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

1. Get Answers

Your online questions are customized to your unique tax situation.

2. Maximize your Refund

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

3. E-File for FREE

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

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

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

Taxes 2010

Form 1040nr SoftwareH&r Block State Taxes1040x ExampleState Tax For FreeWhere's My Amended ReturnIrs Tax Forms 1040ezFile Form 1040x FreeFree Amended Tax ReturnE File 2011 Tax ReturnStudents And TaxesHow Do I File A 2012 Tax ReturnFiling Late Taxes For 2012Income Tax PreparationEtax ComTurbo Tax 1040nrAmended Tax Return DeadlineHelp With 1040x1040ez InstructionTax Credits For StudentsAmending Tax Return OnlineFile Online 1040ezH And R Tax1040ez Tax Form 2014Military Tax Calculator1040ez File On LineHow To File A 2012 Tax Return1040x Amended Return FormIrs Form 1040a Or 1040ezFile Amended Tax Return 2010 OnlineHow Can I File My 2012 Taxes OnlineFile Free State Return Online2006 Tax FormsMilitary Tax Return CalculatorHow Do You Amend A Tax ReturnHandrblockFiling Taxes 2014How Do I Amend My 2012 Tax ReturnFederal Tax Forms 2012How To File An Amended 2011 Tax ReturnIrs Freefile

Taxes 2010

Taxes 2010 7. Taxes 2010   Filing Information Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: What, When, and Where To FileResident Aliens Nonresident Aliens Amended Returns and Claims for Refund Other Forms You May Have To File PenaltiesCivil Penalties Criminal Penalties Introduction This chapter provides the basic filing information that you may need. Taxes 2010 Topics - This chapter discusses: Forms aliens must file, When and where to file, Penalties, and Amended returns and claims for refund. Taxes 2010 Useful Items - You may want to see: Forms (and Instructions) 1040 U. Taxes 2010 S. Taxes 2010 Individual Income Tax Return 1040A U. Taxes 2010 S. Taxes 2010 Individual Income Tax Return 1040EZ Income Tax Return for Single and Joint Filers With No Dependents 1040NR U. Taxes 2010 S. Taxes 2010 Nonresident Alien Income Tax Return 1040NR-EZ U. Taxes 2010 S. Taxes 2010 Income Tax Return for Certain Nonresident Aliens With No Dependents See chapter 12 for information about getting these forms. Taxes 2010 What, When, and Where To File What return you must file as well as when and where you file that return, depends on your status at the end of the tax year as a resident or a nonresident alien. Taxes 2010 Resident Aliens Resident aliens should file Form 1040EZ, 1040A, or 1040 at the address shown in the instructions for that form. Taxes 2010 The due date for filing the return and paying any tax due is April 15 of the year following the year for which you are filing a return (but see the Tip, later). Taxes 2010 Under U. Taxes 2010 S. Taxes 2010 immigration law, a lawful permanent resident who is required to file a tax return as a resident and fails to do so may be regarded as having abandoned status and may lose permanent resident status. Taxes 2010 Extensions of time to file. Taxes 2010   You are allowed an automatic extension to June 15 to file if your main place of business and the home you live in are outside the United States and Puerto Rico on April 15. Taxes 2010 You can get an extension of time to October 15 to file your return if you get an extension by April 15 (June 15 if you qualify for the June 15 extension). Taxes 2010 Use Form 4868 to get the extension to October 15. Taxes 2010 In addition to this 6-month extension, taxpayers who are out of the country (as defined in the Form 4868 instructions) can request a discretionary 2-month additional extension of time to file their returns (to December 15 for calendar year taxpayers). Taxes 2010 To request this extension, you must send the IRS a letter explaining the reasons why you need the additional 2 months. Taxes 2010 Send the letter by the extended due date (October 15 for calendar year taxpayers) to the following address:  Department of the Treasury Internal Revenue Service Center Austin, TX 73301-0215   You will not receive any notification from the IRS unless your request is denied for being untimely. Taxes 2010   The discretionary 2-month additional extension is not available to taxpayers who have an approved extension of time to file on Form 2350 (for U. Taxes 2010 S. Taxes 2010 citizens and resident aliens abroad who expect to qualify for special tax treatment). Taxes 2010    If the due date for filing falls on a Saturday, Sunday, or legal holiday, the due date is the next day which is not a Saturday, Sunday, or legal holiday. Taxes 2010 You may be able to file your return electronically. Taxes 2010 See IRS e-file in your form instructions. Taxes 2010 Nonresident Aliens Nonresident aliens who are required to file an income tax return should use Form 1040NR or, if qualified, Form 1040NR-EZ. Taxes 2010 If you are any of the following, you must file a return. Taxes 2010 A nonresident alien individual engaged or considered to be engaged in a trade or business in the United States during 2013. Taxes 2010 (But see Exceptions , later. Taxes 2010 ) You must file even if: Your income did not come from a trade or business conducted in the United States, You have no income from U. Taxes 2010 S. Taxes 2010 sources, or Your income is exempt from income tax. Taxes 2010 A nonresident alien individual not engaged in a trade or business in the United States with U. Taxes 2010 S. Taxes 2010 income on which the tax liability was not satisfied by the withholding of tax at the source. Taxes 2010 A representative or agent responsible for filing the return of an individual described in (1) or (2). Taxes 2010 A fiduciary for a nonresident alien estate or trust. Taxes 2010 You must also file if you want to: Claim a refund of overwithheld or overpaid tax, or Claim the benefit of any deductions or credits. Taxes 2010 For example, if you have no U. Taxes 2010 S. Taxes 2010 business activities but have income from real property that you choose to treat as effectively connected income (discussed in chapter 4), you must timely file a true and accurate return to take any allowable deductions against that income. Taxes 2010 For information on what is timely, see When to file for deductions and credits under When To File, later. Taxes 2010 Exceptions. Taxes 2010   You do not need to file Form 1040NR or Form 1040NR-EZ if you meet either of the following conditions. Taxes 2010 Your only U. Taxes 2010 S. Taxes 2010 trade or business was the performance of personal services, and Your wages were less than $3,900, and You have no other need to file a return to claim a refund of overwithheld taxes, to satisfy additional withholding at source, or to claim income exempt or partly exempt by treaty. Taxes 2010 You were a nonresident alien student, teacher, or trainee who was temporarily present in the United States under an “F,” “J,” “M,” or “Q” visa and you have no income that is subject to tax, such as wages, tips, scholarship and fellowship grants, dividends, etc. Taxes 2010 Even if you have left the United States and filed a Form 1040-C, U. Taxes 2010 S. Taxes 2010 Departing Alien Income Tax Return, on departure, you still must file an annual U. Taxes 2010 S. Taxes 2010 income tax return. Taxes 2010 If you are married and both you and your spouse are required to file, you must each file a separate return. Taxes 2010 Form 1040NR-EZ You can use Form 1040NR-EZ if all of the following conditions are met. Taxes 2010 You do not claim any dependents. Taxes 2010 You cannot be claimed as a dependent on someone else's U. Taxes 2010 S. Taxes 2010 tax return. Taxes 2010 If you were married, you do not claim an exemption for your spouse. Taxes 2010 Your taxable income is less than $100,000. Taxes 2010 The only itemized deduction you can claim is for state and local income taxes. Taxes 2010 Note. Taxes 2010 Residents of India who were students or business apprentices may be able to take the standard deduction instead of the itemized deduction for state and local income taxes. Taxes 2010 See chapter 5. Taxes 2010 Your only U. Taxes 2010 S. Taxes 2010 source income is from wages, salaries, tips, taxable refunds of state and local income taxes, scholarship or fellowship grants, and nontaxable interest or dividends. Taxes 2010 (If you had taxable interest or dividend income, you cannot use this form. Taxes 2010 ) You are not claiming any adjustments to income other than the student loan interest deduction or scholarship and fellowship grants excluded. Taxes 2010 You are not claiming any tax credits. Taxes 2010 This is not an “expatriation return. Taxes 2010 ” See Expatriation Tax in chapter 4. Taxes 2010 The only taxes you owe are: The income tax from the Tax Table. Taxes 2010 The social security and Medicare tax from Form 4137 or Form 8919. Taxes 2010 You are not claiming a credit for excess social security and tier 1 RRTA tax withheld. Taxes 2010 You are not filing Form 8959, to figure the amount of Additional Medicare Tax you owe and/or the amount of Additional Medicare Tax withheld by your employer, if any. Taxes 2010 If you do not meet all of the above conditions, you must file Form 1040NR. Taxes 2010 When To File If you are an employee and you receive wages subject to U. Taxes 2010 S. Taxes 2010 income tax withholding, you will generally file by the 15th day of the 4th month after your tax year ends. Taxes 2010 For the 2013 calendar year, file your return by April 15, 2014. Taxes 2010 If you are not an employee who receives wages subject to U. Taxes 2010 S. Taxes 2010 income tax withholding, you must file by the 15th day of the 6th month after your tax year ends. Taxes 2010 For the 2013 calendar year, file your return by June 16, 2014 (because June 15 is a Sunday. Taxes 2010 ) Extensions of time to file. Taxes 2010   If you cannot file your return by the due date, file Form 4868 or use one of the electronic filing options explained in the Form 4868 instructions. Taxes 2010 For the 2013 calendar year, this will extend the due date to October 15, 2014 (December 15, 2014, if the regular due date of your return is June 16, 2014). Taxes 2010 You must file the extension by the regular due date of your return. Taxes 2010   In addition to the 6-month extension to October 15, taxpayers whose main place of business is outside the United States and Puerto Rico and who live outside those jurisdictions can request a discretionary 2-month extension of time to file their returns (to December 15 for calendar year taxpayers). Taxes 2010 To request this extension, you must send the IRS a letter explaining the reasons why you need the additional 2 months. Taxes 2010 Send the letter by the extended due date (October 15 for calendar year taxpayers) to the following address: Department of the Treasury Internal Revenue Service Center Austin, TX 73301-0215   You will not receive any notification from the IRS unless your request is denied for being untimely. Taxes 2010 When to file for deductions and credits. Taxes 2010   To get the benefit of any allowable deductions or credits, you must timely file a true and accurate return. Taxes 2010 For this purpose, a return is timely if it is filed within 16 months of the due date just discussed. Taxes 2010 However, if you did not file a 2012 tax return and 2013 is not the first year for which you are required to file one, your 2013 return is timely for this purpose if it is filed by the earlier of: The date that is 16 months after the due date for filing your 2013 return, or The date the IRS notifies you that your 2013 return has not been filed and that you cannot claim certain deductions and credits. Taxes 2010 The allowance of the following credits is not affected by this time requirement. Taxes 2010 Credit for withheld taxes. Taxes 2010 Credit for excise tax on certain uses of gasoline and special fuels. Taxes 2010 Credit for tax paid by a mutual fund (or other regulated investment company) or a real estate investment trust on undistributed long-term capital gains. Taxes 2010 Protective return. Taxes 2010   If your activities in the United States were limited and you do not believe that you had any gross income effectively connected with a U. Taxes 2010 S. Taxes 2010 trade or business during the year, you can file a protective return (Form 1040NR) by the deadline explained above. Taxes 2010 By filing a protective return, you protect your right to receive the benefit of deductions and credits in the event it is later determined that some or all of your income is effectively connected. Taxes 2010 You are not required to report any effectively connected income or any deductions on the protective return, but you must give the reason the return is being filed. Taxes 2010   If you believe some of your activities resulted in effectively connected income, file your return reporting that income and related deductions by the regular due date. Taxes 2010 To protect your right to claim deductions or credits resulting from other activities, attach a statement to that return explaining that you wish to protect your right to claim deductions and credits if it is later determined that the other activities produced effectively connected income. Taxes 2010   You can follow the same procedure if you believe you have no U. Taxes 2010 S. Taxes 2010 tax liability because of a U. Taxes 2010 S. Taxes 2010 tax treaty. Taxes 2010 Be sure to also complete item L on page 5 of Form 1040NR. Taxes 2010 Waiver of filing deadline. Taxes 2010   The IRS may waive the filing deadline if you establish that, based on the facts and circumstances, you acted reasonably and in good faith in failing to file a U. Taxes 2010 S. Taxes 2010 income tax return (including a protective return) and you cooperate with the IRS in determining your U. Taxes 2010 S. Taxes 2010 income tax liability for the tax year for which you did not file a return. Taxes 2010 Where To File If you are not enclosing a payment, file Form 1040NR-EZ and Form 1040NR at the following address. Taxes 2010  Department of the Treasury Internal Revenue Service Center Austin, TX 73301-0215 If enclosing a payment, mail your return to:  Internal Revenue Service  P. Taxes 2010 O. Taxes 2010 Box 1303 Charlotte, NC 28201-1303 Aliens from the U. Taxes 2010 S. Taxes 2010 Virgin Islands. Taxes 2010    If you are a bona fide resident of the U. Taxes 2010 S. Taxes 2010 Virgin Islands during your entire tax year and work temporarily in the United States, you must pay your income taxes to the U. Taxes 2010 S. Taxes 2010 Virgin Islands and file your income tax returns at the following address. Taxes 2010 Virgin Islands Bureau of Internal Revenue 6115 Estate Smith Bay Suite 225 St. Taxes 2010 Thomas, VI 00802   Report all income from U. Taxes 2010 S. Taxes 2010 sources, as well as income from other sources, on your return. Taxes 2010 For information on filing U. Taxes 2010 S. Taxes 2010 Virgin Islands returns, contact the U. Taxes 2010 S. Taxes 2010 Virgin Islands Bureau of Internal Revenue. Taxes 2010   Chapter 8 discusses withholding from U. Taxes 2010 S. Taxes 2010 wages of U. Taxes 2010 S. Taxes 2010 Virgin Islanders. Taxes 2010 Aliens from Guam or the Commonwealth of the Northern Mariana Islands. Taxes 2010   If you are a bona fide resident of Guam or the Commonwealth of the Northern Mariana Islands (CNMI) during your entire tax year, you must file your return with, and pay any tax due to, Guam or the CNMI. Taxes 2010 Report all income, including income from U. Taxes 2010 S. Taxes 2010 sources, on your return. Taxes 2010 It is not necessary to file a separate U. Taxes 2010 S. Taxes 2010 income tax return. Taxes 2010    Bona fide residents of Guam should file their Guam returns at the following address. Taxes 2010   Department of Revenue and Taxation Government of Guam P. Taxes 2010 O. Taxes 2010 Box 23607 GMF, GU 96921    Bona fide residents of the CNMI should file their CNMI income tax returns at the following address. Taxes 2010   Department of Finance Division of Revenue and Taxation Commonwealth of the Northern Mariana Islands P. Taxes 2010 O. Taxes 2010 Box 5234 CHRB Saipan, MP 96950   If you are not a bona fide resident of Guam or the CNMI, see Pub. Taxes 2010 570, Tax Guide for Individuals With Income From U. Taxes 2010 S. Taxes 2010 Possessions, for information on where to file your return. Taxes 2010 Amended Returns and Claims for Refund If you find changes in your income, deductions, or credits after you mail your return, file Form 1040X, Amended U. Taxes 2010 S. Taxes 2010 Individual Income Tax Return. Taxes 2010 Also use Form 1040X if you should have filed Form 1040, 1040A, or 1040EZ instead of Form 1040NR or 1040NR-EZ, or vice versa. Taxes 2010 If you amend Form 1040NR or Form 1040NR-EZ or file the correct return, attach the corrected return (Form 1040, Form 1040NR, etc. Taxes 2010 ) to Form 1040X. Taxes 2010 Print “Amended” across the top. Taxes 2010 Ordinarily, an amended return claiming a refund must be filed within 3 years from the date your return was filed or within 2 years from the time the tax was paid, whichever is later. Taxes 2010 A return filed before the final due date is considered to have been filed on the due date. Taxes 2010 Other Forms You May Have To File You may be required to file information returns to report certain foreign income or assets, or monetary transactions. Taxes 2010 FinCen Form 105 FinCEN Form 105 (formerly Customs Form 4790), Report of International Transportation of Currency or Monetary Instruments, must be filed by each person who physically transports, mails, or ships, or causes to be physically transported, mailed, or shipped, currency or other monetary instruments in a total amount of more than $10,000 at one time from the United States to any place outside the United States, or into the United States from any place outside the United States. Taxes 2010 The filing requirement also applies to each person who receives in the United States currency or monetary instruments totaling more than $10,000 at one time from any place outside of the United States. Taxes 2010 The term “monetary instruments” means the following: Coin and currency of the United States or of any other country, Travelers' checks in any form, Investment securities or stock in bearer form or otherwise in such form that title to them passes upon delivery, Negotiable instruments (including checks, promissory notes, and money orders) in bearer form, endorsed without restriction, made out to a fictitious payee, or otherwise in such form that title to them passes upon delivery, and Checks, promissory notes, and money orders which are signed but on which the name of the payee has been omitted. Taxes 2010 However, the term does not include: Checks or money orders made payable to the order of a named person which have not been endorsed or which contain restrictive endorsements, Warehouse receipts, or Bills of lading. Taxes 2010 A transfer of funds through normal banking procedures (wire transfer) that does not involve the physical transportation of currency or monetary instruments is not required to be reported on FinCEN Form 105. Taxes 2010 Filing requirements. Taxes 2010   FinCEN Form 105 filing requirements follow. Taxes 2010 Recipients. Taxes 2010   Each person who receives currency or other monetary instruments in the United States must file FinCEN Form 105 within 15 days after receipt, with the Customs officer in charge at any port of entry or departure, or by mail at the following address. Taxes 2010 Commissioner of Customs  Attention: Currency Transportation Reports Washington, DC 20229 Shippers or mailers. Taxes 2010   If the currency or other monetary instrument does not accompany the person entering or departing the United States, FinCEN Form 105 can be filed by mail at the above address on or before the date of entry, departure, mailing, or shipping. Taxes 2010 Travelers. Taxes 2010   Travelers must file FinCEN Form 105 with the Customs officer in charge at any Customs port of entry or departure, when entering or departing the United States. Taxes 2010 Penalties. Taxes 2010   Civil and criminal penalties are provided for failing to file a report, filing a report containing material omissions or misstatements, or filing a false or fraudulent report. Taxes 2010 Also, the entire amount of the currency or monetary instrument may be subject to seizure and forfeiture. Taxes 2010 More information. Taxes 2010   More information regarding the filing of FinCEN Form 105 can be found in the instructions on the back of the form. Taxes 2010 Form 8938 You may have to file Form 8938, Statement of Specified Foreign Financial Assets, to report the ownership of specified foreign financial asset(s) if you are one of the following individuals. Taxes 2010 A resident alien of the United States for any part of the tax year. Taxes 2010 A resident alien of the United States who elects to be treated as a resident of a foreign country under the provisions of a U. Taxes 2010 S. Taxes 2010 income tax treaty. Taxes 2010 See Effect of Tax Treaties in chapter 1. Taxes 2010 A nonresident alien who makes an election to be treated as a resident alien for purposes of filing a joint income tax return. Taxes 2010 See chapter 1 for information about this election. Taxes 2010 A nonresident alien who is a bona fide resident of American Samoa or Puerto Rico. Taxes 2010 See Publication 570, Tax Guide for Individuals With Income From U. Taxes 2010 S. Taxes 2010 Possessions, for a definition of bona fide resident. Taxes 2010 You must file Form 8938 if the total value of those assets exceeds an applicable threshold (the “reporting threshold”). Taxes 2010 The reporting threshold varies depending on whether you live in the United States, are married, or file a joint income tax return with your spouse. Taxes 2010 Specified foreign financial assets include any financial account maintained by a foreign financial institution and, to the extent held for investment, any stock, securities, or any other interest in a foreign entity and any financial instrument or contract with an issuer or counterparty that is not a U. Taxes 2010 S. Taxes 2010 person. Taxes 2010 You may have to pay penalties if you are required to file Form 8938 and fail to do so, or if you have an understatement of tax due to any transaction involving an undisclosed foreign financial asset. Taxes 2010 More information about the filing of Form 8938 can be found in the separate instructions for Form 8938. Taxes 2010 Penalties The law provides penalties for failure to file returns or pay taxes as required. Taxes 2010 Civil Penalties If you do not file your return and pay your tax by the due date, you may have to pay a penalty. Taxes 2010 You may also have to pay a penalty if you substantially understate your tax, file a frivolous tax submission, or fail to supply your taxpayer identification number. Taxes 2010 If you provide fraudulent information on your return, you may have to pay a civil fraud penalty. Taxes 2010 Filing late. Taxes 2010   If you do not file your return by the due date (including extensions), you may have to pay a failure-to-file penalty. Taxes 2010 The penalty is based on the tax not paid by the due date (without regard to extensions). Taxes 2010 The penalty is usually 5% for each month or part of a month that a return is late, but not more than 25%. Taxes 2010 Fraud. Taxes 2010   If your failure to file is due to fraud, the penalty is 15% for each month or part of a month that your return is late, up to a maximum of 75%. Taxes 2010 Return over 60 days late. Taxes 2010   If you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100% of the unpaid tax. Taxes 2010 Exception. Taxes 2010   You will not have to pay the penalty if you show that you failed to file on time because of reasonable cause and not because of willful neglect. Taxes 2010 Paying tax late. Taxes 2010   You will have to pay a failure-to-pay penalty of ½ of 1% (. Taxes 2010 50%) of your unpaid taxes for each month, or part of a month, after the due date that the tax is not paid. Taxes 2010 This penalty does not apply during the automatic 6-month extension of time to file period, if you paid at least 90% of your actual tax liability on or before the due date of your return and pay the balance when you file the return. Taxes 2010   The monthly rate of the failure-to-pay penalty is half the usual rate (. Taxes 2010 25% instead of . Taxes 2010 50%) if an installment agreement is in effect for that month. Taxes 2010 You must have filed your return by the due date (including extensions) to qualify for this reduced penalty. Taxes 2010   If a notice of intent to levy is issued, the rate will increase to 1% at the start of the first month beginning at least 10 days after the day that the notice is issued. Taxes 2010 If a notice and demand for immediate payment is issued, the rate will increase to 1% at the start of the first month beginning after the day that the notice and demand is issued. Taxes 2010   This penalty cannot be more than 25% of your unpaid tax. Taxes 2010 You will not have to pay the penalty if you can show that you had a good reason for not paying your tax on time. Taxes 2010 Combined penalties. Taxes 2010   If both the failure-to-file penalty and the failure-to-pay penalty (discussed earlier) apply in any month, the 5% (or 15%) failure-to-file penalty is reduced by the failure-to-pay penalty. Taxes 2010 However, if you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100% of the unpaid tax. Taxes 2010 Accuracy-related penalty. Taxes 2010   You may have to pay an accuracy-related penalty if you underpay your tax because: You show negligence or disregard of rules or regulations, You substantially understate your income tax, You claim tax benefits for a transaction that lacks economic substance, or You fail to disclose a foreign financial asset. Taxes 2010 The penalty is equal to 20% of the underpayment. Taxes 2010 The penalty is 40% of any portion of the underpayment that is attributable to an undisclosed noneconomic substance transaction or an undisclosed foreign financial asset transaction. Taxes 2010 The penalty will not be figured on any part of an underpayment on which the fraud penalty (discussed later) is charged. Taxes 2010 Negligence or disregard. Taxes 2010   The term “negligence” includes a failure to make a reasonable attempt to comply with the tax law or to exercise ordinary and reasonable care in preparing a return. Taxes 2010 Negligence also includes failure to keep adequate books and records. Taxes 2010 You will not have to pay a negligence penalty if you have a reasonable basis for a position you took. Taxes 2010   The term “disregard” includes any careless, reckless, or intentional disregard. Taxes 2010 Adequate disclosure. Taxes 2010   You can avoid the penalty for disregard of rules or regulations if you adequately disclose on your return a position that has at least a reasonable basis. Taxes 2010 See Disclosure statement , later. Taxes 2010   This exception will not apply to an item that is attributable to a tax shelter. Taxes 2010 In addition, it will not apply if you fail to keep adequate books and records, or substantiate items properly. Taxes 2010 Substantial understatement of income tax. Taxes 2010   You understate your tax if the tax shown on your return is less than the correct tax. Taxes 2010 The understatement is substantial if it is more than the larger of 10% of the correct tax or $5,000. Taxes 2010 However, the amount of the understatement is reduced to the extent the understatement is due to: Substantial authority, or Adequate disclosure and a reasonable basis. Taxes 2010   If an item on your return is attributable to a tax shelter, there is no reduction for an adequate disclosure. Taxes 2010 However, there is a reduction for a position with substantial authority, but only if you reasonably believed that your tax treatment was more likely than not the proper treatment. Taxes 2010 Substantial authority. Taxes 2010   Whether there is or was substantial authority for the tax treatment of an item depends on the facts and circumstances. Taxes 2010 Consideration will be given to court opinions, Treasury regulations, revenue rulings, revenue procedures, and notices and announcements issued by the IRS and published in the Internal Revenue Bulletin that involve the same or similar circumstances as yours. Taxes 2010 Disclosure statement. Taxes 2010   To adequately disclose the relevant facts about your tax treatment of an item, use Form 8275, Disclosure Statement. Taxes 2010 You must also have a reasonable basis for treating the item the way you did. Taxes 2010   In cases of substantial understatement only, items that meet the requirements of Revenue Procedure 2012-51, 2012-51 IRB 719 (or later update) are considered adequately disclosed on your return without filing Form 8275. Taxes 2010   Use Form 8275-R, Regulation Disclosure Statement, to disclose items or positions contrary to regulations. Taxes 2010 Transaction lacking economic substance. Taxes 2010   For more information on economic substance, see section 7701(o). Taxes 2010 Foreign financial asset. Taxes 2010   For more information on undisclosed foreign financial assets, see section 6662(j) or the Instructions for Form 8938. Taxes 2010 Reasonable cause. Taxes 2010   You will not have to pay a penalty if you show a good reason (reasonable cause) for the way you treated an item. Taxes 2010 You must also show that you acted in good faith. Taxes 2010 This does not apply to a transaction that lacks economic substance. Taxes 2010 Filing erroneous claim for refund or credit. Taxes 2010   You may have to pay a penalty if you file an erroneous claim for refund or credit. Taxes 2010 The penalty is equal to 20% of the disallowed amount of the claim, unless you can show a reasonable basis for the way you treated an item. Taxes 2010 However, any disallowed amount due to a transaction that lacks economic substance will not be treated as having a reasonable basis. Taxes 2010 The penalty will not be figured on any part of the disallowed amount of the claim that relates to the earned income credit or on which the accuracy-related or fraud penalties are charged. Taxes 2010 Frivolous tax submission. Taxes 2010   You may have to pay a penalty of $5,000 if you file a frivolous tax return or other frivolous submissions. Taxes 2010 A frivolous tax return is one that does not include enough information to figure the correct tax or that contains information clearly showing that the tax you reported is substantially incorrect. Taxes 2010 For more information on frivolous returns, frivolous submissions, and a list of positions that are identified as frivolous, see Notice 2010-33, 2010-17 IRB 609 available at www. Taxes 2010 irs. Taxes 2010 gov/irb/2010-17_irb/ar13. Taxes 2010 html. Taxes 2010   You will have to pay the penalty if you filed this kind of return or submission based on a frivolous position or a desire to delay or interfere with the administration of federal tax laws. Taxes 2010 This includes altering or striking out the preprinted language above the space provided for your signature. Taxes 2010   This penalty is added to any other penalty provided by law. Taxes 2010 Fraud. Taxes 2010   If there is any underpayment of tax on your return due to fraud, a penalty of 75% of the underpayment due to fraud will be added to your tax. Taxes 2010 Failure to supply taxpayer identification number. Taxes 2010   If you do not include your social security number (SSN) or individual taxpayer identification number (ITIN) or the SSN or ITIN of another person where required on a return, statement, or other document, you will be subject to a penalty of $50 for each failure. Taxes 2010 You will also be subject to a penalty of $50 if you do not give your SSN or ITIN to another person when it is required on a return, statement, or other document. Taxes 2010   For example, if you have a bank account that earns interest, you must give your SSN or ITIN to the bank. Taxes 2010 The number must be shown on the Form 1099-INT or other statement the bank sends you. Taxes 2010 If you do not give the bank your SSN or ITIN, you will be subject to the $50 penalty. Taxes 2010 (You also may be subject to “backup” withholding of income tax. Taxes 2010 )   You will not have to pay the penalty if you are able to show that the failure was due to reasonable cause and not willful neglect. Taxes 2010 Criminal Penalties You may be subject to criminal prosecution (brought to trial) for actions such as: Tax evasion, Willful failure to file a return, supply information, or pay any tax due, Fraud and false statements, or Preparing and filing a fraudulent return. Taxes 2010 Prev  Up  Next   Home   More Online Publications
Print - Click this link to Print this page

Information for Governmental Liaisons

Mission
The mission of the Office of Governmental Liaison and Disclosure is to improve tax administration by efficiently partnering with other government agencies and by effectively administering the Disclosure statutes.

IRS Information Sharing Programs
The IRS information sharing program saves government resources by partnering with agencies at all levels of government to enhance voluntary compliance with tax laws.

Congressional Affairs Program
The Congressional Affairs Program manages relationships with congressional representatives and staff.

Disclosure
The IRS Freedom of Information Program website contains information on contacting local IRS Disclosure Offices.

Disclosure - Protecting Federal Tax Information: A Message From The IRS
This video on disclosure awareness discusses what access to Federal Tax Information (FTI) is and how to guard it. It also covers how the disclosure of that information is protected by law.

Disclosure - Protecting Federal Tax Information: A Pocket Guide for Government Employees (PDF)
Publication 4761, Protecting Federal Tax Information: A Pocket Guide for Government Employees, is for federal, state and local agency employees who receive and use federal tax information (FTI). It provides basic disclosure concepts and warns of civil and criminal sanctions for misuse of FTI. It can be ordered by government agencies.

Safeguards Program
The Safeguards program and staff are responsible for ensuring that federal, state and local agencies receiving federal tax information protect it as if the information remained in IRS’s hands.

Page Last Reviewed or Updated: 26-Mar-2014

The Taxes 2010

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