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Irs Form 1040 Ez Instructions

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Irs Form 1040 Ez Instructions

Irs form 1040 ez instructions 5. Irs form 1040 ez instructions   Taxes Table of Contents What's New Introduction Topics - This chapter discusses: Useful Items - You may want to see: When To Deduct Taxes Real Estate TaxesSeparate elections. Irs form 1040 ez instructions Making the election. Irs form 1040 ez instructions Form 3115. Irs form 1040 ez instructions Income TaxesAccrual of contested income taxes. Irs form 1040 ez instructions Employment Taxes Other TaxesAdditional Medicare Tax. Irs form 1040 ez instructions What's New Additional Medicare Tax. Irs form 1040 ez instructions  Beginning in 2013, you must withhold a 0. Irs form 1040 ez instructions 9% Additional Medicare Tax from wages you pay to an employee in excess of $200,000 in a calendar year. Irs form 1040 ez instructions Also, self-employed individuals may be required to pay Additional Medicare Tax on self-employment income. Irs form 1040 ez instructions See Employment Taxes , and Self-employment tax , later. Irs form 1040 ez instructions Introduction You can deduct various federal, state, local, and foreign taxes directly attributable to your trade or business as business expenses. Irs form 1040 ez instructions You cannot deduct federal income taxes, estate and gift taxes, or state inheritance, legacy, and succession taxes. Irs form 1040 ez instructions Topics - This chapter discusses: When to deduct taxes Real estate taxes Income taxes Employment taxes Other taxes Useful Items - You may want to see: Publication 15 (Circular E), Employer's Tax Guide 334 Tax Guide for Small Business 510 Excise Taxes 538 Accounting Periods and Methods 551 Basis of Assets Form (and Instructions) Sch A (Form 1040) Itemized Deductions Sch SE (Form 1040) Self-Employment Tax 3115 Application for Change in Accounting Method 8959 Additional Medicare Tax See chapter 12 for information about getting publications and forms. Irs form 1040 ez instructions When To Deduct Taxes Generally, you can only deduct taxes in the year you pay them. Irs form 1040 ez instructions This applies whether you use the cash method or an accrual method of accounting. Irs form 1040 ez instructions Under an accrual method, you can deduct a tax before you pay it if you meet the exception for recurring items discussed under Economic Performance in Publication 538. Irs form 1040 ez instructions You can also elect to ratably accrue real estate taxes as discussed later under Real Estate Taxes . Irs form 1040 ez instructions Limit on accrual of taxes. Irs form 1040 ez instructions   A taxing jurisdiction can require the use of a date for accruing taxes that is earlier than the date it originally required. Irs form 1040 ez instructions However, if you use an accrual method, and can deduct the tax before you pay it, use the original accrual date for the year of change and all future years to determine when you can deduct the tax. Irs form 1040 ez instructions Example. Irs form 1040 ez instructions Your state imposes a tax on personal property used in a trade or business conducted in the state. Irs form 1040 ez instructions This tax is assessed and becomes a lien as of July 1 (accrual date). Irs form 1040 ez instructions In 2013, the state changed the assessment and lien dates from July 1, 2014, to December 31, 2013, for property tax year 2014. Irs form 1040 ez instructions Use the original accrual date (July 1, 2014) to determine when you can deduct the tax. Irs form 1040 ez instructions You must also use the July 1 accrual date for all future years to determine when you can deduct the tax. Irs form 1040 ez instructions Uniform capitalization rules. Irs form 1040 ez instructions   Uniform capitalization rules apply to certain taxpayers who produce real property or tangible personal property for use in a trade or business or for sale to customers. Irs form 1040 ez instructions They also apply to certain taxpayers who acquire property for resale. Irs form 1040 ez instructions Under these rules, you either include certain costs in inventory or capitalize certain expenses related to the property, such as taxes. Irs form 1040 ez instructions For more information, see chapter 1. Irs form 1040 ez instructions Carrying charges. Irs form 1040 ez instructions   Carrying charges include taxes you pay to carry or develop real estate or to carry, transport, or install personal property. Irs form 1040 ez instructions You can elect to capitalize carrying charges not subject to the uniform capitalization rules if they are otherwise deductible. Irs form 1040 ez instructions For more information, see chapter 7. Irs form 1040 ez instructions Refunds of taxes. Irs form 1040 ez instructions   If you receive a refund for any taxes you deducted in an earlier year, include the refund in income to the extent the deduction reduced your federal income tax in the earlier year. Irs form 1040 ez instructions For more information, see Recovery of amount deducted (tax benefit rule) in chapter 1. Irs form 1040 ez instructions    You must include in income any interest you receive on tax refunds. Irs form 1040 ez instructions Real Estate Taxes Deductible real estate taxes are any state, local, or foreign taxes on real estate levied for the general public welfare. Irs form 1040 ez instructions The taxing authority must base the taxes on the assessed value of the real estate and charge them uniformly against all property under its jurisdiction. Irs form 1040 ez instructions Deductible real estate taxes generally do not include taxes charged for local benefits and improvements that increase the value of the property. Irs form 1040 ez instructions See Taxes for local benefits , later. Irs form 1040 ez instructions If you use an accrual method, you generally cannot accrue real estate taxes until you pay them to the government authority. Irs form 1040 ez instructions However, you can elect to ratably accrue the taxes during the year. Irs form 1040 ez instructions See Electing to ratably accrue , later. Irs form 1040 ez instructions Taxes for local benefits. Irs form 1040 ez instructions   Generally, you cannot deduct taxes charged for local benefits and improvements that tend to increase the value of your property. Irs form 1040 ez instructions These include assessments for streets, sidewalks, water mains, sewer lines, and public parking facilities. Irs form 1040 ez instructions You should increase the basis of your property by the amount of the assessment. Irs form 1040 ez instructions   You can deduct taxes for these local benefits only if the taxes are for maintenance, repairs, or interest charges related to those benefits. Irs form 1040 ez instructions If part of the tax is for maintenance, repairs, or interest, you must be able to show how much of the tax is for these expenses to claim a deduction for that part of the tax. Irs form 1040 ez instructions Example. Irs form 1040 ez instructions To improve downtown commercial business, Waterfront City converted a downtown business area street into an enclosed pedestrian mall. Irs form 1040 ez instructions The city assessed the full cost of construction, financed with 10-year bonds, against the affected properties. Irs form 1040 ez instructions The city is paying the principal and interest with the annual payments made by the property owners. Irs form 1040 ez instructions The assessments for construction costs are not deductible as taxes or as business expenses, but are depreciable capital expenses. Irs form 1040 ez instructions The part of the payments used to pay the interest charges on the bonds is deductible as taxes. Irs form 1040 ez instructions Charges for services. Irs form 1040 ez instructions   Water bills, sewerage, and other service charges assessed against your business property are not real estate taxes, but are deductible as business expenses. Irs form 1040 ez instructions Purchase or sale of real estate. Irs form 1040 ez instructions   If real estate is sold, the real estate taxes must be allocated between the buyer and the seller. Irs form 1040 ez instructions   The buyer and seller must allocate the real estate taxes according to the number of days in the real property tax year (the period to which the tax imposed relates) that each owned the property. Irs form 1040 ez instructions Treat the seller as paying the taxes up to but not including the date of sale. Irs form 1040 ez instructions Treat the buyer as paying the taxes beginning with the date of sale. Irs form 1040 ez instructions You can usually find this information on the settlement statement you received at closing. Irs form 1040 ez instructions   If you (the seller) use an accrual method and have not elected to ratably accrue real estate taxes, you are considered to have accrued your part of the tax on the date you sell the property. Irs form 1040 ez instructions Example. Irs form 1040 ez instructions Alberto Verde, a calendar year accrual method taxpayer, owns real estate in Olmo County. Irs form 1040 ez instructions He has not elected to ratably accrue property taxes. Irs form 1040 ez instructions November 30 of each year is the assessment and lien date for the current real property tax year, which is the calendar year. Irs form 1040 ez instructions He sold the property on June 30, 2013. Irs form 1040 ez instructions Under his accounting method he would not be able to claim a deduction for the taxes because the sale occurred before November 30. Irs form 1040 ez instructions He is treated as having accrued his part of the tax, 181/366  (January 1–June 29), on June 30, and he can deduct it for 2013. Irs form 1040 ez instructions Electing to ratably accrue. Irs form 1040 ez instructions   If you use an accrual method, you can elect to accrue real estate tax related to a definite period ratably over that period. Irs form 1040 ez instructions Example. Irs form 1040 ez instructions Juan Sanchez is a calendar year taxpayer who uses an accrual method. Irs form 1040 ez instructions His real estate taxes for the real property tax year, July 1, 2013, to June 30, 2014, are $1,200. Irs form 1040 ez instructions July 1 is the assessment and lien date. Irs form 1040 ez instructions If Juan elects to ratably accrue the taxes, $600 will accrue in 2013 ($1,200 × 6/12, July 1–December 31) and the balance will accrue in 2014. Irs form 1040 ez instructions Separate elections. Irs form 1040 ez instructions   You can elect to ratably accrue the taxes for each separate trade or business and for nonbusiness activities if you account for them separately. Irs form 1040 ez instructions Once you elect to ratably accrue real estate taxes, you must use that method unless you get permission from the IRS to change. Irs form 1040 ez instructions See Form 3115 , later. Irs form 1040 ez instructions Making the election. Irs form 1040 ez instructions   If you elect to ratably accrue the taxes for the first year in which you incur real estate taxes, attach a statement to your income tax return for that year. Irs form 1040 ez instructions The statement should show all the following items. Irs form 1040 ez instructions The trades or businesses to which the election applies and the accounting method or methods used. Irs form 1040 ez instructions The period to which the taxes relate. Irs form 1040 ez instructions The computation of the real estate tax deduction for that first year. Irs form 1040 ez instructions   Generally, you must file your return by the due date (including extensions). Irs form 1040 ez instructions However, if you timely filed your return for the year without electing to ratably accrue, you can still make the election by filing an amended return within 6 months after the due date of the return (excluding extensions). Irs form 1040 ez instructions Attach the statement to the amended return and write “Filed pursuant to section 301. Irs form 1040 ez instructions 9100-2” on the statement. Irs form 1040 ez instructions File the amended return at the same address where you filed the original return. Irs form 1040 ez instructions Form 3115. Irs form 1040 ez instructions    If you elect to ratably accrue real estate taxes for a year after the first year in which you incur real estate taxes, or if you want to revoke your election to ratably accrue real estate taxes, file Form 3115. Irs form 1040 ez instructions For more information, including applicable time frames for filing, see the Instructions for Form 3115. Irs form 1040 ez instructions Note. Irs form 1040 ez instructions If you are filing an application for a change in accounting method filed after January 9, 2011, for a year of change ending after April 29, 2010, see Revenue Procedure 2011-14, 2011-4 I. Irs form 1040 ez instructions R. Irs form 1040 ez instructions B. Irs form 1040 ez instructions 330, as modified and clarified by Revenue Procedure 2012-19, 2012-14 I. Irs form 1040 ez instructions R. Irs form 1040 ez instructions B. Irs form 1040 ez instructions 689, and Revenue Procedure 2012-20, 2012-14 I. Irs form 1040 ez instructions R. Irs form 1040 ez instructions B. Irs form 1040 ez instructions 700, or any successor. Irs form 1040 ez instructions Revenue Procedure 2011-14 is available at  www. Irs form 1040 ez instructions irs. Irs form 1040 ez instructions gov/irb/2011-04IRB/ar08. Irs form 1040 ez instructions html. Irs form 1040 ez instructions Income Taxes This section discusses federal, state, local, and foreign income taxes. Irs form 1040 ez instructions Federal income taxes. Irs form 1040 ez instructions   You cannot deduct federal income taxes. Irs form 1040 ez instructions State and local income taxes. Irs form 1040 ez instructions   A corporation or partnership can deduct state and local income taxes imposed on the corporation or partnership as business expenses. Irs form 1040 ez instructions An individual can deduct state and local income taxes only as an itemized deduction on Schedule A (Form 1040). Irs form 1040 ez instructions   However, an individual can deduct a state tax on gross income (as distinguished from net income) directly attributable to a trade or business as a business expense. Irs form 1040 ez instructions Accrual of contested income taxes. Irs form 1040 ez instructions   If you use an accrual method, and you contest a state or local income tax liability, you must accrue and deduct any contested amount in the tax year in which the liability is finally determined. Irs form 1040 ez instructions   If additional state or local income taxes for a prior year are assessed in a later year, you can deduct the taxes in the year in which they were originally imposed (the prior year) if the tax liability is not contested. Irs form 1040 ez instructions You cannot deduct them in the year in which the liability is finally determined. Irs form 1040 ez instructions    The filing of an income tax return is not considered a contest and, in the absence of an overt act of protest, you can deduct the tax in the prior year. Irs form 1040 ez instructions Also, you can deduct any additional taxes in the prior year if you do not show some affirmative evidence of denial of the liability. Irs form 1040 ez instructions   However, if you consistently deduct additional assessments in the year they are paid or finally determined (including those for which there was no contest), you must continue to do so. Irs form 1040 ez instructions You cannot take a deduction in the earlier year unless you receive permission to change your method of accounting. Irs form 1040 ez instructions For more information on accounting methods, see When Can I Deduct an Expense in chapter 1. Irs form 1040 ez instructions Foreign income taxes. Irs form 1040 ez instructions   Generally, you can take either a deduction or a credit for income taxes imposed on you by a foreign country or a U. Irs form 1040 ez instructions S. Irs form 1040 ez instructions possession. Irs form 1040 ez instructions However, an individual cannot take a deduction or credit for foreign income taxes paid on income that is exempt from U. Irs form 1040 ez instructions S. Irs form 1040 ez instructions tax under the foreign earned income exclusion or the foreign housing exclusion. Irs form 1040 ez instructions For information on these exclusions, see Publication 54, Tax Guide for U. Irs form 1040 ez instructions S. Irs form 1040 ez instructions Citizens and Resident Aliens Abroad. Irs form 1040 ez instructions For information on the foreign tax credit, see Publication 514, Foreign Tax Credit for Individuals. Irs form 1040 ez instructions Employment Taxes If you have employees, you must withhold various taxes from your employees' pay. Irs form 1040 ez instructions Most employers must withhold their employees' share of social security, Medicare taxes, and Additional Medicare Tax (if applicable) along with state and federal income taxes. Irs form 1040 ez instructions You may also need to pay certain employment taxes from your own funds. Irs form 1040 ez instructions These include your share of social security and Medicare taxes as an employer, along with unemployment taxes. Irs form 1040 ez instructions Note. Irs form 1040 ez instructions Additional Medicare Tax is only imposed on the employee. Irs form 1040 ez instructions There is no employer share of Additional Medicare Tax. Irs form 1040 ez instructions Your deduction for wages paid is not reduced by the social security and Medicare taxes, Additional Medicare Tax, and income taxes you withhold from your employees. Irs form 1040 ez instructions You can deduct the employment taxes you must pay from your own funds as taxes. Irs form 1040 ez instructions Example. Irs form 1040 ez instructions You pay your employee $18,000 a year. Irs form 1040 ez instructions However, after you withhold various taxes, your employee receives $14,500. Irs form 1040 ez instructions You also pay an additional $1,500 in employment taxes. Irs form 1040 ez instructions You should deduct the full $18,000 as wages. Irs form 1040 ez instructions You can deduct the $1,500 you pay from your own funds as taxes. Irs form 1040 ez instructions For more information on employment taxes, see Publication 15 (Circular E). Irs form 1040 ez instructions Unemployment fund taxes. Irs form 1040 ez instructions   As an employer, you may have to make payments to a state unemployment compensation fund or to a state disability benefit fund. Irs form 1040 ez instructions Deduct these payments as taxes. Irs form 1040 ez instructions Other Taxes The following are other taxes you can deduct if you incur them in the ordinary course of your trade or business. Irs form 1040 ez instructions Excise taxes. Irs form 1040 ez instructions   Generally, you can deduct as a business expense all excise taxes that are ordinary and necessary expenses of carrying on your trade or business. Irs form 1040 ez instructions However, see Fuel taxes , later. Irs form 1040 ez instructions   For more information on excise taxes, see Publication 510. Irs form 1040 ez instructions Franchise taxes. Irs form 1040 ez instructions   You can deduct corporate franchise taxes as a business expense. Irs form 1040 ez instructions Fuel taxes. Irs form 1040 ez instructions   Generally, taxes on gasoline, diesel fuel, and other motor fuels that you use in your business are included as part of the cost of the fuel. Irs form 1040 ez instructions Do not deduct these taxes as a separate item. Irs form 1040 ez instructions   You may be entitled to a credit or refund for federal excise tax you paid on fuels used for certain purposes. Irs form 1040 ez instructions For more information, see Publication 510. Irs form 1040 ez instructions Occupational taxes. Irs form 1040 ez instructions   You can deduct as a business expense an occupational tax charged at a flat rate by a locality for the privilege of working or conducting a business in the locality. Irs form 1040 ez instructions Personal property tax. Irs form 1040 ez instructions   You can deduct any tax imposed by a state or local government on personal property used in your trade or business. Irs form 1040 ez instructions Sales tax. Irs form 1040 ez instructions   Treat any sales tax you pay on a service or on the purchase or use of property as part of the cost of the service or property. Irs form 1040 ez instructions If the service or the cost or use of the property is a deductible business expense, you can deduct the tax as part of that service or cost. Irs form 1040 ez instructions If the property is merchandise bought for resale, the sales tax is part of the cost of the merchandise. Irs form 1040 ez instructions If the property is depreciable, add the sales tax to the basis for depreciation. Irs form 1040 ez instructions For more information on basis, see Publication 551. Irs form 1040 ez instructions    Do not deduct state and local sales taxes imposed on the buyer that you must collect and pay over to the state or local government. Irs form 1040 ez instructions Also, do not include these taxes in gross receipts or sales. Irs form 1040 ez instructions Self-employment tax. Irs form 1040 ez instructions   You can deduct part of your self-employment tax as a business expense in figuring your adjusted gross income. Irs form 1040 ez instructions This deduction only affects your income tax. Irs form 1040 ez instructions It does not affect your net earnings from self-employment or your self-employment tax. Irs form 1040 ez instructions   To deduct the tax, enter on Form 1040, line 27, the amount shown on the Deduction for one-half of self-employment tax line of Schedule SE (Form 1040). Irs form 1040 ez instructions   For more information on self-employment tax, see Publication 334. Irs form 1040 ez instructions Additional Medicare Tax. Irs form 1040 ez instructions   Beginning in 2013, you may be required to pay Additional Medicare Tax on self-employment income. Irs form 1040 ez instructions See Form 8959 and the Instructions for Form 8959 for more information on the Additional Medicare Tax. Irs form 1040 ez instructions Prev  Up  Next   Home   More Online Publications
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The Irs Form 1040 Ez Instructions

Irs form 1040 ez instructions 6. Irs form 1040 ez instructions   How To Figure Cost of Goods Sold Table of Contents Introduction Figuring Cost of Goods Sold on Schedule C, Lines 35 Through 42Line 35 Inventory at Beginning of Year Line 36 Purchases Less Cost of Items Withdrawn for Personal Use Line 37 Cost of Labor Line 38 Materials and Supplies Line 39 Other Costs Line 40 Add Lines 35 through 39 Line 41 Inventory at End of Year Line 42 Cost of Goods Sold Introduction If you make or buy goods to sell, you can deduct the cost of goods sold from your gross receipts on Schedule C. Irs form 1040 ez instructions However, to determine these costs, you must value your inventory at the beginning and end of each tax year. Irs form 1040 ez instructions This chapter applies to you if you are a manufacturer, wholesaler, or retailer or if you are engaged in any business that makes, buys, or sells goods to produce income. Irs form 1040 ez instructions This chapter does not apply to a personal service business, such as the business of a doctor, lawyer, carpenter, or painter. Irs form 1040 ez instructions However, if you work in a personal service business and also sell or charge for the materials and supplies normally used in your business, this chapter applies to you. Irs form 1040 ez instructions If you must account for an inventory in your business, you must generally use an accrual method of accounting for your purchases and sales. Irs form 1040 ez instructions For more information, see chapter 2. Irs form 1040 ez instructions Figuring Cost of Goods Sold on Schedule C, Lines 35 Through 42 Figure your cost of goods sold by filling out lines 35 through 42 of Schedule C. Irs form 1040 ez instructions These lines are reproduced below and are explained in the discussion that follows. Irs form 1040 ez instructions 35 Inventory at beginning of year. Irs form 1040 ez instructions If different from last year's closing inventory, attach explanation   36 Purchases less cost of items withdrawn for personal use   37 Cost of labor. Irs form 1040 ez instructions Do not include any amounts paid to yourself   38 Materials and supplies   39 Other costs   40 Add lines 35 through 39   41 Inventory at end of year   42 Cost of goods sold. Irs form 1040 ez instructions Subtract line 41 from line 40. Irs form 1040 ez instructions  Enter the result here and on line 4   Line 35 Inventory at Beginning of Year If you are a merchant, beginning inventory is the cost of merchandise on hand at the beginning of the year that you will sell to customers. Irs form 1040 ez instructions If you are a manufacturer or producer, it includes the total cost of raw materials, work in process, finished goods, and materials and supplies used in manufacturing the goods (see Inventories in chapter 2). Irs form 1040 ez instructions Opening inventory usually will be identical to the closing inventory of the year before. Irs form 1040 ez instructions You must explain any difference in a schedule attached to your return. Irs form 1040 ez instructions Donation of inventory. Irs form 1040 ez instructions   If you contribute inventory (property that you sell in the course of your business), the amount you can claim as a contribution deduction is the smaller of its fair market value on the day you contributed it or its basis. Irs form 1040 ez instructions The basis of donated inventory is any cost incurred for the inventory in an earlier year that you would otherwise include in your opening inventory for the year of the contribution. Irs form 1040 ez instructions You must remove the amount of your contribution deduction from your opening inventory. Irs form 1040 ez instructions It is not part of the cost of goods sold. Irs form 1040 ez instructions   If the cost of donated inventory is not included in your opening inventory, the inventory's basis is zero and you cannot claim a charitable contribution deduction. Irs form 1040 ez instructions Treat the inventory's cost as you would ordinarily treat it under your method of accounting. Irs form 1040 ez instructions For example, include the purchase price of inventory bought and donated in the same year in the cost of goods sold for that year. Irs form 1040 ez instructions   A special rule may apply to certain donations of food inventory. Irs form 1040 ez instructions See Publication 526, Charitable Contributions. Irs form 1040 ez instructions Example 1. Irs form 1040 ez instructions You are a calendar year taxpayer who uses an accrual method of accounting. Irs form 1040 ez instructions In 2013, you contributed property from inventory to a church. Irs form 1040 ez instructions It had a fair market value of $600. Irs form 1040 ez instructions The closing inventory at the end of 2012 properly included $400 of costs due to the acquisition of the property, and in 2012, you properly deducted $50 of administrative and other expenses attributable to the property as business expenses. Irs form 1040 ez instructions The charitable contribution allowed for 2013 is $400 ($600 − $200). Irs form 1040 ez instructions The $200 is the amount that would be ordinary income if you had sold the contributed inventory at fair market value on the date of the gift. Irs form 1040 ez instructions The cost of goods sold you use in determining gross income for 2013 must not include the $400. Irs form 1040 ez instructions You remove that amount from opening inventory for 2013. Irs form 1040 ez instructions Example 2. Irs form 1040 ez instructions If, in Example 1, you acquired the contributed property in 2013 at a cost of $400, you would include the $400 cost of the property in figuring the cost of goods sold for 2013 and deduct the $50 of administrative and other expenses attributable to the property for that year. Irs form 1040 ez instructions You would not be allowed any charitable contribution deduction for the contributed property. Irs form 1040 ez instructions Line 36 Purchases Less Cost of Items Withdrawn for Personal Use If you are a merchant, use the cost of all merchandise you bought for sale. Irs form 1040 ez instructions If you are a manufacturer or producer, this includes the cost of all raw materials or parts purchased for manufacture into a finished product. Irs form 1040 ez instructions Trade discounts. Irs form 1040 ez instructions   The differences between the stated prices of articles and the actual prices you pay for them are called trade discounts. Irs form 1040 ez instructions You must use the prices you pay (not the stated prices) in figuring your cost of purchases. Irs form 1040 ez instructions Do not show the discount amount separately as an item in gross income. Irs form 1040 ez instructions   An automobile dealer must record the cost of a car in inventory reduced by any manufacturer's rebate that represents a trade discount. Irs form 1040 ez instructions Cash discounts. Irs form 1040 ez instructions   Cash discounts are amounts your suppliers let you deduct from your purchase invoices for prompt payments. Irs form 1040 ez instructions There are two methods of accounting for cash discounts. Irs form 1040 ez instructions You can either credit them to a separate discount account or deduct them from total purchases for the year. Irs form 1040 ez instructions Whichever method you use, you must be consistent. Irs form 1040 ez instructions If you want to change your method of figuring inventory cost, you must file Form 3115, Application for Change in Accounting Method. Irs form 1040 ez instructions For more information, see Change in Accounting Method in chapter 2. Irs form 1040 ez instructions   If you credit cash discounts to a separate account, you must include this credit balance in your business income at the end of the tax year. Irs form 1040 ez instructions If you use this method, do not reduce your cost of goods sold by the cash discounts. Irs form 1040 ez instructions Purchase returns and allowances. Irs form 1040 ez instructions   You must deduct all returns and allowances from your total purchases during the year. Irs form 1040 ez instructions Merchandise withdrawn from sale. Irs form 1040 ez instructions   If you withdraw merchandise for your personal or family use, you must exclude this cost from the total amount of merchandise you bought for sale. Irs form 1040 ez instructions Do this by crediting the purchases or sales account with the cost of merchandise you withdraw for personal use. Irs form 1040 ez instructions You must also charge the amount to your drawing account. Irs form 1040 ez instructions   A drawing account is a separate account you should keep to record the business income you withdraw to pay for personal and family expenses. Irs form 1040 ez instructions As stated above, you also use it to record withdrawals of merchandise for personal or family use. Irs form 1040 ez instructions This account is also known as a “withdrawals account” or “personal account. Irs form 1040 ez instructions ” Line 37 Cost of Labor Labor costs are usually an element of cost of goods sold only in a manufacturing or mining business. Irs form 1040 ez instructions Small merchandisers (wholesalers, retailers, etc. Irs form 1040 ez instructions ) usually do not have labor costs that can properly be charged to cost of goods sold. Irs form 1040 ez instructions In a manufacturing business, labor costs properly allocable to the cost of goods sold include both the direct and indirect labor used in fabricating the raw material into a finished, saleable product. Irs form 1040 ez instructions Direct labor. Irs form 1040 ez instructions   Direct labor costs are the wages you pay to those employees who spend all their time working directly on the product being manufactured. Irs form 1040 ez instructions They also include a part of the wages you pay to employees who work directly on the product part time if you can determine that part of their wages. Irs form 1040 ez instructions Indirect labor. Irs form 1040 ez instructions   Indirect labor costs are the wages you pay to employees who perform a general factory function that does not have any immediate or direct connection with making the saleable product, but that is a necessary part of the manufacturing process. Irs form 1040 ez instructions Other labor. Irs form 1040 ez instructions   Other labor costs not properly chargeable to the cost of goods sold can be deducted as selling or administrative expenses. Irs form 1040 ez instructions Generally, the only kinds of labor costs properly chargeable to your cost of goods sold are the direct or indirect labor costs and certain other costs treated as overhead expenses properly charged to the manufacturing process, as discussed later under Line 39 Other Costs. Irs form 1040 ez instructions Line 38 Materials and Supplies Materials and supplies, such as hardware and chemicals, used in manufacturing goods are charged to cost of goods sold. Irs form 1040 ez instructions Those that are not used in the manufacturing process are treated as deferred charges. Irs form 1040 ez instructions You deduct them as a business expense when you use them. Irs form 1040 ez instructions Business expenses are discussed in chapter 8. Irs form 1040 ez instructions Line 39 Other Costs Examples of other costs incurred in a manufacturing or mining process that you charge to your cost of goods sold are as follows. Irs form 1040 ez instructions Containers. Irs form 1040 ez instructions   Containers and packages that are an integral part of the product manufactured are a part of your cost of goods sold. Irs form 1040 ez instructions If they are not an integral part of the manufactured product, their costs are shipping or selling expenses. Irs form 1040 ez instructions Freight-in. Irs form 1040 ez instructions   Freight-in, express-in, and cartage-in on raw materials, supplies you use in production, and merchandise you purchase for sale are all part of cost of goods sold. Irs form 1040 ez instructions Overhead expenses. Irs form 1040 ez instructions   Overhead expenses include expenses such as rent, heat, light, power, insurance, depreciation, taxes, maintenance, labor, and supervision. Irs form 1040 ez instructions The overhead expenses you have as direct and necessary expenses of the manufacturing operation are included in your cost of goods sold. Irs form 1040 ez instructions Line 40 Add Lines 35 through 39 The total of lines 35 through 39 equals the cost of the goods available for sale during the year. Irs form 1040 ez instructions Line 41 Inventory at End of Year Subtract the value of your closing inventory (including, as appropriate, the allocable parts of the cost of raw materials and supplies, direct labor, and overhead expenses) from line 40. Irs form 1040 ez instructions Inventory at the end of the year is also known as closing or ending inventory. Irs form 1040 ez instructions Your ending inventory will usually become the beginning inventory of your next tax year. Irs form 1040 ez instructions Line 42 Cost of Goods Sold When you subtract your closing inventory (inventory at the end of the year) from the cost of goods available for sale, the remainder is your cost of goods sold during the tax year. Irs form 1040 ez instructions Prev  Up  Next   Home   More Online Publications