification standards. Free electronic tax filing   You can deduct your costs as a current expense only if the barrier removal meets the guidelines and requirements issued by the Architectural and Transportation Barriers Compliance Board under the Americans with Disabilities Act (ADA) of 1990. Free electronic tax filing You can view the Americans with Disabilities Act at www. Free electronic tax filing ada. Free electronic tax filing gov/pubs/ada. Free electronic tax filing htm. Free electronic tax filing   The following is a list of some architectural barrier removal costs that can be deducted. Free electronic tax filing Ground and floor surfaces. Free electronic tax filing Walks. Free electronic tax filing Parking lots. Free electronic tax filing Ramps. Free electronic tax filing Entrances. Free electronic tax filing Doors and doorways. Free electronic tax filing Stairs. Free electronic tax filing Floors. Free electronic tax filing Toilet rooms. Free electronic tax filing Water fountains. Free electronic tax filing Public telephones. Free electronic tax filing Elevators. Free electronic tax filing Controls. Free electronic tax filing Signage. Free electronic tax filing Alarms. Free electronic tax filing Protruding objects. Free electronic tax filing Symbols of accessibility. Free electronic tax filing You can find the ADA guidelines and requirements for architectural barrier removal at www. Free electronic tax filing usdoj. Free electronic tax filing gov/crt/ada/reg3a. Free electronic tax filing html. Free electronic tax filing   The costs for removal of transportation barriers from rail facilities, buses, and rapid and light rail vehicles are deductible. Free electronic tax filing You can find the guidelines and requirements for transportation barrier removal at www. Free electronic tax filing fta. Free electronic tax filing dot. Free electronic tax filing gov. Free electronic tax filing   Also, you can access the ADA website at www. Free electronic tax filing ada. Free electronic tax filing gov for additional information. Free electronic tax filing Other barrier removals. Free electronic tax filing   To be deductible, expenses of removing any barrier not covered by the above standards must meet all three of the following tests. Free electronic tax filing The removed barrier must be a substantial barrier to access or use of a facility or public transportation vehicle by persons who have a disability or are elderly. Free electronic tax filing The removed barrier must have been a barrier for at least one major group of persons who have a disability or are elderly (such as people who are blind, deaf, or wheelchair users). Free electronic tax filing The barrier must be removed without creating any new barrier that significantly impairs access to or use of the facility or vehicle by a major group of persons who have a disability or are elderly. Free electronic tax filing How to make the election. Free electronic tax filing   If you elect to deduct your costs for removing barriers to the disabled or the elderly, claim the deduction on your income tax return (partnership return for partnerships) for the tax year the expenses were paid or incurred. Free electronic tax filing Identify the deduction as a separate item. Free electronic tax filing The election applies to all the qualifying costs you have during the year, up to the $15,000 limit. Free electronic tax filing If you make this election, you must maintain adequate records to support your deduction. Free electronic tax filing   For your election to be valid, you generally must file your return by its due date, including extensions. Free electronic tax filing 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). Free electronic tax filing Clearly indicate the election on your amended return and write “Filed pursuant to section 301. Free electronic tax filing 9100-2. Free electronic tax filing ” File the amended return at the same address you filed the original return. Free electronic tax filing Your election is irrevocable after the due date, including extensions, of your return. Free electronic tax filing Disabled access credit. Free electronic tax filing   If you make your business accessible to persons with disabilities and your business is an eligible small business, you may be able to claim the disabled access credit. Free electronic tax filing If you choose to claim the credit, you must reduce the amount you deduct or capitalize by the amount of the credit. Free electronic tax filing   For more information, see Form 8826, Disabled Access Credit. Free electronic tax filing Film and Television Production Costs Film and television production costs are generally capital expenses. Free electronic tax filing However, you can elect to deduct costs paid or incurred for certain productions commencing before January 1, 2014. Free electronic tax filing For more information, see section 181 of the Internal Revenue Code and the related Treasury Regulations. Free electronic tax filing Prev  Up  Next   Home   More Online Publications
Español

U.S. Government Resources in Tagalog

Familia / Family

Education

Kalusugan / Health

Pera at Saka Karapatan / Money and Benefits

Visitors to the United States

The Free Electronic Tax Filing

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