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Free tax filing companies 5. Free tax filing companies   Business Income Table of Contents Introduction Kinds of IncomeBartering for Property or Services Real Estate Rents Personal Property Rents Interest and Dividend Income Canceled Debt Other Income Items That Are Not IncomeAmount you can exclude. Free tax filing companies Short-term lease. Free tax filing companies Retail space. Free tax filing companies Qualified long-term real property. Free tax filing companies Guidelines for Selected Occupations Accounting for Your Income Introduction This chapter primarily explains business income and how to account for it on your tax return, what items are not considered income, and gives guidelines for selected occupations. Free tax filing companies If there is a connection between any income you receive and your business, the income is business income. Free tax filing companies A connection exists if it is clear that the payment of income would not have been made if you did not have the business. Free tax filing companies You can have business income even if you are not involved in the activity on a regular full-time basis. Free tax filing companies Income from work you do on the side in addition to your regular job can be business income. Free tax filing companies You report most business income, such as income from selling your products or services, on Schedule C or C-EZ. Free tax filing companies But you report the income from the sale of business assets, such as land and office buildings, on other forms instead of Schedule C or C-EZ. Free tax filing companies For information on selling business assets, see chapter 3. Free tax filing companies Nonemployee compensation. Free tax filing companies Business income includes amounts you received in your business that were properly shown on Forms 1099-MISC. Free tax filing companies This includes amounts reported as nonemployee compensation in box 7 of the form. Free tax filing companies You can find more information in the instructions on the back of the Form 1099-MISC you received. Free tax filing companies Kinds of Income You must report on your tax return all income you receive from your business unless it is excluded by law. Free tax filing companies In most cases, your business income will be in the form of cash, checks, and credit card charges. Free tax filing companies But business income can be in other forms, such as property or services. Free tax filing companies These and other types of income are explained next. Free tax filing companies If you are a U. Free tax filing companies S. Free tax filing companies citizen who has business income from sources outside the United States (foreign income), you must report that income on your tax return unless it is exempt from tax under U. Free tax filing companies S. Free tax filing companies law. Free tax filing companies If you live outside the United States, you may be able to exclude part or all of your foreign-source business income. Free tax filing companies For details, see Publication 54, Tax Guide for U. Free tax filing companies S. Free tax filing companies Citizens and Resident Aliens Abroad. Free tax filing companies Bartering for Property or Services Bartering is an exchange of property or services. Free tax filing companies You must include in your gross receipts, at the time received, the fair market value of property or services you receive in exchange for something else. Free tax filing companies If you exchange services with another person and you both have agreed ahead of time on the value of the services, that value will be accepted as the fair market value unless the value can be shown to be otherwise. Free tax filing companies Example 1. Free tax filing companies You are a self-employed lawyer. Free tax filing companies You perform legal services for a client, a small corporation. Free tax filing companies In payment for your services, you receive shares of stock in the corporation. Free tax filing companies You must include the fair market value of the shares in income. Free tax filing companies Example 2. Free tax filing companies You are an artist and create a work of art to compensate your landlord for the rent-free use of your apartment. Free tax filing companies You must include the fair rental value of the apartment in your gross receipts. Free tax filing companies Your landlord must include the fair market value of the work of art in his or her rental income. Free tax filing companies Example 3. Free tax filing companies You are a self-employed accountant. Free tax filing companies Both you and a house painter are members of a barter club, an organization that each year gives its members a directory of members and the services each member provides. Free tax filing companies Members get in touch with other members directly and bargain for the value of the services to be performed. Free tax filing companies In return for accounting services you provided for the house painter's business, the house painter painted your home. Free tax filing companies You must include in gross receipts the fair market value of the services you received from the house painter. Free tax filing companies The house painter must include the fair market value of your accounting services in his or her gross receipts. Free tax filing companies Example 4. Free tax filing companies You are a member of a barter club that uses credit units to credit or debit members' accounts for goods or services provided or received. Free tax filing companies As soon as units are credited to your account, you can use them to buy goods or services or sell or transfer the units to other members. Free tax filing companies You must include the value of credit units you received in your gross receipts for the tax year in which the units are credited to your account. Free tax filing companies The dollar value of units received for services by an employee of the club, who can use the units in the same manner as other members, must be included in the employee's gross income for the tax year in which received. Free tax filing companies It is wages subject to social security and Medicare taxes (FICA), federal unemployment taxes (FUTA), and income tax withholding. Free tax filing companies See Publication 15 (Circular E), Employer's Tax Guide. Free tax filing companies Example 5. Free tax filing companies You operate a plumbing business and use the cash method of accounting. Free tax filing companies You join a barter club and agree to provide plumbing services to any member for a specified number of hours. Free tax filing companies Each member has access to a directory that lists the members of the club and the services available. Free tax filing companies Members contact each other directly and request services to be performed. Free tax filing companies You are not required to provide services unless requested by another member, but you can use as many of the offered services as you wish without paying a fee. Free tax filing companies You must include the fair market value of any services you receive from club members in your gross receipts when you receive them even if you have not provided any services to club members. Free tax filing companies Information returns. Free tax filing companies   If you are involved in a bartering transaction, you may have to file either of the following forms. Free tax filing companies Form 1099-B, Proceeds From Broker and Barter Exchange Transactions. Free tax filing companies Form 1099-MISC, Miscellaneous Income. Free tax filing companies For information about these forms, see the General Instructions for Certain Information Returns. Free tax filing companies Real Estate Rents If you are a real estate dealer who receives income from renting real property or an owner of a hotel, motel, etc. Free tax filing companies , who provides services (maid services, etc. Free tax filing companies ) for guests, report the rental income and expenses on Schedule C or C-EZ. Free tax filing companies If you are not a real estate dealer or the kind of owner described in the preceding sentence, report the rental income and expenses on Schedule E. Free tax filing companies For more information, see Publication 527, Residential Rental Property (Including Rental of Vacation Homes). Free tax filing companies Real estate dealer. Free tax filing companies   You are a real estate dealer if you are engaged in the business of selling real estate to customers with the purpose of making a profit from those sales. Free tax filing companies Rent you receive from real estate held for sale to customers is subject to SE tax. Free tax filing companies However, rent you receive from real estate held for speculation or investment is not subject to SE tax. Free tax filing companies Trailer park owner. Free tax filing companies   Rental income from a trailer park is subject to SE tax if you are a self-employed trailer park owner who provides trailer lots and facilities and substantial services for the convenience of your tenants. Free tax filing companies    You generally are considered to provide substantial services for tenants if they are primarily for the tenants' convenience and normally are not provided to maintain the lots in a condition for occupancy. Free tax filing companies Services are substantial if the compensation for the services makes up a material part of the tenants' rental payments. Free tax filing companies   Examples of services that are not normally provided for the tenants' convenience include supervising and maintaining a recreational hall provided by the park, distributing a monthly newsletter to tenants, operating a laundry facility, and helping tenants buy or sell their trailers. Free tax filing companies   Examples of services that are normally provided to maintain the lots in a condition for tenant occupancy include city sewerage, electrical connections, and roadways. Free tax filing companies Hotels, boarding houses, and apartments. Free tax filing companies   Rental income you receive for the use or occupancy of hotels, boarding houses, or apartment houses is subject to SE tax if you provide services for the occupants. Free tax filing companies   Generally, you are considered to provide services for the occupants if the services are primarily for their convenience and are not services normally provided with the rental of rooms for occupancy only. Free tax filing companies An example of a service that is not normally provided for the convenience of the occupants is maid service. Free tax filing companies However, providing heat and light, cleaning stairways and lobbies, and collecting trash are services normally provided for the occupants' convenience. Free tax filing companies Prepaid rent. Free tax filing companies   Advance payments received under a lease that does not put any restriction on their use or enjoyment are income in the year you receive them. Free tax filing companies This is true no matter what accounting method or period you use. Free tax filing companies Lease bonus. Free tax filing companies   A bonus you receive from a lessee for granting a lease is an addition to the rent. Free tax filing companies Include it in your gross receipts in the year received. Free tax filing companies Lease cancellation payments. Free tax filing companies   Report payments you receive from your lessee for canceling a lease in your gross receipts in the year received. Free tax filing companies Payments to third parties. Free tax filing companies   If your lessee makes payments to someone else under an agreement to pay your debts or obligations, include the payments in your gross receipts when the lessee makes the payments. Free tax filing companies A common example of this kind of income is a lessee's payment of your property taxes on leased real property. Free tax filing companies Settlement payments. Free tax filing companies   Payments you receive in settlement of a lessee's obligation to restore the leased property to its original condition are income in the amount that the payments exceed the adjusted basis of the leasehold improvements destroyed, damaged, removed, or disconnected by the lessee. Free tax filing companies Personal Property Rents If you are in the business of renting personal property (equipment, vehicles, formal wear, etc. Free tax filing companies ), include the rental amount you receive in your gross receipts on Schedule C or C-EZ. Free tax filing companies Prepaid rent and other payments described in the preceding Real Estate Rents discussion can also be received for renting personal property. Free tax filing companies If you receive any of those payments, include them in your gross receipts as explained in that discussion. Free tax filing companies Interest and Dividend Income Interest and dividends may be considered business income. Free tax filing companies Interest. Free tax filing companies   Interest received on notes receivable that you have accepted in the ordinary course of business is business income. Free tax filing companies Interest received on loans is business income if you are in the business of lending money. Free tax filing companies Uncollectible loans. Free tax filing companies   If a loan payable to you becomes uncollectible during the tax year and you use an accrual method of accounting, you must include in gross income interest accrued up to the time the loan became uncollectible. Free tax filing companies If the accrued interest later becomes uncollectible, you may be able to take a bad debt deduction. Free tax filing companies See Bad Debts in chapter 8. Free tax filing companies Unstated interest. Free tax filing companies   If little or no interest is charged on an installment sale, you may have to treat a part of each payment as unstated interest. Free tax filing companies See Unstated Interest and Original Issue Discount (OID) in Publication 537, Installment Sales. Free tax filing companies Dividends. Free tax filing companies   Generally, dividends are business income to dealers in securities. Free tax filing companies For most sole proprietors and statutory employees, however, dividends are nonbusiness income. Free tax filing companies If you hold stock as a personal investment separately from your business activity, the dividends from the stock are nonbusiness income. Free tax filing companies   If you receive dividends from business insurance premiums you deducted in an earlier year, you must report all or part of the dividend as business income on your return. Free tax filing companies To find out how much you have to report, see   Recovery of items previously deducted under Other Income, later. Free tax filing companies Canceled Debt The following explains the general rule for including canceled debt in income and the exceptions to the general rule. Free tax filing companies General Rule Generally, if your debt is canceled or forgiven, other than as a gift or bequest to you, you must include the canceled amount in your gross income for tax purposes. Free tax filing companies Report the canceled amount on line 6 of Schedule C if you incurred the debt in your business. Free tax filing companies If the debt is a nonbusiness debt, report the canceled amount on line 21 of Form 1040. Free tax filing companies Exceptions The following discussion covers some exceptions to the general rule for canceled debt. Free tax filing companies Price reduced after purchase. Free tax filing companies   If you owe a debt to the seller for property you bought and the seller reduces the amount you owe, you generally do not have income from the reduction. Free tax filing companies Unless you are bankrupt or insolvent, treat the amount of the reduction as a purchase price adjustment and reduce your basis in the property. Free tax filing companies Deductible debt. Free tax filing companies   You do not realize income from a canceled debt to the extent the payment of the debt would have led to a deduction. Free tax filing companies Example. Free tax filing companies You get accounting services for your business on credit. Free tax filing companies Later, you have trouble paying your business debts, but you are not bankrupt or insolvent. Free tax filing companies Your accountant forgives part of the amount you owe for the accounting services. Free tax filing companies How you treat the canceled debt depends on your method of accounting. Free tax filing companies Cash method — You do not include the canceled debt in income because payment of the debt would have been deductible as a business expense. Free tax filing companies Accrual method — You include the canceled debt in income because the expense was deductible when you incurred the debt. Free tax filing companies   For information on the cash and accrual methods of accounting, see chapter 2. Free tax filing companies Exclusions Do not include canceled debt in income in the following situations. Free tax filing companies However, you may be required to file Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness. Free tax filing companies For more information, see Form 982. Free tax filing companies The cancellation takes place in a bankruptcy case under title 11 of the U. Free tax filing companies S. Free tax filing companies Code (relating to bankruptcy). Free tax filing companies See Publication 908, Bankruptcy Tax Guide. Free tax filing companies The cancellation takes place when you are insolvent. Free tax filing companies You can exclude the canceled debt to the extent you are insolvent. Free tax filing companies See Publication 908. Free tax filing companies The canceled debt is a qualified farm debt owed to a qualified person. Free tax filing companies See chapter 3 in Publication 225, Farmer's Tax Guide. Free tax filing companies The canceled debt is a qualified real property business debt. Free tax filing companies This situation is explained later. Free tax filing companies The canceled debt is qualified principal residence indebtedness which is discharged after 2006. Free tax filing companies See Form 982. Free tax filing companies If a canceled debt is excluded from income because it takes place in a bankruptcy case, the exclusions in situations 2 through 5 do not apply. Free tax filing companies If it takes place when you are insolvent, the exclusions in situations 3 and 4 do not apply to the extent you are insolvent. Free tax filing companies Debt. Free tax filing companies   For purposes of this discussion, debt includes any debt for which you are liable or which attaches to property you hold. Free tax filing companies Qualified real property business debt. Free tax filing companies   You can elect to exclude (up to certain limits) the cancellation of qualified real property business debt. Free tax filing companies If you make the election, you must reduce the basis of your depreciable real property by the amount excluded. Free tax filing companies Make this reduction at the beginning of your tax year following the tax year in which the cancellation occurs. Free tax filing companies However, if you dispose of the property before that time, you must reduce its basis immediately before the disposition. Free tax filing companies Cancellation of qualified real property business debt. Free tax filing companies   Qualified real property business debt is debt (other than qualified farm debt) that meets all the following conditions. Free tax filing companies It was incurred or assumed in connection with real property used in a trade or business. Free tax filing companies It was secured by such real property. Free tax filing companies It was incurred or assumed at either of the following times. Free tax filing companies Before January 1, 1993. Free tax filing companies After December 31, 1992, if incurred or assumed to acquire, construct, or substantially improve the real property. Free tax filing companies It is debt to which you choose to apply these rules. Free tax filing companies   Qualified real property business debt includes refinancing of debt described in (3) earlier, but only to the extent it does not exceed the debt being refinanced. Free tax filing companies   You cannot exclude more than either of the following amounts. Free tax filing companies The excess (if any) of: The outstanding principal of qualified real property business debt (immediately before the cancellation), over The fair market value (immediately before the cancellation) of the business real property that is security for the debt, reduced by the outstanding principal amount of any other qualified real property business debt secured by this property immediately before the cancellation. Free tax filing companies The total adjusted bases of depreciable real property held by you immediately before the cancellation. Free tax filing companies These adjusted bases are determined after any basis reduction due to a cancellation in bankruptcy, insolvency, or of qualified farm debt. Free tax filing companies Do not take into account depreciable real property acquired in contemplation of the cancellation. Free tax filing companies Election. Free tax filing companies   To make this election, complete Form 982 and attach it to your income tax return for the tax year in which the cancellation occurs. Free tax filing companies You must file your return by the due date (including extensions). Free tax filing companies 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 tax filing companies For more information, see When To File in the form instructions. Free tax filing companies Other Income The following discussion explains how to treat other types of business income you may receive. Free tax filing companies Restricted property. Free tax filing companies   Restricted property is property that has certain restrictions that affect its value. Free tax filing companies If you receive restricted stock or other property for services performed, the fair market value of the property in excess of your cost is included in your income on Schedule C or C-EZ when the restriction is lifted. Free tax filing companies However, you can choose to be taxed in the year you receive the property. Free tax filing companies For more information on including restricted property in income, see Publication 525, Taxable and Nontaxable Income. Free tax filing companies Gains and losses. Free tax filing companies   Do not report on Schedule C or C-EZ a gain or loss from the disposition of property that is neither stock in trade nor held primarily for sale to customers. Free tax filing companies Instead, you must report these gains and losses on other forms. Free tax filing companies For more information, see chapter 3. Free tax filing companies Promissory notes. Free tax filing companies   Report promissory notes and other evidences of debt issued to you in a sale or exchange of property that is stock in trade or held primarily for sale to customers on Schedule C or C-EZ. Free tax filing companies In general, you report them at their stated principal amount (minus any unstated interest) when you receive them. Free tax filing companies Lost income payments. Free tax filing companies   If you reduce or stop your business activities, report on Schedule C or C-EZ any payment you receive for the lost income of your business from insurance or other sources. Free tax filing companies Report it on Schedule C or C-EZ even if your business is inactive when you receive the payment. Free tax filing companies Damages. Free tax filing companies   You must include in gross income compensation you receive during the tax year as a result of any of the following injuries connected with your business. Free tax filing companies Patent infringement. Free tax filing companies Breach of contract or fiduciary duty. Free tax filing companies Antitrust injury. Free tax filing companies Economic injury. Free tax filing companies   You may be entitled to a deduction against the income if it compensates you for actual economic injury. Free tax filing companies Your deduction is the smaller of the following amounts. Free tax filing companies The amount you receive or accrue for damages in the tax year reduced by the amount you pay or incur in the tax year to recover that amount. Free tax filing companies Your loss from the injury that you have not yet deducted. Free tax filing companies Punitive damages. Free tax filing companies   You must also include punitive damages in income. Free tax filing companies Kickbacks. Free tax filing companies   If you receive any kickbacks, include them in your income on Schedule C or C-EZ. Free tax filing companies However, do not include them if you properly treat them as a reduction of a related expense item, a capital expenditure, or cost of goods sold. Free tax filing companies Recovery of items previously deducted. Free tax filing companies   If you recover a bad debt or any other item deducted in a previous year, include the recovery in income on Schedule C or C-EZ. Free tax filing companies However, if all or part of the deduction in earlier years did not reduce your tax, you can exclude the part that did not reduce your tax. Free tax filing companies If you exclude part of the recovery from income, you must include with your return a computation showing how you figured the exclusion. Free tax filing companies Example. Free tax filing companies Joe Smith, a sole proprietor, had gross income of $8,000, a bad debt deduction of $300, and other allowable deductions of $7,700. Free tax filing companies He also had 2 personal exemptions for a total of $7,800. Free tax filing companies He would not pay income tax even if he did not deduct the bad debt. Free tax filing companies Therefore, he will not report as income any part of the $300 he may recover in any future year. Free tax filing companies Exception for depreciation. Free tax filing companies   This rule does not apply to depreciation. Free tax filing companies You recover depreciation using the rules explained next. Free tax filing companies Recapture of depreciation. Free tax filing companies   In the following situations, you have to recapture the depreciation deduction. Free tax filing companies This means you include in income part or all of the depreciation you deducted in previous years. Free tax filing companies Listed property. Free tax filing companies   If your business use of listed property (explained in chapter 8 under Depreciation ) falls to 50% or less in a tax year after the tax year you placed the property in service, you may have to recapture part of the depreciation deduction. Free tax filing companies You do this by including in income on Schedule C part of the depreciation you deducted in previous years. Free tax filing companies Use Part IV of Form 4797, Sales of Business Property, to figure the amount to include on Schedule C. Free tax filing companies For more information, see What is the Business-Use Requirement? in chapter 5 of Publication 946, How To Depreciate Property. Free tax filing companies That chapter explains how to determine whether property is used more than 50% in your business. Free tax filing companies Section 179 property. Free tax filing companies   If you take a section 179 deduction (explained in chapter 8 under Depreciation ) for an asset and before the end of the asset's recovery period the percentage of business use drops to 50% or less, you must recapture part of the section 179 deduction. Free tax filing companies You do this by including in income on Schedule C part of the deduction you took. Free tax filing companies Use Part IV of Form 4797 to figure the amount to include on Schedule C. Free tax filing companies See chapter 2 in Publication 946 to find out when you recapture the deduction. Free tax filing companies Sale or exchange of depreciable property. Free tax filing companies   If you sell or exchange depreciable property at a gain, you may have to treat all or part of the gain due to depreciation as ordinary income. Free tax filing companies You figure the income due to depreciation recapture in Part III of Form 4797. Free tax filing companies For more information, see chapter 4 in Publication 544, Sales and Other Dispositions of Assets. Free tax filing companies Items That Are Not Income In some cases the property or money you receive is not income. Free tax filing companies Appreciation. Free tax filing companies   Increases in value of your property are not income until you realize the increases through a sale or other taxable disposition. Free tax filing companies Consignments. Free tax filing companies   Consignments of merchandise to others to sell for you are not sales. Free tax filing companies The title of merchandise remains with you, the consignor, even after the consignee possesses the merchandise. Free tax filing companies Therefore, if you ship goods on consignment, you have no profit or loss until the consignee sells the merchandise. Free tax filing companies Merchandise you have shipped out on consignment is included in your inventory until it is sold. Free tax filing companies   Do not include merchandise you receive on consignment in your inventory. Free tax filing companies Include your profit or commission on merchandise consigned to you in your income when you sell the merchandise or when you receive your profit or commission, depending upon the method of accounting you use. Free tax filing companies Construction allowances. Free tax filing companies   If you enter into a lease after August 5, 1997, you can exclude from income the construction allowance you receive (in cash or as a rent reduction) from your landlord if you receive it under both the following conditions. Free tax filing companies Under a short-term lease of retail space. Free tax filing companies For the purpose of constructing or improving qualified long-term real property for use in your business at that retail space. Free tax filing companies Amount you can exclude. Free tax filing companies   You can exclude the construction allowance to the extent it does not exceed the amount you spent for construction or improvements. Free tax filing companies Short-term lease. Free tax filing companies   A short-term lease is a lease (or other agreement for occupancy or use) of retail space for 15 years or less. Free tax filing companies The following rules apply in determining whether the lease is for 15 years or less. Free tax filing companies Take into account options to renew when figuring whether the lease is for 15 years or less. Free tax filing companies But do not take into account any option to renew at fair market value determined at the time of renewal. Free tax filing companies Two or more successive leases that are part of the same transaction (or a series of related transactions) for the same or substantially similar retail space are treated as one lease. Free tax filing companies Retail space. Free tax filing companies   Retail space is real property leased, occupied, or otherwise used by you as a tenant in your business of selling tangible personal property or services to the general public. Free tax filing companies Qualified long-term real property. Free tax filing companies   Qualified long-term real property is nonresidential real property that is part of, or otherwise present at, your retail space and that reverts to the landlord when the lease ends. Free tax filing companies Exchange of like-kind property. Free tax filing companies   If you exchange your business property or property you hold for investment solely for property of a like kind to be used in your business or to be held for investment, no gain or loss is recognized. Free tax filing companies This means that the gain is not taxable and the loss is not deductible. Free tax filing companies A common type of nontaxable exchange is the trade-in of a business automobile for another business automobile. Free tax filing companies For more information, see Form 8824. Free tax filing companies Leasehold improvements. Free tax filing companies   If a tenant erects buildings or makes improvements to your property, the increase in the value of the property due to the improvements is not income to you. Free tax filing companies However, if the facts indicate that the improvements are a payment of rent to you, then the increase in value would be income. Free tax filing companies Loans. Free tax filing companies   Money borrowed through a bona fide loan is not income. Free tax filing companies Sales tax. Free tax filing companies   State and local sales taxes imposed on the buyer, which you were required to collect and pay over to state or local governments, are not income. Free tax filing companies Guidelines for Selected Occupations This section provides information to determine whether your earnings should be reported on Schedule C (Form 1040) or C-EZ (Form 1040). Free tax filing companies Direct seller. Free tax filing companies   You must report all income you receive as a direct seller on Schedule C or C-EZ. Free tax filing companies This includes any of the following. Free tax filing companies Income from sales—payments you receive from customers for products they buy from you. Free tax filing companies Commissions, bonuses, or percentages you receive for sales and the sales of others who work under you. Free tax filing companies Prizes, awards, and gifts you receive from your selling business. Free tax filing companies You must report this income regardless of whether it is reported to you on an information return. Free tax filing companies   You are a direct seller if you meet all the following conditions. Free tax filing companies You are engaged in one of the following trades or businesses. Free tax filing companies Selling or soliciting the sale of consumer products either in a home or other place that is not a permanent retail establishment, or to any buyer on a buy-sell basis or a deposit-commission basis for resale in a home or other place of business that is not a permanent retail establishment. Free tax filing companies Delivering or distributing newspapers or shopping news (including any services directly related to that trade or business). Free tax filing companies Substantially all your pay (whether paid in cash or not) for services described above is directly related to sales or other output (including performance of services) rather than to the number of hours worked. Free tax filing companies Your services are performed under a written contract between you and the person for whom you perform the services, and the contract provides that you will not be treated as an employee for federal tax purposes. Free tax filing companies Executor or administrator. Free tax filing companies   If you administer a deceased person's estate, your fees are reported on Schedule C or C-EZ if you are one of the following: A professional fiduciary. Free tax filing companies A nonprofessional fiduciary (personal representative) and both of the following apply. Free tax filing companies The estate includes an active trade or business in which you actively participate. Free tax filing companies Your fees are related to the operation of that trade or business. Free tax filing companies A nonprofessional fiduciary of a single estate that requires extensive managerial activities on your part for a long period of time, provided these activities are enough to be considered a trade or business. Free tax filing companies    If the fees do not meet the above requirements, report them on line 21 of Form 1040. Free tax filing companies Fishing crew member. Free tax filing companies    If you are a member of the crew that catches fish or other water life, your earnings are reported on Schedule C or C-EZ if you meet all the requirements shown in chapter 10 under Fishing crew member . Free tax filing companies Insurance agent, former. Free tax filing companies   Termination payments you receive as a former self-employed insurance agent from an insurance company because of services you performed for that company are not reported on Schedule C or C-EZ if all the following conditions are met. Free tax filing companies You received payments after your agreement to perform services for the company ended. Free tax filing companies You did not perform any services for the company after your service agreement ended and before the end of the year in which you received the payment. Free tax filing companies You entered into a covenant not to compete against the company for at least a 1-year period beginning on the date your service agreement ended. Free tax filing companies The amount of the payments depended primarily on policies sold by you or credited to your account during the last year of your service agreement or the extent to which those policies remain in force for some period after your service agreement ended, or both. Free tax filing companies The amount of the payment did not depend to any extent on length of service or overall earnings from services performed for the company (regardless of whether eligibility for the payments depended on length of service). Free tax filing companies Insurance agent, retired. Free tax filing companies   Income paid by an insurance company to a retired self-employed insurance agent based on a percentage of commissions received before retirement is reported on Schedule C or C-EZ. Free tax filing companies Also, renewal commissions and deferred commissions for sales made before retirement are generally reported on Schedule C or C-EZ. Free tax filing companies   However, renewal commissions paid to the survivor of an insurance agent are not reported on Schedule C or C-EZ. Free tax filing companies Newspaper carrier or distributor. Free tax filing companies   You are a direct seller and your earnings are reported on Schedule C or C-EZ if all the following conditions apply. Free tax filing companies You are in the business of delivering or distributing newspapers or shopping news (including directly related services such as soliciting customers and collecting receipts). Free tax filing companies Substantially all your pay for these services directly relates to your sales or other output rather than to the number of hours you work. Free tax filing companies You perform the services under a written contract that says you will not be treated as an employee for federal tax purposes. Free tax filing companies   This rule applies whether or not you hire others to help you make deliveries. Free tax filing companies It also applies whether you buy the papers from the publisher or are paid based on the number of papers you deliver. Free tax filing companies Newspaper or magazine vendor. Free tax filing companies   If you are 18 or older and you sell newspapers or magazines, your earnings are reported on Schedule C or C-EZ if all the following conditions apply. Free tax filing companies You sell newspapers or magazines to ultimate consumers. Free tax filing companies You sell them at a fixed price. Free tax filing companies Your earnings are based on the difference between the sales price and your cost of goods sold. Free tax filing companies   This rule applies whether or not you are guaranteed a minimum amount of earnings. Free tax filing companies It also applies whether or not you receive credit for unsold newspapers or magazines you return to your supplier. Free tax filing companies Notary public. Free tax filing companies   Fees you receive for services you perform as a notary public are reported on Schedule C or C-EZ. Free tax filing companies These payments are not subject to self-employment tax (see the instructions for Schedule SE (Form 1040)). Free tax filing companies Public official. Free tax filing companies   Public officials generally do not report what they earn for serving in public office on Schedule C or C-EZ. Free tax filing companies This rule applies to payments received by an elected tax collector from state funds on the basis of a fixed percentage of the taxes collected. Free tax filing companies Public office includes any elective or appointive office of the United States or its possessions, the District of Columbia, a state or its political subdivisions, or a wholly owned instrumentality of any of these. Free tax filing companies   Public officials of state or local governments report their fees on Schedule C or C-EZ if they are paid solely on a fee basis and if their services are eligible for, but not covered by, social security under a federal-state agreement. Free tax filing companies Real estate agent or direct seller. Free tax filing companies   If you are a licensed real estate agent or a direct seller, your earnings are reported on Schedule C or C-EZ if both the following apply. Free tax filing companies Substantially all your pay for services as a real estate agent or direct seller directly relates to your sales or other output rather than to the number of hours you work. Free tax filing companies You perform the services under a written contract that says you will not be treated as an employee for federal tax purposes. Free tax filing companies Securities dealer. Free tax filing companies   If you are a dealer in options or commodities, your gains and losses from dealing or trading in section 1256 contracts (regulated futures contracts, foreign currency contracts, nonequity options, dealer equity options, and dealer securities futures contracts) or property related to those contracts (such as stock used to hedge options) are reported on Schedule C or C-EZ. Free tax filing companies For more information, see sections 1256 and 1402(i). Free tax filing companies Securities trader. Free tax filing companies   You are a trader in securities if you are engaged in the business of buying and selling securities for your own account. Free tax filing companies As a trader in securities, your gain or loss from the disposition of securities is not reported on Schedule C or C-EZ. Free tax filing companies However, see Securities dealer , earlier, for an exception that applies to section 1256 contracts. Free tax filing companies For more information about securities traders, see Publication 550, Investment Income and Expenses. Free tax filing companies Accounting for Your Income Accounting for your income for income tax purposes differs at times from accounting for financial purposes. Free tax filing companies This section discusses some of the more common differences that may affect business transactions. Free tax filing companies Figure your business income on the basis of a tax year and according to your regular method of accounting (see chapter 2). Free tax filing companies If the sale of a product is an income-producing factor in your business, you usually have to use inventories to clearly show your income. Free tax filing companies Dealers in real estate are not allowed to use inventories. Free tax filing companies For more information on inventories, see chapter 2. Free tax filing companies Income paid to a third party. Free tax filing companies   All income you earn is taxable to you. Free tax filing companies You cannot avoid tax by having the income paid to a third party. Free tax filing companies Example. Free tax filing companies You rent out your property and the rental agreement directs the lessee to pay the rent to your son. Free tax filing companies The amount paid to your son is gross income to you. Free tax filing companies Cash discounts. Free tax filing companies   These are amounts the seller permits you to deduct from the invoice price for prompt payment. Free tax filing companies For income tax purposes, you can use either of the following two methods to account for cash discounts. Free tax filing companies Deduct the cash discount from purchases (see Line 36, Purchases Less Cost of Items Withdrawn for Personal Use in chapter 6). Free tax filing companies Credit the cash discount to a discount income account. Free tax filing companies You must use the chosen method every year for all your purchase discounts. Free tax filing companies   If you use the second method, the credit balance in the account at the end of your tax year is business income. Free tax filing companies Under this method, you do not reduce the cost of goods sold by the cash discounts you received. Free tax filing companies When valuing your closing inventory, you cannot reduce the invoice price of merchandise on hand at the close of the tax year by the average or estimated discounts received on the merchandise. Free tax filing companies Trade discounts. Free tax filing companies   These are reductions from list or catalog prices and usually are not written into the invoice or charged to the customer. Free tax filing companies Do not enter these discounts on your books of account. Free tax filing companies Instead, use only the net amount as the cost of the merchandise purchased. Free tax filing companies For more information, see Trade discounts in chapter 6. Free tax filing companies Payment placed in escrow. Free tax filing companies   If the buyer of your property places part or all of the purchase price in escrow, you do not include any part of it in gross sales until you actually or constructively receive it. Free tax filing companies However, upon completion of the terms of the contract and the escrow agreement, you will have taxable income, even if you do not accept the money until the next year. Free tax filing companies Sales returns and allowances. Free tax filing companies   Credits you allow customers for returned merchandise and any other allowances you make on sales are deductions from gross sales in figuring net sales. Free tax filing companies Advance payments. Free tax filing companies   Special rules dealing with an accrual method of accounting for payments received in advance are discussed in chapter 2 under Accrual Method. Free tax filing companies Insurance proceeds. Free tax filing companies   If you receive insurance or another type of reimbursement for a casualty or theft loss, you must subtract it from the loss when you figure your deduction. Free tax filing companies You cannot deduct the reimbursed part of a casualty or theft loss. Free tax filing companies   For information on casualty or theft losses, see Publication 547, Casualties, Disasters, and Thefts. Free tax filing companies Prev  Up  Next   Home   More Online Publications
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Understanding your CP2005 Notice

 
We accepted the information you sent us. We're not going to change your tax return. We've closed our review of it.


What you need to do

  • Read your notice carefully.
  • You don't have to do anything.
  • You don't have to answer the notice.
  • If you have a payment plan for another IRS debt, keep making your payments.

You may want to...

  • Keep a copy of your notice for your files.
  • Contact us if you don't get a refund for any payment you made on the proposed changes we now aren't going to make.
  • Contact us by mail or by calling the toll free number on your notice with any questions we haven't answered below.

Answers to Common Questions

Why did it take you so long to contact me about this matter?
Our computer systems match the information you report on your tax return with information reported by employers, banks, businesses, and others. This matching takes several months to complete.

What if I sent you a payment based on the changes you proposed?
You'll receive a refund check in 4 to 6 weeks as long as you owe no taxes or other debts we have to collect.

What if I petitioned the U.S. Tax Court?
Our Office of Chief Counsel will contact you about closing your petition.

What should I do if you close my case without changing my account and I think you closed it in error?
Please call the toll free number on your notice.

What should I do if I receive another notice or letter?
If the notice or letter is about this matter, pay no attention to it. If it's about another matter, read it carefully and follow its instructions.


Tips for next year

Consider filing your taxes electronically. Filing online can help you avoid mistakes and find credits and deductions that you may qualify for. In many cases you can file for free. Learn more about e-file.

You can avoid future mistakes by:

  • keeping accurate and full records
  • waiting until you get all of your income statements to file your tax return
  • checking the records you get from your employer, mortgage company, bank, or other sources of income (W-2s, 1098s, 1099s, etc.) to make sure they're correct
  • including all the income you received during the year on your tax return
  • following the instructions for your tax return on how to report income, expenses and deductions
  • filing an amended tax return if you receive any additional information after you've filed your return
Page Last Reviewed or Updated: 28-Feb-2014

Printable samples of this notice (PDF)

 

 

How to get help

  • Call the 1-800 number listed on the top right corner of your notice.
  • Authorize someone (e.g., accountant) to contact the IRS on your behalf using Form 2848.
  • See if you qualify for help from a Low Income Taxpayer Clinic.
     

The Free Tax Filing Companies

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