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School Tax Forms

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School Tax Forms

School tax forms Publication 559 - Introductory Material Table of Contents Future Developments Reminders Introduction Useful Items - You may want to see: Future Developments For the latest information about developments affecting Publication 559, such as legislation enacted after we release it, go to www. School tax forms irs. School tax forms gov/pub559. School tax forms Reminders Throughout this publication, section references are to the Internal Revenue Code unless otherwise noted. School tax forms Consistent treatment of estate and trust items. School tax forms  Beneficiaries must generally treat estate items the same way on their individual returns as they are treated on the estate's return. School tax forms Photographs of missing children. School tax forms  The Internal Revenue Service is a proud partner with the National Center for Missing and Exploited Children. School tax forms Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. School tax forms You can help bring these children home by looking at the photographs and calling 1-800-THE-LOST (1-800-843-5678) if you recognize a child. School tax forms Introduction This publication is designed to help those in charge (personal representatives) of the property (estate) of an individual who has died (decedent). School tax forms It shows them how to complete and file federal income tax returns and explains their responsibility to pay any taxes due on behalf of the decedent. School tax forms A comprehensive example of the decedent's final tax return, Form 1040, and estate's income tax return, Form 1041, are included in this publication. School tax forms The publication also explains how much money or property a taxpayer can give away during their lifetime or leave to their heirs at their death before any tax will be owed. School tax forms A discussion of Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return, and Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, is included. School tax forms Also included in this publication are the following items: A checklist of the forms you may need and their due dates. School tax forms A worksheet to reconcile amounts reported in the decedent's name on information returns including Forms W-2, 1099-INT, 1099-DIV, etc. School tax forms The worksheet will help you correctly determine the income to report on the decedent's final return and on the return for either the estate or a beneficiary. School tax forms Comments and suggestions. School tax forms   We welcome your comments about this publication and your suggestions for future editions. School tax forms   You can send us comments from http://www. School tax forms irs. School tax forms gov/formspubs. School tax forms Click on “More Information” and then on “Give us Feedback. School tax forms ” Or you can also send your comments to the Internal Revenue Service, Tax Forms and Publications Division, 1111 Constitution Ave. School tax forms NW, IR-6526, Washington, DC 20224. School tax forms Useful Items - You may want to see: Publication 3 Armed Forces' Tax Guide Form (and Instructions) SS-4 Application for Employer Identification Number 56 Notice Concerning Fiduciary Relationship 1040 U. School tax forms S. School tax forms Individual Income Tax Return 1041 U. School tax forms S. School tax forms Income Tax Return for Estates and Trusts 706 United States Estate (and Generation-Skipping Transfer) Tax Return 709 United States Gift (and Generation-Skipping Transfer) Tax Return 1310 Statement of Person Claiming Refund Due a Deceased Taxpayer  See How To Get Tax Help near the end of this publication for information about getting publications and forms. School tax forms Also near the end of this publication is Table A, a checklist of forms and their due dates for the executor, administrator, or personal representative. School tax forms Prev  Up  Next   Home   More Online Publications
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The School Tax Forms

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